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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 June 30, 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 36,300,462 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 July 31, 2004.
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FEDDERS CORPORATION
INDEX
PAGE
NUMBER
------
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2004 AND JUNE 30, 2003. 3
CONSOLIDATED BALANCE SHEETS AS OF JUNE 30, 2004, DECEMBER 31, 2003 AND JUNE 30, 2003 4
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE SIX MONTHS ENDED JUNE 30, 2004 AND 2003 5
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 6-18
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION 19-23
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 24
ITEM 4. CONTROLS AND PROCEDURES 24
PART II OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 25
ITEM 6. EXHIBITS AND REPORTS ON FORM 25
8-K 25
SIGNATURE 26
CERTIFICATIONS 27-30
2
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
FEDDERS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE INCOME (LOSS)
(amounts in thousands, except per share data)
(unaudited)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
---------------------- ----------------------
2004 2003 2004 2003
--------- --------- --------- ---------
Net sales ............................................... $ 196,018 $ 186,696 $ 315,313 $ 310,050
Costs and expenses:
Cost of sales ......................................... 161,603 142,684 259,140 238,004
Selling, general and administrative expense ........... 19,913 17,972 36,963 33,245
Restructuring credit .................................. (709) -- (709) --
--------- --------- --------- ---------
180,807 160,656 295,394 271,249
--------- --------- --------- ---------
Operating income ........................................ 15,211 26,040 19,919 38,801
Partners' interest in joint venture (losses) earnings.... (361) 1,291 (652) 1,129
Interest expense, net ................................... 5,226 4,795 10,169 9,857
Loss on debt extinguishment ............................. 683 -- 8,075 --
Other (expense) income .................................. (87) 147 270 308
--------- --------- --------- ---------
Income before income taxes .............................. 8,854 22,683 1,293 30,381
Provision for income taxes .............................. 2,835 7,372 421 9,874
--------- --------- --------- ---------
Net income .............................................. 6,019 15,311 872 20,507
Preferred stock dividends ............................... 1,005 222 2,010 396
--------- --------- --------- ---------
Net income (loss) applicable to common stockholders ..... 5,014 15,089 (1,138) 20,111
Other comprehensive (loss) income:
Foreign currency translation, net of tax .............. (84) (195) 62 (276)
--------- --------- --------- ---------
Comprehensive income (loss) ............................. $ 4,930 $ 14,894 $ (1,076) $ 19,835
========= ========= ========= =========
Net income (loss) per common share:
Basic/diluted net income (loss) per common share ........ 0.16 0.50 (0.04) 0.66
========= ========= ========= =========
Weighted average shares outstanding:
Basic ................................................. 30,444 29,610 30,435 29,890
Diluted ............................................... 30,846 29,719 30,435 29,947
Dividends per share declared:
Common Stock .......................................... $ 0.060 $ 0.060 $ 0.090 $ 0.090
Class B Stock ......................................... 0.060 0.060 0.090 0.090
Preferred Stock ....................................... 1.076 1.076 1.614 1.614
See accompanying notes to the consolidated financial statements
3
FEDDERS CORPORATION
CONSOLIDATED BALANCE SHEETS
(amounts in thousands, except par value)
(unaudited)
JUNE 30, DECEMBER 31, JUNE 30,
2004 2003 2003
---------- ------------ ----------
ASSETS
Current assets:
Cash and cash equivalents.................................................... $ 32,713 $ 22,043 $ 39,020
Accounts receivable (net of allowance of $2,060, $2,032 and $2,346 at June
30, 2004, December 31, 2003 and June 30, 2003, respectively)................ 103,636 29,718 90,427
Inventories:
Finished goods.............................................................. 80,686 113,659 61,154
Work-in-process............................................................. 4,033 4,487 3,939
Raw materials and supplies.................................................. 31,849 27,340 21,311
---------- ---------- ----------
Net inventories.............................................................. 116,568 145,486 86,404
Deferred income taxes........................................................ 7,645 7,652 5,578
Assets held for sale......................................................... 8,249 8,564 8,249
Other current assets......................................................... 14,966 28,352 23,875
---------- ---------- ----------
Total current assets........................................................... 283,777 241,815 253,553
Net property, plant and equipment:
Land and improvements........................................................ 1,508 1,508 1,434
Buildings and leasehold improvements......................................... 33,737 31,880 32,355
Machinery and equipment...................................................... 101,049 102,815 99,927
---------- ---------- ----------
Gross property, plant and equipment.......................................... 136,294 136,203 133,716
Less accumulated depreciation................................................ 84,670 81,541 76,353
---------- ---------- ----------
Net property, plant and equipment.............................................. 51,624 54,662 57,363
Deferred income taxes.......................................................... 8,224 8,224 2,867
Goodwill....................................................................... 78,093 78,630 78,630
Other intangible assets........................................................ 1,422 1,685 1,463
Other assets................................................................... 35,854 31,232 35,545
---------- ---------- ----------
Total assets................................................................... $ 458,994 $ 416,248 $ 429,421
========== ========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term notes............................................................. $ 36,865 $ 30,446 $ 23,173
Current portion of long-term debt............................................ 1,421 2,779 3,452
Accounts payable............................................................. 86,569 86,313 73,174
Income taxes payable......................................................... -- -- 10,852
Accrued expenses............................................................. 52,244 39,032 63,435
---------- ---------- ----------
Total current liabilities...................................................... 177,099 158,570 174,086
Long-term debt................................................................. 159,096 158,965 161,114
Other long-term liabilities.................................................... 31,388 31,528 18,802
Partners' net interest in joint venture........................................ 4,798 4,235 4,864
Stockholders' equity:
Preferred Stock, $0.01 par value, 15,000 shares authorized, 1,870, 675 and 324
issued at June 30, 2004, December 31, 2003 and June 30, 2003, respectively... 19 7 4
Common Stock, $0.01 par value, 70,000 shares authorized, 36,519, 36,444 and
35,934 issued at June 30, 2004, December 31, 2003 and June 30, 2003,
respectively................................................................. 365 364 353
Class B Stock, $0.01 par value, 5,000 shares authorized, 2,493 issued at June
30, 2004, December 31, 2003 and June 30, 2003................................ 25 25 25
Additional paid-in capital..................................................... 109,019 80,680 68,122
Retained earnings ............................................................. 18,721 23,603 41,036
Accumulated other comprehensive loss........................................... (1,690) (1,752) (1,522)
----------- ---------- -----------
126,459 102,927 108,018
Treasury stock, at cost, 8,521, 8,521 and 8,158 shares of Common Stock at June
30, 2004, December 31, 2003 and June 30, 2003, respectively.................. (39,188) (39,188) (37,322)
Deferred compensation.......................................................... (658) (789) (141)
----------- ---------- -----------
Total stockholders' equity..................................................... 86,613 62,950 70,555
---------- ---------- ----------
Total liabilities and stockholders' equity..................................... $ 458,994 $ 416,248 $ 429,421
========== ========== ==========
See accompanying notes to the consolidated financial statements
4
FEDDERS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(amounts in thousands)
(unaudited)
SIX MONTHS ENDED
JUNE 30,
---------------------------
2004 2003
----------- -----------
Cash flows from operating activities:
Net income........................................................................................ $ 872 $ 20,507
Adjustments to reconcile net income to net cash used in
operating activities:
Depreciation and amortization................................................................... 4,657 5,116
Deferred compensation amortization.............................................................. 131 141
Deferred income taxes........................................................................... 7 29
Loss on debt extinguishment..................................................................... 8,075 --
Partners' net interest in joint venture losses (earnings)....................................... 652 (1,129)
Loss (gain) on disposal of assets............................................................... 286 (96)
Changes in operating assets and liabilities:
Accounts receivable............................................................................. (73,918) (71,917)
Inventories..................................................................................... 28,918 17,292
Other current assets............................................................................ 13,386 (4,936)
Other assets.................................................................................... 753 2,830
Accounts payable................................................................................ 256 19,224
Accrued expenses................................................................................ 11,104 33,334
Income taxes payable............................................................................ -- 9,691
Other long-term liabilities..................................................................... (140) (3,056)
Other-- net..................................................................................... 93 (276)
----------- -----------
Net cash (used in) provided by operating activities............................................... (4,868) 26,754
------------ -----------
Cash flows from investing activities:
Additions to property, plant and equipment...................................................... (3,039) (4,281)
Disposal of property, plant and equipment....................................................... 1,551 539
Investment in joint venture..................................................................... (932) (1,333)
------------ -----------
Net cash used in investing activities............................................................. (2,420) (5,075)
------------ -----------
Cash flows from financing activities:
Proceeds from short-term notes.................................................................. 6,419 (1,131)
Repayments of long-term debt.................................................................... (2,815) (1,430)
Net proceeds from issuance of 9 7/8% Senior Notes............................................... 150,245 --
Repayment of 9 3/8% Senior Subordinated Notes................................................... (150,000) --
Call premium and deferred financing charges..................................................... (10,245) --
Proceeds from stock options exercised........................................................... 91 --
Cash dividends.................................................................................. (3,837) (2,183)
Costs of stock offerings........................................................................ (223) (734)
Proceeds from stock rights exercised............................................................ 28,323 --
------------ -----------
Net cash provided by (used in) financing activities............................................... 17,958 (5,478)
----------- -----------
Net increase in cash and cash equivalents......................................................... 10,670 16,201
Cash and cash equivalents at beginning of period.................................................. 22,043 22,819
----------- -----------
Cash and cash equivalents at end of period........................................................ $ 32,713 $ 39,020
=========== ===========
Supplemental disclosure:
Interest paid................................................................................... $ 10,037 $ 8,929
Income taxes paid............................................................................... 846 1,125
=========== ===========
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)
(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 April 1, 2004 through June 30, 2004 and
for the six-month period from January 1, 2004 through June 30, 2004. The
unaudited statements for the three-month and six-month periods ended June 30,
2003 have been provided for comparison purposes.
The Company's business is seasonal and, consequently, operating results
for the six-month period ending June 30, 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 SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------ -------------------
2004 2003 2004 2003
-------- -------- -------- --------
Net income (loss) applicable to common stockholders-as reported................ $ 5,014 $ 15,089 $ (1,138) $ 20,111
Deduct: Total stock-based employee compensation expense determined
under fair-value-based method for all awards, net of related tax effects..... 184 90 459 180
-------- -------- -------- --------
Pro forma net income (loss).................................................... $ 4,830 $ 14,999 $ (1,597) $ 19,931
======== ======== ======== ========
Net income (loss) per common share:
Basic/diluted -- as reported.............................................. $ 0.16 $ 0.50 $ (0.04) $ 0.66
Basic/diluted -- pro forma................................................ $ 0.16 $ 0.50 $ (0.05) $ 0.67
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. In the first six months of 2004, the Company
expended $30, primarily for facility closing costs. During the three months
ended June 30, 2004, the Company conducted a detailed evaluation of the
remaining restructuring reserves, as the activities for the past 10 months have
been minimal. The Company identified required reserves of $401 for on going
projects and recorded a restructuring credit of $709 for reserves in excess of
identified requirements.
6
The following table displays the activity and balances of the
restructuring reserve account from December 31, 2003 to June 30, 2004.
DECEMBER 31, JUNE 30,
2003 2004
BALANCE ADDITIONS DEDUCTIONS BALANCE
------------ --------- ---------- -------
Workforce reductions....................................................... $ 586 -- 432 $ 154
Facility closing costs..................................................... 340 -- 292 48
Other costs................................................................ 214 -- 15 199
-------- --------- --- -------
Total.................................................................... $ 1,140 -- 739 $ 401
======== ========= === =======
The remaining balance of $401, which consists primarily of workforce
reduction and environmental cleanup 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 June 30, 2004 and 2003, net income (loss) per
share was computed using the weighted average number of shares of Common and
Class B stock outstanding, which amounted to 30,444,418 and 29,609,770 shares,
respectively. Stock options included in computing diluted earnings per share
amounted to 401,355 and 109,017 shares for the three months ended June 30, 2004
and 2003, respectively.
For the six months ended June 30, 2004 and 2003, net income (loss) per
share was computed using the weighted average number of shares of Common and
Class B stock outstanding, which amounted to 30,434,757 and 29,889,826 shares,
respectively. Stock options included in computing diluted earnings per share
amounted to 57,339 shares for the six months ended June 30, 2003. Due to their
anti-dilutive effect, 575,046 options were excluded from the computation of
diluted loss per share for the six months ended June 30, 2004.
6. LONG-TERM DEBT
On February 6, 2004, Fedders North America, Inc., a wholly owned subsidiary
of the Company ("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"). As of June 30, 2004, all
Notes have been purchased and the Company recorded a loss on debt extinguishment
of $8,075, consisting of $4,848 of call premiums and $3,227 for the write-off of
associated debt issuance costs.
7
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.
Goodwill and other intangible assets consist of the following:
ENGINEERED
HVACR PRODUCTS TOTAL
---------- ---------- --------
Goodwill balance as of December 31, 2003............................................ $ 70,133 $ 8,497 $ 78,630
Effect of foreign currency charge................................................... (537) -- (537)
---------- ---------- --------
Goodwill balance as of June 30, 2004................................................ $ 69,596 $ 8,497 $ 78,093
========== ========== ========
JUNE 30, DECEMBER 31,
2004 2003
---------- ------------
Other intangible assets......................................................... $ 2,994 $ 3,178
Accumulated amortization........................................................ (1,572) (1,493)
----------- ----------
Other intangible assets......................................................... $ 1,422 $ 1,685
========== ==========
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 June 30, 2004 and 2003 is $51 and $44, respectively.
Amortization expense for the six months ended June 30, 2004 and 2003 is $102 and
$92, 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 Walkersville facility for sale. The Company
has since changed the marketing strategy and taken necessary actions to divide
the property in order to enhance the property value. Currently there are several
interested parties; the Company is managing the process to maximize the sale
price. 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. At June 30, 2004, assets totaling $8,249, 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. During the three months ended June 30, 2004, a
building in Ningbo, China was sold; the Company recorded loss of $7 on the
disposal of this property.
The following table presents the carrying amount, by asset class, of the
"Assets Held for Sale" at:
JUNE 30, DECEMBER 31,
2004 2003
--------- ------------
Land and land improvements...................................................... $ 2,181 $ 2,181
Building, net................................................................... 4,272 4,587
Building improvements, net...................................................... 1,796 1,796
--------- ---------
Assets held for sale............................................................ $ 8,249 $ 8,564
========= =========
8
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.
SUMMARY OF BUSINESS BY SEGMENT:
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------- ------------------------
2004 2003 2004 2003
----------- ----------- ----------- -----------
Net sales:
HVACR............................................................. $ 185,688 $ 178,530 $ 293,832 $ 293,459
Engineered Products............................................... 10,330 8,166 21,481 16,591
----------- ----------- ----------- -----------
Net sales......................................................... $ 196,018 $ 186,696 $ 315,313 $ 310,050
=========== =========== =========== ===========
Income before interest expense, income taxes and loss on debt
extinguishment:
HVACR............................................................. $ 11,596 $ 26,089 $ 14,653 $ 38,510
Engineered Products............................................... 908 (16) 1,463 (609)
----------- ------------ ----------- -----------
Segment income before interest expense and income taxes........... 12,504 26,073 16,116 37,901
Non-allocated income ............................................. 2,259 1,405 3,421 2,337
Loss on debt extinguishment....................................... 683 -- 8,075 --
Interest expense, net............................................. 5,226 4,795 10,169 9,857
Provision for income taxes........................................ 2,835 7,372 421 9,874
----------- ----------- ----------- -----------
Net income........................................................ $ 6,019 $ 15,311 $ 872 $ 20,507
=========== =========== =========== ===========
JUNE 30, DECEMBER 31, JUNE 30,
2004 2003 2003
----------- ------------ -----------
Total assets:
HVACR................................................................ $ 345,929 $ 310,646 $ 324,341
Engineered Products.................................................. 56,537 52,826 52,996
Non-allocated assets................................................. 56,528 52,776 52,084
----------- ---------- ----------
$ 458,994 $ 416,248 $ 429,421
=========== ========== ==========
Non-allocated income and assets are primarily related to the Company's
corporate headquarters.
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.
9
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 June 30, 2004:
SIX MONTHS
ENDED
JUNE 30, 2004
-------------
Warranty balance at December 31, 2003......................................... $ 5,641
Accruals for warranties issued during the period.............................. 9,713
Settlements made during the period............................................ (6,310)
---------
Warranty balance at June 30, 2004............................................. $ 9,044
=========
At June 30, 2004, $8,239 of warranty liability was included in current
liabilities and $805 of warranty liability was included in other long-term
liabilities.
LOAN GUARANTEES
Guarantees of subsidiary debt by Fedders Corporation (the "Company" or the
"Parent") and subsidiaries consist of the following at June 30, 2004:
(i) The Parent guarantees the obligations of 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.
(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 June 30, 2004.
(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 June 30, 2004 is $0.8 million.
(iv) The Parent and Melcor Corporation guarantee the obligations of
a subsidiary, Fedders Eubank Company, 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 June 30, 2004 is
$1.9 million.
(v) The Parent guarantees the obligations of a subsidiary, Fedders
Eubank Company 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 June 30, 2004 is $0.4 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 June 30,
2004 is $6.0 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% per annum and
matures June 2006. The Parent would be
10
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
June 30, 2004.
(viii) The Parent guarantees the obligations of a subsidiary,
Fedders Eubank Company, 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 June 30, 2004 is $0.8 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 June 30, 2004 is $1.9
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 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 June 30, 2004.
11. SUBSEQUENT EVENTS
None
12. SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL STATEMENTS
FNA and the Company 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 its guarantor subsidiaries, the Parent, and the other
non-guarantor subsidiaries 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 INCOME (LOSS)
THREE MONTHS ENDED JUNE 30, 2004
-------------------------------------------------------------------
FEDDERS
NORTH OTHER ELIMINATING FEDDERS
AMERICA FEDDERS CORPORATE ENTRIES CORPORATION
---------- ---------- ---------- ---------- -----------
Net sales ..................................... $ 172,703 $ 80,985 -- $ (57,670) $ 196,018
Costs and expenses:
Cost of sales ................................. 146,235 73,038 -- (57,670) 161,603
Selling, general and administrative expense (a) 16,307 6,058 $ (2,452) -- 19,913
Restructuring credit .......................... (709) -- -- -- (709)
---------- ---------- ---------- ---------- ----------
Operating income .............................. 10,870 1,889 2,452 -- 15,211
Partners' net interest in joint venture losses. (287) (74) -- -- (361)
Equity income in investment ................... -- -- 4,444 (4,444) --
Interest expense, net(b) ...................... 4,634 542 50 -- 5,226
Loss on debt extinguishment ................... 683 -- -- -- 683
Other income (expense) ........................ 67 (154) -- -- (87)
---------- ---------- ---------- ---------- ----------
Income before income taxes .................... 5,333 1,119 6,846 (4,444) 8,854
Provision for income taxes .................... 1,733 275 827 -- 2,835
---------- ---------- ---------- ---------- ----------
Net income .................................... 3,600 844 6,019 (4,444) 6,019
Preferred stock dividend ...................... -- -- 1,005 -- 1,005
---------- ---------- ---------- ---------- ----------
Net income applicable to common stockholders .. 3,600 844 5,014 (4,444) 5,014
Foreign currency translation, net of tax ...... (58) (84) 58 (84)
---------- ---------- ---------- ---------- ----------
Comprehensive income .......................... $ 3,600 $ 786 $ 4,930 $ (4,386) $ 4,930
========== ========== ========== ========== ==========
THREE MONTHS ENDED JUNE 30, 2003
------------------------------------------------------------------
FEDDERS
NORTH OTHER ELIMINATING FEDDERS
AMERICA FEDDERS CORPORATE ENTRIES CORPORATION
---------- ---------- ---------- ----------- -----------
Net sales ..................................... $ 169,339 $ 91,386 -- $ (74,029) $ 186,696
Costs and expenses:
Cost of sales ................................. 134,502 82,211 -- (74,029) 142,684
Selling, general and administrative expense(a). 14,620 5,558 $ (2,206) -- 17,972
---------- ---------- ---------- ---------- ----------
Operating income .............................. 20,217 3,617 2,206 -- 26,040
Partners' net interest in joint venture
(losses) earnings............................ (334) 1,625 -- -- 1,291
Equity income in investment ................... -- -- 13,889 (13,889) --
Interest expense, net (b) ..................... 4,092 636 67 -- 4,795
Other income (expense) ........................ (69) 203 13 -- 147
---------- ---------- ---------- ---------- ----------
Income before income taxes .................... 15,722 4,809 16,041 (13,889) 22,683
Provision for income taxes .................... 5,030 1,612 730 -- 7,372
---------- ---------- ---------- ---------- ----------
Net income .................................... 10,692 3,197 15,311 (13,889) 15,311
Preferred stock dividend ...................... -- -- 222 -- 222
---------- ---------- ---------- ---------- ----------
Net income applicable to common stockholders .. 10,692 3,197 15,089 (13,889) 15,089
Foreign currency translation, net of tax ...... (420) 325 (195) 95 (195)
---------- ---------- ---------- ---------- ----------
Comprehensive income .......................... $ 10,272 $ 3,522 $ 14,894 $ (13,794) $ 14,894
========== ========== ========== ========== ==========
12
FEDDERS CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
AND COMPREHENSIVE (LOSS) INCOME
SIX MONTHS ENDED JUNE 30, 2004
-------------------------------------------------------------------
FEDDERS
NORTH OTHER ELIMINATING FEDDERS
AMERICA FEDDERS CORPORATE ENTRIES CORPORATION
---------- ---------- ---------- ----------- -----------
Net sales ......................................... $ 278,982 $ 167,155 -- $ (130,824) $ 315,313
Costs and expenses:
Cost of sales ..................................... 235,870 154,094 -- (130,824) 259,140
Selling, general and administrative expense (a) ... 29,633 10,981 $ (3,651) -- 36,963
Restructuring credit .............................. (709) -- -- -- (709)
---------- ---------- ---------- ---------- ----------
Operating income .................................. 14,188 2,080 3,651 -- 19,919
Partners' net interest in joint venture losses. ... (503) (149) -- -- (652)
Equity income in investment ....................... -- -- (1,502) 1,502 --
Interest expense, net (b) ......................... 8,966 1,072 131 -- 10,169
Loss on debt extinguishment ....................... 8,075 -- -- -- 8,075
Other income ...................................... 150 120 -- -- 270
---------- ---------- ---------- ---------- ----------
(Loss) income before income taxes ................. (3,206) 979 2,018 1,502 1,293
(Benefit) provision for income taxes .............. (1,043) 318 1,146 -- 421
---------- ---------- ---------- ---------- ----------
Net (loss) income ................................. (2,163) 661 872 1,502 872
Preferred stock dividend .......................... -- -- 2,010 -- 2,010
---------- ---------- ---------- ---------- ----------
Net (loss) income applicable to common stockholders (2,163) 661 (1,138) 1,502 (1,138)
Foreign currency translation, net of tax .......... 6 74 62 (80) 62
---------- ---------- ---------- ---------- ----------
Comprehensive (loss) income ....................... $ (2,157) $ 735 $ (1,076) $ 1,422 $ (1,076)
========== ========== ========== ========== ==========
SIX MONTHS ENDED JUNE 30, 2003
-------------------------------------------------------------------
FEDDERS
NORTH OTHER ELIMINATING FEDDERS
AMERICA FEDDERS CORPORATE ENTRIES CORPORATION
---------- ---------- ---------- ----------- -----------
Net sales ..................................... $ 283,195 $ 158,790 -- $ (131,935) $ 310,050
Costs and expenses:
Cost of sales ................................. 227,634 142,305 -- (131,935) 238,004
Selling, general and administrative expense (a) 26,690 9,833 $ (3,278) -- 33,245
---------- ---------- ---------- ---------- ----------
Operating income .............................. 28,871 6,652 3,278 -- 38,801
Partners' net interest in joint venture
(losses) earnings............................ (334) 1,463 -- -- 1,129
Equity income in investment ................... -- -- 18,638 (18,638) --
Interest expense, net (b) ..................... 8,229 1,274 354 -- 9,857
Other (expense) income ........................ (72) 373 7 -- 308
---------- ---------- ---------- ---------- ----------
Income before income taxes .................... 20,236 7,214 21,569 (18,638) 30,381
Provision for income taxes .................... 6,341 2,471 1,062 -- 9,874
---------- ---------- ---------- ---------- ----------
Net income .................................... 13,895 4,743 20,507 (18,638) 20,507
Preferred stock dividend ...................... -- -- 396 -- 396
---------- ---------- ---------- ---------- ----------
Net income applicable to common stockholders .. 13,895 4,743 20,111 (18,638) 20,111
Foreign currency translation, net of tax ...... (328) (21) (276) 349 (276)
---------- ---------- ---------- ---------- ----------
Comprehensive income .......................... $ 13,567 $ 4,722 $ 19,835 $ (18,289) $ 19,835
========== ========== ========== ========== ==========
13
FEDDERS CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
CONDENSED CONSOLIDATING BALANCE SHEETS
AS OF JUNE 30, 2004
-------------------------------------------------------------------
FEDDERS
NORTH OTHER ELIMINATING FEDDERS
AMERICA FEDDERS CORPORATE ENTRIES CORPORATION
---------- ---------- ---------- ----------- -----------
ASSETS
Current assets:
Cash and cash equivalents .............. $ 10,424 $ 12,141 $ 10,148 -- $ 32,713
Net accounts receivable ................ 86,616 17,020 -- -- 103,636
Net inventories ........................ 84,528 32,040 -- -- 116,568
Assets held for sale ................... 8,249 -- -- -- 8,249
Other current assets ................... 3,643 9,544 9,424 -- 22,611
---------- ---------- ---------- ---------- ----------
Total current assets ..................... 193,460 70,745 19,572 -- 283,777
Investments in subsidiaries .............. -- -- (12,340) $ 12,340 --
Net property, plant and equipment ........ 35,474 15,686 464 -- 51,624
Goodwill ................................. 62,870 15,223 -- -- 78,093
Other intangible assets .................. 1,363 59 -- -- 1,422
Other assets ............................. 11,223 1,972 37,906 (7,023) 44,078
---------- ---------- ---------- ---------- ----------
Total assets ............................. $ 304,390 $ 103,685 $ 45,602 $ 5,317 $ 458,994
========== ========== ========== ========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term notes ....................... -- $ 36,865 -- -- $ 36,865
Current portion of long-term debt ...... $ 1,302 119 -- -- 1,421
Accounts and income taxes payable ...... 22,524 62,417 $ 1,628 -- 86,569
Accrued expenses ....................... 34,807 8,419 9,018 -- 52,244
---------- ---------- ---------- ---------- ----------
Total current liabilities ................ 58,633 107,820 10,646 -- 177,099
Long-term debt ........................... 157,611 1,485 -- -- 159,096
Other long-term liabilities .............. 895 12,220 30,094 $ (7,023) 36,186
Net due to (from) affiliates ............. 94,185 (12,434) (81,751) -- --
Stockholders' equity:
Preferred Stock ........................ -- -- 19 -- 19
Common and Class B Stock ............... 5 -- 390 (5) 390
Additional paid-in capital ............. 20,292 25,542 109,019 (45,834) 109,019
Retained earnings ...................... (26,324) (30,181) 18,721 56,505 18,721
Deferred compensation and treasury stock -- -- (39,846) -- (39,846)
Accumulated other comprehensive loss ... (907) (767) (1,690) 1,674 (1,690)
---------- ---------- ---------- ---------- ----------
Total stockholders' equity ............... (6,934) (5,406) 86,613 12,340 86,613
---------- ---------- ---------- ---------- ----------
Total liabilities and stockholders' equity $ 304,390 $ 103,685 $ 45,602 $ 5,317 $ 458,994
========== ========== ========== ========== ==========
14
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
========== ========== ========== ========== ==========
15
FEDDERS CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
CONDENSED CONSOLIDATING BALANCE SHEETS
AS OF JUNE 30, 2003
-------------------------------------------------------------------
FEDDERS
NORTH OTHER ELIMINATING FEDDERS
AMERICA FEDDERS CORPORATE ENTRIES CORPORATION
---------- ---------- ---------- ----------- -----------
ASSETS
Current assets:
Cash and cash equivalents .............. $ 9,806 $ 8,497 $ 20,717 -- $ 39,020
Net accounts receivable ................ 72,961 17,466 -- -- 90,427
Net inventories ........................ 68,466 17,938 -- -- 86,404
Assets held for sale ................... 8,249 -- -- -- 8,249
Other current assets ................... 2,244 20,849 6,360 -- 29,453
---------- ---------- ---------- ---------- ----------
Total current assets ..................... 161,726 64,750 27,077 -- 253,553
Investments in subsidiaries .............. -- -- 16,378 $ (16,378) --
Net property, plant and equipment ........ 41,449 15,223 691 -- 57,363
Goodwill ................................. 62,870 15,760 -- -- 78,630
Other intangible assets .................. 1,463 -- -- -- 1,463
Other assets ............................. 7,922 7,029 30,484 (7,023) 38,412
---------- ---------- ---------- ---------- ----------
Total assets ............................. $ 275,430 $ 102,762 $ 74,630 $ (23,401) $ 429,421
========== ========== ========== ========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term notes ....................... -- $ 23,173 -- -- $ 23,173
Current portion of long-term debt ...... $ 1,723 1,713 $ 16 -- 3,452
Accounts and income taxes payable ...... 25,508 47,634 10,884 -- 84,026
Accrued expenses ....................... 44,290 10,299 8,846 -- 63,435
---------- ---------- ---------- ---------- ----------
Total current liabilities ................ 71,521 82,819 19,746 -- 174,086
Long-term debt ........................... 158,359 2,737 18 -- 161,114
Other long-term liabilities .............. 1,755 11,899 17,035 $ (7,023) 23,666
Net due to (from) affiliates ............. 22,141 10,583 (32,724) -- --
Stockholders' equity:
Preferred Stock ........................ -- -- 4 -- 4
Common and Class B Stock ............... 5 -- 378 (5) 378
Additional paid-in capital ............. 20,292 25,542 68,122 (45,834) 68,122
Retained earnings (deficit) ............ 1,674 (29,541) 41,036 27,867 41,036
Deferred compensation and treasury stock -- -- (37,463) -- (37,463)
Accumulated other comprehensive loss ... (317) (1,277) (1,522) 1,594 (1,522)
---------- ---------- ---------- ---------- ----------
Total stockholders' equity ............... 21,654 (5,276) 70,555 (16,378) 70,555
---------- ---------- ---------- ---------- ----------
Total liabilities and stockholders' equity $ 275,430 $ 102,762 $ 74,630 $ (23,401) $ 429,421
========== ========== ========== ========== ==========
16
FEDDERS CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 2004
-------------------------------------------------------------------
FEDDERS
NORTH OTHER ELIMINATING FEDDERS
AMERICA FEDDERS CORPORATE ENTRIES CORPORATION
---------- ---------- ---------- ----------- -----------
Net cash (used in) provided by operating activities $ (23,515) $ 16,478 $ 2,169 -- $ (4,868)
---------- ---------- ---------- ---------- ----------
Net additions to property, plant and equipment ..... (1,178) (1,841) (20) -- (3,039)
Disposal of property, plant and equipment .......... 1,243 308 -- -- 1,551
Investment in joint venture ........................ -- (932) -- (932)
---------- ---------- ---------- ---------- ----------
Net cash provided by (used in) investing activities 65 (2,465) (20) -- (2,420)
---------- ---------- ---------- ---------- ----------
Proceeds from short-term notes /.................... -- 6,419 -- -- 6,419
Net repayments of long-term debt ................... (960) (1,855) -- -- (2,815)
Proceeds from stock options exercised .............. -- -- 91 -- 91
Cash dividends ..................................... -- -- (3,837) -- (3,837)
Net proceeds from issuance of 9 7/8% Senior Notes .. 150,245 -- -- -- 150,245
Repayments of 9 3/8% Senior Subordinated Notes ..... (150,000) -- -- -- (150,000)
Call premium and financing costs ................... (10,245) -- -- -- (10,245)
Costs of stock offerings ........................... -- -- (223) -- (223)
Proceeds from stock rights offering ................ -- -- 28,323 -- 28,323
Change in net due to (from) affiliate .............. 31,177 (14,822) (16,355) -- --
---------- ---------- ---------- ---------- ----------
Net cash provided by (used in) financing activities 20,217 (10,258) 7,999 -- 17,958
---------- ---------- ---------- ---------- ----------
Net (decrease) increase in cash and cash equivalents (3,233) 3,755 10,148 -- 10,670
Cash and cash equivalents at beginning of period ... 13,657 8,386 -- -- 22,043
---------- ---------- ---------- ---------- ----------
Cash and cash equivalents at end of period ......... $ 10,424 $ 12,141 $ 10,148 -- $ 32,713
========== ========== ========== ========== ==========
FOR THE SIX MONTHS ENDED JUNE 30, 2003
------------------------------------------------------------------
FEDDERS
NORTH OTHER ELIMINATING FEDDERS
AMERICA FEDDERS CORPORATE ENTRIES CORPORATION
---------- ---------- ---------- ---------- -----------
Net cash (used in) provided by operating activities $ (6,975) $ 20,349 $ 13,380 -- $ 26,754
---------- ---------- ---------- ---------- ----------
Net additions to property, plant and equipment ..... (2,209) (1,935) (137) -- (4,281)
Disposal of property, plant and equipment .......... 539 -- -- -- 539
Investment in joint venture ........................ -- (1,333) -- -- (1,333)
---------- ---------- ---------- ---------- ----------
Net cash (used in) provided by investing activities (1,670) (3,268) (137) -- (5,075)
---------- ---------- ---------- ---------- ----------
Repayments of short-term notes ..................... -- (1,131) -- -- (1,131)
(Repayments of) proceeds from long-term debt ....... (958) (506) 34 -- (1,430)
Cash dividends ..................................... -- -- (2,183) -- (2,183)
Preferred stock exchange offer ..................... -- -- (734) -- (734)
Change in net due to (from) affiliate .............. 1,983 (12,340) 10,357 -- --
---------- ---------- ---------- ---------- ----------
Net cash provided by (used in) financing activities 1,025 (13,977) 7,474 -- (5,478)
---------- ---------- ---------- ---------- ----------
Net (decrease) increase in cash and cash equivalents (7,620) 3,104 20,717 -- 16,201
Cash and cash equivalents at beginning of period ... 17,426 5,393 -- -- 22,819
---------- ---------- ---------- ---------- ----------
Cash and cash equivalents at end of period ......... $ 9,806 $ 8,497 $ 20,717 -- $ 39,020
========== ========== ========== ========== ==========
17
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 $6.9 million and $6.7 million for the three months
ended June 30, 2004 and 2003, respectively. Such charges to FNA
amounted to approximately $11.3 million for the six months ended
June 30, 2004 and 2003.
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
June 30, 2004 and 2003 amounted to approximately $1.1 million and
$1.8 million, respectively. Capital expenditures of FNA amounted to
$0.8 million and $1.1 million in the three months ended June 30,
2004 and 2003, respectively. FNA's depreciation and amortization for
the six months ended June 30, 2004 and 2003 amounted to
approximately $3.2 million and $3.6 million, respectively. Capital
expenditures of FNA amounted to $1.2 million and $2.2 million in the
six months ended June 30, 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.
g) For the three months ended June 30,2004, net sales for Other
Fedders entities were unfavorably affected by timing of production
versus prior year period.
18
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 and six-month periods ended June 30, 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 RESULTS OF OPERATIONS
AS PERCENT OF AS PERCENT OF
NET SALES NET SALES
---------------------- ---------------------
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
---------------------- ---------------------
2004 2003 2004 2003
--------- ---------- ---------- --------
Gross profit....................................................... 17.6% 23.6% 17.8% 23.2%
Selling, general and administrative expense........................ 10.2% 9.6% 11.7% 10.7%
Operating income................................................... 7.8% 14.0% 6.3% 12.5%
Net interest expense............................................... 2.7% 2.7% 3.2% 3.2%
Pre-tax income..................................................... 4.5% 12.1% 0.4% 9.8%
19
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED JUNE 30, 2004 VERSUS THE THREE
MONTHS ENDED JUNE 30, 2003.
Net sales in the three-month period ended June 30, 2004 increased by 5.0%
to $196.0 million, compared to $186.7 million in the prior-year period. Sales in
the HVACR reporting segment increased by 4.0% to $185.7 million from $178.5
million in the prior-year period. Sales in the HVACR segment increased despite a
decline in sales of room air conditioners in North America caused by cooler than
normal weather conditions and lower prices. Sales gains in the HVACR segment
were the result of improving sales of residential central air conditioners in
the Americas and sales of all HVACR products in Asia. Sales in the Engineered
Products reporting segment increased by 26.0% to $10.3 million from $8.2 million
in the prior-year period due primarily to increased sales of industrial air
cleaners in Asia and North America
The gross profit in the period was $34.4 million, or 17.6% of net sales,
compared to $44.0 million, or 23.6% of net sales, in the prior-year period.
Gross profit and margin percentage in the quarter were adversely affected by
higher component and raw material costs due to increases in commodity prices and
costs associated with the wind down of high volume manufacturing in the U.S. and
start-up costs in China.
Selling, general and administrative ("SG&A") expenses in the three months
ended June 30, 2004 were $19.9 million, or 10.2% of net sales, compared to $18.0
million, or 9.6% of net sales, in the prior-year period. SG&A expenses were
higher than prior year as a result of higher selling expenses due to increased
sales activity globally and increased warehousing costs to support higher
inventory levels as a result of the sale of a broader range of products globally
and higher inventory levels due to the cooler than normal weather conditions in
North America.
Operating income in the three months ended June 30, 2004 was $15.2
million, or 7.8% of net sales, compared to operating income of $26.0 million, or
14.0% of net sales, in the prior-year period.
Net interest expense in the three months ended June 30, 2004 was $5.2
million, or 2.7% of net sales, compared to $4.8 million, or 2.7% 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 higher than prior year due to higher short-term
borrowings during the period due to the higher inventory levels.
A loss on debt extinguishment of $0.7 million 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. A $0.7 million credit was
recorded in the second quarter of 2004 due to a revision in management's
estimates of the required restructuring reserves for ongoing projects associated
with the 2001 restructuring.
Net income in the three months ended June 30, 2004 applicable to common
stockholders, which included the loss on debt extinguishment, was $5.0 million,
or 16 cents per diluted common share, compared to net income in the three months
ended June 30, 2003 applicable to common stockholders of $15.1 million, or 51
cents per diluted common share.
20
RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 2004 VERSUS THE SIX
MONTHS ENDED JUNE 30, 2003.
Net sales in the six-month period ended June 30, 2004 increased by 1.7% to
$315.3 million, compared to $310.1 million in the prior-year period. Sales in
the HVACR reporting segment increased by a 0.1% increase to $293.8 million from
$293.5 million in the prior-year period. Sales in the HVACR segment increased
due to growing sales of residential central air conditioners in the Americas and
all HVACR products in Asia. Sales in the Engineered Products reporting segment
increased by 30.0% to $21.5 million from $16.6 million in the prior-year period.
Sales improved in all product categories and markets with the exception of
Europe. Net sales for the six months ended June 30, 2004 reflect an adjustment
to reclassify $3.9 million of accured warranty expenses from Cost of Sales to
Net Sales, consistent with the Company's accounting practices. The adjustment
had no effect on gross profit or net income.
The gross profit in the period was $56.2 million, or 17.8% of net sales,
compared to $72.1 million, or 23.2% of net sales, in the prior-year period.
Gross profit and margin percentage 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 and increases in material and ocean freight costs.
Selling, general and administrative ("SG&A") expenses in the six months
ended June 30, 2004 were $37.0 million, or 11.7% of net sales, compared to $33.2
million, or 10.7% of net sales, in the prior-year period. SG&A expenses were
higher than prior year as a result of higher selling expenses due to increased
sales activity globally and increased warehousing costs to support higher
inventory requirements.
The operating income in the six months ended June 30, 2004 was $19.9
million, or 6.3% of net sales, compared to an operating income of $38.8 million,
or 12.5% of net sales, in the prior-year period.
Net interest expense in the six months ended June 30, 2004 was $10.2
million, or 3.2% of net sales, compared to $9.9 million, or 3.2% 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 slightly higher than prior year due to higher
short-term borrowings during the period.
A loss on debt extinguishment of $8.1 million 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 $4.9
million of call premiums required to be paid to note holders and $3.2 million
for the write-off of unamortized debt discount. A $0.7 million credit due to a
revision in management's estimates of the required restructuring reserves for
ongoing projects associated with the 2001 restructuring was recorded in the
period.
Net loss in the six months ended June 30, 2004 applicable to common
stockholders, which included the loss on debt extinguishment, was $1.1 million,
or 4 cents per diluted common share, compared to net income in the six months
ended June 30, 2003 applicable to common stockholders of $20.1 million, or 66
cents per diluted common share.
21
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 $32.7 million at June 30, 2004 compared to $39.0 million a year
earlier. Short-term borrowings under the Company's working capital credit
facilities amounted to $36.9 million at June 30, 2004 compared to $23.2 million
a year earlier and consisted of bank borrowings in China. There were no
borrowings on the Company's $100 million revolving credit facility at the end of
June.
Net cash used in operations for the six months ended June 30, 2004
amounted to $4.9 million, compared to net cash provided by operations of $26.8
million in the prior period. A build-up in inventory to support seasonal
requirements and expansion of sales of new products was the main use of cash
during the period. Net inventories at June 30, 2004 were $116.6 million compared
to $145.5 million at December 31, 2003 and $86.4 million at June 30, 2003.
Inventories were higher compared to the previous year due to inventory required
to support the expansion of sales of central air conditioners globally, sales of
products in Asian markets, as well as higher inventory in North America due to
the cooler than normal weather conditions.
Net cash used in investing activities was $2.4 million and consisted of
capital expenditures of $3.0 million, primarily to support the expansion of
production capacity in Asia offset by $1.5 million of proceeds on the sales of
building and equipment, versus $4.3 million used in investing activities in the
prior-year period.
Net cash provided by financing activities during the six months ended June
30, 2004 was $18 million and consisted primarily of $6.4 million in short-term
borrowings to support production in Asia, $28.3 million of proceeds from stock
rights exercised offset by $3.8 million of cash dividends, $10.2 million of call
premium and financing charges, and the repayment of $2.8 million of long-term
debt. Net cash used by financing activities during the prior-year period was
$5.5 million, consisting primarily of $2.2 million of cash dividends, the
repayment of $1.1 million of short-term notes, and the repayment of $1.4 million
of long-term debt.
The Company declared dividends of 6 cents on each share of outstanding
Common and Class B Stock and 107.6 cents on each share of outstanding Preferred
Stock in the three months ended June 30, 2004 and the three months ended June
30, 2003.
The Company declared dividends of 9 cents on each share of outstanding
Common and Class B Stock and 161.4 cents on each share of outstanding Preferred
Stock in the six months ended June 30, 2004 and the six months ended June 30,
2003.
The following summarizes Fedders' contractual cash obligations and
commercial commitments at June 30, 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 $ 157,045 $ 979 $ 1,548 $ 837 $ 153,681
Capital lease obligations .................. 3,472 442 1,360 711 959
Operating leases and contractual minimum
payments ................................. 22,291 4,977 8,822 6,038 2,454
Short-term notes ........................... 36,865 36,865 -- -- --
---------- ---------- ---------- ---------- ----------
Total contractual cash obligations ......... $ 219,673 $ 43,263 $ 11,730 $ 7,586 $ 157,094
========== ========== ========== ========== ==========
22
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.
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................................. $ 2,455 $ 1,424 $ 1,031 -- --
-------- ------- ------- --------- -------
Total commercial commitments...................... $ 2,455 $ 1,424 $ 1,031 -- --
-------- ------- ------- --------- -------
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.
23
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 six-month period ended June
30, 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.
24
PART II OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) The Company held its Annual Meeting of Stockholders on April 27, 2004.
(c) Messrs. Sal Giordano, Jr., William J. Brennan, David C. Chang, Michael L.
Ducker, Joseph Giordano, Howard S. Modlin, S. A. Muscarnera and Anthony E.
Puleo were elected directors for a term of one year. The vote tabulation
was as follows:
Votes For Votes Withheld
---------- --------------
Sal Giordano, Jr. 24,182,628 1,874,290
William J. Brennan 24,198,888 1,858,030
David C. Chang 23,901,585 2,155,333
Michael L. Ducker 23,903,766 2,153,152
Joseph Giordano 24,176,175 1,880,743
Howard S. Modlin 23,863,950 2,192,868
S. A. Muscarnera 21,181,283 4,875,635
Anthony E. Puleo 23,893,545 2,163,373
In addition to electing directors, stockholders:
(i) approved an Incentive Compensation Plan for Executive Officers by a
vote of 15,157,046 votes for and 3,283,946 votes against, with 682,207 shares
abstaining;
(ii) approved a grant of a performance-based award to the Chief Executive
Officer by a vote of 14,740,348 votes for and 3,693,180 votes against, with
689,672 shares abstaining; and
(iii)ratified the appointment of Deloitte & Touche, LLP as the Company's
independent auditors by a vote of 25,579,430 votes for and 360,845 votes
against, with 116,642 shares abstaining.
Broker non-votes on items (c) (i) and (ii) were approximately 6.9 million
shares.
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
No reports on Form 8-K were filed during the three months ended June 30, 2004.
25
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.
August 9, 2004
26