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NORTEK REPORTS QUARTERLY EPS
PROVIDENCE, RI, July 19, 2002--Nortek, Inc. (NYSE:NTK), continuing to benefit from the strength of the construction and remodeling industries, today announced financial results for the second quarter of 2002. Nortek recorded diluted net earnings per share from continuing operations of $2.02.
Key financial highlights from continuing operations for the second quarter included:
- Net sales of $522 million compared to $495 million for last year’s second quarter.
- Operating earnings of $61.5 million compared to last year’s $54.2 million.
- EBITDA of $72.5 million compared to $68.7 million for the prior year.
- Earnings of $23.5 million, compared to $17.1 million for the comparable period last year.
- Diluted earnings per share of $2.02, compared to $1.53 for the second quarter of last year.
For the first six months of 2002, Nortek results from continuing operations included net sales of $951 million, up 6.9 percent from last year’s $890 million; EBITDA of $122 million versus $107 million last year; operating earnings totaled $99 million compared to $78 million last year; and diluted per-share earnings for the first six months of 2002 and 2001 were $2.87 per share and $1.56 per share, respectively.
Goodwill amortization included in operating earnings in the second quarter and for the first six months of 2001 was approximately $4.1 and $8.3 million as determined under generally accepted accounting principles in the United States in effect in 2001. Operating earnings for the comparable periods of 2002 did not include any amortization of goodwill. As adjusted earnings per share from continuing operations for the second quarter and first six months of 2001 would have been approximately $1.88 and $2.28 per share, respectively, excluding the after-tax effect of goodwill amortization.
Richard L. Bready, Chairman and Chief Executive Officer, said, “Operating results for the quarter reflect the underlying strength of the various markets we serve and the solid execution of our strategy to be a premier provider of high-quality building products. Net earnings were particularly strengthened by the successful implementation of manufacturing efficiencies and an aggressive strategic purchasing program that is creating significant cost savings across our three operating groups. We are also continuing to benefit from an expanded branding effort in our line of residential heating and air conditioning products. Additionally, we ended the period with approximately $255 million in unrestricted cash, cash equivalents and marketable securities.
“Looking forward, we believe the overall construction and remodeling markets will remain fairly robust for the remainder of the year. However, there are certain business conditions that could impact results, among them a continued softness in the market for commercial HVAC products; anticipated price hikes in the cost of raw materials such as steel and resin; and a possible slowdown in the general economic recovery now taking place in the U.S. Meanwhile, we are continuing to closely monitor market conditions and make necessary adjustments to keep our costs in line with overall sales.”
Nortek* 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. The Company 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 Company’s reports and filings with the Securities and Exchange Commission.
NORTEK, INC. AND SUBSIDIARIES UNAUDITED CONDENSED CONSOLIDATED SUMMARY OF OPERATIONS (In thousands except per share amounts)
Three Months Ended Six Months Ended June 29, June 30, June 29, June 30, 2002 2001 2002 2001 (Unaudited) Net sales $ 522,206 $ 494,994 $ 951,297 $ 890,227 Cost of products sold 362,791 361,442 672,897 656,150 Selling, general and administrative expenses 96,442 73,734 175,974 144,880 Amortization of goodwill and intangible assets 1,487 5,617 2,992 11,266 460,720 440,793 851,863 812,296 Operating earnings 61,486 54,201 99,434 77,931 Interest expense (24,223 ) (25,694 ) (48,390 ) (51,032 ) Investment income 1,937 1,993 3,656 4,201 Earnings from continuing operations before provision for income taxes 39,200 30,500 54,700 31,100 Provision for income taxes 15,700 13,400 21,700 13,700 Earnings from continuing operations 23,500 17,100 33,000 17,400 Earnings (loss) from discontinued operations 4,200 2,600 5,300 (100 ) Net earnings $ 27,700 $ 19,700 $ 38,300 $ 17,300 Earnings (loss) per share of common stock: Earnings from continuing operations: Basic $ 2.14 $ 1.56 $ 3.00 $ 1.59 Diluted $ 2.02 $ 1.53 $ 2.87 $ 1.56 Earnings (loss) from discontinued operations: Basic $ .38 $ .24 $ .48 $ (.01 ) Diluted $ .36 $ .23 $ .47 $ (.01 ) Net earnings: Basic $ 2.52 $ 1.80 $ 3.48 $ 1.58 Diluted $ 2.38 $ 1.76 $ 3.34 $ 1.55 Weighted average number of shares: Basic 10,997 10,925 10,988 10,920 Diluted 11,656 11,204 11,482 11,182 EBITDA $ 72,527 $ 68,693 $ 121,758 $ 106,848 Capital expenditures $ 5,930 $ 11,878 $ 10,272 $ 25,608
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”), in the opinion of management, reflects all adjustments necessary for a fair statement of the periods presented. Effective in the third quarter of 2001, the Company adopted Statement of Financial Accounting Standards (“SFAS”) No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets” (“SFAS No. 144”) and accordingly the presentation for all periods has been reclassified to conform with the new standard. See Notes G and I. 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 and its latest quarterly report on Form 10-Q, as filed with the Securities and Exchange Commission (“SEC”).
B. EBITDA from operations is operating earnings from continuing operations plus depreciation and amortization expense (other than amortization of deferred debt expense and debt discount).
C. On June 20, 2002, the Company and Nortek Holdings, Inc. and K Holdings, Inc. (“K Holdings”), an affiliate of Kelso & Company, L.P. (“Kelso”), entered into an Agreement and Plan of Recapitalization (the “Recapitalization Agreement”), which is expected to be completed in the third quarter of 2002, subject to the satisfactory completion by all parties of the terms and conditions outlined in the Recapitalization Agreement, including the approval of the Company’s shareholders, the availability of certain financing, the expiration of the applicable waiting period under the Hart-Scott Rodino Act and other customary conditions. Pursuant to the Recapitalization Agreement each publicly owned outstanding share, with the exception of certain shares owned by certain members of management of the Company, will be acquired for $46 per share in cash by K Holdings in partnership with certain members of management, including Richard L. Bready, the Chairman and Chief Executive Officer of the Company (the “Recapitalization”). The Recapitalization transaction is valued at approximately $1.6 billion based upon the $46 per share price and the assumption or refinancing of the Company’s outstanding indebtedness at the completion of the Recapitalization. The Company’s Board of Directors, based upon the recommendation of a Special Committee of disinterested directors, has approved the Recapitalization. Morgan Stanley & Co. served as financial advisor to the Special Committee and delivered its opinion that the $46 per share consideration to be received by the Company’s public shareholders is fair from a financial point of view. A special meeting of the Company’s shareholders will be scheduled as soon as practical following approval by the Securities and Exchange Commission of all required proxy materials.
The Company believes the Recapitalization will be accounted for as a purchase in accordance with the provisions of SFAS No. 141, which will result in a new valuation for the assets and liabilities of the Company upon the completion of the Recapitalization.
During the first six months of 2002,the Company has expensed approximately $5,200,000 (included in selling, general and administrative expenses) related to the Recapitalization transaction, primarily for fees incurred by the Special Committee of the Company’s Board of Directors in their evaluation of the fairness of the transaction. Under certain circumstances, including the subsequent acceptance by the Company of a superior acquisition offer or a change in recommendation by the Company against the Recapitalization, the Company may be liable to Kelso and K Holdings for additional fees and expenses in the range of approximately $0 to $24 million in the event that the Recapitalization transaction is not consummated.
In connection with the Recapitalization, Kelso has received a financing commitment, subject to certain terms and conditions including the completion of the Recapitalization, from a bank for a senior unsecured term loan facility not to exceed $955 million (the “Bridge Facility”). The Bridge Facility may be used to finance the purchase of the Company’s 8 7/8% Senior Notes due 2008, 91/4% Senior Notes due 2007, 9 1/8% Senior Notes due 2007 and 9 7/8% Senior Subordinated Notes due 2011 (collectively the “Existing Notes”) to the extent that the Existing Notes are tendered for payment under change in control provisions in the Existing Notes respective indentures and are not otherwise repurchased or refinanced. It is expected that any borrowings under the Existing Notes, if any, would subsequently either be paid off or refinanced with new debt.
The Company has received a commitment from a bank for a $200,000,000 Senior Secured Credit Facility (the “Senior Credit Facility”) which is expected to be syndicated among several banks. The Senior Credit Facility will be secured by substantially all of the Company’s accounts receivable and inventory, as well as certain intellectual property rights, and will permit borrowings up to the lesser of the $200,000,000 or the total of 85% of eligible accounts receivable, as defined, and 50% of eligible inventory, as defined. The outstanding principal balances under the Senior Credit Facility will accrue interest at the Company’s option at either LIBOR plus a margin ranging from 2.0% to 2.5% or the banks’ prime rate plus a margin ranging from 0.5% to 1.0% depending upon the excess available borrowing capacity, as defined, and the timing of the borrowing as the margin rates will be adjusted quarterly. The Senior Credit Facility will include customary limitations and covenants, but will not require the Company to maintain any financial covenant unless excess available borrowing capacity, as defined, is less than $40,000,000 in which case the Company would be required to maintain, on a trailing four quarter basis a minimum level of $175,000,000 of earnings before interest, taxes, depreciation and amortization, as defined. The Senior Credit Facility will permit the Company to enter into the Recapitalization provided certain conditions are met. Proceeds from the Senior Credit Facility will be used to repay the remaining approximately $43,000,000 due on the Ply Gem credit facility as well as certain other debt of the Company’s subsidiaries totaling approximately $8,300,000. It is expected that the Senior Credit Facility will be closed in late July 2002, although there can be no assurances that this will happen or happen on exactly the terms discussed above.
D. In the first half and second quarter of 2002 a $4,400,000 charge to operating earnings was recorded and is included in selling, general and administrative expenses relating to an incentive earned by certain of the Company’s officers under the Company’s 1999 Equity Performance Plan. In addition, as discussed in Note C, the Company has recorded expenses of approximately $5,200,000 in selling, general and administrative expenses in the first half and second quarter of 2002 related to fees and expenses associated with the Recapitalization of the Company. In the first half and second quarter of 2001, the Company expensed approximately $2,200,000 and $1,500,000, respectively, of manufacturing costs incurred in connection with the start up of a residential air conditioning facility and a vinyl fence and decking facility. Also, in the first half and second quarter of 2001, the Company expensed approximately $2,100,000 and $1,600,000, respectively, of third party fees and expenses associated with the Company’s material procurement strategy. Approximately $1,400,000 and $1,100,000 of these fees and expenses were charged to the Residential Building Products Segment, $600,000 and $400,000 to the Air Conditioning and Heating Products Segment and $100,000 to the Windows, Doors and Siding Products Segment in the first half and second quarter of 2001, respectively. In the first half of 2002, the Company did not expense any third party fees and expenses associated with this material procurement strategy. The Company estimates that it has realized benefits associated with this material procurement strategy of between $7,000,000 and $10,000,000 in the first half of 2002 as compared to the first half of 2001 and between $5,000,000 and $7,000,000 in the second quarter of 2002 as compared to the second quarter of 2001. The Company recorded in operating earnings, a non-taxable gain of approximately $3,200,000 ($.29 per share) and $2,400,000 ($.22 per share) in the first half and second quarter of 2001, respectively, from net death benefit insurance proceeds related to life insurance maintained on former managers. In the second quarter of 2001, the Company also incurred certain duplicative net interest expense as discussed in Note F.
E. In the first quarter of 2001, the Company adopted SFAS No. 133 “Accounting for Derivative Instruments and Hedging Activities”, as amended (“SFAS No. 133”) by recording an approximate $800,000 liability in its balance sheet at March 31, 2001, representing the fair value of the Company’s interest rate collar agreement. As a result, interest expense includes a non-cash reduction in interest expense of approximately $800,000 ($.04 per share, net of tax) and approximately $350,000 ($.02 per share, net of tax) for the first half and second quarter of 2002, respectively, and a non-cash charge to interest expense of approximately $875,000 ($.05 per share, net of tax) and $75,000 for the first half and second quarter of 2001, respectively.
F. In June 2001, the Company sold $250,000,000 principal amount of its 9 7/8% Senior Subordinated Notes due 2011 (“9 7/8% Notes”) at a slight discount. Net proceeds from the sale of the 9 7/8% Notes, after deducting underwriting commissions and expenses amounted to approximately $241,800,000 and a portion of such proceeds was used to redeem, on July 11, 2001, $204,822,000 principal amount of the Company’s 9 7/8% Senior Subordinated Notes due 2004 (which notes were called for redemption on June 13, 2001), plus an approximate $2,900,000 redemption premium thereon and approximately $7,400,000 of accrued interest thereon. As a result of this redemption, the Company recorded an extraordinary loss of approximately $5,500,000 ($.32 per share, net of tax) in the third quarter of 2001. See note G for further discussion on the classification of losses on debt extinguishments classified as extraordinary. In the second quarter of 2001, the Company incurred approximately $800,000 ($.05 per share, net of tax) of duplicative interest expense, net of interest income, since the redemption of the 9 7/8% Senior Subordinated Notes due 2004 did not occur on the same day as the financing.
G. SFAS No. 141, “Business Combinations” requires all business combinations initiated after June 30, 2001 to be accounted for using the purchase method.
On January 1, 2002, the Company adopted SFAS No. 142, “Goodwill and Other Intangible Assets” (“SFAS No. 142”). This statement applies to goodwill and intangible assets acquired after June 30, 2001, as well as goodwill and intangible assets previously acquired. Under this statement, goodwill and intangible assets determined to have an indefinite useful life are no longer amortized, instead these assets are evaluated for impairment on an annual basis and whenever events or business conditions warrant. All other intangible assets will continue to be amortized over their remaining estimated useful lives and are evaluated for impairment in accordance with the provisions of SFAS No. 144 “Accounting for the Impairment or Disposal of Long-Lived Assets” (“SFAS No. 144”). In addition, SFAS No. 142 requires additional disclosures with respect to each major intangible asset class relative to gross and net carrying amounts, accumulated amortization, amortization expense, weighted-average amortization periods and residual value assumptions, if any. SFAS No. 142 also requires that the estimated aggregate amortization expense for each of the five succeeding years be disclosed. The adoption of SFAS No. 142 did not result in any material changes to the Company’s accounting for intangible assets and additional disclosures will be required in the Company’s 2002 annual report on Form 10-K to be filed with the SEC.
The Company has preliminarily evaluated the carrying value of goodwill and determined that no impairment exists and therefore no impairment loss will be required to be recorded in the Company’s Consolidated Financial Statements as a result of adopting SFAS No. 142 on January 1, 2002. Impairment charges, if any, associated with the initial adoption will be retroactively recorded as a cumulative effect of a change in accounting principle in the first quarter of 2002. Thereafter, any additional goodwill impairment charges will be included in income from continuing operations unless they relate to a discontinued operation. SFAS No. 142 also requires additional disclosures with respect to goodwill by reportable segment for changes in goodwill balances, impairment losses, if any, including the methodology for determination, and the amount of goodwill included in the gain or loss on disposal of a reporting unit.
Goodwill amortization included in operating earnings in the first half and second quarter of 2001 was approximately $8,269,000 and $4,102,000 as determined under accounting principles generally accepted in the United States in effect in the year 2001. As adjusted, earnings per share from continuing operations for the six months and three months ended June 30, 2001 would have been approximately $2.28 per share and $1.88 per share, respectively, excluding the after tax effect of goodwill amortization.
SFAS No. 143, “Accounting for Asset Retirement Obligations” (“SFAS No. 143”) addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. SFAS No. 143 requires that the fair value of a liability for an asset retirement obligation be recognized in the period in which it is incurred if a reasonable estimate of fair value can be made. The associated asset retirement costs are capitalized as part of the carrying amount of the long-lived asset. SFAS No. 143 is effective for financial statements issued for fiscal years beginning after June 15, 2002 with early adoption permitted. The Company is currently evaluating the impact of adopting SFAS No. 143 on its consolidated financial statements.
SFAS No. 144 addresses financial accounting and reporting for the impairment or disposal of long-lived assets and does not apply to goodwill or intangible assets that are not being amortized and certain other long-lived assets. This Statement supersedes SFAS No. 121, “Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of”, and the accounting and reporting provisions of APB Opinion No. 30 “Reporting the Results of Operations - Reporting the Effects of Disposal of a Segment of a Business and Extraordinary, Unusual and Infrequently Occurring Events and Transactions” (“APB 30”), for the disposal of a segment of a business (as previously defined in that Opinion). This Statement also amends ARB No. 51, “Consolidated Financial Statements”, to eliminate the exception to consolidation for a subsidiary for which control is likely to be temporary. SFAS No. 144 is effective for financial statements issued for fiscal years beginning after December 15, 2001 with early adoption encouraged. The Company adopted SFAS No. 144 in the third quarter of 2001 and applied this accounting standard as of the beginning of the year. Adoption of this accounting standard did not result in any material changes in net earnings from accounting standards previously applied. Adoption of this standard did result in the accounting for the gain (loss) on the sale of certain businesses and their related operating results as discontinued operations (see Note I).
SFAS No. 145 “Rescission of FASB Statements No. 4, 44 and 64 Amendment of FASB Statement No. 13 and Technical Corrections”, was issued in April 2002 and addresses the reporting of gains and losses resulting from the extinguishment of debt, accounting for sale-leaseback transactions and rescinds or amends other existing authoritative pronouncements. SFAS No.145 requires that any gain or loss on extinguishment of debt that does not meet the criteria of APB 30 for classification as an extraordinary item shall not be classified as extraordinary and shall be included in earnings from continuing operations. The provisions of this statement related to the extinguishment of debt are effective for financial statements issued in fiscal years beginning after May 15, 2002 with early application encouraged. The Company is currently evaluating the impact of adopting SFAS No. 145 on its consolidated financial statements.
H. Net sales from continuing operations for the Company’s segments for the three months and six months ended June 29, 2002 and June 30, 2001 were as follows:
Three Six Months Ended Months Ended June 29, June 30, June 29, June 30, 2002 2001 2002 2001 (Amounts in millions) Net Sales: Residential building products $ 183 .9 $ 161 .4 $ 363 .9 $ 325 .3 Air conditioning and heating products 190 .2 189 .2 338 .0 326 .5 Windows, doors and siding products 148 .1 144 .4 249 .4 238 .4 Consolidated net sales $ 522 .2 $ 495 .0 $ 951 .3 $ 890 .2
Operating earnings and depreciation and amortization expense from continuing operations for the Company’s segments for the three months and six months ended June 29, 2002 and June 30, 2001 were as follows:
Three Six Months Ended Months Ended June 29, June 30, June 29, June 30, 2002 2001 2002 2001 (Amounts in millions) Operating Earnings (Loss): Residential building products $ 31 .4 $ 21 .0 $ 59 .3 $ 41 .8 Air conditioning and heating products 23 .7 23 .1 37 .3 32 .1 Windows, doors and siding products 28 .7 17 .0 35 .7 16 .9 Other (22 .3) (6 .9) (32 .9) (12 .9) Consolidated operating earnings 61 .5 54 .2 99 .4 77 .9 Unallocated: Interest expense (24 .2) (25 .7) (48 .4) (51 .0) Investment income 1 .9 2 .0 3 .7 4 .2 Earnings before provision for income taxes $ 39 .2 $ 30 .5 $ 54 .7 $ 31 .1 Depreciation and Amortization: Residential building products $ 3 .9 $ 5 .8 $ 8 .1 $ 11 .5 Air conditioning and heating products 3 .2 3 .1 6 .5 6 .3 Windows, doors and siding products 3 .8 5 .5 7 .4 10 .8 Other .1 .1 .3 .3 Consolidated depreciation and amortization expense $ 11 .0 $ 14 .5 $ 22 .3 $ 28 .9 Amortization of Goodwill included in Depreciation and Amortization Expense: Residential building products $ 1 .8 $ 3 .7 Air conditioning and heating products .3 .7 Windows, doors and siding products 2 .0 3 .9 Consolidated goodwill amortization expense $ 4 .1 $ 8 .3 Capital Expenditures: Residential building products $ 2 .2 $ 4 .0 $ 3 .7 $ 7 .1 Air conditioning and heating products 1 .8 5 .3 2 .6 8 .3 Windows, doors and siding products 1 .5 2 .6 3 .6 10 .2 Other .4 -- .4 -- Consolidated capital expenditures $ 5 .9 $ 11 .9 $ 10 .3 $ 25 .6
I. On April 2, 2002, the Company’s Ply Gem Industries, Inc. (“Ply Gem”) subsidiary sold the capital stock of its subsidiary Hoover Treated Wood Products, Inc. (“Hoover”), for approximately $20,000,000 of net cash proceeds and recorded a pre-tax gain of approximately $5,400,000 ($.37 per share, net of tax benefit from the utilization of a capital loss carry forward of $.15 per share) in the second quarter of 2002. The operating results of Hoover were previously included in the Other Segment. Approximately $8,500,000 of the cash proceeds was used to pay down outstanding debt under the Company’s Ply Gem credit facility.
On September 21, 2001, the Company sold the capital stock of Peachtree Doors and Windows, Inc. (“Peachtree”) and SNE Enterprises, Inc. (“SNE”), subsidiaries of Ply Gem, for approximately $45,000,000, and recorded a pre-tax loss on the sale of approximately $34,000,000 ($1.79 per share, net of tax) in the third quarter of 2001, including the write off of approximately $11,700,000 of unamortized intangible assets. Peachtree and SNE were previously part of the Windows, Doors and Siding Products segment. A portion of the cash proceeds was used to pay down approximately $20,500,000 of outstanding debt under the Company’s Ply Gem credit facility.
The sale of these subsidiaries and their related operating results have been excluded from earnings from continuing operations and are classified as discontinued operations for all periods presented.
The following is a summary of the results of discontinued operations for three months and six months ended June 29, 2002 and June 30, 2001:
Three Six Months Ended Months Ended June 29, June 30, June 29, June 30, 2002 2001 2002 2001 (Amounts in thousands) (Unaudited) Net Sales $ --