You have me looking some more at Nortek.
Found this article posted in November, 2015.
Wall Street Reacts to Negative Nortek Q3 Numbers; AVC Sales Drop 36.8%
Posted on November 5, 2015
by Ted
Company Blames Declines on ‘Negative Impact’ of United Technologies Unsuccessful Acquisition Bid
Surprisingly, the Nortek AVC division saw sales drop an astonishing 36.8% to $30.1 million – well off the $47.6 million in the quarter last year – in the wake of the spin-off of TV One and the company’s exit from commercial AV businesses.
Nortek is the parent company of Core Brands, a holding company of several significant custom integration brands, such as Niles, Elan, SpeakerCraft, Xantech, etc. In our analysis of Nortek’s previous second quarter report, we noted troubling red flags that had emerged. The smoke started rising in the fiscal first quarter, when the company disclosed that it was seeing a dramatic drop-off in orders from a key partner for its CAS (custom air solutions) segment – a “major semiconductor capital equipment customer.” It was, therefore, disappointing, but not a huge surprise that the company announced in their Q2 report that they will be forced to restructure the division, apparently not expecting that customer’s business to revive.
If the news from the company had stopped there in Q2, then they would probably have emerged unscathed. But then two nasty surprises were disclosed: 1) the RCH business unit (residential and commercial HVAC) had experienced a “temporary operational setback” related to some kind of shipment snafu from a third-party logistics provider that flattened sales and drove the unit to book a loss; and perhaps even more significantly, 2) the SCS (security and control solutions) segment, in the past the primary growth engine for the company, had unexpectedly booked both sales and profit declines of double-digit percentages. The company attributed this to “a difficult comparison” with the previous year.
The reaction to the Q2 report from Wall Street was swift and brutal – within a matter of hours, the company’s stock price had dropped 6%. Since the beginning of this year, Nortek has seen the total market value of the company decline by almost a third, as its stock price has dropped a total of 30%.
There were other surprising disclosures in the previous Q2 report, though not necessarily as nasty. These other disclosures included the fact that AVC (audio, video, and control) – a separate reporting unit but not considered a core segment by the company – was still apparently challenged, showing sales declines and losses…although the losses had diminished.
The company announced it had decided to restructure AVC after receiving an unsolicited offer from the management of TVOne to spin-off the unit. So Nortek essentially gifted the division to management, as it received no money…or in corporate-speak…sold to management for “no substantial cash consideration received.” BUT, the company also announced that in addition to the TVOne spin-off, it would also: 1) merge Gefen into Core Brands; and 2) exit the commercial AV business.
The Story Continues in Q3 (2015)
So turning to the third quarter report, we see more results – and learn more details – about rapidly unfolding events. Some may conclude that the situation is a deteriorating one, although company management would likely try to reassure you that they are on top of the situation.
“Nortek’s third-quarter net sales decreased 3.9% year-over-year, excluding acquisitions, divestitures and the impact of foreign exchange translation, and adjusted EBITDA, on the same basis, was down 3.7%,” said President and Chief Executive Officer Michael J. Clarke in a prepared statement. “Solid performance in our Custom Air, Ergonomics and Air Quality businesses was offset by lower sales and profitability in our HVAC and Security segments. During the quarter, we believe that the receipt of an unsolicited proposal to acquire the Company, related market rumors and activity related to the Company’s review of strategic alternatives had a negative impact on our business, employees and customers, primarily in our HVAC segment and to a lesser extent in our Security and Custom Air segments. We have ended all such activity, and we are working to put the uncertainties and the distraction related to this issue behind us. Rebuilding our momentum in the company, particularly in HVAC, will take some time. As a result, we have revised our full-year 2015 financial guidance.”
Besides sales and net profit declines in the third quarter this year, the company also saw declines in gross profit – both in dollars, and in percentage of sales. Operating earnings as well, declined from $33.4 million in 2014 to $14.9 million, or a drop of 55.4%.
What Investors Expected
These numbers are all well below what Wall Street was expecting. According to StreetInsider.com, the net loss of $14.4 million works out to a loss of $0.90 per share. Analysts were forecasting
earnings per share of $0.52, meaning the final result was $1.42 per share below the consensus.
And although the company had booked Q3 sales of $618.5 million, the consensus forecast from analysts had expected Nortek’s Q3 sales to come in at $654.1 million…a significant miss. That makes this new Q3 result the second consecutive quarter where actual performance fell short of Wall Street’s expectations.
Four Segments Decline
But this was not all that had investors concerned, the new report seemed to show deterioration in the performance of more of the company’s business segments. Ironically, the CAS segment – the original culprit – appears to have rebounded based on their reorganization. But four other segments seem to face more or new challenges. These four segments – AQH (air quality & home solutions), SCS, RCH, and AVC – showed flat or significant sales declines…and all showed profit declines, with RCH and AVC generating operating losses.
In a deeper dive analysis by management on each of these segments, we learned things may be worse than originally thought. Especially in the case of SCS, the former golden child is starting to look more like a problem child.
#2 of a 1-2 Punch
The RCH HVAC business was also impacted by the recent news that United Technologies was in discussions to acquire Nortek. In a conference call with analysts, Clarke noted that the potential acquirer (he refused to say the name United Technologies) was a direct competitor to the company’s HVAC segment and the widely spread news of the potential sale of Nortek caused customers to pull back or even switch their business to other companies, like United Technologies.
Clarke acknowledged that the company lost “share of the wallet” with these customers. “The company mentioned in the [Wall Street Journal] article is one of our major competitors in HVAC,” Clarke said. “We haven’t lost any customers, but our ‘share of wallet’ was definitely affected.”
Clarke had to admit, “It will take some time to win back this business.” With this being the case, the HVAC business is expected to remain flat the rest of this year and on through the entire of 2016.
SCS – The Golden Child Becomes a Problem Child
Maybe even more concerning is the new details we’ve learned about the problems now vexing the Security and Control Solutions segment. In their Q2 report, management claimed the sales and profit declines were the result of “a difficult comparison to the prior year when we shipped a large concentration of orders in the second quarter of 2014.”
In Q3, SCS segment sales declined to $94.1 million or almost 10% below $104.2 million in the quarter last year. Operating earnings dropped as well, coming in at $7.1 million this year, a $5.7 million or 44.5% decline from the $12.8 million in operating earnings booked in the quarter last year.
Now management tells us that this drop in the third quarter is the result of declining orders by a couple of significant OEM customers. That, to us, seems materially different than blaming “a difficult comparison” as they did in Q2.
Remember that the company acquired Numera (a PERS provider) in June of this year to beef up the SCS segment. Numera
is in these numbers, but “did not contribute any significant amount to net sales in the third quarter…”
“We continue to see a choppiness in orders with our largest OEM customers,” Clarke told analysts.
Management says they are trying to continue to diversify the customer base in the SCS segment. They also note that, other than the sales declines of the two large OEM customers, sales actually increased 4% with all other SCS dealers.
Management says they are trying to continue to diversify the customer base in the SCS segment. They also note that, other than the sales declines of the two large OEM customers, sales actually increased 4% with all other SCS dealers.
The company as well, is set to introduce a new product line, Go-Control 3 at CES. They have high hopes for this new line, which, Clarke told analysts, has a great pull-through to ancillary products with each console sold.
