Nortek Inc. News Release

NORTEK REPORTS RECORD 3RD-QUARTER OPERATING EARNINGS
All Operating Groups Show Growth in Sales and Earnings

PROVIDENCE, RI, November 6, 2003-Nortek, Inc. (“Nortek”), a leading international designer, manufacturer and marketer of high-quality brand name building products, today announced operating earnings from continuing operations for the third quarter increased 40 percent to a record $74.5 million as its core residential housing and home-improvement markets remained strong.

Key financial highlights from continuing operations for the third quarter included:

Richard L. Bready, Chairman and Chief Executive Officer, said, "We are pleased with our third-quarter performance, as Nortek is continuing to benefit from its leading market share positions and strong brand recognition."

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 October 4, 2003 were $34 million and $1,535 million, respectively. Operating earnings (loss) for the nine-day period ending January 9, 2003 and the period from January 10 to October 4, 2003 were $(86.8) million and $175.7 million, respectively. EBITDA for the nine-day period ending January 9, 2003 and the period from January 10 to October 4, 2003 was $(85.9) million and $210.7 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 nine-month results presented below include the nine-day period from January 1 to January 9 (pre-recapitalization) and the post-recapitalization period from January 10 to October 4.

The Company's net sales from continuing operations for the combined periods of January 1 to October 4, 2003 were $1,569 million, an increase of 8.1 percent over the $1,452 million reported for the first nine months of 2002. Operating earnings for the combined periods from January 1 to October 4, 2003 were $88.8 million compared to $151.9 million last year. Excluding expenses and charges of approximately $87.7 million arising from the recapitalization, operating earnings for the combined periods ending October 4, 2003 were $176.5 million. As adjusted (excluding costs related to recapitalization), EBITDA from continuing operations for the combined period from January 1 to October 4, 2003 was $212.5 million, compared to $190.7 million for the prior year.

Mr. Bready noted that, "Overall housing activity remains very healthy as demonstrated by strong September reports of housing starts and sales of new and existing homes. Going forward, it is expected that the overall residential housing markets will continue solid in the seasonally slow fourth quarter. However, we believe the tough conditions we face in the manufactured housing and commercial HVAC markets will continue into 2004."

Mr. Bready also noted that Nortek operating earnings in the first nine months benefited from continued implementation of manufacturing efficiencies and strategic sourcing programs, offset to some degree by high energy costs, particularly on resin-based materials.

Acquisitions contributed approximately $17 million and $28 million to net sales and $2.8 million and $4.3 million to operating earnings for the third quarter and the combined periods ended October 4, 2003, respectively.

As of October 4, 2003, Nortek had approximately $121 million in unrestricted cash, equivalents and marketable securities and availability under its $200 million revolving credit facility of approximately $170 million (net of outstanding letters of credit totaling approximately $30 million).

On October 9, 2003, Nortek announced that it has retained financial advisors to assist in exploring strategic alternatives for its Windows, Doors and Siding Products Segment, including its possible sale. There can be no assurance that any transaction will result from the exploration process.

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.


# # #


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 -
Oct. 4, 2003
 Sept. 28, 2002
 Oct. 4, 2003
 Jan. 9, 2003
 Sept. 28, 2002
(Unaudited)
 
Net sales     $ 555,102   $ 504,583   $ 1,534,806   $ 33,775   $ 1,451,514  
 
Cost of products sold    393,032    365,726    1,107,189    26,286    1,044,940  
Selling, general and administrative expenses, net    84,495    83,449    242,999    6,485    244,040  
Amortization of intangible assets    3,055    1,467    8,956    137    4,459  
Expenses and charges arising from the Recapitalization    --    1,000    --    87,700    6,200  
     480,582    451,642    1,359,144    120,608    1,299,639  
 
Operating earnings (loss)    74,520    52,941    175,662    (86,833 )  151,875  
Interest expense    (22,838 )  (23,993 )  (71,039 )  (2,288 )  (72,383 )
Investment income    318    1,852    1,077    121    5,508  
Earnings (loss) from continuing operations  
  before provision (benefit) for income taxes    52,000    30,800    105,700    (89,000 )  85,000  
Provision (benefit) for income taxes    21,900    14,200    43,200    (24,100 )  35,700  
Earnings (loss) from continuing operations    30,100    16,600    62,500    (64,900 )  49,300  
Earnings from discontinued operations    --    100    --    --    5,700  
Net earnings (loss)   $ 30,100   $ 16,700   $ 62,500   $ (64,900 ) $ 55,000  

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 period from January 10, 2003 to October 4, 2003, the Company reflected approximately $6,000,000 of excess purchase price allocated to inventory as a non-cash charge to cost of goods sold. There was no additional non-cash charge to cost of goods sold in the three months ended October 4, 2003 arising from excess purchase price from the Recapitalization allocated to inventory. During the three months ended October 4, 2003 and the period from January 10, 2003 to October 4, 2003, the Company reflected approximately $3,400,000 and $9,700,000, respectively, of lower depreciation expense in cost of sales, approximately $1,600,000 and $4,600,000, respectively, of additional amortization expense of intangible assets and approximately $1,500,000 and $4,300,000, 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 summary of operations for the periods ended October 4, 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 combined periods from January 1, 2003 to January 9, 2003 and from January 10, 2003 to October 4, 2003 contain 275 days while the first nine months of 2002 contained 270 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
October 4, 2003
 September 28, 2002
(Amounts in thousands)
(Unaudited)
 
Net earnings     $ 30,100   $ 16,700  
  Earnings from discontinued operations    --    (100 )
  Provision for income taxes    21,900    14,200  
  Investment income    (318 )  (1,852 )
  Interest expense    22,838    23,993  
Operating earnings    74,520    52,941  
  Depreciation expense    6,670    9,191  
  Amortization of intangible assets    3,055    1,467  
  Non cash charge of purchase price allocated to  
     inventory    323    --  
EBITDA    84,568    63,599  
Expenses and charges arising from the  
    Recapitalization    --    1,000  
Adjusted EBITDA   $ 84,568   $ 64,599  

For the Periods
Post-
Recapitalization
 Pre-Recapitalization
Jan. 10, 2003 - Jan. 1, 2003 - Jan. 1, 2002 -
Oct. 4, 2003
 Jan. 9, 2003
 Sept. 28, 2002
(Amounts in thousands)
(Unaudited)
 
Net earnings (loss)     $ 62,500   $ (64,900 ) $ 55,000  
  Earnings from discontinued operations    --    --    (5,700 )
  Provision (benefit) for income taxes    43,200    (24,100 )  35,700  
  Investment income    (1,077 )  (121 )  (5,508 )
  Interest expense    71,039    2,288    72,383  
Operating earnings (loss)    175,662    (86,833 )  151,875  
  Depreciation expense    19,406    831    28,146  
  Amortization of intangible assets    8,956    137    4,459  
  Non cash charge of purchase price allocated to  
     inventory    6,685    --    --  
EBITDA    210,709    (85,865 )  184,480  
Expenses and charges arising from the  
    Recapitalization    --    87,700    6,200  
Adjusted EBITDA   $ 210,709   $ 1,835   $ 190,680  

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 October 4, 2003 includes approximately $4,100,000 of interest expense from the amortization of the Bridge Facility commitment fees and related expenses. In the third 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 $1,000,000 and $6,200,000 was recorded in the third quarter and first nine months of 2002, respectively.


 

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 Nine For the
Jan. 1, 2003 - Months Ended Months Ended Year ended
Jan. 9, 2003
 Sept. 28, 2002
 Sept. 28, 2002
 Dec. 31, 2002
(Amounts in thousands)
 
Net sales     $ 33,775   $ 504,583   $ 1,451,514   $ 1,888,292  
Operating earnings    832    54,924    159,192    197,442  
Earnings (loss) from continuing operations    (1,126 )  21,814    53,192    64,998  
 
EBITDA:    
  Net earnings (loss)   $ (1,126 ) $ 21,914   $ 58,892   $ 68,498  
      Earnings from discontinued operations    --    (100 )  (5,700 )  (3,500 )
      Provision (benefit) for income taxes    (90 )  10,769    34,389    38,714  
      Investment income    (98 )  (622 )  (1,538 )  (2,252 )
      Interest expense    2,146    22,963    73,149    95,982  
  Operating earnings    832    54,924    159,192    197,442  
      Depreciation expense    494    6,382    19,146    25,528  
      Amortization expense    234    3,045    9,135    12,181  
      Non cash charge of purchase price  
        allocated to inventory