Nortek, Inc.

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Nortek, Inc.

50 Kennedy Plaza
Providence, Rhode Island 02903
U.S.A.
Telephone: (401) 751-1600
Fax: (401) 751-4610
Web site: http://www.nortek-inc.com

Public Company
Incorporated: 1967
Employees: 12,200
Sales: $1.99 billion (1999)
Stock Exchanges: New York
Ticker Symbol: NTK
NAIC: 332322 Sheet Metal Work Manufacturing; 333415 Air Conditioning and Warm Air Heating Equipment and Commercial and Industrial Refrigeration Equipment Manufacturing; 335228 Other Major Household Appliance Manufacturing

Nortek, Inc., founded in 1967 by Ralph R. Papitto, is a leading international, diversified manufacturer and distributor of building products for residential, light commercial, and commercial applications. From its headquarters in Providence, Rhode Island, Nortek manages over 30 wholly owned subsidiaries that operate within three principal segments: Residential Building Products; Air Conditioning and Heating (HVAC) Products; and Windows, Doors, and Siding Products. These subsidiaries manufacture and sell—primarily in the United States, Canada, and Europe—a wide variety of building products in key categories, such as kitchen range hoods and other spot-ventilating products, heating and air conditioning systems, wood and vinyl windows and doors, vinyl siding products, indoor air-quality systems, and specialty electronic products. Nortek products are designed to meet the needs of professionals in the manufactured home, new construction, and remodeling markets as well as those of individual contractors, wholesalers, and do-it-yourself customers. Nortek is the world’s number one manufacturer of kitchen range hoods and bath fans; it is also North America’s leading manufacturer of residential products for the quality of interior air; custom-designed HVAC equipment; and HVAC equipment for the manufactured-housing market.

Shifting Business Structures, Fluctuating Economy: 1956-68

Ralph R. Papitto began his career as an entrepreneur in 1956 by founding Glass-Tite Industries, Inc., later known as GTI Corporation, a manufacturer of electronic semiconductor components. On July 24,1967, Papitto founded Nortek, Inc. (named in part after Norma, his first wife) in Cranston, Rhode Island, and took the company public in September. His purpose, as stated in Nortek’s 1967 annual report, was to form “an alliance of companies with long records of successful growth.” Within a Nortek alliance, Papitto believed these companies could operate from “a larger perspective... and better cope with technical, financial, production, and marketing problems.” In other words, Papitto based his business philosophy on “strong internal growth and external growth with strong companies in carefully selected industries.”

Papitto quickly implemented this business philosophy. On November 20, 1967, Nortek purchased Kinetic Instrument Corp. and Kaybe Machine and Instrument Corp.; in December he acquired Nursery Plastics, Inc. and Young Designs, Inc. Kinetic produced high-performance elements—such as small gears, gyroscope yokes, wave guides, and microwave insulators for space-age technologies. Kaybe was a recognized manufacturer of large multiple-needle stitching machines and the innovator of quilting patterns used by textile firms. Nursery Plastics and Young Designs, on the other hand, worked with educators, pediatricians, and child psychologists to manufacture items for developing the coordination, association, and memory retention of small children.

During 1968, Nortek acquired four organizations. The first two were Vitta Corporation, originator of a new dry-plating method that used flexible tapes in the electronics industry primarily to transfer thin layers of precious metals to surfaces without causing any molecular change; and Providence, Rhode Island-based Domestic Credit Corporation, which conducted several banking activities. In December Nortek purchased American Flexible Conduit Co., Inc. and its two associated companies (all of which Papitto bought after his retirement). Nortek also acquired the Massachusetts-based Duro Group of seven companies engaged in dyeing, finishing, printing, and distributing textiles. By year-end 1968, Nortek reported net revenues of $23.70 million compared to revenues of $13.62 million in fiscal 1967. Internal growth of operating units during 1968 averaged 15 percent, compared to a growth of nine percent in the Gross National Product Index of that year.

In an interview included in Nortek’s 1968 annual report, Chairman Papitto told financial analyst James D. Kilpatrick that Nortek’s rapid growth was largely due to the application of the multi-market company concept. Most medium-sized companies in the United States, said Papitto, were “convinced of the merits of becoming public companies” but feared that lack of sufficient resources would prevent them from performing successfully as public companies responsible to shareholders. Papitto persuaded companies to join multi-market Nortek, a parent organization that would give them the resources for meeting public company responsibilities of growth through new opportunities for “planning, research, risk-taking, and expansion.” Papitto explained that Nortek’s business strategy was one of “planned growth through balanced diversification.”

Diversification, Energy Crisis, Recession, and Inflation: 1969-79

In 1969 Nortek was listed on the American Stock Exchange and was one of the most actively traded issues of that year. Initially, the company focused on three major areas: land sales and development; consumer and industrial products, and financial services. Nortek purchased Vermont-based Rock of Ages Corporation and its granite quarries. Rock of Ages was the leader of the memorialization industry (monuments, markers, mausoleums, memorials) in North America. In Nortek’s 1969 annual report, Papitto quoted data from U.S. News & World Report indicating that from 1959 to 1969 land prices “soared 95 percent while common stocks, by contrast, rose only 18 percent in the same period, in terms of the Dow Jones Industrial average.”

In sync with the trend to buy land, Nortek acquired the Webb Realty Group of five associated companies that were among the fastest-growing organizations in the land development business in Florida (where they created planned communities) and also acquired large acreage for community developments in New England, Arizona, Nebraska, and Michigan. The growth of consumer reliance on installment credit fostered Domestic Credit Corp.’s diversification into financing and mortgaging services. Net sales and operating revenues for fiscal 1969 totaled $43.75 million, compared to $23.70 million (as restated for pooling of interests) in fiscal 1968.

The Webb Realty Group sold mobile homes and reported record revenues. In 1971 Domestic Credit Corp. relocated to Cranston, Rhode Island and offered all financial services, except checking and trust functions. Domestic’s operations complemented those of the Webb Group; financial services were a necessary dimension for full-service land sales and development, including the financing and development of mobile home communities. Nortek also acquired Arizona-based Mastercraft Homes, Inc.—which had a strong growth record as a builder of homes. Despite the soft economy that prevailed in 1971, Nortek reported revenues of $30.81 million for that fiscal year.

During 1972-73, Nortek reduced overhead costs, raised selling prices, and increased sales. Substantial debt was eliminated by the company’s withdrawal from real estate and land development activities. Nortek divested itself of both Nortek Properties, Inc. (formerly the Webb Group) and Mastercraft Homes, Inc., continued to nurture the growth of its other subsidiary companies, and strengthened corporate management. Richard J. Harris joined the company as manager of corporate accounting, thereby initiating a career path that would bring him to serve as vice-president, treasurer, and chief financial officer beyond the year 2000. At the end of fiscal 1973, Nortek reported net earnings of $1.43 million, compared to $1.14 million in 1972.

An energy crisis, shortages of raw materials, high interest rates, government controls, and accelerating inflation created an adverse economic environment during 1974-75. Nortek strengthened its senior management team with the appointment of Richard L. Bready (who became president and CEO in 1990) as vice-president and treasurer. A growing demand for Duro Group’s fabrics allowed it to recover from the 1974 turndown of the textile industry. Rock of Ages continued to upgrade its procedures and, according to Nortek’s 1975 annual report, “was particularly proud of the unique 27-x30-foot bas-relief granite sculpture completed for installation on the facade of the giant Libby Dam in Montana.” For fiscal 1975, Nortek posted net sales of $62.42 million, an increase of 28 percent over 1974.

Although net sales for 1976 peaked at $72.71 million, net earnings—reduced by settlement of litigation for a seven-year-old lawsuit and reorganization of Nortek’s Cable and Wire Division—dropped to $82,000. Nortek sold its marginally profitable finance subsidiary, Domestic Credit Corporation, and merged its new acquisition—Minnesota-based Manufacturers Systems, Inc.—into a Nortek subsidiary. MSI manufactured and distributed a wide variety of metal products for heating and cooling systems. During 1977, harsh winter weather severely impacted the quarrying operations of Nortek’s Rock of Ages subsidiary and the worldwide oversupply of copper caused continued erosion in the selling prices and gross profit margins of the Cable and Wire Division. Nevertheless, despite adverse economic conditions in many of Nortek’s primary markets, none of Nortek’s operating divisions experienced losses during 1978-79. Net sales for fiscal 1979 rose to $117.96 million while net earnings grew to $3.75 million.

Company Perspectives:

Nortek’s mission is to broaden its offerings of high-quality building products; profitably grow its businesses both domestically and internationally; make strategic acquisitions, and assimilate these into its operations; and continue to build shareholder value.

Rebounding Economy, Rise and Decline of Housing Market, High Leverage and Downturn: 1980-89

The 1980s, according to Kingwood College Library’s web site, was “an era of hostile takeovers, leveraged buyouts, and mega-mergers that spawned a new breed of billionaires.” For many people, binge buying and running up credit were the order of the day during this decade, which began with double-digit inflation. President Reagan (1981-89) “obtained legislation to curb inflation, stimulate economic growth, increase employment, strengthen the military and renew national self confidence.” The recession of 1981-82 slowly gave way to relative prosperity as corporations adapted to a changing economy.

Higher prices for supplies and raw materials, rising wage levels, additional fringe benefits, and other costs that Nortek could not completely pass along to customers had a negative impact on net earnings. Furthermore, reduced demand for exports of higher-margin rough granite and price fluctuations in copper adversely affected the profitability of Rock of Ages and of the Cable and Wire Division.

It was at this time that Nortek, with subsidiaries in various types of business, entered the building products industry with the acquisition of Miami-based Glassalum Engineering Corp. and of Glassalum Installations, Inc. These companies engineered, manufactured and installed glass and aluminum exteriors for multi-story commercial buildings and condominiums—and brought in a $16 million backlog of orders. In January 1981, Nortek further strengthened its position in the building products industry by acquiring Wisconsin-based Broan Mfg. Co., Inc., a manufacturer of built-in home products, and the largest manufacturer of kitchen-range hoods; Broan products were used in new construction and in renovation projects.

Nortek’s investment in building products did not pay off immediately but did serve as the seed from which Nortek would grow. High interest rates on mortgages slowed down the demand for housing in 1981-82. In the mid-1980s, however, according to Carl Horowitz’s analysis of housing in the 1980s, the United States “had 102.7 million dwellings in 1987, a 49.5 percent increase over the 68.7 million dwellings in 1970.” The increase was due in part to a recovering economy and a shift in population brought on by baby boomers who, “by the close of the 1980s, were in the 35-54 age group, had established their own households”—and were not seeking housing for the first time.

“During the 1980s,” according to the April 29, 1990 issue of the Boston Globe, Nortek “bought or sold more than a dozen companies, including makers of aerospace fasteners, bicycle spokes, aircraft landing gear, brass nuts and plastics.” Nortek continued to diversify through acquisitions, mainly Linear Corporation and Nordyne Inc. At first, Nortek financed acquisitions with commercial bank debt. Early in the 1980s, however, “the company was introduced to a different way of raising money: selling high-yield, high-risk debt, known as junk bonds,” according to Neil Downing in the Providence Journal-Bulletin. These bonds gave Nortek millions of dollars for acquisitions. “Nortek issued junk bonds to help pay for one or two big acquisitions, which never materialized. While searching for deals, Nortek invested a lot of the proceeds from the bond sales in other companies’ junk bonds or in junk-bond mutual funds,” Downing noted. At the end of the decade, the company’s profits suffered from the 1987 stock market crash, which devastated Nortek’s junk-bond portfolio. For several years after early 1988, Nortek made no significant material acquisitions.

Furthermore, by 1989, Nortek had other problems. Housing starts had begun to plummet in 1986 and by 1989 were down for the third consecutive year nationwide and at their lowest level since the 1981-82 recession. “Resales of existing homes were at a five-year low,” wrote Biddle for the Boston Globe. Nortek had to settle two court cases and resolve allegations brought by the Securities and Exchange Commission. For fiscal 1989, the company posted a $12.5 million loss on sales of $1.08 billion, the company’s largest net loss and, ironically, its largest net sales in about ten years. But all was not gloom and doom: Nortek had begun to evolve as a manufacturer of building products, to cut operating costs, and to restructure.

Lean Years and an Upturn: 1990-94

Since its founding in 1967, Nortek had owned a granite quarry, a land development company, and a lamp manufacturer. It had bought and sold dozens of companies, including those involved in textiles, toys, banking, and aerospace. A significant number of acquisitions made in a relatively short time rapidly increased the company’s debt. Relatively high interest rates, problems in the savings-and-loan industry, and a sudden downturn in the housing market slowed sales of building products. Nortek found it difficult to service its debt on a continuing basis. By 1990, Nortek shares had plunged to $2.875 per share, compared to a range before the October 1987 crash of $12-$ 16 per share.

In November 1990, Papitto retired in favor of his longtime associate, Nortek President Richard L. Bready, who succeeded him as the company’s chief executive officer. Bready came into his new position to face $350 million in short- and long-term debt, including $170 million in junk bonds. Nortek’s stock had dropped down to less than $2 a share.

Key Dates:

1967:: Ralph R. Papitto founds Nortek, Inc.
1969:: Nortek is listed on the American Stock Exchange.
1971:: Nortek subsidiary reports record sales of mobile homes.
1980-81:: Nortek enters building-products industry.
1985:: Nortek relocates its headquarters to Providence, Rhode Island.
1989:: Housing starts drop sharply for the third consecutive year.
1990:: Chairman Papitto retires in favor of Nortek President Richard L. Bready.
1993:: Nortek management restructures operations and revises its business strategy.
1995-96:: Nortek restructures its product segments.
1998-99:: Nortek sells eight businesses and acquires seven major companies.
1999:: Nortek posts record sales.

Nortek’s growth had been generated largely by strategic acquisitions and mergers, and by the success of its product groups. The profitability of these groups was significantly impacted between 1986 and 1991 by a decline of 43.8 percent in new housing starts as well as by harsh economic conditions, particularly in the Northeast, California, and Canada. Construction of residential housing increased about 20 percent during 1990-94 but remained below the levels of the mid-1980s. President and CEO Bready led Nortek management through a restructuring of operations and a revision of Nortek’s business philosophy. The company reduced production costs and overhead levels, improved the efficiency and productivity of its operations, and showed operating earnings despite a slow economy. Net sales decreased to $744.11 million in 1993 but net losses that had spiraled to $38.1 million in 1990 were down to $20.8 million in fiscal 1993, although 1993 sales were $55.87 million lower than those of the preceding year.

During an interview with Don DeMaio for the Providence Business News, Chairman Bready commented that since 1990, Nortek had sold nine businesses, reduced the workforce by 15 percent, and “cost-reduced the entire delivery system....” Bready explained Nortek’s revised business philosophy: “We want to have one of the best products in the industries that we’re in and the lowest delivered cost. You have to have continuous improvement in both the product and your costs. If you don’t have that, somebody else will,” he emphasized. At year-end 1994, Nortek posted net earnings of $17.8 million and had accumulated $100 million in cash reserves.

As a diversified manufacturer of residential and commercial building products, in 1995 Nortek operated within three principal product sections: the Residential Building Products Group; the HVAC Products Group; and the Plumbing Products Group. To strengthen the Residential Building Products Group, during the last quarter of 1995, Nortek acquired Texas-based Rangaire Company (kitchen-range hoods and lighting fixtures); the capital stock and related entities of Italy-based Best S.p.A. (kitchen-range hoods); and the stock of Venmar Ventilation Inc. (continuous ventilation systems and energy-recovery ventilators), headquartered in Quebec, Canada. These acquisitions expanded Nortek’s product lines, advanced its indoor air-quality technology, and moved the company into new global markets.

In mid-1994 Nortek had experienced significant increases in the cost for raw materials as well as fewer demands for building products. Although these negative factors increased in fiscal 1995 Nortek posted net earnings of $15 million on sales of $776.21 million. In 1996 Nortek’s operations were stimulated by an increase in housing starts throughout the United States and Canada. Cost increases subsided and Nortek began to reap increased benefits from the turnaround strategy that Chairman Bready and his team had set in place in the early 1990s; namely, development of a strong core group of businesses; divestiture of units that did not fit the core; reduction of debt-servicing costs; and initiation of a rigorous but realistic system of cost reductions and controls. Nortek became one of the largest suppliers of custom-designed commercial HVAC products in the United States. Fiscal 1996 net sales grew to $969.80 million and net earnings to $22 million.

1996 and Beyond

Because of continuing losses in the Plumbing Products Group, in 1997 Nortek adopted a plan to discontinue this Group and reorganized the company into three segments: Residential Building Products; Air Conditioning and Heating Products; and Windows, Doors, and Siding. The August acquisition of New York-based Ply Gem Industries, Inc., a leading manufacturer and distributor of specialty building products for the home-improvement industry and a major supplier to national do-it-yourself retail home centers, represented a quantum leap in growth for the company and raised it to national leadership ranks in the building products industry. Ply Gem operated two principal product groups targeting the residential and light-commercial markets: Windows, Doors, and Siding; and Specialty Products and Distribution; Ply Gem was phased into one of Nortek’s wholly owned subsidiaries. Nortek’s sales for fiscal 1997 peaked at $1.13 billion and net earnings were $21.2 million.

During 1998 Nortek sold eight businesses, some of which were considered non-strategic assets that had come with the purchase of Ply Gem. In July, from London-based Williams Plc, Nortek acquired Ohio-based NuTone, Inc., which specialized in intercom systems and home theater systems. In October Nortek acquired Pennsylvania-based Napco Inc., which owned factories—within a few miles of each other—for the production of quality vinyl siding, aluminum building products, and vinyl windows. Napco’s siding business was combined with Nortek’s Variform siding subsidiary, and Napco’s window fabrication operations were merged with Nortek’s Great Lakes Window Inc. subsidiary, according to the September 7, 1998 issue of Plastic News. All of Nortek’s core businesses were profitable in fiscal 1998, principally as a result of acquisitions and higher sales for superior-level, built-in ventilation products in North America. Net sales for fiscal 1998 rose to $1.74 billion, a 53 percent increase over those of 1997; net earnings increased to $35 million, a 65 percent rise over those for 1997.

During 1999 the company acquired seven companies, among which was Webco, Inc.—a designer and manufacturer of custom air-handling equipment for industrial, institutional, and commercial customers. To expand its presence in the windows and doors marketplace, Nortek also purchased three businesses from United Kingdom-based Caradon plc: Georgia-based Peachtree Doors and Windows, a national supplier of premium residential windows, entry doors and patio doors that targeted custom and high-end home markets; Pennsylvania-based Thermal-Gard, which made premium replacement windows, patio doors and sunrooms; and Alberta, Canada-based CWD Windows and Doors, a leading provider of complete window and door systems for new homes in western Canada.

Next came Nortek’s purchase of Multiplex Technologies, Inc., a manufacturer of high-performance, multi-room video distribution equipment for the home. In October Nortek acquired Kroy Building Products, Inc., a market leader in vinyl fencing, railing profiles and vinyl decking systems for residential and commercial applications. In early December Nortek acquired Xantech Corporation, a manufacturer of residential infrared remote-control systems for extending control of VCR, cable, satellite, and stereo systems to multiple rooms throughout an entire household.

Fiscal 1999 was the second consecutive year for which Nortek reported record financial results. Net sales for the year rose to $1.99 billion, a 15 percent increase from the $1.74 billion for 1998. Net earnings peaked at $49 million, a 41 percent increase from the $35 million reported for 1998.

As the year 2000 unfolded, Chairman Bready commented, in a letter to Nortek shareholders, that Nortek was poised “to benefit from generally favorable economic conditions. Low inflation, near full employment, strong liquidity and strong consumer confidence continued to help Americans fulfill their dream of home ownership and improved home amenities through extensive home remodeling and expansion.”

In short, Nortek had known lean years—but judging from its history and a strong trend to new homes and renewed emphasis on home renovation—the company had good reason to believe in its near-term and longer-term prosperity as an international leader of the building products industry.

Principal Subsidiaries

Best S.p.A. (Italy); Broan-NuTone LLC; Broan-NuTone Canada Inc.; CWD Windows and Doors (Canada); Elektromec S.p.A. (Italy); Goverenair Corporation; Great Lakes Window, Inc.; Hoover Treated Wood Products, Inc.; Kroy Building Products, Inc.; Linear Corporation; Mammoth, Inc.; Napco, Inc. Nordyne Inc.; NuTone Inc.; Peachtree Doors & Windows, Inc.; Rangaire LP; Richwood Building Products, Inc.; SNE Enterprises, Inc.; Temtrol, Inc.; Thermal-Gard, Inc.; Variform, Inc.; Venmar Ventilation Inc. (Canada); Venmar Aston (Canada); Venmar CES (Canada); Ventrol Air Handling Systems, Inc.; Webco, Inc.