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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2004
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
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 27,948,129 shares of Common Stock and
2,493,061 shares of Class B Stock (which is immediately convertible into Common
Stock, on a share-for-share basis) as of April 30, 2004.
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FEDDERS CORPORATION
INDEX
PAGE
NUMBER
------
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE (LOSS) INCOME
FOR THE THREE MONTHS ENDED MARCH 31, 2004 AND 2003 3
CONSOLIDATED BALANCE SHEETS AS OF MARCH 31, 2004, DECEMBER 31, 2003 AND
MARCH 31, 2003 4
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE THREE MONTHS ENDED MARCH
31, 2004 AND 2003 5
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 6 - 17
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION 18 - 19
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 20
ITEM 4. CONTROLS AND PROCEDURES 20
PART II OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 21
8-K 21
SIGNATURE 22
CERTIFICATIONS 23 - 26
2
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
FEDDERS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE (LOSS) INCOME
THREE MONTHS ENDED
MARCH 31,
----------------------
2004 2003
--------- ---------
(AMOUNT IN
THOUSANDS, EXCEPT
PER SHARE DATA)
(UNAUDITED)
Net sales ............................................. $ 123,177 $ 123,354
Costs and expenses:
Cost of sales ....................................... 101,419 95,320
Selling, general and administrative expense ......... 17,050 15,273
--------- ---------
118,469 110,593
--------- ---------
Operating income ...................................... 4,708 12,761
Partners' net interest in joint venture results ....... (291) (162)
Interest expense, net ................................. 4,943 5,062
Debt extinguishment ................................... 7,392 --
Other income .......................................... 357 161
--------- ---------
(Loss) income before income taxes ..................... (7,561) 7,698
(Benefit) provision for income taxes .................. (2,414) 2,502
--------- ---------
Net (loss) income ..................................... (5,147) 5,196
Preferred stock dividends ............................. 1,005 174
--------- ---------
Net (loss) income applicable to common stockholders.... (6,152) 5,022
Other comprehensive (loss) income:
Foreign currency translation, net of tax ............ 146 (81)
--------- ---------
Comprehensive (loss) income ........................... $ (6,006) $ 4,941
========= =========
(Loss) income per common share:
Basic/diluted (loss) income per common share ........ (0.20) 0.17
========= =========
Weighted averages shares:
Basic ............................................... 30,425 30,170
Diluted ............................................. 30,425 30,176
Dividends per share declared:
Common Stock ........................................ $ 0.030 $ 0.030
Class B Stock ....................................... 0.030 0.030
Preferred Stock ..................................... 0.538 0.538
See accompanying notes to the consolidated financial statements
3
FEDDERS CORPORATION
CONSOLIDATED BALANCE SHEETS
MARCH 31, DECEMBER 31, MARCH 31,
2004 2003 2003
--------- ------------ ---------
(AMOUNTS IN THOUSANDS, EXCEPT PAR VALUE DATA)
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents ...................................... $ 23,344 $ 22,043 $ 13,393
Accounts receivable (net of allowance of $1,983, $2,032
and $2,370 at March 31, 2004, December 31, 2003 and
March 31, 2003, respectively) ................................ 79,191 29,718 91,826
Inventories:
Finished goods ............................................... 133,084 113,659 75,896
Work-in-process .............................................. 4,006 4,487 4,418
Raw materials and supplies ................................... 22,452 27,340 32,505
--------- --------- ---------
Net inventories ................................................ 159,542 145,486 112,819
Deferred income taxes .......................................... 7,650 7,652 5,579
Assets held for sale ........................................... 8,564 8,564 8,249
Other current assets ........................................... 28,123 28,352 22,470
--------- --------- ---------
Total current assets ............................................. 306,414 241,815 254,336
Net property, plant and equipment:
Land and improvements .......................................... 1,508 1,508 1,508
Buildings and leasehold improvements ........................... 32,710 31,880 33,693
Machinery and equipment ........................................ 100,673 102,815 96,737
--------- --------- ---------
Gross property, plant and equipment ............................ 134,891 136,203 131,938
Less accumulated depreciation .................................. 82,444 81,541 74,620
--------- --------- ---------
Net property, plant and equipment ................................ 52,447 54,662 57,318
Deferred income taxes ............................................ 8,224 8,224 2,867
Goodwill ......................................................... 78,090 78,630 78,630
Other intangible assets .......................................... 1,438 1,685 1,483
Other assets ..................................................... 35,679 31,232 36,253
--------- --------- ---------
Total assets ..................................................... $ 482,292 $ 416,248 $ 430,887
========= ========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term notes ............................................... $ 49,352 $ 30,446 $ 62,694
Current portion of long-term debt .............................. 24,471 2,779 3,161
Accounts payable ............................................... 88,107 86,313 74,717
Income taxes payable ........................................... -- -- 3,490
Accrued expenses ............................................... 40,763 39,032 41,614
--------- --------- ---------
Total current liabilities ........................................ 202,693 158,570 185,676
Long-term debt ................................................... 159,687 158,965 162,446
Other long-term liabilities ...................................... 31,387 31,528 20,710
Partners' net interest in joint venture .......................... 4,248 4,235 4,366
Stockholders' equity:
Preferred Stock, $0.01 par value, 15,000 shares authorized,
1,870, 675 and 324 issued at March 31, 2004, December 31,
2003 and March 31, 2003, respectively ........................... 19 7 3
Common Stock, $0.01 par value, 70,000 shares authorized,
36,456, 36,444, and 35,934 issued at March 31, 2004,
December 31, 2003 and March 31, 2003, respectively .............. 365 364 359
Class B Stock, $0.01 par value, 5,000 shares authorized,
2,493 issued at March 31, 2004, December 31, 2003
and March 31, 2003, respectively ................................ 25 25 25
Additional paid-in capital ....................................... 108,847 80,680 68,220
Retained earnings ................................................ 16,538 23,603 27,943
Accumulated other comprehensive loss ............................. (1,606) (1,752) (1,327)
--------- --------- ---------
124,188 102,927 95,223
Treasury stock, at cost, 8,521, 8,521 and 8,158 shares of
Common Stock at March 31, 2004, December 31, 2003 and
March 31, 2003, respectively .................................... (39,188) (39,188) (37,322)
Deferred compensation ............................................ (723) (789) (212)
--------- --------- ---------
Total stockholders' equity ....................................... 84,277 62,950 57,689
--------- --------- ---------
Total liabilities and stockholders' equity ....................... $ 482,292 $ 416,248 $ 430,887
========= ========= =========
See accompanying notes to the consolidated financial statements
4
FEDDERS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED
MARCH 31,
----------------------
2004 2003
--------- ---------
(AMOUNTS IN THOUSANDS)
(UNAUDITED)
Cash flows from operating activities:
Net (loss) income ................................................ $ (5,147) $ 5,196
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization .................................. 2,356 2,455
Deferred income taxes .......................................... 2 28
Call premium and deferred financing charges .................... 7,392 --
Partners' net interest in joint venture results ................ 291 162
Changes in operating assets and liabilities:
Accounts receivable ............................................ (49,473) (70,200)
Inventories .................................................... (14,056) (9,123)
Other current assets ........................................... 229 (3,531)
Other assets ................................................... (514) (800)
Accounts payable ............................................... 1,794 18,468
Accrued expenses ............................................... 1,731 11,807
Income taxes payable ........................................... -- 2,329
Other long-term liabilities .................................... (141) (1,148)
Other-- net .................................................... 491 167
--------- ---------
Net cash used in operating activities ............................ (55,045) (44,190)
--------- ---------
Cash flows from investing activities:
Additions to property, plant and equipment ..................... (1,613) (1,545)
Disposal of property, plant and equipment ...................... 180 15
Investment in joint venture .................................... (132) --
--------- ---------
Net cash used in investing activities ............................ (1,565) (1,530)
--------- ---------
Cash flows from financing activities:
Proceeds from short-term notes ................................. 18,906 38,390
Repayments of long-term debt ................................... (946) (389)
Net proceeds from issuance of 9 7/8% Senior Notes .............. 150,245 --
Repayment of 9 3/8% Senior Subordinated Notes .................. (128,150) --
Call premium and deferred financing charges .................... (8,393) --
Proceeds from stock options exercised .......................... 38 --
Cash dividends ................................................. (1,918) (1,076)
Proceeds from stock rights exercised ........................... 28,323 --
Costs of stock offerings ....................................... (194) (631)
--------- ---------
Net cash provided by financing activities ........................ 57,911 36,294
--------- ---------
Net increase (decrease) in cash and cash equivalents ............. 1,301 (9,426)
Cash and cash equivalents at beginning of period ................. 22,043 22,819
--------- ---------
Cash and cash equivalents at end of period ....................... $ 23,344 $ 13,393
========= =========
Supplemental disclosure:
Interest paid .................................................. $ 5,933 $ 4,416
Income taxes paid .............................................. 83 137
========= =========
See accompanying notes to the consolidated financial statements
5
FEDDERS CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA AND TENDER OFFER
CONSIDERATION (NOTE 6))
(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. The
financial statements and notes included herein provide unaudited results of the
Company for the three-month period from January 1, 2004 through March 31, 2004.
The prior unaudited three-month period ended March 31, 2003 has been provided
for comparison purposes.
The Company's business is seasonal and, consequently, operating results for
the three-month period ending March 31, 2004 are not necessarily indicative of
the results that may be expected for the fiscal year ending December 31, 2004.
Certain reclassifications have been made in prior-year amounts to conform to the
current-year presentation.
2. STOCK COMPENSATION
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 have 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
MARCH 31,
------------------
2004 2003
------- -------
(Loss) income applicable to common stockholders-as reported... $(6,152) $ 5,022
Deduct: Total stock-based employee compensation expense
determined under fair-value-based method for all awards,
net of related tax effects ................................. 275 90
------- -------
Pro forma net (loss) income .................................. $(6,427) $ 4,932
======= =======
Net (loss) income per common share:
Basic/diluted -- as reported ............................ $ (0.20) $ 0.17
Basic/diluted -- pro forma .............................. $ (0.21) $ 0.16
3. ASSET IMPAIRMENT, EMPLOYEE SEVERANCE AND OTHER RESTRUCTURING AND RELATED
CHARGES
In the fourth quarter of fiscal year 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 fiscal year 2001.
The following table displays the activity and balances of the restructuring
reserve account from December 31, 2003 to March 31, 2004.
DECEMBER 31, MARCH 31,
2003 2004
BALANCE ADDITIONS DEDUCTIONS BALANCE
------------ --------- ---------- ---------
Workforce reductions .... $ 586 -- -- $ 586
Facility closing costs... 340 -- -- 340
Other costs ............. 214 -- -- 214
------ ---- ----- ------
Total ................. $1,140 -- -- $1,140
====== ==== ===== ======
6
The remaining balance of $1,140, which consists primarily of workforce
reduction and facility closing costs, is expected to be expended during fiscal
2004. The final amounts will be settled upon the expiration of the period for
workers' compensation claims and completion of facility clean up and waste
removal.
4. STOCKHOLDERS' EQUITY
On December 5, 2003, the Company's Board of Directors authorized the
distribution of transferable rights to the Company's Common and Class B
stockholders. Stockholders received one right for every share of Common Stock
and Class B Stock they held as of December 22, 2003. Every 20 rights entitled
the holder to purchase one share of Cumulative Preferred Stock at the
subscription price of $23.70 per share, and carried with it a basic subscription
right and an over-subscription right. As of January 16, 2004, 1,195,092 shares
of Cumulative Preferred Stock had been issued as result of the offering for
gross proceeds of $28.3 million.
5. EARNINGS PER SHARE
For the three months ended March 31, 2004 and 2003, net (loss) income per
share was computed using the weighted average number of shares of Common and
Class B stock outstanding, which amounted to 30,425,096 and 30,169,882 shares,
respectively. In the first three months of 2003, stock options included in
computing diluted earnings per share amounted to 5,660 shares. Due to their
anti-dilutive effect, 748,736 options were excluded from the computation of
diluted loss per share for the three months ended March 31, 2004.
6. LONG-TERM DEBT
In March 2004, Fedders North America, Inc. ("FNA"), a wholly-owned
subsidiary of the Company, issued $155,000 principal amount of 9 7/8% Senior
Notes due 2014. The Company and all of the continuing subsidiaries of FNA are
guarantors, on a senior basis, of the notes. FNA may redeem the notes on and
after March 1, 2009 for a defined redemption price. The provisions of the notes
limit, among other things, the payment of dividends by the subsidiary.
On February 6, 2004, FNA commenced a cash tender offer for any and all of
FNA's outstanding 9 3/8% Senior Subordinated Notes due 2007, issued August 24,
1999, and any and all of FNA's outstanding 9 3/8% Senior Subordinated Notes due
2007, issued August 18, 1997 (collectively, the "Notes"). The total
consideration offered in the tender was comprised of the tender offer
consideration and a consent payment. The tender offer consideration was equal to
$1,012.50 per $1,000 principal amount of Notes plus accrued and unpaid interest
from the last interest payment up to, but not including, the settlement date. An
additional consent fee was paid to holders who effectively consented to amend
the Notes, in the amount of $20.00 per $1,000 principal amount of Notes. As of
March 31, 2004, $128.2 million of the Notes were purchased, expenditures of
$7,392 were incurred as a result of the early retirement of debt, consisting of
$4,165 of call premiums and $3,227 for the write-off of associated debt issuance
costs. The balances of the Notes are expected to be redeemed by April 6, 2004
(Note 11).
7. 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 1 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 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.
7
Goodwill and other intangible assets consist of the following:
MARCH 31, DECEMBER 31,
2004 2003
-------- -----------
Goodwill-as reported ................ $ 78,090 $ 78,630
Currency translation adjustment...... 540 --
-------- --------
Goodwill ............................ $ 78,630 $ 78,630
======== ========
Gross other amortizable intangibles.. $ 2,964 $ 3,178
Accumulated amortization ............ (1,526) (1,493)
-------- --------
Other intangible assets ............. $ 1,438 $ 1,685
======== ========
As of March 31, 2004 and December 31, 2003, the Company had goodwill of
$69,593 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 March 31, 2004 and 2003 is $50
and $47, respectively. Estimated amortization expense for other intangible
assets will be approximately $180 for each of the next five years.
8. ASSETS HELD FOR SALE
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. The sale of both properties is expected to be
completed no later than June 2004. At March 31, 2004, 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 March 31:
2004
------
Land and land improvements... $2,181
Building, net ............... 4,587
Building improvements, net .. 1,796
------
Assets Held for Sale ........ $8,564
======
9. 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,
through-the-wall, ductless split and portable room air conditioners, ducted
central air conditioning systems, air cleaners, humidifiers and dehumidifiers.
HVACR products are distributed through a variety of sales channels, including
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.
8
SUMMARY OF BUSINESS BY SEGMENT:
THREE MONTHS ENDED
MARCH 31,
----------------------
2004 2003
--------- ---------
Net sales:
HVACR ......................................... $ 112,026 $ 114,929
Engineered Products ........................... 11,151 8,425
--------- ---------
Net sales ..................................... $ 123,177 $ 123,354
========= =========
Income (loss) before interest, taxes and debt
extinguishment:
HVACR ......................................... $ 3,060 $ 12,421
Engineered Products ........................... 555 (593)
--------- ---------
Segment income before interest and taxes ...... 3,615 11,828
Non-allocated income (expenses) ............... 1,159 932
Debt extinguishment ........................... 7,392 --
Interest expense, net ......................... 4,943 5,062
(Benefit) provision for income taxes .......... (2,414) 2,502
--------- ---------
Net (loss) income ............................. $ (5,147) $ 5,196
========= =========
MARCH 31, DECEMBER 31, MARCH 31,
2004 2003 2003
-------- ----------- --------
Total assets:
HVACR ................. $374,760 $310,646 $340,110
Engineered Products ... 56,342 52,826 54,101
Non-allocated assets... 51,190 52,776 36,676
-------- -------- --------
$482,292 $416,248 $430,887
======== ======== ========
10. GUARANTEES
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 are 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.
The following table displays the activity and balances of the product
warranty liability from December 31, 2003 to March 31, 2004:
THREE MONTHS
ENDED
MARCH 31, 2004
--------------
Warranty balance at December 31, 2003 ............. $ 5,641
Accruals for warranties issued during the period... 3,050
Settlements made during the period ................ (2,126)
-------
Warranty balance at March 31, 2004 ................ $ 6,565
=======
LOAN GUARANTEES
Guarantees of subsidiary debt by Fedders Corporation (the "Parent") and
subsidiaries consist of the following at March 31, 2004:
(i) The Parent guarantees the obligations of Fedders North America,
Inc. ("FNA") under its 9 7/8% Senior Notes due 2014 (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 $155 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.
9
(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 guaranties 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. The
outstanding loan balance at March 31, 2004 is $20.1 million.
(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 guarantee 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 March 31, 2004 is $0.8 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 March
31, 2004 is $2.0 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 guarantee 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 March 31, 2004 is $0.5 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. The outstanding loan balance at March 31,
2004 is $4.2 million.
(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 March 31, 2004.
(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 March 31, 2004 is $1.5 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 guarantee 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 March 31, 2004 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
guarantee 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 March 31, 2004 is $2.1 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 guarantee in the event FDF
fails to pay the
10
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 March 31, 2004.
11. SUBSEQUENT EVENTS
On April 6, 2004, $21.8 million of the remaining balance of the 9 3/8%
Senior Subordinated Notes were redeemed. A call premium of $683 thousand was
incurred as a result of the early retirement of debt.
12. 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 $155 million 9 7/8% Senior Notes due 2014. In addition, the subsidiaries of
FNA are also guarantors of the notes.
The Company's and the subsidiaries' guarantees are 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.
11
FEDDERS CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
AND COMPREHENSIVE (LOSS) INCOME
THREE MONTHS ENDED MARCH 31, 2004
----------------------------------------------------------------
FEDDERS
NORTH OTHER ELIMINATING FEDDERS
AMERICA FEDDERS CORPORATE ENTRIES CORPORATION
--------- --------- --------- ----------- -----------
Net sales .......................................... $ 110,161 $ 86,170 -- $ (73,154) $ 123,177
Cost of sales ...................................... 93,517 81,056 -- (73,154) 101,419
Selling, general and administrative expense(a) ..... 13,325 4,923 $ (1,198) -- 17,050
--------- --------- --------- --------- ---------
Operating income ................................... 3,319 191 1,198 -- 4,708
Partners' net interest in joint venture results..... (216) (75) -- -- (291)
Equity income in investment ........................ -- -- (5,945) 5,945 --
Interest expense, net(b) ........................... 4,332 530 81 -- 4,943
Debt extinguishment ................................ 7,392 -- -- -- 7,392
Other income (expense) ............................. 83 274 -- -- 357
--------- --------- --------- --------- ---------
Loss before income taxes ........................... (8,538) (140) (4,828) 5,945 (7,561)
(Benefit) provision for income taxes ............... (2,776) 43 319 -- (2,414)
--------- --------- --------- --------- ---------
Net loss ........................................... (5,762) (183) (5,147) 5,945 (5,147)
Preferred stock dividend ........................... -- -- 1,005 -- 1,005
--------- --------- --------- --------- ---------
Net loss applicable to common stockholders ......... (5,762) (183) (6,152) 5,945 (6,152)
Foreign currency translation, net of tax ........... 6 132 146 (138) 146
--------- --------- --------- --------- ---------
Comprehensive loss ................................. $ (5,756) $ (51) $ (6,006) $ 5,807 $ (6,006)
========= ========= ========= ========= =========
THREE MONTHS ENDED MARCH 31, 2003
----------------------------------------------------------------
FEDDERS
NORTH OTHER ELIMINATING FEDDERS
AMERICA FEDDERS CORPORATE ENTRIES CORPORATION
--------- --------- --------- ----------- -----------
Net sales ........................................... $ 115,856 $ 67,404 -- $ (59,906) $ 123,354
Cost of sales ....................................... 95,132 60,094 -- (59,906) 95,320
Selling, general and administrative expense(a) ...... 12,150 4,275 $ (1,152) -- 15,273
--------- --------- --------- --------- ---------
Operating income .................................... 8,574 3,035 1,152 -- 12,761
Partners' net interest in joint venture results...... -- (162) -- -- (162)
Equity income in investment ......................... -- -- 4,695 (4,695) --
Interest expense, net (b) ........................... 4,137 638 287 -- 5,062
Other income (expense) .............................. (3) 170 (6) -- 161
--------- --------- --------- --------- ---------
Income before income taxes .......................... 4,434 2,405 5,554 (4,695) 7,698
Benefit for income taxes ............................ 1,285 859 358 -- 2,502
--------- --------- --------- --------- ---------
Net income .......................................... 3,149 1,546 5,196 (4,695) 5,196
Preferred Stock dividend ............................ -- -- 174 -- 174
--------- --------- --------- --------- ---------
Net loss applicable to common stockholders .......... 3,149 1,546 5,022 (4,695) 5,022
Foreign currency translation, net of tax ............ 92 (346) (81) 254 (81)
--------- --------- --------- --------- ---------
Comprehensive income ................................ $ 3,241 $ 1,200 $ 4,941 $ (4,441) $ 4,941
========= ========= ========= ========= =========
12
FEDDERS CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
CONDENSED CONSOLIDATING BALANCE SHEETS
AS OF MARCH 31, 2004
---------------------------------------------------------------------------
FEDDERS
NORTH OTHER ELIMINATING FEDDERS
AMERICA FEDDERS CORPORATE ENTRIES CORPORATION
----------- ----------- ----------- ----------- -----------
ASSETS
Current assets:
Cash and cash equivalents .................... $ 7,125 $ 13,259 $ 2,960 -- $ 23,344
Net accounts receivable ...................... 66,780 12,411 -- -- 79,191
Net inventories .............................. 125,206 34,336 -- -- 159,542
Assets held for sale ......................... 8,249 315 -- -- 8,564
Other current assets ......................... 2,786 21,303 11,684 -- 35,773
----------- ----------- ----------- ----------- -----------
Total current assets ........................... 210,146 81,624 14,644 -- 306,414
Investments in subsidiaries .................... -- -- (16,736) $ 16,736 --
Net property, plant and equipment .............. 35,813 16,101 533 -- 52,447
Goodwill ....................................... 62,870 15,220 -- -- 78,090
Other intangible assets ........................ 1,379 59 -- -- 1,438
Other assets ................................... 10,627 2,980 37,319 (7,023) 43,903
----------- ----------- ----------- ----------- -----------
Total assets ................................... $ 320,835 $ 115,984 $ 35,760 $ 9,713 $ 482,292
=========== =========== =========== =========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term notes ............................. $ 20,113 $ 29,239 -- -- $ 49,352
Current portion of long-term debt ............ 23,152 1,319 -- -- 24,471
Accounts and income taxes payable ............ 17,843 69,400 $ 864 -- 88,107
Accrued expenses ............................. 24,950 9,440 6,373 -- 40,763
----------- ----------- ----------- ----------- -----------
Total current liabilities ...................... 86,058 109,398 7,237 -- 202,693
Long-term debt ................................. 157,802 1,885 -- -- 159,687
Other long-term liabilities .................... 395 11,976 30,287 $ (7,023) 35,635
Net due to (from) affiliates ................... 87,113 (1,072) (86,041) -- --
Stockholders' equity:
Preferred Stock .............................. -- -- 19 -- 19
Common and Class B Stock ..................... 5 -- 390 (5) 390
Additional paid-in capital ................... 20,292 25,542 108,847 (45,834) 108,847
Retained earnings (deficit) .................. (29,923) (31,036) 16,538 60,959 16,538
Deferred compensation and treasury
stock ..................................... -- -- (39,911) -- (39,911)
Accumulated other comprehensive
loss ...................................... (907) (709) (1,606) 1,616 (1,606)
----------- ----------- ----------- ----------- -----------
Total stockholders' equity ..................... (10,533) (6,203) 84,277 16,736 84,277
----------- ----------- ----------- ----------- -----------
Total liabilities and stockholders'
equity ....................................... $ 320,835 $ 115,984 $ 35,760 $ 9,713 $ 482,292
=========== =========== =========== =========== ===========
13
FEDDERS CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
CONDENSED CONSOLIDATING BALANCE SHEETS
AS OF DECEMBER 31, 2003
---------------------------------------------------------------------------
FEDDERS
NORTH OTHER ELIMINATING FEDDERS
AMERICA FEDDERS CORPORATE ENTRIES CORPORATION
----------- ----------- ----------- ----------- -----------
ASSETS
Current assets:
Cash and cash equivalents .................... $ 13,657 $ 8,386 -- -- $ 22,043
Net accounts receivable ...................... 18,646 11,072 -- -- 29,718
Net inventories .............................. 111,587 33,899 -- -- 145,486
Assets held for sale ......................... 8,249 315 -- -- 8,564
Other current assets ......................... 2,864 23,266 $ 9,874 $ -- 36,004
----------- ----------- ----------- ----------- -----------
Total current assets ........................... 155,003 76,938 9,874 -- 241,815
Investments in subsidiaries .................... -- -- (11,047) 11,047 --
Net property, plant and equipment .............. 38,911 15,160 591 -- 54,662
Goodwill ....................................... 62,870 15,760 -- -- 78,630
Other intangible assets ........................ 1,685 -- -- -- 1,685
Other assets ................................... 8,035 624 37,820 (7,023) 39,456
----------- ----------- ----------- ----------- -----------
Total assets ................................... $ 266,504 $ 108,482 $ 37,238 $ 4,024 $ 416,248
=========== =========== =========== =========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term notes ............................. $ -- $ 30,446 -- -- $ 30,446
Current portion of long-term debt ............ 1,446 1,331 $ 2 -- 2,779
Accounts and income taxes payable ............ 27,983 57,084 1,246 -- 86,313
Accrued expenses ............................. 21,497 9,492 8,043 -- 39,032
----------- ----------- ----------- ----------- -----------
Total current liabilities ...................... 50,926 98,353 9,291 -- 158,570
Long-term debt ................................. 157,027 1,938 -- -- 158,965
Other long-term liabilities .................... 630 11,630 30,526 $ (7,023) 35,763
Net due to (from) affiliates ................... 62,829 2,700 (65,529) -- --
Stockholders' equity:
Preferred Stock .............................. -- -- 7 -- 7
Common and Class B Stock ..................... 5 -- 389 (5) 389
Additional paid-in capital ................... 20,292 25,542 80,680 (45,834) 80,680
Retained earnings (deficit) .................. (24,292) (30,840) 23,603 55,132 23,603
Deferred compensation and treasury
stock ..................................... -- -- (39,977) -- (39,977)
Accumulated other comprehensive
loss ...................................... (913) (841) (1,752) 1,754 (1,752)
----------- ----------- ----------- ----------- -----------
Total stockholders' equity ..................... (4,908) (6,139) 62,950 11,047 62,950
----------- ----------- ----------- ----------- -----------
Total liabilities and stockholders'
equity ....................................... $ 266,504 $ 108,482 $ 37,238 $ 4,024 $ 416,248
=========== =========== =========== =========== ===========
14
FEDDERS CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
CONDENSED CONSOLIDATING BALANCE SHEETS
AS OF MARCH 31, 2003
---------------------------------------------------------------------------
FEDDERS
NORTH OTHER ELIMINATING FEDDERS
AMERICA FEDDERS CORPORATE ENTRIES CORPORATION
----------- ----------- ----------- ----------- -----------
ASSETS
Current assets:
Cash and cash equivalents .................... $ 3,868 $ 9,015 $ 510 -- $ 13,393
Net accounts receivable ...................... 80,766 11,060 -- -- 91,826
Net inventories .............................. 73,664 39,155 -- -- 112,819
Assets held for sale ......................... 8,249 -- -- -- 8,249
Other current assets ......................... 2,702 17,264 8,083 $ -- 28,049
----------- ----------- ----------- ----------- -----------
Total current assets ........................... 169,249 76,494 8,593 -- 254,336
Investments in subsidiaries .................... -- -- 2,530 (2,530) --
Net property, plant and equipment .............. 42,295 14,263 760 -- 57,318
Goodwill ....................................... 62,870 15,760 -- -- 78,630
Other intangible assets ........................ 1,483 -- -- -- 1,483
Other assets ................................... 7,442 4,454 34,247 (7,023) 39,120
----------- ----------- ----------- ----------- -----------
Total assets ................................... $ 283,339 $ 110,971 $ 46,130 $ (9,553) $ 430,887
=========== =========== =========== =========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term notes ............................. -- $ 25,529 $ 37,165 -- $ 62,694
Current portion of long-term debt ............ $ 1,763 1,382 $ 16 -- 3,161
Accounts and income taxes payable ............ 21,445 52,061 4,701 -- 78,207
Accrued expenses ............................. 27,852 8,297 5,465 -- 41,614
----------- ----------- ----------- ----------- -----------
Total current liabilities ...................... 51,060 87,269 47,347 -- 185,676
Long-term debt ................................. 159,025 3,376 45 -- 162,446
Other long-term liabilities .................... 1,859 11,386 18,854 $ (7,023) 25,076
Net due to (from) affiliates ................... 60,067 17,738 (77,805) -- --
Stockholders' equity:
Preferred Stock .............................. -- -- -- -- --
Common and Class B Stock ..................... 5 -- 387 (5) 387
Additional paid-in capital ................... 20,292 25,542 68,220 (45,834) 68,220
Retained earnings (deficit) .................. (9,072) (32,738) 27,943 41,810 27,943
Deferred compensation and treasury
stock ..................................... -- -- (37,534) -- (37,534)
Accumulated other comprehensive
loss ...................................... 103 (1,602) (1,327) 1,499 (1,327)
----------- ----------- ----------- ----------- -----------
Total stockholders' equity ..................... 11,328 (8,798) 57,689 (2,530) 57,689
----------- ----------- ----------- ----------- -----------
Total liabilities and stockholders'
equity ....................................... $ 283,339 $ 110,971 $ 46,130 $ (9,553) $ 430,887
=========== =========== =========== =========== ===========
15
FEDDERS CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 2004
---------------------------------------------------------------------------
FEDDERS
NORTH OTHER ELIMINATING FEDDERS
AMERICA FEDDERS CORPORATE ENTRIES CORPORATION
----------- ----------- ----------- ----------- -----------
Net cash (used in) provided by
operating activities ......................... $ (63,613) $ 11,196 $ (2,628) -- $ (55,045)
----------- ----------- ----------- ----------- -----------
Net additions to property, plant and
equipment .................................... (447) (1,150) (16) -- (1,613)
Disposal of property, plant and
equipment ...................................... 180 -- -- -- 180
Investment in joint venture .................... -- (132) -- (132)
----------- ----------- ----------- ----------- -----------
Net cash (used in) provided by
investing activities............................ (267) (1,282) (16) -- (1,565)
----------- ----------- ----------- ----------- -----------
Proceeds (repayments) of short-term notes....... 20,113 (1,207) -- -- 18,906
Net repayments of long-term debt ............... (882) (64) -- -- (946)
Proceeds from stock options exercised .......... -- -- 38 -- 38
Cash dividends ................................. -- -- (1,918) -- (1,918)
Net proceeds from issuance of 9 7/8%
Senior Notes.................................. 150,245 -- -- -- 150,245
Repayments of 9 3/8% Senior
Subordinated Notes ............................. (128,150) -- -- -- (128,150)
Call premium and financing costs................ (8,393) -- -- -- (8,393)
Costs of stock offerings ....................... -- -- (194) -- (194)
Proceeds from stock rights offering ............ -- -- 28,323 -- 28,323
Change in net due to (from) affiliate .......... 24,415 (3,770) (20,645) -- --
----------- ----------- ----------- ----------- -----------
Net cash provided by (used in) financing
activities .................................. 57,348 (5,041) 5,604 -- 57,911
----------- ----------- ----------- ----------- -----------
Net (decrease) increase in cash and
cash equivalents ............................. (6,532) 4,873 2,960 -- 1,301
Cash and cash equivalents at beginning
of period .................................... 13,657 8,386 -- -- 22,043
----------- ----------- ----------- ----------- -----------
Cash and cash equivalents at end of
period ....................................... $ 7,125 $ 13,259 $ 2,960 -- $ 23,344
=========== =========== =========== =========== ===========
FOR THE THREE MONTHS ENDED MARCH 31, 2003
---------------------------------------------------------------------------
FEDDERS
NORTH OTHER ELIMINATING FEDDERS
AMERICA FEDDERS CORPORATE ENTRIES CORPORATION
----------- ----------- ----------- ----------- -----------
Net cash (used in) provided by operating
activities ................................... $ (52,168) $ 8,192 $ (214) -- $ (44,190)
----------- ----------- ----------- ----------- -----------
Net additions to property, plant and
equipment .................................... (1,062) (412) (71) -- (1,545)
----------- ----------- ----------- ----------- -----------
Disposal of property, plant and equipment....... 15 -- -- -- 15
Net cash (used in) provided by investing
activities ................................... (1,047) (412) (71) -- (1,530)
----------- ----------- ----------- ----------- -----------
Proceeds from short-term notes ................. -- 1,225 37,165 -- 38,390
Net repayments of long-term debt ............... (252) (198) 61 -- (389)
Cash dividends ................................. -- -- (1,076) -- (1,076)
Preferred Stock exchange offer ................. -- -- (631) -- (631)
Change in net due to (from) affiliate .......... 39,909 (5,185) (34,724) -- --
----------- ----------- ----------- ----------- -----------
Net cash provided by (used in)financing
activities ................................... 39,657 (4,158) 795 -- 36,294
----------- ----------- ----------- ----------- -----------
Net (decrease) increase in cash and cash
equivalents .................................. (13,558) 3,622 510 -- (9,426)
Cash and cash equivalents at beginning of
period ....................................... 17,426 5,393 -- -- 22,819
----------- ----------- ----------- ----------- -----------
Cash and cash equivalents at end of period ..... $ 3,868 $ 9,015 $ 510 -- $ 13,393
=========== =========== =========== =========== ===========
16
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 $4.4 million and $4.6 million for the three months ended
March 31, 2004 and 2003, respectively.
b) FNA's interest expense reflects actual interest charges on the 9
7/8% Senior Notes, 9 3/8% Senior Subordinated Notes, retired in April
2004, State of Illinois Promissory Note, Trion Industrial Revenue
Bond, capital lease obligations and a revolving line of credit.
c) FNA's depreciation and amortization for the three months ended
March 31, 2004 and 2003 amounted to approximately $2.1 million and
$1.8 million, respectively. Capital expenditures of FNA amounted to
$0.4 million and $1.1 million in the three months ended March 31, 2004
and 2003, 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.
17
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.
Fedders Corporation is a leading global producer and marketer of air
treatment products for the residential, commercial and industrial markets. Our
products include room air conditioners, central air conditioners, dehumidifiers,
humidifiers, air cleaners, and thermal technology products. We have 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, we have
re-positioned ourselves through globalization and expansion of our product
offerings from serving primarily the $1.3 billion North American market for
window air conditioners to serving the $37.0 billion global air treatment
market. Major markets we are targeting include the global market for central air
conditioning and high growth markets in Asia.
Due to the current seasonality of our business, we normally report 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.
The following table presents our results of operations for the periods
indicated. Results for the three-month periods ended March 31, 2004 and 2003 are
unaudited. On August 26, 2003, the Board of Directors changed the Company's
fiscal year-end from August 31 to December 31.
RESULTS OF OPERATIONS
AS PERCENT OF
NET SALES
---------------------
THREE MONTHS ENDED
MARCH 31,
---------------------
2004 2003
--------- --------
Gross profit......................... 17.7% 22.7%
Selling, general and administrative 13.8% 12.4%
expense..............................
Operating income.................... 3.9% 10.3%
Net interest expense................. 4.0% 4.1%
Pre-tax (loss) income................ (6.1)% 6.2%
==== ====
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 2004 VERSUS THE THREE
MONTHS ENDED MARCH 31, 2003.
Net sales in the three-month period ended March 31, 2004 decreased by 0.2%
to $123.2 million, compared to $123.4 million in the prior-year period. Sales
were affected by a 2.5% decrease to $112.0 million from $114.9 million in the
prior-year period within the HVACR reporting segment due to the timing of sales
of room air conditioners in North America, which were impacted by a major U.S.
customer's change in invoicing terms from FOB China in the prior year, to
delivered to the customer's U.S. distribution centers. The effect of this change
is to shift sales to the second fiscal quarter. Sales in the HVACR segment were
affected positively by growth in sales of residential central air conditioners.
Sales in the Engineered Products reporting segment increased by 33% to $11.2
million from $8.4 million in the prior-year period due primarily to increased
sales of industrial air cleaners in China.
The gross profit in the period was $21.8 million, or 17.7% of net sales,
compared to $28.0 million, or 22.7% of net sales, in the prior-year period.
Gross profit and margin percentage in the quarter were reduced by transition and
start-up costs related to the final stages of transferring production of high
volume products from the U.S. to China.
Selling, general and administrative ("SG&A") expenses in the three months
ended March 31, 2004 were $17.1 million, or 13.8% of net sales, compared to
$15.3 million, or 12.4% of net sales, in the prior-year period. SG&A expenses
were slightly higher than prior year as a result of higher selling expenses due
to increased sales activity globally and warehousing costs to support higher
seasonal inventory requirements.
The operating income in the three months ended March 31, 2004 was $4.7
million, or 3.9% of net sales, compared to an operating income of $12.8 million,
or 10.3% of net sales, in the prior-year period.
Net interest expense in the three months ended March 31, 2004 was $4.9
million, or 4.0% of net sales, compared to $5.1 million, or 4.1% of net sales,
in the prior-year period and consisted of interest expense on the Company's
long-term debt and interest on short- term working capital loans in Asia and the
U.S. Net interest expense was lower than prior year due to lower short-term
borrowings
18
during the period.
A debt extinguishment charge of $7.4 million, which is tax deductible, was
recorded during the period to account for the early retirement of the Company's
ten-year notes and the issuance of new ten-year notes due March 2014. The charge
consisted of $4.2 million of cash and $3.2 million non-cash, un-amortized debt
discount.
Net loss in the three months ended March 31, 2004 applicable to common
stockholders, which included the debt extinguishment charge, was $6.2 million,
or 20 cents diluted loss per common share, compared to net income in the three
months ended March 31, 2003 applicable to common stockholders of $5.0 million,
or 17 cents diluted earnings per common share. Net loss applicable to common
stockholders in the three months ended March 31, 2004, included the $7.4 million
debt extinguishment charge.
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 $23.3 million at March 31, 2004 compared to $13.4 million a
year earlier. Short-term borrowings under the Company's working capital credit
facilities amounted to $49.4 million at March 31, 2004.
Net cash used in operations for the three months ended March 31, 2004
amounted to $55.0 million, compared to $44.2 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 March 31, 2004 were $159.5 million
compared to $145.5 million at December 31, 2003 and $112.8 million at March 31,
2003. 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' shipment
and warehousing requirements for the 2004 season, and change in invoicing terms
on sales to major U.S. customer.
Net cash used in investing activities was $1.6 million and consisted of
capital expenditures of $1.6 million primarily to support the expansion of
production capacity in Asia. versus $1.5 million used in investing activities in
the prior-year period.
Net cash provided by financing activities during the three months ended
March 31, 2004 was $57.9 million and consisted primarily of $18.9 million in
short-term borrowings to support production in Asia, $28.3 million of proceeds
from stock rights exercised offset by $1.9 million of cash dividends and the
repayment of $1.0 million of long-term debt. Net cash provided by financing
activities during the prior-year period was $36.3 million, consisting primarily
of $38.4 million in short-term borrowings to support production in Asia offset
by $1.1 million of cash dividends and the repayment of $0.4 million of long-term
debt.
The Company declared quarterly dividends of 3 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 March 31, 2004 and the three months
ended March 31, 2003.
The following summarizes Fedders' contractual cash obligations and
commercial commitments at March 31, 2004, and the effect such obligations are
expected to have on liquidity and cash flows 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.... $ 180,560 $ 23,996 $ 1,886 $ 1,034 $ 153,644
Capital lease obligations ...................... 3,598 475 1,037 1,000 1,086
Operating leases and contractual
minimum payments ............................. 23,776 5,210 8,118 5,866 4,582
Short-term notes ............................... 49,352 49,352 -- -- --
----------- ----------- ----------- ----------- -----------
Total contractual cash
obligations .................................. $ 257,286 $ 79,033 $ 11,041 $ 7,900 $ 159,312
=========== =========== =========== =========== ===========
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 guarantees, and has not recorded corresponding
obligations. The Company's subsidiaries would be obligated to perform their
obligations under such guarantees 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.
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PAYMENTS DUE BY PERIOD LESS THAN
---------------------------------------------------------------------------
AFTER
OTHER COMMERCIAL COMMITMENTS TOTAL 1 YEAR 2-3 YEARS 4-5 YEARS 5 YEARS
- ------------------------------------------------ ----------- ----------- ----------- ----------- -----------
(AMOUNTS IN THOUSANDS)
Guarantee of debt .............................. $ 2,660 $ 1,424 $ 1,236 -- --
----------- ----------- ----------- ----------- -----------
Total commercial commitments ................... $ 2,660 $ 1,424 $ 1,236 -- --
----------- ----------- ----------- ----------- -----------
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 three-month period ended March
31, 2004, 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.
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PART II OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
EXHIBIT
NUMBER DESCRIPTION
- ------ ------------------------------------------------------------
31.1 Certifications pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.
31.2 Certifications pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.
32.1 Certifications pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
32.2 Certifications pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
(b) Reports on Form 8-K
The Company filed a Report on Form 8-K dated March 12, 2004 covering a press
release issued by the Company on that date.
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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.
May 10, 2004
22