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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(XX) Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the Three Months ended November 30, 2003 or
( ) Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from _____________ to ____________
Commission file number 1-8831
FEDDERS CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 22-2572390
(State of incorporation) (I.R.S. Employer Identification No.)
505 Martinsville Road, Liberty Corner, NJ 07938 - 0813
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (908) 604-8686
Indicate by check mark whether the 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 [ ]
The registrant has outstanding 27,923,129 shares of Common Stock and 2,493,046
shares of Class B Stock (which is immediately convertible into Common Stock, on
a share-for-share basis) as of December 31, 2003.
FEDDERS CORPORATION
INDEX
PAGE NUMBER
-----------
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statements of Operations and Comprehensive Loss for
the three months ended November 30, 2003 and November 30, 2002 3
Consolidated Balance Sheets as of November 30, 2003, August 31, 2002 and
November 30, 2002 4-5
Consolidated Statements of Cash Flows for the three months ended
November 30, 2003 and November 30, 2002 6
Notes to Consolidated Financial Statements 7-19
Item 2. Management's Discussion and Analysis of Results of
Operations and Financial Condition 20-22
Item 3. Quantitative and Qualitative Disclosures about Market Risk 22
Item 4. Controls and Procedures 22
PART II OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 22
SIGNATURE 23
CERTIFICATIONS 24-27
2
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
FEDDERS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE LOSS
(amounts in thousands, except per share data)
(unaudited)
THREE MONTHS ENDED
NOVEMBER 30,
----------------------
2003 2002
--------- ---------
Net sales .......................................................... $ 43,144 $ 39,163
Costs and expenses:
Cost of sales .................................................... 36,414 31,332
Selling, general and administrative expense ...................... 16,847 14,368
-------- --------
53,261 45,700
-------- --------
Operating loss ..................................................... (10,117) (6,537)
Partners' net interest in joint venture results .................... (950) (309)
Interest expense, net .............................................. (4,428) (4,445)
Other income (expense) ............................................. (2) 37
-------- --------
Loss before income taxes and cumulative effect of a change in
accounting principle ............................................. (15,497) (11,254)
Benefit for income taxes ........................................... (5,037) (3,656)
-------- --------
Loss before cumulative effect of a change in accounting
principle ........................................................ (10,460) (7,598)
Cumulative effect of a change in accounting principle .............. -- (11,906)
-------- --------
Net loss ........................................................... (10,460) (19,504)
Preferred stock dividends .......................................... (363) --
-------- --------
Net loss applicable to common stockholders ......................... (10,823) (19,504)
Other comprehensive (loss) income:
Foreign currency translation, net of tax ........................... 500 (249)
-------- --------
Comprehensive loss ................................................. $(10,323) $(19,753)
======== ========
Loss per common share:
Basic/diluted loss per common share before cumulative effect of
a change in accounting principle, less preferred stock
dividends ..................................................... $ (0.36) $ (0.23)
Cumulative effect of a change in accounting principle ............ -- (0.37)
-------- --------
Basic/diluted loss per common share .............................. $ (0.36) $ (0.60)
======== ========
Weighted average shares:
Basic ............................................................ 30,099 32,584
Diluted .......................................................... 30,099 32,584
Dividends per share declared:
Common Stock ..................................................... $ 0.030 $ 0.030
Class B Stock .................................................... 0.030 0.030
Preferred Stock .................................................. 0.538 --
======== ========
See accompanying notes to the consolidated financial statements
3
FEDDERS CORPORATION
CONSOLIDATED BALANCE SHEETS
(amounts in thousands)
(unaudited)
NOVEMBER 30, AUGUST 31, NOVEMBER 30,
2003 2003 2002
------------ ---------- ------------
ASSETS
Current assets:
Cash and cash equivalents ................................... $ 30,387 $ 60,902 $ 37,895
Accounts receivable (net of allowance of $1,881,
$2,032 and $2,127 at November 30, 2003,
August 31, 2003 and November 30, 2002,
respectively) ............................................. 34,815 51,178 24,100
Inventories:
Finished goods ............................................. 85,913 52,226 57,543
Work-in-process ............................................ 4,521 5,114 3,486
Raw materials and supplies ................................. 29,524 21,608 24,096
-------- -------- --------
Net inventories ............................................. 119,958 78,948 85,125
Deferred income taxes ....................................... 7,650 7,654 5,607
Assets held for sale ........................................ 8,564 8,564 --
Other current assets ........................................ 24,097 21,463 17,699
-------- -------- --------
Total current assets .......................................... 225,471 228,709 170,426
Net property, plant and equipment:
Land and improvements ....................................... 3,778 1,508 3,794
Buildings and leasehold improvements ........................ 32,160 31,423 40,103
Machinery and equipment ..................................... 103,623 100,581 100,313
-------- -------- --------
Gross property, plant and equipment ......................... 139,561 133,512 144,210
Less accumulated depreciation ............................... 84,660 77,652 77,672
-------- -------- --------
Net property, plant and equipment ............................. 54,901 55,860 66,538
Deferred income taxes ......................................... 8,289 8,224 2,867
Goodwill ...................................................... 78,630 78,630 78,630
Other intangible assets ....................................... 1,699 1,788 1,526
Other assets .................................................. 33,334 35,718 35,270
-------- -------- --------
Total assets .................................................. $402,324 $408,929 $355,257
======== ======== ========
See accompanying notes to the consolidated financial statements
4
FEDDERS CORPORATION
CONSOLIDATED BALANCE SHEETS
(amounts in thousands, except par value)
(unaudited)
NOVEMBER 30, AUGUST 31, NOVEMBER 30,
2003 2003 2002
------------ ---------- ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term notes ........................................................ $ 19,371 $ 7,520 $ 20,122
Current portion of long-term debt ....................................... 3,016 4,652 3,340
Accounts payable ........................................................ 60,653 56,812 48,031
Income taxes payable .................................................... 967 5,452 3,229
Accrued expenses ........................................................ 56,707 64,552 34,155
--------- --------- ---------
Total current liabilities ................................................ 140,714 138,988 108,877
Long-term debt ........................................................... 158,873 159,392 163,259
Other long-term liabilities .............................................. 30,712 31,037 21,937
Partners' net interest in joint venture .................................. 4,264 4,584 4,043
Stockholders' equity:
Preferred Stock, $0.01 par value, 15,000 shares authorized, 675, 675 and
none issued at November 30, 2003, August 31, 2003 and November 30, 2002,
respectively ............................................................ 7 7 --
Common Stock, $0.01 par value, 70,000 shares authorized, 36,435, 35,278
and 38,249 issued at November 30, 2003, August 31, 2003 and November 30,
2002, respectively ...................................................... 364 353 382
Class B Stock, $0.01 par value, 5,000 shares authorized, 2,493 issued at
November 30, 2003, August 31, 2003 and November 30, 2002, respectively .. 25 25 25
Additional paid-in capital ............................................... 80,665 74,025 68,848
Retained earnings ........................................................ 28,468 40,179 27,075
Accumulated other comprehensive loss ..................................... (1,745) (2,245) (1,561)
--------- --------- ---------
107,784 112,344 106,675
Treasury stock, at cost, 8,851 shares of Common Stock at November 30,
2003, 8,158 shares of Common Stock at August 31, 2003 and November 30,
2002, respectively ....................................................... (39,188) (37,322) (37,322)
Deferred compensation .................................................... (835) (94) (306)
--------- --------- ---------
Total stockholders' equity ............................................... 67,761 74,928 57,141
--------- --------- ---------
Total liabilities and stockholders' equity ............................... $ 402,324 $ 408,929 $ 355,257
========= ========= =========
See accompanying notes to the consolidated financial statements
5
FEDDERS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(amounts in thousands)
(unaudited)
THREE MONTHS ENDED
NOVEMBER 30,
----------------------
2003 2002
--------- ---------
Cash flows from operating activities:
Net loss.................................................................... $(10,460) $(19,504)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization ............................................. 2,182 2,389
Deferred income taxes ..................................................... (61) (3,656)
Stock option repricing .................................................... 2,256 (339)
Goodwill impairment ....................................................... -- 11,906
Partners' net interest in joint venture results ........................... 950 309
Changes in operating assets and liabilities:
Accounts receivable ....................................................... 363 7,668
Inventories ............................................................... (41,010) (36,545)
Other current assets ...................................................... (2,634) (4,122)
Other assets .............................................................. 1,268 2,116
Accounts payable .......................................................... 3,841 6,143
Accrued expenses .......................................................... 8,011 (2,944)
Income taxes payable ...................................................... (4,485) 930
Other long-term liabilities ............................................... (325) (740)
Other - net ............................................................... 614 335
-------- --------
Net cash used in operating activities ....................................... (39,490) (36,054)
-------- --------
Cash flows from investing activities:
Additions to property, plant and equipment ................................ (1,287) (2,211)
Disposal of property, plant and equipment ................................. -- 15
-------- --------
Net cash used in investing activities ....................................... (1,287) (2,196)
-------- --------
Cash flows from financing activities:
Proceeds from short-term notes ............................................ 11,851 10,293
Proceeds from stock options exercised ..................................... 1,683 --
Repayments of long-term debt .............................................. (2,155) (532)
Cash dividends ............................................................ (1,108) (972)
Other ..................................................................... (9) (23)
-------- --------
Net cash provided by financing activities ................................... 10,262 8,766
-------- --------
Net decrease in cash and cash equivalents ................................... (30,515) (29,484)
Cash and cash equivalents at beginning of period ............................ 60,902 67,379
-------- --------
Cash and cash equivalents at end of period .................................. $ 30,387 $ 37,895
======== ========
Supplemental disclosure:
Interest paid ............................................................. $ 463 $ 385
Income taxes paid ......................................................... 61 (829)
======== ========
See accompanying notes to the consolidated financial statements
6
FEDDERS CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except share and per share data)
(unaudited)
1. BASIS OF PRESENTATION
The financial information included herein is unaudited and prepared in
accordance with the instructions for Form 10-Q; however, such information
reflects all adjustments, which consist solely of normal recurring adjustments
which are, in the opinion of management, necessary for a fair presentation of
results for the interim periods. Reference should be made to the annual
financial statements, including footnotes thereto, included in Fedders
Corporation's (the "Company") Annual Report on Form 10-K for the fiscal year
ended August 31, 2003. The Company's fiscal year end through the 2003 fiscal
year was August 31. However, on August 26,2003, the Board of Directors decided
to change the Company's fiscal year end from August 31, to December 31. Certain
reclassifications have been made in prior-year amounts to conform to the
current-year presentation.
2. STOCK COMPENSATION
On October 28, 2003, the Board of Directors granted options to purchase
approximately 791,000 shares of the Common Stock of the Company to 25 employees
under a stock option plan approved by stockholders in 1996. The exercise price
of the options is equal to the fair market value of the Common Stock of the
Company on the date of the grant. These options have a term of 5 years and vest
in increments of 25% per year over a four-year period on the anniversary date of
the grant.
In December 2002, the FASB issued Statement of Financial Accounting Standards
No. 148, "Accounting for Stock-Based Compensation-Transition and Disclosure-an
amendment of FASB Statement No. 123" ("SFAS 123"). This statement provides
alternative methods of transition for a voluntary change to the fair-value-based
method of accounting for stock-based employee compensation. In addition, this
statement amends the disclosure requirements of SFAS 123 to require prominent
disclosures in both annual and interim financial statements. The Company adopted
the disclosure requirements of this statement at the beginning of its second
fiscal quarter.
The Company accounts for stock options issued to its employees under the
recognition and measurement principles of APB Opinion 25,"Accounting for Stock
Issued to Employees," and related interpretations. No stock-based employee
compensation cost is reflected in net income, as all options granted had an
exercise price equal to the market value of the underlying Common Stock on the
date of grant. The following table illustrates the effect on net income and
earnings per share if the Company had applied the fair-value recognition
provisions of SFAS No. 123 to stock-based employee compensation.
THREE MONTHS ENDED
NOVEMBER 30,
----------------------
2003 2002
--------- ---------
Net loss applicable to common
stockholders-as reported .................. $(10,823) $(19,504)
Add: Stock-based employee
compensation expense (income)
included in reported net income,
net of related tax effects ................ 1,523 (229)
Deduct: Total stock-based employee
compensation expense determined under
fair-value-based method for all awards, net
of related tax effects .................... 48 90
-------- --------
Pro forma net loss........................... $ (9,348) $(19,823)
======== ========
Net loss per common share:
Basic and diluted-as reported ........... $ (0.36) $ (0.60)
Basic and diluted-pro forma ............. $ (0.31) $ (0.61)
3. ASSET IMPAIRMENT, EMPLOYEE SEVERANCE AND OTHER RESTRUCTURING AND RELATED
CHARGES
In the fourth quarter of 2001, the Company announced a plan to restructure its
existing operations, which included the transfer of a majority of the Company's
room air conditioner production, as well as all production of dehumidifiers and
compressors, from its Illinois, Tennessee and Maryland facilities to facilities
in China in order to lower costs and improve profitability. The Company's plan
resulted in charges for fixed-asset impairments, employee severance costs,
inventory write-downs, and other restructuring charges directly related to the
restructuring plan, including facility closing costs and lease termination
costs. In conjunction with the restructuring plan, the Company recorded $13,694
of charges in the fourth quarter of 2001.
7
The following table displays the activity and balances of the restructuring
reserve account from August 31, 2003 to November 30, 2003.
AUGUST 31, NOVEMBER 30,
2003 2003
BALANCE ADDITIONS DEDUCTIONS BALANCE
---------- --------- ---------- ------------
Workforce reductions $ 586 -- -- $ 586
Facility closing costs 477 -- -- 477
Other costs 214 -- -- 214
------ --- --- ------
Total $1,277 -- -- $1,277
====== === === ======
The remaining balance of $1,277, which consists primarily of workforce reduction
and facility closing costs, is expected to be expended during the twelve months
ended December 31, 2004. The final amounts will be settled upon the expiration
period for workers' compensation claims and completion of facility clean up and
waste removal.
4. STOCKHOLDERS' EQUITY
On October 1, 2003, the Company granted an officer 150,000 shares of restricted
Common Stock of the Company pursuant to the officer's employment agreement. The
officer is not permitted to sell, assign, transfer, pledge or otherwise encumber
these shares prior to January 1, 2007. The Company recorded $0.9 million of
deferred compensation to be amortized over the vesting period
5. EARNINGS PER SHARE
For the three months ended November 30, 2003 and 2002, net loss per share was
computed using the weighted average number of shares of Common and Class B Stock
outstanding, which amounted to approximately 30,098,686 and 32,584,111 shares,
respectively Due to their anti-dilutive effect, 722,871 and none options were
excluded from the computation of diluted earnings per share for the three months
ended November 30, 2003 and 2002, respectively.
6. STOCK OPTION REPRICING
In October 2000, the Company's Board of Directors approved the repricing of a
majority of unexercised stock options, reducing the exercise price to $3.625 per
share, which was the fair market value of the Class A Stock on the date of
repricing. For the three months ended November 30, 2003, as result of exercise
of 851,769 shares of options subject to repricing, the Company recorded a $2.3
million charge to compensation expense to reflect changes in the market price of
the Company's stock and an increase in the Company's additional paid in capital
of $5,794. For the three months ended November 30, 2002 the Company recorded a
$339 reduction to compensation expense to reflect changes in the market price of
the Company's stock.
7. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities." This interpretation defines when a business
enterprise must consolidate a variable interest entity. This interpretation
applies immediately to variable interest entities created after January 31, 2003
and became effective for all other transactions as of July 1, 2003. However, in
October 2003, the FASB permitted companies to defer the July 1, 2003 effective
date to December 31, 2003, in whole or in part, and indicated that it would
provide further clarification of this interpretation before December 31, 2003.
The Company has determined that it is not reasonably probable that it will be
required to consolidate or disclose information about a variable interest
entity.
8. GOODWILL AND INTANGIBLE ASSETS
The Company records the excess purchase price of net tangible and intangible
assets acquired over their estimated fair value as goodwill. The Company adopted
the provisions of SFAS 142 "Goodwill and Other Intangible Assets" ("SFAS 142"),
as of September 1, 2002. Under SFAS 142, the Company is required to test
goodwill for impairment at least annually. The Company has elected to perform
its annual test for indications of goodwill impairment as of September 30 of
each year. The Company identifies potential goodwill impairment by comparing the
fair value of a reporting segment with its carrying amount, including goodwill.
The Company determines fair value using a discounted cash flow and
market-multiple approach. If the fair value of a reporting segment exceeds its
carrying amount, goodwill of the reporting segment is not considered impaired.
If the carrying amount of a segment exceeds its fair
8
value, the amount of goodwill impairment loss, if any, must be measured. The
Company measures the amount of goodwill impairment loss by comparing the implied
fair value of reporting segment goodwill with the carrying amount of that
goodwill. If the carrying amount of the segment goodwill exceeds the implied
fair value of goodwill, an impairment loss is recognized as an operating
expense.
The Company completed the transitional goodwill impairment test during the
fourth quarter for fiscal 2003 and recognized a non-cash goodwill impairment
charge of $11.9 million within its Engineered Products reporting segment. As
required, the transitional goodwill impairment charge was recorded as a
cumulative effect of a change in accounting principle as of September 1, 2002.
In accordance with SFAS No. 142, the Company ceased amortization of goodwill as
of September 1, 2002.
Goodwill and other intangible assets consist of the following:
NOVEMBER 30, AUGUST 31,
2003 2003
------------ -----------
Goodwill .................................. $ 78,630 $ 78,630
======== ========
Gross other amortizable intangibles ....... $ 3,189 $ 3,189
Accumulated amortization .................. (1,490) (1,401)
-------- --------
Other intangible assets ................... $ 1,699 $ 1,788
======== ========
As of November 30, 2003 and August 31, 2003, the Company had goodwill of $70,133
and $8,497 reflected in its HVACR and Engineered Products reportable segments,
respectively. Other intangible assets primarily include a right associated with
a joint venture that is being amortized over 20 years. Amortization expense for
the three months ended November 30, 2003 and 2002 is $46 and $44, respectively.
Estimated amortization expense for other intangible assets will be approximately
$120 for each of the next five years.
9. ASSETS HELD FOR SALE
In October 2001, FASB issued Statement of Financial Accounting Standards No.
144, "Accounting for the Impairment or Disposal of Long-Lived Assets" ("SFAS
144"). This statement addresses financial accounting and reporting for the
impairment or disposal of long-lived assets. The Company adopted this statement
at the beginning of its fiscal year 2003.
In connection with a restructuring of the Company's operations in 2001 (Note 3),
the Company ceased production at its Walkersville, Maryland facility, part of
the Company's HVACR reportable segment. In December 2002, the Company began the
process of actively marketing the sale of the Walkersville facility. The Company
anticipates the selling price of the facility will exceed its net book value
after consideration of selling expenses associated with marketing the facility
for sale. A vacant property belonging to the Company in Ningbo, China is also
being marketed for sale and the sale is expected to be completed no later than
June 2004. At November 30, 2003, assets totaling $8,564, which consist of land,
land improvements, buildings, and building improvements have been classified as
"Assets Held for Sale" and are no longer being depreciated in accordance with
SFAS 144.
The following table presents the carrying amount, by asset class, of
the "Assets Held for Sale" at November 30:
2003
--------
Land and land improvements...... $ 2,181
Building, net................... 4,587
Building improvements, net...... 1,796
--------
Assets Held for Sale............ $ 8,564
========
10. INDUSTRY SEGMENTS
The Company has two reportable segments: Heating, Ventilation, Air Conditioning
and Refrigeration ("HVACR") and Engineered Products. The Company's reportable
segments were determined based upon several factors, including the nature of the
products provided and markets served. Each reportable segment is managed
separately and includes various operating segments that have been aggregated due
to similar economic characteristics.
The HVACR segment designs, manufactures and distributes window, split,
multi-split, through-the-wall, portable and vertical packaged unit air
conditioners and dehumidifiers. HVACR products are distributed through a variety
of sales channels, including
9
national retailers, regional retailers, wholesale distributors, catalog supply
houses, private label/OEM, government direct and the Internet.
The Engineered Products segment designs, manufactures and distributes media
filters, electronic filters, humidifiers, dust collectors, fan filter units, and
solid-state thermoelectric heat pump modules. These products are sold through
manufacturers' representatives, distributors and direct sales to end-users.
SUMMARY OF BUSINESS BY SEGMENT:
THREE MONTHS ENDED
NOVEMBER 30,
----------------------
2003 2002
--------- ---------
Net sales:
HVACR .............................................. $ 33,793 $ 29,450
Engineered Products ................................ 9,351 9,713
-------- --------
Net sales .......................................... $ 43,144 $ 39,163
======== ========
Income before interest, taxes and goodwill impairment:
HVACR .............................................. $ (6,300) $ (4,513)
Engineered Products ................................ 641 37
-------- --------
Segment income before interest and taxes ........... (5,659) (4,476)
Goodwill impairment ................................ -- 11,906
Non-allocated expenses ............................. 5,410 2,333
Interest expense, net .............................. 4,428 4,445
Provision for income taxes ......................... (5,037) (3,656)
-------- --------
Net income ........................................ $(10,460) $(19,504)
======== ========
NOVEMBER 30, AUGUST 31, NOVEMBER 30,
2003 2003 2002
------------ ---------- ------------
Total assets:
HVACR ................. $292,740 $266,967 $241,134
Engineered Products.... 53,028 53,024 67,276
Non-allocated assets... 56,556 88,938 58,753
-------- -------- --------
$402,324 $408,929 $367,163
======== ======== ========
12. GUARANTEES
In November 2002, FASB Interpretation ("FIN") 45, "Guarantor's Accounting And
Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others", was approved by the FASB. FIN 45 clarifies that a
guarantor is required to recognize, at the inception of a guarantee, a liability
for the fair value of the obligation undertaken in issuing the guarantee. The
initial recognition and initial measurement provisions of this interpretation
are applicable on a prospective basis to guarantees issued or modified after
December 31, 2002. The interpretation also requires enhanced and additional
disclosures of guarantees in interim and annual financial statements for periods
ending after December 15, 2002. The Company adopted this statement in the second
quarter of fiscal year 2003.
Product Warranty
Certain of the Company's products are covered by standard product warranty plans
that extend from 1 to 5 years. In addition, major retailers have consumer return
policies which allow consumers to return product that may be defective in lieu
of field service. Upon return to the Company, these units are inspected,
repaired as required, reboxed and held for future sale as factory reconditioned
products. A portion of those units returned is not repairable. At the time
revenue is recognized, upon shipment, measurements of those sales are reduced by
estimates of the future costs associated with fulfilling warranty obligations
and for the expense associated with repairing or scrapping defective returns.
The Company uses historical failure and defective return rates, which may or may
not be indicative of future rates. Each quarter, the estimate of warranty and
defective return obligations including the assumptions about estimated failure
and return rates, is reevaluated.
10
The following table displays the activity and balances of the product warranty
liability from August 31, 2003 to November 30, 2003:
THREE MONTHS
ENDED
NOVEMBER 30, 2003
-----------------
Warranty balance at August 31, 2003................ $ 9,660
Accruals for warranties issued during the period... 400
Settlements made during the period................. (3,893)
---------
Warranty balance at November 30, 2003.............. $ 6,166
=========
Loan Guarantees
Guarantees of subsidiary debt by Fedders Corporation ("the Parent") and
subsidiaries consist of the following at November 30, 2003:
(i) The Parent guarantees the obligations of Fedders North America, Inc.
("FNA") under its 9 3/8% Senior Subordinated Notes due 2007 (the
"Notes"). This is a guarantee of payment of principal and interest on
the Notes that arose in connection with the issuance and sale of $150
million in principal amount of the Notes. The Parent would be required
to perform under the guarantee in the event FNA failed to pay principal
and interest when due or to perform its obligations under the indenture
pursuant to which the Notes were issued.
(ii) The Parent and various subsidiaries guarantee the obligations of
certain subsidiaries under a $100 million working capital line of
credit. The line of credit bears interest at Libor +2% or the prime
rate of Wachovia Bank and expires in February 2006. The Parent and
guarantor subsidiaries would be required to perform under the
guarantees in the event that the borrowing subsidiaries failed to repay
amounts borrowed under the line of credit and interest and other
charges associated therewith, or failed to comply with the provisions
of the credit agreement. There is no outstanding loan balance at
November 30, 2003.
(iii) The Parent guarantees the obligations of its subsidiary, Melcor
Corporation, under a $1.3 million New Jersey Economic Development
Authority Economic Development Bond. The bond bears interest at the
rate of 6.6% per annum and matures in July 2010. The Parent would be
required to perform under the guaranty in the event that Melcor fails
to pay the principal of and interest on the bond or fails to comply
with the provisions of the bond agreement pursuant to which the bond
was issued. The outstanding loan balance at November 30, 2003 is $0.9
million.
(iv) The Parent and Melcor Corporation guarantee the obligations of a
subsidiary, Eubank Manufacturing Enterprises, Inc., under an equipment
financing lease in the amount of $3.1 million. The lease bears interest
at the rate of 7.16% per annum and expires in December 2007. The Parent
and Melcor Corporation would be required to perform under the guarantee
in the event Eubank fails to pay rent when due or fails to comply with
the provisions of the lease agreement. The outstanding loan balance at
November 30, 2003 is $2.2 million.
(v) The Parent guarantees the obligations of a subsidiary, Eubank
Manufacturing Enterprises, Inc., under a loan agreement providing for a
loan of $2.0 million. The loan bears interest at the prime rate of Flag
Bank and matures in February 2007. The Parent would be required to
perform under the guaranty in the event Eubank fails to pay the
principal of and interest on the loan or fails to comply with the
provisions of the loan agreement. The outstanding loan balance at
November 30, 2003 is $0.6 million.
(vi) The Parent guarantees the obligations of a subsidiary, Fedders Shanghai
Co., Ltd. ("FSC") under a working capital line of credit totaling $6.0
million. The line of credit bears interest at the rate of Sibor + 1.5%
per annum and matures at various dates. The Parent would be obligated
to perform under the guarantee in the event that FSC fails to pay the
principal of and interest on the loan or fails to comply with the
provisions of the loan agreement. There is no outstanding loan balance
at November 30, 2003.
(vii) The Parent guarantees the obligations of a subsidiary, Polenz GmbH
("Polenz"), under a Euro 6.0 million working capital line of credit.
The line of credit bears interest at the rate of Libor +2.5% per annum
and matures June 2004. The Parent would be obligated to perform under
the guarantee in the event Polenz fails to pay the principal of and
interest on the loan or fails to comply with the provisions of the loan
agreement. There is no outstanding loan balance at November 30, 2003.
11
(viii) The Parent guarantees the obligations of a subsidiary, Fedders Koppel,
Inc. ("FK"), under a Ph peso 320 million term loan. The loan bears
interest at the rate of Phibor + 3% per annum and matures May 2005. The
Parent would be obligated to perform under the guarantee in the event
that FK fails to pay the principal of and interest on the loan or fails
to comply with the provisions of the loan agreement. The outstanding
loan balance at November 30, 2003 is $1.8 million.
(ix) The Parent guarantees the obligations of a subsidiary, Eubank
Manufacturing Enterprises, Inc., under a mortgage agreement providing
for a loan of $1.0 million. The loan has an interest rate of 4.25% and
matures in June 2008. The Parent would be required to perform under the
guaranty in the event Eubank fails to pay the principal of and interest
on the loan or fails to comply with the provisions of the loan
agreement. The outstanding loan balance at November 30, 2003 is $0.9
million.
The Company also provides loan guarantees to two joint ventures which are not
consolidated in the Company's financial statements:
(i) Fedders International, Inc., ("FI") a subsidiary of the Company,
guarantees up to 50% of the obligations of a 50%-owned joint venture,
Universal Comfort Products Pvt., Ltd., ("UCPL"), under a Rupees 230
million term loan. The loan bears interest at the rate of State Bank
Mid Term Loan Rate and matures November 2006. FI would be obligated to
perform under the guaranty in the event UCPL fails to pay the principal
of and interest on the loan or fails to comply with the terms of the
loan agreement. FI's exposure under the guarantee at November 30, 2003
is $2.3 million.
(ii) Fedders Indoor Air Quality (Suzhou) Co., Ltd., ("FIAQ"), a
subsidiary of the Company, guarantees up to RMB 5 million of the
obligations of Xi'an Fedders Dong Fang Air Conditioner Compressor Co.,
Ltd., ("FDF"), a 50%-owned joint venture of the Company, under a
working capital line of credit. The line of credit bears interest at
the rate set by the Peoples Bank of China and matures December 2004.
FIAQ would be obligated to perform its obligations under the guaranty
in the event FDF fails to pay the principal of and interest on the loan
or fails to comply with the provisions of the loan agreement. FIAQ's
maximum exposure under the guarantee is $0.6 million as of November 30,
2003.
13. ACQUISITIONS AND JOINT VENTURES
On October 21, 2003, the Company entered into a joint venture with Jiangsu
Xingrong Hi-Tech Company ("Xingrong") to design, produce and market heat
exchangers used in air conditioners. The Company and Xingrong each have a 50%
interest in the joint venture, Changzhou Fedders Xingrong Air Conditioner
Components Co., Ltd. This joint venture is included within the HVACR reportable
segment. The Company reports the results of the joint venture by the equity
method of accounting.
14. SUBSEQUENT EVENTS
On December 5, 2003,the Company's Board of Directors authorized the distribution
of transferable rights to the holders of the Company's Common and Class B stock.
In the rights offering, holders of Common Stock and Class B Stock as of December
22, 2003 will receive subscription rights to purchase shares of Series A
Cumulative Preferred Stock. Every 20 rights will entitle the holder to purchase
one share of Cumulative Preferred Stock at the subscription price of $23.70 per
share, and carries with it a basic subscription right and an over-subscription
right. The rights offering will expire at 5:00 p.m. New York City time on
January 16, 2004, unless extended by the Company.
On December 9, 2003, the Company and BSH Bosch und Siemens Hausgerate GmbH
terminated their joint venture named BSH and Fedders International Air
Conditioning, S.A., as of November 2003. This joint venture was established on
March 24, 1998. The Company agreed to sell all shares owned for the sum of 3.6
million Euros, approximately $4.4 million, and expect to realize a gain from
$0.5 million to $0.7 million.
On December 29, 2003 the Company entered into a strategic alliance with WFI
Industries Ltd. ("WFI") to produce water source heat pumps in China. These units
will be sold in China and Korea by WFI under the WaterFurnace brand.
15. SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL STATEMENTS
Fedders North America, Inc. ("FNA") is a wholly-owned subsidiary of the Company.
FNA and the Parent are the issuer and the guarantor, respectively, of the Senior
Subordinated Notes due 2007, of which $100,000 were issued in August 1997 and
$50,000 were issued in August 1999. The Parent's guarantee is full and
unconditional. The following condensed consolidating financial statements
present separate information for FNA and for the Parent and its subsidiaries
other than FNA, and should be read in conjunction with the consolidated
financial statements of the Company.
12
FEDDERS CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
AND COMPREHENSIVE INCOME
THREE MONTHS ENDED NOVEMBER 30, 2003
----------------------------------------------------------------
FEDDERS
NORTH OTHER ELIMINATING FEDDERS
AMERICA FEDDERS CORPORATE ENTRIES CORPORATION
--------- --------- --------- ----------- -----------
Net sales ............................. $ 24,192 $ 22,504 -- $ (3,552) $ 43,144
Cost of sales ......................... 22,132 17,834 -- (3,552) 36,414
Selling, general and administrative
expense(a) .......................... 7,672 7,226 $ 1,949 -- 16,847
-------- -------- -------- -------- --------
Operating loss ........................ (5,612) (2,556) (1,949) -- (10,117)
Partners' net interest in joint venture
Results ............................. 212 (1,162) -- -- (950)
Equity income in investment ........... -- -- (9,016) 9,016 --
Interest expense, net(b) .............. (3,855) (496) (77) -- (4,428)
Other income (expense) ................ (111) 106 3 -- (2)
-------- -------- -------- -------- --------
Loss before income taxes .............. (9,366) (4,108) (11,039) 9,016 (15,497)
Benefit for income taxes .............. (3,132) (1,326) (579) -- (5,037)
-------- -------- -------- -------- --------
Net loss .............................. $ (6,234) $ (2,782) $(10,460) $ 9,016 $(10,460)
-------- -------- -------- -------- --------
Preferred stock dividend .............. -- -- 363 -- 363
-------- -------- -------- -------- --------
Net loss applicable to common
stockholders ........................ $ (6,234) $ (2,782) $(10,823) $ 9,016 $(10,823)
-------- -------- -------- -------- --------
Foreign currency translation, net of
Tax ................................. (138) 637 500 (499) 500
-------- -------- -------- -------- --------
Comprehensive loss .................... $ (6,372) $ (2,145) $(10,323) $ 8,517 $(10.323)
======== ======== ======== ======== ========
THREE MONTHS ENDED NOVEMBER 30, 2002
----------------------------------------------------------------
FEDDERS
NORTH OTHER ELIMINATING FEDDERS
AMERICA FEDDERS CORPORATE ENTRIES CORPORATION
--------- --------- --------- ----------- -----------
Net sales ............................... $ 22,331 $ 21,365 -- $ (4,533) $ 39,163
Cost of sales ........................... 18,932 16,933 -- (4,533) 31,332
Selling, general and administrative
expense(a) ............................ 7,682 6,686 -- -- 14,368
-------- -------- -------- -------- --------
Operating loss .......................... (4,283) (2,254) -- -- (6,537)
Partners' net interest in joint venture
results ............................... -- (309) -- -- (309)
Equity income in investment ............. -- -- (19,387) 19,387 --
Interest expense, net(b) ................ (3,802) (498) (145) -- (4,445)
Other income (expense) .................. 213 (176) -- -- 37
-------- -------- -------- -------- --------
Loss before income taxes and
cumulative effect of a change in
accounting principle .................. (7,872) (3,237) (19,532) 19,387 (11,254)
Benefit for income taxes ................ (2,646) (982) (28) -- (3,656)
-------- -------- -------- -------- --------
Net loss before cumulative effect of a
change in accounting principle ........ (5,226) (2,255) (19,504) 19,387 (7,598)
Cumulative effect of a change in
accounting principle .................. 6,906 5,000 -- -- 11,906
-------- -------- -------- -------- --------
Net loss ................................ $(12,132) $ (7,255) $(19,504) $ 19,387 $(19,504)
-------- -------- -------- -------- --------
Foreign currency translation, net of
tax ................................... (20) (229) (249) 249 (249)
-------- -------- -------- -------- --------
Comprehensive loss ...................... $(12,152) $ (7,484) $(19,753) $ 19,636 $(19,753)
======== ======== ======== ======== ========
13
FEDDERS CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
CONDENSED CONSOLIDATING BALANCE SHEETS
AS OF NOVEMBER 30, 2003
--------------------------------------------------------------------
FEDDERS
NORTH OTHER ELIMINATING FEDDERS
AMERICA FEDDERS CORPORATE ENTRIES CORPORATION
---------- ---------- ---------- ----------- -----------
ASSETS
Current assets:
Cash and cash equivalents .................. $ 20,931 $ 9,456 -- -- $ 30,387
Net accounts receivable .................... 18,311 16,504 -- -- 34,815
Net inventories ............................ 87,724 32,234 -- -- 119,958
Assets held for sale ....................... 8,249 315 -- -- 8,564
Other current assets ....................... 11,274 12,205 $ 15,291 $ (7,023) 31,747
--------- --------- --------- --------- ---------
Total current assets .......................... 146,489 70,714 15,291 (7,023) 225,471
Investments in subsidiaries ................... -- -- (7,929) 7,929 --
Net property, plant and equipment ............. 32,447 21,854 600 -- 54,901
Goodwill ...................................... 57,885 20,745 -- -- 78,630
Other intangible assets ....................... 253 1,446 -- -- 1,699
Other assets .................................. 7,484 4,471 29,668 -- 41,623
--------- --------- --------- --------- ---------
Total assets .................................. $ 244,558 $ 119,230 $ 37,630 $ 906 $ 402,324
========= ========= ========= ========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term notes ........................... $ 6,041 $ 13,330 -- -- $ 19,371
Current portion of long-term debt .......... 421 2,595 -- -- 3,016
Accounts and income taxes payable .......... 37,178 22,181 $ 2,261 -- 61,620
Accrued expenses ........................... 38,705 9,160 8,842 -- 56,707
--------- --------- --------- --------- ---------
Total current liabilities ..................... 82,345 47,266 11,103 -- 140,714
Long-term debt ................................ 153,505 5,368 -- -- 158,873
Other long-term liabilities ................... 1,027 11,409 29,563 $ (7,023) 34,976
Net due to (from) affiliates .................. (6,976) 77,773 (70,797) -- --
Stockholders' equity:
Preferred Stock ............................ -- -- 7 -- 7
Common and Class B Stock ................... 5 -- 389 (5) 389
Additional paid-in capital ................. 21,109 24,725 80,665 (45,834) 80,665
Retained earnings (deficit) ................ (5,527) (46,486) 28,468 52,013 28,468
Deferred compensation and treasury stock ... -- -- (40,023) -- (40,023)
Accumulated other comprehensive loss ....... (930) (825) (1,745) 1,755 (1,745)
--------- --------- --------- --------- ---------
Total stockholders' equity .................... 14,657 (22,586) 67,761 7,929 67,761
--------- --------- --------- --------- ---------
Total liabilities and stockholders' equity..... $ 244,558 $ 119,230 $ 37,630 $ 906 $ 402,324
========= ========= ========= ========= =========
14
FEDDERS CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
CONDENSED CONSOLIDATING BALANCE SHEETS
AS OF AUGUST 31,2003
-------------------------------------------------------------------
FEDDERS
NORTH OTHER ELIMINATING FEDDERS
AMERICA FEDDERS CORPORATE ENTRIES CORPORATION
---------- ---------- --------- ----------- -----------
ASSETS
Current assets:
Cash and cash equivalents ....................... $ 54,354 $ 6,548 -- -- $ 60,902
Net accounts receivable ......................... 28,913 22,265 -- -- 51,178
Inventories ..................................... 42,204 36,744 -- -- 78,948
Assets held for sale ............................ 8,249 315 -- -- 8,564
Other current assets ............................ 8,081 12,689 $ 15,370 $ (7,023) 29,117
--------- --------- --------- --------- ---------
Total current assets ............................... 141,801 78,561 15,370 (7,023) 228,709
Investments in subsidiaries ........................ -- -- 17,139 (17,139) --
Net property, plant and equipment .................. 33,464 21,742 654 -- 55,860
Goodwill ........................................... 57,885 20,745 -- -- 78,630
Other intangible assets ............................ 274 1,514 -- -- 1,788
Other long-term assets ............................. 7,314 6,202 30,426 -- 43,942
--------- --------- --------- --------- ---------
Total assets ....................................... $ 240,738 $ 128,764 $ 63,589 $ (24,162) $ 408,929
========= ========= ========= ========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term notes ................................ $ -- $ 7,520 -- -- $ 7,520
Current portion of long-term debt ............... 451 4,185 $ 16 -- 4,652
Accounts and income taxes payable ............... 26,981 28,072 7,211 -- 62,264
Accrued expenses ................................ 44,760 10,553 9,239 -- 64,552
--------- --------- --------- --------- ---------
Total current liabilities .......................... 72,192 50,330 16,466 -- 138,988
Long-term debt ..................................... 153,544 5,848 -- -- 159,392
Other long-term liabilities ........................ 1,351 11,529 29,764 $ (7,023) 35,621
Net due to (from) affiliates ....................... (24,029) 81,598 (57,569) -- --
Stockholders' equity:
Preferred Stock ................................. -- -- 7 -- 7
Common and Class B Stock ........................ 5 -- 378 (5) 378
Additional paid-in capital ...................... 21,209 24,625 74,025 (45,834) 74,025
Retained earnings (deficit) ..................... 17,258 (43,704) 40,179 26,446 40,179
Deferred compensation and treasury stock ........ -- -- (37,416) -- (37,416)
Accumulated other comprehensive loss ............ (792) (1,462) (2,245) 2,254 (2,245)
--------- --------- --------- --------- ---------
Total stockholders' equity ......................... 37,680 (20,541) 74,928 (17,139) 74,928
--------- --------- --------- --------- ---------
Total liabilities and stockholders' equity ......... $ 240,738 $ 128,764 $ 63,589 $ (24,162) $ 408,929
========= ========= ========= ========= =========
15
FEDDERS CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
CONDENSED CONSOLIDATING BALANCE SHEETS
AS OF NOVEMBER 30, 2002
-------------------------------------------------------------------
FEDDERS
NORTH OTHER ELIMINATING FEDDERS
AMERICA FEDDERS CORPORATE ENTRIES CORPORATION
---------- ---------- --------- ----------- -----------
ASSETS
Current assets:
Cash and cash equivalents...................... $ 31,111 $ 6,784 -- -- $ 37,895
Net accounts receivable........................ 11,123 12,977 -- -- 24,100
Inventories.................................... 51,004 34,121 -- -- 85,125
Other current assets........................... 7,649 9,852 $ 12,828 $ (7,023) 23,306
--------- --------- --------- --------- ---------
Total current assets.............................. 100,887 63,734 12,828 (7,023) 170,426
Investments in subsidiaries....................... -- -- 947 (947) --
Net property, plant and equipment................. 44,861 20,893 784 -- 66,538
Goodwill.......................................... 57,885 20,745 -- -- 78,630
Other intangible assets........................... 302 1,224 -- -- 1,526
Other long-term assets............................ 7,485 4,960 25,692 -- 38,137
--------- --------- --------- --------- ---------
Total assets...................................... $ 211,420 $ 111,556 $ 40,251 $ (7,970) $ 355,257
========= ========= ========= ========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term notes............................... $ 8,764 $ 11,358 -- -- $ 20,122
Current portion of long-term debt.............. 578 2,665 $ 97 -- 3,340
Accounts and income taxes payable.............. 27,214 19,822 995 -- 48,031
Accrued expenses............................... 16,215 10,763 10,406 -- 37,384
--------- --------- --------- --------- ---------
Total current liabilities......................... 52,771 44,608 11,498 -- 108,877
Long-term debt.................................... 153,492 9,767 -- -- 163,259
Other long-term liabilities....................... 1,764 11,326 19,913 $ (7,023) 25,980
Net due to (from) affiliates...................... (14,842) 63,143 (48,301) -- --
Stockholders' equity:
Common and Class B Stock....................... 5 -- 407 (5) 407
Additional paid-in capital..................... 21,292 24,642 68,848 (45,934) 68,848
Retained earnings (deficit).................... (3,054) (40,377) 27,075 43,431 27,075
Deferred compensation and treasury stock....... -- -- (37,628) -- (37,628)
Accumulated other comprehensive loss........... (8) (1,553) (1,561) 1,561 (1,561)
--------- --------- --------- --------- ---------
Total stockholders' equity........................ 18,235 (17,288) 57,141 (947) 57,141
--------- --------- --------- --------- ---------
Total liabilities and stockholders' equity........ $ 211,420 $ 111,556 $ 40,251 $ (7,970) $ 355,257
========= ========= ========= ========= =========
16
FEDDERS CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED NOVEMBER 30, 2003
---------------------------------------------------------------
FEDDERS
NORTH OTHER ELIMINATING FEDDERS
AMERICA FEDDERS CORPORATE ENTRIES CORPORATION
--------- --------- --------- ----------- -----------
Net cash used in operating activities .... $(39,305) $ 3,664 $ (3,849) -- $(39,490)
-------- -------- -------- -------- --------
Net additions to property, plant and
equipment .............................. (592) (671) (24) -- (1,287)
Dividend received from affiliate ......... -- -- 16,551 (16,551) --
-------- -------- -------- -------- --------
Net cash used in investing activities .... (592) (671) 16,527 (16,551) (1,287)
-------- -------- -------- -------- --------
Proceeds from short-term notes ........... 6,041 5,810 -- -- 11,851
Net repayments of long-term debt ......... (69) (2,070) (16) -- (2,155)
Proceeds from stock options exercised .... -- -- 1,683 -- 1,683
Cash dividends ........................... (16,551) -- (1,108) 16,551 (1,108)
Other .................................... -- -- (9) -- (9)
Change in net due to (from) affiliate .... 17,053 (3,825) (13,228) -- --
-------- -------- -------- -------- --------
Net cash provided by (used in)
financing activities ................... 6,474 (85) (12,678) 16,551 10,262
-------- -------- -------- -------- --------
Net (decrease) increase in cash and cash
equivalents ............................ (33,423) 2,908 -- -- (30,515)
Cash and cash equivalents at beginning
of period .............................. 54,354 6,548 -- -- 60,902
-------- -------- -------- -------- --------
Cash and cash equivalents at end of
period ................................. $ 20,931 $ 9,456 -- -- $ 30,387
======== ======== ======== ======== ========
17
FEDDERS CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED NOVEMBER 30, 2002
---------------------------------------------------------------
FEDDERS
NORTH OTHER ELIMINATING FEDDERS
AMERICA FEDDERS CORPORATE ENTRIES CORPORATION
--------- --------- --------- ----------- -----------
Net cash used in operating activities .... $(22,740) $ (9,530) $ (3,784) -- $(36,054)
-------- -------- -------- ----------- --------
Net additions to property, plant and
equipment .............................. (1,658) (501) (37) -- (2,196)
-------- -------- -------- ----------- --------
Net cash used in investing activities .... (1,658) (501) (37) -- (2,196)
-------- -------- -------- ----------- --------
Proceeds from short-term notes ........... 6,332 3,961 -- -- 10,293
Net repayments of long-term debt ......... (147) (359) (26) -- (532)
Cash dividends ........................... -- -- (972) -- (972)
Other .................................... -- -- (23) -- (23)
Change in net due (from) to affiliate .... (14,842) 10,000 4,842 -- --
-------- -------- -------- ----------- --------
Net cash (used in) provided by
financing activities ................... (8,657) 13,602 3,821 -- 8,766
-------- -------- -------- ----------- --------
Net (decrease) increase in cash and
cash equivalents ....................... (33,055) 3,571 -- -- (29,484)
Cash and cash equivalents at beginning
of period .............................. 64,166 3,213 -- -- 67,379
-------- -------- -------- ----------- --------
Cash and cash equivalents at end of
period ................................. $ 31,111 $ 6,784 -- -- $ 37,895
======== ======== ======== =========== ========
18
FEDDERS CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
INTERCOMPANY TRANSACTIONS:
The historical condensed consolidating financial statements presented above
include the following transactions between the Company and FNA:
a) The Company charges corporate overhead essentially on a cost basis
allocated in proportion to sales. Such charges to FNA amounted to
approximately $2.5 million and $3.1 million for the three months ended
November 30, 2003 and 2002, respectively.
b) FNA's interest expense reflects actual interest charges on the 9-3/8%
Senior Subordinated Notes due 2007, State of Illinois Promissory Note,
capital lease obligations and a revolving line of credit.
c) FNA's depreciation and amortization for the three months ended November
30, 2003 and 2002 amounted to approximately $1.7 million and $1.6
million, respectively. Capital expenditures of FNA amounted to $0.6
million and $1.7 million in the three months ended November 30, 2003
and 2002, respectively.
d) The Company guarantees FNA's obligations under FNA's revolving credit
facility.
e) The Company's stock option plans include FNA's employees.
f) Certain reclassifications have been made in the prior year to conform
to the current year presentation.
g) On November 30, 2003, FNA declared a dividend of $16,551 to the
Company. In Fiscal 2003, FNA did not declare a dividend.
19
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
The following is management's discussion and analysis of certain significant
factors, which affected the Company's financial position, and operating results
during the periods included in the accompanying consolidated financial
statements.
RESULTS OF OPERATIONS
OPERATING RESULTS AS PERCENT OF NET SALES
-----------------------------------------
THREE MONTHS ENDED NOVEMBER 30,
2003 2002
---- ----
Gross profit 15.6% 20.0%
Selling, general and administrative expense 39.0% 36.7%
Operating loss 23.4% 16.7%
Net interest expense 10.3% 11.3%
Pre-tax loss 35.9% 28.7%
==== ====
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED NOVEMBER 30, 2003 VERSUS THE
THREE MONTHS ENDED NOVEMBER 30, 2002.
The Company has two reportable industry segments: Heating, Ventilation, Air
Conditioning and Refrigeration ("HVACR") and Engineered Products. Both segments
operate and sell products in the global air treatment market. Over the past five
years, the Company has re-positioned itself through globalization and expansion
of its product offerings from serving primarily the $4.3 billion global market
for room air conditioners to effectively serving the $37 billion global air
treatment market. Major markets the Company is targeting include central air
conditioning and high growth markets in Asia. Due to the current seasonality of
its business, the Company normally reports a loss during the second half of the
calendar year, with a majority of shipments and revenue being derived during the
first six months of the calendar year.
Net sales in the three-month period ended November 30, 2003 increased by 10.2%
to $43.1 million, compared to $39.2 million in the prior-year period. The
improvement was the result of an increase of $4.3 million, or 14.8% within the
HVACR reporting segment due to increased air conditioner sales in Asia and
dehumidifier sales in North America. The gain in sales was partially offset by a
slight decline in sales within the Engineered Products reporting segment of $0.4
million, or 3.7%, from the prior-year period due to continued weak demand in the
capital equipment market for commercial and industrial air cleaners in North
America substantially offset by strengthening demand in Asia.
The gross profit margin in the three months ended November 30, 2003 decreased to
15.6% from 20.0% in the prior year period. The lower gross margin was the result
of costs associated with the closing of the Company's air conditioner production
plant in Georgia and consolidation of the production of commercial air
conditioners at our plant in Texas. Costs associated with this manufacturing
rationalization and redundant overhead costs between the two plants during the
period amounted to approximately $1.5 million. The Company also incurred
start-up and transition costs of approximately $2.0 million during the period
associated with the transfer of production of additional high-volume products
from the U.S. to China. Margins were also affected during the period due to an
increase in sales of lower margin products.
Selling, general and administrative ("SG&A") expenses in the three months ended
November 30, 2003 were $16.8 million, compared to $14.4 million in the
prior-year period. The SG&A expenses in the current period included a
non-cash expense of $2.3 million due to the variable accounting treatment
associated with the value of re-priced stock options to reflect the increase in
the market price of the Company's stock. All of the re-priced options were
exercised or expired during the period and will have no further effect on SG&A
expenses in subsequent periods.
The operating loss in the three months ended November 30, 2003 was $10.1
million, compared to an operating loss of $6.5 million in the prior-year period.
Net interest expense in the three months ended November 30, 2003 of $4.4 million
was approximately equal to prior year and consisted primarily of interest
expense on the Company's long-term debt.
20
Upon adoption of SFAS No. 142, the Company was required to perform a
transitional goodwill impairment test. The transitional goodwill impairment test
was completed during the fourth quarter of fiscal year 2003. As a result, the
Company recognized a non-cash transitional goodwill impairment charge of $11.9
million in its Engineered Products segment, because the projected financial
performance of the Engineered Products segment was insufficient to support the
related goodwill. As required, the transitional goodwill impairment charge was
recorded as a cumulative effect of a change in accounting principle as of
September 1, 2002.
Net loss in the three months ended November 30, 2003 applicable to common
stockholders, before the cumulative effect of a change in accounting principle,
was $10.8 million, or 36 cents diluted loss per common share, compared to a net
loss in the three months ended November 30, 2002 applicable to common
stockholders, before the cumulative effect of a change in accounting principle,
of $7.6 million, or 23 cents diluted loss per common share. Net loss applicable
to common stockholders in the three months ended November 30, 2002, including
the $11.9 million non-cash transitional goodwill impairment charge, was $19.5
million, or 60 cents diluted loss per common share.
LIQUIDITY AND CAPITAL RESOURCES
Working capital requirements of the Company are seasonal, with cash balances
peaking in the third quarter of each calendar year and the greatest utilization
of its lines of credit occurring early in the calendar year. Cash on hand
amounted to $30.4 million at November 30, 2003 compared to $37.9 million a year
earlier.
Net cash used in operations for the three-months ended November 30, 2003
amounted to $39.5 million, compared to $36.1 million in the prior period. A
build-up in inventory to support seasonal requirements was the main use of cash
during the period. Net inventories at November 30, 2003 were $120.0 million
compared to $78.9 million at August 31, 2003 and $85.1 million at November 30,
2002. Inventories are higher compared to the previous year due to inventory
required to support the expansion of sales of central air conditioners globally
and all products in Asian markets, as well as to meet U.S. retailers' earlier
shipment requirements for the 2004 season.
Net cash used in investing activities was $1.3 million and consisted of capital
expenditures primarily to support the expansion of production capacity in Asia
versus $2.2 million used in investing activities in the prior-year period.
Net cash provided by financing activities during the three months ended November
30, 2003 was $10.3 million and consisted primarily of $11.9 million in
short-term borrowings to support production in Asia, $1.7 million of proceeds
from stock options exercised offset by $1.1 million of cash dividends and the
repayment of $2.2 million of long-term debt. Net cash provided by financing
activities during the prior-year period was $8.8 million, consisting primarily
of $10.3 million in short-term borrowings to support production in Asia offset
by $1.0 million of cash dividends and the repayment of $0.5 million of long-term
debt.
The Company declared quarterly dividends of 3.0 cents on each share of
outstanding Common and Class B Stock and 53.8 cents on each share of outstanding
Preferred Stock in the three months ended November 30, 2003. The Company
declared quarterly dividends of 3.0 cents on each share of outstanding Common
and Class B Stock in the three months ended November 30, 2002.
The following summarizes Fedders' contractual cash obligations and
commercial commitments at November 30, 2003, and the effect such obligations are
expected to have on liquidity and cash flow in future periods.
PAYMENTS DUE BY PERIOD
--------------------------------------------------------
LESS THAN
--------------------------------------------------------
AFTER
CONTRACTUAL OBLIGATION TOTAL 1 YEAR 2-3 YEARS 4-5 YEARS 5 YEARS
- ------------------------------------------ -------- -------- --------- --------- --------
(AMOUNTS IN THOUSANDS)
Long-term debt, including current
maturities ............................. $157,808 $ 2,607 $ 1,989 $149,968 $ 3,244
Capital lease obligations ................ 4,080 409 1,180 1,395 1,096
Operating leases and contractual
minimum payments ....................... 18,724 3,444 5,660 5,424 4,196
Short-term notes ......................... 19,371 19,371 -- -- --
-------- -------- -------- -------- --------
Total contractual cash obligations ....... $199,983 $ 25,831 $ 8,829 $156,787 $ 8,536
======== ======== ======== ======== ========
From time to time, subsidiaries of the Company may guarantee the debt
of certain unconsolidated joint ventures, up to a maximum of the Company's
ownership percentage in the unconsolidated joint venture. The Company currently
holds no collateral for such
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guarantees, and has not recorded corresponding obligations. The Company's
subsidiaries would be obligated to perform in the event the unconsolidated joint
ventures fail to pay the principal and interest on the loans or fail to comply
with the terms of the loan agreement.
COMMITMENTS BY PERIOD
-------------------------------------------------
LESS THAN
------------------------------
AFTER 5
OTHER COMMERCIAL COMMITMENTS TOTAL 1 YEAR 2-3 YEARS 4-5 YEARS YEARS
- -------------------------------- ------ ------ --------- --------- -------
(AMOUNTS IN THOUSANDS)
Guarantee of debt............... $2,900 1,400 1,500 -- --
------ ----- ----- --- ---
Total commercial commitments.... $2,900 1,400 1,500 -- --
====== ===== ===== ==== ===
Management believes that the Company's cash, earnings and borrowing capacity are
adequate to meet the demands of its operations and its long-term credit
requirements.
Forward-looking statements are covered under the "Safe-Harbor" clause of the
Private Securities Litigation Reform Act of 1995. Such statements are based upon
current expectations and assumptions. Actual results could differ materially
from those currently anticipated as a result of known and unknown risks and
uncertainties including, but not limited to, weather and economic, political,
market and industry conditions and reliance on key customers. Such factors are
described in Fedders' SEC filings, including its most recently filed annual
report on Form 10-K. The Company disclaims any obligation to update any
forward-looking statements to incorporate subsequent events.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
None
ITEM 4.
Controls and Procedures
(a) Evaluation of Disclosure Controls and Procedures. The
Company's Chief Executive Officer and Chief Financial Officer
have evaluated the effectiveness of the Company's disclosure
controls and procedures (as such term is defined in Rules
13a-14 (c) and 15d-14(c) under the Securities Exchange Act of
1934, as amended (the "Exchange Act") as of the end of the
period covered by this quarterly report (the "Evaluation
Date"). Based on such evaluation, such officers have
concluded that, as of the Evaluation Date, the Company's
disclosure controls and procedures are effective in alerting
them on a timely basis to material information relating to the
Company, including its consolidated subsidiaries required to
be included in the Company's reports filed or submitted under
the Exchange Act.
(b) Changes in Internal Controls. During the Company's last fiscal
quarter, there have not been any significant changes in the
Company's internal controls over financial reporting or in
other factors that have materially affected or are reasonably
likely to materially affect the Company's internal control
over financial reporting.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
31.1 Certifications pursuant to Section 302 of the Sarbanes-Oxley Act of
2002 of Chief Executive Officer.
31.2 Certifications pursuant to Section 302 of the Sarbanes-Oxley Act of
2002 of Chief Financial Officer.
32.1 Certifications pursuant to Section 906 of the Sarbanes-Oxley Act of
2002 of Chief Executive Officer.
32.2 Certifications pursuant to Section 906 of the Sarbanes-Oxley Act of
2002 of Chief Financial Officer.
(b) Reports on Form 8-K
None
22
SIGNATURE
Pursuant to the requirements 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.
FEDDERS CORPORATION
By /s/ Michael Giordano
- -----------------------------
Executive Vice President,
Finance and Administration
and Chief Financial Officer
Signing both in his capacity as
Executive Vice President,
Finance and Administration
and Chief Financial Officer
and on behalf of the registrant.
January 14, 2003
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