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NORTEK 2ND-QUARTER SALES AND OPERATING EARNINGS INCREASE
PROVIDENCE, RI, August 7, 2003--Nortek, Inc. ("Nortek"), a leading international designer, manufacturer and marketer of high-quality brand name building products, today announced increased second quarter financial results building on a continuing strong residential housing and home improvement market.
Key financial highlights from continuing operations for the second quarter included:
Net sales of $545 million, an increase of 4.8 percent compared to the $520 million recorded for the second quarter of 2002.
Operating earnings of $65.7 million, an increase of 7.4 percent compared to last year's $61.2 million.
EBITDA of $76.4 million, an increase of 6.1 percent compared to $72 million for the prior year.
Richard L. Bready, Chairman and Chief Executive Officer, said, "All three of Nortek's operating groups reported solid sales growth in the quarter despite continued softness in commercial HVAC and manufactured housing markets.
"Our sales gains reflect the continued strength of the residential building products markets - strength that is expected to continue in the second half of the year."
On January 9, 2003, certain affiliates of Kelso & Company, L.P. and certain members of management acquired control of Nortek in a recapitalization transaction.
Net sales for the nine-day period ending January 9, 2003 and the period from January 10 to July 5, 2003 were $34 million and $980 million, respectively. Operating earnings (loss) for the nine-day period ending January 9, 2003 and the period from January 10 to July 5, 2003 were $(86.8) million and $101.1 million, respectively. EBITDA for the nine-day period ending January 9, 2003 and the period from January 10 to July 5, 2003 was $(85.9) million and $126.1 million, respectively. Excluding expenses and charges of approximately $87.7 million arising from the Recapitalization, as-adjusted EBITDA was $1.8 million for the nine-day period ending January 9, 2003.
The 2003 six-month results presented include the nine-day period from January 1 to January 9 (pre-recapitalization) and the post-recapitalization period from January 10 to July 5.
The Company's net sales from continuing operations for the combined periods of January 1 to July 5, 2003 were $1,014 million, an increase of 7 percent over the $947 million reported for the first six months of 2002. Operating earnings for the combined periods from January 1 to July 5, 2003 was $14.3 million (including $87.7 million of expense related to the recapitalization) compared to $98.9 million last year. As adjusted, EBITDA from continuing operations for the combined period from January 1 to July 5, 2003, excluding costs related to the recapitalization, was $128 million, compared to $126 million for the prior year.
Mr. Bready noted as "highly encouraging" that, "Sales of new homes in June rose to a second consecutive record-breaking high and that housing sector economists have forecast near-certain record new home sales for the year."
Nortek continued in the second quarter its long-term strategy of increasing market share and expanding its product branding strategy, particularly in the air conditioning and heating products segment.
However, Mr. Bready also noted that Nortek operating earnings in the first half were affected by high energy costs, particularly impacting resin-based materials. He said, "Continuation of these price pressures and softness in the HVAC markets could impact second-half results."
As of July 5, 2003, Nortek had approximately $110 million in unrestricted cash, equivalents and marketable securities, of which approximately $58 million was subsequently used byNortek's Linear Corporation subsidiary for the acquisition of SpeakerCraft in July 2003. SpeakerCraft is a leading designer and supplier of architectural loudspeakers and audio products used in residential custom applications. SpeakerCraft's product lines and dealer networks complement those of other Linear subsidiaries: ELAN, Xantech and Multiplex.
Nortek* (a wholly owned subsidiary of Nortek Holdings, Inc.) is a leading international manufacturer and distributor of high-quality, competitively priced building, remodeling and indoor environmental control products for the residential and commercial markets.Nortek offers a broad array of products for improving the environments where people live and work. Its products include: range hoods and other spot ventilation products; heating and air conditioning systems; vinyl products, including windows and doors, siding, decking, fencing and accessories; indoor air quality systems; and specialty electronic products.
*As used herein, the term "Nortek" refers to Nortek, Inc., together with its subsidiaries, unless the context indicates otherwise. This term is used for convenience only and is not intended as a precise description of any of the separate corporations, each of which manages its own affairs.
This press release contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements are based on the Company's current plans and expectations and involve risks and uncertainties that could cause actual future activities and results of operations to be materially different from those set forth in the forward-looking statements. Important factors impacting such forward-looking statements include the availability and cost of raw materials and purchased components, the level of construction and remodeling activity, changes in general economic conditions, the rate of sales growth, and product liability claims. The Company undertakes no obligation to update publicly any forward-looking statements, whether as a result of new information, future events, or otherwise. For further information, please refer to the reports and filings of the Company with the Securities and Exchange Commission.
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NORTEK, INC. AND SUBSIDIARIES UNAUDITED CONDENSED CONSOLIDATED SUMMARY OF OPERATIONS (Amounts in thousands)
Three Months Ended For the Periods Post- Pre- Post-Recapitalization Pre-Recapitalization Recapitalization Recapitalization Jan. 10, 2003 - Jan. 1, 2003 - Jan. 1, 2002 - July 5, 2003 June 29, 2002 July 5, 2003 Jan. 9, 2003 June 29, 2002 (Unaudited) Net sales $ 544,503 $ 519,719 $ 979,704 $ 33,775 $ 946,931 Cost of products sold 394,401 366,415 714,157 26,286 679,214 Selling, general and administrative expenses, net 81,283 85,431 158,504 6,485 160,591 Amortization of intangible assets 3,091 1,487 5,901 137 2,992 Expenses and charges arising from the Recapitalization -- 5,200 -- 87,700 5,200 478,775 458,533 878,562 120,608 847,997 Operating earnings (loss) 65,728 61,186 101,142 (86,833 ) 98,934 Interest expense (22,552 ) (24,223 ) (48,201 ) (2,288 ) (48,390 ) Investment income 324 1,937 759 121 3,656 Earnings (loss) from continuing operations before provision (benefit) for income taxes 43,500 38,900 53,700 (89,000 ) 54,200 Provision (benefit) for income taxes 17,300 15,600 21,300 (24,100 ) 21,500 Earnings (loss) from continuing operations 26,200 23,300 32,400 (64,900 ) 32,700 Earnings from discontinued operations -- 4,400 -- -- 5,600 Net earnings (loss) $ 26,200 $ 27,700 $ 32,400 $ (64,900 ) $ 38,300
The accompanying notes are an integral part of this unaudited condensed consolidated summary of operations.
NORTEK, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED SUMMARY OF OPERATIONS
A. The unaudited condensed consolidated summary of operations for Nortek, Inc. and its subsidiaries (the "Company" or "Nortek"), in the opinion of management, reflects all adjustments necessary for a fair statement of the periods presented. In 2002, the Company sold certain subsidiaries of its wholly-owned subsidiary, Ply Gem Industries, Inc. ("Ply Gem"). The sale of these subsidiaries and their related operating results have been excluded from earnings (loss) from continuing operations and are classified as discontinued operations for all periods presented (see Note H). Certain amounts in the prior year's unaudited condensed consolidated summary of operations have been reclassified to conform to the current year presentation. It is suggested that this unaudited condensed consolidated summary of operations be read in conjunction with the consolidated financial statements and the notes included in the Company's latest annual report on Form 10-K, its latest quarterly report on Form 10-Q and its latest Current Reports on Form 8-K as filed with the Securities and Exchange Commission ("SEC") (see Note C).
On November 20, 2002, the Company reorganized into a holding company structure and each outstanding share of capital stock of the Company was converted into an identical share of capital stock of Nortek Holdings, Inc. ("Nortek Holdings"), a Delaware corporation formed in 2002, with Nortek Holdings becoming the successor company and the Company becoming a wholly-owned subsidiary of Nortek Holdings (the "Nortek Holdings Reorganization"). On January 9, 2003, Nortek Holdings, the parent company of Nortek, was acquired by certain affiliates and designees of Kelso & Company L.P. ("Kelso") and certain members of the Company's management (the "Management Investors") in accordance with the Agreement and Plan of Recapitalization by and among Nortek, Inc., Nortek Holdings, Inc. and K Holdings, Inc. ("K Holdings") dated as of June 20, 2002, as amended, (the "Recapitalization Agreement") in a transaction valued at approximately $1.6 billion, including all of the Company's indebtedness (the "Recapitalization") (see Note C).
Beginning on January 9, 2003, the Company and Nortek Holdings accounted for the Recapitalization as a purchase in accordance with the provisions of Statement of Financial Accounting Standards ("SFAS") No. 141, "Business Combinations" ("SFAS No. 141"), which resulted in a new valuation for the assets and liabilities of Nortek Holdings and its subsidiaries based upon fair values as of the date of the Recapitalization. As allowed under SEC Staff Accounting Bulletin No. 54, "Push Down Basis of Accounting Required in Certain Limited Circumstances", the Company has reflected all applicable purchase accounting adjustments recorded by Nortek Holdings in the Company's Consolidated Financial Statements for all SEC filings covering periods subsequent to the Recapitalization ("Push Down Accounting"). Push Down Accounting requires the Company to establish a new basis for its assets and liabilities based on the amount paid for its ownership at January 9, 2003. Accordingly, Nortek Holdings' ownership basis (including the fair value of options rolled over by the Management Investors) is reflected in Nortek's Consolidated Financial Statements beginning upon completion of the Recapitalization. In order to apply Push Down Accounting, Nortek Holdings' purchase price of approximately $468,737,000 was allocated to the assets and liabilities based on their relative fair values and approximately $440,837,000 was reflected in the Company's Stockholder's Investment as the value of Nortek Holdings' ownership in the Company upon completion of the Recapitalization. Immediately prior to the Recapitalization, the Company's Stockholder's Investment was approximately $156,702,000. Purchase price allocations are subject to refinement until all pertinent information is obtained. As of January 10, 2003, the Company preliminarily allocated the excess purchase price over the net assets acquired in the Recapitalization based on its estimates of the fair value of assets and liabilities as follows:
Excess purchase price of the Recapitalization allocated to Inventories $ 13,234,000 Property, plant and equipment 102,474,000 Intangible assets 72,953,000 Goodwill 232,372,000 Indebtedness (33,776,000 ) Prepaid and deferred income taxes (51,611,000 ) Pension (24,044,000 ) Other 433,000 Total $ 312,035,000
During the three months ended July 5, 2003 and the period from January 10, 2003 to July 5, 2003, the Company reflected approximately $800,000 and $6,000,000, respectively, of excess purchase price allocated to inventory as a non-cash charge to cost of goods sold, approximately $3,400,000 and $6,300,000, respectively, of lower depreciation expense in cost of sales, approximately $1,600,000 and $3,100,000, respectively, of additional amortization expense of intangible assets and approximately $1,400,000 and $2,800,000, respectively, of lower interest expense from the amortization of premium allocated to indebtedness as compared to the Company's historical basis of accounting prior to the Recapitalization.
The Company has estimated the fair value of its assets and liabilities, including intangible assets and property, plant and equipment, as of the Recapitalization, utilizing information available at the time that the Company's Unaudited Condensed Consolidated Financial Statements were prepared and these estimates are subject to refinement until all pertinent information has been obtained. The Company is in the process of obtaining outside third party appraisals of its intangible assets and property, plant and equipment.
The impact of these fair value estimates has been reflected in the Company's statement of operations for the periods ended July 5, 2003. Should the intangible asset or property, plant and equipment appraisals result in differences in the average amortizable or depreciable lives of these assets or in the fair value amount of the estimates, the following estimated changes in annual operating earnings would occur:
Increase (decrease) in operating earnings Property, Plant Intangible and Equipment Assets Total If lives are one year greater $ 1,800,000 $ 800,000 $ 2,600,000 If lives are one year less (2,100,000 ) (900,000 ) (3,000,000 ) If fair value is $10,000,000 greater (800,000 ) (700,000 ) (1,500,000 ) If fair value is $10,000,000 less 800,000 700,000 1,500,000
The period from January 1, 2003 to January 9, 2003 and the period from January 10, 2003 to July 5, 2003 combined, contained 185 days while the first half of 2002 contained 180 days. Accordingly, operating results for 2003 include approximately $1,000,000 of additional interest expense as compared to 2002 since the Company accrues interest expense based on the number of days contained in each reporting period.
B. EBITDA from operations is operating earnings (loss) from continuing operations plus depreciation and amortization expense (other than amortization of deferred debt expense and debt premiums and discounts) and the non cash write off of the portion of the excess purchase price from acquisitions allocated to inventories. Adjusted EBITDA excludes expenses and charges arising from the Recapitalization. EBITDA is presented as it is a common analytical measurement utilized by investors to assess the Company's performance. The Company's common stock is no longer publicly traded. In accordance with the indentures of the Company's 8 7/8% Senior Notes due 2008, 9 1/4% Senior Notes due 2007, 9 1/8% Senior Notes due 2007 and 9 7/8% Senior Subordinated Notes due 2011 (the "Existing Notes"), the Company is required to continue to file periodic reports with the SEC. Numerous covenants contained in the indentures to the Existing Notes require financial measurements involving a cash flow measure similar to EBITDA. In addition, EBITDA is presented as it allows noteholders to assess the Company's ability to service and incur indebtedness. We also believe that EBITDA, when considered with other information, is useful to investors to analyze current results since it reflects operating results before depreciation, amortization and other non-cash items, which items are based on historical cost and varying depreciable lives. Since each of the Company's segments, its competitors and other investment opportunities available to noteholders all have differing historical cost structures, EBITDA is another measurement available to investors, particularly noteholders, to make investment decisions. EBITDA should not be considered as an alternative to earnings (loss) from continuing operations, net earnings (loss) or cash flow measures as determined in accordance with accounting principles generally accepted in the United States.
The following table presents a reconciliation from net earnings (loss) to EBITDA and Adjusted EBITDA for the periods presented:
Three Months Ended Post-Recapitalization Pre-Recapitalization July 5, 2003 June 29, 2002 (Amounts in thousands) (Unaudited) Net earnings $ 26,200 $ 27,700 Earnings from discontinued operations -- (4,400 ) Provision for income taxes 17,300 15,600 Investment income (324 ) (1,937 ) Interest expense 22,552 24,223 Operating earnings 65,728 61,186 Depreciation expense 6,585 9,366 Amortization of intangible assets 3,091 1,487 Non cash charge of purchase price allocated to inventory 958 -- EBITDA 76,362 72,039 Expenses and charges arising from the Recapitalization -- 5,200 Adjusted EBITDA $ 76,362 $ 77,239
For the Periods Post- Recapitalization Pre-Recapitalization Jan. 10, 2003 - Jan. 1, 2003 - Jan. 1, 2002 - July 5, 2003 Jan. 9, 2003 June 29, 2002 (Amounts in thousands) (Unaudited) Net earnings (loss) $ 32,400 $ (64,900 ) $ 38,300 Earnings from discontinued operations -- -- (5,600 ) Provision (benefit) for income taxes 21,300 (24,100 ) 21,500 Investment income (759 ) (121 ) (3,656 ) Interest expense 48,201 2,288 48,390 Operating earnings (loss) 101,142 (86,833 ) 98,934 Depreciation expense 12,736 831 18,955 Amortization of intangible assets 5,901 137 2,992 Non cash charge of purchase price allocated to inventory 6,362 -- -- EBITDA 126,141 (85,865 ) 120,881 Expenses and charges arising from the Recapitalization -- 87,700 5,200 Adjusted EBITDA $ 126,141 $ 1,835 $ 126,081
C. On January 8, 2003, at a special meeting of stockholders of Nortek Holdings, the stockholders approved the following amendments to the certificate of incorporation (the "Stockholder Approval"), which were required in order to complete the Recapitalization:
A new class of common stock, Class A Common Stock, par value $1.00 per share, of Nortek Holdings was created consisting of 19,000,000 authorized shares.
At the time that the amendment to the certificate of incorporation became effective, each share of common stock, par value $1.00 per share and special common stock, par value $1.00 per share outstanding, was reclassified into one share of a new class of mandatorily redeemable common stock, Class B Common Stock, par value $1.00 per share, of Nortek Holdings consisting of 14,000,000 authorized shares.
Class B Common Stock was required to be immediately redeemed for $46 per share in cash upon completion of the Recapitalization.
The authorized number of shares of Series B Preference Stock, par value $1.00 per share, was increased to 19,000,000 authorized shares.
Following the Stockholder Approval, common stock and special common stock held by the Management Investors were exchanged for an equal number of newly created shares of Series B Preference Stock. In addition, certain options to purchase shares of common and special common stock held by the Management Investors were exchanged for fully vested options to purchase an equal number of shares of the newly created Class A Common Stock. The remaining outstanding options, including some held by Management Investors, were cancelled in exchange for the right to receive a single lump sum cash payment equal to the product of the number of shares of common stock or special common stock underlying the option and the amount by which the redemption price of $46 per share exceeded the per share exercise price of the option.
On January 9, 2003, in connection with the Recapitalization, Kelso purchased newly issued shares of Series B Preference Stock for approximately $355,923,000 and purchased shares of Series B Preference Stock held by the Management Investors for approximately $18,077,000. Newly issued Class A Common Stock of approximately $3,262,000 was purchased by designated third parties. Shares of Series B Preference Stock held by the Management Investors that were not purchased by Kelso were converted into an equal number of shares of Class A Common Stock. In addition, the Company declared and distributed to Nortek Holdings a dividend of approximately $120,000,000 and distributed approximately $27,900,000 for reimbursement of fees and expenses of Kelso, which were paid out of the Company's unrestricted cash and cash equivalents on hand and were permissible under the most restrictive covenants with respect to the indentures of the Company's Existing Notes.
Nortek Holdings used the proceeds from the purchase by Kelso and designated third parties of the newly issued Series B Preference Stock and Class A Common Stock and the dividend from Nortek to redeem Nortek Holdings' Class B Common Stock and to cash out options to purchase common and special common stock totaling approximately $479,185,000. Kelso also purchased from certain Management Investors 392,978 shares of Series B Preference Stock for approximately $18,077,000.
In connection with the Recapitalization, K Holdings received a bridge financing letter from a lender for a senior unsecured term loan facility not to exceed $955,000,000 (the "Bridge Facility"). The Bridge Facility was intended to be used to fund, if necessary, any change in control offers the Company might have made in connection with the Recapitalization. The Company did not use this Bridge Facility because the structure of the Recapitalization did not require the Company to make any change of control offers. The commitment letter expired on January 31, 2003. As a result, the Company's consolidated interest expense for the period from January 10, 2003 to July 5, 2003 includes approximately $4,100,000 of interest expense from the amortization of the Bridge Facility commitment fees and related expenses. In the second quarter of 2003, the Company did not incur any additional interest expense related to the expiration of this commitment letter.
In January 2003, Nortek Holdings filed for the deregistration of its shares of common and special common stock under the Securities Exchange Act of 1934. Nortek Holdings' shares of common and special common stock are no longer publicly traded. The Company will continue to file periodic reports with the SEC as required by the respective indentures of the Company's Existing Notes.
Under the terms of one of the Company's supplemental executive retirement plans ("SERP"), the Company was required to make one-time cash payments to participants in such plan in satisfaction of obligations under that plan when the Recapitalization was completed. Accordingly, the Company made a distribution of approximately $75,100,000 to the participants in the plan from funds included in the Company's Consolidated Balance Sheet at December 31, 2002 and classified in long-term assets in restricted investments and marketable securities held by pension trusts and transferred to one of the participants a life insurance policy with approximately $10,300,000 of cash surrender value to satisfy a portion of the SERP's obligation to such participant. The termination and settlement of the obligation of this SERP resulted in a curtailment loss on January 9, 2003 (see Note D).
The total amount of transaction fees and related costs incurred by the Company and Kelso associated with the Recapitalization was approximately $47,348,000, including the $27,900,000 noted above, of which approximately $10,500,000 of advisory fees and expenses was paid to Kelso & Company L.P. A portion of these fees and expenses was recorded by the Company in selling, general and administrative expense, since they were obligations of the Company prior to the Recapitalization. Approximately $12,848,000 was recorded as expense on January 9, 2003 since these fees and expenses became obligations of the Company upon consummation of the Recapitalization (see Note D). Approximately $6,600,000 of expense was previously recorded by the Company in the year ended December 31, 2002, of which $5,200,000 was recorded in the second quarter of 2002.
The following reflects the pro forma effect of the Recapitalization for the periods presented through January 9, 2003:
For the Period For the Three For the Six For the Jan. 1, 2003 - Months Ended Months Ended Year ended Jan. 9, 2003 June 29, 2002 June 29, 2002 Dec. 31, 2002 (Amounts in thousands) Net sales $ 33,775 $ 519,719 $ 946,931 $ 1,888,292 Operating earnings 832 69,366 104,268 197,442 Earnings (loss) from continuing operations (1,126 ) 26,696 31,378 64,998 EBITDA: Net earnings (loss) $ (1,126 ) $ 31,096 $ 36,978 $ 68,498 Earnings from discontinued operations -- (4,400 ) (5,600 ) (3,500 ) Provision (benefit) for income taxes (90 ) 20,166 23,620 38,714 Investment income (98 ) (527 ) (916 ) (2,252 ) Interest expense 2,146 23,031 50,186 95,982 Operating earnings 832 69,366 104,268 197,442 Depreciation expense 494 6,337 12,764 25,528 Amortization expense 234 3,045 6,090 12,181 Non cash charge of purchase price allocated to inventory -- 851