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Nortek Won’t Talk, But The Numbers Will

Executives from Nortek Holdings and its residential custom-install companies won’t pick up the phone to answer some basic questions about Nortek’s debt restructuring, which includes a debt-for-equity swap that will result in new owners and a planned pre-packaged Chapter 11 filing.The experience reminds me of the desperate phone calls that I made to find a high-school prom date. Someone finally picked up the phone and said yes. This time, I’m not so sure.

I’m still waiting for Nortek chairman/CEO Richard Bready and VP/treasurer Ed Cooney – and the executives of some of its subsidiaries – to call back and answer some fundamental questions that could clarify the issues and allay any fears that dealers might have about the future of some of their key suppliers. Those suppliers include many of the major powers in the residential custom-install industry. They include Aton, Channel Plus, Elan, Gefen, Imerge, M&S, Niles, Omnimount, Panamax, SpeakerCraft, Sunfire and Xantech.

All of these companies operate independently of Nortek Holdings, but they all send money to Nortek Holdings to pay off a large amount of debt accumulated by Nortek over the years to acquire those companies at a time when revenues have dipped precipitously because of the collapse in new-home and commercial construction. These companies are part of a stable of Nortek brands that include residential HVAC and ventilation companies, such as Nordyne and Broan-NuTone, and commercial HVAC suppliers, such as Cleanpak, Venmar, Huntair and Eaton-Williams.

I’m sure you’ve struggled to read Nortek’s restructuring-plan statement on the company Web site. The company also posts annual profit and quarterly profit results, even though it’s not a publicly traded company. Let’s try to put it all together.

In short, the company acquired too much debt, not just by acquiring so many respected brands over the year but also by going private in 2003. That year, management and a private investment company purchased Nortek. Then, in 2004, the company changed hands again, with investment company Thomas H. Lee Partners and Nortek management purchasing the company in a transaction valued at $1.75 billion.

Now Nortek can’t service its debt in the face of rapidly declining sales, and it has worked out a debt-for-equity swap with lenders who own most of its debt. The company is now trying to work out a similar arrangement with the rest of its debt holders. If that happens, the company plans a prepackaged Chapter 11 filing to get court approval of the arrangements.

If it all works out, Nortek will have new owners, whose plans for the company’s future aren’t known. If it doesn’t work out, it seems logical that Nortek would consider selling off some brands to raise cash.

Now let’s look at the numbers.

Calendar 2008 financials show that 2008 pretax losses before income taxes came to $819 million compared to 2007 earnings of $3.6 million and 2006 earnings of $104 million. In 2008, the company’s net loss was $844.5 million compared to a 2007 net loss of only $7 million.

Also in 2008, the company posted an operating loss of $574 million, compared to an operating profit of $210 million, as companywide net sales fell 4.2 percent to $2.37 billion, compared to a 2007 gain of 6.8 percent. At the same time, interest expenses rose to $200 million from $184 million.

So far this year, the company continues to lose money. First-half financial results show net sales fell 22 percent to $927 million, operating losses hit $201 million compared to year-ago earnings of $70 million, interest expenses rose to $76 million from $59 million, and net losses hit $278 million compared to a net loss of $400,000. All this comes after cost-reduction measures saved the company an estimated $39.5 million in the first half.

Now let’s take a look at the performance of Nortek’s home-technology brands, excluding residential HVAC and ventilation and Nortek’s commercial brands. Home technology, by the way, accounted for only 23 percent of 2008 companywide sales.

In calendar 2008, combined sales of Nortek’s home technology companies fell by 9.8 percent to $514 million compared to a dramatic 2007 gain of 17.7 percent to $570 million. The home companies posted a combined operating loss in 2008 of $39 million, compared to 2007 operating earnings of $76 million, which was down 9 percent.

In the first half of 2009, home technology sales fell 22 percent to $198.3 million compared to the year-ago half, and the segment posted an operating loss of $246 million compared to year-ago operating earnings of $18 million. The loss includes an estimated non-cash goodwill impairment charge of about $250 million.

Now let’s look at the company’s debt.

In its first- and second-quarter statement, Nortek said that its 2009 principal and interest payments would come to about $164.5 million, most of which was due in the second half, and that 2010 P&I payments would come to $147 million. The company, however, didn’t pay a $26.5 million interest payment due September 1.

As of July 4, the company’s “principal sources of liquidity” were $124 million worth of unrestricted cash and cash equivalents, “cash flow from its subsidiaries,” and subsidiaries’ “unrestricted cash and cash equivalent balances of approximately $47.9 million,” the company said in its second-quarter statement.

To keep operations running, the company said it had $170 million of cash on hand as of Aug. 31 and that it has additional funds available through an asset-based lending facility.

Based on figures in its restructuring announcement, it looks like Nortek’s total debt load is about $2.05 billion for a company whose 2008 sales were $2.37 billion. It also looks like owners of $1.3 billion in debt have agreed to swap their debt for “substantially all of the equity” of the company to get the company out of its jam. It looks like owners of another $750 million in debt, however, haven’t agreed to anything yet, but Nortek is hopeful.

We’ll soon find out if that hope is misplaced.