UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
Form 10-Q
                        (Mark One)
[X]           QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

 
For the quarterly period ended September 27, 2008

OR

[  ]       TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission file number:  333-126389

NTK Holdings, Inc.
(exact name of registrant as specified in its charter)
   
Delaware
20-1934298
(State or other jurisdiction of incorporation or organization)
(IRS Employer Identification Number)
   
50 Kennedy Plaza
Providence, Rhode Island
 
02903-2360
(Address of principal executive offices)
(zip code)
   
Registrant’s Telephone Number, Including Area Code:
(401) 751-1600
 
Securities registered pursuant to Section 12(b) of the Act:  None



Indicate by check mark whether registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.
Yes [_] No [X]

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company.  See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act).  (Check one):

Large accelerated filer [_]
Accelerated filer [_]
Non-accelerated filer [X]
Smaller reporting company [_]

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).Yes [_] No [X]

There is no established public trading market for any of the common stock of the Company.  The aggregate market value of voting stock held by non-affiliates is zero.

The number of shares of Common Stock outstanding as of November 7, 2008 was 3,000.
 
 

PART I – FINANCIAL INFORMATION

Item 1.  Financial Statements

NTK HOLDINGS, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEET
(Dollar amounts in millions)

   
September 27,
    
December 31,
  
   
2008
    
2007
  
Assets
            
Current Assets:
            
Unrestricted cash and cash equivalents
   $ 80.2     $ 53.4  
Restricted cash
     0.7       1.0  
Accounts receivable, less allowances of $13.3 and $12.2
     338.0       320.0  
Inventories:
                
   Raw materials
     100.5       91.6  
   Work in process
     32.0       29.9  
   Finished goods
     191.2       187.1  
      323.7       308.6  
                 
Prepaid expenses
     14.2       11.7  
Other current assets
     14.4       19.8  
Prepaid income taxes
     22.1       28.9  
   Total current assets
     793.3       743.4  
                 
Property and Equipment, at Cost:
                
Land
     10.6       10.4  
Buildings and improvements
     112.4       110.1  
Machinery and equipment
     234.0       217.1  
      357.0       337.6  
Less accumulated depreciation
     129.0       99.7  
   Total property and equipment, net
     228.0       237.9  
                 
Other Assets:
                
Goodwill
     919.0       1,528.9  
Intangible assets, less accumulated amortization of $102.2 and $80.7
     143.8       156.6  
Deferred debt expense
     49.0       31.4  
Restricted investments and marketable securities
     2.4       2.3  
Other assets
     9.8       10.3  
      1,124.0       1,729.5  
Total Assets
   $ 2,145.3     $ 2,710.8  
                 
Liabilities and Stockholder’s (Deficit) Investment
          
                 
Current Liabilities:
                
Notes payable and other short-term obligations
   $ 65.0     $ 64.0  
Current maturities of long-term debt
     15.8       32.4  
Long-term debt (see Note B)
     9.2       ---  
Accounts payable
     214.4       192.7  
Accrued expenses and taxes, net
     242.6       248.6  
   Total current liabilities
     547.0       537.7  
                 
Other Liabilities:
                
Deferred income taxes
     32.1       37.0  
Other
     150.7       125.6  
      182.8       162.6  
                 
Notes, Mortgage Notes and Obligations Payable, Less Current Maturities
     2,021.1       1,921.5  
                 
Commitments and Contingencies (see Note G)
          
                 
Stockholder’s (Deficit) Investment:
                
Common stock, $0.01 par value, authorized 3,000 shares;
  
   3,000 issued and outstanding at September 27, 2008 and December 31, 2007
     ---       ---  
Additional paid-in capital
     25.9       21.6  
(Accumulated deficit) retained earnings
     (664.4 )     29.7  
Accumulated other comprehensive income
     32.9       37.7  
   Total stockholder's (deficit) investment
     (605.6 )     89.0  
Total Liabilities and Stockholder's (Deficit) Investment
   $ 2,145.3     $ 2,710.8  


The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
 
 
NTK HOLDINGS, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
 
   
For the third quarter ended
  
   
Sept. 27, 2008
    
Sept. 29, 2007
  
   
(Dollar amounts in millions)
  
             
Net Sales
   $ 582.6     $ 602.2  
                 
Costs and Expenses:
                
   Cost of products sold (see Note D)
     434.4       433.0  
   Selling, general and administrative expense, net (see Note D)
     121.2       125.1  
   Goodwill impairment charge (see Note A)
     600.0       ---  
   Amortization of intangible assets
     6.7       6.5  
      1,162.3       564.6  
Operating (loss) earnings
     (579.7 )     37.6  
Interest expense
     (53.4 )     (46.4 )
Investment income
     0.2       0.6  
Loss before provision for income taxes
     (632.9 )     (8.2 )
Provision for income taxes
     3.7       0.5  
Net loss
   $ (636.6 )   $ (8.7 )
 
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
 
 
NTK HOLDINGS, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
 
   
For the first nine months ended
  
   
Sept. 27, 2008
    
Sept. 29, 2007
  
   
(Dollar amounts in millions)
  
             
Net Sales
   $ 1,769.9     $ 1,799.0  
                 
Costs and Expenses:
                
   Cost of products sold (see Note D)
     1,299.3       1,269.7  
   Selling, general and administrative expense, net (see Note D)
     358.2       363.3  
   Goodwill impairment charge (see Note A)
     600.0       ---  
   Amortization of intangible assets
     21.8       18.9  
      2,279.3       1,651.9  
Operating (loss) earnings
     (509.4 )     147.1  
Interest expense
     (143.8 )     (137.4 )
Loss from debt retirement
     (9.9 )     ---  
Investment income
     0.6       1.5  
(Loss) earnings before provision for income taxes
     (662.5 )     11.2  
Provision for income taxes
     31.6       11.4  
Net loss
   $ (694.1 )   $ (0.2 )
 
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
 
 
 NTK HOLDINGS, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS

   
For the first nine months ended
  
   
Sept. 27, 2008
    
Sept. 29, 2007
  
   
(Dollar amounts in millions)
  
Cash Flows from operating activities:
            
Net loss
   $ (694.1 )   $ (0.2 )
                 
Adjustments to reconcile net (loss) earnings to net cash provided by operating activities:
                
Depreciation and amortization expense
     53.1       46.9  
Non-cash interest expense, net
     53.7       50.4  
Non-cash goodwill impairment charge
     600.0       ---  
Non-cash stock-based compensation expense
     0.1       0.3  
(Gain) loss on property and equipment
     (2.5 )     1.0  
Loss from debt retirement
     9.9       ---  
Deferred federal income tax provision (benefit)
     16.8       (9.4 )
Changes in certain assets and liabilities, net of effects from acquisitions and dispositions:
                
Accounts receivable, net
     (20.2 )     (12.6 )
Inventories
     (16.3 )     (36.7 )
Prepaids and other current assets
     (1.5 )     1.4  
Accounts payable
     22.7       16.3  
Accrued expenses and taxes
     31.2       (3.5 )
Long-term assets, liabilities and other, net
     5.1       4.1  
   Total adjustments to net loss
     752.1       58.2  
   Net cash provided by operating activities
     58.0       58.0  
Cash Flows from investing activities:
                
Capital expenditures
     (20.7 )     (24.1 )
Net cash paid for businesses acquired
     (32.7 )     (93.5 )
Proceeds from the sale of property and equipment
     6.2       0.6  
Change in restricted cash and marketable securities
     0.3       1.5  
Other, net
     (2.0 )     (1.4 )
   Net cash used in investing activities
     (48.9 )     (116.9 )
Cash Flows from financing activities:
                
Increase in borrowings
     165.4       112.8  
Payment of borrowings
     (105.5 )     (40.2 )
Net proceeds from sale of the 10% Senior Secured Notes due 2013
     742.2       ---  
Redemption of Nortek's senior secured credit facility
     (755.5 )     ---  
Fees paid in connection with new debt facilities
     (33.1 )     ---  
Equity investment by THL-Nortek Investors, LLC
     4.2       ---  
Payment in connection with senior unsecured loan facility rollover
     ---       (4.5 )
   Net cash provided by financing activities
     17.7       68.1  
Net change in unrestricted cash and cash equivalents
     26.8       9.2  
Unrestricted cash and cash equivalents at the beginning of the period
     53.4       57.4  
Unrestricted cash and cash equivalents at the end of the period
   $ 80.2     $ 66.6  
                 
Supplemental disclosure of cash flow information:
                
                 
Interest paid
   $ 75.7     $ 95.4  
                 
Income taxes paid, net
   $ 9.3     $ 4.7  
 
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
 
 
NTK HOLDINGS, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDER’S INVESTMENT
FOR THE THIRD QUARTER ENDED SEPTEMBER 29, 2007
(Dollar amounts in millions)

               
Accumulated
        
   
Additional
          
Other
        
   
Paid-in
    
Retained
    
Comprehensive
    
Comprehensive
  
   
Capital
    
Earnings
    
Income (Loss)
    
Income (Loss)
  
                         
                         
Balance, June 30, 2007
   $ 21.5     $ 45.2     $ 20.1     $ ---  
Net loss
     ---       (8.7 )     ---       (8.7 )
Other comprehensive income (loss):
                                
   Currency translation adjustment
     ---       ---       8.1       8.1  
   Pension liability adjustment
     ---       ---       (0.1 )     (0.1 )
Comprehensive loss
                           $ (0.7 )
                                 
Stock-based compensation
     0.1       ---       ---          
Balance, September 29, 2007
   $ 21.6     $ 36.5     $ 28.1          
 
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

 
NTK HOLDINGS, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDER’S INVESTMENT
FOR THE FIRST NINE MONTHS ENDED SEPTEMBER 29, 2007
(Dollar amounts in millions)

               
Accumulated
        
   
Additional
          
Other
        
   
Paid-in
    
Retained
    
Comprehensive
    
Comprehensive
  
   
Capital
    
Earnings
    
Income (Loss)
    
Income (Loss)
  
                         
                         
Balance, December 31, 2006
   $ 21.3     $ 39.9     $ 11.6     $ ---  
Net loss
     ---       (0.2 )     ---       (0.2 )
Other comprehensive income (loss):
                                
   Currency translation adjustment
     ---       ---       16.7       16.7  
   Pension liability adjustment
     ---       ---       (0.2 )     (0.2 )
Comprehensive income
                           $ 16.3  
                                 
Adoption of FIN 48 (see Note F)
     ---       (3.2 )     ---          
Stock-based compensation
     0.3       ---       ---          
Balance, September 29, 2007
   $ 21.6     $ 36.5     $ 28.1          
 
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

 
NTK HOLDINGS, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDER’S (DEFICIT) INVESTMENT
FOR THE THIRD QUARTER ENDED SEPTEMBER 27, 2008
(Dollar amounts in millions)

               
Accumulated
        
   
Additional
          
Other
        
   
Paid-in
    
Accumulated
    
Comprehensive
    
Comprehensive
  
   
Capital
    
Deficit
    
Income (Loss)
    
Loss
  
                         
                         
Balance, June 28, 2008
   $ 25.9     $ (27.8 )   $ 39.0     $ ---  
Net loss
     ---       (636.6 )     ---       (636.6 )
Other comprehensive loss:
                                
   Currency translation adjustment
     ---       ---       (5.7 )     (5.7 )
   Pension liability adjustment
     ---       ---       (0.4 )     (0.4 )
Comprehensive loss
                           $ (642.7 )
                                 
Balance, September 27, 2008
   $ 25.9     $ (664.4 )   $ 32.9          
 
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

 
NTK HOLDINGS, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDER’S (DEFICIT) INVESTMENT
FOR THE FIRST NINE MONTHS ENDED SEPTEMBER 27, 2008
(Dollar amounts in millions)

         
Retained
    
Accumulated
        
   
Additional
    
Earnings
    
Other
        
   
Paid-in
    
(Accumulated
    
Comprehensive
    
Comprehensive
  
   
Capital
    
Deficit)
    
Income (Loss)
    
Loss
  
                         
                         
Balance, December 31, 2007
   $ 21.6     $ 29.7     $ 37.7     $ ---  
Net loss
     ---       (694.1 )     ---       (694.1 )
Other comprehensive loss:
                                
   Currency translation adjustment
     ---       ---       (4.4 )     (4.4 )
   Pension liability adjustment
     ---       ---       (0.4 )     (0.4 )
Comprehensive loss
                           $ (698.9 )
                                 
Capital contribution from parent
     4.2       ---       ---          
Stock-based compensation
     0.1       ---       ---          
Balance, September 27, 2008
   $ 25.9     $ (664.4 )   $ 32.9          
 
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
 
 
 
NTK HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 27, 2008 AND SEPTEMBER 29, 2007

(A)        The unaudited condensed consolidated financial statements presented herein (the “Unaudited Financial Statements”) reflect the financial position, results of operations and cash flows of NTK Holdings, Inc. (the “Company” or “NTK Holdings”) and all of its wholly-owned subsidiaries.  The Unaudited Financial Statements include the accounts of NTK Holdings, as appropriate, and all of its wholly-owned subsidiaries, including Nortek, Inc. (“Nortek”), after elimination of intercompany accounts and transactions, without audit and, in the opinion of management, reflect all adjustments of a normal recurring nature necessary for a fair statement of the interim periods presented.  Although certain information and footnote disclosures normally included in annual financial statements prepared in accordance with U.S. generally accepted accounting principles have been omitted, the Company believes that the disclosures included are adequate to make the information presented not misleading.  Operating results for the third quarter and first nine months ended September 27, 2008 are not necessarily indicative of the results that may be expected for other interim periods or for the year ending December 31, 2008.  Certain amounts in the prior year’s Unaudited Financial Statements have been reclassified to conform to the current period presentation.  It is suggested that these Unaudited Financial Statements 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 Current Reports on Form 8-K as filed with the Securities and Exchange Commission (“SEC”).

Goodwill and Other Long-Lived Assets

The following table presents a summary of the activity in goodwill by reporting segment for the first nine months ended September 27, 2008:
 
               
Air
        
   
Residential
    
Home
    
Conditioning
        
   
Ventilation
    
Technology
    
and Heating
        
   
Products
    
Products
    
Products *
    
Consolidated
  
   
(Dollar amounts in millions)
  
                         
Balance as of December 31, 2007
   $ 798.8     $ 415.6     $ 314.5     $ 1,528.9  
Estimated impairment losses
     (340.0 )     (60.0 )     (200.0 )     (600.0 )
Purchase accounting adjustments
     (7.9 )     0.2       ---       (7.7 )
Impact of changes in foreign currency
                                
   exchange rates and other
     (0.6 )     (0.2 )     (1.4 )     (2.2 )
Balance as of September 27, 2008
   $ 450.3     $ 355.6     $ 113.1     $ 919.0  

 
*
The $200 million impairment loss relates to the Residential HVAC reporting unit.  Segment goodwill, after recording the estimated goodwill impairment loss, at September 27, 2008 consists of $33.7 million related to the Residential HVAC reporting unit and $79.4 million related to the Commercial HVAC reporting unit.

 
The Company has classified as goodwill the cost in excess of fair value of the net assets (including tax attributes) of companies acquired in purchase transactions (see Note C), net of any subsequent impairment losses.  Approximately $47.3 million of goodwill associated with certain companies acquired during the year ended December 31, 2007 will be deductible for income tax purposes.  Purchase accounting adjustments relate principally to final revisions resulting from the completion of fair value adjustments and adjustments to deferred income taxes that impact goodwill.
 
The Company accounts for acquired goodwill and intangible assets in accordance with Statement of Financial Standards (“SFAS”) No. 141, “Business Combinations” (“SFAS No. 141”) and SFAS No. 142, “Goodwill and Other Intangible Assets” (“SFAS No. 142”) which involves judgment with respect to the determination of the purchase price and the valuation of the acquired assets and liabilities in order to determine the final amount of goodwill.

Under SFAS No. 142, goodwill and intangible assets determined to have indefinite useful lives are not amortized.  Instead these assets are evaluated for impairment on an annual basis, or more frequently when an event occurs or circumstances change between annual tests that would more likely than not reduce the fair value of the reporting unit below its carrying value, including, among others, a significant adverse change in the business climate.  The Company has set the annual evaluation date as of the first day of its fiscal fourth quarter.  The Company believes that the severe impact of the worldwide crisis in the credit and financial markets in September and October 2008, declines in new and existing home sales, the instability in the troubled mortgage market and rising unemployment will have a further negative impact on consumer disposable income and spending on home remodeling and repair expenditures through at least 2009. As a result, the Company concluded in the third quarter of 2008 that indicators of potential goodwill impairment were present and therefore the Company needed to perform an interim test of goodwill impairment in accordance with SFAS No. 142.

In accordance with SFAS No. 142, the Company prepared a “Step 1” Test that compares the estimated fair value of each reporting unit to its carrying value.  In the event that the carrying value of a reporting unit exceeded the estimated fair value, the Company was required to perform a “Step 2” Test and measure the impairment loss by allocating the estimated fair value of the reporting unit, as determined in Step 1, to the reporting units’ assets and liabilities, with the residual amount representing the implied fair value of goodwill.  To the extent the implied fair value of goodwill is less than the carrying value, an impairment loss is recognized. The Company utilized a discounted cash flow approach in order to value the Company’s reporting units for the Step 1 Test, which required that the Company forecast future cash flows of the reporting units and discount the cash flow stream based upon a weighted average cost of capital that was derived, in part, from comparable companies within similar industries.  The reporting units evaluated for goodwill impairment by the Company have been determined to be the same as the Company’s operating segments in accordance with the criteria in SFAS No. 142 for determining reporting units (see Note E) and include Residential Ventilation Products (“RVP”), Home Technology Products (“HTP”) and the residential and commercial segments of Air Conditioning and Heating Products (“Residential HVAC” and “Commercial HVAC”)