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  **SECURITIES AND EXCHANGE COMMISSION****WASHINGTON, D.C. 20549****FORM 10-Q**   þ **QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934******For the quarterly period ended September 30, 2006****   o **TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF1934****COMMISSION FILE NUMBER 1-8831****FEDDERS CORPORATION**(Exact name of registrant as specified in its charter)   DELAWARE 22-2572390(State of incorporation) (I.R.S. Employer Identification No.)   505 MARTINSVILLE ROAD, LIBERTY CORNER, NJ 07938-0813(Address of principal executive offices) (Zip Code)REGISTRANT’S TELEPHONE NUMBER, INCLUDING AREA CODE:(908) 604-8686Indicate by check mark whether the registrant (1) has filed all reports required to be filed bySection 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months and (2)has been subject to such filing requirements for the past 90 days.Yes þ       No o Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, ora non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule12b-2 of the Exchange Act. (Check one):                         Large accelerated filer o           Accelerated filer þ           Non-accelerated filer oIndicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of theExchange Act).Yes o No þ     The registrant has outstanding 30,129,443 shares of Common Stock and 2,492,181 shares of ClassB Stock (which is immediately convertible into Common Stock, on a share-for-share basis) as ofOctober 31, 2006.  
 

 
FEDDERS CORPORATIONINDEX           **PAGE**     **NUMBER** PART I FINANCIAL INFORMATION  3 ITEM 1. FINANCIAL STATEMENTS  3   CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2006 AND 2005AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2006 AND 2005  3   CONSOLIDATED BALANCE SHEETS AS OF SEPTEMBER 30, 2006,DECEMBER 31, 2005 AND SEPTEMBER 30, 2005  4   CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE NINE MONTHSENDED SEPTEMBER 30, 2006 AND 2005  5   NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS  6-22 ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF RESULTS OFOPERATIONS AND FINANCIAL CONDITION  23-27 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK  28 ITEM 4. CONTROLS AND PROCEDURES  28-30  PART II OTHER INFORMATION  31 ITEM 1. LEGAL PROCEEDINGS  31 ITEM 1A. RISK FACTORS  31 ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS  31 ITEM 3. DEFAULTS ON SENIOR SECURITIES  31 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS  31 ITEM 5. OTHER INFORMATION  31 ITEM 6. EXHIBITS  31    SIGNATURE  32   CERTIFICATIONS  33-36  EX-31.1: CERTIFICATIONS EX-31.2: CERTIFICATIONS EX-32.1: CERTIFICATIONS EX-32.2: CERTIFICATIONS
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**PART I — FINANCIAL INFORMATION**ITEM 1. FINANCIAL STATEMENTSFEDDERS CORPORATIONCONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS(UNAUDITED)                   **Three Months Ended**  **Nine Months Ended**   **September 30,**  **September 30,** **(amounts in thousands, except per share data)** **2006**  **2005**  **2006**  **2005** Net sales $51,178  $63,110  $246,446  $258,740 Cost of sales  42,447   55,197   211,331   214,115              Gross profit  8,731   7,913   35,115   44,625                  Selling, general and administrative expense  12,593   16,823   44,142   53,802 Asset impairment, employee severance, and other restructuringcharges/(credits)  2,153   3,874   2,764   4,246              Total operating expenses  14,746   20,697   46,906   58,048                               Operating income/(loss)  (6,015)  (12,784)  (11,791)  (13,423)                 Partners’ net interest in joint venture results  167   151   235   844 Interest expense, net  5,285   5,492   16,098   16,538 Other (income)/expense  395   877   984   355              Income/(loss) from continuing operations before income taxes  (11,528)  (19,002)  (28,638)  (29,472)                 Provision/(benefit) for income taxes  115   (84)  707   263              Income/(loss) from continuing operations  (11,643)  (18,918)  (29,345)  (29,735)                 Income/(loss) from discontinued operations, net of 2005 tax of $11and $48  —   561   —   1,894              Net income/(loss)  (11,643)  (18,357)  (29,345)  (27,841)                 Preferred stock dividends  1,143   1,145   3,430   3,294                               Net income/(loss) applicable to common stockholders $(12,786) $(19,502) $( 32,775) $(31,135)                              Income/(loss) per common share:                Basic net income/(loss) per common share from continuing operations $(0.41) $(0.65) $(1.06) $(1.08)             Diluted net income/(loss) per common share from continuingoperations  (0.41)  (0.65)  (1.06)  (1.08)                              Basic net income/(loss) per common share from discontinuedoperations $—  $0.02  $—  $0.06              Diluted net income/(loss) per common share from discontinuedoperations  —   0.02   —   0.06                               Basic net income/(loss) per common share $(0.41) $(0.63) $(1.06) $(1.02)              Diluted net income/(loss) per common share  (0.41)  (0.63)  (1.06)  (1.02)                              Weighted average shares:                Basic  31,270   30,688   31,011   30,608 Diluted  31,270   30,688   31,011   30,608                  Dividends per share declared:                Common and Class B Stock $—  $—  $—  $0.060 Preferred Stock  —   —   —   1.075 See accompanying notes to the consolidated financial statements
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FEDDERS CORPORATIONCONDENSED CONSOLIDATED BALANCE SHEETS               **September 30,**  **December 31,**  **September 30,** **(amounts in thousands, except par value data)** **2006**  **2005**  **2005**   (Unaudited)      (Unaudited) ASSETS            Current assets:            Cash and cash equivalents $16,387  $14,417  $16,946 Accounts receivable (net of allowance of $3,707 , $3,928 and$4,393 at September 30, 2006, December 31, 2005 and September30, 2005, respectively)  41,721   42,157   53,318 Inventories:            Finished goods  28,952   52,395   59,547 Work-in-process  2,306   2,694   3,040 Raw materials and supplies  17,640   19,224   21,365           Net inventories  48,898   74,313   83,952 Deferred income taxes  3,916   3,882   8,887 Assets held for sale  —   843   — Other current assets  6,435   6,333   8,754 Current assets of discontinued operations  —   —   4,158           Total current assets  117,357   141,945   176,015              Net property, plant and equipment:            Land and improvements  4,900   4,900   5,186 Buildings and leasehold improvements  35,307   35,952   40,587 Machinery and equipment  73,857   71,083   86,236           Gross property, plant and equipment  114,064   111,935   132,009 Less accumulated depreciation  72,575   67,392   78,218           Net property, plant and equipment  41,489   44,543   53,791 Deferred income taxes  21,629   21,629   22,105 Goodwill  88,229   87,725   87,441 Other intangible assets  4,039   4,726   4,556 Other assets  24,833   30,486   36,259 Other assets of discontinued operations  —   —   3,088           Total assets $297,576  $331,054  $383,255                        LIABILITIES AND STOCKHOLDERS’ EQUITY/(DEFICIT)            Current liabilities:            Short-term notes $45,765  $56,740  $66,438 Current portion of long-term debt  2,213   2,470   1,408 Accounts payable  51,638   43,961   45,354 Income taxes payable  1,781   1,370   1,003 Accrued expenses  38,632   39,149   41,153 Current liabilities of discontinued operations  —   —   1,196           Total current liabilities  140,029   143,690   156,552              Long-term debt  157,731   158,113   159,517 Other long-term liabilities  22,636   24,952   28,626 Long-term liabilities of discontinued operations  —   —   1,185 Partners’ net interest in joint venture  4,740   4,361   4,358           Total liabilities  325,136   331,116   350,238              Stockholders’ equity/(deficit):            Preferred Stock, $0.01 par value, 15,000 shares authorized and2,127 shares issued  21   21   21 Common Stock, $0.01 par value, 70,000 shares authorized,37,299, 36,816 and 36,716 issued at September 30, 2006,December 31, 2005 and September 30, 2005, respectively  373   367   367 Class B Stock, $0.01 par value, 5,000 shares authorized and2,492 shares issued  25   25   25 Additional paid-in capital  115,431   115,523   115,297 Retained earnings/(deficit)  (105,580)  (76,235)  (41,995)Accumulated other comprehensive gain/(loss)  1,358   (92)  (1,181)Treasury stock, at cost, 8,521 shares of Common Stock atSeptember 30, 2006, December 31, 2005 and September 30, 2005  (39,188)  (39,188)  (39,188)Deferred compensation  —   (483)  (329)          Total stockholders’ equity/(deficit)  (27,560)  (62)  33,017           Total liabilities and stockholders’ equity/(deficit) $297,576  $331,054  $383,255           See accompanying notes to the consolidated financial statements
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FEDDERS CORPORATIONCONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS           **Nine Months Ended**   **September 30,** **(amounts in thousands, except per share data)** **2006**  **2005**   **(Unaudited)** Cash flows from operating activities:        Net loss $(29,345) $(27,841)Adjustments to reconcile net loss to net cash used in operating activities:        Depreciation and amortization  5,126   7,510 Deferred income taxes  (34)  98 Amortization of deferred financing costs  670   635 (Gain)/loss on asset disposal  (35)  (55)Asset impairment charge  —   2,732 Partners’ net interest in joint venture results  235   (664)Changes in operating assets and liabilities, net of acquisition:        Accounts receivable  436   (22,711)Inventories  25,415   50,294 Proceeds from Company’s interest in life insurance  7,291   — Other current assets  (102)  1,831 Other assets  (2,137)  (642)Accounts payable  7,677   (4,722)Accrued expenses and income taxes payable  (107)  (190)Other long-term liabilities  (2,171)  (490)Other-net  693   389        Net cash provided by/(used in) operating activities  13,612   6,174                 Cash flows from investing activities:        Additions to property, plant, and equipment  (2,162)  (3,961)Proceeds from disposal of property, plant and equipment  941   127 Acquisition of business, net of cash acquired (Note 5)  —   (9,426)       Net cash provided by/(used in) investing activities  (1,221)  (13,260)                Cash flows from financing activities:        Proceeds/(repayments), net from short-term notes  (10,975)  7,102 Repayments of long-term debt  (896)  (1,370)Cash dividends  —   (3,978)       Net cash provided by/(used in) financing activities  (11,871)  1,754                 Effect of exchange rate changes  1,450   (505)                Net increase/(decrease) in cash and cash equivalents  1,970   (5,837)Cash and cash equivalents at beginning of period  14,417   22,783        Cash and cash equivalents at end of period $16,387  $16,946                 Supplemental disclosure:        Interest paid $18,017  $18,973 Income taxes paid  407   409 In accordance with Statement of Financial Accounting Standards No. 123 (revised 2004), “Share-BasedPayment”, effective January 1, 2006, the Company reversed the unearned compensation balance relatedto restricted stock, included in deferred compensation in the December 31, 2005 consolidatedbalance sheet, netting the balance against additional paid-in capital. In February 2006, theCompany issued 100,000 shares of restricted stock with a value of $139. In June 2006, the Companyissued 300,000 shares of restricted stock with a value of $783. (See Note 3)In June 2006, the Company issued Directors 82,764 shares of common stock with a value of $216.See accompanying notes to the consolidated financial statements
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FEDDERS CORPORATIONNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(amounts in thousands, except share and per share data)(unaudited)1. BASIS OF PRESENTATION     The financial statements included herein are unaudited and prepared in accordance with theinstructions for Form 10-Q; however, such information reflects all adjustments, which consistsolely of normal recurring adjustments, which are, in the opinion of management, necessary for afair presentation of results for the interim periods. Reference should be made to the annualfinancial statements, including footnotes thereto, included in the Annual Report on Form 10-K ofFedders Corporation (the “Company”) for the fiscal year ended December 31, 2005. Certainreclassifications may have been made in prior-year amounts to conform to the current-yearpresentation.     On January 25, 2005, the Company’s Board of Directors approved the sale of all of the capitalstock of Melcor Corporation, its thermal management subsidiary, which was not considered a corebusiness unit. On October 25, 2005, the Company sold Melcor to Laird Technologies, Inc. for$17,300 in cash (before a $200 temporary holdback), which resulted in a pre-tax gain of $11,400.The consolidated statements of operations, consolidated balance sheets, and notes to theconsolidated financial statements have been adjusted to reflect the accounts of Melcor asdiscontinued operations. Melcor’s revenues, which were reported in the Engineered Productssegment, were $6,644 for the first nine months of 2005. Discontinued operations do not include anallocation of interest expense.     The Company’s business is seasonal and, consequently, operating results for the nine-monthperiod ended September 30, 2006 are not necessarily indicative of the results that may be expectedfor the year ending December 31, 2006. The Company is proceeding with its strategy to diversifysales and earnings to become less dependent on the manufacture and sale of room air conditioners.The demand for room air conditioners is highly seasonal in the North American market.2. COMPREHENSIVE INCOME (LOSS)     Assets and liabilities of the Company’s foreign subsidiaries are translated at the rate ofexchange in effect at the end of the period. Net sales and expenses are translated at the averagerate of exchange for the period. Translation adjustments are reflected in other comprehensive lossas a separate component of stockholders’ equity.                   **Three Months Ended**  **Nine Months Ended**   **September 30,**  **September 30,**   **2006**  **2005**  **2006**  **2005** Net income/(loss) $(11,643) $(18,357) $(29,345) $(27,841)Other comprehensive income/(loss):                Change in fair value of cash flow hedge income/(loss)  58   —   —   — Foreign currency translation  1,115   469   1,450   (505)             Comprehensive income/(loss) $(10,470) $(17,888) $(27,895) $(28,346)             3. STOCK COMPENSATION     The Company adopted SFAS No. 123(R), “Share-Based Payment” as of January 1, 2006. ThisStatement replaced SFAS No. 123, “Accounting for Stock-Based Compensation” and supersededAccounting Principles Board (APB) Opinion No. 25, “Accounting for Stock Issued to Employees” (APB25). SFAS No. 123(R) requires the cost of employee services received in exchange for an award ofequity instruments to be based upon the grant-date fair value of the award. This cost is to berecognized as expense over the period during which an employee is required to provide services inexchange for the award (usually the vesting period). SFAS No. 123(R) also requires that theadditional tax benefits the Company receives from stock-based compensation be recorded as cashinflows from financing activities in the statement of cash flows. Prior to January 1, 2006, theCompany applied the provisions of APB 25 in accounting for awards made under the Company’sstock-based compensation plans.
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     The Company adopted the provisions of SFAS No. 123(R) using the modified-prospectivetransition method. Under this method, results from prior periods have not been restated. TheCompany has not granted stock options since 2003, and as a result, the effect of adopting SFAS No.123(R) was not material to the Company’s results of operations, balance sheet, or cash flows forthe nine months ended September 30, 2006, nor on a pro-forma basis for the nine months endedSeptember 30, 2005.     The Company has granted restricted stock to certain key employees. The restricted stockrequires no payment from the recipient and compensation cost is measured based on the market priceon the grant date and is recorded over the vesting period. Restricted stock does not have anoption for cash payment.     The following table summarizes stock-based compensation expense recorded for the three monthsand nine months ended September 30, 2006 and 2005.                   **Three Months Ended**  **Nine Months Ended**   **September 30,**  **September 30**   **2006**  **2005**  **2006**  **2005** Restricted stock $118  $66  $276  $197 Stock options  —   —   —   —              Total share-based compensation expense  118   66   276   197                  Tax effect on share-based compensation expense  —   —   —   —              Net effect on income from continuingoperations $118  $66  $276  $197                               Effect on basic and diluted earnings per share $—  $—  $—  $—                   The following table summarizes restricted stock activity for the nine months ended September 30,2006 and 2005.                       **Weighted**      **Weighted**   **Nine months**  **Average**  **Nine months**  **Average**   **ended**  **Grant-Date**  **ended**  **Grant-Date** Restricted stock shares **September 30,**  **Fair Value**  **September 30,**  **Fair Value**   **2006**      **2005**     Balance at January 1  250,000  $4.33   150,000  $5.70 Granted  400,000   2.31   —   — Cancelled or expired  —   —   —   —                Balance at September 30  650,000  $3.09   150,000  $5.70                   The following table summarizes stock option activity for the nine months ended September 30, 2006and 2005.                       **Weighted**      **Weighted**   **Nine months**  **Average**  **Nine months**  **Average**   **ended**  **Grant-Date**  **ended**  **Grant-Date** Stock options **September 30,**  **Fair Value**  **September 30,**  **Fair Value**   **2006**      **2005**     Outstanding at January 1  1,128,750  $4.25   1,473,750  $4.30 Granted  —   —   —   — Cancelled or expired  (100,000)  4.92   (313,750)  4.45 Exercised  —   —   —   —                Outstanding at September 30  1,028,750  $4.18   1,160,000  $4.26               Exercisable at September 30  1,028,750  $4.18   1,160,000  $4.26              Exercise price per share $3.02 - $5.65      $3.02 - $5.65                    
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     There were no stock options granted during 2006 or 2005. The fair value of each option grantedprior to 2004 was estimated on the date of grant using the Binomial option-pricing model with thefollowing weighted-average assumptions.     Expected dividend yield  2.1%Risk-free rate  3.0%Expected life in years  5 Volatility  39%     The following table summarizes information on stock options outstanding at September 30, 2006:                       **Options Outstanding**  **Options Exercisable**   **Number**  **Contractual**  **Exercise**  **Number**  **Exercise** **Exercise Prices** **Outstanding**  **Life Remaining(1)**  **Price(1)**  **Exercisable**  **Price(1)** $3.02  573,750   0.73  $3.02   573,750  $3.02 $5.65  455,000   2.08   5.65   455,000   5.65                    1,028,750   1.33  $4.18   1,028,750  $4.18                  (1) weighted average4. EARNINGS/(LOSS) PER SHARE     For the three months ended September 30, 2006 and 2005, net loss per share was computed usingthe weighted -average number of shares of common and class B stock outstanding, which amounted toan aggregate of 31,270,272 shares in 2006and 30,687,508 shares in 2005. Due to their anti-dilutiveeffect, 1,028,750 and 1,160,000 stock options were excluded from the computation of diluted lossper share for the three months ended September 30, 2006 and 2005, respectively.     For the nine months ended September 30, 2006 and 2005, net loss per share was computed usingthe weighted average number of shares of common and class B stock outstanding, which amounted to anaggregate of 31,010,675 shares in 2006 and 30,608,029 shares in 2005. Due to their anti-dilutiveeffect, 1,028,750 and 1,160,000 stock options were excluded from the computation of diluted lossper share for the nine months ended September 30, 2006 and 2005, respectively.5. ACQUISITIONS AND DISCOUNTINUED OPERATIONS*Sale of Melcor*     On January 25, 2005, the Company’s Board of Directors approved the sale of all of the capitalstock of Melcor Corporation, its thermal management subsidiary, which was not considered a corebusiness unit. On October 25, 2005, the Company sold Melcor to Laird Technologies, Inc. for$17,300 in cash (before a $200 temporary holdback), which resulted in a pre-tax gain of $11,400.Melcor’s revenues, which were reported in the Engineered Products segment, were $6,644 for thefirst nine months of 2005.*Acquisition of Islandaire*     On March 7, 2005, the Company completed the acquisition of eighty percent of the stock ofIslandaire, Inc. (“Islandaire”) for a combination of $9,550 in cash; 257,484 shares of PreferredStock valued at $6,437; 100,000 shares of Common Stock valued at $310; and $32 of transactioncosts, which primarily consisted of fees paid for appraisals, legal and accounting services. TheCompany is obligated to purchase the remaining twenty percent of Islandaire stock within threeyears at a price based on a multiple of trailing EBITDA (earnings before interest, taxes,depreciation, and amortization). The results of operations of Islandaire have been included in theCompany’s consolidated financial statements since the acquisition date. The acquisition was notmaterial to the Company’s operations, financial position, or cash flows, and thus pro-formainformation has not been presented.
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     Islandaire is located in East Setauket, New York, and now operates as Fedders Islandaire, Inc.It manufactures and markets a line of specialized through-the-wall packaged terminal airconditioners (PTACs) and heat pumps, primarily for replacement applications in apartment buildings,hotels, and motels, and in institutional buildings such as schools, offices, hospitals, and nursinghomes. Islandaire’s replacement PTAC units fit into existing wall openings without alteration tothe structure of the building. The addition of Islandaire’s products extends the product line ofthe Company’s existing commercial products division. This subsidiary has been included within theHVACR segment since the date of acquisition.     The Company recorded the Islandaire acquisition under the purchase method of accountingaccording to SFAS No. 141, “Business Combinations”. The consolidated financial statements includethe results of Islandaire from the date of acquisition. The purchase price has been allocatedbased on estimated fair values as of the acquisition date. The following table represents thepurchase price allocation.     **At March 7, 2005**    Cash $158 Accounts receivable  3,412 Inventory  3,862 Other current assets  226 Property, plant and equipment  880 Goodwill  9,582 Intangible assets:    Customer relationships (estimated useful life of 10 years)  3,300 Engineering drawings (estimated useful life of 2 years)  300 Noncompetition agreement (estimated useful life of 5.5 years)  1,100 Other intangible assets  42 Current liabilities  (5,930)Long-term debt  (168)Minority interest  (435)    Net assets acquired $16,329          The amount assigned to intangible assets primarily represents customer relationships, anon-competition agreement and engineering drawings and was based on an appraisal. The intangibleassets will be amortized over periods ranging from two to ten years using straight-line methods.     The Islandaire facility continues to be leased from an officer of the subsidiary at a marketrate.6. GOODWILL AND OTHER INTANGIBLE ASSETS     The Company records the excess purchase price of net tangible and intangible assets acquiredover their estimated fair value as goodwill. The Company adopted the provisions of SFAS 142“Goodwill and Other Intangible Assets” (“SFAS 142”), as of September 1, 2002. Under SFAS 142, theCompany is required to test goodwill for impairment at least annually. The Company performs anannual test for indications of goodwill impairment as of October 1 in each year. The Companyidentifies potential goodwill impairment by comparing the fair value of a reporting segment withits carrying amount, including goodwill. The Company determines fair value using a discounted cashflow and market-multiple approach. If the fair value of a reporting segment exceeds its carryingamount, goodwill of the reporting segment is not considered impaired. If the carrying amount of asegment exceeds its fair value, the amount of goodwill impairment, if any, must be measured. TheCompany measures the amount of goodwill impairment by comparing the implied fair value of reportingsegment goodwill with the carrying amount of that goodwill. If the carrying amount of the segmentgoodwill exceeds the implied fair value of goodwill, the impairment is recognized as an operatingexpense.
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     Goodwill and other intangible assets of continuing operations consist of the following.                   Engineered      HVACR  Products  Total Goodwill balance as of December 31, 2005 $79,336  $8,389  $87,725 Effect of foreign currency change  504   —   504           Goodwill balance as of September 30, 2006 $79,840  $8,389  $88,229                          September 30,  December 31,  September 30,   2006  2005  2005 Other intangible assets $7,084  $7,911  $6,390 Accumulated amortization  (3,045)  (3,185)  (1,834)          Other intangible assets — net $4,039  $4,726  $4,556                Goodwill increased by $504 as a result of a positive currency translation adjustment. Otherintangible assets primarily represent intangible assets of Islandaire. Amortization expense forcontinuing operations for the three months ended September 30, 2006 and 2005 was $235 and $234,respectively. Amortization expense for continuing operations for the nine months ended September30, 2006 and 2005 was $687and $397, respectively. Estimated amortization expense for otherintangibles for the next five years will be approximately $462, $621, $599, $578 and $474,respectively, and $1,305 thereafter.7. ASSETS HELD FOR SALE     At December 31, 2005, net assets totaling $843 at the Company’s Columbia, Tennessee facilitywere classified as “Assets Held for Sale”. These assets were sold at their carrying value onFebruary 3, 2006. There were no “Assets Held for Sale” at September 30, 2006 and 2005.8. INDUSTRY SEGMENTS     The Company has two reportable segments: Heating, Ventilation, Air Conditioning andRefrigeration (“HVACR”) and Engineered Products. The Company’s reportable segments were determinedbased upon several factors, including the nature of the products provided and markets served. Eachreportable segment is managed separately and includes various operating segments that have beenaggregated due to similar economic characteristics.     The HVACR segment designs, manufactures and distributes window, through-the-wall, ductlesssplit and portable room air conditioners, ducted central air conditioning systems, air cleaners,humidifiers and dehumidifiers. HVACR products are distributed through a variety of sales channels,including national retailers, regional retailers, wholesale distributors, catalog supply houses,private label/OEM, government direct and the Internet.     The Engineered Products segment designs, manufactures and distributes media filters,electronic filters, humidifiers, dust collectors, and fan filter units. These products are soldthrough manufacturers’ representatives, distributors and direct sales to end-users. (See Note 12)
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SUMMARY OF BUSINESS BY SEGMENT:                   **Three Months Ended**  **Nine Months Ended**   **September, 30**  **September, 30**   **2006**  **2005**  **2006**  **2005** Net sales:                HVACR $43,890  $53,360  $225,173  $234,215 Engineered Products  7,288   9,750   21,273   24,525              Net sales $51,178  $63,110  $246,446  $258,740                               Income/(loss) by segment:                HVACR $(3,896) $(11,517) $(6,909) $(9,804)Engineered Products  703   759   1,138   1,876              Segment operating income/(loss)  (3,193)  (10,758)  (5,771)  (7,928)Goodwill impairment, asset impairment, employee severanceand other restructuring charges/(credits)charges/(credits)  2,153   3,874   2,764   4,246 Non-allocated expense/(income)  897   (1,290)  4,005   760 Interest expense, net  5,285   5,492   16,098   16,538 Income tax expense/(benefit)  115   84   707   263              Income/(loss) from continuing operations  (11,643)  (18,918)  (29,345)  (29,735)Net income/(loss) from discontinued operations, net of tax  —   561   —   1,894              Net income/(loss) $(11,643) $(18,357) $(29,345) $(27,841)                            **September 30,**  **December 31,**  **September 30,**   **2006**  **2005**  **2005** Total assets:            HVACR $206,527  $240,281  $262,410 Engineered Products  40,946   40,287   44,118 Non-allocated assets  50,103   50,486   69,481 Discontinued operations  —   —   7,246             $297,576  $331,054  $383,255                Non-allocated (income)/expense and assets are primarily related to the Company’s corporateheadquarters, other (income)/expense, and minority interest.9. DEFERRED RETIREE OBLIGATION AND OTHER COMPENSATION ARRANGEMENTS     The Company has a deferred retiree obligation for certain retirees. The following tablesummarizes certain information with respect to this obligation.           **Nine Months Ended**   **September 30,**   **2006**  **2005** **Change in benefit obligation**        Benefit obligation at beginning of year $10,280  $11,228 Service cost  —   — Interest cost  255   454 Actuarial changes and other  (949)  — Benefits paid  (1,249)  (1,258)       Benefit obligation at end of period $8,337  $10,424                 Weighted-average assumptions as of September 30:        Discount rate  5.75%  5.75%Actuarial changes and other includes an adjustment to an actuarial computation of an obligation tobe paid out over the next five years.
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10. PRODUCT WARRANTY     Certain of the Company’s products are covered by standard product warranty plans that extendfrom 1 to 5 years. In addition, major retailers have customer return policies, which allowcustomers to return product that may be defective in lieu of field service. At the time revenue isrecognized, upon shipment, measurements of those sales are reduced by estimates of the future costsassociated with fulfilling warranty obligations.     The Company uses historical failure and defective return rates, which may or may not beindicative of future rates. Each quarter, the estimate of warranty and defective returnobligations, including the assumptions about estimated failure and return rates, is re-evaluated.     The following table displays the activity and balances of the product warranty liability forthe nine months ended September 30:           2006  2005 Warranty balance at beginning of period $7,552  $7,333 Accrual for warranty based on revenue during the period  5,493   9,195 Settlements made during the period  (5,693)  (10,882)       Warranty balance at end of period $7,352  $5,646        Warranty expense is lower due to fewer sales to large retailers.11. EFFECT OF NEW ACCOUNTING PRONOUNCEMENTS     In September 2006, the Financial Accounting Standards Board (“FASB”) issued Statement ofFinancial Accounting Standard (“SFAS”) No. 157, “Fair Value Measurements”*.*SFAS No. 157 definesfair value, provides a framework for measuring fair value under current standards in GAAP, andrequires additional disclosure about fair value measurements. In accordance with the Statement, thedefinition of fair value retains the exchange price notion, and exchange price is defined as theprice in an orderly transaction between market participants to sell an asset or transfer aliability. If there is a principal market for the asset or liability, the fair value measurementshould reflect that price, whether that price is directly observable or otherwise used in avaluation technique. Depending on the asset or liability being valued, the inputs used to determinefair value can range from observable inputs (i.e., prices based on market data independent from theentity) and unobservable inputs (i.e., the entity’s own assumptions about the assumptions thatmarket participants would use). The Statement applies to other accounting pronouncements thatrequire or permit fair value measurements and will be effective for fiscal years beginning afterNovember 15, 2007, and interim periods within those fiscal years. The Company is currentlyevaluating the provisions of SFAS No. 157 to determine the potential impact, if any, the adoptionwill have on the Company’s financial statements.     In September 2006, the FASB issued SFAS No. 158, “Employers’ Accounting for Defined BenefitPension and Other Postretirement Plans”. SFAS No. 158 requires companies to recognize theover-funded or under-funded status of a defined benefit postretirement plan as an asset orliability in the statement of financial position. The funded status of a plan represents thedifference between the fair value of plan assets and the related plan projected benefit obligation.Changes in the funded status should be recognized through comprehensive income in the year in whichthe changes occur. Additionally, disclosure of additional information about certain effects on netperiodic benefit cost for the next fiscal year that arise from delayed recognition of gains orlosses, prior service costs or credits, and transition assets or obligations will be required. SFASNo. 158 is effective for the Company for this fiscal year ending December 31, 2006. SFAS No. 158also requires the funded status of a plan to be measured as of the date of the year-end statementof financial position. The Company is currently unable to estimate the impact of adopting SFAS No.158 on its Consolidated Balance Sheet. The impact of adopting SFAS No. 158 is dependent on planasset performance through the end of 2006 as well as interest rates and other factors that will beapplicable as of December 31, 2006.     In September 2006, the SEC issued Staff Accounting Bulletin (“SAB) No. 108, which expressesthe views of the SEC staff regarding the process of quantifying financial statement misstatements.SAB No. 108 provides guidance on the consideration of the effects of prior year misstatements inquantifying current year misstatements for the purpose of a materiality assessment. The guidance ofthis SAB is effective for annual financial statements covering the first fiscal year ending afterNovember 15, 2006, which is December 31, 2006 for the Company. The Company is currently evaluatingthe impact of applying this guidance.
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     In July 2006, the FASB issued FASB Interpretation No. 48, “Accounting for Uncertainty inIncome Taxes, an Interpretation of FASB Statement No. 109” (“FIN 48”). FIN 48 provides recognitioncriteria and a related measurement model for tax positions taken by companies. In accordance withFIN 48, a tax position is a position in a previously filed tax return or a position expected to betaken in a future tax filing that is reflected in measuring current or deferred income tax assetsand liabilities. Tax positions shall be recognized only when it is more likely than not (likelihoodof greater than 50%), based on technical merits, that the position would be sustained uponexamination. Tax positions that meet the more likely than not threshold should be measured using aprobability-weighted approach as the largest amount of tax benefit that is greater than 50% likelyof being realized upon settlement. FIN 48 is effective for fiscal years beginning after December15, 2006 and the Company will adopt FIN 48 as of January 1, 2007. The Company is currentlyevaluating the provisions of FIN 48 to determine the potential impact, if any, the adoption willhave on the Company’s financial statements.     In May 2005, the Financial Accounting Standards Board (“FASB”) issued Statement of FinancialAccounting Standards (“SFAS”) No. 154, “Accounting Changes and Error Corrections — a replacement ofAPB Opinion No. 20 and SFAS No. 3”*.*This Statement changes the requirements for accounting andreporting of a voluntary change in accounting principle and changes required by an accountingpronouncement when the specific transition provisions are absent. This statement requiresretrospective application to prior periods’ financial statements of changes in accountingprinciple. If it is impracticable to determine either the period-specific effects or the cumulativeeffect of the change, this Statement requires that the new accounting principle be adoptedprospectively from the earliest practicable date. SFAS No. 154 was effective for the Company as ofJanuary 1, 2006 and did not have a material impact on the Company’s financial position and resultsof operations.     In December 2004, the FASB issued SFAS No. 151, “Inventory Costs, an amendment of ARB No. 43,Chapter 4” to improve the comparability of cross-border financial reporting. This statement amendsand clarifies the accounting for abnormal amounts of idle facility expenses, freight, handlingcosts, and wasted material (spoilage). This Statement requires that those items be recognized ascurrent-period charges regardless of whether they meet the criterion of “so abnormal” as stated inARB No. 43, Chapter 4. In addition, this Statement requires that allocation of fixed productionoverhead costs to conversion costs be based on the normal capacity of the production facilities.The provisions of this Statement were effective for the Company as of January 1, 2006, and did nothave a material impact on the Company’s financial position and results of operations.     In December 2004, the FASB issued SFAS No. 123 (revised 2004), or SFAS No. 123(R),“Share-Based Payment”, which replaces Statement No. 123 “Accounting for Stock-Based Compensation”,and supersedes APB Opinion No. 25, “Accounting for Stock Issued to Employees”. SFAS No. 123(R)eliminates the alternative to use APB Opinion 25’s intrinsic value method of accounting andrequires recording expense for stock compensation based on a fair value based method.     In March 2005, the Securities and Exchange Commission (“SEC”) issued Staff Accounting BulletinNo. 107, “Share Based Payments” (“SAB 107”) to provide public companies additional guidance inapplying the provisions of SFAS No. 123(R). Among other things, SAB 107 describes the SEC staff’sexpectations in determining the assumptions that underlie the fair value estimates and discussesthe interaction of SFAS No. 123(R) with certain existing SEC guidance. The Company adopted SAB 107in conjunction with adopting SFAS No. 123(R) as of January 1, 2006.     During 2005, the FASB issued the following four Staff Position Papers (“FSPs”) providingguidance on implementing SFAS No. 123(R) “Share Based Payments”: FSP SFAS No. 123(R)-1,“Classification and Measurement of Freestanding Financial Instruments Originally Issued in Exchangefor Employee Services under SFAS No. 123(R)”; FSP SFAS No. 123(R)-2, “Practical Accommodation tothe Application of Grant Date as Defined in SFAS No. 123(R)”; FSP SFAS No. 123(R)-3, “TransitionElection Related to Accounting for the Tax Effect of Share-Based Payment Awards”; and FSP SFAS No.123(R)-4, “Classification of Options and Similar Instruments Issued as Employee Compensation thatAllow for Cash Settlement upon the Occurrence of a Contingent Event”. During 2006, the FASB issuedFSP SFAS No. 123(R)-5, “Amendment of FASB Staff Position FAS 123(R)-1”.     The Company implemented SFAS No. 123(R) effective January 1, 2006. The Company used themodified-prospective phase-in method that requires entities to recognize compensation costs infinancial statements issued after the date of adoption for all share-based payments granted,modified, or settled after the date of adoption as well as for any awards that were granted priorto the adoption date for which the required service has not yet been performed. The Company doesnot believe that any of the alternative phase-in methods would have a materially different effecton the Company’s financial position and results of operations. The provisions of this Statementdid not have a material impact on the Company’s financial position and results of operations.
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12. DEBT AND SUBSEQUENT EVENTS     On October 31, 2006, the Company announced that it plans to appeal the decision by the NewYork Stock Exchange (NYSE) to suspend trading of Fedders’ common and preferred stock on November 8,2006. The Company was not in compliance with the NYSE‘s continuing listing standards for marketcapitalization and stockholders’ equity. Only one of these standards must be met. The appeal isbased on the Company making significant progress in executing a plan to restore the Company’scompliance with the NYSE standard. The plan comprises, among other things, focusing on theprofitable and growing segments of its core HVAC business and the previously-announced sale of itsnon-core businesses. During the appeal process, the Company’s common stock will trade on the OTCBulletin Board.     On August 11 and October 19, 2006, the Company amended its secured revolving credit facilityto add $10 million supplemental loan availability. The Company is obligated to repay thissupplemental loan based on the terms of the agreement and/or from the proceeds of asset sales. Inaddition, the amendment waived the EBITDA covenants in the original agreement through December2006, and requires the Company’s Chairman make an equitycontribution of $$3.5 million before January 15, 2007. InOctober 2006, Chairman made a $1.5 million equitycontribution in the form of a treasury stock purchase. There is a$1.3 million EBITDA covenant for the fourth quarter of 2006, andthe original covenants (discussed below) will apply in 2007.     On July 27, 2006, the Company announced that it hired an advisor to explore the possible saleof its global indoor air quality business, which includes the entire Engineered Products segmentplus a non-material portion of the residential business in the HVACR segment. Annual sales of thisbusiness are over $40 million with assets less than $50 million.     On January 31, 2006, the Company replaced its expiring $100 million secured revolving creditfacility with a five-year, $75 million secured revolving credit facility. The Company reduced theamount of its revolver based on its anticipated borrowing needs. Availability under the new lineof credit is based primarily on advance rates on accounts receivable and inventory in the UnitedStates and Canada. Financial covenants include an EBITDA test ifavailability under the line falls below $10 million or below$7.5 million if no revoling loan is outstanding, which havesince been modified as discussed above. The revolver balance was approximately $22 million at September 30, 2006. Thecredit facility is collateralized by substantially all of the Company’s assets and is in effectuntil January 2011. The Company is no longer subject to minimum working capital or net worthcovenants.13. HEDGING     During the second quarter the Company entered into a foreign currency derivative to hedgeagainst fluctuations in the Canadian dollar. There were no new hedge instruments in the thirdquarter, but the second-quarter hedges expired during the third quarter. As a cash flow hedge,changes in the fair value of the derivative are recorded in accumulated other comprehensiveincome/(loss) in shareholders’ equity and amounts in accumulated other comprehensive income/(loss)are reclassified into earnings in the same period or periods during which the hedged transactionaffects earnings. Because less than the full value of Canadian dollar receivables was hedged, thehedge was deemed to be one hundred percent effective. The accumulated other changes in equity fromcash flow hedges are shown in the following table.                   **Three Months Ended**  **Nine Months Ended** **Cash Flow Hedge Impact on Equity** **September 30,**  **September 30,**   **2006**  **2005**  **2006**  **2005** Balance at January 1 $—  $—  $—  $— Netgain/(loss) from cash flow hedges  31   —   (43)  — Net amounts reclassified to earnings  27   —   43   —              Balance at September 30 $58  $—  $—  $—              14. SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL STATEMENTS     Fedders North America, Inc. (“FNA”) is a wholly-owned subsidiary of the Company. FNA and theCompany are the issuer and the guarantor, respectively, of the Senior Notes. In addition, thesubsidiaries of FNA and, effective September 13, 2005, Fedders International, Inc., are alsoguarantors of the Senior Notes.     The Company’s and the subsidiaries’ guarantees are full and unconditional. The followingcondensed consolidating financial statements present separate information for its guarantorentities (FNA and the Corporate Parent) and the other non-guarantor subsidiaries and should be readin conjunction with the consolidated financial statements of the Company. The followingpresentation has been prepared on a historical basis taking into account theguarantor/non-guarantor structure that resulted from the issuance of the Senior Notes in March 2004and the adoption of the First Supplemental Indenture and Waiver, dated September 13, 2005.
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     The following unaudited condensed consolidating financial statements have been preparedpursuant to the rules and regulations of the Securities and Exchange Commission. Certaininformation and note disclosures normally included in annual financial statements prepared inaccordance with generally accepted accounting principles have been condensed or omitted pursuant tothose rules and regulations, although the Company believes that the disclosures made are adequateto make the information not misleading. It is suggested that these condensed consolidatingfinancial statements be read in conjunction with the financial statements and the notes theretoincluded in the Company’s latest Form 10-K.     Certain reclassifications may have been made in prior-year amounts to conform to thecurrent-year presentation.
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FEDDERS CORPORATION