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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-----------------
Form 10-K
(Mark One) ------------------
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934 (FEE REQUIRED)
For the fiscal year ended December 31, 1994
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For the transition period from to
Commission file number: 1-6112
------------------------
Nortek, Inc.
(exact name of Registrant as specified in its charter)
Delaware 05-0314991
(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification Number)
50 Kennedy Plaza 02903-2360
Providence, Rhode Island (zip code)
(Address of principal executive offices)
Registrant's telephone number, including area code: (401) 751-1600
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
Common Stock, $1.00 par value New York Stock Exchange
Preference Stock Purchase Rights New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
Title of Class
Special Common Stock, $1.00 par value
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 X No __.
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K [X].
The aggregate market value of the voting stock held by nonaffiliates of the
registrant as of February 17, 1995 was $107,282,927. See Item 12.
The number of shares of Common Stock outstanding as of February 17, 1995 was
12,022,300. The number of shares of Special Common Stock outstanding as of
February 17, 1995 was 527,355.
Documents Incorporated by Reference
Portions of the registrant's proxy statement for use at its 1995 Annual Meeting
of Shareholders are incorporated by reference into Part III.
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PART I
Item 1. Business
The Company is a diversified manufacturer of residential and commercial
building products, operating within three principal product groups: the
Residential Building Products Group; the Air Conditioning and Heating ("HVAC")
Products Group; and the Plumbing Products Group. Through these product groups,
the Company manufactures and sells, primarily in the United States and Canada,
a wide variety of products for the residential and commercial construction,
manufactured housing, and the do-it-yourself and professional remodeling and
renovation markets. (As used in this report, the term "Company" refers to
Nortek, Inc., together with its subsidiaries, unless the context indicates
otherwise.)
The Company's performance is dependent to a significant extent upon the
levels of new residential construction, residential replacement and remodeling
and non-residential construction, all of which are affected by such factors as
interest rates, inflation and unemployment. In recent periods, the Company's
product groups have operated in an environment of increasing levels of
construction and remodeling activity, particularly new housing starts which
increased approximately 20% between 1990 and 1994. New residential
construction housing starts, however, remain below the levels experienced in
the mid-1980's. The Company's operations have been affected by the difficult
economic conditions in the Northeastern United States, California and Canada.
However, the actions taken to reduce production costs and overhead levels and
improve the efficiency and profitability of the Company's operations have
enabled it to significantly increase operating earnings, as well as to position
the Company for growth. In the near term, the Company expects to operate in an
environment of relatively stable levels of construction and remodeling
activity. However, recent increases in interest rates could have a negative
impact on the level of housing construction and remodeling activity.
Inflation has not had a material effect on the Company's results of
operations and financial condition until mid-1994, when the Company experienced
significant increases in certain costs and expenses including raw material
costs. There can be no assurance that the Company will be able to sufficiently
increase its sales prices if these cost increases persist.
Additional information concerning the Company's business is set forth in
Management's Discussion and Analysis of Financial Condition and Results of
Operations, Item 7, Part II of this report (pages 14 through 25) and
incorporated herein by reference.
Residential Building Products Group
The Residential Building Products Group manufactures and distributes built-
in products primarily for the residential new construction, do-it-yourself and
professional remodeling and renovation markets. The principal products sold by
the Group are kitchen range hoods, bath fans, combination units (fan, heater
and light combinations) and bath cabinets. The Group is one of the largest
suppliers in the United States and Canada of range hoods, bath fans and
combination units. Products are sold under the Broan(R), Nautilus(R) and Air
Care (TM) brand names, among others, to distributors and dealers of electrical
and lighting products, kitchen and bath dealers, retail home centers and OEMs
(original equipment manufacturers). Other products sold by this Group include,
among others, wireless security products, garage door openers, built-in home
intercoms and entertainment systems, home automation systems, door chimes and
central vacuum systems.
Customers for the Group's products include residential and electrical
contractors, professional remodelers and do-it-yourself homeowners. The
Group's products are sold on a wholesale basis through distributors and dealers
of electrical and lighting products, on a retail basis through building supply
centers and to OEMs for inclusion in their product lines.
A key component of the Group's operating strategy is the introduction of
new products which capitalize on the strong Broan (R), Nautilus(R) and Air Care
(TM) brand names and the extensive distribution system of the Group's
businesses. Recent product introductions under these brand names include:
indoor air quality systems for continuous and intermittent home ventilation;
down-draft ventilating systems for cooking ranges; SensAire (R) (humidity and
motion sensing) bath fans; and the Rangemaster(R) line of commercial-style
range hoods for use in the home. Consumer preferences are important in
developing new products and establishing marketing strategies, and the Company
believes that the Group's ability to develop new and improved product styles
and features provides a significant competitive advantage.
With respect to certain product lines, several private label customers
account for a substantial portion of revenues. In 1994, approximately 13.2% of
the total sales of such product lines were made to private label customers.
Production generally consists of fabrication from coil and sheet steel and
formed metal utilizing stamping, pressing and welding methods, assembly with
components and subassemblies purchased from outside sources (motors, fan
blades, heating elements, wiring harnesses, controlling devices, glass mirrors,
lighting fixtures, lumber, wood and polyethylene components, speakers, grilles
and similar electronic components, and compact disc and tape player mechanisms)
and painting, finishing and packaging.
The Group offers a broad array of products with various features and
styles across a range of price points. The Company believes that the Group's
variety of product offerings helps the Group maintain and improve its market
position for its principal products. At the same time, the Company believes
that the Group's status as a low-cost producer, in large part as a result of
cost reduction initiatives, provides the Group with a competitive advantage.
With respect to range hoods, bath fans, combination units and radio
intercoms, the Company believes that the Group's primary competitor is NuTone,
a subsidiary of Williams Holdings Companies. The market for bath cabinets is
highly fragmented with no single dominant supplier. The Group's other products
compete with many domestic and international suppliers in their various
markets. The Group competes with suppliers of competitive products primarily
on the basis of quality, distribution, delivery and price. Although the Group
believes it competes favorably with respect to each of these factors,
competition among suppliers of the Group's products is intense and certain of
these suppliers have greater financial and marketing resources than the Group.
The Group has eight manufacturing plants and employed 1,804 full-time
people as of December 31, 1994, 85 of whom are covered by a collective
bargaining agreement which expires in 1996. The Company believes that the
Group's relationships with its employees are satisfactory.
Air Conditioning and Heating Products Group
The Air Conditioning and Heating Products Group manufactures and sells
HVAC systems for custom-designed commercial applications and for manufactured
and site-built residential housing. The Group's commercial products consist of
HVAC systems which are custom-designed to meet customer specifications for
commercial offices, manufacturing and educational facilities, hospitals, retail
stores and governmental buildings. Such systems are primarily designed to
operate on building rooftops (including large self-contained walk-in-units) or
on individual floors within a building, and range from 40 to 600 tons of
cooling capacity. The Group markets its commercial products under the
Governair(R), Mammoth(R) and Temtrol(TM) brand names. For manufactured and
site-built residential housing, the Group's products include central air
conditioners, heat pumps, furnaces and a wide range of accessories marketed
under the Intertherm(R) and Miller(R) brand names. Residential central air
conditioning products range from 1.5 to 5 tons of cooling capacity and furnaces
range from 45,000 BTU's to 144,000 BTU's of heating capacity. The Group's
residential products also include portable and permanent electric baseboard
heating products.
Commercial Products. The Group's commercial products include packaged rooftop
units and air handlers, custom walk-in units, individual floor units and heat
pumps. The market for commercial HVAC equipment is segmented between standard
and custom-designed equipment. Standard equipment can be manufactured at a
lower cost and therefore offered at substantially lower initial prices than
custom-designed equipment. As a result, suppliers of standard equipment
generally have a larger share of the overall commercial HVAC market than
suppliers of custom-designed equipment, including the Group. However, because
of certain building designs, shapes or other characteristics, the Company
believes there are many applications for which custom-designed equipment is
required or is more cost effective over the life of the building. Unlike
standard equipment, the Group's commercial HVAC equipment can be designed to
match the exact space, capacity and performance requirements of the customer.
The Group sells its commercial products primarily to contractors, owners and
developers of commercial office buildings, manufacturing and educational
facilities, hospitals, retail stores and government buildings. The Group seeks
to maintain strong relationships nationwide with design engineers, owners and
developers, the persons who are most likely to value the benefits and long-term
cost efficiencies of the Group's custom-designed equipment.
The Company estimates that more than half of the Group's commercial sales
in 1994 were attributable to replacement and retrofit activity, which typically
is less cyclical than new construction activity and generally commands higher
margins. The Group continues to develop product and marketing programs to
increase penetration in the growing replacement and retrofit market.
For many commercial applications, the ability to provide a custom-designed
system is the principal concern of the customer. The Group's packaged rooftop
and self-contained walk-in units maximize a building's rentable floor space
because they are located outside the building. In addition, factors relating
to the manner of construction and timing of installation of commercial HVAC
equipment can often favor custom-designed rather than standard systems. As
compared with site-built HVAC systems, the Group's systems are factory
assembled and then installed, rather than assembled on site, permitting
extensive testing prior to shipment. As a result, the Group's commercial
systems can be installed later in the construction process than site-built
systems, thereby saving the owner or developer construction and labor costs.
The Group's individual floor units offer flexibility in metering and billing, a
substantial advantage if a building is to be occupied in stages or where HVAC
usage varies significantly from floor to floor.
The Group's commercial products are marketed through independently owned
manufacturers' representatives and an in-house sales, marketing and engineering
group of 55 persons as of December 31, 1994. The independent representatives
are typically HVAC engineers, a factor which is significant in marketing the
Group's commercial products because of the design intensive nature of the
market segment in which the Group competes.
The Company believes that the Group is among the largest suppliers of
custom-designed commercial HVAC products in the United States. The Group's
five largest competitors in the commercial HVAC market are Brod & McClung, Inc.
(which sells under the "Pace" tradename), Carrier Corporation, McQuay (a
division of Snyder-General Corporation), Miller-Picking (a division of York
International Corporation) and The Trane Company (a subsidiary of American
Standard Inc.). The Group competes primarily on the basis of engineering
support, quality, flexibility in design and construction and total installed
system cost. Although the Company believes that the Group competes favorably
with respect to certain of these factors, most of the Group's competitors have
greater financial and marketing resources than the Group and enjoy greater
brand awareness. However, the Company believes that the Group's ability to
produce equipment that meets the performance characteristics required by the
particular product application provides it with advantages not enjoyed by
certain of these competitors.
Residential Products. The Group is one of the largest suppliers of air
conditioners, heat pumps and furnaces to the manufactured housing market in the
United States. In addition, the Group manufactures and markets HVAC products
for site-built homes, a business it entered in 1987.
The principal factors affecting the market for the Group's residential
HVAC products are the levels of manufactured housing shipments and housing
starts and the demand for replacement and modernization of existing equipment.
The Company anticipates that the replacement market will continue to expand as
a large number of previously installed heating and cooling products become
outdated or reach the end of their useful lives during the 1990s. This growth
may be accelerated by a tendency among consumers to replace older heating and
cooling products with higher efficiency models prior to the end of such
equipment's useful life. The Company estimates that slightly less than half of
the Group's net sales of residential HVAC products in 1994 were attributable to
the replacement market, which tends to be less cyclical than the new
construction market. The market for residential cooling products, including
those sold by the Group, is affected by spring and summer temperatures. The
Group does not sell window air conditioners, a segment of the market which is
highly seasonal and especially affected by spring and summer temperatures. The
Company believes that the Group's ability to offer both heating and cooling
products helps offset the effects of seasonality of the Group's sales.
The Group sells its manufactured housing products to builders of
manufactured housing and, through distributors, to manufactured housing dealers
and owners of such housing. The majority of sales to builders of manufactured
housing consist of furnaces designed and engineered to meet or exceed certain
standards mandated by federal agencies. These standards differ in several
important respects from the standards for furnaces used in site-built
residential homes. The after market channel of distribution includes sales of
both new and replacement air conditioning units and heat pumps and furnaces.
A substantial portion of site-built residential products have been
introduced in the past several years, including a new line of furances and a
reengineered line of high efficiency air conditioners and heat pumps.
Residential HVAC products for use in site-built homes are sold through
independently-owned distributors who sell to HVAC dealers and contractors.
The Company believes that the Group has one major competitor in this
market, Evcon Industries, which markets its products under the "Evcon/Coleman"
name. Competition in the site-built residential HVAC market is intense, and
many suppliers of such equipment have substantially greater financial and
marketing resources than the Group and enjoy greater brand awareness. In these
markets, the Group competes with, among others, Carrier Corporation, Lennox
Industries, The Trane Company and York International Corporation. The Group
competes in both the manufactured housing and site-built markets on the basis
of breadth and quality of its product line, distribution, product availability
and price. The Company believes that the Group competes favorably with respect
to these factors.
The Group has six manufacturing plants and employed 1,861 full-time people
as of December 31, 1994, 192 of whom are covered under a collective bargaining
agreement which expires in 1995. The Company believes that the Group's
relationships with its employees are satisfactory.
Plumbing Products Group
The Plumbing Products Group manufactures and sells vitreous china bathroom
fixtures (including lavatories, toilet bowls, flush tanks, bidets and urinals),
fiberglass and acrylic bathtubs, shower stalls and whirlpools, brass and die
cast faucets, bath cabinets and vanities and shower doors, and also markets
stainless steel and enameled steel tubs and sinks. In addition to its standard
product offerings, the Group also sells designer bathroom fixtures, 1.6 gallon
water-efficient toilets and a variety of products that are accessible to
physically challenged individuals. Products are sold under the URC(TM),
Universal-Rundle(R), CareFree(R), Milwaukee Faucets(TM) and Raphael(R) brand
names principally to wholesale plumbing distributors and retail home centers.
End customers of the Group's products are generally home builders, do-it-
yourself homeowners, remodeling contractors and commercial builders.
The Group sells its products to distributors and home centers primarily
through independently owned manufacturer's representatives supported by 54
sales and marketing personnel employed by the Group as of December 31, 1994.
The Group competes with many suppliers of plumbing and related products,
several of which have greater financial and marketing resources than the Group
and greater brand awareness. The Group's competitors include American Standard
Inc., Eljer Industries and Kohler Company. The Group competes primarily on the
basis of service, price, quality, and breadth of product line offerings. The
Group believes it competes favorably by offering quality products and customer
service at a reasonable price and by developing products using new
technologies.
The Plumbing Products Group has eight manufacturing facilities and
employed 1,340 full-time people as of December 31, 1994, approximately 936 of
whom are covered by collective bargaining agreements which expire in 1996 and
1997. The Company believes that the Group's relationships with its employees
are satisfactory.
RECENT DEVELOPMENTS
Disposition
On March 31, 1994, the Company sold its Dixieline Lumber Company business
(a chain of ten retail home centers in the greater San Diego area). See Note
9, Notes to Consolidated Financial Statements, Item 8 of Part II of this
report, incorporated herein by reference.
GENERAL CONSIDERATIONS
Employees
The Company employed approximately 5,317 persons at December 31, 1994.
Backlog
Backlog expected to be filled during 1995 was approximately $111,705,000
at December 31, 1994 ($95,839,000 at December 31, 1993). Backlog is not
regarded as a significant factor for operations where orders are generally for
prompt delivery. While backlog stated for December 31, 1994 is believed to be
firm, the possibility of cancellations makes it difficult to assess the
firmness of backlog with certainty.
Research and Development
The Company's research and development activities are principally new
product development and do not involve significant expenditures.
Patents and Trademarks
The Company holds numerous design and process patents that it considers
important, but no single patent is material to the overall conduct of its
business. It is the Company's policy to obtain and protect patents whenever
such action would be beneficial to the Company. The Company owns several
trademarks that it considers material to the marketing of its products,
including Broan(R), Nautilus(R), Air Care(TM), Governair(R), Mammoth(R),
Temtrol(TM), Miller(R), Intertherm(R), Softheat(R), Powermiser(R), URC(TM) and
Universal-Rundle(R). The Company believes that its rights in these trademarks
are adequately protected.
Raw Materials
The Company purchases raw materials and most components used in its
various manufacturing processes. The principal raw materials purchased by the
Company are rolled sheet, formed and galvanized steel, copper, aluminum, plate
mirror glass, silica, lumber, plywood, paints, chemicals, resins and plastics.
The materials, molds and dies, subassemblies and components purchased from
other manufacturers, and other materials and supplies used in manufacturing
processes have generally been available from a variety of sources. Whenever
practical, the Company establishes multiple sources for the purchase of raw
materials and components to achieve competitive pricing, ensure flexibility and
protect against supply disruption. However, recent increases in raw material
costs may affect future supply availability due in part to raw material demands
by other industries.
Working Capital
The carrying of inventories to support distributors and to permit prompt
delivery of finished goods requires substantial working capital. Substantial
working capital is also required to carry receivables. See "Liquidity and
Capital Resources" in Management's Discussion and Analysis of Financial
Condition and Results of Operations, beginning on Page 21 of this report,
incorporated herein by reference.
Executive Officers of the Registrant
Name Age Position
Richard L. Bready 50 Chairman, President and
Chief Executive Officer
Almon C. Hall 48 Vice President, Controller
and Chief Accounting Officer
Richard J. Harris 58 Vice President and Treasurer
Siegfried Molnar 54 Senior Vice President -
Group Operations
Kenneth J. Ortman 59 Senior Vice President -
Group Operations
Kevin W. Donnelly 40 Vice President, General Counsel
and Secretary
The executive officers have served in the same or substantially similar
executive positions with the Company for at least the past five years, except
Mr. Bready, who became Chairman and Chief Executive Officer in 1990 after
serving as President, Chief Operating and Chief Financial Officer of the
Company for more than the past five years.
Executive Officers are elected annually by the Board of Directors of the
Company and serve until their successors are chosen and qualified. Mr. Bready
has an employment agreement with the Company providing for his employment as
Chief Executive Officer through 1998. The Company's executive officers include
only those officers of the Company who perform policy-making functions for the
Company as a whole and have managerial responsibility for major aspects of the
Company's overall operations. A number of other individuals who serve as
officers of the Company or its subsidiaries perform policy-making functions and
have managerial responsibilities for the subsidiary or division by which they
are employed, although not for the Company overall. Certain of these
individuals could, depending on earnings of such unit, be more highly
compensated than some executive officers of the Company.
Item 2. Properties
Set forth below is a brief description of the location and general
character of the principal administrative and manufacturing facilities and
other material real properties of the Company, all of which the Company
considers to be in satisfactory repair. All properties are owned, except for
those indicated by an asterisk, which are leased.
Approximate
Location Description Square Feet
Union, IL Manufacturing/Warehouse/Administrative 174,000*
Hartford, WI Manufacturing/Warehouse/Administrative 402,000
Old Forge, PA Warehouse/Administrative 40,000
Bensenville, IL Warehouse/Administrative 69,000*
Mississauga, ONT Manufacturing/Administrative 108,000
Dallas, TX Manufacturing/Administrative 71,000
Carlsbad, CA Administrative 30,000
Hong Kong Manufacturing 30,000*
Waupaca, WI Manufacturing 35,000
St. Peters, MO Warehouse/Administrative 250,000*
St. Louis, MO Manufacturing 214,000
Boonville, MO Manufacturing 250,000*
Chaska, MN Manufacturing/Administrative 230,000*
Oklahoma City, OK Manufacturing/Administrative 122,000
Okarche, OK Manufacturing/Administrative 112,000
Los Angeles, CA Manufacturing/Administrative 177,000
New Castle, PA Manufacturing/Administrative 420,000
Hondo, TX Manufacturing/Administrative 404,000
Monroe, GA Manufacturing/Administrative 414,000
Union Point, GA Manufacturing/Administrative 191,000
Ottumwa, IA Manufacturing/Administrative 85,000
Milwaukee, WI Manufacturing/Administrative 76,000
Rensselaer, IN Manufacturing/Administrative 165,000
Chicago, IL Manufacturing/Administrative 100,000
Providence, RI Administrative 31,000*
Item 3. Legal Proceedings
The Company and its operating units are subject to numerous federal, state
and local laws and regulations, including environmental laws and regulations
that impose limitations on the discharge of pollutants into the air and water
and establish standards for the treatment, storage and disposal of solid and
hazardous wastes. The Company believes that it is in substantial compliance
with the material laws and regulations applicable to it. The Company and its
subsidiaries or former subsidiaries are involved in current, and may become
involved in future, remedial actions under federal and state environmental laws
and regulations which impose liability on companies to clean up, or contribute
to the cost of cleaning up, sites at which their hazardous wastes or materials
were disposed of or released. Such claims may relate to properties or business
lines acquired by the Company after a release has occurred. In other
instances, the Company may be partially liable under law or contract to other
parties that have acquired businesses or assets from the Company for past
practices relating to hazardous substances management. The Company believes
that all such claims asserted against it, or such obligations incurred by it,
will not have a material adverse effect upon the Company's financial condition
or results of operations. Expenditures in 1993 and 1994 to evaluate and
remediate such sites were not material. However, the Company is presently
unable to estimate accurately its ultimate financial exposure in connection
with identified or yet to be identified remedial actions due among other
reasons to: (i) uncertainties surrounding the nature and application of
environmental regulations, (ii) the Company's lack of information about
additional sites at which it may be listed as a potentially responsible party
("PRP"), (iii) the level of clean-up that may be required at specific sites and
choices concerning the technologies to be applied in corrective actions and
(iv) the time periods over which remediation may occur. Furthermore, since
liability for site remediation is joint and several, each PRP is potentially
wholly liable for other PRPs that become insolvent or bankrupt. Thus, the
solvency of other PRPs could directly affect the Company's ultimate aggregate
clean-up costs. In certain circumstances, the Company's liability for clean-up
costs may be covered in whole or in part by insurance or indemnification
obligations of third parties.
In addition to the legal matters described above, the Company and its
subsidiaries are parties to various legal proceedings incident to the conduct
of their businesses. None of these proceedings is expected to have a material
adverse effect, either individually or in the aggregate, on the Company's
financial position or results of operations. See Note 7, Notes to Consolidated
Financial Statements, Item 8 of Part II of this report, incorporated herein by
reference.
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable.
PART II
Item 5. Market for Registrant's Common Stock and Related Stockholder Matters
Stockholders of record of Nortek Common and Special Common Stock at
February 17, 1995, numbered approximately 4,166 and 3,115, respectively. There
were no dividends declared on the Common and Special Common in 1993 or 1994.
The high and low sales prices of Nortek's Common Stock traded on the New York
Stock Exchange in each quarter of 1993 and 1994 were:
1994
Quarter High Low
First 13 1/2 7 7/8
Second 9 7/8 7 7/8
Third 12 5/8 9 1/8
Fourth 12 5/8 10 1/4
1993
Quarter High Low
First 6 1/8 4 7/8
Second 5 1/2 4 3/4
Third 6 4 3/8
Fourth 9 6
See Note 5, Notes to Consolidated Financial Statements.
Item 6. Consolidated Selected Financial Data
Nortek, Inc. and Subsidiaries
For the Five Years Ended December 31, 1994
1994 1993 1992 1991 1990
---- ---- ---- ---- ----
(In Thousands Except Per Share Amounts)
Consolidated Summary of
Operations:
Net sales $737,160 $744,113 $799,979 $917,049 $1,037,239
Operating earnings (loss) 50,017 30,346 20,436 11,015 (16,512)
Loss on businesses sold (1,750) (20,300) (14,500) (15,200) ---
Earnings (loss) from
continuing operations 17,200 (12,600) (21,000) (34,700) (41,400)
Loss from discontinued
operations --- --- (3,300) --- (6,600)
Extraordinary gain (loss)
from debt retirements 200 (6,100) 100 7,600 9,900
Cumulative effect of
accounting changes 400 (2,100) --- --- ---
Net earnings (loss) 17,800 (20,800) (24,200) (27,100) (38,100)
Financial Position:
Unrestricted cash, invest-
ments and marketable
securities $105,080 $ 82,498 $ 73,748 $ 42,919 $ 61,098
Working capital 173,459 117,926 132,587 139,657 176,742
Total assets 519,217 509,209 515,373 582,372 715,427
Total debt--
Current 4,629 37,539 6,810 4,875 68,483
Long-term 219,951 178,210 201,863 232,581 284,323
Current ratio 2.1:1 1.6:1 1.9:1 1.9:1 1.9:1
Debt to equity ratio 1.9:1 2.1:1 1.6:1 1.6:1 2.0:1
Depreciation and amorti-
zation 17,960 20,726 23,644 28,373 31,050
Capital expenditures 19,424 10,809 8,804 16,015 24,523
Stockholders' investment 117,790 104,007 126,906 152,929 180,743
Common and special common
shares outstanding 12,550 12,542 12,526 13,079 13,512
Per Share:
Earnings (loss) from continuing
operations--
Primary $ 1.35 $ (1.00) $ (1.67) $ (2.57) $ (3.07)
Fully diluted 1.34 (1.00) (1.67) (2.57) (3.07)
Net earnings (loss)--
Primary 1.40 (1.66) (1.92) (2.01) (2.83)
Fully diluted 1.39 (1.66) (1.92) (2.01) (2.83)
Cash dividends--
Common --- --- --- --- .10
Special common --- --- --- --- .04
Stockholders' investment 9.39 8.29 10.13 11.69 13.38
See Notes 7 to 12 and Note 14 of the Notes to Consolidated Financial
Statements, and Item 7, Management's Discussion and Analysis of Financial
Condition and Results of Operations, Page 14, regarding the effect on operating
results of businesses sold and other matters.
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The Company is a diversified manufacturer of residential and commercial
building products, operating within three principal product groups: the
Residential Building Products Group; the Air Conditioning and Heating Products
Group; and the Plumbing Products Group. Through these product groups, the
Company manufactures and sells, primarily in the United States and Canada, a
wide variety of products for the residential and commercial construction,
manufactured housing, and the do-it-yourself and professional remodeling and
renovation markets.
In March 1994, the Company sold its Retail Home Center Operations ("Dixieline")
and for purposes of this Management's Discussion and Analysis of Financial
Condition and Results of Operations, the results of operations attributable to
Dixieline have been excluded from all data reported as ongoing operations,
including net sales, cost of products sold, selling, general and administrative
expense and segment earnings. Total consolidated operating results of the
Company, however, include the operating results of Dixieline through October 2,
1993, the date that such business was accounted for as a business held for
sale. (See Notes 1 and 9 of the Notes to Consolidated Financial Statements.)
Results of Operations
The following tables set forth, for the three years ended December 31, 1994,
(a) certain consolidated operating results, (b) the percentage change of such
results as compared to the prior year, (c) the percentage which such results
bears to net sales and (d) the change of such percentages as compared to the
prior year:
Percentage
Change
--------------
Year Ended December 31, 1993 1992
----------------------- to to
1994 1993 1992 1994 1993
---- ---- ---- ---- ----
(Amounts in Millions)
Net sales $737.2 $744.1 $800.0 (.9)% (7.0)%
Cost of products sold 520.4 532.5 595.2 2.3 10.5
Selling, general and admini-
strative expense 166.8 181.3 184.4 8.0 1.7
Operating earnings 50.0 30.3 20.4 65.0 48.5
Interest expense (26.2) (26.5) (29.2) 1.1 9.3
Interest income 5.3 3.2 4.4 65.6 (27.3)
Net gain on investment and
marketable securities --- 1.7 .9 (100.0) 88.9
Loss on businesses sold (1.7) (20.3) (14.5) 91.6 (40.0)
Earnings (loss) from continuing
operations before provision
for income taxes 27.4 (11.6) (18.0) --- 35.6
Provision for income taxes 10.2 1.0 3.0 (920.0) 66.7
Earnings (loss) from continuing
operations 17.2 (12.6) (21.0) --- 40.0
Loss from discontinued
operations --- --- (3.3) --- 100.0
Extraordinary gain (loss) from
debt retirements .2 (6.1) .1 --- ---
Cumulative effect of accounting
changes .4 (2.1) --- --- ---
Net earnings (loss) 17.8 (20.8) (24.2) --- 14.1
Percentage
Percentage of Net Sales Change
--------------
Year Ended December 31, 1993 1992
----------------------- to to
1994 1993 1992 1994 1993
---- ---- ---- ---- ----
Net sales 100.0% 100.0% 100.0% --- ---
Cost of products sold 70.6 71.5 74.4 .9 2.9
Selling, general and admini-
strative expense 22.6 24.4 23.0 1.8 (1.4)
Operating earnings 6.8 4.1 2.6 2.7 1.5
Interest expense (3.6) (3.6) (3.7) --- .1
Interest income .7 .4 .6 .3 (.2)
Net gain on investment and
marketable securities --- .2 --- (.2) .2
Loss on businesses sold (.2) (2.7) (1.8) 2.5 (.9)
Earnings (loss) from continuing
operations before provision
for income taxes 3.7 (1.6) (2.3) 5.3 .7
Provision for income taxes 1.4 .1 .3 (1.3) .2
Earnings (loss) from continuing
operations 2.3 (1.7) (2.6) 4.0 .9
Loss from discontinued
operations --- --- (.4) --- .4
Extraordinary gain (loss)
from debt retirements --- (.8) --- .8 (.8)
Cumulative effect of accounting
changes .1 (.3) --- .4 (.3)
Net earnings (loss) 2.4 (2.8) (3.0) 5.2 .2
The following table presents the net sales for the Company's principal product
groups for the three years ended December 31, 1994, and the percentage change
of such results as compared to the prior year:
Percentage
Change
------
1993 1992
Year Ended December 31, to to
-----------------------
1994 1993 1992 1994 1993
(Amounts in Millions)
---- ---- ---- ---- ----
Net sales:
Residential Building
Products $265.2 $257.2 $249.2 3.1% 3.2%
Air Conditioning and
Heating Products 338.0 275.6 237.0 22.6 16.3
Plumbing Products 134.0 128.1 126.1 4.6 1.6
----- ----- ----- ----- -----
Net sales from ongoing
operations 737.2 660.9 612.3 11.5 7.9
Businesses sold --- 83.2 187.7 (100.0) (55.7)
----- ----- ----- ----- -----
$737.2 $744.1 $800.0 (.9)% (7.0)%
===== ===== ===== ===== =====
Year Ended December 31, 1994 as Compared to the Year Ended December 31, 1993
Net sales from ongoing operations increased approximately $76,300,000, or
11.5%, as compared to 1993. Total net sales decreased approximately
$6,900,000, or approximately .9%, in 1994 as compared to 1993, as a result of
the sale of Dixieline, partially offset by the following factors. Net sales
from ongoing operations increased principally as a result of increased sales
volume of residential air conditioning and heating ("HVAC") products, increased
shipments of new and replacement HVAC products to manufactured housing
customers and increased sales levels of commercial and industrial HVAC
products. Increased sales of the Plumbing Products Group are principally due
to increased shipments of water efficient toilets, partially offset by
decreased sales levels (approximately $7,100,000) of bathroom fixtures as a
result of the restructure of certain product lines in the fourth quarter of
1993.
Cost of products sold from ongoing operations as a percentage of net sales from
ongoing operations decreased from approximately 71.1% in 1993 to approximately
70.6% in 1994. Total cost of products sold as a percentage of total net sales
decreased from approximately 71.5% in 1993 to approximately 70.6% in 1994, as a
result of the factors described below and the effect of Dixieline which
operated at higher cost levels than the Company's other product groups. The
decrease in cost of products sold as a percentage of net sales from ongoing
operations were primarily attributable to an increase in Plumbing Products
Group net sales and increased sales of residential and commercial HVAC products
in the Air Conditioning and Heating Products Group, all without a proportionate
increase in costs. To a lesser extent, these decreases in the percentage were
partially offset by slightly higher cost levels in the Residential Building
Products Group, in part, due to the effect of increased competition and the
impact of consolidating certain manufacturing facilities. The overall
improvement in cost levels is due, in part, to the Company's ongoing cost
control efforts.
Selling, general and administrative expense from ongoing operations as a
percentage of net sales from ongoing operations decreased from approximately
24.3% in 1993 to approximately 22.6% in 1994. Total selling, general and
administrative expense as a percentage of total net sales decreased from
approximately 24.4% in 1993 to approximately 22.6% in 1994, as a result of the
factors described below and the effect of Dixieline which operated at higher
expense levels than the Company's other product groups. The decrease in
selling, general and administrative expense from ongoing operations as a
percentage of net sales from ongoing operations in 1994 was principally due to
lower non-segment expense, the effect of 1993 pre-tax losses of approximately
$2,800,000 from the restructure of certain product lines in the Plumbing
Products Group, approximately $1,600,000 as a result of the sale in October
1993 of certain real property and $700,000 in connection with the consolidation
of certain manufacturing facilities by the Company's Building Products Group,
and approximately $3,200,000 of income from the settlement of insurance claims
and disputes in 1994, combined with the effect of increased net sales from
ongoing operations in 1994. The effect of the percentage increase in net sales
in the Air Conditioning and Heating Products Group in excess of the percentage
increases in net sales by the Company's other product groups was also a factor
in the overall decrease in the percentage of ongoing net sales, since this
group operates at lower expense levels than the total expense level of ongoing
operations. These improvements in the percentage were partially offset by the
effect of approximately $11,300,000 of expenses relating to the implementation
of certain cost reduction activities and manufacturing process improvements in
Year Ended December 31, 1994 as Compared to the Year Ended December 31, 1993
(Continued)
each of the Company's operating groups, the cost of installing new system
marketing expenses as a result of competitive conditions and expenses of
certain litigation and other matters in dispute. Approximately $2,600,000 of
expenses relating to certain cost reduction activities and manufacturing
process improvements were incurred in 1993.
Segment earnings from ongoing operations were approximately $61,300,000 for
1994, as compared to approximately $47,200,000 for 1993. Total segment earnings
were approximately $61,300,000 for 1994, as compared to approximately
$46,900,000 for 1993 as a result of the effect of Dixieline and the following
factors. Segment earnings are operating earnings plus corporate and other
expenses not directly attributable to the Company's operating activities. The
increase in segment earnings from ongoing operations principally was due to
increased sales levels in the Air Conditioning and Heating Products and
Plumbing Products Groups, without a proportionate increase in cost and from the
effect of 1993 pre-tax losses of approximately $2,800,000, $1,600,000 and
$700,000 described above. Approximately $1,500,000 of the increase in segment
earnings in 1994 related to income from the settlement of insurance claims.
The increase in segment earnings was partially offset by the effect of
approximately $10,000,000 in 1994, of expenses incurred in connection with the
implementation of certain cost reduction activities and manufacturing process
improvements in each of the Company's operating groups, the cost of installing
new systems, and marketing expenses as a result of competitive conditions in
the Residential Building Products Group. Expenses incurred in connection with
cost reduction activities and manufacturing process improvements in 1993 were
approximately $2,600,000.
Foreign segment earnings, consisting primarily of the results of operations of
the Company's Canadian subsidiary which manufactures built-in ventilating
products, declined to approximately 7% of segment earnings from ongoing
operations in 1994 from approximately 11% of such earnings in 1993. This
decline was primarily due to an approximate 36% increase in domestic segment
earnings from ongoing operations in 1994, as well as an approximate 20%
decrease in foreign segment earnings in 1994. The decrease in foreign segment
earnings was primarily the result of the continued weakness in the residential
construction market in Canada.
Operating earnings in 1994 increased approximately $19,700,000, or
approximately 65%, as compared to 1993 primarily as a result of the factors
discussed above and the effect of Dixieline's operating results. Operating
earnings also include approximately $1,700,000 of non-segment income from the
settlement in 1994 of insurance claims and disputes, partially offset by
approximately $1,300,000 of non-segment expense of certain litigation and other
matters in dispute in 1994. Dixieline's loss included in the Company's
consolidated operating results was approximately $300,000 in 1993. Dixieline's
operating results were no longer included in the Company's consolidated
operating results in 1994. (See Notes 1 and 9 of the Notes to Consolidated
Financial Statements included elsewhere herein.)
Interest expense decreased approximately $300,000, or approximately 1.1% in
1994, as compared to 1993. In February 1994, the Company sold in a public
offering $218,500,000 of its 9 7/8% Senior Subordinated Notes due 2004 ("9 7/8%
Notes") and used the proceeds to redeem approximately $153,000,000 of certain
of the Company's outstanding indebtedness. Interest expense (net of interest
Year Ended December 31, 1994 as Compared to the Year Ended December 31, 1993
(Continued)
income) was approximately $1,300,000 greater in 1994 than it would have been
had the debt redemption occurred on the same day as the financing. This
increase was partially offset by the effect of the redemption of certain other
outstanding indebtedness in January 1994. The decrease in interest expense was
primarily due to the redemption and financing discussed above. (See Note 4 of
the Notes to Consolidated Financial Statements included elsewhere herein.)
Interest income in 1994 increased approximately $2,100,000, or approximately
65.6%, as compared to 1993. The increases were principally due to higher
average invested balances of short-term investments, marketable securities and
other investments, and the effect of slightly higher yields earned on
investment and marketable securities.
The net gain on investment and marketable securities was approximately
$1,650,000 for 1993, a portion of which were unrealized gains recorded in the
Company's Statement of Operations in 1993. Due to the adoption in 1994 of
Statement of Financial Accounting Standards ("SFAS") No. 115, such unrealized
gains and losses are now recorded as adjustments to stockholders' investment.
(See Note 11 of the Notes to Consolidated Financial Statements included
elsewhere herein.)
The pre-tax loss on businesses sold of approximately $1,750,000 in 1994 was
significantly lower than the approximate $20,300,000 loss in 1993, which was
related to Dixieline. (See Note 9 of Notes to Consolidated Financial
Statements included elsewhere herein.)
The provision for income taxes was approximately $10,200,000 for 1994, as
compared to approximately $1,000,000 for 1993. The provision for income taxes
as a percentage of the pre-tax earnings from continuing operations was
approximately 37.2% in 1994 and approximately 8.6% of the pre-tax loss from
continuing operations in 1993. The provision for income taxes in 1994 has been
reduced by approximately $1,600,000, principally reflecting the reversal of tax
valuation reserves as a result of the realization of certain tax assets. The
effect of nondeductible losses on businesses sold in both years and an increase
in income tax valuation reserves in 1993 were significant factors in the
percentages. The income tax rates also differ from the United States federal
statutory rate of 35% as a result of the effect of foreign income tax on
foreign source income, state income taxes and nondeductible amortization
expense (for tax purposes). (See Note 3 of the Notes to Consolidated Financial
Statements included elsewhere herein.)
The Company recorded an extraordinary gain of approximately $200,000 in 1994
resulting from the call for redemption and purchases in the open market of the
Company's 7 1/2% Convertible Debentures compared to an approximate $6,100,000
loss in 1993. The loss in 1993 resulted primarily from the call for redemption
on February 22, 1994 of certain of the Company's various Notes and Debentures
in connection with the refinancing described in Note 4 of Notes to Consolidated
Financial Statements.
The cumulative effect of accounting changes resulted in earnings of
approximately $400,000 in 1994 and a loss of approximately $2,100,000 in 1993
from the adoption of SFAS No. 115 and No. 106, respectively. (See Notes 11 and
6 of the Notes to Consolidated Financial Statements included elsewhere herein.)
Year Ended December 31, 1994 as Compared to the Year Ended December 31, 1993
(Continued)
In 1994, the Company incurred increased marketing expenses, principally in its
Residential Building Products Group, as a result of competitive conditions.
There can be no assurance that such conditions will not continue in the future
or what effect such conditions, if they persist, may have on future operations.
Year Ended December 31, 1993 as Compared to the Year Ended December 31, 1992
Net sales from ongoing operations increased approximately $48,598,000, or
approximately 7.9%, in 1993 as compared to 1992. Total net sales decreased
approximately $55,866,000, or approximately 7.0%, in 1993 as compared to 1992
as a result of businesses sold in 1992 and the effect of Dixieline, partially
offset by the following factors. Net sales from ongoing operations increased
principally as a result of increased sales volume of residential air
conditioning and heating products (in part, as a result of the addition of
certain distributors) and increased shipments of new and replacement air
conditioning and heating products to manufactured housing customers by the Air
Conditioning and Heating Products Group. To a lesser extent, increased sales
levels in the Residential Building Products Group and increased sales levels of
bathroom fixtures (principally vitreous china products) by the Plumbing
Products Group were also a factor.
Cost of products sold from ongoing operations as a percentage of net sales from
ongoing operations decreased from approximately 72.5% in 1992 to approximately
71.1% in 1993. Total cost of products sold as a percentage of total net sales
decreased from approximately 74.4% in 1992 to approximately 71.5% in 1993 as a
result of the effect of businesses sold in 1992, which was partially offset by
the effect of increases in cost of products sold as a percentage of net sales
at Dixieline and the following factors. The decrease in cost of products sold
from ongoing operations as a percentage of net sales from ongoing operations
primarily was attributable to increased sales levels and a reduction in cost in
the Plumbing Products Group and, to a lesser extent, increased sales in the
Residential Building Products Group and the Air Conditioning and Heating
Products Group, in both cases, without a proportionate increase in costs. The
improvement in cost levels was due, in part, to the Company's ongoing cost
control efforts.
Selling, general and administrative expense from ongoing operations, as a
percentage of net sales from ongoing operations increased from approximately
23.3% in 1992 to approximately 24.3% in 1993. Total selling, general and
administrative expense, as a percentage of total net sales increased from
approximately 23.0% in 1992 to approximately 24.4% in 1993 as a result of the
factors described below and the effect of businesses sold in 1992, which sold
businesses operated at lower expense levels than the Company's other product
groups, partially offset by lower expense levels at Dixieline. The increase in
the percentage of net sales from ongoing operations in 1993 was principally due
to the effect of a pre-tax loss in the fourth quarter of 1993 of approximately
$2,800,000 in connection with the restructure of certain product lines by the
Company's Plumbing Products Group and the effect of pre-tax losses in the third
quarter of 1993 of approximately $1,600,000 as a result of the sale in October
1993 of certain real property and approximately $700,000 in connection with the
consolidation of certain manufacturing facilities by the Company's Residential
Building Products Group. The increase in the percentage of net sales from
ongoing operations was partially offset by the effect of increased sales volume
Year Ended December 31, 1993 as Compared to the Year Ended December 31, 1992
(Continued)
of residential and manufactured housing air conditioning and heating products
by the Air Conditioning and Heating Products Group, without proportionate
increases in expense.
Segment earnings from ongoing operations were approximately $47,200,000 for
1993, as compared to approximately $38,100,000 for 1992. Total segment
earnings were approximately $46,900,000 for 1993, as compared to approximately
$32,700,000 for 1992 as a result of the effect of changes in the results of
Dixieline and a business sold in 1992 and the following factors. The increase
in segment earnings from ongoing operations principally was due to the
increased sales level and reduced costs in the Plumbing Products Group, in
part, due to the Company's ongoing cost control efforts, and increased sales
volume of residential and manufactured housing air conditioning and heating
products by the Air Conditioning and Heating Products Group and increased sales
level in the Residential Building Products Group, without a proportionate
increase in cost and expense. The increase in segment earnings from ongoing
operations was partially offset by the effect of 1993 pre-tax losses of
approximately $2,800,000, $1,600,000 and $700,000 described above.
Foreign segment earnings, consisting primarily of the results of operations of
the Company's Canadian subsidiary, which manufactures built-in ventilating
products, declined to approximately 11% of segment earnings from ongoing
operations in 1993 from approximately 16% of such earnings in 1992. This
decline was primarily due to an approximate 30% increase in domestic segment
earnings from ongoing operations in 1993, as well as an approximate 11%
decrease in foreign segment earnings in 1993. The decrease in foreign segment
earnings was primarily the result of the continued weakness in the residential
construction market in Canada.
Dixieline's operating loss decreased by approximately $700,000 to a loss of
approximately $300,000 in 1993. Net sales of Dixieline were approximately
$83,200,000 in 1993 and approximately $94,800,000 in 1992. Total consolidated
operating results of the Company include the operating results of Dixieline
through October 2, 1993. Weakness in the San Diego area residential
construction market and increased competition continued to affect Dixieline's
results adversely.
Operating earnings in 1993 increased approximately $9,900,000, or approximately
48.5%, as compared to 1992, primarily as a result of the factors discussed
above and include the effect of the results of Dixieline and a business sold in
1992.
Interest expense in 1993 decreased approximately $2,700,000, or approximately
9.3%, as compared to 1992, primarily as a result of purchases, at a discount,
in open market and negotiated transactions of the Company's debentures and
notes in 1992 and the payment of current maturities of long-term debt.
Interest income in 1993 decreased approximately $1,200,000, or approximately
27.3%, as compared to 1992, principally due to lower average invested balances
of short-term investments, marketable securities and other investments (in
Year Ended December 31, 1993 as Compared to the Year Ended December 31, 1992
(Continued)
part, due to a reduction in indebtedness), and lower yields earned on
investment and marketable securities.
The net gain on investment and marketable securities was approximately
$1,650,000 for 1993, as compared to approximately $850,000 for 1992.
The pre-tax loss on businesses sold of approximately $20,300,000 in 1993 and
approximately $14,500,000 in 1992 resulted in the approximate $11,600,000 loss
before provision for income taxes in 1993 and was the primary reason for the
approximate $18,000,000 loss before provision for income taxes in 1992. The
pre-tax loss on businesses sold in 1993 resulted from the Company's decision to
sell Dixieline and therefore to reduce the Company's net investment in such
business to estimated net realizable value. (See Notes 1 and 9 of Notes to
Consolidated Financial Statements.)
The provision for income taxes was approximately $1,000,000 for 1993, as
compared to approximately $3,000,000 for 1992. The provision for income taxes
as a percentage of the pre-tax loss from continuing operations was
approximately 8.6% in 1993 as compared to approximately 16.7% in 1992. The
income tax rates differed from the United States federal statutory rate of 35%
in 1993 and 34% in 1992 as a result of the effect of an increase in income tax
valuation reserves in 1993 and higher foreign income tax on foreign source
income, a limited amount of state income tax benefits recorded, and
nondeductible amortization expense (for tax purposes) in both years, and, in
1992, as a result of certain nondeductible costs associated with a business
sold and unrecorded income tax credits relating to capital loss carryforwards
since the income tax benefits attributable thereto may not be realized. (See
Note 3 of the Notes to Consolidated Financial Statements.)
An extraordinary loss of approximately $6,100,000 in 1993 compared to an
approximate $100,000 gain in 1992. The loss in 1993 resulted primarily from
the call for redemption on February 22, 1994 of certain of the Company's
various Notes and Debentures in connection with the financing described in Note
4 of Notes to Consolidated Financial Statements.
The charge to operations in 1993 from the cumulative effect of an accounting
change of approximately $2,100,000 resulted from the adoption of Statement of
Financial Accounting Standards ("SFAS") No. 106. (See Note 6 of Notes to
Consolidated Financial Statements.)
Liquidity and Capital Resources
The Company's primary sources of liquidity in 1994 have been funds provided by
the sale of Notes (See Note 4 of the Notes to the Consolidated Financial
Statements) and proceeds from a business sold and, in 1994 and 1993, subsidiary
operations, unrestricted investments and marketable securities. The Company's
Canadian subsidiary, Broan Limited, has a $20,100,000 Canadian (approximately
$14,300,000 U. S. at exchange rates prevailing at December 31, 1994) secured
line of credit, of which approximately $14,800,000 Canadian (approximately
$10,550,000 U. S. at exchange rates prevailing at February 17, 1995), in the
aggregate, is available to the Company (the "Line of Credit") at February 17,
1995.
Liquidity and Capital Resources (Continued)
Borrowings under the Line of Credit are available for working capital and other
general corporate purposes. The Line of Credit contains covenants requiring
Broan Limited to maintain (i) a ratio of earnings before interest and taxes to
interest of at least 2 to 1, (ii) a working capital ratio of at least 1.5 to 1
and (iii) a debt to equity ratio of no higher than 3 to 1. The Line of Credit
also limits the annual amount of capital expenditures which Broan Limited may
make to $1,000,000 Canadian (approximately $713,000 U. S. at exchange rates
prevailing at December 31, 1994). Broan Limited pays a commitment fee of .25%
per annum on the unutilized portion of the Line of Credit payable monthly on a
pro rata basis, and the Line of Credit is subject to an annual review by the
lender in April of each year. As of February 17, 1995, there were no
outstanding borrowings under the Line of Credit.
In March 1994, the Company sold Dixieline for approximately $18,800,000 in cash
and $6,000,000 of preferred stock of the purchaser. (See Note 9 of Notes to
Consolidated Financial Statements.)
On January 14, 1994, the Company redeemed $22,600,000 principal amount of its
11 1/2% Senior Subordinated Debentures due May 1994, which were called for
redemption in December 1993. In February 1994, the Company sold in a public
offering $218,500,000 of its 9 7/8% Senior Subordinated Notes due 2004 ("9 7/8%
Notes") at a slight discount. A portion of the net proceeds from the sale of
the 9 7/8% Notes was used to redeem, on March 24, 1994, approximately
$153,000,000 of certain of the Company's outstanding principal amount of
indebtedness and to pay accrued interest. (See Note 4 of Notes to Consolidated
Financial Statements.)
In October 1994, the Company's 9 7/8% Notes were upgraded on an unsolicited
basis by a major rating agency.
The indenture governing the 9 7/8% Notes restricts, among other things, the
payment of cash dividends, repurchase of the Company's capital stock and the
making of certain other restricted payments, the incurrence of additional
indebtedness, the making of certain investments, mergers, consolidations and
sale of assets (all as defined in the indenture). Upon certain asset sales (as
defined in the indenture), the Company will be required to offer to purchase,
at 100% principal amount plus accrued interest to the date of purchase, 9 7/8%
Notes in a principal amount equal to any net cash proceeds (as defined in the
indenture) that are not invested in properties and assets used primarily in the
same or related business to those owned and operated by the Company at the
issue date of the 9 7/8% Notes or at the date of such asset sale and such net
cash proceeds were not applied to permanently reduce Senior Indebtedness (as
defined in the indenture).
At December 31, 1994, approximately $28,800,000 was available for the payment
of cash dividends or stock payments under the terms of the Company's indenture
governing the 9 7/8% Notes.
During 1992, a former subsidiary of the Company (sold in 1984) defaulted on
certain principal and interest payments relating to obligations under which the
Company was contingently liable. In March 1994, the Company paid approximately
$1,594,000 of interest payments through that date on such obligations. In the
third and fourth quarter of 1994, the Company purchased at a slight discount,
Liquidity and Capital Resources (Continued)
approximately $6,640,000 principal amount of such obligations (consisting of
all of such obligations) from several holders. The Company did not record any
losses in 1994 in connection with the settlement of these contingent
obligations. (See Note 7 of Notes to Consolidated Financial Statements.)
Unrestricted cash and investments were approximately $105,080,000 at December
31, 1994.
The Company believes that cash flow from subsidiary operations, unrestricted
cash and marketable securities and borrowings under the Line of Credit or under
new credit facilities or arrangements which may be entered into will provide
sufficient liquidity to meet the Company's working capital, capital
expenditure, debt service and other ongoing business needs through the next 12
months. Capital expenditures were approximately $19,400,000 in 1994, and are
expected to be approximately $18,000,000 in 1995.
The Company's investment in marketable securities at December 31, 1994
consisted primarily of investments in United States Treasury securities. (See
Note 11 of Notes to Consolidated Financial Statements.) At December 31, 1994,
approximately $9,337,000 of the Company's cash and investments were pledged as
collateral with insurance companies and were classified as restricted in
current assets in the Company's accompanying consolidated balance sheet.
The Company's working capital and current ratio increased from approximately
$117,926,000 and approximately 1.6:1, respectively, at December 31, 1993 to
approximately $173,459,000 and approximately 2.1:1, respectively, at December
31, 1994, principally as a result of the reduction of current indebtedness and
the factors described below.
Accounts receivable increased approximately $6,844,000, or approximately 8.1%,
between December 31, 1993 and December 31, 1994, while net sales from ongoing
operations were approximately $9,088,000, or 5.4% greater in the fourth quarter
of 1994 as compared to the fourth quarter of 1993. The increase in accounts
receivable is principally as a result of increased net sales of new and
replacement products from residential and manufactured housing customers by the
Air Conditioning and Heating Products Group. The rate of change in accounts
receivable in certain periods may be different than the rate of change in sales
in such periods principally due to the timing of net sales. Significant net
sales near the end of any period generally result in significant amounts of
accounts receivable on the date of the balance sheet at the end of such period.
In recent periods, the Company has not experienced any significant changes in
credit terms, collection efforts, credit utilization or delinquency.
Inventories increased approximately $13,335,000, or approximately 16.3%,
between December 31, 1993 and December 31, 1994.
Accounts payable increased approximately $5,774,000, or approximately 12.3%,
between December 31, 1993 and December 31, 1994.
Unrestricted cash and investments increased approximately $20,500,000 from
December 31, 1993 to December 31, 1994, principally as a result of cash
Liquidity and Capital Resources (Continued)
provided by (used in) the following:
Condensed
Consolidated
Cash Flows
----------
Operating activities--
Cash flow from operations, net $40,710,000
Increase in accounts receivable, net (5,501,000)
Increase in inventories (12,593,000)
Increase in trade accounts payable 6,364,000
Change in accrued expenses, taxes, prepaids,
other assets, liabilities, and other, net (2,801,000)
Investing activities--
Net cash proceeds relating to businesses sold 12,465,000
Purchase of marketable securities (5,032,000)
Capital expenditures (19,424,000)
Change in restricted cash and investments (2,475,000)
Financing activities--
Increases in borrowings, net of payments,
including purchase of debentures 8,651,000
All other, net 136,000
------------
$20,500,000
==========
The Company's debt-to-equity ratio decreased from approximately 2.1:1 at
December 31, 1993 to approximately 1.9:1 at December 31, 1994, primarily as a
result of the effect of increased stockholders' investment as a result of net
earnings in 1994, partially offset by a net increase in indebtedness of
approximately $8,800,000. (See Note 4 of Notes to Consolidated Financial
Statements.)
The Company's St. Louis, Missouri plant, which is part of the Company's Air
Conditioning and Heating Products Group and manufactures products for the
residential site-built and manufactured housing markets, experienced damage as
a result of the flooding of the Mississippi River in July 1993. The plant was
closed for several weeks, but returned to full operation in late August 1993.
In the second quarter of 1994, the Company settled its claims with its
insurance carrier with respect to this matter and recorded approximately
$1,500,000 of income.
At December 31, 1994, the Company has approximately $3,000,000 of net U. S.
Federal prepaid income tax assets which are expected to be realized through
future operating earnings. (See Note 3 of Notes to the Consolidated Financial
Statements.)
The Company believes that its growth will be generated largely by internal
growth in each of its product groups, augmented by strategic acquisitions. The
Company regularly reviews potential acquisitions which would increase or expand
the market penetration of, or otherwise complement, its current product lines,
although there are no pending agreements for any material acquisitions and the
Company has made no material acquisitions since early 1988.
Inflation, Trends and General Considerations
The Company's performance is dependent to a significant extent upon the levels
of new residential construction, residential replacement and remodeling and non-
residential construction, all of which are affected by such factors as interest
rates, inflation and unemployment. In recent periods, the Company's product
groups have operated in an environment of increasing levels of construction and
remodeling activity, particularly new housing starts which increased
approximately 20% between 1990 and 1994. New residential construction housing
starts, however, remain below the levels experienced in the mid-1980s. The
Company's operations have been affected by the difficult economic conditions in
the Northeastern United States, California and Canada. However, the actions
taken to reduce production costs and overhead levels and improve the efficiency
and profitability of the Company's operations have enabled it to significantly
increase operating earnings, as well as to position the Company for growth. In
the near term, the Company expects to operate in an environment of relatively
stable levels of construction and remodeling activity. However, recent
increases in interest rates could have a negative impact on the level of
housing construction and remodeling activity.
Inflation has not had a material effect on the Company's results of operations
and financial condition until mid-1994, when the Company experienced
significant increases in certain costs and expenses including raw material
costs. There can be no assurance that the Company will be able to sufficiently
increase its sales prices if these cost increases persist.
Item 8. Financial Statements and Supplementary Data
Financial statements and supplementary data required by this Item 8 are set
forth at the pages indicated in Item 14(a) included elsewhere herein.
Item 9. Disagreements on Accounting and Financial Disclosure
Not applicable.
PART III
Item 10. Directors and Executive Officers of the Registrant
See Election of Directors in the definitive Proxy Statement for the Company's
1995 Annual Meeting of Stockholders, incorporated herein by reference. See
also Part I, Item 1, Business-General Considerations-Executive Officers of the
Registrant.
Item 11. Executive Compensation
See Executive Compensation in the definitive Proxy Statement for the Company's
1995 Annual Meeting of Stockholders, incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management
See Security Ownership of Certain Beneficial Owners and Management in the
definitive Proxy Statement for the Company's 1995 Annual Meeting of
Stockholders, incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions
See Election of Directors in the definitive Proxy Statement for the Company's
1995 Annual Meeting of Stockholders, incorporated herein by reference.
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) Financial Statements and Schedules
The following documents are filed as part of this report:
1. Financial Statements: Page No.
Consolidated Statement of
Operations for the three
years ended December 31,
1994 29
Consolidated Balance Sheet
as of December 31, 1994
and 1993 30
Consolidated Statement of
Cash Flows for the three
years ended December 31,
1994 32
Consolidated Statement of
Stockholders' Investment
for the three years ended
December 31, 1994 33
Notes to Consolidated
Financial Statements 34
Report of Independent
Public Accountants 53
2. Financial Statement Schedules:
Schedule II Valuation
and Qualifying Accounts 54
Schedules I, III, IV and V, are omitted as not applicable or not required
under the rules of Regulation S-X.
3. The exhibits are listed in the Exhibit Index, which is incorporated
herein by reference.
(b) Reports on Form 8-K
No reports on Form 8-K were filed by the Registrant during the last
quarter of the period covered by this report.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized on March 6, 1995.
NORTEK, INC.
By: /s/Richard L. Bready
--------------------
Richard L. Bready
Chairman of the Board
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities indicated, as of March 6, 1995.
/s/Richard L. Bready /s/D. Stevens McVoy
- ------------------------------- ----------------------------------
Richard L. Bready, Chairman D. Stevens McVoy, Director
of the Board and President
(principal executive officer)
/s/Richard J. Harris /s/J. Peter Lyons
- ------------------------------- ----------------------------------
Richard J. Harris, Vice President J. Peter Lyons, Director
and Treasurer (principal financial
officer) and Director
/s/Almon C. Hall /s/Dennis J. McGillicuddy
- ------------------------------- ----------------------------------
Almon C. Hall, Vice President Dennis J. McGillicuddy, Director
and Controller (principal
accounting officer)
/s/Philip B. Brooks /s/Barry Silverstein
- ------------------------------- ----------------------------------
Philip B. Brooks, Director Barry Silverstein, Director
Nortek, Inc. and Subsidiaries
Consolidated Statement of Operations
For the Three Years Ended December 31, 1994
1994 1993 1992
---- ---- ----
(In Thousands Except Per Share Amounts)
Net Sales $737,160 $744,113 $799,979
------- ------- -------
Costs and Expenses:
Cost of products sold 520,328 532,488 595,177
Selling, general and administrative
expense 166,815 181,279 184,366
------- ------- -------
687,143 713,767 779,543
------- ------- -------
Operating earnings 50,017 30,346 20,436
Interest expense (26,162) (26,519) (29,232)
Interest income 5,295 3,223 4,446
Net gain on investment and
marketable securities --- 1,650 850
Loss on businesses sold (1,750) (20,300) (14,500)
------- ------- -------
Earnings (loss) from continuing
operations before provision
for income taxes 27,400 (11,600) (18,000)
Provision for income taxes 10,200 1,000 3,000
------- ------- -------
Earnings (loss) from continuing
operations 17,200 (12,600) (21,000)
Loss from discontinued operations --- --- (3,300)
------- ------- -------
Earnings (loss) before extraordinary
gain (loss) 17,200 (12,600) (24,300)
Extraordinary gain (loss) from debt
retirements 200 (6,100) 100
------- ------- -------
Earnings (loss) before the cumulative
effect of accounting changes 17,400 (18,700) (24,200)
Cumulative effect of accounting changes 400 (2,100) ---
------- ------- -------
Net Earnings (Loss) $17,800 $(20,800) $(24,200)
======= ======= =======
Net Earnings (Loss) Per Share:
Continuing operations
Primary $1.35 $ (1.00) $ (1.67)
------- ------- -------
Fully diluted $1.34 $ (1.00) $ (1.67)
------- ------- -------
Discontinued operations
Primary --- --- (.26)
------- ------ -------
Fully diluted --- --- (.26)
------- ------- -------
Earnings (loss) before extraordinary
gain (loss)
Primary 1.35 (1.00) (1.93)
Fully diluted 1.34 (1.00) (1.93)
Extraordinary gain (loss)
Primary .02 (.49) .01
Fully diluted .02 (.49) .01
Cumulative Effect of Accounting Changes
Primary .03 (.17) ---
------- ------- -------
Fully diluted .03 (.17) ---
------- ------- -------
Net Earnings (Loss)
Primary $1.40 $ (1.66) $ (1.92)
======= ======= =======
Fully diluted $1.39 $ (1.66) $ (1.92)
======= ======= =======
Weighted Average Number of Shares:
Primary 12,707 12,622 12,645
======= ======= =======
Fully diluted 13,144 13,362 13,411
======= ======= =======
The accompanying notes are an integral part of these financial statements.
Nortek, Inc. and Subsidiaries
Consolidated Balance Sheet
December 31, 1994 and 1993
Assets 1994 1993
---- ----
(Amounts in Thousands)
Current Assets:
Unrestricted
Cash and investments at cost which
approximates market $ 77,106 $ 56,606
Marketable securities available for sale 27,974 25,892
Restricted
Cash, investments and marketable
securities at cost which approximates
market 9,337 6,687
Accounts receivable, less allowances
of $4,030,000 and $4,198,000 91,687 84,843
Inventories
Raw materials 32,660 27,603
Work in process 9,497 9,227
Finished goods 53,191 45,183
------- -------
95,348 82,013
------- -------
Current assets of a business sold --- 23,736
Insurance claims receivable --- 14,500
Prepaid expenses and other current assets 7,542 7,541
U. S. Federal prepaid income taxes 19,800 17,000
------- -------
Total current assets 328,794 318,818
------- -------
Property and Equipment, at cost:
Land 6,069 5,833
Buildings and improvements 55,639 52,309
Machinery and equipment 123,848 108,983
------- -------
185,556 167,125
Less accumulated depreciation 87,475 76,546
------- -------
Total property and equipment, net 98,081 90,579
------- -------
Other Assets:
Goodwill, less accumulated amortization
of $21,459,000 and $19,180,000 72,682 75,599
Non-current assets of a business sold --- 11,987
Deferred debt expense 8,502 563
Other 11,158 11,663
------- -------
92,342 99,812
------- -------
$519,217 $509,209
======= =======
The accompanying notes are an integral part of these financial statements.
Nortek, Inc. and Subsidiaries
Consolidated Balance Sheet
December 31, 1994 and 1993
1994 1993
---- ----
(Amounts in Thousands)
Liabilities and Stockholders' Investment
Current Liabilities:
Notes payable, current maturities
of long-term debt and other
short-term obligations $ 4,629 $ 14,957
11 1/2% Senior Subordinated Debentures, net --- 22,582
Accounts payable 52,697 46,923
Accrued expenses and taxes, net 98,009 91,422
Current liabilities of a business sold --- 11,769
Insurance claims advances --- 13,239
------- -------
Total current liabilities 155,335 200,892
------- -------
Other Liabilities:
Deferred income taxes 18,232 18,000
Other 7,909 8,100
------- -------
26,141 26,100
------- -------
Notes, Mortgage Notes and Debentures
Payable, Less Current Maturities 219,951 169,664
------- -------
Mortgage Notes Payable of a business
sold --- 8,546
------- -------
Commitments and Contingencies (Note 7)
Stockholders' Investment:
Preference stock, $1 par value; authorized
7,000,000 shares, none issued --- ---
Common stock, $1 par value; authorized
40,000,000 shares, 15,814,246 and
15,758,974 shares issued 15,814 15,759
Special common stock, $1 par value;
authorized 5,000,000 shares, 802,097
and 849,575 shares issued 802 849
Additional paid-in capital 134,627 134,627
Retained earnings (accumulated deficit) 766 (17,034)
Cumulative translation, pension
and other adjustments (6,168) (2,143)
Less --treasury common stock at cost,
3,795,028 shares (26,371) (26,371)
--treasury special common stock
at cost, 271,574 shares (1,680) (1,680)
------- -------
Total stockholders' investment 117,790 104,007
------- -------
$519,217 $509,209
======= =======
The accompanying notes are an integral part of these financial statements.
Nortek, Inc. and Subsidiaries
Consolidated Statement of Cash Flows
For the Three Years Ended December 31, 1994
1994 1993 1992
---- ---- ----
(Amounts in Thousands)
Cash flows from operating activities:
Net earnings (loss) $17,800 $(20,800) $(24,200)
------ ------- -------
Adjustments to reconcile net earnings
(loss) to cash:
Depreciation and amortization 17,960 20,726 23,644
Gain on marketable securities --- (1,650) (850)
Extraordinary (gain) loss from debt
retirements (250) 9,275 (150)
Loss on businesses sold 1,750 20,300 19,500
Cumulative effect of accounting changes (400) 3,100 ---
Deferred federal income tax provision (credit)
from continuing operations 300 (6,300) (1,700)
Deferred federal income tax provision on
discontinued operations 2,200 --- ---
Deferred federal income tax provision (credit)
on extraordinary items 1,350 (3,175) ---
Changes in certain assets and liabilities,
net of effects from acquisitions and
dispositions:
Accounts receivable, net (5,501) (11,033) (7,323)
Prepaids and other current assets (4,361) (937) 2,443
U. S. Federal income tax refund --- --- 1,803
Inventories (12,593) (2,854) (2,807)
Accounts payable 6,364 4,360 (1,638)
Accrued expenses and taxes 4,242 (3,913) 3,398
Long-term assets, liabilities and other, net (2,682) 5,326 (21)
------- ------- -------
Total adjustments to net earnings (loss) 8,379 33,225 36,299
------- ------- -------
Net cash provided by operating activities 26,179 12,425 12,099
------- ------- -------
Cash Flows from investing activities:
Capital expenditures (19,424) (10,436) (8,804)
Proceeds from the sale of property and
equipment 114 5,242 1,045
Purchase of investments and marketable
securities (5,032) (87,922) (94,671)
Proceeds from the sale of investments
and marketable securities --- 113,961 72,280
Net cash proceeds (payments) relating
to businesses sold or discontinued 12,465 (2,420) 38,813
Change in restricted cash and investments (2,475) 2,552 13,030
Other, net 51 (777) 1,080
------- ------- -------
Net cash provided by (used in)
investing activities (14,301) 20,200 22,773
------- ------- -------
Cash Flows from financing activities:
Sale of Notes, net 209,195 --- ---
Purchase of debentures and notes payable (191,582) (1,383) (21,693)
Increase in borrowings --- 7,348 4,197
Payment of borrowings (8,962) (4,124) (5,692)
Purchase of Nortek Common and Special Common
Stock --- --- (2,006)
Other, net (29) (1,327) (2,720)
------- ------- -------
Net cash provided by (used in)
financing activities 8,622 514 (27,914)
------- ------- -------
Net increase in unrestricted cash and
investments 20,500 33,139 6,958
Unrestricted cash and investments
at the beginning of the year 56,606 23,467 16,509
------- ------- -------
Unrestricted cash and investments
at the end of the year $77,106 $56,606 $ 23,467
======= ======= =======
The accompanying notes are an integral part of these financial statements.
Nortek, Inc. and Subsidiaries
Consolidated Statement of Stockholders' Investment
For the Three Years Ended December 31, 1994
Cumulative
Translation,
Addi- Retained Pension
Special tional Earnings and Other
Common Common Paid-in (Accumulat- Adjust-Treasury
Stock Stock Capital ed Deficit) ments Stock
------ ------ ------- ---------- -------- -------
(Amounts in Thousands)
Balance, December 31,
1991 $15,438 $1,077 $134,493 $ 27,966 $--- $(26,045)
86,345 shares of special
common stock converted
into 86,345 shares of
common stock 87 (87) --- --- --- ---
631,701 shares of common
treasury stock acquired,
net --- --- --- --- --- (2,006)
77,837 shares of common
stock issued upon
exercise of stock options 77 --- 106 --- --- ---
Net loss --- --- --- (24,200) --- ---
------ ------ ------- ------- ------ -------
Balance, December 31,
1992 15,602 990 134,599 3,766 --- (28,051)
140,432 shares of
special common stock
converted into 140,432
shares of common stock 141 (141) --- --- --- ---
16,400 shares of common
stock issued upon
exercise of stock options 16 --- 28 --- --- ---
Translation adjustment --- --- --- --- (1,337) ---
Pension adjustment --- --- --- --- (806) ---
Net loss --- --- --- (20,800) --- ---
------ ------ ------- ------- ------ -------
Balance, December 31,
1993 15,759 849 134,627 (17,034) (2,143) (28,051)
47,478 shares of
special common stock
converted into 47,478
shares of common stock 47 (47) --- --- --- ---
7,794 shares of common
stock issued upon
exercise of stock options 8 --- --- --- --- ---
Translation adjustment --- --- --- --- (780) ---
Pension adjustment --- --- --- --- 134 ---
Cumulative effect of an
accounting change --- --- --- --- (400) ---
Unrealized decline in
marketable securities --- --- --- --- (2,979) ---
Net earnings --- --- --- 17,800 --- ---
------ ------ ------- ------- ------ -------
Balance, December 31,
1994 $15,814 $ 802 $134,627 $ 766 $(6,168) $(28,051)
====== ====== ======= ======= ====== =======
The accompanying notes are an integral part of these financial statements.
Nortek, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
1. Summary of Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include the accounts of Nortek, Inc. and
all of its significant wholly-owned subsidiaries (the "Company" or "Nortek")
after elimination of intercompany accounts and transactions. Certain amounts
in the prior years' financial statements have been reclassified to conform to
the presentation at December 31, 1994. On October 2, 1993, the Company began
to account for its Dixieline Lumber Company, Inc. subsidiary ("Dixieline") as a
business held for sale. As a result, Dixieline's assets and liabilities have
been separately reflected in the Company's accompanying consolidated balance
sheet, and Dixieline's operating results through October 2, 1993 have been
included in the Company's consolidated statement of operations for the year
ended December 31, 1993. Dixieline's operating results were no longer included
in the Company's consolidated operating results subsequent to October 2, 1993.
The Company sold this business on March 31, 1994.(See Note 9.)
Cash, Investments and Marketable Securities
Investments consist of short-term highly liquid investments which are readily
convertible into cash. Investments and marketable securities are carried at
approximate market price.
The Company has classified as restricted, certain cash, investments and
marketable securities that are not fully available for use in its operations.
At December 31, 1994, approximately $9,337,000 of cash, investments and
marketable securities has been pledged as collateral for insurance and other
requirements and is classified as restricted in current assets in the
accompanying consolidated balance sheet.
Disclosures About Fair Value of Financial Instruments
The following methods and assumptions were used to estimate fair value of each
class of financial instruments for which it is practicable to estimate that
value:
Cash and Investments--
The carrying amount approximates fair value because of the short maturity
of those instruments.
Marketable Securities--
The fair value of marketable securities is based on quoted market prices.
At December 31, 1994, the fair value of marketable securities approximated
the amount on the Company's consolidated balance sheet.
Long-Term Debt--
At December 31, 1994, the fair value of long-term indebtedness was
approximately $26,765,000 lower than the amount on the Company's
consolidated balance sheet, based on quoted market prices. (See Note 4.)
Nortek, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Continued)
Inventories
Inventories in the accompanying consolidated balance sheet are valued at the
lower of cost or market. At December 31, 1994 and 1993, approximately
$64,589,000 and $53,154,000 of total inventories, respectively, were valued on
the last-in, first-out method (LIFO). Under the first-in, first-out method
(FIFO) of accounting, such inventories would have been approximately $6,710,000
and $4,982,000 greater at December 31, 1994 and 1993, respectively. All other
inventories were valued under the FIFO method.
Sales Recognition
The Company recognizes sales upon the shipment of its products net of
applicable provisions for discounts and allowances. The Company also provides
for its estimate of warranty and bad debts at the time of shipment as selling,
general and administrative expense.
Foreign Currency Translation
The Company translates the assets and liabilities of its foreign subsidiaries
at the exchange rates in effect at year-end. Net sales and expenses are
translated using exchange rates in effect during the year. Gains and losses
from foreign currency translation are credited or charged to cumulative
translation adjustment included in stockholders' investment in the accompanying
consolidated balance sheet. Gains and losses from foreign currency translation
were not material in 1992.
Depreciation and Amortization
Depreciation and amortization of property and equipment is provided on a
straight-line basis over the estimated useful lives, which are generally as
follows:
Buildings and improvements 10-35 years
Machinery and equipment, including leases 3-15 years
Leasehold improvements term of lease
Expenditures for maintenance and repairs are expensed when incurred.
Expenditures for renewals and betterments are capitalized. When assets are
sold, or otherwise disposed of, the cost and accumulated depreciation are
eliminated and the resulting gain or loss is recognized.
Goodwill
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. Goodwill is being amortized on a straight-line method over 40
years. Amortization charged to continuing operations amounted to $2,407,000,
$2,418,000 and $2,548,000 for 1994, 1993 and 1992, respectively. At each
balance sheet date, the Company evaluates the realizability of goodwill based
on expectations of non-discounted cash flows and operating income for each
subsidiary having a material goodwill balance. Based on its most recent
Nortek, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Continued)
analysis, the Company believes that no material impairment of goodwill exists
at December 31, 1994.
Net Earnings (Loss) Per Share
Net earnings (loss) per share amounts have been computed using the weighted
average number of common and common equivalent shares outstanding during each
year. Earnings (loss) per share calculations for 1993 and 1992 do not include
the effect of common stock equivalents or convertible debentures (and the
reduction in related interest expense) because the assumed exercise of stock
options and conversion of debentures is anti-dilutive for the net loss per
share amounts. Special Common Stock is treated as the equivalent of Common
Stock in determining earnings per share results.
2. Cash Flows
Interest paid was $22,119,000, $26,981,000 and $27,436,000 in 1994, 1993 and
1992, respectively.
The following table summarizes the activity of businesses sold or discontinued
included in the accompanying consolidated statement of cash flows:
Year Ended December 31,
-----------------------
1994 1993 1992
---- ---- ----
(Amounts in Thousands)
Fair value of assets sold $39,439 $ --- $ 52,793
Liabilities assumed by the purchaser (16,143) --- (13,329)
Notes receivable and other non-cash proceeds
received as part of the proceeds (6,000) --- (316)
Cash payments relating to businesses
sold or discontinued, net (4,831) (2,420) (335)
------ ------ ------
Net cash proceeds (payments) relating
to businesses sold or discontinued $12,465 $(2,420) $38,813
======= ====== ======
Non-cash financing and investing activities excluded from the accompanying
consolidated statement of cash flows consisted of approximately $2,979,000 of
unrealized loss on investment in marketable securities in 1994 (see Note 11).
Non-cash financing and investing activities were not significant for the year
ended December 31, 1993.
The following summarizes other non-cash financing and investing activities for
1992:
(Amounts in Thousands)
Use of restricted cash and investments
in settlement of certain litigation
(see Note 7) $11,800
Exchange of debentures (see Note 7) 4,050
Settlement of 11% subordinated notes
receivable (see Note 7) 2,576
Other 1,556
Nortek, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Continued)
3. Income Taxes
In the first quarter of 1993, the Company adopted SFAS No. 109, as a change in
accounting method. The effect of this change in the accounting method was not
material. Prior year financial statements have not been restated to reflect
the new accounting method. The effect of adopting this new accounting method
in the first quarter of 1993 was not significant to the provision for income
taxes as compared to the prior accounting method. For the year ended December
31, 1992, the provision (credit) for income taxes was computed in accordance
with the comprehensive income tax allocation method, which recognizes the tax
effects of all income and expense transactions included in each year's
consolidated statement of operations, regardless of the year the transactions
are reported for tax purposes.
The tax effect of temporary differences which gave rise to significant portions
of deferred income tax assets and liabilities as of December 31, 1994 and
December 31, 1993 are as follows:
Dec. 31, Dec. 31,
1994 1993
------ ------
(Amounts in Thousands)
U. S. Federal Prepaid (Deferred) Income Tax
Assets Arising From:
Accounts receivable $ 1,399 $ 1,387
Inventory (468) (666)
Insurance reserves 7,688 4,576
Other reserves, liabilities and
assets, net 11,181 11,703
------ ------
$19,800 $17,000
====== ======
Deferred (Prepaid) Income Tax Liabilities
Arising From:
Property and equipment, net $12,406 $11,709
Prepaid pension assets 1,230 1,666
Unamortized debt discount --- 102
Insurance reserves (643) (1,025)
Other reserves, liabilities and
assets, net 2,476 2,504
Capital loss carryforward (6,217) (6,217)
Unrealized loss on business sold (604) (3,405)
Other tax assets (3,642) (1,660)
Valuation allowances 13,226 14,326
------ ------
$18,232 $18,000
====== ======
Nortek, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Continued)
At December 31, 1994, the Company has a capital loss carryforward of
approximately $17,700,000, which expires in the year 1997. The Company has
provided a valuation allowance equal to the tax effect of capital loss
carryforwards and certain other tax assets, since realization of these tax
assets cannot be reasonably assured. At December 31, 1994, the Company has
approximately $3,000,000 of net U.S. Federal prepaid income tax assets which
are expected to be realized through future operating earnings.
The following is a summary of the components of earnings (loss) from continuing
operations before income tax credit:
Year Ended December 31,
-----------------------
1994 1993 1992
---- ---- ----
(Amounts in Thousands)
Domestic $23,100 $(17,000) $(24,400)
Foreign 4,300 5,400 6,400
------ ------- -------
$27,400 $(11,600) $(18,000)
====== ======= =======
The following is a summary of the provision (credit) for income taxes from
continuing operations included in the accompanying consolidated statement of
operations:
Year Ended December 31,
------------------------
1994 1993 1992
---- ---- ----
(Amounts in Thousands)
Federal income taxes--
Current $ 7,125 $2,800 $ 600
Deferred 300 (6,300) (1,700)
----- ------ -------
7,425 (3,500) (1,100)
Foreign 1,500 2,600 3,200
State 1,275 1,900 900
----- ------ -------
$10,200 $1,000 $ 3,000
====== ===== ======
Nortek, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Continued)
Income tax payments, net of refunds, were approximately $10,895,000,
$11,950,000 and $1,600,000 in 1994, 1993 and 1992, respectively.
The table below reconciles the federal statutory income tax rate to the
effective tax rate from continuing operations of approximately 37.2%, 8.6% and
16.7% in 1994, 1993 and 1992, respectively.
Year Ended December 31,
-----------------------
1994 1993 1992
---- ---- ----
(Amounts in Thousands)
Income tax provision (credit) from
continuing operations at the Federal
statutory rate $ 9,590 $(4,060) $(6,120)
Net change from statutory
rate:
Change in valuation reserve, net (1,625) 2,618 ---
Effect of unrecognized capital losses --- --- 3,990
State taxes, net of federal tax effect 829 1,235 594
Amortization not deductible for
tax purposes 737 746 552
Businesses sold 613 (172) 2,827
Foreign source deemed income --- 700 648
Tax effect on foreign income 164 196 479
Other, net (108) (263) 30
----- ------ -------
$10,200 $ 1,000 $ 3,000
===== ====== =======
The Company recorded a $1,000,000 income tax credit (principally deferred) in
the first quarter of 1993 relating to the cumulative effect of an accounting
change for certain post-retirement benefits. In the fourth quarter of 1993,
the Company recorded a $3,175,000 deferred income tax credit relating to the
extraordinary loss, arising from indebtedness called for redemption. (See Note
4.)
Nortek, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Continued)
4. Notes, Mortgage Notes and Debentures Payable
Notes, mortgage notes and debentures payable in the accompanying consolidated
balance sheet at December 31, 1994 and 1993 consist of the following:
December 31,
-------------
1994 1993
---- ----
(Amounts in Thousands)
Notes payable to banks $ 51 $ 7,348
Mortgage notes payable 6,774 8,188
Other 887 1,141
9 7/8% Senior Subordinated Notes
due 2004 ("9 7/8% Notes"), net of
unamortized original issue discount
of $1,632,000 216,868 ---
9 3/4% Senior Notes due 1997
("9 3/4% Senior Notes"), net of
unamortized original issue
discount of $293,000 --- 51,152
13 1/2% Senior Subordinated
Debentures due 1997 ("13 1/2%
Debentures"), net of unamortized
original issue discount of
$53,000 --- 79,305
11 1/2% Senior Subordinated
Debentures due 1994 ("11 1/2%
Debentures"), net of unamortized
original issue discount of
$18,000 --- 22,582
11% Subordinated Sinking Fund
Debentures due 2004 ("11%
Debentures"), net of unamortized
debt discount of $18,000 --- 19,406
10% Subordinated Sinking Fund
Debentures due 1999 ("10%
Debentures"), net of unamortized
debt discount of $8,000 --- 2,587
7 1/2% Convertible Sinking Fund
Debentures due 2006 ("7 1/2%
Convertible Debentures") --- 15,494
------- -------
224,580 207,203
Less amounts included in current
liabilities 4,629 37,539
------- -------
$219,951 $169,664
======= =======
On January 14, 1994, the Company redeemed $22,600,000 principal amount of its
11 1/2% Debentures, which were called for redemption in December 1993 and were
classified as a current liability in the accompanying consolidated balance
sheet. In February 1994, the Company sold in a public offering $218,500,000 of
Nortek, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Continued)
its 9 7/8% Senior Subordinated Notes due 2004 ("9 7/8% Notes") at a discount of
approximately $1,717,000, which is being amortized over the life of the issue.
Net proceeds from the sale of the 9 7/8% Notes, after deducting underwriting
commissions and expenses, amounted to approximately $207,695,000, and a portion
of such proceeds was used to redeem, on March 24, 1994, the Company's
outstanding principal amount of indebtedness and to pay accrued interest on
$51,445,000 of its 9 3/4% Senior Notes, $79,358,000 of its 13 1/2% Debentures,
$2,595,000 of its 10% Debentures, and $19,424,000 of its 11% Debentures, all of
which were called for redemption on February 22, 1994. The 13 1/2% Debentures
were redeemed at 101.5% of the outstanding principal amount thereof, while the
other issues were redeemed at par. Interest expense, net of interest income,
in the first quarter of 1994 was approximately $1,300,000 greater than it would
have been had the debt redemption occurred on the same day as the financing.
The call for these debt redemptions resulted in an extraordinary loss of
approximately $6,100,000 ($.49 per share) net of an income tax credit of
approximately $3,175,000, which was recorded in the fourth quarter of 1993.
See Note 9 with respect to the pro forma effect of the debt redemptions.
The indenture governing the 9 7/8% Notes restricts, among other things, the
payment of cash dividends, repurchase of the Company's capital stock and the
making of certain other restricted payments, the incurrence of additional
indebtedness, the making of certain investments, mergers, consolidations and
sale of assets (all as defined in the indenture). Upon certain asset sales (as
defined in the indenture), the Company will be required to offer to purchase,
at 100% principal amount plus accrued interest to the date of purchase, 9 7/8%
Notes in a principal amount equal to any net cash proceeds (as defined in the
indenture) that are not invested in properties and assets used primarily in the
same or related business to those owned and operated by the Company at the
issue date of the 9 7/8% Notes or at the date of such asset sale and such net
cash proceeds were not applied to permanently reduce Senior Indebtedness (as
defined in the indenture). The 9 7/8% Notes are redeemable at the option of
the Company, in whole or in part, at any time and from time to time, at
104.214% on March 1, 1999, declining to 100% on March 1, 2002 and thereafter.
In the first half of 1994, the Company purchased $9,121,000 principal amount of
7 1/2% Convertible Debentures, which resulted in an extraordinary gain of
approximately $300,000, net of income taxes of approximately $150,000. On
October 24, 1994, the Company redeemed its remaining outstanding $6,373,000
principal amount of 7 1/2% Convertible Debentures, plus paid accrued interest
and a slight redemption premium. This redemption resulted in an extraordinary
loss of approximately $100,000, net of income taxes of $100,000 in the third
quarter of 1994. These purchases and redemptions resulted in a net
extraordinary gain of $200,000 ($.02 per share) for the year ended December 31,
1994.
Discount and deferred costs relating to various notes and debentures in 1993
were principally being amortized over the original life of those issues. Such
amortization of discount and deferred costs was approximately $1,400,000,
$2,100,000 and $2,000,000 in 1994, 1993 and 1992, respectively. In the fourth
quarter of 1993, as a result of the call for redemption of certain of the
Company's indebtedness described above, the Company wrote off approximately
$8,100,000 of unamortized deferred debt expense and debt discount and provided
a redemption premium of approximately $1,175,000, both of which were recorded
Nortek, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Continued)
as an extraordinary loss.
At December 31, 1994, approximately $28,800,000 was available for the payment
of cash dividends or stock payments under the terms of the Company's Indenture
governing the 9 7/8% Notes.
The Company's Canadian subsidiary has a $14,300,000 secured line of credit, of
which approximately $10,550,000 in the aggregate is available to the Company.
At December 31, 1994, there was approximately $51,000 outstanding under this
secured line of credit bearing interest at rates that approximate the prime
rate of interest. The line of credit facility is subject to review in April of
each year. The Canadian subsidiary pays a commitment fee of .25% per annum on
the unutilized portion of the line of credit payable monthly on a pro rata
basis.
Mortgage notes payable include various mortgage notes and other related
indebtedness payable in installments through 2009 and bearing interest at rates
ranging from 8.4% to 11.5%. Approximately $6,774,000 of such indebtedness is
collateralized by property and equipment with an aggregate net book value of
approximately $5,254,000 at December 31, 1994.
Other obligations include borrowings relating to equipment purchases and other
borrowings bearing interest from 2% to 12.45% and maturing at various dates
through 2001. Approximately $887,000 of such indebtedness is collateralized by
property and equipment with an aggregate net book value of approximately
$700,000 at December 31, 1994.
There were no material short-term borrowings during 1994.
The following is a summary of maturities of all of the Company's debt
obligations, excluding unamortized debt discount, due after December 31, 1995:
(Amounts in Thousands)
1996 $ 527
1997 547
1998 549
1999 205
Thereafter 219,755
-------
$221,583
=======
Nortek, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Continued)
5. Common Stock, Special Common Stock, Stock Options and Deferred
Compensation
Each share of Special Common Stock has 10 votes on all matters submitted to a
stockholder vote, except that the holders of Common Stock, voting separately as
a class, have the right to elect 25% of the directors to be elected at a
meeting, with the remaining 75% being elected by the combined vote of both
classes. Shares of Special Common Stock are generally non-transferable, but
are freely convertible on a share-for-share basis into shares of Common Stock.
The Company has a rights plan which provides for the right to purchase for $75,
one one-hundredth of a share of $1.00 par value Series A Participating
Preference Stock for each right held. The rights that are not currently
exercisable, are attached to each share of Common Stock and may be redeemed by
the Directors at $.01 per share at any time. After a shareholder acquires
beneficial ownership of 17% or more of the Company's Common Stock and Special
Common Stock, the rights will trade separately and become exercisable entitling
a rights holder to acquire additional shares of the Company's Common Stock
having a market value equal to twice the amount of the exercise price of the
right. In addition, after a person or group ("Acquiring Company") commences a
tender offer or announces an intention to acquire 30% or more of the Company's
Common Stock and Special Common Stock, the rights will trade separately and,
under certain circumstances, will permit each rights holder to acquire common
stock of the Acquiring Company, having a market value equal to twice the amount
of the exercise price of the right.
At December 31, 1994, a total of 1,584,597 shares of Common Stock was reserved
as follows:
Stock option plans 782,500
Conversion of Special Common Stock 802,097
----------
1,584,597
=========
At December 31, 1994, a total of 43,500 shares of Special Common Stock was
reserved for stock option plans.
The Company has several stock option plans which provide for the granting of
options to certain officers, employees and non-employee directors of the
Company. Options granted under the plans vest over periods ranging up to five
years and expire from eight to ten years from the date of grant. At December
31, 1994, the total options granted and available for grant under these plans
is 782,500, and there were options outstanding covering 494,100 shares of
Common and Special Common Stock, of which 261,500 options are currently
exercisable.
Options for 50,100 and 65,100 shares of Common and Special Common Stock became
exercisable during 1994 and 1993, respectively. Proceeds from options
exercised are credited to common stock and additional paid-in capital.
Nortek, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Continued)
The following table summarizes all Common and Special Common Stock option
transactions for the three years ended December 31, 1994:
Number Option Price
of Shares Per Share Total
--------- --------- -----
Options outstanding at
December 31, 1991 376,500 $2.25-$15.69 $1,593,459
Exercised (85,700) 2.25-2.88 (240,613)
Canceled (50,500) 2.25-8.69 (288,008)
------- ----------- ---------
Options outstanding at
December 31, 1992 240,300 $2.25-$15.69 $1,064,838
Granted 280,000 8.75 2,450,000
Exercised (16,400) 2.25-2.875 (44,000)
------- ----------- ---------
Options outstanding at
December 31, 1993 503,900 $2.25-$15.69 $3,470,838
Exercised (9,800) 2.875 (28,175)
------- ----------- ---------
Options outstanding at
December 31, 1994 494,100 $2.25-$15.69 $3,442,663
======= =========== =========
On January 31, 1992, the Company acquired 625,000 shares of its Common Stock in
a negotiated transaction for approximately $1,975,000 including expenses. (See
Note 4 with respect to limitations on the payment of cash dividends and stock
payments.)
6. Pension, Retirement, Profit Sharing Plans and Post-Retirement Benefits
The Company and its subsidiaries have various pension, retirement and profit
sharing plans requiring contributions to qualified trusts and union
administered funds. Pension and profit sharing expense charged to operations
aggregated approximately $2,883,000 in 1994, $1,683,000 in 1993 and $2,130,000
in 1992. The Company's policy is to fund currently the actuarially determined
annual contribution.
The Company's net pension expense for its defined benefit plans for 1994, 1993
and 1992 consists of the following components:
Year Ended December 31,
-----------------------
1994 1993 1992
---- ---- ----
(Amounts in Thousands)
Service costs $1,647 $1,685 $1,584
Interest cost 2,261 1,989 1,967
Actual net income on plan assets (2,155) (3,295) (3,173)
Net amortization and deferred items 10 822 1,070
----- ----- -----
$1,763 $1,201 $1,448
===== ===== =====
Nortek, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Continued)
The following tables set forth the funded status of the Company's defined
benefit plans and amounts recognized in the Company's consolidated balance
sheet at December 31, 1994 and 1993:
Plan Assets Exceeding
Benefit Obligation
------------------
1994 1993
---- ----
(Amounts in Thousands)
Actuarial present value of benefit
obligations at September 30:
Vested benefits $18,149 $17,799
Non-vested benefits 630 434
------ ------
Accumulated benefit obligation 18,779 18,233
Effect of projected future compensation levels 5,373 5,936
------ ------
Projected benefit obligation 24,152 24,169
Plan assets at fair value at September 30 24,486 24,055
------ ------
Plan assets in excess of (less than)
the projected benefit obligation 334 (114)
Unrecognized net loss 5,401 7,294
Unrecognized net assets (2,412) (2,971)
Unrecognized prior service costs (129) 312
------ ------
$ 3,194 $ 4,521
====== ======
Accumulated Benefit
Obligation
Exceeding Plan Assets
---------------------
1994 1993
==== ====
(Amounts in Thousands)
Actuarial present value of benefit
obligations at September 30:
Vested benefits $ 4,199 $ 4,221
Non-vested benefits 232 305
------ ------
Accumulated benefit obligation 4,431 4,526
Effect of projected future compensation levels --- ---
------ ------
Projected benefit obligation 4,431 4,526
Plan assets at fair value at September 30 3,691 3,678
------ ------
Plan assets less than the projected
benefit obligation (740) (848)
Unrecognized net loss 807 806
Unrecognized prior service costs 602 652
Additional minimum liability (1,409) (1,458)
------ ------
$ (740) $ (848)
====== ======
Plan assets include commingled funds, marketable securities, insurance
contracts and cash and short-term investments. The weighted average discount
rate and rate of increase in future compensation levels used in determining the
actuarial present value of the projected benefit obligation were 8 percent and
5 1/2 percent, respectively, in 1994, 7 1/8 percent and 5 1/2 percent,
respectively, in 1993 and 8 percent and 6 percent, respectively, in 1992. The
expected long-term rate of return on assets was 8 1/2 percent in 1994 and 1993
and 9 1/2 percent in 1992.
Nortek, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Continued)
In 1994 and 1993, a minimum pension liability and an intangible asset for
certain plans was recognized, resulting in a reduction in the Company's
stockholders' investment of approximately $672,000 and $806,000, respectively.
On January 1, 1993, the Company adopted the accounting requirements of
Statement of Financial Accounting Standards ("SFAS") No. 106, "Employers'
Accounting for Post-Retirement Benefits Other Than Pensions" and recorded, as a
charge to operations, the accumulated post-retirement benefit obligation
("APBO") of approximately $3,100,000, before income tax credit of approximately
$1,000,000 ($.17 per share, net of tax), as the cumulative effect of an
accounting change. Previously, health care and related benefits for qualified
active and retired beneficiaries were charged to operating results in the
period that such benefits were paid. The remaining liability of approximately
$1,200,000 at December 31, 1994 related to these benefits is not significant to
the Company's financial position.
7. Commitments and Contingencies
The Company provides accruals for all direct and indirect costs associated with
the estimated resolution of contingencies at the earliest date at which the
incurrence of a liability is deemed probable and the amount of such liability
can be reasonably estimated.
At December 31, 1994, the Company and its subsidiaries are obligated under
lease agreements for the rental of certain real estate and machinery and
equipment used in its operations. Minimum annual rental expense aggregates
approximately $26,598,000 at December 31, 1994. The obligations are payable as
follows:
1995 $ 4,130,000
1996 3,393,000
1997 2,907,000
1998 2,596,000
1999 1,880,000
Thereafter 11,692,000
Nortek, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Continued)
Certain of these lease agreements provide for increased payments based on
changes in the consumer price index. Rental expense, from continuing
operations in the accompanying consolidated statement of operations, excluding
Dixieline, for the years ended December 31, 1994, 1993 and 1992 was
approximately $7,000,000, $6,600,000 and $8,700,000, respectively. Under
certain of these lease agreements, the Company and its subsidiaries are also
obligated to pay insurance and taxes.
During 1992, a former subsidiary of the Company (sold in 1984) defaulted on
certain principal and interest payments relating to obligations under which the
Company was contingently liable. In March 1994, the Company paid approximately
$1,594,000 of interest payments through that date on such obligations. In the
third and fourth quarter of 1994, the Company purchased, at a slight discount,
approximately $6,640,000 principal amount of such obligations (consisting of
all of such obligations) from several holders. The Company did not record any
losses in 1994 in connection with the settlement of these contingent
obligations.
In July 1992, derivative litigation against the Company and its directors
challenging the transactions involving the retirement in 1990 of the Company's
former Chairman was settled. In connection with the settlement, the Company
recorded a net after-tax gain on discontinued operations, in the third quarter,
of approximately $900,000 ($.07 per share).
The Company is subject to other contingencies, including additional legal
proceedings and claims arising out of its businesses that cover a wide range of
matters, including, among others, environmental matters, contract and
employment claims, product liability, warranty and modification, adjustment or
replacement of component parts of units sold, which may include product
recalls. The Company has used various substances in its products and
manufacturing operations which have been or may be deemed to be hazardous or
dangerous, and the extent of its potential liability, if any, under
environmental, product liability and worker's compensation statutes, rules,
regulations and case law is unclear. Further, due to the lack of adequate
information and the potential impact of present regulations and any future
regulations, there are certain circumstances in which no range of potential
exposure may be reasonably estimated.
While it is impossible to ascertain the ultimate legal and financial liability
with respect to contingent liabilities, including lawsuits, the Company
believes that the aggregate amount of such liabilities, if any, in excess of
amounts provided, will not have a material adverse effect on the consolidated
financial position or results of operations of the Company.
Nortek, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Continued)
8. Operating Segment Information and Concentration of Credit Risk
The Company operates in one industry segment, Residential and Commercial
Building Products. No single customer accounts for 10% or more of consolidated
net sales. More than 90% of net sales and identifiable segment assets are
related to the Company's domestic operations.
Financial instruments which potentially subject the Company to concentrations
of credit risk consist principally of temporary cash investments and trade
receivables. The Company places its temporary cash investments with high
credit quality financial institutions and limits the amount of credit exposure
to any one financial institution. Concentrations of credit risk with respect
to trade receivables are limited due to the large number of customers
comprising the Company's customer base and their dispersion across many
different geographical regions. At December 31, 1994, the Company had no
significant concentrations of credit risk.
9. Businesses Sold
On March 31, 1994, the Company sold all the capital stock of Dixieline for
approximately $18,800,000 in cash and $6,000,000 in preferred stock of the
purchaser. In the third quarter of 1993, the Company provided a valuation
reserve of approximately $20,300,000 ($1.19 per share, net of tax) to reduce
the Company's net investment in Dixieline to estimated net realizable value.
No additional loss in 1994 was incurred in connection with this sale. In
January 1995, the Company paid approximately $1,750,000 ($.14 per share, net
of tax) as a final purchase price adjustment related to one of its businesses
sold and recorded a charge to earnings in the fourth quarter of 1994.
The following table presents the approximate unaudited pro forma operating
results of the Company for the year ended December 31, 1994 and December 31,
1993, as adjusted for the debt financing, debt redemptions (see Note 4) and
the pro forma effect of businesses sold including the sale of Dixieline:
Year Ended December 31,
-----------------------
1994 1993
---- ----
(Amounts in Thousands except
per share amounts)
Net sales $737,160 $660,908
Earnings from continuing operations 19,900 3,500
Fully diluted earnings per share 1.55 .28
In computing the pro forma earnings from continuing operations, interest
expense on the indebtedness redeemed during the period that such indebtedness
was outstanding was excluded from operating results at an average interest rate
of approximately 13.5% (including amortization of debt discount and deferred
debt expense) for the periods presented, net of the tax effect. Interest
expense was included on the Notes at a rate of approximately 9 7/8%, plus
amortization of deferred debt expense and debt discount, for the periods
presented, net of tax effect. The net after-tax loss recorded in the third
quarter of 1993 from the valuation reserve recorded to reduce the Company's net
investment in Dixieline to
Nortek, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Continued)
net realizable value and the $1,750,000 in 1994, noted above, was also
excluded. Investment income was assumed earned on the remaining cash proceeds
from the debt financing at a rate of 3.5%. No investment income was assumed
earned on the proceeds from the sale of Dixieline.
On January 2, 1992, the Company's Dixieline Products, Inc. subsidiary sold the
assets, subject to certain liabilities of its subsidiary, L. J. Smith, Inc.
("L. J. Smith") for approximately $24,000,000. The Company recorded a pre-tax
gain on the sale of L. J. Smith of approximately $8,000,000 ($.34 per share,
net of tax) in the first quarter of 1992. On October 2, 1992, the Company sold
all of the capital stock of its wholly-owned subsidiary, Bend Millwork Systems,
Inc. ("Bend") for approximately $17,200,000 in cash and recorded a pre-tax loss
on sale in the third quarter of 1992 of approximately $20,500,000 ($1.43 per
share, net of tax). In the fourth quarter of 1992, the Company provided
additional reserves of approximately $2,000,000 ($.17 per share, net of tax) in
connection with the sale of Bend related to purchase price negotiations and
settlements.
The combined unaudited net sales and pre-tax loss for all businesses sold in
1993 and 1992 included in the consolidated statement of operations of the
Company were approximately $83,205,000 and $600,000, respectively, for the year
ended December 31, 1993, and approximately $187,700,000 and $2,250,000,
respectively, for the year ended December 31, 1992.
10. Discontinued Operations
Results of discontinued operations include other income and expense items
relating to businesses discontinued in prior years, including an increase in
reserves of approximately $1,400,000 in the third quarter and $5,000,000 in the
fourth quarter of 1992.
11. Net Gain (Loss) on Investment and Marketable Securities
On January 1, 1994, the Company adopted the accounting requirements of SFAS No.
115 "Accounting for Certain Investments in Debt and Equity Securities", and
recorded as income the accumulated unrealized marketable security reserve
recorded at December 31, 1993 of approximately $400,000 ($.03 per share) as the
cumulative effect of an accounting change. Under the new accounting method,
the Company will record unrealized gains or losses on such investment
securities as adjustments to stockholders' investment. Previously, such gains
or losses were recorded in the Company's statement of operations. At December
31, 1994, the reduction in the Company's stockholders' investment under the new
accounting method for gross unrealized losses was approximately $3,379,000. At
December 31, 1994, there were no gross unrealized gains on the Company's
marketable securities. Prior periods have not been restated.
Nortek, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Continued)
The Company's marketable securities at December 31, 1994 consist of U. S.
Government Treasury Notes due as follows:
Fair
Principal Market
Due Amount Cost Value
------ ---- -----
(Amounts in Thousands)
1-5 years $16,000 $16,004 $14,712
5-10 years 15,000 15,349 13,262
------ ------ ------
$31,000 $31,353 $27,974
====== ====== ======
In 1994, there were no realized gains or losses on marketable securities.
During 1993, the Company recorded a pre-tax gain on investment and marketable
securities of $1,000,000 ($.05 per share, net of tax) in the first quarter, a
pre-tax gain of $450,000 ($.02 per share, net of tax) in the second quarter, a
$900,000 pre-tax gain ($.05 per share, net of tax) in the third quarter and a
pre-tax loss of $700,000 ($.04 per share, net of tax) in the fourth quarter.
During 1992, the Company recorded a pre-tax loss on investment and marketable
securities of $500,000 ($.03 per share, net of tax) in the first quarter, a pre-
tax gain of $850,000 ($.04 per share, net of tax) in the second quarter, a
$1,050,000 pre-tax gain ($.06 per share, net of tax) in the third quarter and a
pre-tax loss of $550,000 ($.04 per share, net of tax) in the fourth quarter.
12. Selling, General and Administrative Expense
During 1994, the Company incurred net after-tax charges of approximately
$6,600,000 principally relating to expenses of certain cost reduction
activities and manufacturing process improvements in each of the Company's
operating groups, marketing expenses as a result of competitive conditions and
expenses of certain litigation and other matters in dispute. The effect of
these costs and expenses was partially offset in the second quarter of 1994 by
approximately $1,900,000 of after-tax income resulting from the settlement of
certain insurance claims and disputes. Net after-tax charges of approximately
$1,500,000 in 1993 were incurred in connection with cost reduction activities
and manufacturing process improvements.
In the fourth quarter of 1993, the Company's Plumbing Products Group recorded a
pre-tax loss of approximately $2,800,000 ($.15 per share, net of tax) in
connection with the restructure of certain product lines. In the third quarter
of 1993, the Company recorded a pre-tax loss of approximately $1,600,000 ($.08
per share, net of tax) as a result of the sale in October 1993 of certain real
property and provided a pre-tax reserve of approximately $700,000 ($.04 per
share, net of tax) in connection with the consolidation of certain of its
manufacturing facilities.
Nortek, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Continued)
13. Accrued Expenses and Taxes, Net
Accrued expenses and taxes, net, consist of the following at December 31, 1994
and 1993:
December 31,
-------------
1994 1993
---- ----
(Amounts in Thousands)
Interest $ 7,446 $ 4,759
Insurance 23,483 17,677
Payroll, management incentive and
accrued employee benefits 14,609 11,647
Businesses sold or discontinued 1,750 8,650
Other, net 50,721 48,689
------- ------
$98,009 $91,422
======= ======
14. Summarized Quarterly Financial Data (Unaudited)
The following summarizes unaudited quarterly financial data for the years ended
December 31, 1994 and December 31, 1993:
For the Quarters Ended
----------------------
April 2 July 2 Oct. 1 Dec. 31
------- ------- ------ -------
(In Thousands Except Per Share Amounts)
1994
Net sales $169,020 $193,722 $197,012 $177,406
Gross profit 49,718 57,678 58,075 51,361
Earnings from continuing
operations 700 5,500 6,400 4,600
Net earnings 1,500 5,400 6,300 4,600
Earnings per share from
continuing operations:
Primary .06 .44 .50 .36
Fully diluted .06 .43 .50 .36
Net earnings per share:
Primary .12 .43 .49 .36
Fully diluted .12 .42 .49 .36
Nortek, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Continued)
For the Quarters Ended
----------------------
April 3 July 3 Oct. 2 Dec. 31
------- ------- ------ -------
(In Thousands Except Per Share Amounts)
1993
Net sales $178,707 $195,058 $202,030 $168,318
Gross profit 49,545 54,665 56,985 50,430
Earnings (loss) from
continuing operations (1,400) 1,500 (12,900) 200
Net earnings (loss) (3,500) 1,500 (12,900) (5,900)
Earnings (loss) per share
from continuing operations:
Primary (.11) .12 (1.03) .02
Fully diluted (.11) .12 (1.03) .02
Net earnings (loss) per share:
Primary (.28) .12 (1.03) (.47)
Fully diluted (.28) .12 (1.03) (.47)
The Company's earnings (loss) from continuing operations in 1993 includes an
approximate $14,900,000 net after-tax loss ($1.19 per share) in the third
quarter relating to a valuation reserve to reduce the Company's investment in
Dixieline to estimated net realizable value. (See Notes 1 and 9.) The net
earnings (loss) in 1993 also includes an approximate $2,100,000 net after-tax
loss ($.17 per share) related to the cumulative effect of an accounting change
in the first quarter (see Note 6), and an approximate $6,100,000 after-tax
extraordinary loss ($.49 per share) in the fourth quarter related to the call
for debt redemption in the first quarter of 1994. (See Note 4.)
See Notes 4, 6, 9, 11 and 12 regarding certain other quarterly transactions
included in the operating results in the above table.
Lower net sales in 1994 and 1993, as compared to the prior year principally
reflect the effect of businesses sold, partially offset by increased net sales
of ongoing operations, in part, resulting from the overall improvement in the
residential housing market. (See Management's Discussion and Analysis of
Financial Condition and Results of Operations).
Report of Independent Public Accountants
To Nortek, Inc.:
We have audited the accompanying consolidated financial statements of Nortek,
Inc. (a Delaware corporation) and subsidiaries listed in Item 14(a)(1) of this
Form 10-K. These financial statements and the schedule referred to below are
the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements and schedule based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Nortek, Inc. and subsidiaries
as of December 31, 1994 and 1993, and the results of their operations and their
cash flows for each of the three years in the period ended December 31, 1994 in
conformity with generally accepted accounting principles.
As explained in Note 6 to the consolidated financial statements, effective
January 1, 1993, the Company changed its method of accounting for post-
retirement benefits other than pensions. As explained in Note 11 to the
consolidated financial statements, effective January 1, 1994, the Company
changed its method of accounting for marketable securities.
Our audit was made for the purpose of forming an opinion on the basic financial
statements taken as a whole. The schedule listed in Item 14(a)(2) is presented
for purposes of complying with the Securities and Exchange Commission's rules
and is not part of the basic financial statements. This schedule has been
subjected to the auditing procedures applied in the audit of the basic
financial statements and, in our opinion, fairly states in all material
respects the financial data required to be set forth therein in relation to the
basic financial statements taken as a whole.
ARTHUR ANDERSEN LLP
Boston, Massachusetts,
February 28, 1995
SCHEDULE II
NORTEK, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
BALANCE CHARGED
AT TO COSTS CHARGED DEDUCTIONS BALANCE
BEGINNING AND TO OTHER FROM AT END
CLASSIFICATION OF YEAR EXPENSES ACCOUNTS RESERVES OF YEAR
- -------------- --------- -------- -------- ---------- -------
(Amounts in Thousands)
For the year ended December 31, 1992:
Allowances for doubtful
accounts and sales
allowances $4,633 $2,362 $ (573)(b)$(2,354)(a) $4,068
===== ===== ===== ====== =====
For the year ended December 31, 1993:
Allowances for doubtful
accounts and sales
allowances $4,068 $1,832 $ (125)(c)$(1,577)(a) $4,198
===== ===== ===== ====== =====
For the year ended December 31, 1994:
Allowances for doubtful
accounts and sales
allowances $4,198 $ 762 $ 147 (d)$(1,077)(a) $4,030
===== ===== ===== ====== =====
(a) Amounts written off, net of recoveries.
(b) Sale of businesses.
(c) Transfer of allowances for doubtful accounts of Dixieline to current assets
of business held for sale.
(d) Other
EXHIBIT INDEX
Exhibits marked with an asterisk are filed herewith. The remainder of the
exhibits have heretofore been filed with the Commission and are incorporated
herein by reference. Exhibits marked with a double asterisk identify each
management contract or compensatory plan or arrangement.
3.1 Restated Certificate of Incorporation of Nortek, Inc. (Exhibit 2
to Form 8-K filed April 23, 1987, File No. 1-6112).
3.2 Amendment to Restated Certificate of Incorporation of Nortek,
Inc. effective May 10, 1989 (Exhibit 3.2 to Form 10-K filed March 30,
1990, File No. 1-6112).
3.3 By-laws of Nortek, Inc. (as amended through November 30, 1993)
(Exhibit 3.3 to Form 10-K filed March 25, 1994, File No. 1-6112).
4.1 Rights Agreement dated as of March 31, 1986 as amended and
restated as of March 18, 1991 between the Company and State Street
Bank and Trust Company, as Rights Agent (Exhibit 1 to Form 8-K filed
March 26, 1991, File No. 1-6112).
4.2 Amendment No. 1 dated as of October 6, 1993 to Amended and
Restated Rights Agreement dated as of March 18, 1991 (Exhibit 1 to
Form 8-K filed October 12, 1993, File No. 1-6112).
4.3 Indenture dated as of February 14, 1994 between the Company and
State Street Bank and Trust Company, as Trustee, relating to the 9
7/8% Senior Subordinated Notes due 2004 (Exhibit 4.5 to Form 10-K
filed March 25, 1994, File No. 1-6112).
**10.1 Employment Agreement between Richard L. Bready and the
Company, dated as of January 1, 1984 (Exhibit 10.2 to Form 10-K filed
March 31, 1986, File No. 1-6112).
**10.2 Amendment dated as of March 3, 1988 to Employment Agreement
between Richard L. Bready and the Company dated as of January 1, 1984
(Exhibit 19.2 to Form 10-Q filed May 17, 1988, File No. 1-6112).
**10.3 Second Amendment dated as of November 1, 1990 to Employment
Agreement between Richard L. Bready and the Company dated as of
January 1, 1984 (Exhibit 10.3 to Form 10-K filed April 1, 1991, File
No. 1-6112).
**10.4 Deferred Compensation Agreement dated March 7, 1983 between
Richard L. Bready and the Company (Exhibit 10.4 to Registration
Statement No. 33-69778 filed February 9, 1994).
**10.5 Deferred Compensation Agreement dated March 7, 1983 between
Almon C. Hall and the Company (Exhibit 10.5 to Registration Statement
No. 33-69778 filed February 9, 1994.
**10.6 Deferred Compensation Agreement dated March 7, 1983 between
Richard J. Harris and the Company (Exhibit 10.6 to Registration
Statement No. 33-69778 filed February 9, 1994).
**10.7 1984 Stock Option Plan, as amended through May 27, 1987
(Exhibit 28.2 to Registration Statement No. 33-22527 filed June 15,
1988).
**10.8 Change in Control Severance Benefit Plan for Key Employees
adopted February 10, 1986, and form of agreement with employees
(Exhibit 10.19 to Form 10-K filed March 31, 1986, File No. 1-6112).
**10.9 1987 Stock Option Plan (Exhibit 28.3 to Registration
Statement No. 33-22527 filed June 15, 1988).
**10.10 Form of Indemnification Agreement between the Company and
its directors and certain officers (Appendix C to Proxy Statement
dated March 23, 1987 for Annual Meeting of Nortek Stockholders, File
No. 1-6112).
**10.11 1988 General Stock Option Plan (Appendix A to Proxy
Statement dated April 1, 1988 for Annual Meeting of Nortek
Stockholders, File No. 1-6112).
**10.12 1988 General Stock Option Plan III (Appendix C to Proxy
Statement dated April 12, 1989 for Annual Meeting of Nortek
Stockholders, File No. 1-6112).
10.13 Registration Rights Agreement dated as of October 31, 1990
between the Company and Bready Associates (Exhibit 4 to Schedule 13D
filed November 13, 1990 by Bready Associates relating to the Common
Stock, par value $1.00 per share, of the Company).
**10.14 1990 General Stock Option Plan (Appendix A to Proxy
Statement dated April 17, 1991 for Annual Meeting of Nortek
Stockholders, File No. 1-6112).
*11.1 Calculation of Shares Used in Determining Earnings Per
Share.
*21.1 List of subsidiaries.
*23.1 Consent of Independent Public Accountants
*27.1 Financial Data Schedule.