Fedders (FJCC) 10-Q 2007 Q1 Quarterly report

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 March 31, 2007

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

COMMISSION FILE NUMBER 1-8831

FEDDERS CORPORATION

(Exact name of registrant as specified in its charter)

DELAWARE (State of incorporation)	22-2572390 (I.R.S. Employer Identification No.)
505 MARTINSVILLE ROAD, LIBERTY CORNER, NJ (Address of principal executive offices)	07938-0813 (Zip Code)

REGISTRANT’S TELEPHONE NUMBER, INCLUDING AREA CODE:

(908) 604-8686

Indicate by check mark whether the 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 and (2) has been subject to such filing requirements for the past 90 days.

Yesþ   Noo

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filero    Accelerated filerþ    Non-accelerated filero

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yeso    Noþ

     The registrant has outstanding 30,020,380 shares of Common Stock and 2,492,181 shares of Class B Stock (which is immediately convertible into Common Stock, on a share-for-share basis) as of March 31, 2007.

FEDDERS CORPORATION

INDEX

	PAGE
	NUMBER
PART I FINANCIAL INFORMATION		3
ITEM 1. FINANCIAL STATEMENTS		3
CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 2007 AND 2006		3
CONSOLIDATED BALANCE SHEETS AS OF MARCH 31, 2007, DECEMBER 31, 2006 AND MARCH 31, 2006		4
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE THREE MONTHS ENDED MARCH 31, 2007 AND 2006		5
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY/(DEFICIT) AS OF MARCH 31, 2007, DECEMBER 31, 2006 AND MARCH 31, 2006		6
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS		7-19
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION		20-23
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK		24
ITEM 4. CONTROLS AND PROCEDURES		24-25
PART II OTHER INFORMATION		26
ITEM 1. LEGAL PROCEEDINGS		26
ITEM 1A. RISK FACTORS		26
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS		26
ITEM 3. DEFAULTS ON SENIOR SECURITIES		26
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS		26
ITEM 5. OTHER INFORMATION		26
ITEM 6. EXHIBITS		26-27
SIGNATURE		28
CERTIFICATIONS		29-33
EX-31.1: CERTIFICATIONS
EX-31.2: CERTIFICATIONS
EX-32.1: CERTIFICATIONS
EX-32.2: CERTIFICATIONS

2

PART I — FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

FEDDERS CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)

	Three Months Ended
	March 31,
(amounts in thousands, except per share data)	2007			2006
Net sales	$	30,140		$	99,701
Cost of sales		27,982			87,006
Gross profit		2,158			12,695
Selling, general and administrative expense		13,939			15,040
Operating income/(loss)		(11,781	)		(2,345	)
(Income)/loss from minority interest and net interest in unconsolidated subsidiaries		(418	)		147
Interest expense, net		6,185			5,473
Other (income)/expense		224			559
Income/(loss) before income taxes		(17,772	)		(8,524	)
Provision/(benefit) for income taxes		15			277
Net income/(loss)		(17,787	)		(8,801	)
Preferred stock dividends		1,143			1,143
Net income/(loss) applicable to common stockholders	$	(18,930	)	$	(9,944	)
Income/(loss) per common share:
Basic net income/(loss) per common share	$	(0.56	)	$	(0.32	)
Diluted net income/(loss) per common share		(0.56	)		(0.32	)
Weighted average shares:
Basic		33,882			30,832
Diluted		33,882			30,832
Dividends per share declared:
Common and Class B Stock	$	—		$	—
Preferred Stock		—			—

See accompanying notes to the consolidated financial statements

3

FEDDERS CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

	March 31			December 31,			March 31
	2007			2006			2006
(amounts in thousands, except par value data)	(Unaudited)						(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	12,096		$	4,789		$	10,135
Accounts receivable (net of allowance of $3,918, $3,761 and $3,698 at March 31, 2007, December 31, 2006 and March 31, 2006, respectively)		27,808			27,525			65,310
Inventories:
Finished goods		18,531			23,633			54,367
Work-in-process		1,976			1,316			2,716
Raw materials and supplies		19,111			16,524			20,923
Net inventories		39,618			41,473			78,006
Deferred income taxes		—			—			3,904
Other current assets		8,910			12,429			10,746
Total current assets		88,432			86,216			168,101
Net property, plant and equipment:
Land and improvements		3,907			3,636			4,900
Buildings and leasehold improvements		35,656			35,606			35,150
Machinery and equipment		73,888			73,695			72,891
Gross property, plant and equipment		113,451			112,937			112,941
Less accumulated depreciation		74,845			73,595			69,041
Net property, plant and equipment		38,606			39,342			43,900
Deferred income taxes		—			—			21,629
Goodwill		27,493			27,493			88,052
Other intangible assets		3,546			3,727			4,544
Other assets		28,201			24,582			30,469
Total assets	$	186,278		$	181,360		$	356,695
LIABILITIES AND STOCKHOLDERS’ EQUITY/(DEFICIT)
Current liabilities:
Short-term notes	$	14,398		$	17,777		$	55,989
Current portion of long-term debt		743			2,487			2,508
Accounts payable		48,272			40,795			79,551
Accrued expenses		34,364			41,086			38,763
Total current liabilities		97,777			102,145			176,811
Long-term debt		201,721			177,479			158,052
Other long-term liabilities		18,031			18,251			25,086
Partners’ net interest in joint venture		4,519			4,841			4,751
Total liabilities		322,048			302,726			364,700
Stockholders’ equity/(deficit):
Preferred Stock, $0.01 par value, 15,000 shares authorized and 2,127 shares issued		21			21			21
Common Stock, $0.01 par value, 70,000 shares authorized, 37,299, 37,299, and 36,916 issued at March 31, 2007, December 31, 2006, and March 31, 2006, respectively		373			373			369
Class B Stock, $0.01 par value, 5,000 shares authorized and 2,492 shares issued		25			25			25
Warrants		1,000			—			—
Additional paid-in capital		115,548			115,487			115,118
Retained earnings/(deficit)		(230,055	)		(205,571	)		(85,036	)
Accumulated other comprehensive income/(loss)		1,594			1,272			686
Treasury stock, at cost, 5,278, 7,169, and 8,521 shares of Common Stock at March 31, 2007, December 31, 2006 and March 31, 2006, respectively		(24,276	)		(32,973	)		(39,188	)
Total stockholders’ equity/(deficit)		(135,770	)		(121,366	)		(8,005	)
Total liabilities and stockholders’ equity/(deficit)	$	186,278		$	181,360		$	356,695

See accompanying notes to the consolidated financial statements

4

FEDDERS CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

	Three Months Ended
	March 31,
	2007			2006
(amounts in thousands, except par value data)	(Unaudited)
Cash flows from operating activities:
Net loss	$	(17,787	)	$	(8,801	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization		1,590			1,846
Deferred income taxes		—			(22	)
Amortization of deferred financing costs		253			221
Stock compensation expense		58			—
Partners’ net interest in joint venture results		(418	)		147
Changes in operating assets and liabilities, net of acquisition:
Accounts receivable		(283	)		(23,153	)
Inventories		1,855			(3,693	)
Other current assets		(579	)		(4,413	)
Other assets		(3,757	)		35
Accounts payable		7,477			35,590
Accrued expenses		(6,722	)		(1,755	)
Other long-term liabilities		(131	)		133
Other-net		—			1
Net cash provided by/(used in) operating activities		(18,444	)		(3,864	)
Cash flows from investing activities:
Additions to property, plant, and equipment		(673	)		(1,182	)
Proceeds from prior-year sale of Walkersville, MD and sale of Columbia, TN real estate		4,098			843
Net cash provided by/(used in) investing activities		3,425			(339	)
Cash flows from financing activities:
Net (repayments) of short-term notes		(5,123	)		(751	)
Proceeds received from long-term debt		50,000			—
Net (repayments) of long-term debt		(24,873	)		(106	)
Proceeds received from sale of treasury shares		2,000			—
Net cash provided by/(used in) financing activities		22,004			(857	)
Effect of exchange rate changes		322			778
Net increase/(decrease) in cash and cash equivalents		7,307			(4,282	)
Cash and cash equivalents at beginning of period		4,789			14,417
Cash and cash equivalents at end of period	$	12,096		$	10,135
Supplemental disclosure:
Interest paid	$	8,041		$	9,223
Income taxes paid		129			95
Non-cash disclosure:
Warrants issued	$	1,000		$	—

The Company adopted Statement of Financial Accounting Standards No. 123(R), “Share-Based Payment”, effective January 1, 2006, and reversed the unearned compensation balance related to restricted stock, included in deferred compensation in the December 31, 2005 consolidated balance sheet, netting the balance against additional paid-in capital. In February 2006, the Company issued 100,000 shares of restricted stock with a value of $139, and, in June 2006, issued 300,000 shares of restricted stock with a value of $783. The grants were issued under the Fedders Corporation Restricted Stock Plan, which was approved by the shareholders at the June, 2006 annual meeting. (See Note 3)

In June 2006, the Company issued to independent Directors 82,764 shares of common stock with a value of $216 in payment of the stock portion of the directors’ annual honorarium.

See accompanying notes to the consolidated financial statements

5

FEDDERS CORPORATION

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY/(DEFICIT)

	Three Months			Twelve Months			Three Months
	Ended			Ended			Ended
	March 31,			December 31,			March 31,
	2007			2006			2006
(Amounts in thousands except per share data)	(Unaudited)						(Unaudited)
PREFERRED STOCK
Balance at beginning of period	$	21		$	21		$	21
Issuance of shares upon exchange offer		—			—			—
Stock rights subscribed		—			—			—
Issuance of shares in Islandaire acquisition		—			—			—
Balance at end of period	$	21		$	21		$	21
COMMON STOCK
Balance at beginning of period	$	373		$	367		$	367
Stock options exercised		—			—			—
Restricted stock granted		—			6			1
Issuance of shares in Islandaire acquisition		—			—			—
Exchange of shares upon Preferred Stock exchange offer		—			—			—
Other		—			—			1
Balance at end of period	$	373		$	373		$	369
CLASS B STOCK
Balance at beginning and end of period	$	25		$	25		$	25
WARRANTS
Balance at beginning of period	$	—		$	—		$	—
Issuance of warrants to Goldman Sachs Partners		1,000			—			—
Balance at end of period	$	1,000		$	—		$	—
ADDITIONAL PAID-IN CAPITAL
Balance at beginning of period	$	115,487		$	115,523		$	115,523
Stock options exercised		—			—			—
Restricted stock granted		—			—			—
Cost of offerings		—			—			—
Stock option re-pricing and valuation		—			—			—
Amortization of restricted stock grants		58			415			78
Proceeds from rights offering		—			—			—
Issuance of shares in Islandaire acquisition		—			—			—
Transfer from deferred compensation		—			(483	)		(483	)
Other		3			32			—
Balance at end of period	$	115,548		$	115,487		$	115,118
RETAINED EARNINGS (DEFICIT)
Balance at beginning of period	$	(205,571	)	$	(76,232	)	$	(76,235	)
Net (loss) income		(17,787	)		(124,624	)		(8,801	)
Treasury stock sold for less than carrying value		(6,697	)		(4,715	)		—
Dividends		—			—			—
Balance at end of period	$	(230,055	)	$	(205,571	)	$	(85,036	)
ACCUMULATED OTHER COMPREHENSIVE LOSS
Balance at beginning of period	$	1,272		$	(92	)	$	(92	)
Foreign currency translation adjustment, net of tax		322			1,364			778
Balance at end of period	$	1,594		$	1,272		$	686
DEFERRED COMPENSATION
Balance at beginning of period	$	—		$	(483	)	$	(483	)
Restricted stock granted		—			—			—
Amortization of deferred compensation		—			—			—
Re-classed to additional paid in capital		—			483			483
Balance at end of period	$	—		$	—		$	—
TREASURY STOCK
Balance at beginning of period	$	(32,973	)	$	(39,188	)	$	(39,188	)
Shares sold/(purchased)		8,697			6,215			—
Balance at end of period	$	(24,276	)	$	(32,973	)	$	(39,188	)

See accompanying notes to the consolidated financial statements.

6

FEDDERS CORPORATION

NOTES 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 the instructions for Form 10-Q; however, such information reflects all adjustments, which consist solely of normal recurring adjustments, which are, in the opinion of management, necessary for a fair presentation of results for the interim periods. Reference should be made to the annual financial statements, including footnotes thereto, included in the Annual Report on Form 10-K of Fedders Corporation (the “Company”) for the fiscal year ended December 31, 2006. Certain reclassifications may have been made in prior-year amounts to conform to the current-year presentation.

     The Company’s business is seasonal and, consequently, operating results for the three-month period ended March 31, 2007 are not necessarily indicative of the results that may be expected for the year ending December 31, 2007. The demand for room air conditioners is highly seasonal in the North American market; however, over the last several years, the Company lessened its dependence on sales of room air conditioners through acquisitions, strategic alliances, and joint ventures that complement or enhance its core air treatment business. In the last two years, the Company withdrew from selling room air conditioners and dehumidifiers to The Home Depot and Wal-Mart. In 2006, the Company discontinued manufacturing and selling dehumidifiers.

     The financial statements have been prepared assuming that the Company will continue as a going concern. The Company has reported recurring operating losses, negative working capital, and decreases in cash equivalents for the last two years as well as has a substantial stockholders deficit. Management has taken numerous steps (as more fully described in Note 1 in the Company’s 2006 Form 10-K) to reduce its risk profile by reducing its customer concentration, its dependence on the sale of room air conditioners in North America, and the high working capital demands of big-box retailers. In addition to these steps, management initiatives are directed toward returning the Company to profitability by focusing the business on products and customers in what it considers core markets that generate more stable sales and higher margins.

     In the first quarter of 2007, the Company's financing provided inadequate liquidity to produce sufficient product to meet customer demand until new financing was secured on March 20, 2007. The new financing provided the Company with adequate capital to commence full production; however, it occurred too late in the quarter to impact sales. As a result, sales volume was significantly curtailed, and profitability was reduced by the low sales volume.

     Management believes that as a result of the above actions that reposition the Company strategically and reduce the Company’s cost structure as well as the new debt financing, that the Company’s existing and future sources of cash, anticipated future earnings, and short-term borrowing capacity are adequate to meet the demands of its operations.

2. COMPREHENSIVE INCOME (LOSS)

     Assets and liabilities of the Company’s foreign subsidiaries are translated at the currency exchange rate in effect at the end of the period. Net sales and expenses are translated at the average currency exchange rate for the period. Currency translation adjustments are reflected in other comprehensive income/(loss) as a separate component of stockholders’ equity.

	Three Months Ended
	March 31,
	2007			2006
Net income/(loss)	$	(17,787	)	$	(8,801	)
Other comprehensive income/(loss):
Foreign currency translation		322			778
Comprehensive income/(loss)	$	(17,465	)	$	(8,023	)

3. STOCK COMPENSATION

     Effective January 1, 2006, the Company adopted SFAS No. 123(R), “Share-Based Payment”. This Statement replaced SFAS No. 123, “Accounting for Stock-Based Compensation” and superseded Accounting Principles Board (APB) Opinion No. 25, “Accounting for Stock Issued to Employees” (APB 25). SFAS No. 123(R) requires the cost of employee services received in exchange for an award of equity instruments to be based upon the grant-date fair value of the award. This cost is to be recognized as expense over the period during which an employee is required to provide services in exchange for the award (usually the vesting period). SFAS No. 123(R) also requires that the additional tax benefits the Company receives from stock-based compensation be recorded as cash inflows from financing activities in the statement of cash flows. Prior to January 1, 2006, the Company applied the provisions of APB 25 in accounting for awards made under the Company’s stock-based compensation plans.

     The Company adopted the provisions of SFAS No. 123(R) using the modified-prospective transition method. Under this method, results from prior periods have not been restated. The Company 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 in 2006.

     The Company has granted restricted stock to certain key employees. The restricted stock requires no payment from the recipient and compensation cost is measured based on the market price on the grant date and is recorded over the vesting period. Restricted stock does not have an option for cash payment.

7

     The following table summarizes stock-based compensation expense recorded for the three months ended March 31, 2006 and 2007.

	Three Months Ended
	March 31,
	2007		2006
Restricted stock	$	58	$	80
Stock options		—		—
Total share-based compensation expense		58		80
Tax effect on share-based compensation expense		—		—
Net effect on income from continuing operations		58		80
Effect on basic and diluted earnings per share	$	—	$	—

     The following table summarizes restricted stock activity for the three months ended March 31, 2006 and 2007.

			Weighted				Weighted
			Average				Average Grant-
			Grant-Date				Date
Restricted stock shares	2007		Fair Value		2006		Fair Value
Balance at January 1		500,000	$	2.30		250,000	$	4.35
Granted		—		—		100,000		1.39
Cancelled or expired		—		—		—		—
Balance at March 31		500,000	$	2.30		350,000	$	3.52

     The following table summarizes stock option activity for the three months ended March 31, 2006 and 2007.

			Weighted					Weighted
	Options		Average Grant-		Options			Average Grant-
	Outstanding		Date		Outstanding			Date
Stock options	2007		Fair Value		2006			Fair Value
Outstanding at January 1		1,028,750	$	4.18		1,128,750		$	4.25
Granted		—		—		—			—
Cancelled or expired		—		—		(15,000	)		5.65
Exercised		—		—		—			—
Outstanding at March 31		1,028,750	$	4.18		1,113,750		$	4.25
Exercisable at March 31		1,028,750	$	4.18		1,113,750		$	4.25
Exercise price per share	$	3.02-$5.65			$	3.02 - $5.65

     There were no stock options granted during 2006, 2005, or 2004. The fair value of each option granted prior to 2004 was estimated on the date of grant using the Binomial option-pricing model with the following weighted-average assumptions.

Expected dividend yield	2.1	%
Risk-free rate	3.0	%
Expected life in years	5
Volatility	39	%

8

     The following table summarizes information on stock options outstanding at March 31, 2007:

	Options Outstanding						Options Exercisable
	Number		Contractual		Exercise		Number		Exercise
Exercise Prices	Outstanding		Life Remaining (1)		Price(1)		Exercisable		Price(1)
$3.02		573,750		0.24	$	3.02		573,750	$	3.02
$5.65		455,000		1.58	$	5.65		455,000	$	5.65
(1) weighted average		1,028,750		0.83	$	4.18		1,028,750	$	4.18

4. EARNINGS/(LOSS) PER SHARE

     For the three months ended March 31, 2007 and 2006, net loss per share was computed using the weighted -average number of shares of Common and Class B stock outstanding, which amounted to an aggregate of 33,882,249 shares in 2007 and 30,831,728 shares in 2006. Due to their anti-dilutive effect, 1,028,750 and 1,113,750 stock options were excluded from the computation of diluted loss per share for the three months ended March 31, 2007 and 2006, respectively, and 1,175,303 warrants were excluded from the computation of diluted loss per share in 2007.

5. GOODWILL AND OTHER INTANGIBLE ASSETS

     The Company records the excess purchase price of net tangible and intangible assets acquired over 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, the Company is required to test goodwill for impairment at least annually. The Company performs an annual test for indications of goodwill impairment as of October 1 in each year. The Company identifies potential goodwill impairment by comparing the fair value of a reporting segment with its carrying amount, including goodwill. The Company determines fair value using a discounted cash flow and market-multiple approach. If the fair value of a reporting segment exceeds its carrying amount, goodwill of the reporting segment is not considered impaired. If the carrying amount of a segment exceeds its fair value, the amount of goodwill impairment, if any, must be measured. The Company measures the amount of goodwill impairment by comparing the implied fair value of reporting segment goodwill with the carrying amount of that goodwill. If the carrying amount of the segment goodwill exceeds the implied fair value of goodwill, the impairment is recognized as an operating expense.

     Goodwill and other intangible assets of continuing operations consist of the following.

			Engineered
	HVAC		Products		Total
Goodwill balance as of December 31, 2006	$	19,104	$	8,389	$	27,493
Effect of foreign currency change		—		—		—
Goodwill balance as of March 31, 2007	$	19,104	$	8,389	$	27,493

	March 31,			December 31,			March 31,
	2007			2006			2006
Other intangible assets	$	3,727		$	6,854		$	6,484
Accumulated amortization		(181	)		(3,127	)		(1,564	)
Other intangible assets — net	$	3,546		$	3,727		$	4,920

     Other intangible assets primarily represent intangible assets of Islandaire. Amortization expense for continuing operations for the three months ended March 31, 2007 and 2006 was $239 and $235, respectively. Estimated amortization expense for other intangibles for the next five years will be approximately $631, $606, $564, $437 and $332, respectively, and $976 thereafter.

6. INCOME TAXES

     Effective January 1, 2007, the Company adopted FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes, an Interpretation of FASB Statement No. 109” (“FIN 48”). FIN 48 provides recognition criteria and a related measurement model for tax positions taken by companies. In accordance with FIN 48, a tax position is a position in a previously filed tax return or a position expected to be taken in a future tax filing that is reflected in measuring current or deferred income tax assets and liabilities. Tax positions shall be recognized only when it is more likely than not (likelihood of greater than 50%), based on technical merits, that the position would be sustained upon examination. Tax positions that meet the more likely than not threshold should be measured using a probability-weighted approach as the largest amount of tax benefit that is greater than 50% likely of being realized upon settlement.

9

     The Company recognized no material adjustment in the liability for unrecognized tax benefits upon adoption of FIN 48. As of January 1, 2007 and March 31, 2007, unrecognized tax benefits amounted to $1.9 million of which $1.9 million would impact the effective tax rate, if recognized. Such unrecognized tax benefits relate to operations in US and foreign taxing jurisdictions. At December 31, 2006, $0.6 million was accrued for interest and penalties and is included as a component of the $1.9 million unrecognized tax benefits. No uncertain tax positions were identified for which it is reasonably possible that the total amount of unrecognized tax benefits will significantly increase or decrease within the twelve months following the date of adoption of FIN 48.

     The Company files tax returns in U.S. and foreign tax jurisdictions with various statutes of limitations. The years after 2002 generally remain subject to tax examination in the USA, while years after 2001 generally remain subject to tax examination in major foreign tax jurisdictions. The approximate U.S. net operating tax loss carry forwards at March 31, 2007 were $150.1 million which expire in 17 – 20 years.

7. INDUSTRY SEGMENTS

     The Company has two reportable segments: Heating, Ventilation, and Air Conditioning (“HVAC”) and Engineered Products. The Company’s reportable segments were determined based upon several factors, including the nature of the products provided and markets served. Each reportable segment is managed separately and includes various operating segments that have been aggregated due to similar economic characteristics.

     The HVAC segment designs, manufactures, and markets ducted central air conditioners; heat pumps; gas furnaces; ductless split air conditioning systems; through-the-wall, portable window, and packaged unit room air conditioners; residential humidifiers; and air cleaners. HVAC 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 markets products for commercial and industrial indoor air quality around the world. These products are sold through manufacturers’ representatives, distributors, and direct sales to end-users.

SUMMARY OF BUSINESS BY SEGMENT:

	Three Months Ended
	March 31
	2007			2006
Net sales:
HVAC	$	23,597		$	93,299
Engineered Products		6,543			6,402
Net sales	$	30,140		$	99,701
Income/(loss) by segment:
HVAC	$	(8,398	)	$	(1,925	)
Engineered Products		384			61
Segment operating income/(loss)		(8,014	)		(1,864	)
Non-allocated expense/(income)		3,573			1,187
Interest expense, net		6,185			5,473
Income tax expense/(benefit)		15			277
Net income/(loss)	$	(17,787	)	$	(8,801	)

	March 31,		December 31,		March 31,
	2007		2006		2006
Total assets:
HVAC	$	110,345	$	113,269	$	264,825
Engineered Products		25,484		27,666		38,886
Non-allocated assets		50,449		40,425		52,984
	$	186,278	$	181,360	$	356,695

     Non-allocated (income)/expense and assets are primarily related to the Company’s corporate headquarters, other (income)/expense, and minority interest.

10

8. DEFERRED RETIREE OBLIGATION AND OTHER COMPENSATION ARRANGEMENTS

     The Company has a deferred retiree obligation for certain retirees. The following table summarizes certain information with respect to this obligation.

	Three Months Ended
	March 31,
	2007			2006
Change in benefit obligation
Benefit obligation at beginning of year	$	7,597		$	10,280
Interest cost		135			138
Actuarial changes and other		—			(90	)
Benefits paid		(413	)		(418	)
Benefit obligation at end of period	$	7,319		$	9,910
Weighted-average assumptions as of March 31:
Discount rate		8.03	%		5.75	%

9. PRODUCT WARRANTY

     Certain of the Company’s products are covered by standard product warranty plans that extend from 1 to 5 years. In addition, major retailers have customer return policies, which allow customers to return product that may be defective in lieu of field service. At the time revenue is recognized, upon shipment, measurements of those sales are reduced by estimates of the future costs associated with fulfilling warranty obligations.

     The Company uses historical failure and defective return rates, which may or may not be indicative of future rates. Each quarter, the estimate of warranty and defective return obligations, 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 for the three months ended March 31:

	2007			2006
Warranty balance at beginning of period	$	6,978		$	7,552
Accrual for warranty based on revenue during the period		1,110			3,531
Settlements made during the period		(1,053	)		(1,833	)
Warranty balance at end of period	$	7,035		$	9,250

Warranty expense is lower due to fewer sales to large retailers.

10. EFFECT OF NEW ACCOUNTING PRONOUNCEMENTS

     In September 2006, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standard (“SFAS”) No. 157, “Fair Value Measurements".SFAS No. 157 defines fair value, provides a framework for measuring fair value under current standards in GAAP, and requires additional disclosure about fair value measurements. In accordance with the Statement, the definition of fair value retains the exchange price notion, and exchange price is defined as the price in an orderly transaction between market participants to sell an asset or transfer a liability. If there is a principal market for the asset or liability, the fair value measurement should reflect that price, whether that price is directly observable or otherwise used in a valuation technique. Depending on the asset or liability being valued, the inputs used to determine fair value can range from observable inputs (i.e., prices based on market data independent from the entity) and unobservable inputs (i.e., the entity’s own assumptions about the assumptions that market participants would use). The Statement applies to other accounting pronouncements that require or permit fair value measurements and will be effective for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. The Company is currently evaluating the provisions of SFAS No. 157 to determine the potential impact, if any, the adoption will have on the Company’s financial statements.

11

     In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities — Including an amendment of FASB Statement No. 115”, which permits entities to choose to measure many financial instruments and certain other items at fair value. SFAS No. 159 is effective for fiscal years beginning after November 15, 2007. The Company is currently evaluating the provisions of SFAS No. 159 to determine the potential impact, if any, the adoption will have on the Company’s financial statements.

11. DEBT

     On March 20, 2007, the Company obtained a new $50 million, 30-month senior secured term loan and a $40 million, 30-month secured revolving credit facility arranged through Goldman Sachs Credit Partners L.P. and repaid the balance outstanding on its existing secured revolving facility and supplemental term loan with Wachovia. The new senior secured term loan has an interest rate of Prime plus 11% or LIBOR plus 12(17.3% at March 31, 2007), and the new revolving credit facility has an interest rate of Prime plus 1% or LIBOR plus 2%. As a part of the new debt agreement, the Company issued warrants to purchase 1,175,303 shares valued at market on the date of issuance at $1.0 million that are exercisable through March 2017 at $0.01 per share. The Company was required to draw the total balance of the senior secured term loan immediately. In addition to repayment of the Wachovia obligations, the loan proceeds will be used to fund working capital requirements. Availability under the new revolving line of credit is based primarily on advance rates on accounts receivable and inventory in the U.S. and Canada. Financial covenants under the term loan and revolving credit facility will include EBITDA, interest coverage, and secured leverage tests. In addition, the Company is prohibited from paying dividends, making acquisitions, and selling assets, as well as the lender must approve asset sales.

     In September 2006, the Company received a $10 million supplemental term loan that was to expire on January 26, 2007 and was subsequently extended to March 20, 2007. In conjunction with this loan, the Company’s Chairman made equity contributions of $1.5 million in October, 2006 and $2.0 million in January, 2007 in the form of treasury stock purchases from a portion of his supplemental retirement plan assets. The supplemental retirement plan assets and obligations are recorded as a non-current asset and a non-current liability, respectively. This loan was repaid with proceeds from the new $50 million senior secured term loan.

     On January 31, 2006, the Company replaced its expiring $100 million secured revolving credit facility with a five-year $75 million secured revolving credit facility with Wachovia Bank.

     The Company also utilized short-term borrowing facilities to support production in its China operations.

     Long-term debt consists of the following:

	March 31		December 31
	2007		2006
9 7/8% Senior Subordinated Notes due in 2014 ($155,000 principal amount less unamortized discount of $3,761 and $3,854 as of March 31, 2007 and December 31, 2006, respectively)	$	151,239	$	151,146
Promissory note payable to the State of Illinois		467		561
Trion Industrial Revenue Bond		—		3,200
Eubank Manufacturing Enterprises, Inc. mortgage		269		321
Fedders Addison Company mortgage		—		1,902
Wachovia debt reclassified to long-term		—		20,277
Goldman Sachs Credit Partners Note, net of $977 unamortized warrants cost		49,023		—
Capital lease obligations		1,466		2,559
Total debt		202,464		179,966
Less current maturities		743		2,487
Total long-term debt	$	201,721	$	177,479

12. SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL STATEMENTS

     Fedders North America, Inc. (“FNA”) is a wholly-owned subsidiary of the Company. FNA and the Company are the issuer and the guarantor, respectively, of the Senior Notes. In addition, the subsidiaries of FNA and, effective September 13, 2005, Fedders International, Inc., are also guarantors of the Senior Notes.

12

     The Company’s and the subsidiaries’ guarantees are full and unconditional. The following condensed consolidating financial statements present separate information for its guarantor entities (FNA and the Corporate Parent) and the other non-guarantor subsidiaries and should be read in conjunction with the consolidated financial statements of the Company. The following presentation has been prepared on a historical basis taking into account the guarantor/non-guarantor structure that resulted from the issuance of the Senior Notes in March 2004 and the adoption of the First Supplemental Indenture and Waiver, dated September 13, 2005.

     The following unaudited condensed consolidating financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and note disclosures normally included in annual financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to those rules and regulations, although the Company believes that the disclosures made are adequate to make the information not misleading. It is suggested that these condensed consolidating financial statements be read in conjunction with the financial statements and the notes thereto included in the Company’s latest Form 10-K.

     Certain reclassifications may have been made in prior-year amounts to conform to the current-year presentation.

13

FEDDERS CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)

CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS

	Three Months Ended March 31, 2007
	Fedders
	North			Other			Corporate			Eliminating			Fedders
	America			Fedders			Parent			Entries			Corporation
Net sales	$	26,324		$	3,816		$	—		$	—		$	30,140
Cost of sales		22,993			4,989			—			—			27,982
Gross profit		3,331			(1,173	)		—			—			2,158
Selling, general and administrative expense (a)		8,433			1,227			4,279			—			13,939
Asset impairment, employee severance and other restructuring charges/(credits)		—			—			—			—			—
Operating income/(loss)		(5,102	)		(2,400	)		(4,279	)		—			(11,781	)
(Income)/loss from minority interest and net interest in unconsolidated subsidiaries		(3	)		(415	)		—			—			(418	)
Equity income in investment		—			—			13,532			(13,532	)		—
Interest expense, net (b)		5,890			295			—			—			6,185
Other (income)/expense		(28	)		276			(24	)		—			224
Income/(loss) before income taxes		(10,961	)		(2,556	)		(17,787	)		13,532			(17,772	)
Provision/(benefit) for income taxes		4			11			—			—			15
Income/(loss) from continuing operations		(10,965	)		(2,567	)		(17,787	)		13,532			(17,787	)
Preferred stock dividend		—			—			1,143			—			1,143
Net income/(loss) applicable to common stockholders	$	(10,965	)	$	(2,567	)	$	(18,930	)	$	13,532		$	(18,930	)

	Three Months Ended March 31, 2006
	Fedders
	North			Other		Corporate			Eliminating			Fedders
	America			Fedders		Parent			Entries			Corporation
Net sales	$	91,223		$	75,208	$	—		$	(66,730	)	$	99,701
Cost of sales		84,686			69,050		—			(66,730	)		87,006
Gross profit		6,537			6,158		—			—			12,695
Selling, general and administrative expense (a)		11,334			3,405		301			—			15,040
Asset impairment, employee severance and other restructuring charges/(credits)		—			—		—			—			—
Operating income/(loss)		(4,797	)		2,753		(301	)		—			(2,345	)
(Income)/loss from minority interest and net interest in unconsolidated subsidiaries		29			118		—			—			147
Equity income in investment		—			—		(8,500	)		8,500			—
Interest expense, net (b)		4,806			667		—			—			5,473
Other (income)/expense		254			305		—			—			559
Income/(loss) from continuing operations before income taxes		(9,886	)		1,663		(8,801	)		8,500			(8,524	)
Provision/(benefit) for income taxes		9			268		—			—			277
Income/(loss) from continuing operations		(9,895	)		1,395		(8,801	)		8,500			(8,801	)
Preferred stock dividends		—			—		1,143			—			1,143
Net income/(loss) applicable to common stockholders	$	(9,895	)	$	1,395	$	(9,944	)	$	8,500		$	(9,944	)

14

CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)

CONDENSED CONSOLIDATING BALANCE SHEETS

	March 31, 2007
	Fedders
	North			Other			Corporate			Eliminating			Fedders
	America			Fedders			Parent			Entries			Corporation
ASSETS
Current assets:
Cash and cash equivalents	$	1,376		$	2,982		$	7,738		$	—		$	12,096
Net accounts receivable		21,312			6,496			—			—			27,808
Net inventories		26,214			13,404			—			—			39,618
Other current assets		2,785			6,090			35			—			8,910
Total current assets		51,687			28,972			7,773			—			88,432
Investments in subsidiaries		—			—			(198,778	)		198,778			—
Net property, plant and equipment		24,064			14,478			64			—			38,606
Goodwill		27,493			—			—			—			27,493
Other intangible assets		3,546			—			—			—			3,546
Other assets		4,815			5,960			17,426			—			28,201
Total assets	$	111,605		$	49,410		$	(173,515	)	$	198,778		$	186,278
LIABILITIES AND STOCKHOLDERS’ EQUITY/(DEFICIT)
Current liabilities:
Short-term notes	$	—		$	14,398		$	—		$	—		$	14,398
Current portion of long-term debt		743			—			—			—			743
Accounts payable		13,897			27,150			7,225			—			48,272
Accrued expenses		18,648			8,731			6,985			—			34,364
Total current liabilities		33,288			50,279			14,210			—			97,777
Long-term debt		201,721			—			—			—			201,721
Other long-term liabilities		5,561			3,505			13,484			—			22,550
Net due to (from) affiliates		31,249			34,190			(65,439	)		—			—
Total liabilities		271,819			87,974			(37,745	)		—			322,048
Stockholders’ equity/(deficit):
Preferred Stock		5			—			21			(5	)		21
Common and Class B Stock		—			—			398			—			398
Warrants		—			—			1,000			—			1,000
Additional paid-in capital		26,938			27,403			115,548			(54,341	)		115,548
Retained earnings/(deficit)		(187,327	)		(67,273	)		(230,055	)		254,600			(230,055	)
Treasury stock		—			—			(24,276	)		—			(24,276	)
Accumulated other comprehensive loss		170			1,306			1,594			(1,476	)		1,594
Total stockholders’ equity/(deficit)		(160,214	)		(38,564	)		(135,770	)		198,778			(135,770	)
Total liabilities and stockholders’ equity/(deficit)	$	111,605		$	49,410		$	(173,515	)	$	198,778		$	186,278

15

FEDDERS CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)

CONDENSED CONSOLIDATING BALANCE SHEETS

	As of December 31, 2006
	Fedders
	North			Other						Eliminating			Fedders
	America			Fedders			Corporate			Entries			Corporation
ASSETS
Current assets:
Cash and cash equivalents	$	1,490		$	2,597		$	702		$	—		$	4,789
Net accounts receivable		20,982			6,543			—			—			27,525
Inventories		30,604			10,869			—			—			41,473
Other current assets		5,356			6,356			717			—			12,429
Total current assets		58,432			26,365			1,419			—			86,216
Investments in subsidiaries		—			—			(185,804	)		185,804			—
Net property, plant and equipment		24,544			14,733			65			—			39,342
Goodwill		27,493			—			—			—			27,493
Other intangible assets		3,727			—			—			—			3,727
Other assets		3,821			5,373			15,388			—			24,582
Total assets	$	118,017		$	46,471		$	(168,932	)	$	185,804		$	181,360
LIABILITIES AND STOCKHOLDERS’ EQUITY/(DEFICIT)
Current liabilities:
Short-term notes	$	—		$	17,777		$	—		$	—		$	17,777
Current portion of long-term debt		2,487			—			—			—			2,487
Accounts payable		13,124			23,218			4,453			—			40,795
Accrued expenses		24,545			7,322			9,219			—			41,086
Total current liabilities		40,156			48,317			13,672			—			102,145
Long-term debt		177,479			—			—			—			177,479
Other long-term liabilities		5,171			3,829			14,102			—			23,102
Net due to (from) affiliates		44,450			30,887			(75,337	)		—			—
Total liabilities		267,256			83,033			(47,563	)		—			302,726
Stockholders’ equity/(deficit):
Preferred Stock		5			—			21			(5	)		21
Common and Class B Stock		—			—			398			—			398
Additional paid-in capital		26,938			27,403			115,487			(54,341	)		115,487
Retained earnings/(deficit)		(176,364	)		(64,935	)		(205,574	)		241,302			(205,571	)
Deferred compensation and treasury stock		—			—			(32,973	)		—			(32,973	)
Accumulated other comprehensive loss		182			970			1,272			(1,152	)		1,272
Total stockholders’ equity/(deficit)		(149,239	)		(36,562	)		(121,369	)		185,804			(121,366	)
Total liabilities and stockholders’ equity/(deficit)	$	118,017		$	46,471		$	(168,932	)	$	185,804		$	181,360

16

FEDDERS CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)

CONDENSED CONSOLIDATING BALANCE SHEETS

	March 31, 2006
	Fedders
	North			Other			Corporate			Eliminating			Fedders
	America			Fedders			Parent			Entries			Corporation
ASSETS
Current assets:
Cash and cash equivalents	$	5,052		$	4,142		$	941		$	—		$	10,135
Net accounts receivable		55,510			9,800			—			—			65,310
Net inventories		58,969			19,037			—			—			78,006
Other current assets		3,117			7,763			9,110			(5,340	)		14,650
Total current assets		122,648			40,742			10,051			(5,340	)		168,101
Investments in subsidiaries		—			—			(116,655	)		116,655			—
Net property, plant and equipment		26,891			16,928			81			—			43,900
Goodwill		72,980			15,072			—			—			88,052
Other intangible assets		4,534			10			—			—			4,544
Other assets		4,245			6,801			41,052			—			52,098
Total assets	$	231,298		$	79,553		$	(65,471	)	$	111,315		$	356,695
LIABILITIES AND STOCKHOLDERS’ EQUITY/(DEFICIT)
Current liabilities:
Short-term notes	$	35,785		$	20,204		$	—		$	—		$	55,989
Current portion of long-term debt		2,389			119						—			2,508
Accounts and income taxes payable		12,864			64,644			3,429			—			80,937
Accrued expenses		21,258			9,145			6,974			—			37,377
Total current liabilities		72,296			94,112			10,403			—			176,811
Long-term debt		156,729			1,323			—			—			158,052
Other long-term liabilities		4,182			9,951			21,044			(5,340	)		29,837
Net due to (from) affiliates		93,910			(4,997	)		(88,913	)		—			—
Total liabilities		327,117			100,389			(57,466	)		5,340	)		364,700
Stockholders’ equity/(deficit):
Preferred Stock		—			—			21			—			21
Common and Class B Stock		5			—			394			(5	)		394
Additional paid-in capital		4,727			29,106			115,118			(33,833	)		115,118
Retained earnings/(deficit)		(100,615	)		(50,564	)		(85,036	)		151,179			(85,036	)
Deferred compensation and treasury stock		—			—			(39,188	)		—			(39,188	)
Accumulated other comprehensive loss		64			622			686			(686	)		686
Total stockholders’ equity/(deficit)		(95,819	)		(20,836	)		(8,005	)		116,655			(8,005	)
Total liabilities and stockholders’ equity/(deficit)	$	231,298		$	79,553		$	(65,471	)	$	111,315		$	356,695

17

FEDDERS CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)

CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS

		For The Three Months Ended March 31, 2007
		Fedders
		North			Other			Corporate			Eliminating		Fedders
		America			Fedders			Parent			Entries		Corporation
Net cash (used in) provided by operating activities		$	(13,025	)	$	416		$	(5,835	)	$	—	$	(18,444	)
Net additions to property, plant and equipment			(357	)		(291	)		(25	)		—		(673	)
Proceeds from prior year Walkersville sale			4,098			—			—			—		4,098
Net cash (used in) provided by investing activities			3,741			(291	)		(25	)		—		3,425
Repayments of short-term notes			(1,744	)		(3,379	)		—			—		(5,123	)
Warrants issued			(1,000	)		—			1,000			—		—
Proceeds from long-term debt			50,000			—			—			—		50,000
Repayments of long-term borrowings			(24,873	)		—			—			—		(24,873	)
Proceeds from sale of treasury stock			—			—			2,000			—		2,000
Change in net due to (from ) affiliate			(13,201	)		3,303			9,898			—		—
Net cash (used in) provided by financing activities			9,182			(76	)		12,898			—		22,004
Effect of exchange rates	��		(12	)		336			(2	)		—		322
Net (decrease) increase in cash and cash equivalents			(114	)		385			7,036			—		7,307
Cash and cash equivalents at beginning of period			1,490			2,597			702			—		4,789
Cash and cash equivalents at end of period		$	1,376		$	2,982		$	7,738		$	—	$	12,096

	For The Three Months Ended March 31, 2006
	Fedders
	North			Other			Corporate			Eliminating		Fedders
	America			Fedders			Parent			Entries		Corporation
Net cash (used in) provided by operating activities	$	(18,379	)	$	30,956		$	(16,441	)	$	—	$	(3,864	)
Net additions to property, plant and equipment		(536	)		(632	)		(14	)		—		(1,182	)
Disposal of property, plant and equipment		843			—						—		843
Acquisition of business, net of cash acquired					—			—			—		—
Net cash (used in) provided by investing activities		307			(632	)		(14	)		—		(339	)
Proceeds (repayments) of short-term notes		1,186			(1,937	)		—			—		(751	)
Net repayments of long-term debt		(80	)		(26	)		—			—		(106	)
Change in net due to (from) affiliate		15,563			(31,297	)		15,734			—		—
Net cash provided by (used in) financing activities		16,669			(33,260	)		15,734			—		(857	)
Effect of exchange rates		—			778			—			—		778
Net (decrease) increase in cash and cash equivalents		(1,403	)		(2,158	)		(721	)		—		(4,282	)
Cash and cash equivalents at beginning of period		6,455			6,300			1,662			—		14,417
Cash and cash equivalents at end of period	$	5,052		$	4,142		$	941		$	—	$	10,135

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FEDDERS CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)

The historical condensed consolidating financial statements presented above include the following transactions between the Company and FNA:

a) The Company charges corporate overhead essentially on a cost basis allocated in proportion to sales. Such charges to FNA amounted to approximately $2.0 million and $2.5 million for the three months ended March 31, 2007 and 2006, respectively.

b) FNA’s interest expense reflects actual interest charges on the 9 7/8% Senior Notes, senior secured term loan, Addison mortgage, Trion Industrial Revenue Bond, State of Illinois Promissory Note, Eubank mortgage, capital lease obligations, and a revolving line of credit.

c) FNA’s depreciation and amortization for the three months ended March 31, 2007 and 2006 each amounted to approximately $1.0 million. Capital expenditures of FNA amounted to $0.4 million and $0.5 million in the three months ended March 31, 2007 and 2006, respectively.

d) The Company guarantees FNA’s obligations under FNA’s revolving credit facility.

e) The Company’s stock option plans include FNA’s employees.

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

     The following is management’s discussion and analysis (“MD&A”) of certain significant factors, which affected our financial position, and operating results during the periods included in the accompanying consolidated financial statements. This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results could differ from those anticipated in forward-looking statements for many reasons.

Overview

     Fedders is a global producer and marketer of air treatment products for the residential, commercial, and industrial markets. The Company’s products include a wide range of residential and commercial heating and cooling products, air cleaners, and humidifiers. The Company has two reportable industry segments: Heating, Ventilation, and Air Conditioning (“HVAC”) and Engineered Products. Both segments operate and sell products in the global air treatment market. Over the past six years, the Company has re-positioned itself through globalization and expansion of its product offerings from serving primarily the $1.3 billion North American market for room air conditioners to serving the $37 billion global air treatment market. Major markets the Company has entered include residential central and commercial air conditioning and high growth markets in Asia. Although the seasonality of the Company’s business is lessening, the Company generally reports a loss during the second half of the calendar year, with a majority of shipments and revenue being derived during the first six months of the calendar year.

     In the first quarter of 2007, the Company’s financing provided inadequate liquidity to produce sufficient product to meet customer demand until new financing was secured on March 20, 2007. The new financing provided the Company with adequate capital to commence full production; however, it occurred too late in the quarter to impact sales. As a result, sales volume was significantly curtailed, and profitability was reduced by the low sales volume.

     In November 2006, the Company disclosed that it discontinued selling room air conditioners and dehumidifiers to Wal-Mart and Home Depot due to low profit margins. At the same time, the Company disclosed that it discontinued manufacturing and selling dehumidifiers due to low profit margins. The Company recognized restructuring costs and goodwill impairment in its HVAC segment in 2006 primarily due to this voluntary volume reduction.

     The Company implemented a restructuring plan during 2005 to significantly reduce costs throughout the Company, to enhance its competitive position in the markets in which it participates, and to return the Company to profitability. In 2006, the benefits of this restructuring included lower SG&A expenses, in absolute terms and as a percentage of sales, compared with the prior year as shipping and warehousing costs decreased by 42% from consolidating warehouses in the U.S. and research & development costs declined by 25% from consolidating this function into a new R&D facility in China. Other benefits included fewer management layers and more efficient manufacturing and distribution.

     Management believes that as a result of the above actions that reposition the Company strategically and reduce the Company’s cost structure as well as the new debt financing (discussed in Note 11 and in Liquidity and Capital Resources of the MD&A), that the Company’s existing and future sources of cash, anticipated future earnings, and short-term borrowing capacity are adequate to meet the demands of its operations.

Development of the Business

     Over the last several years, the Company lessened its dependence on sales of room air conditioners through acquisitions, strategic alliances, and joint ventures that complement or enhance our core air treatment business and generate overall corporate value. In the last two years, the Company withdrew from selling room air conditioners and dehumidifiers to The Home Depot and Wal-Mart. These activities have (i) been a critical factor in driving down costs by establishing a low-cost manufacturing base in Asia; (ii) provided access to new geographic markets through well-known local brand names, existing sales and distribution networks, and experienced employees who are familiar with the local markets; and (iii) expanded its air treatment business through broadening product lines and extending distribution into commercial and industrial markets. In 2006, lower industry selling prices, an unfavorable mix of room air conditioners combined with product sold to large “big-box” retailers, and higher raw materials costs that could not be passed along to “big-box” retailers with fixed-price contracts affected the Company’s ability to return to profitability. In 2006, the Company successfully developed new product lines including 13 SEER residential central air conditioners and gas furnaces and roof-top commercial packaged systems to position the Company well in the $10 billion North American HVAC market.

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Results of Operations

     The following table presents the results of continuing operations for the three months ended March 31, 2007 and 2006.

Operating Results as a Percent of Net Sales

	Three Months Ended
	March 31,
	2007			2006
Net sales	$	30,140		$	99,701
Gross profit		7.2	%		12.7	%
Selling, general, and administrative expense		(46.2	)		(15.1	)
Operating income/(loss)		(39.1	)		(2.4	)
Net interest expense		(20.5	)		(5.5	)
Pre-tax loss		(59.0	)		(8.4	)

Three Months Ended March 31, 2007 versus the Three Months Ended March 31, 2006

     Net sales for the three-month period ended March 31, 2007 of $30.1 million declined by 69.8% compared with $99.7 million in the prior-year period. Net sales within the HVAC segment decreased by 74.7% during the period as a result of the decision in 2006 to cease selling to The Home Depot and Wal-Mart and discontinuing dehumidifier manufacturing and sales. Sales also declined due to production constraints for all products caused by limited working capital liquidity while the Company arranged for new financing that was secured on March 20, 2007. Residential central air conditioning system sales were lower because of a 32% industry-wide decline in unit shipments in the first quarter due to the continuing effects of the transition to the new Federal 13 SEER energy efficiency standards for these systems. This industry-wide decline resulted in excess inventory levels at wholesale distributors. Additional factors impacting sales were warmer-than-normal winter weather that affected heating product sales and the downturn in the residential new-construction housing market. Net sales in the Engineered Products segment increased by 2.2% due to growth in North American sales, partly offset by continued weakness in Asia. The order backlog at the end of the first quarter was $48.5 million, compared with $45.5 million excluding The Home Depot, Wal-Mart, and dehumidifiers in the prior-year quarter.

     Gross profit decreased to $2.2 million in the first quarter of 2007, compared with $12.7 million in the prior-year period, in part because of the sales reduction and, in part, due to $2.7 million of unabsorbed manufacturing overhead caused by production constraints discussed above. Gross profit was 7.2% of net sales during the first quarter versus 12.7% of net sales in the prior-year quarter. Excluding the effect of the unabsorbed overhead, gross profit as a percent of net sales was 16.0% in the first quarter of 2007.

     Selling, general, and administrative (SG&A) expenses for the three-month period ended March 31, 2007 were $13.9 million, or 46.2% of net sales, compared with $15.0 million, or 15.1% of net sales, in the prior-year period. This represents a 7.3% reduction in dollar terms. The first quarter of 2007 included higher bank costs required by the Company’s previous lender as well as higher legal expenses. SG&A as a percentage of sales is higher due to the lower sales.

     The operating loss for the three-months ended March 31, 2007 was $11.8 million, or 39.1% of net sales, compared with a loss of $2.3 million, or 2.4% of net sales, in the prior-year period. The decrease is due to the lower sales, partly offset by reduced operating expenses.

     Net interest expense increased in the three-month period ended March 31, 2007 to $6.2 million compared with $5.5 million in the prior-year period. Interest expense consisted of interest on the Company’s long-term debt, on short-term working capital loans in Asia, and on the Company’s revolving credit facility in the U.S. Net interest expense was higher than prior year due to costs of $1.0 million for extending the Wachovia supplemental loan from January to March, writing off deferred debt acquisition costs of $0.4 million on the Wachovia loans, and higher borrowing rates for the new financing.

     Net loss applicable to common stockholders in the three-month period ended March 31, 2007 was $18.9 million, or a $0.56 loss per diluted common share. Net loss applicable to common stockholders in the prior-year period was $9.9 million, or a $0.32 loss per diluted common share.

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Liquidity and Capital Resources

     The Company’s working capital requirements are seasonal, with cash balances peaking in the third quarter of each calendar year and the greatest utilization of its lines of credit occurring early in the calendar year. Cash on hand amounted to $12.1 million at March 31, 2007 compared with $10.1 million a year earlier. Short-term borrowings under the Company’s working capital credit facilities amounted to $14.4 million, used only in Asia, at March 31, 2007 compared with $56.0 million, in Asia plus a USA revolver, a year earlier. Current portion of long-term debt amounted to $0.7 million at March 31, 2007, compared with $2.5 million a year earlier.

     Net cash used by operating activities for the three-month period ended March 31, 2007 amounted to $18.4 million, compared with cash used of $3.9 million in the prior-year period. Cash used by operations was primarily a result of the net loss, lower accrued expenses and income taxes payable, and increased other assets, partly offset by higher accounts payable, depreciation and amortization and lower inventory levels. Net inventories at March 31, 2007 were $39.6 million compared with $41.5 million at December 31, 2006 and $78.0 million at March 31, 2006. The reduced inventory levels reflect the Company’s decision to discontinue selling to The Home Depot and Wal-Mart, discontinuing manufacturing and selling dehumidifiers, and the effect of production constraints discussed previously. Inventory levels would normally increase from December to March. Accounts payable at March 31, 2007 were $48.3 million compared with $40.8 million at December 31, 2006 and $79.6 million at March 31, 2006. Accounts payable increased during the first quarter of 2007 as a result of liquidity constraints and increased production after the new financing was secured.

     Net cash provided by investing activities in the three-month period ended March 31, 2007 of $3.4 million compared with cash used of $0.3 million in the prior-year period. Investing activities included capital expenditures of $0.7 million, compared with $1.2 million in the prior-year period. This was more than offset by $4.1 million received in the first quarter from the Walkersville, Maryland non-productive land sale that occurred in the fourth quarter of 2006.

     Net cash provided by financing activities for the three-month period ended March 31, 2007 amounted to $22.0 million from the new term loan obtained through Goldman Sachs Credit Partners L.P. Proceeds from the new $50 million term loan were used to repay $30.0 million of then-existing debt, and the Company received $2.0 million from the sale of treasury stock (discussed below). In connection with the debt refinancing, the Company was required to pay off its $3.2 million Trion Industrial Revenue Bond, which the Company plans to reissue, and its $1.9 million Fedders Addison mortgage. Net cash used by financing activities in the prior-year period was $0.9 million for debt repayment.

     The Company did not declare quarterly dividends in the three months ended March 31, 2007 as dividend payments are restricted by the indenture covering Company’s outstanding notes and also by the new loan agreements. The Company stopped declaring quarterly dividends on its outstanding common stock, class B stock, and preferred stock in the third quarter of 2005. Previously, the Company declared quarterly dividends of $0.03 per outstanding share of common and class B stock and $0.5375 per outstanding share of preferred stock. Accumulated undeclared and unpaid preferred stock dividends were $8.0 million at March 31, 2007.

     On March 20, 2007, the Company obtained a new $50 million, 30-month senior secured term loan and a $40 million, 30-month secured revolving credit facility arranged through Goldman Sachs Credit Partners L.P. and repaid the balance outstanding on its existing secured revolving facility and supplemental term loan with Wachovia. The new senior secured term loan has an interest rate of Prime plus 11% or LIBOR plus 12% (17.3% at March 31, 2007), and the new revolving credit facility has an interest rate of Prime plus 1% or LIBOR plus 2%. As a part of the new debt agreement, the Company issued warrants to purchase 1,175,303 shares valued at market on the date of issuance at $1.0 million that are exercisable through March 2017 at $0.01 per share. The Company was required to draw the total balance of the senior secured term loan immediately. In addition to repayment of the Wachovia obligations, the loan proceeds will be used to fund working capital requirements. Availability under the new revolving line of credit is based primarily on advance rates on accounts receivable and inventory in the U.S. and Canada. Financial covenants under the term loan and revolving credit facility will include EBITDA, interest coverage, and secured leverage tests. In addition, the Company is prohibited from paying dividends, making acquisitions, as well as the lender must approve asset sales.

     In September 2006, the Company received a $10 million supplemental term loan from Wachovia that was to expire on January 26, 2007 and was subsequently extended to March 20, 2007. In conjunction with this loan, the Company’s Executive Chairman made equity contributions of $1.5 million in October 2006 and $2.0 million in January 2007 in the form of treasury stock purchases from a portion of his supplemental retirement plan assets. The supplemental retirement plan assets and obligations are recorded as a non-current asset and a non-current liability, respectively. The term loan was repaid with proceeds from the new $50 million senior secured term loan.

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     On January 31, 2006, the Company replaced its expiring $100 million secured revolving credit facility with a five-year $75 million secured revolving credit facility with Wachovia Bank.

     The Company also utilized short-term borrowing facilities to support production in its China operations.

     Forward-looking statements are covered under the “Safe-Harbor” clause of the Private Securities Litigation Reform Act of 1995. Such statements are based upon current expectations and assumptions. Actual results could differ materially from those currently anticipated as a result of known and unknown risks and uncertainties including, but not limited to, weather and economic, political, market and industry conditions and reliance on key customers. Such factors are described in Fedders’ SEC filings, including its most recently filed annual report on Form 10-K. The Company disclaims any obligations to update any forward-looking statements to incorporate subsequent events.

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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     From time to time the Company engages in hedging activities in an effort to mitigate the impact of currency exchange rate fluctuations. However, the Company cannot assure that any hedging transactions we enter into will be effective or will not result in foreign exchange hedging loss. The impact of exchange rate fluctuations on our results of operations cannot be accurately predicted.

     At March 31, 2007, the Company has variable-rate debt of $64.6 million. At this level, a one-percentage point increase in interest rates would create $0.6 million additional expense annually.

ITEM 4. CONTROLS AND PROCEDURES

     The Company maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in the Company’s reports under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and that such information is accumulated and communicated to management, including the Company’s Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), as appropriate, to allow timely decisions regarding required disclosure. The Company periodically reviews the design and effectiveness of its disclosure controls and internal control over financial reporting. The Company makes modifications to improve the design and effectiveness of its disclosure controls and internal control structure, and may take other corrective action, if its reviews identify a need for such modifications or actions.

     A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, control may become inadequate because of changes in conditions or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.

     In connection with the preparation of the Company’s 2006 Annual Report on Form 10-K, as of December 31, 2006, under the supervision and with the participation of the Company’s management, including the CEO and CFO, the Company performed an evaluation of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Exchange Act). The Company concluded that control deficiencies in its internal control over financial reporting as of December 31, 2006 constituted material weaknesses within the meaning of the Public Company Accounting Oversight Board’s Auditing Standard No. 2,An Audit of Internal Control Over Financial Reporting Performed in Conjunction with an Audit of Financial Statements. The material weaknesses identified by the Company were disclosed in its 2006 Annual Report on Form 10-K, which was filed with the SEC on March 30, 2007. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that, as of March 30, 2007, the Company’s disclosure controls and procedures were not effective, for the reasons described above (relating to the previously-identified material weakness in internal control over financial reporting).

Changes in Internal Control Over Financial Reporting

     Changes In Internal Control Over Financial Reporting.Management completed its assessment of internal controls for the year ended December 31, 2006. Management, with oversight from the Audit Committee, has been addressing each of the issues identified in the December 31, 2006 Form 10-K, and is committed to effectively remediating known weaknesses as expeditiously as possible. The Company’s remediation efforts during the fiscal quarter ended December 31, 2006 and during the three months ended March 31, 2007 resulted in progress toward improving internal controls over financial reporting, as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act, in areas identified as having a material weakness in management’s 2006 assessment. Management is addressing all of the material weaknesses listed in its 2006 Annual Report. Changes described below were made through the first quarter of 2007.

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     The Company’s remediation efforts during the first quarter includes the following:

a.)	The Company established a work plan to develop new, more efficient accounting processes and scheduled meeting dates in the second quarter of 2007 to complete this initiative that will free up resources to accelerate the closing process and reconcile accounts.
b.)	The Company required that operating units submit to the Corporate office balance sheet reconciliations with evidence of appropriate review and approval.
c.)	The Company required that operating units submit to the Corporate office an analytical review of the income statement and balance sheet as well as a reconciliation of the unit trial balance to its financial statements.
d.)	The Company identified additional potential risks and drafted improved controls for information technology based on COBIT.
e.)	The Company communicated the remediation log from the year-end testing for each operating entity and established a framework for remediation in the second quarter.

     Limitations on the Effectiveness of Controls.A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

     Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

     Further, the design of disclosure controls and procedures and internal control over financial reporting must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected.

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PART II — OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

     The Company is involved in litigation, both as plaintiff and defendant, incidental to the conduct of its business. It is the opinion of management, after consultation with counsel, that the outcome of such litigation will not have a material adverse effect on its financial position, results of operations, and cash flows.

ITEM 1A. RISK FACTORS

     The reader should carefully consider the risk factors disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2006, in Part I, Item 1A, Risk Factors. Any of those risks could have a material adverse effect on the Company’s financial condition and results of operations.

ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS

     None.

ITEM 3. DEFAULTS ON SENIOR SECURITIES

     The Company stopped paying dividends in the third quarter of 2005. The amount of unpaid dividends on the Company’s Series A Cumulative Preferred Stock was $8.0 million, or $3.76 per preferred share, at March 31, 2007.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

     None.

ITEM 5. OTHER INFORMATION

     None.

ITEM 6. EXHIBITS

EXHIBIT
NUMBER	DESCRIPTION
10.1	Revolving Loan and Guaranty Agreement dated as of March 20, 2007 among Fedders North America, Inc., Emerson Quiet Kool Corporation, Columbia Specialties, Inc., Trion, Inc., Envirco Corporation, Eubank Coil Company, Fedders Addison Company, Inc., Fedders Islandaire, Inc. and Island Metal Fabricating, Inc., (each individually a “Borrower” and collectively, “Borrowers”), Fedders Corporation, as Holdings and a Guarantor, certain subsidiaries of Fedders Corporation, as Guarantors, Lenders party hereto from time to time, Bank of America, N.A. as Administrative Agent and as Collateral Agent and General Electric Capital Corporation as Documentation Agent, and Goldman Sachs Credit Partners L.P., as Sole Lead Arranger, Sole Bookrunner and Sole Syndication Agent, filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K dated March 26, 2007 and incorporated herein by reference.
10.2	Term Loan and Guaranty Agreement dated as of March 20, 2007 among Fedders North America, Inc., Fedders Corporation as Holdings and a Guarantor, Certain Subsidiaries of Fedders Corporation, as Guarantors, Lenders party hereto from time to time, and Goldman Sachs Credit Partners L.P. as Sole Lead Arranger, Sole Bookrunner and Sole Syndication Agent, as Administrative Agent and as Collateral Agent, filed as Exhibit 10.2 to the Company’s Current Report on Form 8-K dated March 26, 2007 and incorporated herein by reference.
10.3	Pledge and Security Agreement dated as of March 20, 2007 among Fedders Corporation, as Grantor, Fedders North America, Inc., as Grantor, each of the other Grantors from time to time party hereto and Bank of America, N.A., as Collateral Agent and Administrative Agent, filed as Exhibit 10.3 to the Company’s Current Report on Form 8-K dated March 26, 2007 and incorporated herein by reference.
10.4	Pledge and Security Agreement dated as of March 20, 2007 among Fedders Corporation, as Grantor, Fedders North America, Inc., as Grantor, each of the other Grantors from time to time party hereto and Goldman Sachs Credit Partners L.P., as Collateral Agent, filed as Exhibit 10.4 to the Company’s Current Report on Form 8-K dated March 26, 2007 and incorporated herein by reference.

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EXHIBIT
NUMBER	DESCRIPTION
31.1	Certifications pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2	Certifications pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1	Certifications pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2	Certifications pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

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SIGNATURE

     Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

FEDDERS CORPORATION
By:	ROBERT L. LAURENT, JR.
	Chief Financial Officer

     Signing both in his capacity as Executive Vice President, Finance, and Acquisitions and Chief Financial Officer and on behalf of the registrant.

May 10, 2007

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