Form 10-Q for Nortek, Inc. for the Third Quarter of 2006

Nortek, Inc.
(exact name of registrant as specified in its charter)

Delaware	05-0314991
(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

	September 30, 2006		December 31, 2005
Assets
Current Assets:
Unrestricted cash and cash equivalents	$	56.2	$	77.2
Restricted cash		0.1		---
Accounts receivable, less allowances of $6.9 and $6.6		346.6		272.2
Inventories:
Raw materials		88.5		75.2
Work in process		42.1		21.4
Finished goods		165.5		145.7
		296.1		242.3

Prepaid expenses		15.4		10.5
Other current assets		25.2		26.3
Prepaid income taxes		19.3		20.7
Total current assets		758.9		649.2

Property and Equipment, at Cost:
Land		10.7		8.8
Buildings and improvements		97.3		84.3
Machinery and equipment		163.9		141.1
		271.9		234.2
Less accumulated depreciation		49.6		28.7
Total property and equipment, net		222.3		205.5

Other Assets:
Goodwill		1,404.4		1,381.3
Intangible assets, less accumulated amortization of $43.7 and $27.3		139.3		114.5
Deferred debt expense		34.5		36.9
Long-term portion of receivable from affiliate		---		17.5
Restricted investments and marketable securities		3.5		4.0
Other assets		7.8		7.7
		1,589.5		1,561.9
Total Assets	$	2,570.7	$	2,416.6

Liabilities and Stockholder’s Investment

Current Liabilities:
Notes payable and other short-term obligations	$	44.9	$	4.9
Current maturities of long-term debt		24.2		14.8
Accounts payable		187.6		159.0
Accrued expenses and taxes, net		213.2		196.7
Total current liabilities		469.9		375.4

Other Liabilities:
Deferred income taxes		31.6		20.4
Long-term payable to affiliate		17.3		---
Other		128.6		166.4
		177.5		186.8

Notes, Mortgage Notes and Obligations Payable, Less Current Maturities		1,357.9		1,354.1

Stockholder’s Investment:
Common stock, $0.01 par value, authorized 3,000 shares; 3,000 issued
and outstanding at September 30, 2006 and December 31, 2005		---		---
Additional paid-in capital		412.1		415.0
Retained earnings		139.1		77.8
Accumulated other comprehensive income		14.2		7.5
Total stockholder's investment		565.4		500.3
Total Liabilities and Stockholder's Investment	$	2,570.7	$	2,416.6

	For the third quarter ended
	September 30, 2006			October 1, 2005
	(Dollar amounts in millions)

Net Sales	$	579.0		$	522.9

Costs and Expenses:
Cost of products sold		404.2			361.3
Selling, general and administrative expense, net		100.9			89.6
Amortization of intangible assets		6.2			4.4
		511.3			455.3
Operating earnings		67.7			67.6
Interest expense		(29.9	)		(26.6	)
Investment income		0.4			0.3
Earnings before provision for income taxes		38.2			41.3
Provision for income taxes		15.1			16.3
Net earnings	$	23.1		$	25.0

	For the first nine months ended
	September 30, 2006			October 1, 2005
	(Dollar amounts in millions)

Net Sales	$	1,677.3		$	1,455.8

Costs and Expenses:
Cost of products sold		1,168.4			1,021.1
Selling, general and administrative expense, net		299.2			254.1
Amortization of intangible assets		16.2			13.1
Gain from curtailment of post-retirement medical benefits		(35.9	)		---
		1,447.9			1,288.3
Operating earnings		229.4			167.5
Interest expense		(85.9	)		(76.0	)
Investment income		1.6			1.1
Earnings before provision for income taxes		145.1			92.6
Provision for income taxes		55.7			35.6
Net earnings	$	89.4		$	57.0

	For the first nine months ended
	September 30, 2006			October 1, 2005
	(Dollar amounts in millions)
Cash Flows from operating activities:
Net earnings	$	89.4		$	57.0

Adjustments to reconcile net earnings to net cash provided by operating activities:
Depreciation and amortization expense, including amortization of purchase price allocated to inventory		44.2			34.3
Non-cash interest expense, net		3.9			4.1
Non-cash stock-based compensation expense		0.3			0.3
Gain from curtailment of post-retirement medical benefits		(35.9	)		---
Loss (gain) on property and equipment		1.4			(0.2	)
Deferred federal income tax provision		10.0			22.7
Changes in certain assets and liabilities, net of effects from acquisitions and dispositions:
Accounts receivable, net		(43.4	)		(64.5	)
Inventories		(37.9	)		(11.6	)
Prepaids and other current assets		5.1			(8.2	)
Accounts payable		9.2			32.9
Accrued expenses and taxes		31.7			(3.1	)
Long-term assets, liabilities and other, net		(4.7	)		(3.9	)
Total adjustments to net earnings		(16.1	)		2.8
Net cash provided by operating activities		73.3			59.8
Cash Flows from investing activities:
Capital expenditures		(33.0	)		(15.0	)
Net cash paid for businesses acquired		(67.0	)		(88.8	)
Payment of IPO expenses for NTK Holdings		(2.4	)		---
Proceeds from the sale of property and equipment		3.4			6.1
Change in restricted cash and marketable securities		0.4			(2.1	)
Other, net		(3.1	)		(1.5	)
Net cash used in investing activities		(101.7	)		(101.3	)
Cash Flows from financing activities:
Increase in borrowings		83.9			31.2
Payment of borrowings		(46.8	)		(37.5	)
Dividends		(28.1	)		---
Other, net		(1.6	)		(0.2	)
Net cash provided by (used in) financing activities		7.4			(6.5	)
Net decrease in unrestricted cash and cash equivalents		(21.0	)		(48.0	)
Unrestricted cash and cash equivalents at the beginning of the period		77.2			95.0
Unrestricted cash and cash equivalents at the end of the period	$	56.2		$	47.0

Supplemental disclosure of cash flow information:

Interest paid	$	90.9		$	85.7

Income taxes paid, net	$	17.1		$	9.3

					Accumulated
	Additional				Other
	Paid in		Retained		Comprehensive		Comprehensive
	Capital		Earnings		Income		Income

Balance, July 2, 2005	$	414.3	$	29.3	$	2.5	$	---
Net earnings		---		25.0		---		25.0
Other comprehensive income:
Currency translation adjustment		---		---		5.0		5.0
Comprehensive income							$	30.0
Capital contribution from parent		0.3		---		---
Stock-based compensation		0.1		---		---
Balance, October 1, 2005	$	414.7	$	54.3	$	7.5

			(Accumulated			Accumulated
	Additional		Deficit)			Other
	Paid in		Retained			Comprehensive			Comprehensive
	Capital		Earnings			Income (Loss)			Income (Loss)

Balance, December 31, 2004	$	410.6	$	(2.7	)	$	9.1		$	---
Net earnings		---		57.0			---			57.0
Other comprehensive income (loss):
Currency translation adjustment		---		---			(1.6	)		(1.6	)
Comprehensive income									$	55.4
Capital contribution from parent		3.8		---			---
Stock-based compensation		0.3		---			---
Balance, October 1, 2005	$	414.7	$	54.3		$	7.5

					Accumulated
	Additional				Other
	Paid in		Retained		Comprehensive			Comprehensive
	Capital		Earnings		Income (Loss)			Income (Loss)

Balance, July 1, 2006	$	412.0	$	116.0	$	14.4		$	---
Net earnings		---		23.1		---			23.1
Other comprehensive income (loss):
Currency translation adjustment		---		---		(0.2	)		(0.2	)
Comprehensive income								$	22.9
Stock-based compensation		0.1		---		---
Balance, September 30, 2006	$	412.1	$	139.1	$	14.2

							Accumulated
	Additional						Other
	Paid in			Retained			Comprehensive		Comprehensive
	Capital			Earnings			Income		Income

Balance, December 31, 2005	$	415.0		$	77.8		$	7.5	$	---
Net earnings		---			89.4			---		89.4
Other comprehensive income:
Currency translation adjustment		---			---			6.7		6.7
Comprehensive income									$	96.1
Capital contribution from (dividend to) parent		1.7			(28.1	)		---
Adjustment of carryover basis of continuing
management investors in the THL Transaction		(4.9	)		---			---
Stock-based compensation		0.3			---			---
Balance, September 30, 2006	$	412.1		$	139.1		$	14.2

(A) The unaudited condensed consolidated financial statements presented herein (the “Unaudited Financial Statements”) reflect the financial position, results of operations and cash flows of Nortek, Inc. (the “Company” or “Nortek”) and all of its wholly-owned subsidiaries. The Unaudited Financial Statements include the accounts of Nortek, as appropriate, and all of its wholly-owned subsidiaries, 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 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. Certain amounts in the prior year’s Unaudited Financial Statements have been reclassified to conform to the current year 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”).

In connection with the acquisition of Nortek, Inc. by affiliates of Thomas H. Lee Partners, L.P. (the “THL Transaction”) on August 27, 2004, certain employees and consultants received approximately 21,184 C-1 units and approximately 42,368 C-2 units, which represent equity interests in THL-Nortek Investors, LLC (“Investors LLC”) that function similar to stock awards. Since the initial distribution of the C-1 and C-2 Units on August 27, 2004, approximately 1,916 and 3,548 additional C-1 Units and C-2 Units, respectively, have been granted to certain of the Company’s officers and employees, net of forfeitures. The C-1 units vest pro rata on a quarterly basis over a three-year period and approximately 14,807 and 9,065 were vested at September 30, 2006 and December 31, 2005, respectively. The total fair value of the C-1 units is approximately $1.1 million. Approximately $0.4 million remains to be amortized at September 30, 2006. The C-2 units only vest in the event that certain performance-based criteria, as defined, are met. As of September 30, 2006 and December 31, 2005, there was approximately $1.6 million of unamortized stock-based employee compensation with respect to the C-2 units, which will be amortized in the event that it becomes probable that the C-2 units or any portion thereof will vest. The C-1 and C-2 units were valued using the Black-Scholes option pricing model to determine the freely-traded call option value based upon information from comparable public companies, which was then adjusted to reflect the discount period, the minority interest factor and the lack of marketability factor to arrive at the final valuations.

The Company adopted SFAS No. 123R and followed the modified-prospective transition method of accounting for stock-based compensation. Under the modified-prospective transition method, the Company is required to recognize compensation cost for share-based payments to employees based on their grant-date fair value beginning January 1, 2006. Measurement and attribution of compensation cost for awards that were granted prior to, but not vested as of the date SFAS No. 123R was adopted are based on the same estimate of the grant-date fair value and the same attribution method used previously under SFAS No. 123.

Prior to the THL Transaction on August 27, 2004, certain members of the Company’s management, including certain of the Company’s executive officers, held stock options to purchase shares of common stock of the former Nortek Holdings, Inc. issued to them under the former Nortek Holdings 2002 Stock Option Plan. These members of the Company’s management, who would have been entitled to receive cash payments upon consummation of the Acquisition in respect to these options, instead sold a portion of those options to THL Buildco, Inc. and surrendered the remainder of these options held by them for cancellation without immediate payment. In consideration for option cancellations without immediate payment, these option holders received an equity interest in Investors LLC and Nortek Holdings established a deferred compensation plan and credited for the account of each of these management participants under the plan a number of notional Class A units of Investors LLC equal in value to the value of the old stock options so cancelled.

On May 10, 2006, NTK Holdings borrowed an aggregate principal amount of $205.0 million under a senior unsecured loan facility. A portion of these proceeds was used to contribute capital of approximately $25.9 million to Nortek Holdings, which was used by Nortek Holdings, together with a dividend of approximately $28.1 million from Nortek to make a distribution of approximately $54.0 million to participants under the 2004 Nortek Holdings, Inc. Deferred Compensation Plan (including certain of the Company’s executive officers). This second distribution resulted in additional interest expense of approximately $3.9 million recorded by Nortek Holdings and consequently the participants in the deferred compensation plan are not entitled to any further distributions.

In connection with accounting for the purchase price for the Acquisition, the Company recorded a deferred tax benefit of approximately $32.6 million representing the tax benefit related to the deferred compensation plan of Nortek Holdings. At December 31, 2005, the remaining deferred tax benefit was approximately $17.5 million, which is included in deferred income taxes in the accompanying unaudited condensed consolidated balance sheet. At September 30, 2006, there was no remaining deferred tax benefit as the second distribution noted above is deductible for income tax purposes upon payment.

	(Amounts in millions)

Balance as of December 31, 2004		$	1,295.1
Acquisitions during the year ended December 31, 2005			91.9
Purchase accounting adjustments			(4.8	)
Impact of foreign currency translation			(0.9	)
Balance as of December 31, 2005			1,381.3
Acquisitions during the first nine months ended September 30, 2006			33.3
Purchase accounting adjustments			(7.0	)
Adjustment of carryover basis of continuing management investors in the THL Transaction			(4.9	)
Impact of foreign currency translation			1.7
Balance as of September 30, 2006		$	1,404.4

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). Approximately $32.2 million and $56.1 million of goodwill associated with certain companies acquired during the first nine months ended September 30, 2006 and the year ended December 31, 2005, respectively, 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 $4.9 million non-cash “Adjustment of carryover basis of continuing management investors in the THL Transaction” for the first nine months ended September 30, 2006 as noted in the table above, represents a correction to the original 2004 purchase accounting for the Acquisition resulting in a reduction of goodwill with a corresponding reduction in Stockholder’s Investment. The $4.9 million adjustment has not been reflected in the consolidated financial statements for prior periods as the Company has determined that the adjustment is not material to the prior period consolidated financial statements.

Intangible assets increased approximately $24.8 million from approximately $114.5 million at December 31, 2005 to approximately $139.3 million at September 30, 2006. This increase is primarily as a result of intangible assets acquired as a result of business acquisitions made during the first nine months of 2006 (see Note C), partially offset by intangible asset amortization of approximately $16.2 million for the first nine months ended September 30, 2006.

In June 2006, the Financial Accounting Standards Board (“FASB”) issued FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes (an interpretation of FASB Statement No. 109)”, (“FIN 48”) which is effective for fiscal years beginning after December 15, 2006 with earlier adoption encouraged. FIN 48 was issued to clarify the accounting for uncertainty in income taxes recognized in an entity's financial statements in accordance with FASB Statement No. 109. FIN 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN 48 also provides guidance on financial reporting and classification of differences between tax positions taken in a tax return and amounts recognized in the financial statements. The Company is currently evaluating the impact of adopting FIN 48 on its consolidated financial statements.

In September 2006, the FASB issued Statement of Financial Accounting Standard (“SFAS”) No. 157, “Fair Value Measurements” (“SFAS No. 157”). SFAS No. 157 defines fair value, establishes a framework for measuring fair value in accordance with U.S. generally accepted accounting principles, and expands disclosures about fair value measurements. The provisions of SFAS No. 157 are effective for the Company beginning January 1, 2008, including interim periods within the year ending December 31, 2008. Earlier adoption is encouraged. The Company is currently evaluating the impact of adopting SFAS No. 157 on its consolidated financial statements.

In September 2006, the FASB issued SFAS No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans - an amendment of FASB Statements No. 87, 88, 106, and 132(R)” (“SFAS No. 158”). SFAS No. 158 requires an employer to recognize the over-funded or under-funded status of a defined benefit post-retirement plan (other than a multi-employer plan) as an asset or liability in its statement of financial position and to recognize changes in the funded status in the year in which the changes occur through comprehensive income. The Company will be required to initially recognize the funded status of a defined benefit plan and to provide the required disclosures for the fiscal year ended December 31, 2006. SFAS No. 158 also requires an employer to measure the funded status of a plan as of the date of its year-end statement of financial position, with limited exceptions. The requirement to measure plan assets and benefit obligations as of the date of the employer’s fiscal year-end statement of financial position is effective for the Company for the fiscal year ended December 31, 2008. The Company is currently evaluating the impact of adopting SFAS No. 158 on its consolidated financial statements.

(B) On April 3, 2006, Nortek amended and restated the credit agreement for its senior secured credit facility, expanding its $100.0 million revolving credit facility to $200.0 million and modifying certain covenants. The amendment provides Nortek with additional liquidity and covenant flexibility. The revolving credit facility matures in August 2010 and includes both a letter of credit sub-facility and swing line loan sub-facility. At September 30, 2006, there was approximately $35.0 million of outstanding borrowings under the U.S. revolving portion of its senior secured credit facility.

(C)

On July 18, 2006, the Company, through its wholly-owned subsidiary, Linear LLC (“Linear”), acquired the stock of Magenta Research, Ltd. (“Magenta”) for approximately $14.4 million (utilizing approximately $11.9 million of cash, of which approximately $10.0 million was borrowed under Nortek’s revolving credit facility, and issuing unsecured 6% subordinated notes totaling $2.5 million due July 2008) plus contingent consideration, which may be payable in future years. Magenta is located in New Milford, CT and designs and sells products that distribute audio and video signals over Category 5 and fiber optic cable to multiple display screens.

On June 26, 2006, the Company, through Linear, acquired the stock of Secure Wireless, Inc. (“Secure Wireless”) and Advanced Bridging Technologies, Inc. (“ABT”) through two mergers, for approximately $10.5 million, of which approximately $10.0 million was borrowed under Nortek’s revolving credit facility, plus contingent consideration, which may be payable in future years. Secure Wireless designs and sells wireless security products for the residential and commercial markets while ABT designs and sells innovative radio frequency control products and accessories. Both Secure Wireless and ABT are located in Carlsbad, CA.

On April 14, 2006, the Company, through two newly formed subsidiaries of its Air Conditioning and Heating Products Segment, acquired the assets and certain liabilities of Huntair, Inc. (“Huntair”) and Cleanpak International, LLC (“Cleanpak”), for approximately $48.4 million (utilizing approximately $40.0 million of cash which was borrowed under Nortek’s revolving credit facility, including approximately $1.6 million to fund a portion of Huntair and Cleanpak’s initial working capital needs, and issuing unsecured 6% subordinated notes totaling $10.0 million due April 2008) plus contingent consideration, which may be payable in future years. Both Huntair and Cleanpak are located near Portland, OR and manufacture, market and distribute custom air handlers and related products for commercial and cleanroom applications.

On January 25, 2006, the Company, through its wholly-owned subsidiary, Mammoth China Ltd. (“Mammoth China”), increased its ownership interests in Mammoth (Zhejiang) EG Air Conditioning Ltd. (“MEG”) and Shanghai Mammoth Air Conditioning Co., Ltd. (“MSH”) to sixty-percent for approximately $2.4 million. The majority ownership transaction relating to MSH was finalized with the Chinese authorities in May 2006. Prior to January 25, 2006, Mammoth China had a forty-percent minority interest in MEG and a fifty-percent interest in MSH.

On December 9, 2005, the Company, through Linear, acquired the stock of GTO, Inc. (“GTO”) through a merger for approximately $28.2 million in cash, plus contingent consideration of approximately $0.2 million which was paid in the first quarter of 2006. GTO is located in Tallahassee, FL and designs, manufactures and sells automatic electric gate openers and access control devices to enhance the security and convenience of both residential and commercial property fences.

On August 26, 2005, the Company, through its wholly-owned subsidiary, Elan Home Systems, LLC (“Elan”), acquired the assets and certain liabilities of Sunfire Corporation (“Sunfire”) for approximately $4.0 million (utilizing approximately $3.5 million of cash and issuing an unsecured subordinated promissory note in the amount of approximately $0.5 million) plus contingent consideration, which may be payable in future years. Sunfire is located in Snohomish, WA and manufactures, sells and designs home audio and home cinema amplifiers, receivers and subwoofers.

On July 15, 2005, the Company, through Linear, acquired the assets and certain liabilities of Niles Audio Corporation (“Niles”) for approximately $77.7 million. In connection with the acquisition of Niles, the Company utilized approximately $67.7 million of cash and issued an unsecured promissory note in the amount of approximately $10.0 million. Niles is located in Miami, FL and manufactures, sells and designs products that provide customers with innovative solutions for whole-house distribution and integration of audio and video systems, including speakers, receivers, amplifiers, automation devices, controls and accessories.

On June 13, 2005, the Company, through its wholly-owned subsidiary Nordyne Inc. (“Nordyne”), acquired the assets and certain liabilities of International Marketing Supply, Inc. (“IMS”) for approximately $4.6 million, utilizing approximately $4.1 million of cash and issuing an unsecured promissory note in the amount of approximately $0.5 million. IMS is located in Miami, FL and sells heating, ventilation and air conditioning equipment to customers in Latin America and the Caribbean.

On April 26, 2005, the Company, through Linear, acquired the stock of Panamax for approximately $11.8 million (utilizing approximately $9.5 million of cash and issuing an unsecured promissory note in the amount of approximately $2.3 million) plus contingent consideration of approximately $4.5 million which was paid in the first quarter of 2006. Panamax is located in Petaluma, CA and sells and designs innovative power conditioning and surge protection products that prevent loss or damage of home and small business equipment due to power disturbances.

Acquisitions contributed approximately $66.9 million, $11.6 million and $2.8 million to net sales, operating earnings and depreciation and amortization expense, respectively, for the third quarter ended September 30, 2006 and contributed approximately $149.5 million, $14.3 million and $6.6 million to net sales, operating earnings and depreciation and amortization expense, respectively, for the first nine months ended September 30, 2006. Huntair, Cleanpak, MEG, MSH and IMS are included in the Air Conditioning and Heating Products Segment in the Company’s segment reporting, while all remaining acquisitions are included in the Home Technology Products Segment in the Company’s segment reporting (see Note E).

During the third quarter and first nine months ended September 30, 2006, the Company recorded approximately $0.7 million and $2.9 million, respectively, of amortization of excess purchase price allocated to inventory related to the acquisitions noted above as a non-cash charge to cost of goods sold. During the first nine months ended October 1, 2005, the Company recorded approximately $0.1 million of amortization of excess purchase price allocated to inventory related to the acquisitions noted above as a non-cash charge to cost of goods sold.

Acquisitions are accounted for as purchases and accordingly have been included in the Company’s consolidated results of operations since the acquisition date. For recent acquisitions, the Company has made preliminary estimates of the fair value of the assets and liabilities of the acquired companies, including intangible assets and property and equipment, as of the date of acquisition, utilizing information available at the time that the Company’s Unaudited 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 appraisals of intangible assets and property and equipment and finalizing the integration plans for certain of the acquired companies, which are expected to be completed by the end of 2006.

(D) Operating results for the third quarter and first nine months ended September 30, 2006 include non-cash foreign exchange gains of approximately $0.1 million and $0.4 million, respectively. Operating results for the third quarter ended October 1, 2005 include a non-cash foreign exchange gain of approximately $0.1 million and include a non-cash foreign exchange loss of approximately $1.3 million for the first nine months ended October 1, 2005 related to intercompany debt not indefinitely invested in the Company’s subsidiaries. A portion of this expense has been allocated to the Company’s reporting segments for the third quarter and first nine months ended October 1, 2005 (see Note E).

The operating results of the Air Conditioning and Heating Products Segment for the third quarter and first nine months ended September 30, 2006 include an approximate $1.2 million gain and $1.6 million gain, respectively, related to the favorable settlement of litigation. Operating results for the first nine months ended October 1, 2005 include a gain of approximately $1.4 million from the settlement of certain obligations of former subsidiaries (see Note G).

The Company has a management agreement with an affiliate of Thomas H. Lee Partners, L.P. providing for certain financial and strategic advisory and consultancy services. Nortek expensed approximately $0.6 million and $1.8 million for the third quarter and first nine months ended September 30, 2006, respectively, and expensed approximately $0.5 million and $1.5 million for the third quarter and first nine months ended October 1, 2005, respectively, related to this management agreement in the accompanying Unaudited Condensed Consolidated Statement of Operations.

(E) The Company is a leading diversified manufacturer of innovative, branded residential and commercial ventilation and home technology convenience and security products, which is organized within three reporting segments: the Residential Ventilation Products Segment, the Home Technology Products Segment and the Air Conditioning and Heating Products Segment. The Air Conditioning and Heating Products Segment combines the results of the Company’s residential and commercial heating, ventilating and air conditioning (“HVAC”) businesses. In the tables below, Unallocated includes corporate related items, intersegment eliminations and certain income and expense items not allocated to reportable segments.

The Company evaluates segment performance based on operating earnings before allocations of corporate overhead costs. Intersegment net sales and intersegment eliminations were not material for any of the periods presented. The financial statement impact of all purchase accounting adjustments, including intangible asset amortization and goodwill, is reflected in the applicable operating segment, which are the Company’s reporting units.

	For the third quarter ended
	September 30, 2006			October 1, 2005
	(Dollar amounts in millions)

Net sales:
Residential ventilation products	$	200.4		$	198.4
Home technology products		127.4			100.6
Air conditioning and heating products		251.2			223.9
Consolidated net sales	$	579.0		$	522.9

Operating earnings:
Residential ventilation products (1)	$	30.7		$	30.8
Home technology products		24.1			20.6
Air conditioning and heating products (2)		19.1			22.2
Subtotal		73.9			73.6
Unallocated:
Stock-based compensation charges		(0.1	)		(0.1	)
Foreign exchange gain on intercompany debt		0.1			---
Unallocated, net		(6.2	)		(5.9	)
Consolidated operating earnings		67.7			67.6
Interest expense		(29.9	)		(26.6	)
Investment income		0.4			0.3
Earnings before provision for income taxes	$	38.2		$	41.3

(2) The operating results of the Air Conditioning and Heating Products Segment for the third quarter ended September 30, 2006 include an approximate $1.2 million gain related to the favorable settlement of litigation. The operating results of the Air Conditioning and Heating Products Segment for the third quarter ended October 1, 2005 include a non-cash foreign exchange gain of approximately $0.1 million related to intercompany debt not indefinitely invested in the Company’s subsidiaries.

	For the first nine months ended
	September 30, 2006			October 1, 2005
	(Dollar amounts in millions)

Net sales:
Residential ventilation products	$	619.3		$	598.1
Home technology products		350.0			240.9
Air conditioning and heating products		708.0			616.8
Consolidated net sales	$	1,677.3		$	1,455.8

Operating earnings:
Residential ventilation products (1)	$	136.6		$	88.6
Home technology products (2)		55.8			46.4
Air conditioning and heating products (3)		56.3			49.9
Subtotal		248.7			184.9
Unallocated:
Stock-based compensation charges		(0.3	)		(0.3	)
Foreign exchange gain (loss) on intercompany debt		0.4			(0.3	)
Gain on legal settlement		---			1.4
Unallocated, net		(19.4	)		(18.2	)
Consolidated operating earnings		229.4			167.5
Interest expense		(85.9	)		(76.0	)
Investment income		1.6			1.1
Earnings before provision for income taxes	$	145.1		$	92.6

(1)

The operating results of the Residential Ventilation Products Segment for the first nine months ended September 30, 2006 include an approximate pre-tax $35.9 million curtailment gain related to post-retirement medical and life insurance benefits and an approximate pre-tax $4.1 million charge related to the planned closure of the Company’s NuTone, Inc. Cincinnati, Ohio facility (see Note I). The operating results of the Residential Ventilation Products Segment for the first nine months ended October 1, 2005 include a non-cash foreign exchange loss of approximately $1.0 million related to intercompany debt not indefinitely invested in the Company’s subsidiaries.

	For the third quarter ended
	September 30, 2006		October 1, 2005
	(Dollar amounts in millions)

Depreciation Expense:
Residential ventilation products	$	3.2	$	2.8
Home technology products		1.1		0.6
Air conditioning and heating products		4.2		3.2
Other		0.2		0.2
Consolidated depreciation expense	$	8.7	$	6.8

Amortization expense:
Residential ventilation products (1)	$	1.8	$	2.3
Home technology products		2.5		1.5
Air conditioning and heating products (2)		2.8		0.8
Other		0.1		0.2
Consolidated amortization expense	$	7.2	$	4.8