10-K 1 dec3113_10kntk.htm DECEMBER 31, 2013 FORM 10-K FOR NORTEK, INC 10K 2013


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10 - K
 
(Mark One)
[X]    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year-ended December 31, 2013

OR

[ ]    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________

Commission file number: 001-34697
 
Nortek, Inc.
(Exact name of registrant as specified in its charter)
 
Delaware
 
05-0314991
(State or other jurisdiction
of incorporation or organization)
 
(I.R.S. Employer Identification No.)
 
 
 
50 Kennedy Plaza
Providence, Rhode Island
 
02903-2360
(Address of principal executive offices)
 
(Zip Code)
 
 
 
Registrant's Telephone Number, including Area Code:
 
(401) 751-1600
Securities registered pursuant to Section 12(b) of the Act: None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes [_] No [X]

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Exchange Act. Yes [_] No [X]

Indicate by check mark whether registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [_]

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).     Yes [X]    No [_]

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X]

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer [_]
Accelerated filer [X]
Non-accelerated filer [_]
(Do not check if smaller reporting company)
Smaller reporting company [_]

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [_] No [X]

As of the last business day of the registrant's most recently completed second fiscal quarter (June 29, 2013), the aggregate market value of the registrant's common stock held by non-affiliates was approximately $586.2 million. The registrant's common stock trades on the NASDAQ Global Market under the symbol “NTK”.

Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes [X] No [_]

The number of shares of the registrant's common stock par value $0.01 per share outstanding as of March 7, 2014 was 15,436,960.

Documents incorporated by reference:

Portions of the registrant's definitive Proxy Statement for its 2014 Annual Meeting of Stockholders to be filed with the Securities and Exchange Commission within 120 days after December 31, 2013 are incorporated by reference into Part III of this Annual Report on Form 10-K.




 
TABLE OF CONTENTS
 
 

INFORMATION REGARDING FORWARD-LOOKING STATEMENTS
 
This annual report on Form 10-K contains “forward-looking statements” about Nortek, Inc. ("Nortek") and its subsidiaries (the "Company"). When used in this discussion and throughout this document, words such as “intend,” “plan,” “estimate,” “believe,” “will,” “could,” “may,” “seek,” “anticipate,” and “expect” or other similar expressions are intended to identify forward-looking statements, which are provided "safe harbor" protection under the U.S. Private Securities Litigation Reform Act of 1995. These statements are based on the Company's current plans and expectations and involve risks and uncertainties, over which the Company has no control, that could cause actual future activities and results of operations to be materially different from those set forth in the forward-looking statements. Important factors that could cause actual future activities and operating results to differ include the availability and cost of certain raw materials (including, among others, steel, copper, packaging materials, plastics, resins, glass, wood and aluminum) and purchased components; freight costs; global economic conditions and the level of domestic and foreign construction and remodeling activity affecting residential and commercial markets; interest rates; employment levels; inflation; foreign currency fluctuations; foreign economic and political conditions; consumer spending levels; exposure to foreign economies; the rate of sales growth; prices; competition; maintaining good relationship with customers and suppliers; weather fluctuations; acquisition and integration risks; the success of our operational improvement initiatives; labor disruptions; increased costs associated with regulatory compliance; changes in tax law; our ability to service our indebtedness; and product and warranty liability claims. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof. The Company undertakes no obligation to update publicly any forward-looking statements, whether as a result of new information, future events or otherwise (except as required by applicable securities laws). All subsequent written and oral forward-looking statements attributable to the Company or persons acting on its behalf are expressly qualified in their entirety by these cautionary statements. Readers are also urged to carefully review and consider the various disclosures made by the Company in this annual report on Form 10-K, including without limitation statements in "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the risk factors described in Item 1A, and any further disclosures the Company makes on related subjects in its Form 10-Q and Form 8-K reports filed with the Securities and Exchange Commission (the “SEC”).

WEBSITE ACCESS TO COMPANY REPORTS

Copies of our filings under the Securities Exchange Act of 1934, as amended (the "Exchange Act") (including annual reports on Form 10-K, quarterly reports on Form 10-Q, and current reports on Form 8-K) are available on our website, www.nortekinc.com, free of charge, as soon as reasonably practicable after such materials are filed with, or furnished to, the SEC.

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NORTEK, INC. AND SUBSIDIARIES
December 31, 2013


PART I

ITEM 1.
BUSINESS.
 
General
 
Nortek was founded in 1967 and is headquartered in Providence, Rhode Island. The Company is incorporated in the State of Delaware. In this annual report, “Nortek,” the “Company,” “we,” “us,” and “our” refer to Nortek, Inc. and its wholly-owned subsidiaries unless the context requires otherwise.

Operating within five reporting segments, we are a global, diversified company whose many market-leading brands deliver broad capabilities and a wide array of innovative, technology-driven products and solutions for lifestyle improvement at home and at work. Our reporting segments are as follows:
 
the Residential Ventilation (“RESV”) segment,
the Technology Solutions (“TECH”) segment,
the Display Mount Solutions ("DMS") segment,
the Residential Heating and Cooling (“RHC”) segment, and
the Custom & Engineered Solutions (“CES”) segment.
 
Through these segments, we manufacture and sell, primarily in the United States, Canada, and Europe, with additional manufacturing in China and Mexico, a wide variety of products for the remodeling and replacement markets, the residential and commercial new construction markets, the manufactured housing market, and the personal and enterprise computer markets.

Our performance is significantly impacted by the levels of residential replacement and remodeling activity, as well as the levels of residential and non-residential new construction. New residential and non-residential construction activity and, to a lesser extent, residential remodeling and replacement activity are affected by seasonality and cyclical factors such as interest rates, credit availability, inflation, consumer spending, employment levels and other macroeconomic factors, over which we have no control.
 
Operational Improvement Initiatives
In 2012, Nortek began implementing a plan to transform our structure from that of a largely decentralized holding company to an actively managed operating company. This plan included a set of operational improvement initiatives aimed at improving Nortek’s cost structure and optimizing its operations in order to realize efficiencies and deliver superior value to its customers. Examples of these initiatives, which are underway, include:
Procurement and sourcing,
Manufacturing footprint and distribution optimization,
Leveraging resources and implementing common business practices, and
Working capital management.

We are pursuing these various initiatives in order to improve Nortek’s performance and enhance its competitive position. These initiatives are expected to result in a significantly improved cost structure, align us better in the markets we serve, and create a foundation for growth and sustainable competitive advantage well into the future. For additional detail related to these initiatives, refer to “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources - Operational Improvement Initiatives,” in Item 7 of Part II to this report.
In addition to the above initiatives, which primarily relate to existing operations and organic growth, Nortek has implemented a strategy related to the process by which we evaluate and pursue strategic acquisitions. We plan to pursue acquisitions that are highly synergistic, have a strong strategic rationale, and meet or exceed internal financial hurdles; this focused approach to growth is expected to result in improved value creation for Nortek’s stockholders.

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NORTEK, INC. AND SUBSIDIARIES
December 31, 2013

The Company’s Business Segments
 
Segment
 
Primary Products
 
Major Brands(1)
 
2013 Net
Sales(2)(3)
 
 
 
 
 
 
 
Residential Ventilation
 
Range hoods, exhaust fans, indoor air quality products, central vacuum systems
 
Broan®, NuTone®, Venmar®, Best®, Zephyr®
 
$
600.5

 
 
 
 
 
 
 
Technology Solutions
 
Residential security and home automation systems, audio/video products, power conditioners, video signal management solutions
 
Linear®, 2GIG, Niles®, Elan®, SpeakerCraft®, Panamax®, TVOne®
 
526.9

 
 
 
 
 
 
 
Display Mount Solutions
 
Wall and desk mounts, carts, arms, workstations, stands, related accessories
 
Ergotron®, OmniMount®
 
274.5

 
 
 
 
 
 
 
Residential Heating & Cooling
 
Split-system and packaged air conditioners and heat pumps, air handlers, furnaces
 
Frigidaire®, Gibson®, Westinghouse®, Maytag®, Broan®, NuTone®, Intertherm®
 
415.2

 
 
 
 
 
 
 
Custom & Engineered Solutions
 
Custom-designed and engineered heating, ventilation and air conditioning ("HVAC") products, including air handlers and large rooftop cooling and heating systems
 
Mammoth®, Temtrol®, Ventrol®, Huntair®, Governair®, Cleanpak™, Fanwall®, Vapac®, Edenaire®
 
470.8

 
 
 
 
 
 
 
 
 
 
 
Total
 
$
2,287.9


(1)Certain brands in the RHC Segment are used under license. See the detailed segment description below for details.
(2)Amounts in millions
(3)
Additional financial information on our reporting segments, as well as foreign and domestic operations, is set forth in Note 9, “Segment Information and Concentration of Credit Risk”, to the consolidated financial statements, Item 8 of Part II to this report.

Residential Ventilation Segment
 
Our RESV segment primarily manufactures and distributes room and whole house ventilation products for the professional remodeling and replacement markets, residential new construction market, and do-it-yourself (“DIY”) market. Based on internal research and analysis, we estimate that approximately 69% to 73% of the segment's 2013 net sales were sold for remodeling and replacement applications versus residential new construction. We sell the products in our RESV segment to distributors and dealers of electrical and lighting products, kitchen and bath dealers, retail home centers and private label customers.

The principal products of the segment, which are sold under the Broan®, NuTone®, Venmar®, Best® and Zephyr® brand names, among others, are kitchen range hoods, exhaust fans (such as bath fans and fan, heater and light combination units), and indoor air quality products (such as air exchangers and heat or energy recovery ventilators). Based on internal research and industry knowledge, we believe that we are one of the world's largest suppliers of residential range hoods and exhaust fans and are the largest supplier of these products in North America, in each case, based on revenues. We also believe, based on internal research and industry knowledge, that we are one of the leading suppliers in North America of indoor air quality products, based on revenues.

A key component of our operating strategy for this segment is the introduction of new products and innovations, which capitalize on the strong brand names and the extensive distribution system of the segment's businesses. We believe that new product introductions and the breadth and depth of our product lines help us to maintain and improve our market position for our principal products. We compete with suppliers of competitive products primarily on the basis of quality, distribution, delivery and price. This segment's primary products compete with products supplied by many domestic and international suppliers in various markets. In the range hood market, this segment's primary global competitors are Elica Group, Faber S.p.A. and Cata Electrodomesticas S.L. This segment competes with Panasonic Corporation, among others, in the residential exhaust fan market.


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NORTEK, INC. AND SUBSIDIARIES
December 31, 2013

Technology Solutions Segment
 
Our TECH segment manufactures and distributes a broad array of products designed to provide convenience and security for residential and certain commercial applications. The principal product categories in this segment include security and access control equipment and systems, residential audio/video and home automation solutions, and professional video signal management solutions.

The segment's security and access control products include residential and certain commercial intrusion protection systems and components focused on wireless technology such as control panels, keypads and telephone entry systems, radio transmitters, window and door contacts, and lighting control devices as well as garage and gate operators. These products are sold under the Linear®, 2GIG, SecureWireless, GTO/PRO®, and Mighty Mule® brands, as well as others including private labels for certain customers. Sales of security and access control products accounted for approximately 66%, 53% and 54% of total TECH segment net sales in 2013, 2012 and 2011, respectively.

The segment's residential audio/video and home automation solutions include whole-house audio/video products, and home automation systems as well as certain accessories often used with these systems such as power conditioners and surge protectors. Whole-house audio/video products include, among other products, multi-room/multi-source controllers and amplifiers, architectural speakers, and control devices such as keypads, remote controls and volume controls. The segment's home automation systems include software and hardware that facilitate the control of third-party residential subsystems such as home theater, whole-house audio, climate control, lighting, security and irrigation. These products are sold under the Niles®, Elan®, SpeakerCraft®, Xantech®, Panamax® and Furman® brand names, among others.

The segment's professional video signal management solutions allow conversion of video signals into various formats as well as the extension and transmission of video signals to multiple display screens. These products are often used in non-residential applications such as retail outlets, airports, casinos, houses of worship, live events, and command and control centers as well as certain residential applications and are sold under the Gefen®, Magenta™ and TVOne® brand names.

We sell the products in our TECH segment to distributors, professional installers, electronics retailers and original equipment manufacturers. Sales in this segment are primarily driven by replacement applications, new installations in existing properties and to a lesser extent new construction activity. In addition, a portion of the sales in this segment is driven by sales to customers in the non-residential market. Based on internal analysis, we estimate that in 2013, approximately 87% to 91% of this segment's net sales were attributable to end-use applications not related to residential new construction.

The segment offers a broad array of products under widely-recognized brand names with various features and price points, which we believe allows it to expand its distribution in the professional installation and retail markets. The segment's primary products compete with products supplied by many domestic and international suppliers in various markets. The segment competes with Honeywell Security (owned by Honeywell International, Inc.), Interlogix (owned by United Technologies Corporation), and DSC (owned by Tyco International Ltd.), among others. The segment also competes with Crestron Electronics, Inc. as well as two portfolio companies of Duchossois Industries, Inc., Chamberlain Corporation, and AMX LLC. The segment competes with suppliers of competitive products primarily on the basis of quality, distribution, delivery and price.


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NORTEK, INC. AND SUBSIDIARIES
December 31, 2013

Display Mount Solutions Segment
 
Our DMS segment manufactures and distributes a broad array of innovative products designed with ergonomic features including wall mounts, carts, arms, desk mounts, workstations, and stands that attach to or support a variety of display devices such as notebook computers, computer monitors, and flat panel displays. Many of these products are offered with features that allow users to comfortably sit or stand while working at a computer. The segment also sells charging carts designed for notebook computers and tablet devices.

These products are sold under the Ergotron® and OmniMount® brand names, as well as certain original equipment manufacturer brand names in the personal computer industry. We sell the products in our DMS segment to distributors, retailers and original equipment manufacturers. Through these channels, the segment serves the healthcare, education, office, hospitality and home markets. Sales in this segment are primarily driven by personal computer and information technology ("IT") spending and consumer purchases of flat-panel televisions as well as attachment of our products to existing computer and television displays.

The segment offers innovative products under its strong brands, and at competitive prices, which we believe allows it to expand its distribution and its relationships with original equipment manufacturer customers. Another key component of our strategy in this segment is the continuous introduction of new products that capitalize on our well-known brands and strong customer relationships.

The segment's primary products compete with products supplied by many domestic and international suppliers in various markets. The segment competes with Milestone AV Technologies (sells under the Chief and Sanus brand names), Peerless Industries, Inc., and Rubbermaid Medical Solutions, a division of Newell Rubbermaid, Inc., among others. The segment competes with suppliers of competitive products primarily on the basis of quality, innovation, price, and delivery.

Residential Heating and Cooling Segment
 
Our RHC segment principally manufactures and sells split-system and packaged air conditioners and heat pumps, air handlers, furnaces and related equipment, accessories, and parts for the residential replacement and new construction markets, as well as for certain commercial markets. During 2013, we estimate that between approximately 78% and 82% of this segment's net sales were attributable to applications other than the residential new site-built construction market. For site-built homes and certain commercial structures, the segment markets its products under the licensed brand names Frigidaire®, Tappan®, Philco®, Kelvinator®, Gibson®, Westinghouse® and Maytag®. The segment also supplies products to certain of its customers under the Broan®, NuTone®, Mammoth® and certain private label brand names.

The segment sells residential HVAC products for use in site-built homes primarily through independently owned distributors who sell to HVAC contractors. In 2013, the segment opened three of its own distribution centers in certain markets where it was geographically underrepresented. Building on this distribution strategy, the segment plans to expand its efforts in this area in 2014 and beyond. In the site-built residential HVAC market, the segment competes with, among others, Carrier Corporation (a subsidiary of United Technologies Corporation), Rheem Manufacturing Company, Lennox Industries, Inc., Trane, Inc. (a subsidiary of IngersollRand Company), York by Johnson Controls, and Goodman Global, Inc. (a subsidiary of Daikin Corporation). The segment also sells residential HVAC products outside of North America, primarily in Latin America and the Middle East. These sales outside of North America consist of not only the segment's manufactured products, but also products manufactured to specification by outside sources. The products are sold under the Westinghouse® licensed brand name, the segment's own Miller® brand name, as well as other private label brand names.

Within the residential market, we are one of the largest suppliers of HVAC products for manufactured homes in the United States and Canada. In the manufactured housing market, the segment markets its products under the Intertherm® and Miller® brand names. The segment sells its manufactured housing products to builders of manufactured housing and, through distributors, to manufactured housing retailers and owners. The majority of our sales to manufactured housing builders are for furnaces, and in the aftermarket channel of distribution, we sell both new and replacement air conditioning units and heat pumps, as well as replacement furnaces. We believe that we have one major competitor in the manufactured housing furnace market, York by Johnson Controls, which markets its products primarily under the “Coleman” name. The segment competes with most major industry manufacturers in the manufactured housing air conditioning market.

The segment competes in both the site-built and manufactured housing markets on the basis of breadth and quality of its product line, distribution, product availability and price.

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NORTEK, INC. AND SUBSIDIARIES
December 31, 2013

Custom & Engineered Solutions Segment
 
Our CES segment manufactures and sells custom-designed and engineered HVAC products and systems, primarily in North America, for non-residential applications that include healthcare and educational facilities, commercial buildings, manufacturing facilities, clean rooms, data centers, and government buildings. These systems are designed primarily to operate on building rooftops (including large self-contained walk-in units), or on individual floors within a building, and to have cooling capacities ranging from 40 tons to 600 tons. The principal products sold by this segment are air handlers and large custom rooftop cooling and heating products. The segment markets its commercial HVAC products under the Governair®, Mammoth®, Temtrol®, Venmar CES™, Ventrol®, Webco™, Huntair®, Cleanpak™ and Fanwall® brand names. Our subsidiary, Eaton-Williams Group Limited, manufactures and markets custom and standard air conditioning and humidification equipment throughout Western Europe under the Vapac®, Cubit®, Qualitair®, Edenaire®, Colman™ and Moducel™ brand names. For 2013, we estimate that between approximately 49% and 53% of our air conditioning and heating product commercial sales came from replacement and retrofit activity, which typically is less cyclical than new construction activity and generally commands higher margins.

The segment specializes in custom-designed and engineered HVAC products and systems that meet the specific requirements of its customers and optimize total cost of ownership in ways that are often not possible with standard commercial equipment. Unlike standard commercial HVAC equipment, the segment's equipment can be designed to match a customer's exact space, capacity and performance requirements. The segment's commercial HVAC products are marketed through independent manufacturers' representatives, as well as other sales, marketing and engineering professionals. The independent representatives are typically HVAC engineers, a factor which is significant in marketing the segment's products because of the design-intensive nature of the market segment in which the segment competes. The segment sells its custom designed and engineered HVAC products and systems to contractors, owners and developers of commercial office buildings, manufacturing and educational facilities, hospitals, retail stores, clean rooms, data centers, and government buildings. The segment seeks to maintain, as well as establish and develop, strong relationships nationwide with design engineers, owners and developers, and the persons who are most likely to value the benefits and long-term cost efficiencies of its equipment.

We believe that we are among the largest suppliers of custom and engineered HVAC products in the United States. The segment's four largest competitors in this market are Carrier Corporation (a subsidiary of United Technologies Corporation), York by Johnson Controls, McQuay International (a subsidiary of Daikin Corporation) and Trane, Inc. (a subsidiary of Ingersoll-Rand Company). The segment competes primarily on the basis of engineering support, quality, design and construction flexibility, and total installed system cost. We believe that our ability to produce equipment that meets the performance characteristics required by the particular product application provides us with an advantage in the marketplace.

 
Manufacturing Facilities

The number of manufacturing facilities by segment at December 31, 2013 was as follows:

Segment
 
Number of
Manufacturing Facilities
 
 
 
Residential Ventilation
 
11
 
 
 
Technology Solutions
 
3
 
 
 
Display Mount Solutions
 
3
 
 
 
Residential Heating and Cooling (1)
 
4
 
 
 
Custom & Engineered Solutions (1)
 
11

(1)
See also "Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources - Operational Improvement Initiatives", in Item 7 of Part II, to this report.


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NORTEK, INC. AND SUBSIDIARIES
December 31, 2013

Backlog
 
Backlog expected to be filled within the next twelve months was approximately $344.4 million as of December 31, 2013 as compared to approximately $315.8 million as of December 31, 2012. The increase in backlog at December 31, 2013 as compared to December 31, 2012 was primarily due to increased backlog within the CES Segment primarily related to one large customer.
 
Backlog is not regarded as a significant factor for operations where orders are generally for prompt delivery. While backlog stated for all periods is believed to be firm, as all orders are supported by either a purchase order or a letter of intent, the possibility of cancellations makes it difficult to assess the firmness of backlog with certainty, and therefore there can be no assurance that our backlog will result in actual revenues.
 
Raw Materials and Components
 
We purchase raw materials and most components used in our various manufacturing processes. The principal raw materials and components we purchase are steel, copper, aluminum, electronics, motors, plastics, compressors, various chemicals and paints, and packaging.
 
The materials, molds and dies, subassemblies and components purchased from other manufacturers, and other materials and supplies used in our manufacturing processes have generally been available from a variety of sources. From time to time the cost and availability of raw materials is affected by the raw material demands of other industries, among other factors. Whenever practical, we establish multiple sources for the purchase of raw materials and components to achieve competitive pricing, ensure flexibility, and protect against supply disruption. When possible, we employ a company-wide procurement strategy designed to reduce the purchase price of raw materials and purchased components.
 
As discussed in "Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources - Operational Improvement Initiatives", Item 7 of Part II to this report, in connection with our operational improvement initiatives, we believe that we have a significant opportunity to reduce our manufacturing material cost, as well as our indirect non-manufacturing costs, by optimizing our procurement sources and processes. In 2013, we began the process of consolidating supplier sources and negotiating terms and pricing in a uniform and centralized manner.  As a result of this initiative, we have begun to experience more competitive costs and services from our suppliers, and we expect this favorable trend will continue in 2014 and beyond.

We are subject to significant market risk with respect to the pricing of the principal raw materials used to manufacture our products. If prices of these raw materials were to increase dramatically, we may not be able to pass such increases on to our customers and, as a result, gross margins could decline significantly.

Research and Development
 
Our research and development activities are principally for new product development and represented approximately 2.9%, 2.7% and 2.7% of consolidated net sales for 2013, 2012 and 2011, respectively. We believe that investment in research and development activities is important to our ability to compete effectively in the markets that we serve. As discussed in "Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources - Operational Improvement Initiatives", Item 7 of Part II to this report, in connection with our operational improvement initiatives we have or plan to make significant increased levels of investments in staffing, research and development projects and specialized consulting resources. Consequently, expenditures for research and development activities in 2013 were a higher percentage of consolidated net sales than previously, and we expect this trend to continue in 2014 and beyond.
 

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NORTEK, INC. AND SUBSIDIARIES
December 31, 2013

Trademarks and Patents
 
We own or license numerous trademarks that we use in the marketing of our products. Certain of the trademarks we own are particularly important in the marketing of our products. We also hold numerous design and process patents, but no single patent is material to the overall conduct of our business. It is our policy to obtain and protect patents whenever such action would be beneficial to us.
 
Environmental and Regulatory Matters
 
We are subject to numerous federal, state, local and foreign laws and regulations relating to protection of the environment, including those that impose limitations on the discharge of pollutants into the environment (land, air and water), establish standards for the use, treatment, storage and disposal of solid and hazardous materials and wastes, and govern the cleanup of contaminated sites. We believe that we are in substantial compliance with the material laws and regulations applicable to us. We are involved in current, and may become involved in future, remedial actions under federal and state environmental laws and regulations which impose liability on companies to clean up, or contribute to the cost of cleaning up, sites currently or formerly owned or operated by such companies or sites at which their hazardous wastes or materials were disposed of or released. Such claims may relate to properties or business lines acquired by us after a release has occurred. In other instances, we may be partially liable under law or contract to other parties that have acquired businesses or assets from us for past practices relating to hazardous materials or wastes. Expenditures for 2013, 2012 and 2011 to evaluate and remediate such sites were not material to our business, either individually or collectively. While we are able to reasonably estimate certain of our contingent losses, we are unable to estimate with certainty our range of reasonably possible losses in connection with identified or yet to be identified remedial actions due, among other reasons, to: (i) uncertainties surrounding the nature and application of current or future environmental regulations, (ii) our lack of information about additional sites where we may be identified as a potentially responsible party ("PRP"), (iii) the level of clean-up that may be required at specific sites and choices concerning the technologies to be applied in corrective actions and (iv) the time periods over which remediation may occur. Furthermore, since liability for site remediation may be joint and several, each PRP is potentially wholly liable for other PRPs that become insolvent or bankrupt. Thus, the solvency of other PRPs could directly affect our ultimate aggregate clean-up costs. In certain circumstances, our liability for clean-up costs may be covered in whole or in part by insurance or indemnification obligations of third parties.
 
Certain of our products must be designed and manufactured to meet various regulatory standards. We must continue to modify regulated products to meet applicable standards as such standards develop and become more stringent over time.


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NORTEK, INC. AND SUBSIDIARIES
December 31, 2013

Employees
 
The number of full-time employees, and those covered by collective bargaining agreements, by segment at December 31, 2013 was as follows:

Segment
 
Number of
Employees
 
Collective Bargaining Agreement
 
 
 
 
 
Residential Ventilation (1) (2)
 
2,100

 
155
Technology Solutions
 
2,400

 
0
Display Mount Solutions
 
1,400

 
0
Residential Heating and Cooling
 
1,100

 
0
Custom & Engineered Solutions (3)
 
2,500

 
149
Corporate
 
100

 
0
 
 
9,600

 
304

(1)
Due to continued restructuring at our Italian range hood subsidiary, 68 employees have been excluded from the above table as the union contract associated with this subsidiary has not been renewed. See Note 5, "Exit and Disposal Activities", to the consolidated financial statements, Item 8 of Part II, included elsewhere in this report.
(2)
Collective bargaining agreement expired on December 31, 2013 and is in the process of being renewed.
(3)
Collective bargaining agreement expires in 2015.

We believe that our relationships with employees are satisfactory. A work stoppage at one of our facilities could cause us to lose sales and incur increased costs and could adversely affect our ability to meet customers’ needs. As agreements expire and until negotiations are completed, we do not know whether we will be able to negotiate collective bargaining agreements on the same or more favorable terms as the current agreements, or at all, and do so without production interruptions, including labor stoppages.
 
Working Capital and Seasonality
 
The carrying of inventories to support customers and to permit prompt delivery of finished goods requires substantial working capital. Substantial working capital is also required to carry receivables. The demand for our products is seasonal, particularly in the Northeast and Midwest regions of the United States and in Canada where inclement weather during the winter months usually reduces the level of building and remodeling activity in both the home improvement and new construction markets. Certain of the residential product businesses in the RHC segment have in the past been more seasonal in nature than our other businesses’ product categories. As a result, the demand for working capital of our subsidiaries is greater from late in the first quarter until early in the fourth quarter. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources,” Item 7 of Part II to this report.

As discussed in "Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources - Operational Improvement Initiatives", Item 7 of Part II to this report, in 2012, we began operational improvement initiatives which we expect will result in significant improvements in efficiencies and reductions in operating costs and expenses, both in our manufacturing processes and in our administrative functions, which will better align us with the markets we serve and will improve our overall competitiveness. In 2013, we incurred additional costs to implement these initiatives, which included engaging additional outside resources, the cost of relocating manufacturing and distribution locations in addition to the facilities discussed above, retrofitting existing or building new facilities, reducing our work force, rationalizing or refreshing product lines, and other costs.  The cost of developing and implementing these initiatives impacted the availability of working capital in 2013 and may continue to impact the availability of working capital, and may require that we utilize other available sources or identify additional sources of liquidity during the period that these initiatives are in process.


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NORTEK, INC. AND SUBSIDIARIES
December 31, 2013

ITEM 1A.
RISK FACTORS.
 

This section describes the material risks associated with our business. Investors should carefully consider each of the risks described below, as well as the other information in this report and in our filings with the SEC. The occurrence of any of the following risks could individually or in the aggregate have a material adverse effect on our business, prospects, financial condition, results of operation or cash flow.

 
Risks Related to Our Business:
 
Our business is affected by global economic conditions.

 
Our results of operations are directly influenced by the conditions in the global economy. As a result of the global economic recession, U.S. and foreign economies have experienced significant declines in employment, household wealth, property values, consumer spending and lending. Businesses, including Nortek and many of its customers, have faced and may continue to face weakened demand for products and services, difficulty obtaining access to financing, increased funding costs and barriers to expanding operations. Our results of operations have been negatively impacted by the global economic recession and we can provide no assurance that our results of operations will improve.

 
Our business is dependent upon the levels of remodeling and replacement activity and new construction activity, which may be cyclical or seasonal, and have been negatively impacted by the economic downturn and the instability of the credit markets.

 
Critical factors affecting our future performance, including our level of sales, profitability and cash flows are the levels of residential and non-residential remodeling, replacement and construction activity. The level of new residential and non-residential construction activity and, to a lesser extent, the level of residential remodeling and replacement activity are affected by seasonality and cyclical factors such as interest rates, inflation, consumer spending, employment levels and other macroeconomic factors, over which we have no control. Any decline in economic activity as a result of these or other factors typically results in a decline in new construction and, to a lesser extent, residential remodeling and replacement purchases, which would result in a decrease in our sales, profitability and cash flows. Instability in the credit and financial markets, troubles in the mortgage market, the level of unemployment and the decline in home values could have a negative impact on residential new construction activity, consumer disposable income and spending on home remodeling and repair expenditures. These challenging market conditions are expected to continue for the foreseeable future and may further deteriorate. These factors could have an adverse effect on our operating results.

The demand for our products is seasonal, particularly in the Northeast and Midwest regions of the United States where inclement weather during the winter months usually reduces the level of building and remodeling activity in both the home improvement and new construction markets. Our lower sales levels usually occur during the first and fourth quarters. Since a high percentage of our manufacturing overhead and operating expenses are relatively fixed throughout the year, operating income and net earnings tend to be lower in quarters with lower sales levels. In addition, the demand for cash to fund the working capital needs of our subsidiaries is greater from late in the first quarter until early in the fourth quarter.
 

See “Management's Discussion and Analysis of Financial Condition and Results of Operations”, Item 7 of Part II to this report for further information on industry factors and our 2014 outlook.


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NORTEK, INC. AND SUBSIDIARIES
December 31, 2013

Fluctuations in the cost or availability of raw materials and components and other related costs could have an adverse effect on our business.
 

We are dependent upon raw materials and purchased components, including, among others, steel, copper, aluminum, electronics, motors, plastics, compressors, various chemicals and paints, and packaging that we purchase from third parties. As a result, our results of operations, cash flows and financial condition may be adversely affected by increases in costs of raw materials or components, or by limited availability of these items. We do not typically enter into long-term supply contracts for raw materials and components. In addition, we generally do not hedge against our supply requirements. Accordingly, we may not be able to obtain raw materials and components from our current or alternative suppliers at reasonable prices in the future, or may not be able to obtain these items on the scale and within the time frames we require. Further, if our suppliers are unable to meet our supply requirements, we could experience supply interruptions and/or cost increases. If we are unable to find alternate suppliers or pass along these additional costs to our customers, these interruptions and/or cost increases could adversely affect our results of operations, cash flows and financial condition.
 

Sources of raw materials or component parts for certain of our operations may be dependent upon limited or sole sources of supply which may impact our ability to manufacture finished product. While we continually review alternative sources of supply, there can be no assurance that we will not face disruptions in sources of supply which could adversely affect our results of operations, cash flows and financial position.

Continued strategic sourcing initiatives and other improvements in manufacturing efficiency, as well as sales price increases, help to mitigate fluctuations in these costs. However, there can be no assurance that we will be able to offset any or all material or other cost increases in any future periods.

New regulations related to conflict minerals could require us to incur significant additional expenses.

Pursuant to the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, the SEC promulgated new rules for public companies to ascertain and disclose the use of "conflict minerals" (i.e., cassiterite, columbite-tantalite, wolframite, and gold) which are mined from the Democratic Republic of Congo and adjoining countries in their products. The new rules require disclosure of conflict minerals that are necessary to the functionality or production of products manufactured or contracted to be manufactured by public companies. The new rule requires companies to perform due diligence and disclose through the issuance of a report whether or not their products contain certain "conflict minerals". The new requirements have required us to conduct due diligence efforts and incur associated costs for the 2013 calendar year. Initial disclosure, if any, will be required beginning in May 2014. The new rule could affect sourcing at competitive prices and availability in sufficient quantities of certain minerals used in the manufacture of our products. The number of suppliers who provide conflict-free minerals may be limited, which could have an adverse effect on our ability to source these products in the future. In addition, costs attributable to compliance with the disclosure requirements of the SEC's new rules, such as costs related to determining the source of certain minerals used in our products, will be incurred and could be material. The costs of compliance, including those related to supply chain research, unexpected consequences to our reputation, the limited number of suppliers, and possible changes in the sourcing of these materials, could adversely affect our results from operations and cash flows.

Weather fluctuations may negatively impact our business.
 
Weather fluctuations may adversely affect our operating results and our ability to maintain sales volume. In our RHC segment, operations may be adversely affected by unseasonably warm weather in the months of November to February and unseasonably cool weather in the months of May to August, which has the effect of diminishing customer demand for heating and air conditioning products. In all of our segments, adverse weather conditions at any time of the year may negatively affect overall levels of new construction and remodeling and replacement activity, which in turn may lead to a decrease in sales. Many of our operating expenses are fixed and cannot be reduced during periods of decreased demand for our products. Accordingly, our results of operations and cash flows will be negatively impacted in quarters with lower sales due to weather fluctuations.
 

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NORTEK, INC. AND SUBSIDIARIES
December 31, 2013

If we fail to identify suitable acquisition candidates or successfully integrate the businesses we have acquired or will acquire in the future, our business could be negatively impacted.
 
Historically, we have engaged in a significant number of acquisitions, and those acquisitions have contributed significantly to our growth in sales and operating results. However, we cannot provide assurance that we will continue to locate and secure acquisition candidates on terms and conditions that are acceptable to us. If we are unable to identify attractive acquisition candidates, our growth could be impaired. Acquisitions involve numerous risks, including:
 
the difficulty and expense that we incur in connection with the acquisition, including those acquisitions that we pursue but do not ultimately consummate;
the difficulty and expense that we incur in the subsequent integration of the operations of the acquired company into our operations;
adverse accounting consequences of conforming the acquired company’s accounting policies to our accounting policies;
the difficulties and expense of developing, implementing and monitoring systems of internal controls at acquired companies, including disclosure controls and procedures and internal controls over financial reporting;
the difficulty in operating acquired businesses;
the diversion of management’s attention from our other business concerns;
the potential loss of customers or key employees of acquired companies;
the impact on our financial condition due to the timing of the acquisition or the failure to meet operating expectations for the acquired business; and
the assumption of unknown liabilities of the acquired company.
 
We cannot assure you that any acquisition we have made or may make in the future will be successfully integrated into our on-going operations or that we will achieve any expected cost savings from any acquisition. If the operations of an acquired business do not meet expectations, our profitability and cash flows may be impaired and we may be required to restructure the acquired business or write-off the value of some or all of the assets of the acquired business.

See Note 2, "Acquisitions and Other Investments", to the consolidated financial statements, Item 8 of Part II, included elsewhere in this report.
 
The operational improvement initiatives may not generate the benefits expected.

In 2012, we began to develop and implement a comprehensive operational improvement program which includes a number of transformational operational improvement initiatives intended to produce significant improvements in efficiencies and reductions in operating costs and expenses, both in our manufacturing processes and in our administrative functions.  The initiatives will result in significant investments and capital expenditures through 2015. Restructurings, facility shutdowns and integration of operations involve numerous risks in their implementation including unforeseen costs, business disruption and management distraction, among others, and may be more costly than expected. As a result, there can be no assurance that the expected costs to be incurred in connection with these initiatives, or the economic benefits expected to be achieved, will occur as contemplated.

See "Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources - Operational Improvement Initiatives", Item 7 of Part II to this report for a description of these operational improvement initiatives and the estimated costs associated therewith.


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NORTEK, INC. AND SUBSIDIARIES
December 31, 2013

We continue to evaluate potential restructurings, business shutdowns and integrations focused on improving future cash flows of the business.

We continue to evaluate potential restructurings, business shutdowns and integrations focused on improving future cash flows of the business. These restructurings, business shutdowns and integrations involve numerous risks in their implementation including unforeseen costs, business disruption, management distraction, and potential asset impairment, among others, and may be unsuccessful. In addition, restructurings of international operations may be more costly due to differing labor laws, business practices and governmental restrictions, processes and requirements.

See "Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources - Operational Improvement Initiatives", Item 7 of Part II to this report, and Note 5, "Exit and Disposal Activities", to the consolidated financial statements, Item 8 of Part II, included elsewhere in this report.

Because we compete against competitors with substantially greater resources, we face external competitive risks that may negatively impact our business.
 
Our RESV and TECH segments compete with many domestic and international suppliers in various markets. We compete with suppliers of competitive products primarily on the basis of quality, distribution, delivery and price. Some of our competitors in these markets have greater financial and marketing resources than that of our RESV and TECH segments.

Our DMS segment competes with many domestic and international suppliers in various markets. We compete with suppliers of competitive products primarily on the basis of quality, innovation, price and delivery. Some of our competitors in these markets have greater financial and marketing resources than that of our DMS segment.

Our RHC segment competes in both the site-built and manufactured housing markets on the basis of breadth and quality of its product line, distribution, product availability and price. Most of our residential HVAC competitors have greater financial and marketing resources and the products of certain of our competitors may enjoy greater brand awareness than our residential HVAC products.
 
Our CES segment competes primarily on the basis of engineering support, quality, design and construction flexibility, and total installed system cost. Most of our competitors in the commercial HVAC market have greater financial and marketing resources and enjoy greater brand awareness than we enjoy.
 
Competitive factors could require us to reduce prices or increase spending on product development, marketing and sales, either of which could adversely affect our operating results.
 

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NORTEK, INC. AND SUBSIDIARIES
December 31, 2013

Because we have substantial operations outside the United States, we are subject to the economic and political conditions of the United States and foreign nations.
 
We have manufacturing facilities in several countries outside of the United States. In 2013, we sold products in over 100 countries other than the United States. Foreign net sales, which are attributed based upon the location of our subsidiary responsible for the sale, were approximately 17% and 19% of consolidated net sales for 2013 and 2012, respectively. Our foreign operations are subject to a number of risks and uncertainties, including the following:
 
foreign governments may impose limitations on our ability to repatriate funds;
foreign governments may impose withholding or other taxes on remittances and other payments to us, or the amount of any such taxes may increase;
an outbreak or escalation of any insurrection, armed conflict or act of terrorism, or other forms of political, social or economic instability, may occur;
natural disasters may occur, and local governments may have difficulties in responding to these events;
the United States and foreign governments currently regulate import and export of our products and those of our suppliers and may impose additional limitations on imports or exports of our products or the products of our suppliers;
foreign governments may nationalize foreign assets or engage in other forms of governmental protectionism;
foreign governments may impose or increase investment barriers, customs or tariffs, or other restrictions affecting our business;
development, implementation and monitoring of systems of internal controls of our international operations, including disclosure controls and procedures and internal controls over financial reporting, may be difficult and expensive; and
labor cost inflation and changes in labor practices.
 
The occurrence of any of these conditions could disrupt our business in particular countries or regions of the world, or prevent us from conducting business in particular countries or regions, which could reduce sales and adversely affect profitability. In addition, we rely on dividends and other payments or distributions from our subsidiaries, including our foreign subsidiaries, to meet our debt obligations. If foreign governments impose limitations on our ability to repatriate funds or impose or increase taxes on remittances or other payments to us, the amount of dividends and other distributions we receive from our foreign subsidiaries could be reduced, which could reduce the amount of cash available to us to meet our debt obligations.
 
Our foreign operations are subject to anti-corruption laws.

The U.S. Foreign Corrupt Practices Act, the UK Bribery Act and similar worldwide anti-corruption laws generally prohibit companies and their intermediaries from making improper payments to government officials and others for the purpose of obtaining or retaining business. Our internal policies mandate compliance with these anti-corruption laws. We operate in parts of the world that have experienced governmental corruption to some degree, and in certain circumstances, strict compliance with anti-corruption laws may conflict with local customs and practices. Despite our training and compliance programs, there can be no assurance that our internal control policies and procedures will protect us from reckless or criminal acts committed by those of our employees or agents who violate our policies. Our continued expansion outside the U.S. (including in developing countries) in connection with our growth strategy could increase the risk of such violations in the future. Violations of these laws, or allegations of such violations, could disrupt our business and result in a material adverse effect on our financial condition, results of operations and cash flows.

An ongoing European debt crisis could have a material adverse effect on our European operations.

The European debt crisis and related European financial restructuring efforts have contributed to instability in the global credit markets and may cause the value of the Euro to further deteriorate. If global economic and market conditions, or economic conditions in Europe, the United States or other key markets become uncertain or deteriorate, the value of the Euro could decline and the credit market may weaken. The general financial instability in the stressed European countries could have a contagion effect on the region and contribute to the general instability and uncertainty in the European Union. If this were to occur, it could adversely affect our European customers and suppliers and in turn may have a materially adverse effect on our European business and results of operations.


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NORTEK, INC. AND SUBSIDIARIES
December 31, 2013

Economic instability could continue to adversely affect the company.

Financial markets and the economies in the United States and internationally may continue to experience disruption and volatility as they have in recent years and conditions could worsen. As a result, the economic environment may, among other things:

create downward pressure on the pricing of our products;
affect the collection of accounts receivable in countries such as Greece, Italy, Spain, Portugal and certain other countries in Europe;
increase the sales cycle for certain of our products;
slow the adoption of new technology;
adversely affect our customers, causing them to reduce spending and/or decrease utilization of our products;
adversely affect our suppliers, which could disrupt our ability to produce our products; and
limit our access to capital on terms acceptable to us.

These conditions may continue in the future. Any of these conditions could have a material adverse effect on our business, results of operations, financial condition and/or liquidity.

Fluctuations in currency exchange rates could adversely affect our revenues, profitability and cash flows.
 
Our foreign operations expose us to fluctuations in currency exchange rates and currency devaluations. We report our financial results in U.S. dollars, but a portion of our sales and expenses are denominated in Euros, Canadian dollars, Chinese Renminbi and other foreign currencies. As a result, if the value of the U.S. dollar increases relative to the value of the Euro, Canadian dollar, Chinese Renminbi and other currencies, our levels of revenue and profitability will decline since the translation of a certain number of other currencies into U.S. dollars for financial reporting purposes will represent fewer U.S. dollars. Conversely, if the value of the U.S. dollar decreases relative to the value of the Euro, Canadian dollar, Chinese Renminbi and other currencies, our levels of revenue and profitability will increase since the translation of a certain number of other currencies into U.S. dollars for financial reporting purposes will represent additional U.S. dollars.

In certain instances, we enter into transactions that are denominated in a currency other than the U.S. dollar. At the date the transaction is recognized, each asset, liability, revenue, expense, gain or loss arising from the transaction is measured and recorded in U.S. dollars using the exchange rate in effect at that date. At each balance sheet date, recorded monetary balances denominated in a currency other than the U.S. dollar are adjusted to the U.S. dollar using the current exchange rate with gains or losses recorded in currency translation adjustment and other, net. In addition, in the case of sales to customers in certain locations, our sales are denominated in U.S. dollars, Euros or Canadian dollars but all or a substantial portion of our associated costs are denominated in a different currency. As a result, changes in the relative values of U.S. dollars, Euros, Canadian dollars and Chinese Renminbi and any such different currency will affect our profitability and cash flows.

Varying international business practices may adversely impact our business and reputation.
 
We currently purchase raw materials, components and finished products from various foreign suppliers. To the extent that any such foreign supplier utilizes labor or other practices that vary from those commonly accepted in the United States, our business and reputation could be adversely affected by any resulting litigation, negative publicity, political pressure, or otherwise.

 

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NORTEK, INC. AND SUBSIDIARIES
December 31, 2013

A decline in our relations with key distributors and dealers, loss of major customers or failures or delays in collecting payments from major customers may negatively impact our business.
 

Our operations depend upon our ability to maintain relations with our independent distributors and dealers and we do not typically enter into long-term contracts with them. If our key distributors or dealers are unwilling to continue selling our products, or if any of them merge with or are purchased by a competitor, we could experience a decline in sales. If we are unable to replace such distributors or dealers or otherwise replace the resulting loss of sales, our business, results of operations and cash flows could be adversely affected. For 2013, approximately 52% of our consolidated net sales were made through our independent distributors and dealers, and our largest distributor or dealer accounted for approximately 4% of consolidated net sales for 2013.

In addition, the loss of one or more of our other major customers, or a substantial decrease in such customers' purchases from us, could have a material adverse effect on our results of operations and cash flows. Because we do not generally have binding long-term purchasing agreements with our customers, there can be no assurance that our existing customers will continue to purchase products from us. Our largest customer (other than a distributor or dealer) accounted for approximately 3% and 4% of consolidated net sales for 2013 and 2012, respectively.

Labor disruptions or cost increases could adversely affect our business.
 
A work stoppage at one of our facilities could cause us to lose sales, incur increased costs and adversely affect our ability to meet customers’ needs. A plant shutdown or a substantial modification to employment terms (including the collective bargaining agreements affecting our unionized employees) could result in material gains or losses or the recognition of an asset impairment. As collective bargaining agreements expire and until negotiations are completed, it is not known whether we will be able to negotiate collective bargaining agreements on the same or more favorable terms as the current agreements, or at all, without production interruptions, including labor stoppages. At December 31, 2013, approximately 3% of our employees were unionized, and from time to time we experience union organizing efforts directed at our non-union employees. We may also experience labor cost increases or disruptions in our non-union facilities in circumstances where we must compete for employees with necessary skills and experience or in tight labor markets.
 
We must continue to innovate and improve our products to maintain our competitive advantage.
 
Our ability to maintain and grow our market share depends in part on the ability to continue to develop high quality, innovative products. An important part of our competitive strategy includes leveraging our distributor and dealer relationships and our existing brands to introduce new products. In addition, certain of our products must be designed and manufactured to meet various regulatory standards. We must continue to modify regulated products to meet applicable standards as such standards develop and become more stringent over time. We cannot assure you that our investments in product innovation and technological development will be sufficient or that we will be able to create and market new products to enable us to successfully compete with new products or technologies developed by our competitors or to meet heightened regulatory requirements in the future.
 
Certain of our operations and products are subject to environmental, health and safety laws and regulations, which may result in substantial compliance costs or otherwise adversely affect our business.
 
Our operations are subject to numerous federal, state, local and foreign laws and regulations relating to protection of the environment, including those that impose limitations on the discharge of pollutants into the air and water, establish standards for the use, treatment, storage and disposal of solid and hazardous materials and wastes, and govern the cleanup of contaminated sites. We have used and continue to use various substances in our products and manufacturing operations, and have generated and continue to generate wastes, which have been or may be deemed to be hazardous or dangerous. As such, our business is subject to and may be materially and adversely affected by compliance obligations and other liabilities under environmental, health and safety laws and regulations. These laws and regulations affect ongoing operations and require capital costs and operating expenditures in order to achieve and maintain compliance. For example, the United States and other countries have established programs for limiting the production, importation and use of certain ozone depleting chemicals, including hydrochlorofluorocarbons, a refrigerant used in our air conditioning and heat pump products. Some of these chemicals have been banned completely, and others have been phased out in the United States. Modifications to the design of our products have been made, and further modifications may be necessary, in order to utilize alternative refrigerants. 


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NORTEK, INC. AND SUBSIDIARIES
December 31, 2013

We could incur substantial costs, including cleanup costs, fines and civil or criminal sanctions, as a result of violations of or liabilities under environmental laws.
 
We could incur substantial costs, including cleanup costs, fines and civil or criminal sanctions, and third party property damage or personal injury claims, as a result of violations of or liabilities under environmental laws, or non-compliance with environmental permits required at our facilities. Certain environmental laws and regulations also impose liability, without regard to knowledge or fault, relating to the existence of contamination at or associated with properties used in our current and former operations, or those of our predecessors, or at locations to which current or former operations or those of our predecessors have shipped waste for disposal. Contaminants have been detected at certain of our former sites, and we have been named as a potentially responsible party at several third-party waste disposal sites. While we are not currently aware of any such sites as to which material outstanding claims or obligations exist, the discovery of additional contaminants or the imposition of additional cleanup obligations at these or other sites could result in significant liability. In addition, we cannot be certain that identification of presently unidentified environmental conditions, more vigorous enforcement by regulatory agencies, enactment of more stringent laws and regulations or other unanticipated events will not arise in the future and give rise to material environmental liabilities or an increase in compliance costs, which could have a material adverse effect on our business, financial condition, results of operations and cash flows.
 

We face risks of litigation and liability claims on product liability, workers’ compensation and other matters, the extent of which exposure can be difficult or impossible to estimate and which can negatively impact our business, financial condition, results of operations and cash flows.
 
We are subject to legal proceedings and claims arising out of our businesses that cover a wide range of matters, including contract and employment claims, product liability claims, warranty claims and claims for modification, adjustment or replacement of component parts of units sold. Product liability and other legal proceedings include those related to businesses we have acquired or properties we have previously owned or operated.
 
The development, manufacture, sale and use of our products involves risks of product liability and warranty claims, including personal injury and property damage arising from fire, soot, mold and carbon monoxide. We currently carry insurance and maintain reserves for potential product liability claims. However, our insurance coverage may be inadequate if such claims do arise, and any liability not covered by insurance could have a material adverse effect on our business. The accounting for self-insured plans requires that significant judgments and estimates be made both with respect to the future liabilities to be paid for known claims, and incurred but not reported claims, as of the reporting date. To date, we have been able to obtain insurance in amounts we believe to be appropriate to cover such liability. However, our insurance premiums may increase in the future as a consequence of conditions in the insurance business generally, or our situation in particular. Any such increase could result in lower profits or cause us to reduce our insurance coverage. In addition, a future claim may be brought against us, which would have a material adverse effect on us. Any product liability claim may also include the imposition of punitive damages, the award of which, pursuant to certain state laws, may not be covered by insurance. Our product liability insurance policies have limits that, if exceeded, may result in material costs that would have an adverse effect on future profitability. In addition, warranty claims are generally not covered by our product liability insurance. Further, any product liability or warranty issues may adversely affect our reputation as a manufacturer of high-quality, safe products and could have a material adverse effect on our business.
 
Product recalls or reworks may adversely affect our financial condition, results of operations and cash flows.
 
In the event we produce a product that is alleged to contain a design or manufacturing defect, we could be required to incur costs involved to recall or rework that product. While we have undertaken several voluntary product recalls and reworks over the past several years, additional product recalls and reworks could result in material future costs. Many of our products, especially certain models of bath fans, range hoods, and residential furnaces and air conditioners, have a large installed base, and any recalls and reworks related to products with a large installed base could be particularly costly. The costs of product recalls or reworks are not generally covered by insurance. In addition, our reputation for safety and quality is essential to maintaining market share and protecting our brands. Any recalls or reworks may adversely affect our reputation as a manufacturer of high-quality, safe products and could have a material adverse effect on our financial condition, results of operations and cash flows.
 

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NORTEK, INC. AND SUBSIDIARIES
December 31, 2013

Our business operations could be significantly disrupted if we lost members of our management team or key employees.
 
Our success depends to a significant degree upon the continued contributions of our executive officers, key employees and consultants, both individually and as a group. Our future performance will be substantially dependent on our ability to retain and motivate them. The loss of the services of any of our executive officers, key employees or consultants could prevent us from successfully executing our business strategy.
 
Our business operations could be negatively impacted if we fail to adequately protect our intellectual property rights, if we fail to comply with the terms of our licenses or if third parties claim that we are in violation of their intellectual property rights.
 
We are highly dependent on certain of the brand names under which we sell our products. Failure to protect these brand names and other intellectual property rights or to prevent their unauthorized use by third parties could adversely affect our business. We seek to protect our intellectual property rights through a combination of trademark, copyright, patent and trade secret laws, as well as confidentiality agreements. These protections may not be adequate to prevent competitors from using our brand names and trademarks without authorization or from copying our products or developing products equivalent to or superior to ours. We license several brand names from third parties. In the event we fail to comply with the terms of these licenses, we could lose the right to use these brand names. In addition, we face the risk of claims that we are infringing third parties’ intellectual property rights. Any such claim, even if it is without merit, could be expensive and time-consuming; could cause us to cease making, using, or selling certain products that incorporate the disputed intellectual property; could require us, if feasible, to redesign our products; could divert management time and attention; and could require us to enter into costly royalty or licensing arrangements.

We may experience delays or outages in our information technology system and computer networks.

We, like most companies, may be subject to information technology system failures and network disruptions. These may be caused by delays or disruptions due to system updates, natural disasters, malicious attacks, accidents, power disruptions, telecommunication failures, acts of terrorism or war, computer viruses, physical or electronic break−ins, or similar events or disruptions. Our businesses may implement enterprise resource planning systems or add applications to replace outdated systems and to operate more efficiently. Predictions regarding benefits resulting from the implementation of these projects are subject to uncertainties. We may not be able to successfully implement the projects without experiencing difficulties. In addition, any expected benefits of implementing projects might not be realized or the costs of implementation might outweigh the benefits realized.

Volatility in the capital markets could necessitate increased cash contributions by us to our pension plans to maintain required levels of funding.

Volatility in the capital markets may have a significant impact on the funding status of our defined benefit pension plans. If the performance of the capital markets depresses the value of our defined benefit pension plan assets or increases the liabilities, our plans may be underfunded and we would have to make contributions to the pension plans. The amount of contributions we may be required to make to our pension plans in the future is uncertain and could be significant, which may have a material impact on our results of operations. See Note 13, "Pension, Profit Sharing and Other Post-Retirement Benefits", to the consolidated financial statements, Item 8 of Part II, included elsewhere in this report.

Future tax law changes or the interpretation of existing tax laws may materially impact our effective income tax rate and the resolution of unrecognized tax benefits.

Our businesses are subject to income taxation in the U.S. as well as internationally. It is possible that future income tax legislation may be enacted that could have a material adverse impact on our worldwide income tax provision. We are routinely audited by income tax authorities in many jurisdictions. Although we believe that the recorded tax estimates are reasonable and appropriate, there are significant uncertainties in these estimates. As a result, the ultimate outcome from any audit could be materially different from amounts reflected in our income tax provisions and accruals. Future settlements of income tax audits may have a material adverse effect on earnings between the period of initial recognition of tax estimates in our financial statements and the point of ultimate tax audit settlement. See Note 8, "Income Taxes", to the consolidated financial statements, Item 8 of Part II, included elsewhere in this report.

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NORTEK, INC. AND SUBSIDIARIES
December 31, 2013

Risks Related to Our Indebtedness:
 
Our substantial debt could negatively impact our business, prevent us from fulfilling outstanding debt obligations and adversely affect our financial condition.
 
We have a substantial amount of debt. At December 31, 2013, we had approximately $1,096.8 million of total debt outstanding, which is net of approximately $4.5 million of net unamortized debt premium. The terms of our outstanding debt, including our 8.5% Senior Notes due 2021 (the “8.5% Notes”), our 10% Senior Notes due 2018 (the "10% Notes"), our $300.0 million senior secured asset-based revolving credit facility (the “ABL Facility”) and our senior secured term loan ("Term Loan Facility") limit, but do not prohibit, us from incurring additional debt. If additional debt is added to current debt levels, the related risks described below could intensify.
 
Our substantial debt has or could have important adverse consequences, including the following:
 
our ability to obtain additional financing for working capital, capital expenditures, acquisitions, refinancing indebtedness or other purposes could be impaired;
a substantial portion of our cash flow from operations will be dedicated to paying principal and interest on our debt, thereby reducing funds available for expansion or other purposes;
we are more leveraged than some of our competitors, which may result in a competitive disadvantage;
we are vulnerable to interest rate increases, as certain of our borrowings, including those under the ABL Facility and the Term Loan Facility, are at variable rates;
our failure to comply with the restrictions in our financing agreements would have a material adverse effect on us and our ability to meet our obligations under certain of our borrowings;
we are more vulnerable to changes in general economic conditions than companies with less or no debt;
we face limitations on our ability to make strategic acquisitions, invest in new products or capital assets or take advantage of business opportunities; and
we are limited in our flexibility in planning for, or reacting to, changes in our business and the industries in which we operate.
 
See Note 4, "Notes, Mortgage Notes and Obligations Payable", to the consolidated financial statements, Item 8 of Part II, included elsewhere in this report.

The terms of our debt covenants impose restrictions on how we conduct our business and could limit our ability to raise additional funds.

 
The agreements that govern the terms of our debt, including the respective indentures that govern our 8.5% Notes and our 10% Notes and the credit agreements that govern our ABL Facility and Term Loan Facility, contain covenants that restrict our ability and the ability of our subsidiaries to, among other things:
 
incur additional indebtedness;
pay dividends or make other payment or distributions;
make loans or investments;
incur certain liens;
enter into transactions with affiliates; and
consolidate, merge or sell assets.
 
There are limitations on our ability to incur the full $300.0 million of commitments under the ABL Facility. Availability is limited to the lesser of the borrowing base under the ABL Facility and $300.0 million. As of March 7, 2014, we had approximately $5.0 million in outstanding borrowings (excluding approximately $30.0 million borrowed on March 11, 2014) and approximately $13.0 million in outstanding letters of credit under the ABL Facility. Based on the borrowing base calculations as of January 2014, at March 7, 2014, we had excess availability of approximately $237.2 million under the ABL Facility and approximately $205.3 million of excess availability before triggering the cash deposit requirements.
 
We will be required to deposit cash daily from our material deposit accounts (including all concentration accounts) into collection accounts maintained with the administrative agent under the ABL Facility, which will be used to repay outstanding loans and cash collateralized letters of credit, if (i) excess availability (as defined in the ABL Facility) falls below the greater of $30.0 million or

20


NORTEK, INC. AND SUBSIDIARIES
December 31, 2013

12.5% of the borrowing base or (ii) an event of default has occurred and is continuing. In addition, under the ABL Facility, if (i) excess availability falls below the greater of $30.0 million or 12.5% of the borrowing base or (ii) an event of default has occurred and is continuing, we will be required to satisfy and maintain a consolidated fixed charge coverage ratio measured on a trailing four quarter basis of not less than 1.0 to 1.0. Our ability to meet the required fixed charge coverage ratio can be affected by events beyond our control. A breach of any of these covenants could result in a default under the ABL Facility.  

A breach of the covenants under the indentures that govern our 8.5% Notes and 10% Notes or the credit agreements that govern the ABL Facility and the Term Loan Facility could result in an event of default under the applicable indenture or credit agreement. Such default may allow the creditors to accelerate the related debt and may result in the acceleration of any other debt to which a cross-acceleration or cross-default provision applies. In addition, an event of default under the ABL Facility would permit the lenders under the ABL Facility to terminate all commitments to extend further credit under that facility. Furthermore, if we were unable to repay the amounts due and payable under our ABL Facility or Term Loan Facility, the lenders to the ABL Facility or the Term Loan Facility, respectively, could proceed against the collateral granted to them to secure that indebtedness. In the event our noteholders or lenders accelerate the repayment of our borrowings, we can provide no assurances that we and our subsidiaries would have sufficient assets to repay such indebtedness. As a result of these restrictions, we may be:

limited in how we conduct our business;
unable to raise additional debt or equity financing to operate during general economic or business downturns;
unable to compete effectively or to take advantage of new business opportunities; or
unable to grow in accordance with our plans.

See “Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources - Debt Covenant Compliance", Item 7 of Part II, to this report 

We may be unable to generate sufficient cash to service all of our indebtedness and other liquidity requirements and may be forced to take other actions to satisfy such requirements, which may not be successful.

 
We will be required to repay all amounts outstanding under our ABL Facility in 2017, our Term Loan Facility in 2017, our 10% Notes by 2018 and our 8.5% Notes by 2021. At December 31, 2013, we had outstanding borrowings under these obligations of approximately $1,083.0 million (excluding net unamortized debt premium of approximately $5.0 million). We are currently obligated to make periodic interest payments under the 8.5% Notes, the 10% Notes, the Term Loan Facility and the ABL Facility, as well as make periodic interest and principal payments relating to other indebtedness of our subsidiaries. Our ability to make payments on and to refinance our indebtedness and to fund planned capital expenditures will depend on our ability to generate cash in the future. This, to a certain extent, is subject to general economic, financial, competitive, legislative, regulatory and other factors that are beyond our control.

We expect that we will need to access the capital markets in the future in order to refinance all amounts outstanding under the 8.5% Notes, the 10% Notes, the ABL Facility and the Term Loan Facility, as we do not anticipate generating sufficient cash flow from operations to repay such amounts in full. We cannot assure you that funds will be available to us in the capital markets, together with cash generated from operations, in an amount sufficient to enable us to pay our indebtedness or to fund our other liquidity needs. We cannot assure you that we will be able to refinance any of our indebtedness on commercially reasonable terms or at all. If we cannot service our indebtedness, we may have to take actions such as selling assets, seeking additional equity or reducing or delaying capital expenditures, strategic acquisitions, investments and alliances. We cannot assure you that any such actions, if necessary, could be effected on commercially reasonable terms or at all.

For further information regarding our yearly contractual obligations and sources of liquidity, see “Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources - Contractual Obligations", Item 7 of Part II, to this report.


21


NORTEK, INC. AND SUBSIDIARIES
December 31, 2013

If we are unable to access funds generated by our subsidiaries, we may not be able to meet our financial obligations.
 
Because we conduct our operations through our subsidiaries, we depend on those entities for dividends, distributions and other payments to generate the funds necessary to meet our financial obligations. Legal restrictions in the United States and foreign jurisdictions applicable to our subsidiaries and contractual restrictions in certain agreements governing current and future indebtedness of our subsidiaries, as well as the financial condition and operating requirements of our subsidiaries, may limit our ability to obtain cash from our subsidiaries. All of our subsidiaries are separate and independent legal entities and have no obligation whatsoever to pay any dividends, distributions or other payments to us. 

Risks Related to Our Common Stock:
 
The trading volume in our common stock is less than that of similar public companies.

Although our common stock is listed for trading on the NASDAQ Global Market, the average daily trading volume in our common stock is generally less than that of many of our publicly traded competitors and other diversified manufacturing companies. Public companies such as us, with a relatively concentrated level of institutional shareholders, often have difficulty generating trading volume in their stock. This illiquidity can result in relative price discounts as compared to industry peers or to the stock's inherent value. It can also result in limited or no research analyst coverage, the absence of which may make it difficult for a company to establish and hold a market following. A public trading market having the desired characteristics of depth, liquidity and orderliness depends on the presence of willing buyers and sellers of our common stock at any given time. This presence depends on the individual decisions of investors and general economic and market conditions over which we have no control.

If securities or industry analysts do not publish research or reports about our business, if they adversely change their recommendations regarding our common stock or if our operating results do not meet their expectations, our common stock price could decline.
 
The market price of our common stock will be influenced by the research and reports that industry or securities analysts publish about us or our business. Since our common stock began trading on the NASDAQ Global Market, there has been minimal coverage of Nortek by securities analysts. If we do not have analyst coverage of our common stock, we may lack visibility in the financial markets, which in turn could cause the market price of our common stock or its trading volume to decline. Moreover, if one or more of the analysts who cover our company downgrade our common stock or if our operating results or prospects do not meet their expectations, the market price of our common stock could decline.


22


NORTEK, INC. AND SUBSIDIARIES
December 31, 2013

The price of our common stock could be volatile.
 
The overall market and the price of our common stock may fluctuate greatly. The trading price of our common stock may be significantly affected by various factors, including:
 
quarterly fluctuations in our operating results;
changes in investors' and analysts' perception of the business risks and conditions of our business;
our ability to meet the earnings estimates and other performance expectations of financial analysts or investors;
unfavorable commentary or downgrades of our stock by equity research analysts;
fluctuations in the stock prices of our peer companies or in stock markets in general;
our ability to comply with our debt covenants; and
general economic or political conditions.

The market price for our common stock could also fall if our existing significant stockholders, or management, sell, or attempt to sell, large amounts of our common stock. Alternatively, if these stockholders do not trade their shares, our common stock could be thinly traded resulting in a wide spread of bid and ask prices for our common stock, which could reduce the trading volume of our common stock.

Our significant stockholder may exert significant influence over us. Their interests may not coincide with yours and they may make decisions with which you may disagree.
 
Funds affiliated with Ares Management LLC own, in the aggregate, approximately 40% of the voting power of our outstanding common stock as of March 7, 2014 and other stockholders also own significant portions of our common stock. As a result, these stockholders, acting individually or together, control substantially all matters requiring stockholder approval, including the election of directors and the approval of significant corporate transactions. In addition, this concentration of equity ownership may delay or prevent a change in control of our company and may make some transactions more difficult or impossible without the support of these stockholders. The interests of these stockholders may not always coincide with the interests of other stockholders. Accordingly, these stockholders could cause us to enter into transactions or agreements that you would not approve or make decisions with which you may disagree.
 
Further, our bylaws and certificate of incorporation allow a majority of our stockholders to take action by written consent, rather than at an annual or special meeting of stockholders. These provisions generally allow our stockholders to act quickly.

ITEM 1B.
UNRESOLVED STAFF COMMENTS.
 

None.


23


NORTEK, INC. AND SUBSIDIARIES
December 31, 2013


ITEM 2.
PROPERTIES.
 
Set forth below is a brief description of the location and general character of the principal administrative and manufacturing facilities and other material real properties of our continuing operations, all of which we consider to be in satisfactory repair as of December 31, 2013. All properties are owned, except for those indicated by an asterisk (*), which are leased under operating leases and those with a double asterisk (**), which are leased under capital leases.
 
Location
 
Description
 
Approximate Square Feet
 
 
 
 
 
 
 
Residential Ventilation Segment:
 
 
 
 

 
 
Hartford, Wisconsin
 
Manufacturing/Warehouse/Administrative
 
538,000

 
(2)
Hartford, Wisconsin
 
Warehouse
 
130,000

 
*
Mississauga, ONT, Canada
 
Manufacturing/Warehouse/Administrative
 
110,000

 
 
Fabriano, Italy
 
Warehouse/Administrative
 
12,000

 
 
Cerreto D’Esi, Italy
 
Manufacturing/Warehouse/Administrative
 
174,000

 
 
Drummondville, QUE, Canada
 
Manufacturing/Warehouse/Administrative
 
126,000

 
 
Drummondville, QUE, Canada
 
Manufacturing/Warehouse/Administrative
 
51,000

 
*
Chenjian, Huizhou, PRC
 
Manufacturing/Warehouse/Administrative/Other
 
198,000

 
 
Gliwice, Poland
 
Manufacturing/Warehouse/Administrative
 
162,000

 
(1)
Tecate, Mexico
 
Manufacturing/Warehouse/Administrative
 
204,000

 
*
Alameda, California
 
Warehouse/Administrative
 
37,000

 
*
 
 
 
 
 
 
 
Technology Solutions Segment:
 
 
 
 

 
 
Xiang, Bao An County, Shenzhen, PRC
 
Manufacturing/Warehouse/Administrative/Other
 
410,000

 
*
Chaiwan, Hong Kong
 
Administrative
 
13,000

 
*
Carlsbad, California
 
Warehouse/Administrative
 
86,000

 
*
Grand Rapids, Michigan
 
Manufacturing/Warehouse/Administrative
 
89,000

 
*
Petaluma, California
 
Warehouse/Administrative
 
40,044

 
*
Tallahassee, Florida
 
Warehouse/Administrative
 
71,000

 
(2)
Summerville, South Carolina
 
Warehouse/Administrative
 
162,000

 
*
Los Angeles, California
 
Warehouse/Administrative
 
28,000

 
*
Erlanger, Kentucky
 
Warehouse/Administrative
 
18,000

 
*
Margate, Kent, United Kingdom
 
Manufacturing/Warehouse/Administrative
 
10,000

 
 

24


NORTEK, INC. AND SUBSIDIARIES
December 31, 2013

Location
 
Description
 
Approximate Square Feet
 
 
 
 
 
 
 
Display Mount Solutions Segment:
 
 
 
 
 
 
St. Paul, Minnesota
 
Manufacturing/Warehouse/Administrative
 
102,000

 
(2)
Dongguan City, Guangdong, PRC
 
Manufacturing/Warehouse/Administrative
 
198,000

 
*
Amersfoort, The Netherlands
 
Manufacturing/Warehouse/Administrative
 
20,000

 
*
 
 
 
 
 
 
 
Residential Heating and Cooling Segment:
 
 

 
 
O’Fallon, Missouri
 
Warehouse/Administrative
 
70,000

 
*
St. Louis, Missouri
 
Warehouse
 
103,000

 
*
Boonville, Missouri
 
Manufacturing
 
250,000

 
(2)
Boonville, Missouri
 
Warehouse/Administrative
 
150,000

 
(1)
Poplar Bluff, Missouri
 
Manufacturing/Warehouse
 
725,000

 
**
Dyersburg, Tennessee
 
Manufacturing/Warehouse
 
368,000

 
**
Miami, Florida
 
Warehouse/Administrative
 
23,000

 
*
Guaynabo, Puerto Rico
 
Warehouse
 
15,000

 
*
Lenexa, Kansas
 
Warehouse/Administrative
 
28,000

 
*
San Antonio, Texas
 
Warehouse
 
19,000

 
*
 
 
 
 
 
 
 
Custom & Engineered Solutions Segment:
 
 
 
 

 
 
St. Leonard d’Aston, QUE, Canada
 
Manufacturing/Administrative
 
95,000

 
*
Saskatoon, Saskatchewan, Canada
 
Manufacturing/Administrative
 
59,000

 
*
Holland, Michigan
 
Manufacturing/Administrative
 
45,000

 
*
Oklahoma City, Oklahoma
 
Manufacturing/Administrative
 
127,000

 
(2)
Okarche, Oklahoma
 
Manufacturing/Warehouse/Administrative
 
228,000

 
(2)
Springfield, Missouri
 
Manufacturing/Warehouse/Administrative
 
113,000

 
*
Anjou, QUE, Canada
 
Manufacturing/Administrative
 
127,000

 
*
Edenbridge, Kent, United Kingdom
 
Administrative
 
41,000

 
*
Fenton, Stoke-on-Trent, United Kingdom
 
Manufacturing/Administrative
 
104,000

 
*
Tualatin, Oregon
 
Manufacturing/Warehouse/Administrative
 
315,000

 
*
Eden Prairie, Minnesota
 
Administrative
 
30,000

 
*
Shakopee, Minnesota
 
Warehouse
 
13,000

 
*
 
 
 
 
 
 
 
Other:
 
 
 
 

 
 
Providence, RI
 
Corporate Headquarters
 
36,000

 
*

(1)
These facilities are pledged as security under various subsidiary debt agreements.
(2)
These facilities are pledged as first priority security under our senior secured term loan ("Term Loan Facility") and as second priority under our $300.0 million senior secured asset-based revolving credit facility (the “ABL Facility”).


25


NORTEK, INC. AND SUBSIDIARIES
December 31, 2013

ITEM 3.
LEGAL PROCEEDINGS.
 

The Company is from time to time involved in litigation relating to claims arising in the normal course of business, including a number of product liability lawsuits.
 
The Company does not expect that any of these proceedings will have a material adverse effect, either individually or in the aggregate, on the Company's financial position, results of operations, liquidity or competitive position. See Note 6, “Commitments and Contingencies”, to the consolidated financial statements, Item 8 of Part II, included elsewhere in this report.

ITEM 4.
MINE SAFETY DISCLOSURES

Not applicable.

Executive Officers of the Registrant
Pursuant to General Instruction G(3) to Form 10-K, the following description of our executive officers is included as an unnumbered item in Part I of this report in lieu of being included in our definitive proxy statement for our annual meeting of stockholders. Set forth below are the name, age, present title, and certain other information for each of our executive officers as of March 7, 2014. Each executive officer is appointed by the Company's Board of Directors and holds his/her office until the earlier of his/her death, resignation, retirement, disqualification or removal.

Name
Age
Positions with the Company
Michael J. Clarke
59
President, Chief Executive Officer and Director
Almon C. Hall
67
Senior Vice President and Chief Financial Officer
Kevin W. Donnelly
59
Senior Vice President, General Counsel and Secretary
Timothy J. Burling
55
Senior Vice President, Operational Finance
Sean Burke
52
Group President, Technology Solutions
David J. LaGrand
60
Group President, Residential Heating and Cooling
Peter Segar
51
Group President, Display Mount Solutions
Mark DeVincent
49
Group President, Custom & Engineered Solutions

Mr. Clarke has been President and Chief Executive Officer and a director of the Company since joining the Company on December 30, 2011. From January 2006 until his appointment as the Company's Chief Executive Officer, Mr. Clarke served as President, FlexInfrastructure and Group President of Integrated Network Solutions of Flextronics International, Ltd, a publicly traded provider of design and electronics manufacturing services to original equipment manufacturers ("Flextronics").

Each of Messrs. Hall, Donnelly, and LaGrand has served in the same or substantially similar executive positions with the Company for at least the past five years. Messrs. Hall and Donnelly were executive officers at the Company when it filed voluntary petitions in the Bankruptcy Court seeking relief under the provisions of chapter 11 of the Bankruptcy Code on October 21, 2009.

Mr. Burling has been Vice President, Operational Finance since March 2012 and was appointed Senior Vice President, Operational Finance on March 5, 2014. From 2006 until his appointment as the Company's Senior Vice President, Operational Finance, he served as Vice President, Finance of Integrated Network Solutions of Flextronics.

Mr. Burke has been Group President Technology Solutions since February 2012. From October 2005 until his appointment as the Group President, Technology Solutions, he served as President of FlexComputing at Flextronics.

Mr. Segar has been Group President, Display Mount Solutions Segment since September 2013. Prior to his appointment as the Group President, Display Mount Solutions, he served as Interim President of Ergotron, Inc. (“Ergotron”) from January 2013 to October 2013, he served as Ergotron Brand Products President from August 2010 to October 2013 and he served as Senior Vice President and Chief Technical Officer of Ergotron from September 2004 to August 2010.

Mr. DeVincent has been Group President, Customized Engineering Solutions since February 2014. Prior to his appointment as the Group President, Customized Engineering Solutions, he served as Vice President, Advanced Systems of Flextronics from March 2006 to May 2011 and from June 2011 to January 2014, he served as Senior Vice President & GM, Server & Storage of Flextronics.


26


NORTEK, INC. AND SUBSIDIARIES
December 31, 2013

PART II

ITEM 5.
MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
 
Market Information
 
Our common stock trades on the NASDAQ Global Market ("NASDAQ") under the trading symbol “NTK”. The following table sets forth the high and low sale prices for our common stock as reported by NASDAQ for the periods indicated:
2012 Quarter Ended
 
High
 
Low
March 31, 2012
 
$
44.96

 
$
26.00

June 30, 2012
 
$
58.38

 
$
39.25

September 29, 2012
 
$
55.83

 
$
48.94

December 31, 2012
 
$
67.74

 
$
54.49

 
 
 
 
 
2013 Quarter Ended
 
High
 
Low
March 30, 2013
 
$
74.68

 
$
64.84

June 29, 2013
 
$
73.73

 
$
61.47

September 28, 2013
 
$
70.00

 
$
62.34

December 31, 2013
 
$
76.82

 
$
65.95

 
Holders

As of March 3, 2014, there were approximately 112 holders of record of our common stock and an unknown number of additional beneficial owners whose shares are held through brokerage firms or other institutions.
 
Dividends
 
We did not pay any cash dividends on our common stock in 2013 or 2012, and we do not anticipate declaring any cash dividends to holders of our common stock in the foreseeable future. Furthermore, the agreements that govern the terms of our debt, including the respective indentures that govern our 8.5% Notes and our 10% Notes, and the credit agreements that govern our ABL Facility and Term Loan Facility, restrict our ability to pay dividends. See Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources - Adequacy of Liquidity Sources” and Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources  - Debt Covenant Compliance”, Item 7 of Part II of this report, for further information regarding restrictions on our ability to pay dividends. In addition, the declaration of any future cash dividends and, if declared, the amount of any such dividends will be subject to our financial condition, earnings, capital requirements, financial covenants and other contractual restrictions and to the discretion of our Board of Directors.

 

27


NORTEK, INC. AND SUBSIDIARIES
December 31, 2013

Performance Graph

Set forth below is a graph comparing the cumulative total stockholder return on our common stock against the cumulative total return of the Russell 2000 Index and the Dow Jones US Building Materials & Fixtures Index for the period commencing November 15, 2011 (the first day our common stock began “when-issued” trading on the NASDAQ) through December 31, 2013. Index data was furnished by Dow Jones & Co. and Russell Investments Group. The graph assumes that $100 was invested on November 15, 2011 in each of our common stock, the Russell 2000 Index, and the Dow Jones US Building Materials & Fixtures Index and that all dividends were reinvested.


Recent Sales of Unregistered Securities

There were no unregistered sales of equity securities during the fourth quarter of 2013.

Purchases of Equity Securities by Issuer and Affiliated Purchases

None.




28


NORTEK, INC. AND SUBSIDIARIES
December 31, 2013


ITEM 6.
SELECTED CONSOLIDATED FINANCIAL DATA
 
The table below summarizes our selected consolidated financial information as of and for the periods indicated. You should read the following selected consolidated financial data together with our consolidated financial statements, Item 8 of Part II, to this report, the sections entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Liquidity and Capital Resources”, Item 7 of Part II, to this report, and the section entitled “Market Price of and Dividends on the Registrant’s Common Equity and Related Stockholder Matters” included in Item 5 of Part II, to this report. Our historical results for any prior period are not necessarily indicative of results to be expected in any future period.
 
 
 
Successor
 
Predecessor
 
 
For the Years Ended
 
Period from
 
Period from
 
 
December 31,
 
Dec. 20, 2009 -
 
Jan. 1, 2009 -
 
 
2013
 
2012
 
2011
 
2010
 
Dec. 31, 2009
 
Dec. 19, 2009
 
 
(In millions except per share amounts and ratios)
Consolidated Summary of Operations:
 
 
 
 
 
 

 
 

Net sales
 
$
2,287.9

 
$
2,201.3

 
$
2,140.5

 
$
1,899.3

 
$
44.0

 
$
1,763.9

Pre-petition reorganization items
 

 

 

 

 

 
(22.5
)
Goodwill impairment charge
 

 

 

 

 

 
(284.0
)
Operating earnings (loss)
 
87.9

 
127.6

 
63.1

 
70.6

 
(1.2
)
 
(203.4
)
(Loss) earnings before gain on
  reorganization items, net and (benefit)
  provision for income taxes
 
(11.4
)
 
24.8

 
(76.2
)
 
(25.0
)
 
(4.8
)
 
(338.8
)
Gain on reorganization items, net
 

 

 

 

 

 
619.1

Net (loss) earnings
 
(8.3
)
 
9.5

 
(55.9
)
 
(13.4
)
 
(3.4
)
 
195.3

(Loss) earnings per share:
 
 
 
 
 
 
 
 
 
 

 
 

Basic (1)
 
$
(0.54
)
 
$
0.63

 
$
(3.70
)
 
$
(0.89
)
 
$
(0.23
)
 
$
65,100.00

Diluted (1)
 
$
(0.54
)
 
$
0.61

 
$
(3.70
)
 
$
(0.89
)
 
$
(0.23
)
 
$
65,100.00

 
 
 
 
 
 
 
 
 
 
 
 
 
Financial Position and Other Financial Data:
 
 
 
 
 
 

 
 

Unrestricted cash, investments and
  marketable securities
 
$
80.9

 
$
144.7

 
$
58.2

 
$
57.7

 
$
89.6

 
$
86.7

Working capital (2)
 
250.3

 
348.0

 
317.5

 
330.5

 
320.8

 
323.3

Total assets
 
1,990.9

 
1,888.1

 
1,941.9

 
1,973.1

 
1,620.9

 
1,645.4

Total debt —
 
 
 
 
 
 
 
 
 
 

 
 

  Current
 
3.5

 
3.1

 
33.4

 
17.8

 
49.9

 
53.8

  Long-term
 
1,093.3

 
1,097.9

 
1,111.1

 
1,101.8

 
835.4

 
835.4

Current ratio (3)
 
1.6:1

 
1.9:1

 
1.8:1

 
1.9:1

 
1.9:1

 
1.9:1

Debt to equity ratio (4)
 
11.0:1

 
11.7:1

 
14.2:1

 
7.1:1

 
5.2:1

 
5.2:1

Depreciation and amortization
  expense, including non-cash interest (5)
 
97.6

 
89.3

 
99.9

 
93.8

 
6.2

 
103.2

Capital expenditures (6)
 
43.9

 
25.0

 
21.1

 
19.8

 
0.5

 
17.9

Stockholders’ investment
 
99.9

 
94.2

 
80.4

 
158.8

 
170.1

 
172.0


(1)
See Note 11, "(Loss) Earnings per Share", to the consolidated financial statements, Item 8 of Part II, included elsewhere in this report.
(2)
Working capital is computed by subtracting current liabilities from current assets.
(3)
Current ratio is computed by dividing current assets by current liabilities.
(4)
Debt to equity ratio is computed by dividing total debt by total stockholders’ investment. 
(5)
Includes an increase to cost of goods sold for inventory acquired in business combinations of approximately $3.3 million, $0.9 million, $7.9 million, $12.2 million, $3.1 million and $0.5 million for 2013, 2012, 2011, 2010 and the periods from December 20, 2009 to December 31, 2009 and from January 1, 2009 to December 19, 2009, respectively.
(6)
Includes capital expenditures financed under capital leases of approximately $0.1 million and $0.9 million for the years ended December 31, 2013 and 2012, respectively.

29


NORTEK, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition and Results of Operations
December 31, 2013

ITEM 7.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Executive Overview

We are a global, diversified company whose many market-leading brands deliver broad capabilities and a wide array of innovative, technology-driven products and solutions for lifestyle improvement at home and at work. Our five reporting segments are as follows: 

the Residential Ventilation (“RESV”) segment,
the Technology Solutions (“TECH”) segment,
the Display Mount Solutions ("DMS") segment,
the Residential Heating and Cooling (“RHC”) segment, and
the Custom & Engineered Solutions (“CES”) segment.
 

Through these segments we manufacture and sell, primarily in the United States, Canada, and Europe, with additional manufacturing in China and Mexico, a wide variety of products for the remodeling and replacement markets, the residential and commercial new construction markets, the manufactured housing market, and the personal and enterprise computer markets.

The RESV segment primarily manufactures and sells room and whole house ventilation and other products, primarily for the professional remodeling and replacement markets, the residential new construction market, and the do-it-yourself market. The principal products sold by this segment include kitchen range hoods, exhaust fans (such as bath fans and fan, heater and light combination units), and indoor air quality products.  Sales of our kitchen range hoods and exhaust fans within the RESV segment accounted for approximately 10.7% and 9.8%, respectively, of consolidated net sales for 2013, approximately 11.6% and 10.0%, respectively, of consolidated net sales in 2012 and approximately 11.9% and 9.2%, respectively, of consolidated net sales in 2011.
 
The TECH segment manufactures and distributes a broad array of products designed to provide convenience and security for residential and certain commercial applications. The principal product categories sold in this segment include audio/video distribution and control equipment, and security and access control products. Sales of security and access control products accounted for approximately 66%, 53% and 54% of total TECH segment net sales in 2013, 2012 and 2011, respectively.
 

The DMS segment manufactures and distributes a broad array of products designed with ergonomic features including wall mounts, desk mounts, arms, carts, workstations, and stands that attach to or support a variety of display devices such as computer monitors, notebook computers and flat panel displays. Sales of our digital display mounting and mobility products within the DMS segment accounted for approximately 12.0%, 12.9% and 12.7% of consolidated net sales in 2013, 2012 and 2011, respectively.

The RHC segment manufactures and sells heating, ventilating, and air conditioning systems for site-built residential and manufactured housing structures, and certain commercial markets. The principal products sold by the segment are split-system and packaged air conditioners and heat pumps, air handlers, furnaces, and related equipment. Sales of products sold in our RHC segment accounted for approximately 18.1%, 17.3% and 17.7% of consolidated net sales in 2013, 2012 and 2011, respectively.
 

The CES segment manufactures and sells custom-designed and engineered heating, ventilating and air conditioning products and systems that meet customer specifications. The principal products sold by the segment are air handlers and large custom rooftop cooling and heating products. Sales of our commercial air handlers within the CES segment accounted for approximately 15.4%, 14.6% and 11.4% of consolidated net sales in 2013, 2012 and 2011, respectively.

On March 11, 2013, our Board of Directors approved our operational improvement initiatives and efforts to rationalize our global manufacturing and distribution capacity. See "- Liquidity and Capital Resources - Operational Improvement Initiativesbelow.


30


NORTEK, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition and Results of Operations
December 31, 2013

Basis of Presentation

We operate on a calendar year, and for our interim periods, operate on a 4-4-5 fiscal calendar, where each fiscal quarter is comprised of two 4-week periods and one 5-week period, with each week ending on a Saturday. Our fiscal year always begins on January 1 and ends on December 31. As a result, our first and fourth quarters may have more or less days included than a traditional 4-4-5 fiscal calendar, which consists of 91 days.

This Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") is intended to help the reader understand Nortek, Inc., our operations, and our present business environment. MD&A is provided as a supplement to, and should be read in conjunction with, our consolidated financial statements and the accompanying notes contained in this report. Unless the context requires otherwise, the terms “Nortek,” “Company,” “we”, and “our” in this MD&A refer to Nortek, Inc. and its wholly-owned subsidiaries.

Industry Overview
 
Critical factors affecting our future performance, including our level of sales, profitability, and cash flows are the levels of residential remodeling and replacement activity, and new residential and non-residential construction activity. The level of new construction activity and the level of residential remodeling and replacement activity are affected by seasonality and cyclical factors such as interest rates, inflation, consumer spending, employment levels, and other macroeconomic factors over which we have no control. Any decline in economic activity as a result of these or other factors typically results in a decline in residential and non-residential new construction and, to a lesser extent, residential and non-residential remodeling and replacement spending, which would result in a decrease in our sales, profitability, and cash flows.

Instability in the credit and financial markets, troubles in the mortgage market, the level of unemployment, and the decline in home values could have a negative impact on residential and non-residential new construction activity, consumer disposable income, and spending on home remodeling and repairs. These factors could have an adverse effect on our operating results.

Changes in key industry activity affecting our businesses in the North America for 2013, 2012, and 2011 as compared to the prior year periods were as follows:
 
 
 
Source of
 
% Increase (Decrease)
 
 
Data
 
2013
 
2012
 
2011
Private residential construction spending
 
1
 
18
 %
 
15
%
 
2
 %
Total U.S. housing starts
 
1
 
19
 %
 
28
%
 
4
 %
Total Canadian housing starts
 
2
 
(13
)%
 
11
%
 
2
 %
New home sales
 
1
 
16
 %
 
21
%
 
(5
)%
Existing home sales
 
3
 
9
 %
 
9
%
 
2
 %
Residential improvement spending
 
1
 
4
 %
 
4
%
 
8
 %
Central air conditioning and heat pump shipments
 
4
 
10
 %
 
2
%
 
7
 %
Gas furnace shipments
 
4
 
16
 %
 
1
%
 
(10
)%
Private non-residential construction spending
 
1
 
(1
)%
 
16
%
 
(2
)%
Manufactured housing shipments
 
5
 
10
 %
 
6
%
 
3
 %
Residential fixed investment spending
 
6
 
12
 %
 
13
%
 
1
 %

Source of data:
(1)
U.S. Census Bureau
(2)
Canada Mortgage and Housing Corporation
(3)
National Association of Realtors
(4)
Air Conditioning, Heating and Refrigeration Institute
(5)
Institute for Building Technology and Safety
(6)
U.S. Bureau of Economic Analysis
 



31


NORTEK, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition and Results of Operations
December 31, 2013

In 2013, approximately 52% of consolidated net sales were made through independent distributors, dealers, wholesalers and similar channels, approximately 16% were to commercial HVAC markets, approximately 13% were to retailers (of which approximately 7% were sold to the four largest home center retailers), approximately 11% were private label sales, approximately 5% were to other commercial channels, and approximately 3% were to manufactured housing original equipment manufacturers and aftermarket dealers. Our largest distributor or dealer accounted for approximately 4% of consolidated net sales in 2013. Our largest customer (other than a distributor or dealer) accounted for approximately 3% of consolidated net sales for 2013.

Based on internal research and analysis, we estimate that approximately 65% to 69% of our consolidated 2013 net sales were related to the residential housing market. Our products that serve the residential housing market primarily include range hoods and bath fans sold by our RESV segment, central air conditioning and heating products sold by our RHC segment, and security and access control products and certain of the audio/video distribution and control products sold by our TECH segment. We believe that approximately 18% to 22% of our consolidated 2013 net sales to the residential housing market were related to new construction activity.
Also based on internal research and analysis, we estimate that approximately 31% to 35% of our consolidated 2013 net sales were related to non-residential applications including healthcare and educational institutions. Our products that serve the non-residential market primarily include air handlers and other heating and cooling products sold by our CES segment, digital mounting and mobility products sold by our DMS segment, and certain of the audio/video distribution and control products sold by our TECH segment. We believe that approximately 30% to 34% of our consolidated 2013 net sales to the non-residential market were related to new construction activity.
  
The demand for certain of our products is seasonal, particularly in the Northeast and Midwest regions of the United States. Inclement weather during winter months usually reduces the level of building and remodeling activity in both home improvement and new construction markets, thereby reducing our sales levels during the first and fourth quarters.
 
We are subject to the effects of changing prices and the impact of inflation which could have a significant adverse effect on our results of operations. In some circumstances, market conditions or customer expectations may prevent us from increasing the prices of our products to offset the inflationary pressures that may increase costs in the future. We continually review the costs of our product lines and look for opportunities to help offset the rising costs of raw materials and transportation when possible.  

During the past three years, the following have been our major purchases, expressed as a percentage of consolidated net sales, of raw materials and purchased components:
 
 
 
For the Year Ended December 31,
 
 
2013
 
2012
 
2011
Steel
 
6%
 
6%
 
6%
Motors
 
4%
 
4%
 
4%
Compressors
 
3%
 
2%
 
3%
Plastics
 
3%
 
3%
 
3%
Copper
 
2%
 
2%
 
2%
Electrical
 
2%
 
2%
 
3%
Aluminum
 
2%
 
2%
 
2%
Packaging
 
2%
 
1%
 
2%
 


32


NORTEK, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition and Results of Operations
December 31, 2013

Outlook

In 2014, we anticipate that both residential and non-residential construction activity will be higher than the levels experienced in 2013. We expect that colder-than-normal temperatures in certain regions will have an impact on construction activity in the first few months of 2014. When temperatures are too cold, projects may start later than planned and for projects that are underway, frigid temperatures may cause delays. Colder weather can also have an impact on consumer spending levels, and this could negatively impact certain of our businesses in the beginning of 2014. Also potentially affecting our performance in the first quarter of 2014 is the timing of expected orders from a major customer in our TECH segment, which we anticipate will now be received in the second quarter instead of the first quarter. Despite a slower start to 2014, we expect continued growth in residential new construction activity. We also anticipate that spending on residential improvement projects will increase, albeit at a slower pace than new construction. Our expectation for 2014 is that demand for residential security and home automation products will continue to increase over the levels experienced in 2013. Finally, for non-residential markets, we expect modest growth in the institutional segment, which is a major market for our CES and DMS segments.

As discussed below in "- Liquidity and Capital Resources - Operational Improvement Initiatives", we are well along in a transformation process focused on improving our strategic sourcing and supply chain capabilities, streamlining our warehousing and logistics, and optimizing our manufacturing footprint. Although our investments in these initiatives have reduced our operating margins in recent quarters, we believe they began to generate savings as planned in the fourth quarter, primarily related to sourcing improvements.

With these operational initiatives under way, we believe that we are in a position to focus more of our attention on ways to increase net sales. Toward that end, we have begun to execute on various marketing and product development strategies aimed at adding products that can accelerate our growth by leveraging our brands and distribution channels. We are approaching 2014 with a cautiously optimistic view of our end markets and with a keen focus on driving improvement through our transformation initiatives and sales growth strategies.

Acquisitions
 
We account for acquisitions under the purchase method of accounting and accordingly, the results of these acquisitions are included in our consolidated results from the date of their acquisition. We have made the following acquisitions since January 1, 2011: 
Reporting Segment
 
Acquired Company
 
Acquisition Date
 
Primary Business of Acquired Company
TECH
 
TV One Broadcast Sales Corporation; Barcom (UK) Holdings Limited; and Barcom Asia Holdings, LLC (collectively, "TV One")
 
April 28, 2011
 
Design, manufacture and sale of a complete range of video signal processing products for the professional audio/video and broadcast markets.
TECH
 
Gefen Distribution Verwaltungs GmbH ("Gefen Distribution")
 
February 22, 2013
 
Distributes Gefen products in Europe.
TECH
 
2GIG Technologies, Inc. (“2GIG”)
 
April 1, 2013
 
Designs and supplies residential security and home automation systems


33


NORTEK, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition and Results of Operations
December 31, 2013

Critical Accounting Estimates

This MD&A is based upon our consolidated financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles ("US GAAP"). Certain of our accounting policies require the application of judgment in selecting the appropriate assumptions for calculating financial estimates. By their nature, these judgments are subject to an inherent degree of uncertainty. We periodically evaluate the judgments and estimates used for our critical accounting policies to ensure that such judgments and estimates are reasonable for our interim and year-end reporting requirements. These judgments and estimates are based upon our historical experience, current trends and other information available, as appropriate. If actual conditions are different from those assumptions used in our judgments, actual results could be materially different from our estimates. Our critical accounting policies are discussed below.
 
Revenue Recognition, Accounts Receivable and Related Expenses
 
We generally recognize sales based upon shipment of products to customers and have procedures in place at each of our subsidiaries to ensure that an accurate cut-off is obtained for each reporting period. We consider revenue to be realized or realizable and earned when all of the following criteria are met: persuasive evidence of a sales arrangement exists; delivery has occurred or services have been rendered; the price is fixed or determinable; and collectability is reasonably assured. Revenue is recognized upon passage of title and risk of loss to customers, unless we are required to provide additional services, and provided we can form an estimate for sales returns. When a sale arrangement involves training, installation, or other deliverables, the arrangement is evaluated to determine whether it represents a multiple element arrangement. We recognize revenue on such multiple-element arrangements in accordance with Accounting Standards Update ("ASU") No. 2009-13, "Multiple-Deliverable Revenue Arrangements" ("ASU 2009-13"), based on the estimated selling price of each element. In accordance with ASU 2009-13, we use vendor-specific objective evidence (“VSOE”), if available, to determine the selling price of each element. If VSOE is not available, we use third-party evidence or our best estimated selling price to determine the selling price for each element.
 
Allowances for cash discounts, volume rebates, other customer incentive programs and gross customer returns, among others, are recorded as a reduction of sales at the time of sale based upon the estimated future outcome. Cash discounts, volume rebates and other customer incentive programs are based upon certain percentages agreed to with our various customers, which are typically earned by the customer over an annual period. We record periodic estimates for these amounts based upon the historical results to date, estimated future results through the end of the contract period, and the contractual provisions of the customer agreements. For calendar year customer agreements, we are able to adjust our periodic estimates to actual amounts as of December 31 each year based upon the contractual provisions of the customer agreements. For those customers who have agreements that are not on a calendar year cycle, we record estimates at December 31 consistent with the above described methodology. Customers are generally not required to provide collateral for purchases. As a result, at the end of any given reporting period, the amounts recorded for these allowances are based upon estimates of the likely outcome of future sales with the applicable customers and may require adjustment in the future if the actual outcome differs. We believe that our procedures for estimating such amounts are reasonable.
 
Customer returns are recorded on an actual basis throughout the year and also include an estimate at the end of each reporting period for future customer returns related to sales recorded prior to the end of the period. We generally estimate customer returns based upon the time lag that historically occurs between the date of the sale and the date of the return, while also factoring in any new business conditions that might impact the historical analysis, such as new product introductions. We believe that our procedures for estimating such amounts are reasonable.
 
Provisions for the estimated allowance for doubtful accounts are recorded in selling, general and administrative expense, net ("SG&A"). The amounts recorded are generally based upon historically derived percentages while also factoring in any new business conditions that might impact the historical analysis such as changes in economic conditions, past due and nonperforming accounts, bankruptcies or other events affecting particular customers. We also periodically evaluate the adequacy of our allowance for doubtful accounts recorded in our consolidated balance sheet as a further test to ensure the adequacy of the recorded provisions. The analysis for allowance for doubtful accounts often involves subjective analysis of a particular customer’s ability to pay. As a result, significant judgment is required in determining the appropriate amounts to record and such judgments may prove to be incorrect in the future. We believe that our procedures for estimating such amounts are reasonable.
 

34


NORTEK, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition and Results of Operations
December 31, 2013

Inventory Valuation
 
We value inventories at the lower of the cost or market with approximately 29% of our inventory at December 31, 2013 valued using the last-in, first-out (“LIFO”) method and the remainder valued using the first-in, first-out (“FIFO”) method. In connection with both LIFO and FIFO inventories, we record provisions, as appropriate, to write-down obsolete and excess inventory to estimated net realizable value. The process for evaluating obsolete and excess inventory often requires us to make subjective judgments and estimates concerning future sales levels, quantities, and prices at which such inventory will be able to be sold in the normal course of business. Accelerating the disposal process or incorrect estimates of future sales potential may cause the actual results to differ from the estimates at the time such inventory is disposed or sold. We believe that our procedures for estimating such amounts are reasonable. See Note 1, “Summary of Significant Accounting Policies”, to the consolidated financial statements, Item 8 of Part II, included elsewhere in this report.

Income Taxes
 
We account for income taxes using the liability method in accordance with ASC 740, “Income Taxes” (“ASC 740”), which requires that the deferred tax consequences of temporary differences between the amounts recorded in our consolidated financial statements and the amounts included in our federal, state and foreign income tax returns to be recognized in the balance sheet. As we generally do not file our income tax returns until well after the closing process for the December 31 financial statements is complete, the amounts recorded at December 31 reflect estimates of what the final amounts will be when the actual tax returns are filed for that fiscal year. In addition, estimates are often required with respect to, among other things, the appropriate state income tax rates to use in the various states that we and our subsidiaries are required to file, the potential utilization of operating and capital loss carry-forwards and valuation allowances required, if any, for tax assets that may not be realizable in the future. We require each of our subsidiaries to submit year-end tax information packages as part of the year-end financial statement closing process so that the information used to estimate the deferred tax accounts at December 31 is reasonably consistent with the amounts expected to be included in the filed tax returns. ASC 740 requires balance sheet classification of current and long-term deferred income tax assets and liabilities based upon the classification of the underlying asset or liability that gives rise to a temporary difference. As such, we have historically had deferred tax assets due principally to the unfavorable tax consequences of recording expenses for required book reserves for such things as, among others, bad debts, inventory valuation, insurance, product liability and warranty that cannot be deducted for income tax purposes until such expenses are actually paid. In addition, the Company has deferred tax liabilities related to basis differences in intangible assets and in property and equipment. We believe the procedures and estimates used in our accounting for income taxes are reasonable and in accordance with established tax law. The income tax estimates used have historically not resulted in material adjustments to income tax expense in subsequent periods when the estimates are adjusted to the actual filed tax return amounts, although there may be reclassifications between the current and long-term portion of the deferred tax accounts. See Note 8, “Income Taxes”, to the consolidated financial statements, Item 8 of Part II, included elsewhere in this report.
 

35


NORTEK, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition and Results of Operations
December 31, 2013

Goodwill
 
Evaluation of Goodwill Impairment
 
Our accounting for acquired goodwill requires considerable judgment in the valuation thereof, and the ongoing evaluation of potential impairment. Goodwill is not amortized. Instead, it is evaluated for impairment on an annual basis, or more frequently when an event occurs or circumstances change between annual tests that would more likely than not reduce the fair value of the reporting unit below its carrying value, including a significant adverse change in the business climate, among others. We have set the annual evaluation date as of the first day of our fiscal fourth quarter. The reporting units evaluated for goodwill impairment have been determined to be the same as our operating segments. Only the RESV, DMS, and TECH reporting units have goodwill and, therefore, are the only reporting units that currently are required to be evaluated for goodwill impairment.

In 2011, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update ("ASU") No. 2011-08, Intangibles - Goodwill and Other (Topic 350): Testing Goodwill for Impairment (“ASU 2011-8”), which introduced an optional qualitative assessment for testing goodwill impairment. Under ASU 2011-8, if we conclude that it is more likely than not that the fair value of a reporting unit exceeds the carrying amount, we are not required to perform the annual quantitative two-step impairment test under ASC 350, Goodwill and Other (“ASC 350”). We adopted ASU 2011-8 in 2011 and used the qualitative assessment approach in connection with our 2012 annual impairment evaluation for the RESV and DMS reporting units, and our 2011 annual impairment evaluation for the RESV, DMS and TECH reporting units. We used the quantitative assessment approach in connection with our 2013 annual impairment evaluation for the RESV, TECH and DMS reporting units and our 2012 annual impairment evaluation for the TECH reporting unit. Although we do not believe that there are any indicators of goodwill impairment, we believe that it is appropriate to periodically perform quantitative analysis of goodwill to provide a basis of support for future qualitative assessments, which is the reason that we used the quantitative assessment approach in 2013.

The following analyses were performed in connection with our annual qualitative assessment under ASU 2011-8 and are performed, if necessary, on an interim basis in order to determine if it is more likely than not that the fair value of any of our applicable reporting units are below the respective carrying amounts:
 
We review public information from competitors and other industry information to determine if there are any significant adverse trends in our competitors' businesses, such as significant declines in market capitalization or significant goodwill impairment charges that could be an indication that the goodwill of our reporting units is potentially impaired.

We review changes in our market capitalization and overall enterprise valuation to determine if there are any significant decreases that could be an indication that the valuation of our reporting units has significantly decreased.

We review, and update if necessary, our long-term 5-year financial projections and compare them to the prior long-term 5-year projections to determine if there has been a significant adverse change that could materially lower our prior valuation conclusions under both the discounted cash flow ("DCF") approach and the earnings before interest, taxes, depreciation and amortization ("EBITDA") multiple approach.

We determine if there have been any significant increases to the weighted average cost of capital (“WACC”) rates for each reporting unit, which could materially lower our prior valuation conclusions under the DCF approach.

We determine if there have been any significant decreases to our estimated EBITDA multiples, which could materially lower our prior valuation conclusions under the EBITDA multiple approach.

We determine the current carrying value for each reporting unit as of the end of the quarter and compare it to the previously determined amount in order to determine if there has been any significant increase that could impact our prior goodwill impairment assessments.

We also, as necessary, run pro forma models substituting the new assumption information derived from the above analyses to determine the impact that such assumption changes would have had on the prior valuations. These pro forma calculations assist us in determining whether or not the new valuation assumption information would have resulted in a significant decrease in the fair value of any of the reporting units.


36


NORTEK, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition and Results of Operations
December 31, 2013

Based on these analyses, we make a final determination as to whether or not it is more likely than not that the fair value of any reporting unit with goodwill is lower than its carrying value. If this were to be the case, then a “Step 1 Test” is required under ASC 350. The Step 1 Test compares the estimated fair value of each reporting unit to its carrying value. If the estimated fair value is lower than the carrying value, there is an indication of goodwill impairment and a “Step 2 Test” is required. If the estimated fair value of the reporting unit exceeds the carrying value, no further goodwill impairment testing is required.

The Step 1 fair value estimation includes a combination of a DCF approach and an EBITDA multiple approach. The DCF approach requires that we forecast future cash flows of the reporting unit(s) and discount the cash flow stream(s) based upon a WACC rate that is derived, in part, from comparable companies within similar industries. The DCF calculations also include a terminal value calculation that is based upon an expected long-term growth rate for the applicable reporting unit. The EBITDA multiple approach requires that we estimate certain valuation multiples of EBITDA derived from comparable companies and apply those derived EBITDA multiples to the applicable reporting unit EBITDA for the selected EBITDA measurement periods. We then evaluate what we believe to be the appropriate weighted average of the DCF approach and the EBITDA multiple approach in order to arrive at our estimated fair value.

The key assumptions used in order to determine the appropriate WACC rates for the DCF approach are as follows:
 
A risk free rate based on the 20-year United States Treasury bond yield.
A market risk premium based on our assessment of the additional risk associated with equity investment that is determined, in part, through the use of published historical equity risk studies as adjusted for the business risk index for each reporting unit. The business risk index is derived from comparable companies and measures the estimated stock price volatility. As such, changes in the market risk premium between periods reflect changes in the business risk index for the reporting units.
Comparable company and market interest rate information is used to determine the cost of debt and the appropriate long-term capital structure in order to weight the cost of debt and the cost of equity into an overall WACC.
A size risk premium based on the value of the reporting unit that is determined through the use of published historical size risk premia data.
A specific risk premium for the cost of equity, as necessary, which factors in overall economic and stock market volatility conditions at the time the WACC is estimated.

2013 Annual Impairment Test

For the 2013 annual impairment test for RESV, DMS and TECH, we estimated the fair value of each of the reporting units using a weighted average of 50% for the DCF approach and 50% for the EBITDA approach, which we determined to be the most representative allocation for the estimate of the long-term fair value of the reporting units. The RESV valuation assumed a taxable transaction while the DMS and TECH valuations each assumed a non-taxable transaction, with WACC’s of 13.2%, 13.4% and 14.5%, respectively, and EBITDA multiples in the range of 7.5x to 8.0x, 6.5x to 7.5x and 7.0x to 8.5x, respectively, for the selected measurement periods of the latest twelve months through September 30, 2013, and forecasted 2013 and 2014. As the estimated fair value of RESV, DMS and TECH was greater than the carrying value, no Step 2 test for goodwill impairment was required. The Company did not prepare updated goodwill impairment analyses as of December 31, 2013 for any reporting unit, as there were no indicators during the quarter that would have required such analysis.

We believe that our assumptions used to estimate the fair value of RESV, DMS and TECH as of the first day of the fourth quarter were reasonable. If different assumptions were used, particularly with respect to estimating future cash flows, weighted average costs of capital, and terminal growth rates, different estimates of fair value may have resulted. The estimated fair values of the RESV, DMS, and TECH reporting units would have to decrease by approximately 50.7%, 39.5%, and 23.8%, respectively, before a potential impairment would be recognized.



37


NORTEK, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition and Results of Operations
December 31, 2013

2012 Annual Impairment Test

We determined that it was appropriate for us to use the qualitative assessment approach under ASU 2011-8 for the 2012 annual goodwill impairment evaluation performed as of the first day of the fourth quarter based on the fact that the estimated fair values of the RESV and DMS derived in our valuation analysis continued to be significantly in excess of the carrying values. Based on the qualitative analysis performed, as described above, we determined that it was more likely than not that the fair value of each of these evaluated reporting units was greater than their carrying amounts as of the first day of the fourth quarter. Accordingly, we were not required to perform the two-step impairment test under ASC 350 for 2012 for RESV and DMS.

For the 2012 annual impairment test for TECH, we estimated the fair value of the reporting unit using a weighted average of 50% for the DCF approach and 50% for the EBITDA approach, which we determined to be the most representative allocation for the estimate of the long-term fair value of the reporting unit. The TECH valuation assumed a taxable transaction, with a WACC of 16.9%, and EBITDA multiples in the range of 7.5x to 8.5x for the selected measurement periods of the latest twelve months through September 29, 2012, and forecasted 2012 and 2013. As the estimated fair value of TECH was greater than the carrying value, no Step 2 test for goodwill impairment was required.
 
We believe that our assumptions used to estimate the fair value of TECH as of the first day of the fourth quarter were reasonable. If different assumptions were used, particularly with respect to estimating future cash flows, weighted average costs of capital, and terminal growth rates, different estimates of fair value may have resulted. We estimate that the fair value of TECH would have needed to be reduced by approximately 19.5% to reduce the estimated fair value to an amount below the carrying value.

As of December 31, 2012, we determined that there were no indicators of impairment and, therefore, no interim impairment testing was required for the RESV, DMS, or TECH reporting units as of that date.
 
2011 Annual Impairment Test

We determined that it was appropriate for us to use the qualitative assessment approach under ASU 2011-8 for the 2011 annual goodwill impairment evaluation based on the fact that the fair values of the RESV and TECH reporting units were significantly in excess of the carrying values in 2010, and the fact that substantially all of the DMS reporting unit was a recently completed acquisition at the time. Based on the qualitative analysis performed, as described above, we determined that it was more likely than not that the fair value of each of the three evaluated reporting units was greater than their carrying amounts as of the first day of the fourth quarter. Accordingly, we were not required to perform the two-step impairment test under ASC 350 for 2011.

As of December 31, 2011, we determined that there were no indicators of impairment and, therefore, no interim impairment testing was required for the RESV, DMS, or TECH reporting units as of that date.

See Note 3, “Goodwill and Other Intangible Assets”, to the consolidated financial statements, Item 8 of Part II, included elsewhere in this report.
 
Other Long-Lived Assets

In accordance with ASC 360, “Property, Plant and Equipment” (“ASC 360”), we evaluate the realizability of long-lived assets, which primarily consists of property and equipment and definite-lived intangible assets (the “ASC 360 Long-Lived Assets”), when events or business conditions warrant it, as well as whenever an interim goodwill impairment test is required under ASC 350. ASC 350 requires that the ASC 360 impairment test be completed, and any ASC 360 impairment be recorded, prior to performing the goodwill impairment test.

In accordance with ASC 360, the evaluation of the impairment of long-lived assets, other than goodwill, is based on expectations of non-discounted future cash flows compared to the carrying value of the long-lived asset groups. If the sum of the expected non-discounted future cash flows is less than the carrying amount of the ASC 360 Long-Lived Assets, we would recognize an impairment loss if the carrying amount of the asset group exceeds its fair value. Our cash flow estimates are based upon historical cash flows, as well as future projected cash flows received from subsidiary management in connection with our annual company-wide planning process and interim forecasting, and, if appropriate, include a terminal valuation for the applicable subsidiary based upon an EBITDA multiple. We estimate the EBITDA multiples by reviewing comparable company information and other industry data. We believe

38


NORTEK, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition and Results of Operations
December 31, 2013

that our procedures for estimating gross future cash flows, including the terminal valuation, were reasonable and consistent with current market conditions for each of the dates when impairment testing has been performed.

For the year ended December 31, 2013, we recorded a non-cash impairment charge of approximately $4.3 million within COGS related to the write-down of property and equipment in connection with the exit in the first quarter of 2014 of a product line within the RESV segment. There were no other long-lived asset impairment charges recorded during 2012 or 2011. See Note 3, “Goodwill and Other Intangible Assets”, to the consolidated financial statements, Item 8 of Part II, included elsewhere in this report.
 
Pensions and Post-Retirement Health Benefits
 
Our accounting for pensions, including supplemental executive retirement plans and post-retirement health benefit liabilities, requires estimates of such items as the long-term average return on plan assets, the discount rate, the rate of compensation increase and the assumed medical cost inflation rate. We utilize long-term investment-grade bond yields as the basis for selecting a discount rate by which plan obligations are measured. An analysis of projected cash flows for each plan is performed in order to determine plan-specific duration. Discount rates are selected based on high quality corporate bond yields of similar durations. These estimates require a significant amount of judgment as items such as stock market fluctuations, changes in interest rates, plan amendments, and curtailments can have a significant impact on the assumptions used and, therefore, on the ultimate final actuarial determinations for a particular year. We believe the procedures and estimates used in our accounting for pensions and post-retirement health benefits are reasonable and consistent with acceptable actuarial practices in accordance with U.S. generally accepted accounting principles. See Note 13, “Pension, Profit Sharing and Other Post-Retirement Benefits”, to the consolidated financial statements, Item 8 of Part II, included elsewhere in this report.

Product Warranties
 
We sell a number of products and offer a number of warranties including, in some instances, extended warranties for which we receive proceeds. The specific terms and conditions of these warranties vary depending on the product sold and the country in which the product is sold. We estimate the costs that may be incurred under our warranties, with the exception of extended warranties, and record a liability for such costs at the time of sale. Deferred revenue from extended warranties is recorded at the estimated fair value and is amortized over the life of the warranty. The related deferred revenue is reviewed to ensure that the amount recorded is equal to or greater than estimated future costs. Factors that affect our warranty liability include the number of units sold, historical and anticipated rates of warranty claims, cost per claim, and new product introduction. We periodically assess the adequacy of our recorded reserves for warranty claims and adjust the amounts as necessary. Warranty claims can extend far into the future. As a result, significant judgment is required in determining the appropriate amounts to record and such judgments may prove to be incorrect in the future. We believe that our procedures for estimating such amounts are reasonable. See Note 6, “Commitments and Contingencies”, to the consolidated financial statements, Item 8 of Part II, included elsewhere in this report.
 
Insurance Liabilities, including Product Liability
 
We record insurance liabilities and related expenses for health, workers compensation, product and general liability losses, and other insurance reserves and expenses in accordance with either the contractual terms of our policies or, if self-insured, the total liabilities that are estimable and probable as of the reporting date. Insurance liabilities are recorded as current liabilities to the extent payments are expected to be made in the succeeding year, with the remaining requirements classified as long-term liabilities. The accounting for self-insured plans requires that significant judgments and estimates be made both with respect to the future liabilities to be paid for known claims, and incurred but not reported claims as of the reporting date. We consider historical trends when determining the appropriate insurance reserves to record. In certain cases where partial insurance coverage exists, we must estimate the portion of the liability that will be covered by existing insurance policies to arrive at our net expected liability. Receivables for insurance recoveries for product liability claims are recorded as assets, on an undiscounted basis, in the accompanying consolidated balance sheets. These recoveries are estimated based on the contractual arrangements with vendors and other third parties as well as historical trends. We believe that our procedures for estimating such amounts are reasonable. See Note 6, “Commitments and Contingencies”, to the consolidated financial statements, Item 8 of Part II, included elsewhere in this report.
 

39


NORTEK, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition and Results of Operations
December 31, 2013

Contingencies
 
We are subject to contingencies, including legal proceedings and claims arising out of our business, that cover a wide range of matters including, among others, environmental matters, contract and employment claims, worker compensations claims, product liability, product recalls, warranty, and modification, adjustment or replacement of component parts of units sold. Product liability, environmental and other legal proceedings also include matters with respect to businesses previously owned.
 
We provide accruals for direct costs, including legal costs, associated with the estimated resolution of contingencies at the earliest date at which it is deemed probable that a liability has been incurred and the amount of such liability can be reasonably estimated. Costs accrued have been estimated based upon an analysis of potential results, assuming a combination of litigation and settlement strategies and outcomes. Legal costs for other than probable contingencies are expensed when services are performed.
 
While it is impossible to ascertain the ultimate legal and financial liability with respect to contingent liabilities, including lawsuits, we believe that the aggregate amount of such liabilities, if any, in excess of amounts provided or covered by insurance, will not have a material adverse effect on our consolidated financial position or results of operations. It is possible, however, that future results of operations for any particular future period could be materially affected by changes in our assumptions or strategies related to these contingencies, or changes out of our control. See Note 6, “Commitments and Contingencies”, to the consolidated financial statements, Item 8 of Part II, included elsewhere in this report.

Share-Based Compensation Expense
 
We measure share-based compensation expense at fair value in accordance with ASC 718, “Compensation - Stock Compensation” (“ASC 718”), and recognizes such expense over the vesting period of the share-based awards.

The estimated fair value of options granted is measured on the date of grant using the Black-Scholes option pricing model. The risk-free interest rate for periods within the life of the option is based upon a blend of U.S. Treasury bond rates with maturities equal to the expected term of the options. Prior to December 2011, the expected term assumption was derived using a binomial model analysis. Commencing with grants made in December 2011, the expected term assumption was derived using the simplified method, as described in SEC Staff Accounting Bulletin Topic 14.D.2, "Share-Based Payment - Certain Assumptions Used in Valuation Methods". This change in estimation methodology did not have a material impact on the resulting estimated fair value of options granted. The expected volatility assumption is based upon the historical volatility of comparable public companies' stock as well as the implied volatility of outstanding options for the comparable companies that had such options. The dividend yield represents the expected dividends on the Company's common stock for the expected term of the option. To date, the expected dividend yield has been estimated at zero for all options measured.  A significant change in interest rates, stock volatility, or the Company's expected dividend rate would have a direct impact on the estimated fair value of options granted subsequent to such a change, and related expense. 

The estimated fair value of restricted stock granted is based upon the closing price of the Company's stock on the date of grant.   In addition to restricted stock awards with time based vesting, the Company has also granted performance based awards.  Expense related to restricted stock awards with performance based vesting conditions is recognized as it becomes probable that the restricted shares will vest.  Certain of these awards have multi-year cumulative performance targets.    Changes in estimate with respect to the probability of vesting could have a significant effect upon the amount of expense recognized in a given period.

See Note 12, “Share-Based Compensation”, to the consolidated financial statements, Item 8 Part II, included elsewhere in this report for further information regarding our share-based compensation programs.




40


NORTEK, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition and Results of Operations
December 31, 2013

Results of Operations
Our consolidated operating results for 2013, 2012 and 2011 were as follows:
 
 
For the year ended December 31,
 
Change
 
 
2013
 
2012
 
2011
 
2013 vs. 2012
 
2012 vs. 2011
 
 
Amount
 
% of Net Sales
 
Amount
 
% of Net Sales
 
Amount
 
% of Net Sales
 
Amount
 
2013 % -
2012 %
 
Amount
 
2012 % -
2011 %
 
 
(Dollar amounts in millions)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net Sales
 
$
2,287.9

 
100.0
 %
 
$
2,201.3

 
100.0
 %
 
$
2,140.5

 
100.0
 %
 
$
86.6

 
N/A %

 
$
60.8

 
N/A %

Cost of Products Sold ("COGS"):
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Material costs
 
1,087.6

 
47.5

 
1,050.2

 
47.7

 
1,038.2

 
48.5

 
37.4

 
(0.2
)
 
12.0

 
(0.8
)
Labor costs
 
124.0

 
5.4

 
126.9

 
5.8

 
123.7

 
5.8

 
(2.9
)
 
(0.4
)
 
3.2

 

Overhead costs
 
415.8

 
18.2

 
383.8

 
17.4

 
405.9

 
18.9

 
32.0

 
0.8

 
(22.1
)
 
(1.5
)
Total COGS
 
1,627.4

 
71.1

 
1,560.9

 
70.9

 
1,567.8

 
73.2

 
66.5

 
0.2

 
(6.9
)
 
(2.3
)
Gross profit
 
660.5

 
28.9

 
640.4

 
29.1

 
572.7

 
26.8

 
20.1

 
(0.2
)
 
67.7

 
2.3

SG&A
 
521.3

 
22.8

 
468.5

 
21.3

 
464.8

 
21.8

 
52.8

 
1.5

 
3.7

 
(0.5
)
Amortization of intangible assets
 
51.3

 
2.3

 
44.3

 
2.0

 
44.8

 
2.1

 
7.0

 
0.3

 
(0.5
)
 
(0.1
)
Operating earnings
 
87.9

 
3.8

 
127.6

 
5.8

 
63.1

 
2.9

 
(39.7
)
 
(2.0
)
 
64.5

 
2.9

Interest expense
 
(99.4
)
 
(4.3
)
 
(96.5
)
 
(4.4
)
 
(105.6
)
 
(4.9
)
 
(2.9
)
 
0.1

 
9.1

 
0.5

Loss from debt retirement
 

 

 
(6.4
)
 
(0.3
)
 
(33.8
)
 
(1.6
)
 
6.4

 
0.3

 
27.4

 
1.3

Investment income
 
0.1

 

 
0.1

 

 
0.1

 

 

 

 

 

(Loss) earnings before (benefit) provision
for income taxes
 
(11.4
)
 
(0.5
)
 
24.8

 
1.1

 
(76.2
)
 
(3.6
)
 
(36.2
)
 
(1.6
)
 
101.0

 
4.7

(Benefit) provision for income taxes
 
(3.1
)
 
(0.1
)
 
15.3

 
0.7

 
(20.3
)
 
(1.0
)
 
(18.4
)
 
(0.8
)
 
35.6

 
1.7

Net (loss) earnings
 
$
(8.3
)
 
(0.4
)%
 
$
9.5

 
0.4
 %
 
$
(55.9
)
 
(2.6
)%
 
$
(17.8
)
 
(0.8
)%
 
$
65.4

 
3.0
 %
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Other financial information:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Depreciation and amortization
 
$
95.2

 
4.2
 %
 
$
83.7

 
3.8
 %
 
$
93.9

 
4.4
 %
 
$
11.5

 
0.4
 %
 
$
(10.2
)
 
(0.6
)%
Non-cash impairment charges
 
4.3

 
0.2

 

 

 

 

 
4.3

 
0.2

 

 

Share-based compensation expense
 
10.5

 
0.5

 
4.6

 
0.2

 
1.7

 
0.1

 
5.9

 
0.3

 
2.9

 
0.1

Restructuring and transformation charges
 
35.4

 
1.5

 
16.2

 
0.7

 
19.6

 
0.9

 
19.2

 
0.8

 
(3.4
)
 
(0.2
)
Other
 
7.9

 
0.3

 
2.5

 
0.1

 
10.7

 
0.5

 
5.4

 
0.2

 
(8.2
)
 
(0.4
)

* not meaningful or not applicable

41


NORTEK, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition and Results of Operations
December 31, 2013


Net sales by segment for 2013, 2012 and 2011 were as follows:
 
 
 
 
 
 
 
 
Change
 
 
For the year ended December 31,
 
2013 vs. 2012
 
2012 vs. 2011
 
 
2013
 
2012
 
2011
 
$
 
%
 
$
 
%
 
 
(Dollar amounts in millions)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
RESV
 
$
600.5

 
$
598.3

 
$
591.2

 
$
2.2

 
0.4
 %
 
$
7.1

 
1.2
 %
TECH
 
526.9

 
422.7

 
455.2

 
104.2

 
24.7

 
(32.5
)
 
(7.1
)
DMS
 
274.5

 
284.6

 
280.6

 
(10.1
)
 
(3.5
)
 
4.0

 
1.4

RHC
 
415.2

 
381.8

 
378.6

 
33.4

 
8.7

 
3.2

 
0.8

CES
 
470.8

 
513.9

 
434.9

 
(43.1
)
 
(8.4
)
 
79.0

 
18.2

 
 
$
2,287.9

 
$
2,201.3

 
$
2,140.5

 
$
86.6

 
3.9
 %
 
$
60.8

 
2.8
 %

Operating earnings (loss) by segment for 2013, 2012 and 2011 were as follows:

 
 
 
 
 
 
Change
 
 
For the year ended December 31,
 
2013 vs. 2012
 
2012 vs. 2011
 
 
2013
 
2012
 
2011
 
$
 
%
 
$
 
%
 
 
(Dollar amounts in millions)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
RESV
 
$
63.1

 
$
73.3

 
$
32.6

 
$
(10.2
)
 
(13.9
)%
 
$
40.7

 
* %

TECH
 
7.6

 
14.2

 
35.4

 
(6.6
)
 
(46.5
)
 
(21.2
)
 
(59.9
)
DMS
 
38.2

 
33.1

 
22.2

 
5.1

 
15.4

 
10.9

 
49.1

RHC
 
13.1

 
8.5

 
1.4

 
4.6

 
54.1

 
7.1

 
*

CES
 
26.2

 
42.9

 
12.0

 
(16.7
)
 
(38.9
)
 
30.9

 
*

 
 
148.2

 
172.0

 
103.6

 
(23.8
)
 
(13.8
)
 
68.4

 
66.0

Executive severance
 

 

 
(8.7
)
 

 
*

 
8.7

 
100.0

Unallocated
 
(60.3
)
 
(44.4
)
 
(31.8
)
 
(15.9
)
 
(35.8
)
 
(12.6
)
 
(39.6
)
 
 
$
87.9

 
$
127.6

 
$
63.1

 
$
(39.7
)
 
(31.1
)%
 
$
64.5

 
* %


*
not meaningful or not applicable



42


NORTEK, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition and Results of Operations
December 31, 2013

The remainder of this discussion provides greater detail of our operating results for each of our reporting segments. Our reporting segments offer a significant number of different products across a wide range of price points and numerous distribution channels that do not always allow meaningful quantitative analysis to be performed with respect to the effect on net sales of changes in units sold or the price per unit sold. However, whenever the underlying causes of material increases or decreases in consolidated net sales can be adequately analyzed and quantified, we attempt to make appropriate disclosure of such reasons, including changes in price, volume, and the mix of products sold. Overall, changes in COGS (including material, direct labor, overhead, and freight costs) as a percentage of net sales for one period as compared to another period may reflect a number of factors including changes in the relative mix of products sold, the effect of changes in sales prices and material costs, as well as changes in productivity levels.

We report our financial results in accordance with U.S. GAAP. However, we believe that certain non-GAAP performance measures used in managing the business may provide users of this financial information with additional meaningful comparisons between current results and results in prior periods. Non-GAAP performance measures should be viewed in addition to, and not as an alternative for, our reported results. We provide net sales and cost of products sold excluding the impact of foreign currency as a supplement to net sales and cost of products sold as determined by U.S. GAAP in order to provide readers with a clearer basis to assess our results over time. This measure is considered a non-GAAP financial measure and is calculated by translating the current period net sales and cost of products sold in functional currency to U.S. dollars using the prior year's exchange rate.

On March 11, 2013, our Board of Directors approved our operational improvement initiatives and efforts to rationalize our global manufacturing and distribution capacity. See "- Liquidity and Capital Resources - Operational Improvement Initiativesbelow.

Year ended December 31, 2013 as compared to the year ended December 31, 2012

RESV Segment

The operating results for the RESV segment for 2013 and 2012 were as follows:

 
 
For the year ended December 31,
 
 
 
 
 
 
2013
 
2012
 
Change
 
 
Amount
 
% of Net Sales
 
Amount
 
% of Net Sales
 
Amount
 
2013 % -
2012 %
 
 
(Dollar amounts in millions)
 
 
 
 
 
 
 
 
 
 
 
 
 
Net Sales
 
$
600.5

 
100.0
%
 
$
598.3

 
100.0
 %
 
$
2.2

 
N/A %

 
 
 
 
 
 
 
 
 
 
 
 
 
COGS:
 
 
 
 
 
 
 
 
 
 
 
 
Material costs
 
250.4

 
41.7

 
252.2

 
42.1

 
(1.8
)
 
(0.4