e10vk
UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
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For the fiscal year ended
December 31, 2007
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OR
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
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For the transition period
from to
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Commission File Number
001-15149
Lennox International
Inc.
(Exact name of Registrant as specified in its charter)
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Delaware
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42-0991521
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(State or other jurisdiction of
incorporation or organization)
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(I.R.S. Employer
Identification Number)
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2140 Lake Park Blvd.
Richardson, Texas 75080
(Address of principal executive
offices, including zip code)
(Registrants telephone number, including area code):
(972) 497-5000
Securities
Registered Pursuant to Section 12(b) of the Act:
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Title of each class
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Name of each exchange on which
registered
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Common Stock, $.01 par value per share
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New York Stock Exchange
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Securities Registered Pursuant to Section 12(g) of the Act:
None
Indicate by checkmark if the registrant is a well-known seasoned
issuer, as defined in Rule 405 of the Securities
Act. Yes þ No o
Indicate by checkmark if the registrant is not required to file
reports pursuant to Section 13 or 15(d) of the Exchange
Act. Yes o No þ
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of
the Exchange Act during the preceding 12 months (or for
such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing
requirements for the last
90 days. Yes þ No o
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of
Regulation S-K
is not contained herein, and will not be contained, to the best
of registrants knowledge, in definitive proxy or
information statements incorporated by reference in
Part III of this
Form 10-K
or any amendment to this
Form 10-K. o
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company. See the definitions of
large accelerated filer, accelerated
filer and smaller reporting company in
Rule 12b-2
of the Exchange Act. (Check one):
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Large Accelerated Filer
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Accelerated
Filer o
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Non-Accelerated
Filer o
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Smaller Reporting
Company o
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(Do not check if a smaller reporting company)
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Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2
of the Exchange
Act). Yes o No þ
As of June 30, 2007, the aggregate market value of the
common stock held by non-affiliates of the registrant was
approximately $2,147,127,000 based on the closing price of the
registrants common stock on the New York Stock Exchange on
such date. Common stock held by non-affiliates excludes common
stock held by the registrants executive officers,
directors and stockholders whose ownership exceeds 5% of the
common stock outstanding at June 30, 2007. As of
February 1, 2008, there were 60,560,564 shares of the
registrants common stock outstanding.
DOCUMENTS
INCORPORATED BY REFERENCE
Portions of the registrants Proxy Statement to be filed
with the Securities and Exchange Commission in connection with
the registrants 2008 Annual Meeting of Stockholders to be
held on May 15, 2008 are incorporated by reference into
Part III of this report.
LENNOX
INTERNATIONAL INC.
FORM 10-K
For the Fiscal Year Ended December 31, 2007
INDEX
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PART I
References in this Annual Report on
Form 10-K
to we, our, us,
LII or the Company refer to Lennox
International Inc. and its subsidiaries, unless the context
requires otherwise.
The
Company
Through our subsidiaries, we are a leading global provider of
climate control solutions. We design, manufacture and market a
broad range of products for the heating, ventilation, air
conditioning and refrigeration (HVACR) markets. We
have leveraged our expertise to become an industry leader known
for innovation, quality and reliability. Our products and
services are sold through multiple distribution channels under
well-established brand names including Lennox,
Armstrong Air, Ducane, Bohn,
Larkin, Advanced Distributor Products,
Service Experts and others.
Shown below are our four business segments, the key products and
brand names within each segment and 2007 net sales by
segment. Segment financial data for 2007, 2006 and 2005,
including financial information about foreign and domestic
operations, is included in Note 20 of the Notes to our
Consolidated Financial Statements in Item 8.
Financial Statements and Supplementary Data and is
incorporated herein by reference.
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2007 Net Sales
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Segment
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Products/Services
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Brand Names
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(In millions)
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Residential Heating & Cooling
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Furnaces, air conditioners, heat pumps, packaged heating and
cooling systems, indoor air quality equipment, pre-fabricated
fireplaces, freestanding stoves
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Lennox, Armstrong Air, Ducane, Aire-Flo, AirEase, Concord,
Magic-Pak, Advanced Distributor Products, Superior, Whitfield,
Country Stoves, Security Chimneys
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$
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1,669.6
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Commercial Heating & Cooling
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Unitary heating and air conditioning equipment, applied systems
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Lennox, Allied Commercial
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875.0
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Service Experts
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Sales, installation and service of residential and light
commercial heating and cooling equipment
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Service Experts, various individual service center names
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681.5
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Refrigeration
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Chillers, condensing units, unit coolers, fluid coolers, air
cooled condensers, air handlers
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Bohn, Larkin, Climate Control, Chandler Refrigeration, Heatcraft
Worldwide Refrigeration, Friga-Bohn, HK Refrigeration, Kirby,
Lovelocks, Frigus-Bohn
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607.7
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Eliminations
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(84.1
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Total
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$
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3,749.7
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We were founded in 1895 in Marshalltown, Iowa when Dave Lennox,
the owner of a machine repair business for the railroads,
successfully developed and patented a riveted steel coal-fired
furnace, which was substantially more durable than the cast iron
furnaces used at that time. Manufacturing these furnaces grew
into a significant business and was diverting the Lennox Machine
Shop from its core focus. As a result, in 1904, a group of
investors headed by D.W. Norris bought the furnace business and
named it the Lennox Furnace Company. We reincorporated as a
Delaware corporation in 1991 and completed our initial public
offering in 1999. Over the years, D.W. Norris ensured ownership
was distributed to succeeding generations of his family. We
believe a significant portion of our outstanding common stock is
currently broadly distributed among descendants of, or persons
otherwise related to, D.W. Norris.
1
Products
and Services
Residential
Heating & Cooling
Heating & Cooling Products. We
manufacture and market a broad range of furnaces, air
conditioners, heat pumps, packaged heating and cooling systems,
accessories to improve indoor air quality, replacement parts and
related products for both the residential replacement and new
construction markets in the U.S. and Canada. These products
are available in a variety of designs and efficiency levels and
at a range of price points, and are intended to provide a
complete line of home comfort systems. We believe that by
maintaining a broad product line marketed under multiple brand
names we can address different market segments and penetrate
multiple distribution channels.
The Lennox and Aire-Flo brands are sold
directly to a network of approximately 7,000 installing dealers,
making us one of the largest wholesale distributors of
residential heating and air conditioning products in North
America. The Armstrong Air, Ducane,
AirEase, Concord, Magic-Pak
and Advanced Distributor Products brands are sold
through third party distributors.
Our Advanced Distributor Products operation builds evaporator
coils and air handlers under the Advanced Distributor
Products brand, as well as the Lennox,
Armstrong Air, AirEase,
Concord and Ducane brands. In addition
to supplying us with components for our heating and cooling
systems, Advanced Distributor Products produces evaporator coils
to be used in connection with competitors heating and
cooling products as an alternative to such competitors
brand name components. We have achieved a significant share of
the market for evaporator coils through the application of
technological and manufacturing skills and customer service
capabilities.
Hearth Products. Our hearth products include
prefabricated gas, wood burning and electric fireplaces, free
standing pellet and gas stoves, fireplace inserts, gas logs and
accessories. Many of the fireplaces are built with a blower or
fan option and are efficient heat sources as well as attractive
amenities to the home. We currently market our hearth products
under the Lennox, Superior,
Whitfield, Country Stoves, and
Security Chimneys brand names.
Commercial
Heating & Cooling
North America. In North America, we sell
unitary heating and cooling equipment used in light commercial
applications, such as low-rise office buildings, restaurants,
retail centers, churches and schools, as opposed to larger
applied systems. Our product offerings for these applications
include rooftop units ranging from two to 50 tons of cooling
capacity and split system/air handler combinations, which range
from 1.5 to 20 tons. These products are distributed primarily
through commercial contractors and directly to national account
customers. We believe the success of our products is
attributable to their efficiency, design flexibility, low life
cycle cost, ease of service and advanced control technology.
Europe. In Europe, we manufacture and sell
unitary products, which range from two to 30 tons, and applied
systems with up to 500 tons of cooling capacity. Our European
products consist of small package units, rooftop units,
chillers, air handlers and fan coils that serve medium-rise
commercial buildings, shopping malls, other retail and
entertainment buildings, institutional applications and other
field-engineered applications. We manufacture heating and
cooling products in several locations in Europe and market these
products through both direct and indirect distribution channels
in Europe, Russia and the Middle East.
Service
Experts
Approximately 120 Company-owned Service Experts dealer service
centers provide installation, preventive maintenance, emergency
repair and replacement of heating and cooling systems directly
to residential and light commercial customers in metropolitan
areas in the U.S. and Canada. In connection with these
services, we sell a wide range of our manufactured equipment,
parts and supplies, and third party branded products. We focus
primarily on service and replacement opportunities, which we
believe are more stable and profitable than new construction in
our Service Experts segment. We use a portfolio of management
procedures and best practices, including standards of excellence
for customer service, a training program for new general
managers, common
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information technology systems and financial controls, regional
accounting centers and an inventory management program designed
to enhance the quality, effectiveness and profitability of
operations.
Refrigeration
We manufacture and market equipment for the global commercial
refrigeration market through subsidiaries organized under the
Heatcraft Worldwide Refrigeration name. These products are sold
to distributors, installing contractors, engineering design
firms, original equipment manufacturers and end users.
North America. Our commercial refrigeration
products for the North American market include condensing units,
unit coolers, fluid coolers, air cooled condensers, compressor
racks and air handlers. These products are sold for cold storage
applications, primarily to preserve food and other perishables,
and are used by supermarkets, convenience stores, restaurants,
refrigerated warehouses and distribution centers. As part of the
sale of commercial refrigeration products, we routinely provide
application engineering for consulting engineers, contractors
and others. We also sell products for non-cold storage
applications, such as telecommunications and medical
applications.
International. In international markets, we
manufacture and market refrigeration products including
condensing units, unit coolers, air-cooled condensers, fluid
coolers, compressor racks and small chillers. We have
manufacturing locations in Europe, Australia, Brazil and China.
We also own a 50% common stock interest in a joint venture in
Mexico that produces unit coolers and condensing units of the
same design and quality as those manufactured by us in the
U.S. This venture produces a smaller range of products, and
therefore the product line is complemented with imports from the
U.S., which are sold through the joint ventures
distribution network. We also own a 13.05% common stock interest
in a manufacturer in Thailand that produces compressors for use
in our products and for other HVACR customers as well.
Business
Strategy
Our business strategy is to sustain and expand our premium
position through organic growth and acquisition initiatives
while increasing our focus on cost reductions to drive margin
expansion and support growth into other business segments. This
strategy is supported by five strategic priorities that are
underlined by our values and our people. The five strategic
priorities include:
Innovative
Product and System Solutions
In all of our markets, we are continually renewing our heritage
of innovation by developing commercial, residential, and
refrigeration products that give business owners and families
more precise control over more aspects of their indoor
environments, while significantly lowering their energy costs.
Manufacturing
and Sourcing Excellence
We maintain our commitment to manufacturing and sourcing
excellence by driving low cost assembly through rationalization
of our facilities and product lines, maximizing factory
efficiencies, and leveraging our purchasing power and sourcing
initiatives to expand the use of low cost components.
Distribution
Excellence
By investing resources in expanding our network of physical
distribution points, we are making products available to our
customers in a timely, cost-efficient manner. Additionally, we
are providing enhanced dealer support through the use of
technology, training and advertising and merchandising.
Geographical
Expansion
We are growing our international presence by extending our
successful domestic business model and product knowledge into
developing international markets.
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Expense
Reduction
Through our focus on cost management initiatives, we are
lowering our operating, manufacturing, and administrative
expenses.
Marketing
and Distribution
We utilize multiple channels of distribution and offer different
brands at various price points in order to better penetrate the
HVACR markets. Our products and services are sold through a
combination of distributors, independent and company-owned
dealer service centers, other installing contractors,
wholesalers, manufacturers representatives, original
equipment manufacturers and to national accounts. Dedicated
sales forces and manufacturers representatives are
deployed across our business segments and brands in a manner
designed to maximize their ability to service a particular
distribution channel. To optimize enterprise-wide effectiveness,
we have active cross-functional and cross-organizational teams
coordinating approaches to pricing, product design, distribution
and national account customers.
An example of the competitive strength of our marketing and
distribution strategy is in the North American residential
heating and cooling market in which we use three distinctly
different distribution approaches: the one-step distribution
system, the two-step distribution system and sales made directly
to end-users. We distribute our Lennox and
Aire-Flo brands in a one-step process directly to
dealers that install these heating and cooling products and in
some cases we sell Lennox commercial products
directly to national account customers. We distribute our
Armstrong Air, Ducane,
AirEase, Concord, Magic-Pak and
Advanced Distributor Products brands through the
traditional two-step distribution process pursuant to which we
sell our products to distributors who, in turn, sell the
products to installing contractors. In addition, we provide
heating and cooling products and services directly to consumers
through Company-owned Service Experts dealer service centers.
Over the years, the Lennox brand has become
synonymous with Dave Lennox, a highly recognizable
advertising icon in the heating and cooling industry. The
Dave Lennox image is utilized in mass media
advertising, as well as in numerous locally produced dealer
advertisements, open houses and trade events.
Manufacturing
We operate manufacturing facilities in the U.S. and
international locations. We have embraced lean-manufacturing
principles, a manufacturing philosophy which reduces waste in
manufactured products by shortening the timeline between the
customer order and delivery, accompanied by initiatives to
achieve high product quality across our manufacturing
operations. In our facilities most impacted by seasonal demand,
we manufacture both heating and cooling products to balance
seasonal production demands and maintain a relatively stable
labor force. We are generally able to hire temporary employees
to meet changes in demand.
Strategic
Sourcing
We rely on various suppliers to furnish the raw materials and
components used in the manufacturing of our products. To
maximize our buying effectiveness in the marketplace, our
central strategic sourcing group consolidates required purchases
of materials, components and indirect items across business
segments. The goal of the strategic sourcing group is to develop
global strategies for a given component group, concentrate
purchases with three to five suppliers and develop long term
relationships with these vendors. There are often several
alternative suppliers for our key raw material and component
needs. By developing these strategies and relationships, we
leverage our material spend to our stockholders advantage.
Compressors, motors and controls constitute our most significant
component purchases, while steel, copper and aluminum account
for the bulk of our raw material purchases. We own equity
interests in joint ventures that manufacture compressors. These
joint ventures provide us with compressors for our residential,
commercial, and refrigeration businesses.
Our centrally led supplier development group works with selected
suppliers to improve their costs, quality, and delivery
performance. We seek to accomplish this by employing the same
business excellence tools utilized by our four business segments
to drive improvements in the area of lean manufacturing and six
sigma, a disciplined, data-driven approach and methodology for
improving quality.
4
Research
and Development and Technology
An important part of our growth strategy is continued investment
in research and product development to both develop new products
and make improvements to existing product lines. As a result, we
spent an aggregate of $43.0 million, $42.2 million and
$40.3 million on research and development during 2007, 2006
and 2005, respectively. We operate a global engineering
organization that focuses on product development innovation and
process improvements.
Intellectual property and innovative designs are leveraged
across our businesses. We leverage product development cycle
time improvement and product data management to drive key
programs to market more rapidly. We use advanced, commercially
available computer-aided design, computer-aided manufacturing,
computational fluid dynamics and other sophisticated software to
streamline the design and manufacturing processes and to run
complex computer simulations before a working prototype is
created.
We also operate a full line of metalworking equipment and
advanced laboratories certified by applicable industry
associations.
Seasonal
Nature of Business
Our sales and related segment profit tend to be seasonally
higher in the second and third quarters of the year because
summer is the peak season for sales of air conditioning
equipment and services in the U.S. and Canada.
Patents
and Trademarks
We hold numerous patents that relate to the design and use of
our products. We consider these patents important, but no single
patent is material to the overall conduct of our business. Our
policy is to obtain and protect patents whenever such action
would be beneficial. We own or license several trademarks we
consider important in the marketing of our products, including
Lennox®,
Armstrong
Airtm,
Ducanetm,
Allied
Commercialtm,
Advanced Distributor
Products®,
Aire-Flo®,
AirEase®,
Concord®,
Magic-Paktm,
Superior®,
Whitfield®,
Earth
Stovetm,
Security
Chimneystm,
Country
Stovestm,
Service
Experts®,
Bohntm,
Larkintm,
Climate
Controltm,
Chandler
Refrigeration®,
Kirbytm,
Heatcraft Worldwide
Refrigerationtm,
Lovelockstm,
HK
Refrigerationtm,
Frigus-Bohntm
and
Friga-Bohntm.
These trademarks have no fixed expiration date and we believe
our rights in these trademarks are adequately protected.
Competition
Substantially all markets in which we participate are highly
competitive. The most significant competitive factors we face
are product reliability, product performance, service and price,
with the relative importance of these factors varying among our
businesses. In our Service Experts segment, we face competition
from thousands of independent dealers, as well as dealers owned
by utility companies. Listed below are some of the companies we
view as significant competitors in the three other segments we
serve, with relevant brand names, when different than the
company name, shown in parentheses.
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Residential Heating & Cooling United
Technologies Corp. (Carrier, Bryant, Tempstar, Comfortmaker,
Heil, Arcoaire, Keeprite); Goodman Global, Inc. (Goodman,
Amana); Trane, Inc.; Paloma Co., Ltd. (Rheem, Ruud); Johnson
Controls, Inc. (York, Weatherking); Nordyne (Westinghouse,
Frigidaire, Tappan, Philco, Kelvinator, Gibson); HNI Corporation
(Heatilator, Heat-n-Glo); and CFM Corporation (Majestic).
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Commercial Heating & Cooling United
Technologies Corp. (Carrier); Trane, Inc.; Johnson Controls,
Inc. (York); AAON, Inc.; and Daikin Industries, Ltd. (McQuay).
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Refrigeration United Technologies Corp. (Carrier);
Ingersoll-Rand Company Limited (Hussmann); Tecumseh Products
Company; and Emerson Electric Co. (Copeland).
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Employees
As of December 31, 2007, we employed approximately
15,000 employees, of whom approximately 5,000 were salaried
and 10,000 were hourly. The number of hourly workers we employ
may vary in order to match our
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labor needs during periods of fluctuating demand. Approximately
3,000 employees are represented by unions. We believe our
relationships with our employees and with the unions
representing our employees are generally good and we do not
anticipate any material adverse consequences resulting from
negotiations to renew any collective bargaining agreements.
Environmental
Regulation
Our operations are subject to evolving and often increasingly
stringent international, federal, state, and local laws and
regulations concerning the environment. Environmental laws that
affect or could affect our domestic operations include, among
others, the National Appliance Energy Conservation Act of 1987,
as amended (NAECA), the Energy Policy Act, the Clean
Air Act, the Clean Water Act, the Resource Conservation and
Recovery Act, the Comprehensive Environmental Response,
Compensation and Liability Act, the National Environmental
Policy Act, the Toxic Substances Control Act, any regulations
promulgated under these acts and various other international,
federal, state and local laws and regulations governing
environmental matters. We believe we are in substantial
compliance with such existing environmental laws and regulations
and do not expect that any compliance measures taken by us will
have a material effect on our capital expenditures, earnings or
competitive position in fiscal 2008.
Energy Efficiency. We are subject to appliance
efficiency regulations promulgated under NAECA and various state
regulations concerning the energy efficiency of our products. As
of January 23, 2006, all residential central air
conditioners manufactured in the U.S. must comply with a
minimum 13 seasonal energy efficiency rating, or
SEER, standard under NAECA. We have successfully
developed energy-efficient products that meet this standard. The
U.S. Department of Energy recently revised the national
residential furnace and boiler standards, which become effective
for manufacturers on November 19, 2015. On
December 19, 2007, federal legislation was enacted
authorizing the U.S. Department of Energy to study the
establishment of regional efficiency standards for furnaces and
air conditioners. We anticipate that the U.S. Department of
Energy will consider establishing regional standards for
furnaces and air conditioners during future rulemakings. The
U.S. Department of Energy is expected to commence its
revision of the residential air conditioner and heat pump
standards in 2008 with a likely effective date of 2014. We have
established a process that we believe will allow us to offer new
products that meet or exceed these new standards in advance of
implementation. Similar new standards are being promulgated for
commercial air conditioning and refrigeration equipment. We are
actively involved in the development of these new standards and
believe we are prepared to have compliant product in place in
advance of the implementation of all such regulations being
considered by the U.S. Department of Energy.
Refrigerants. The use of
hydrochlorofluorocarbons, or HCFCs, as a refrigerant
for air conditioning and refrigeration equipment is common
practice in the HVACR industry. However, international and
country specific regulations require the use of certain
substances deemed to be ozone depleting, including HCFCs, to be
phased out over a particular period of time. Under the Clean Air
Act and implementing regulations, the use of all HCFCs in new
equipment within the U.S. must be phased out by 2010. We,
together with major chemical manufacturers, are reviewing and
addressing the potential impact of these regulations on our
product offerings and have developed and continue to develop new
products that replace the use of HCFCs with the widely accepted
hydroflurocarbons, or HFCs, and other approved
substitutes. We have been an active participant in the ongoing
international dialogue on this subject and believe we are well
positioned to react in a timely manner to any changes in the
regulatory landscape. In addition, we are taking proactive steps
to implement responsible use principles and guidelines with
respect to limiting refrigerants from escaping into the
atmosphere throughout the life span of HVACR equipment.
Remediation Activity. In addition to affecting
our ongoing operations, applicable environmental laws can impose
obligations to remediate hazardous substances at our properties,
at properties formerly owned or operated by us and at facilities
to which we have sent or send waste for treatment or disposal.
We are aware of contamination at some of our facilities;
however, based on facts presently known, we do not believe that
any future remediation costs at such facilities will be material
to our results of operations. At one site located in Brazil, we
are currently evaluating the remediation efforts that may be
required by applicable environmental laws related to the release
of certain hazardous materials. We currently believe that the
release of the hazardous materials occurred over an extended
period of time, including a time when we did not own the site.
Extensive investigations have been performed and we plan to
conduct additional assessments in 2008 in order to help
determine the possible
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remediation activities that may be conducted at this site. Once
the site assessments are completed and the possible remediation
activities have been evaluated, we plan to commence remediation
efforts, pending any required approvals by local governmental
authorities. For more information see Note 19 in the Notes
to our Consolidated Financial Statements.
In the past, we have received notices that we are a potentially
responsible party along with other potentially responsible
parties in Superfund proceedings under the Comprehensive
Environmental Response, Compensation and Liability Act for
cleanup of hazardous substances at certain sites to which the
potentially responsible parties are alleged to have sent waste.
Based on the facts presently known, we do not believe
environmental cleanup costs associated with any Superfund sites
where we have received notice that we are a potentially
responsible party will be material.
European WEEE and RoHS Compliance. In the
European marketplace, electrical and electronic equipment is
required to comply with the Directive on Waste Electrical and
Electronic Equipment (WEEE) and the Directive on
Restriction of Use of Certain Hazardous Substances
(RoHS). WEEE aims to prevent waste by encouraging
reuse and recycling and RoHS restricts the use of six hazardous
substances in electrical and electronic products. All HVACR
products and certain components of such products put on
the market in the EU (whether or not manufactured in the
EU) are potentially subject to WEEE and RoHS. Because all HVACR
manufacturers selling within or from the EU are subject to the
standards promulgated under WEEE and RoHS, we believe that
neither WEEE nor RoHS uniquely impact us as compared to such
other manufacturers. Similar directives are being introduced in
other parts of the world, including the U.S. For example,
California, China and Japan have all adopted unique versions of
RoHS possessing similar intent. We are actively monitoring the
development of such directives and believe we are well
positioned to comply with such directives in the required time
frames.
Available
Information
Our web site address is www.lennoxinternational.com. We make
available, free of charge through this web site, our annual
reports on
Form 10-K,
quarterly reports on
Form 10-Q,
current reports on
Form 8-K
and amendments to those reports filed or furnished pursuant to
the Securities Exchange Act of 1934, as amended, as soon as
reasonably practicable after such material is electronically
filed with, or furnished to, the Securities and Exchange
Commission.
Certifications
We submitted the 2007 New York Stock Exchange (the
NYSE) Annual CEO Certification regarding our
compliance with the NYSEs corporate governance listing
standards to the NYSE on June 14, 2007.
The certifications of our Chief Executive Officer and Chief
Financial Officer pursuant to Section 302 and
Section 906 of the Sarbanes-Oxley Act of 2002 are filed and
furnished, respectively, as exhibits to this Annual Report on
Form 10-K.
7
Executive
Officers of the Company
Our executive officers, their present positions and their ages
are as follows:
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Name
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Age
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Position
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Todd M. Bluedorn
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44
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Chief Executive Officer
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Harry J. Bizios
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57
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Executive Vice President and President and Chief Operating
Officer, LII Commercial Heating & Cooling
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Scott J. Boxer
|
|
|
57
|
|
|
Executive Vice President and President and Chief Operating
Officer, Service Experts
|
Susan K. Carter
|
|
|
49
|
|
|
Executive Vice President and Chief Financial Officer
|
Mark R. Hogan
|
|
|
58
|
|
|
Executive Vice President, Engineering
|
David W. Moon
|
|
|
46
|
|
|
Executive Vice President and President and Chief Operating
Officer, LII Worldwide Refrigeration
|
Daniel M. Sessa
|
|
|
43
|
|
|
Executive Vice President and Chief Human Resources Officer
|
William F. Stoll, Jr.
|
|
|
59
|
|
|
Executive Vice President, Chief Legal Officer and Secretary
|
Douglas L. Young
|
|
|
45
|
|
|
Executive Vice President and President and Chief Operating
Officer, LII Residential Heating & Cooling
|
Roy A. Rumbough, Jr.
|
|
|
52
|
|
|
Vice President, Controller and Chief Accounting Officer
|
The following biographies describe the business experience of
our executive officers:
Todd M. Bluedorn was appointed Chief Executive Officer
and elected to our Board of Directors effective April 2,
2007. Mr. Bluedorn previously served as President,
Americas Otis Elevator Company since 2004. After
beginning his career with McKinsey & Company in 1992,
he accepted a position with United Technologies Corporation in
1995 as Director, Strategic Planning. He was appointed Vice
President, North American Truck and Trailer Carrier
Corporation in 1996, and became Vice President, Southeast Asia
Region for Carrier Corporation in 1998. In 2000,
Mr. Bluedorn was named President, Hamilton Sundstrand
Industrial and became President, North America
Commercial Heating, Ventilation and Air Conditioning for Carrier
Corporation in 2001.
Harry J. Bizios was appointed Executive Vice President
and President and Chief Operating Officer of our Commercial
Heating & Cooling segment in October 2006.
Mr. Bizios previously served as Vice President and General
Manager, Worldwide Commercial Systems since 2005 and as Vice
President and General Manager of Lennox North American
Commercial Products from 2003 to 2005. Mr. Bizios began his
career with us in 1976 as an industrial engineer at our
manufacturing facility in Marshalltown, Iowa and was promoted to
Production Manager in 1980 and Factory Manager in 1986. He was
next promoted to Vice President of Operations at Armstrong Air
Conditioning Inc., one of our former subsidiaries, in 1989. In
1991, Mr. Bizios was appointed Vice President of
Manufacturing for Lennox Industries Inc., one of our
subsidiaries, and served as Vice President and General Manager
of Lennox Industries Commercial from June 1998 to 2003.
Scott J. Boxer joined us in 1998 as Executive Vice
President, Lennox Global Ltd., one of our subsidiaries, and
President, European Operations. He was appointed President of
Lennox Industries Inc., one of our subsidiaries, in 2000 and was
named President and Chief Operating Officer of our Service
Experts segment in July 2003. Prior to joining us,
Mr. Boxer spent 26 years with York International
Corporation, a HVACR manufacturer, in various roles, including
President, Unitary Products Group Worldwide, where he reported
directly to the Chairman of that company and directed
residential and light commercial heating and air conditioning
operations worldwide. Mr. Boxer previously served as an
Executive Board Member of the Air-Conditioning &
Refrigeration Institute and is currently Chairman of the Board
of Trustees of North American Technical Excellence, Inc.
Mr. Boxer currently serves on the Board of Managers of The
Weitz Company, Inc., a privately held corporation.
8
Susan K. Carter was appointed Executive Vice President
and Chief Financial Officer in August 2004. Ms. Carter also
served as Treasurer from August 2004 through September 2005.
Prior to joining us, Ms. Carter was Vice President of
Finance and Chief Accounting Officer of Cummins, Inc., a global
power leader and manufacturer of engines, electric power
generation systems, and engine-related products from 2002 to
2004. From 1996 to 2002, Ms. Carter served as Vice
President and Chief Financial Officer of
Transportation & Power Systems and held other senior
financial management positions at Honeywell, Inc., formerly
AlliedSignal, Inc. She also previously served in senior
financial management positions at Crane Co. and DeKalb
Corporation. Ms. Carter served on the Board of Directors of
Lyondell Chemical Company through 2007.
Mark R. Hogan was appointed Executive Vice President,
Engineering in July 2007. Previously, he served as Vice
President, Engineering and Research for LII Worldwide
Heating & Cooling since 2003 and as Vice President,
Product Development and Research for Lennox Industries Inc., one
of our subsidiaries, from 2000 to 2003. Dr. Hogan began his
career in 1971 at Westinghouse Electric Corporation as a Senior
Engineer in the fluid systems laboratory. From 1982 to 1984, he
served as a Manager of the fluid systems laboratory. From 1984
to 1985, he served as a Product Manager for Air Handling and
Noise Control for Carrier Corporation, becoming Program Manager
for Aero-Acoustics and Vibration in 1985 and Director in 1991.
Dr. Hogan moved to Director of Truck and Trailer
Engineering for Carrier Traniscold in 1994, and became Vice
President of Engineering in 1995. Prior to joining us in 2000,
Dr. Hogan served as Vice President of Engineering at
Carrier Refrigeration Operations from 1997 to 2000.
David W. Moon was appointed Executive Vice President and
President and Chief Operating Officer of our Worldwide
Refrigeration business in August 2006. Mr. Moon previously
served as Vice President and General Manager of Worldwide
Refrigeration, Americas Operations since July 2002. Prior to
serving in that position, he served as Managing Director in
Australia beginning in July 1999, where his responsibilities
included heat transfer manufacturing and distribution,
refrigeration wholesaling and manufacturing, and HVAC
manufacturing and distribution in Australia and New Zealand.
Mr. Moon originally joined us in 1998 as Operations
Director, Asia Pacific. Prior to that time, Mr. Moon held
various management positions at Allied Signal, Inc., Case
Corporation, and Tenneco Inc. in the U.S., Hong Kong, Taiwan and
Germany.
Daniel M. Sessa was appointed Executive Vice President
and Chief Human Resources Officer in June 2007. Prior to joining
us, Mr. Sessa served as Vice President, Human Resources for
Otis Elevator Company Americas from February 2005 to
June 2007. From January 2004 to February 2005, Mr. Sessa
served as Director, Employee Benefits and Human Resources
Systems for United Technologies Corporation. He also previously
served as Director, Human Resources for Pratt &
Whitney from May 2002 to January 2004.
William F. Stoll, Jr. was appointed Executive Vice
President, Chief Legal Officer and Secretary in March 2004.
Prior to that time, Mr. Stoll served as Executive Vice
President and Chief Legal Officer of Borden, Inc. from 1996 to
2003. Prior to his career with Borden, Inc., he worked for
21 years with Westinghouse Electric Corporation, becoming
Vice President and Deputy General Counsel in 1993.
Douglas L. Young was appointed Executive Vice President
and President and Chief Operating Officer of our Residential
Heating & Cooling segment in October 2006.
Mr. Young had previously served as Vice President and
General Manager of North American Residential Products since
2003 and as Vice President and General Manager of Lennox North
American Residential Sales, Marketing, and Distribution from
August 1999 to 2003. Prior to his career with us, Mr. Young
was employed in the Appliances division of General Electric
(GE), where he held various management positions in
sales, marketing, and international and consumer services,
before serving as General Manager of Marketing for GE Appliance
divisions $3 billion retail group from 1997 to 1999
and as General Manager of Strategic Initiatives in 1999.
Roy A. Rumbough, Jr. was appointed Vice President,
Controller and Chief Accounting Officer in July 2006. Prior to
joining us, Mr. Rumbough served as Vice President,
Corporate Controller of Maytag Corporation (Maytag),
a position he held since 2002. From 1998 to 2002,
Mr. Rumbough served as Vice President Controller of
Blodgett Corporation, a portfolio of food service equipment
companies and former affiliate of Maytag.
Mr. Rumboughs career at Maytag spanned 17 years
and included internal audit, financial planning and analysis,
and business unit controller roles. Prior to his career at
Maytag, Mr. Rumbough worked for Deloitte and Touche, LLP.
9
Forward-Looking
Statements
This Annual Report on
Form 10-K
contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as
amended, that are based on information currently available to
management as well as managements assumptions and beliefs.
All statements, other than statements of historical fact,
included in this Annual Report on
Form 10-K
constitute forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995, including but
not limited to statements identified by the words
may, will, should,
plan, predict, anticipate,
believe, intend, estimate
and expect and similar expressions. Such statements
reflect our current views with respect to future events, based
on what we believe are reasonable assumptions; however, such
statements are subject to certain risks and uncertainties. In
addition to the specific uncertainties discussed elsewhere in
this Annual Report on
Form 10-K,
the risk factors set forth below may affect our performance and
results of operations. Should one or more of these risks or
uncertainties materialize, or should underlying assumptions
prove incorrect, actual results may differ materially from those
in the forward-looking statements. We disclaim any intention or
obligation to update or review any forward-looking statements or
information, whether as a result of new information, future
events or otherwise.
Risk
Factors
The following risk factors and other information included in
this Annual Report on
Form 10-K
should be carefully considered. We believe these are the
principal material risks currently facing our business; however,
additional risks and uncertainties not presently known to us or
that we presently deem less significant may also impair our
business operations. If any of the following risks actually
occur, our business, financial condition or results of
operations could be materially adversely affected.
Cooler
than Normal Summers and Warmer than Normal Winters May Depress
Our Sales.
Demand for our products and for our services is strongly
affected by the weather. Cooler than normal summers depress our
sales of replacement air conditioning and refrigeration products
and services and warmer than normal winters have the same effect
on our heating products and services.
We
Use a Variety of Raw Materials and Components in Our Business
and Price Increases or Significant Supply Interruptions Could
Increase Our Operating Costs and/or Depress Sales.
In the manufacture of our products, we depend on raw materials,
such as steel, copper and aluminum, and components purchased
from third parties. We generally concentrate purchases for a
given raw material or component with one or two suppliers.
Although we believe there are alternative suppliers for all of
our key raw material and component needs, if a supplier is
unable or unwilling to meet our supply requirements, we could
experience supply interruptions or cost increases, either of
which could have an adverse effect on our gross profit. In
addition, although we regularly pre-purchase a portion of our
raw materials at fixed prices each year to hedge against price
increases, a large increase in raw materials prices could
significantly increase our cost of goods sold and negatively
impact our margins if we are unable to effectively pass such
price increases on to our customers. Alternatively, if we
increase our prices in response to increases in the prices or
quantities of raw materials or components we require or
encounter significant supply interruptions, our competitive
position could be adversely affected, which may result in
depressed sales.
We
May Incur Substantial Costs as a Result of Warranty and Product
Liability Claims Which Could Negatively Affect Our
Profitability.
The development, manufacture, sale and use of our products
involve risks of warranty and product liability claims. In
addition, because we own installing heating and air conditioning
dealers in the U.S. and Canada, we incur the risk of
liability claims for the installation and service of heating and
air conditioning products. Our product liability insurance
policies have limits that, if exceeded, may result in
substantial costs that would have an adverse
10
effect on our future profitability. In addition, warranty claims
are not covered by our product liability insurance and certain
product liability claims may also not be covered by our product
liability insurance.
For some of our HVAC products, we provide warranty terms ranging
from one to 20 years to customers for certain components
such as compressors or heat exchangers. For select products, we
have provided lifetime warranties for heat exchangers.
Warranties of such extended lengths pose a risk to us as actual
future costs may exceed our current estimates of those costs.
Warranty expense is recorded on the date that revenue is
recognized and requires significant assumptions about what costs
will be incurred in the future. We may be required to record
material adjustments to accruals and expense in the future if
actual costs for these warranties are different than our
assumptions.
Our
Business Could be Adversely Affected by an Economic
Downturn.
Our business is affected by a number of economic factors,
including the level of economic activity in the domestic and
international markets in which we operate. Our sales in the
residential and commercial new construction market correlate to
the number of new homes and buildings that are built, which in
turn is influenced by cyclical factors such as interest rates,
inflation, availability of financing, consumer spending habits
and confidence, employment rates and other macroeconomic factors
over which we have no control. In the HVACR business, a decline
in economic activity as a result of these cyclical or other
factors typically results in a decline in new construction and
replacement purchases, which could result in a decrease in our
sales and profitability.
We May
Not be Able to Compete Favorably in the Highly Competitive HVACR
Business.
Substantially all of the markets in which we operate are highly
competitive. The most significant competitive factors we face
are product reliability, product performance, service and price,
with the relative importance of these factors varying among our
product lines. Other factors that affect competition in the
HVACR market include the development and application of new
technologies, an increasing emphasis on the development of more
efficient HVACR products, and new product introductions. The
establishment of manufacturing in low cost countries could also
provide cost advantages to existing and emerging competitors.
Our competitors may have greater financial resources than we
have, allowing them to invest in more extensive research and
development
and/or
marketing activity. In addition, our Service Experts segment
faces competition from independent dealers and dealers owned by
utility companies and other consumer service providers, some of
whom may be able to provide their products or services at lower
prices than we can. We may not be able to compete successfully
against current and future competitors and current and future
competitive pressures may cause us to reduce our prices or lose
market share, or could negatively affect our cash flow, which
could have an adverse effect on our future financial results.
We May
Not be Able to Successfully Develop and Market New
Products.
Our future success depends on our continued investment in
research and new product development and our ability to
commercialize new technological advances in the HVACR industry.
If we are unable to continue to successfully develop and market
new products or to achieve technological advances on a pace
consistent with that of our competitors, our business and
results of operations could be adversely impacted.
We May
Not be Able to Successfully Integrate and Operate Businesses
that We May Acquire.
From time to time, we may seek to complement or expand our
business through strategic acquisitions. The success of these
transactions will depend, in part, on our ability to integrate
and operate the acquired businesses profitably. If we are unable
to successfully integrate acquisitions with our operations, we
may not realize the anticipated benefits associated with such
transactions, which could adversely affect our business and
results of operations.
Because
a Significant Percentage of Our Workforce is Unionized, We Face
Risks of Work Stoppages and Other Labor Relations
Problems.
As of December 31, 2007, approximately 20% of our workforce
was unionized. As we expand our operations, we may be subject to
increased unionization of our workforce. While we believe our
relationships with the unions
11
representing our employees are generally good, the results of
future negotiations with these unions and the effects of any
production interruptions or labor stoppages could have an
adverse effect on our financial results.
We
are Subject to Litigation and Environmental Regulations that
Could Have an Adverse Effect on Our Results of
Operations.
We are involved in various claims and lawsuits incidental to our
business, including those involving product liability, labor
relations and environmental matters, some of which claim
significant damages. Given the inherent uncertainty of
litigation, we cannot be certain that existing litigation or any
future adverse developments will not have a material adverse
impact on our financial condition. In addition, we are subject
to extensive and changing federal, state and local laws and
regulations designed to protect the environment including, among
others, the National Appliance Energy Conservation Act of 1987,
as amended, the Energy Policy Act, the Clean Air Act, the Clean
Water Act, the Resource Conservation and Recovery Act, the
Comprehensive Environmental Response, Compensation and Liability
Act, the National Environmental Policy Act, the Toxic Substances
Control Act, any regulations promulgated under these acts and
various other international, federal, state and local laws and
regulations governing environmental matters. These laws and
regulations could impose liability for remediation costs and
civil or criminal penalties in cases of non-compliance.
Compliance with environmental laws increases our costs of doing
business. Because these laws are subject to frequent change, we
are unable to predict the future costs resulting from
environmental compliance.
Our
International Operations Subject Us to Risks Associated with
Foreign Currency Fluctuations and Changes in Local Government
Regulation.
We earn revenues, pay expenses, own assets and incur liabilities
in countries using currencies other than the U.S. dollar.
Because our consolidated financial statements are presented in
U.S. dollars, we must translate revenues, income and
expenses, as well as assets and liabilities, into
U.S. dollars at exchange rates in effect during or at the
end of each reporting period. Therefore, increases or decreases
in the value of the U.S. dollar against other major
currencies may affect our net operating revenues, operating
income and the value of balance sheet items denominated in
foreign currencies. Because of the geographic diversity of our
operations, weaknesses in some currencies might be offset by
strengths in others over time. However, we cannot assure that
fluctuations in foreign currency exchange rates, particularly
the strengthening of the U.S. dollar against major
currencies, would not materially affect our financial results.
In addition to the currency exchange risks inherent in operating
in foreign countries, our international sales and operations,
including our purchases of raw materials from international
suppliers, are subject to risks associated with changes in local
government laws, regulations and policies, including those
related to tariffs and trade barriers, investments, taxation,
exchange controls, and employment regulations. Our international
sales and operations are also sensitive to changes in foreign
national priorities, including government budgets, as well as to
political and economic instability. International transactions
may involve increased financial and legal risks due to differing
legal systems and customs in foreign countries. The ability to
manage these risks could be difficult and may limit our
operations and make the manufacture and sale of our products
internationally more difficult, which could negatively affect
our business and results of operations.
Any
Future Determination that a Significant Impairment of the Value
of Our Goodwill Intangible Asset has Occurred Could Have a
Material Adverse Effect on Our Results of
Operations.
As of December 31, 2007, we had goodwill, net of
accumulated amortization, of $262.8 million on our
Consolidated Balance Sheet. Any future determination that a
significant impairment of the value of goodwill has occurred
would require a write-down of the impaired portion of
unamortized goodwill to fair value, which would reduce our
assets and stockholders equity and could have a material
adverse effect on our results of operations.
|
|
Item 1B.
|
Unresolved
Staff Comments
|
None.
12
The following chart lists our principal domestic and
international manufacturing, distribution and office facilities
as of February 1, 2008 and indicates the business segment
that uses such facilities, the approximate size of such
facilities and whether such facilities are owned or leased:
|
|
|
|
|
|
|
|
|
Location
|
|
Segment
|
|
Approx. Sq. Ft.
|
|
|
Owned/Leased
|
|
|
|
|
(In thousands)
|
|
|
|
|
Richardson, TX
|
|
Headquarters
|
|
|
311
|
|
|
Owned & Leased
|
Marshalltown, IA
|
|
Residential Heating & Cooling
|
|
|
1,300
|
|
|
Owned & Leased
|
Blackville, SC
|
|
Residential Heating & Cooling
|
|
|
375
|
|
|
Owned
|
Orangeburg, SC
|
|
Residential Heating & Cooling
|
|
|
559
|
|
|
Owned
|
Columbia, SC
|
|
Residential Heating & Cooling
|
|
|
63
|
|
|
Leased
|
Grenada, MS
|
|
Residential Heating & Cooling
|
|
|
300
|
|
|
Leased
|
Union City, TN
|
|
Residential Heating & Cooling
|
|
|
295
|
|
|
Owned
|
Laval, Canada
|
|
Residential Heating & Cooling
|
|
|
152
|
|
|
Owned
|
Des Moines, IA
|
|
Residential & Commercial Heating & Cooling
|
|
|
352
|
|
|
Leased
|
Stuttgart, AR
|
|
Commercial Heating & Cooling
|
|
|
787
|
|
|
Owned
|
Prague, Czech Republic
|
|
Commercial Heating & Cooling
|
|
|
161
|
|
|
Owned
|
Longvic, France
|
|
Commercial Heating & Cooling
|
|
|
133
|
|
|
Owned
|
Mions, France
|
|
Commercial Heating & Cooling
|
|
|
129
|
|
|
Owned
|
Tifton, GA
|
|
Refrigeration
|
|
|
232
|
|
|
Owned
|
Stone Mountain, GA
|
|
Refrigeration
|
|
|
145
|
|
|
Owned
|
Milperra, Australia
|
|
Refrigeration
|
|
|
830
|
|
|
Owned
|
Genas, France
|
|
Refrigeration
|
|
|
175
|
|
|
Owned
|
San Jose dos Campos, Brazil
|
|
Refrigeration
|
|
|
160
|
|
|
Owned
|
Carrollton, TX
|
|
Research and Development facility
|
|
|
130
|
|
|
Owned
|
Additional manufacturing, distribution and office facilities
include the following:
|
|
|
|
|
|
|
|
|
Location
|
|
Segment
|
|
Approx. Sq. Ft.
|
|
|
Owned/Leased
|
|
|
|
|
(In thousands)
|
|
|
|
|
Lynwood, CA(1)
|
|
Residential Heating & Cooling
|
|
|
200
|
|
|
Leased
|
Auburn, WA
|
|
Residential Heating & Cooling
|
|
|
80
|
|
|
Leased
|
Orange, CA
|
|
Residential Heating & Cooling
|
|
|
67
|
|
|
Leased
|
Burgos, Spain
|
|
Commercial Heating & Cooling
|
|
|
71
|
|
|
Owned
|
Danville, IL(1)
|
|
Refrigeration
|
|
|
322
|
|
|
Owned
|
Barcelona, Spain
|
|
Refrigeration
|
|
|
65
|
|
|
Leased
|
Krunkel, Germany
|
|
Refrigeration
|
|
|
43
|
|
|
Owned
|
Wuxi, China
|
|
Refrigeration
|
|
|
23
|
|
|
Owned
|
|
|
|
(1) |
|
In 2007, we announced plans to close our operations in Lynwood,
CA and consolidate our U.S. factory-built fireplace
manufacturing operations in Union City, TN. The phased
consolidation is expected to be completed by the end of second
quarter 2008. Additionally, we announced plans to close our
Refrigeration operations in Danville, IL and consolidate our
Danville manufacturing, support, and warehouse functions in
Tifton, GA and Stone Mountain, GA. The phased consolidation is
expected to be completed in the first quarter 2009. |
In addition to the properties described above, we lease over 100
facilities in the U.S. for use as sales and service offices
and district warehouses and additional facilities worldwide for
use as sales and service offices and regional warehouses. The
majority of our Service Experts service center facilities
are leased. We routinely evaluate our
13
production facilities to ensure adequate capacity, effective
cost structure, and consistency with our business strategy. We
believe that our properties are in good condition, suitable and
adequate for their present requirements and that our principal
plants are generally adequate to meet our production needs.
In the third quarter of 2007, we broke ground on a new
manufacturing facility in Saltillo, Mexico. We plan to shift the
manufacturing lines responsible for our Residential
Heating & Cooling segments Lennox-brand Merit
series air conditioners and heat pumps, as well as air handlers,
to Saltillo. The three-year project is expected to begin initial
production in the second quarter of 2008, ramping up to full
production by early 2010. The Saltillo facility is anticipated
to be approximately 300,000 square feet.
|
|
Item 3.
|
Legal
Proceedings
|
We are involved in various claims and lawsuits incidental to our
business. As previously reported, in January 2003, we, along
with one of our subsidiaries, Heatcraft Inc., were named in the
following lawsuits in connection with our former heat transfer
operations:
|
|
|
|
|
Lynette Brown, et al., vs. Koppers Industries, Inc.,
Heatcraft Inc., Lennox International Inc., et al., Circuit
Court of Washington County, Civil Action No. CI
2002-479;
|
|
|
|
Likisha Booker, et al., vs. Koppers Industries, Inc.,
Heatcraft Inc., Lennox International Inc., et al., Circuit
Court of Holmes County; Civil Action
No. 2002-549;
|
|
|
|
Walter Crowder, et al., vs. Koppers Industries, Inc.,
Heatcraft Inc. and Lennox International Inc., et al.,
Circuit Court of Leflore County, Civil Action
No. 2002-0225; and
|
|
|
|
Benobe Beck, et al., vs. Koppers Industries, Inc., Heatcraft
Inc. and Lennox International Inc., et al., Circuit Court of
the First Judicial District of Hinds County,
No. 03-000030.
|
On behalf of approximately 100 plaintiffs, the lawsuits allege
personal injury resulting from alleged emissions of
trichloroethylene, dichloroethylene, and vinyl chloride and
other unspecified emissions from the South Plant in Grenada,
Mississippi, previously owned by Heatcraft Inc. Each plaintiff
seeks to recover actual and punitive damages. On Heatcraft
Inc.s motion to transfer venue, two of the four lawsuits
(Booker and Crowder) were ordered severed and
transferred to Grenada County by the Mississippi Supreme Court,
requiring plaintiffs counsel to maintain a separate
lawsuit for each of the individual plaintiffs named in these
suits. To our knowledge, as of February 1, 2008,
plaintiffs counsel has requested the transfer of files
regarding five individual plaintiffs from the Booker case
and five individual plaintiffs from the Crowder case.
Additionally, we have joined in motions to dismiss filed by
co-defendants in the four original lawsuits. These motions,
which are still pending, seek dismissal (rather than transfer),
without prejudice to refiling in Grenada County, of all cases
not yet transferred to Grenada County. It is not possible to
predict with certainty the outcome of these matters or an
estimate of any potential loss. Based on current negotiations,
we believe that it is unlikely that any final resolution of
these matters will have a material impact on our financial
statements.
|
|
Item 4.
|
Submission
of Matters to a Vote of Security Holders
|
No matters were submitted to a vote of our stockholders during
the fourth quarter of fiscal 2007.
14
PART II
|
|
Item 5.
|
Market
for Registrants Common Equity, Related Stockholder Matters
and Issuer Purchases of Equity Securities
|
Market
Price for Common Stock
Our common stock is listed for trading on the New York Stock
Exchange under the symbol LII. The high and low
sales prices for our common stock for each quarterly period
during 2007 and 2006 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Price Range Per Common Share
|
|
|
|
2007
|
|
|
2006
|
|
|
|
High
|
|
|
Low
|
|
|
High
|
|
|
Low
|
|
|
First Quarter
|
|
$
|
37.85
|
|
|
$
|
29.06
|
|
|
$
|
32.63
|
|
|
$
|
27.90
|
|
Second Quarter
|
|
|
37.28
|
|
|
|
31.46
|
|
|
|
34.76
|
|
|
|
22.92
|
|
Third Quarter
|
|
|
38.57
|
|
|
|
29.21
|
|
|
|
26.68
|
|
|
|
21.15
|
|
Fourth Quarter
|
|
|
41.96
|
|
|
|
30.17
|
|
|
|
31.39
|
|
|
|
22.44
|
|
Dividends
During 2007 and 2006, we declared quarterly cash dividends as
set forth below:
|
|
|
|
|
|
|
|
|
|
|
Dividends per
|
|
|
|
Common Share
|
|
|
|
2007
|
|
|
2006
|
|
|
First Quarter
|
|
$
|
0.13
|
|
|
$
|
0.11
|
|
Second Quarter
|
|
|
0.13
|
|
|
|
0.11
|
|
Third Quarter
|
|
|
0.13
|
|
|
|
0.11
|
|
Fourth Quarter
|
|
|
0.14
|
|
|
|
0.13
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year
|
|
$
|
0.53
|
|
|
$
|
0.46
|
|
|
|
|
|
|
|
|
|
|
The amount and timing of dividend payments are determined by our
Board of Directors and subject to certain restrictions under our
credit agreements. In December 2007, our Board of Directors
voted to increase the quarterly cash dividend 8.0%, from $0.13
per share of common stock to $0.14 per share of common stock. As
of the close of business on February 1, 2008, there were
approximately 786 record holders of our common stock.
15
Comparison
of Total Stockholder Return
The following performance graph compares our cumulative total
returns with the cumulative total returns of the
Standard & Poors Small-Cap 600 Index and a peer
group of U.S. industrial manufacturing and service
companies in the heating, ventilation, air conditioning and
refrigeration businesses from December 31, 2002 through
December 31, 2007. The graph assumes that $100 was invested
on December 31, 2002, with dividends reinvested. Peer group
returns are weighted by market capitalization. Our peer group
includes AAON, Inc., Trane, Inc. (formerly named American
Standard Companies Inc.), Comfort Systems USA, Inc., Goodman
Global, Inc., and Watsco, Inc.
Comparison
of 5 Year Cumulative Total Return
Assumes Initial Investment of $100
December 2007
Our
Purchase of LII Equity Securities
On July 25, 2007, we announced that our Board of Directors
approved a share repurchase plan, pursuant to which we are
authorized to repurchase up to $500 million of shares of
our common stock through open market purchases (the
2007 Share Repurchase Plan). We are party to a
written trading plan under
Rule 10b5-1
of the Securities Exchange Act of 1934, as amended (the
10b5-1 Plan), to facilitate share repurchases under
the 2007 Share Repurchase Plan. Prior to October 1,
2007, we had repurchased 3,026,100 shares of common stock
for approximately $104,219,477 under the 2007 Share
Repurchase Plan. In the fourth quarter of 2007, we repurchased
shares of our common stock as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Number of
|
|
|
Approximate Dollar
|
|
|
|
Total
|
|
|
|
|
|
Shares Purchased as
|
|
|
Value of Shares that
|
|
|
|
Number of
|
|
|
Average Price
|
|
|
Part of Publicly
|
|
|
may yet be Purchased
|
|
|
|
Shares
|
|
|
Paid Per Share
|
|
|
Announced Plans or
|
|
|
Under the Plans or
|
|
Period
|
|
Purchased (1)
|
|
|
(including fees)
|
|
|
Programs
|
|
|
Programs
|
|
|
October 1 through October 31
|
|
|
601,160
|
|
|
$
|
33.66
|
|
|
|
601,160
|
|
|
$
|
375,544,344
|
|
November 1 through November 30
|
|
|
803,798
|
|
|
$
|
34.38
|
|
|
|
802,655
|
|
|
$
|
347,952,578
|
|
December 1 through December 31
|
|
|
1,556,263
|
|
|
$
|
35.47
|
|
|
|
1,449,072
|
|
|
$
|
296,652,737
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
2,961,221
|
|
|
$
|
34.81
|
|
|
|
2,852,887
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
In addition to purchases under the 2007 Share Repurchase
Plan, this column reflects the surrender to us of
108,334 shares of common stock to satisfy tax-withholding
obligations in connection with the exercise of stock
appreciation rights and the vesting of restricted stock awards. |
16
|
|
Item 6.
|
Selected
Financial Data (unaudited)
|
The table below shows selected financial data for the five years
ended December 31, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
(In millions, except per share data)
|
|
|
Statements of Operations Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Sales
|
|
$
|
3,749.7
|
|
|
$
|
3,715.4
|
|
|
$
|
3,405.3
|
|
|
$
|
3,013.4
|
|
|
$
|
2,818.5
|
|
Operational Income (Loss) From Continuing Operations
|
|
|
265.7
|
|
|
|
223.3
|
|
|
|
250.7
|
|
|
|
(34.8
|
)
|
|
|
162.0
|
|
Income (Loss) From Continuing Operations
|
|
|
169.0
|
|
|
|
166.0
|
|
|
|
152.1
|
|
|
|
(93.5
|
)
|
|
|
86.7
|
|
Net Income (Loss)
|
|
|
169.0
|
|
|
|
166.0
|
|
|
|
150.7
|
|
|
|
(134.4
|
)
|
|
|
86.4
|
|
Diluted Earnings (Loss) Per Share From Continuing Operations
|
|
|
2.43
|
|
|
|
2.26
|
|
|
|
2.13
|
|
|
|
(1.56
|
)
|
|
|
1.36
|
|
Dividends Per Share
|
|
|
0.53
|
|
|
|
0.46
|
|
|
|
0.41
|
|
|
|
0.385
|
|
|
|
0.38
|
|
Other Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital Expenditures
|
|
$
|
68.4
|
|
|
$
|
73.8
|
|
|
$
|
63.3
|
|
|
$
|
40.3
|
|
|
$
|
39.7
|
|
Research and Development Expenses
|
|
|
43.0
|
|
|
|
42.2
|
|
|
|
40.3
|
|
|
|
37.6
|
|
|
|
38.0
|
|
Balance Sheet Data at Period End
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
$
|
1,814.6
|
|
|
$
|
1,719.8
|
|
|
$
|
1,737.6
|
|
|
$
|
1,518.6
|
|
|
$
|
1,720.1
|
|
Total Debt
|
|
|
207.9
|
|
|
|
109.2
|
|
|
|
120.5
|
|
|
|
310.5
|
|
|
|
362.3
|
|
Stockholders Equity
|
|
|
808.5
|
|
|
|
804.4
|
|
|
|
794.4
|
|
|
|
472.9
|
|
|
|
577.7
|
|
In 2004, we recorded a non-cash goodwill impairment charge of
$208.0 million associated with our Service Experts segment,
which is included as a component of operating income in the
Statements of Operations Data above. This impairment charge
reflected the segments performance below managements
expectations and managements decision to divest centers
that no longer matched the realigned Service Experts business
model. We estimated the fair value of our Service Experts
segment using the income method of valuation, which included the
use of estimated discounted cash flows. Based on our analysis,
the carrying value of Service Experts exceeded its fair value.
Accordingly, we performed the second step of the test, comparing
the implied fair value of Service Experts goodwill with the
carrying amount of that goodwill to calculate the impairment
charge.
|
|
Item 7.
|
Managements
Discussion and Analysis of Financial Condition and Results of
Operations
|
Overview
We operate in four reportable business segments of the HVACR
industry. The first reportable segment is Residential
Heating & Cooling, in which we manufacture and market
a full line of heating, air conditioning and hearth products for
the residential replacement and new construction markets in the
U.S. and Canada. The second reportable segment is
Commercial Heating & Cooling, in which we manufacture
and sell rooftop products and related equipment for light
commercial applications in the U.S. and Canada and
primarily rooftop products, chillers and air handlers in Europe.
The third reportable segment is Service Experts, which includes
sales, installation, maintenance, and repair services for HVAC
equipment by company-owned service centers in the U.S. and
Canada. The fourth reportable segment is Refrigeration, in which
we manufacture and sell unit coolers, condensing units and other
commercial refrigeration products in the U.S. and
international markets.
Our products and services are sold through a combination of
distributors, independent and Company-owned dealer service
centers, other installing contractors, wholesalers,
manufacturers representatives, original equipment
manufacturers and to national accounts. The demand for our
products and services is seasonal and dependent on the weather.
Hotter than normal summers generate strong demand for
replacement air conditioning and refrigeration products and
services and colder than normal winters have the same effect on
heating products and services. Conversely, cooler than normal
summers and warmer than normal winters depress HVACR sales and
services. In addition to weather, demand for our products and
services is influenced by national and regional economic and
17
demographic factors, such as interest rates, the availability of
financing, regional population and employment trends, new
construction, general economic conditions and consumer spending
habits and confidence.
The principal elements of cost of goods sold in our
manufacturing operations are components, raw materials, factory
overhead, labor and estimated costs of warranty expense. In our
Service Experts segment, the principal components of cost of
goods sold are equipment, parts and supplies and labor. The
principal raw materials used in our manufacturing processes are
steel, copper and aluminum. Higher prices for these commodities
and related components continue to present a challenge to us and
the HVACR industry in general. We attempt to mitigate the impact
of higher commodity prices through a combination of price
increases, commodity contracts, improved production efficiency
and cost reduction initiatives.
We estimate approximately 30% of the sales of our Residential
Heating & Cooling segment is for new construction,
with the balance attributable to repair, retrofit and
replacement. With the current downturn in residential new
construction activity, we are seeing a decline in the demand for
the products and services we sell into this market.
Our fiscal year ends on December 31 and our interim fiscal
quarters are each comprised of 13 weeks. For convenience,
throughout this Managements Discussion and Analysis of
Financial Condition and Results of Operations, the 13-week
periods comprising each fiscal quarter are denoted by the last
day of the calendar quarter.
Company
Highlights
|
|
|
|
|
Net sales for the year ended December 31, 2007 were
$3,749.7 million. Our Commercial Heating &
Cooling, Service Experts, and Refrigeration segments experienced
volume increases in 2007 as compared to 2006, resulting in
higher net sales. Our Residential Heating & Cooling
segment experienced a decrease in sales related to the weakened
residential new construction market in the U.S. Foreign
currency translation rates had a favorable impact on net sales
in 2007.
|
|
|
|
Operational income for the year ended December 31, 2007 was
$265.7 million. As a percentage of net sales, operational
income increased from 6.0% in 2006 to 7.1% in 2007. The increase
in operational income margins was primarily due to price
increases that were effective in offsetting increased commodity
and other manufacturing costs.
|
|
|
|
Net income for the year ended December 31, 2007 was
$169.0 million. While operating income was higher in 2007
as compared to 2006, our provision for income taxes was
$89.2 million in 2007, up from $52.4 million in 2006.
Our 2006 provision for income taxes reflected non-recurring tax
benefits. Basic net income per share in 2007 was $2.55 compared
to $2.37 in 2006. Diluted net income per share was $2.43 per
share in 2007, up from $2.26 per share in 2006.
|
|
|
|
Cash provided by operating activities was $238.1 million
for the year ended December 31, 2007 compared to
$199.7 million in 2006. The increase in cash provided by
operating activities was primarily due to management of and
favorable changes in inventory, accounts payable and accounts
receivable.
|
18
Results
of Operations
The following table presents certain information concerning our
financial results, including information presented as a
percentage of net sales (dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
Dollars
|
|
|
Percent
|
|
|
Dollars
|
|
|
Percent
|
|
|
Dollars
|
|
|
Percent
|
|
|
Net sales
|
|
$
|
3,749.7
|
|
|
|
100.0
|
%
|
|
$
|
3,715.4
|
|
|
|
100.0
|
%
|
|
$
|
3,405.3
|
|
|
|
100.0
|
%
|
Cost of goods sold
|
|
|
2,697.1
|
|
|
|
71.9
|
|
|
|
2,755.4
|
|
|
|
74.2
|
|
|
|
2,460.2
|
|
|
|
72.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
1,052.6
|
|
|
|
28.1
|
|
|
|
960.0
|
|
|
|
25.8
|
|
|
|
945.1
|
|
|
|
27.8
|
|
Selling, general and administrative expenses
|
|
|
778.7
|
|
|
|
20.8
|
|
|
|
778.0
|
|
|
|
20.9
|
|
|
|
753.7
|
|
|
|
22.1
|
|
(Gains), losses and other expenses, net
|
|
|
(6.4
|
)
|
|
|
(0.2
|
)
|
|
|
(46.6
|
)
|
|
|
(1.3
|
)
|
|
|
(47.5
|
)
|
|
|
(1.4
|
)
|
Restructuring charges
|
|
|
25.2
|
|
|
|
0.7
|
|
|
|
13.3
|
|
|
|
0.4
|
|
|
|
2.4
|
|
|
|
0.1
|
|
Equity in earnings of unconsolidated affiliates
|
|
|
(10.6
|
)
|
|
|
(0.3
|
)
|
|
|
(8.0
|
)
|
|
|
(0.2
|
)
|
|
|
(14.2
|
)
|
|
|
(0.4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operational income (loss) from continuing operations
|
|
$
|
265.7
|
|
|
|
7.1
|
%
|
|
$
|
223.3
|
|
|
|
6.0
|
%
|
|
$
|
250.7
|
|
|
|
7.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from discontinued operations
|
|
$
|
|
|
|
|
|
%
|
|
$
|
|
|
|
|
|
%
|
|
$
|
1.4
|
|
|
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
169.0
|
|
|
|
4.5
|
%
|
|
$
|
166.0
|
|
|
|
4.5
|
%
|
|
$
|
150.7
|
|
|
|
4.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year
Ended December 31, 2007 Compared to Year Ended
December 31, 2006 Consolidated
Results
Net
Sales
Net sales increased $34.3 million, or 0.9%, to
$3,749.7 million for the year ended December 31, 2007
from $3,715.4 million for the year ended December 31,
2006. The favorable impact of foreign currency translation
increased net sales by $80.3 million. Additionally, net
sales were higher due to increased prices in response to an
increase in commodity costs across our segments in 2007. Volumes
increased in three of our four business segments, largely the
result of favorable international markets. We had favorable
product mix in both our Commercial Heating & Cooling
and Residential Heating & Cooling segments. These
increases were partially offset by a decline in volumes in our
Residential Heating & Cooling segment, primarily due
to the downturn in the U.S. residential new construction
market.
Gross
Profit
Gross profit was $1,052.6 million for the year ended
December 31, 2007 compared to $960.0 million for the
year ended December 31, 2006, an increase of
$92.6 million. Gross profit margin increased to 28.1% for
the year ended December 31, 2007 from 25.8% in 2006. Gross
profits increased across all business segments, largely due to
favorable changes in our product mix and through a favorable
combination of price increases, commodity contracts, improved
production efficiency and cost reduction initiatives.
Gross profit for the year ended December 31, 2007 contains
a $16.9 million benefit from a one-time adjustment to a
warranty program in our Residential Heating & Cooling
segment. In the fourth quarter of 2007, we made a change to the
way we fulfill our warranty obligations on the Pulse furnace,
which was produced from
1982-1999.
Under the terms of the revised warranty program, the customer
pays a discounted price for a warranty replacement unit upon
failure of the heat exchanger.
Selling,
General and Administrative Expenses
As a percentage of total net sales, Selling, General and
Administrative (SG&A) expenses were 20.8% for
the year ended December 31, 2007 compared to 20.9% for the
year ended December 31, 2006. Total SG&A expenses
increased $0.7 million in 2007. Included in SG&A
expenses in 2007 are $6.1 million related to one-time
retirement benefit settlement charges with former executives,
higher depreciation, and increased rent and utility costs, as
well
19
as an increase due to changes in foreign currency exchange
rates. However, these increases in SG&A costs were
partially offset by lower advertising and selling related costs,
as well as other cost management and strategic cost reduction
savings.
(Gains),
Losses, and Other Expenses, net
(Gains), losses and other expenses, net for the years ended
December 31, 2007 and 2006 include the following (in
millions):
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended
|
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
Realized gains on settled futures contracts not designated as
cash flow hedges
|
|
$
|
(3.8
|
)
|
|
$
|
(66.0
|
)
|
Ineffective portion of gains on settled cash flow hedges
|
|
|
(0.1
|
)
|
|
|
|
|
Unrealized losses on unsettled futures contracts not designated
as cash flow hedges
|
|
|
3.1
|
|
|
|
20.8
|
|
Ineffective portion of losses on unsettled cash flow hedges
|
|
|
0.2
|
|
|
|
|
|
Foreign currency exchange gains
|
|
|
(6.2
|
)
|
|
|
(0.9
|
)
|
Other items, net
|
|
|
0.4
|
|
|
|
(0.5
|
)
|
|
|
|
|
|
|
|
|
|
(Gains), losses and other expenses, net
|
|
$
|
(6.4
|
)
|
|
$
|
(46.6
|
)
|
|
|
|
|
|
|
|
|
|
We utilize a hedging program to mitigate the exposure to
volatility in the prices of certain commodities used in our
production processes. In 2006, we entered into instruments that
economically hedged certain of our risks, even though hedge
accounting did not apply or we elected not to apply hedge
accounting under Statement of Financial Accounting Standards
No. 133, Accounting for Derivative Instruments and
Hedging Activities (SFAS No. 133) to
these instruments. Changes in the fair value of these
instruments were recorded in net income throughout the term of
the derivative instrument and are reported in (Gains), Losses,
and Other Expenses, net.
Beginning in the fourth quarter of 2006, futures contracts that
meet established accounting criteria are formally designated as
cash flow hedges. The effective portion of the gain or loss on
the futures contracts is recorded, net of applicable taxes, in
Accumulated Other Comprehensive Income (Loss)
(AOCI), a component of Stockholders Equity in
the accompanying Consolidated Balance Sheets. When net income is
affected by the variability of the underlying cash flow, the
applicable offsetting amount of the gain or loss from the
futures contracts that is deferred in AOCI is released to net
income and is reported as a component of Cost of Goods Sold in
the accompanying Consolidated Statements of Operations. Changes
in the fair value of futures contracts that do not effectively
offset changes in the fair value of the underlying hedged item
throughout the designated hedge period
(ineffectiveness) are recorded in net income each
period and are reported in (Gains), Losses, and Other Expenses,
net.
20
Restructuring
Charges
Restructuring charges increased by $11.9 million to
$25.2 million for the year ended December 31, 2007
from $13.3 million for the year ended December 31,
2006. Restructuring charges incurred for the years ended
December 31, 2007 and 2006 include the following amounts
(in millions):
|
|
|
|
|
|
|
|
|
|
|
For the
|
|
|
|
Years Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
Integration of Australia and New Zealand operations
|
|
$
|
0.7
|
|
|
$
|
|
|
Consolidation of U.S. Refrigeration operations
|
|
|
7.6
|
|
|
|
|
|
Consolidation of Lennox Hearth Products operations
|
|
|
3.3
|
|
|
|
|
|
Reorganization of corporate functions
|
|
|
10.0
|
|
|
|
|
|
Lennox Hearth Products production relocation
|
|
|
0.3
|
|
|
|
1.2
|
|
Allied Air Enterprises consolidation
|
|
|
3.2
|
|
|
|
15.9
|
|
Pension settlement
|
|
|
0.7
|
|
|
|
|
|
Gain on sale of facility
|
|
|
|
|
|
|
(3.0
|
)
|
Gain on sale of land
|
|
|
|
|
|
|
(0.8
|
)
|
Other
|
|
|
(0.6
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
25.2
|
|
|
$
|
13.3
|
|
|
|
|
|
|
|
|
|
|
In 2007, our Australian-based manufacturing facilities in
Milperra assumed all heat transfer equipment manufacturing,
while the smaller coil production facility in New Zealand was
closed. The integration was substantially complete as of
December 31, 2007.
In 2007, we announced plans to close our refrigeration
operations in Danville, Illinois and consolidate our Danville
manufacturing, support, and warehouse functions in our Tifton,
Georgia and Stone Mountain, Georgia operations. The
consolidation is a phased process and is expected to be
completed in the first quarter of 2009. We expect to incur
pre-tax restructuring charges of approximately
$10.0 million over the next 15 months due to this
consolidation project.
In 2007, we announced plans to close Lennox Hearth Products
Inc.s operations in Lynwood, California and consolidate
our U.S. factory-built fireplace manufacturing operations
in our facility in Union City, Tennessee. The consolidation will
be a phased process and is expected to be completed by the end
of the second quarter of 2008. We expect to incur pre-tax
restructuring charges of approximately $1.6 million in the
first quarter of 2008 in connection with this consolidation
project.
In 2007, we took steps to reorganize our corporate functions and
in the second quarter of 2007 eliminated the position of chief
administrative officer. As a result, we reached a negotiated
settlement with our former chief administrative officer with
respect to our obligations under his employment agreement. In
the fourth quarter of 2007, the Company eliminated two
additional positions.
In 2005, we relocated Lennox Hearth Products Inc.s
Whitfield pellet stove and Lennox cast iron product lines from
Burlington, Washington to a third party production facility in
Juarez, Mexico, discontinued our steel wood stove line
manufactured in Burlington, and closed the Burlington facility.
During 2006, we recorded a restructuring charge related to an
operating lease on the idle facility in Burlington. The charge
reflected the net present value of the remaining lease payments
on the operating lease, net of estimated sublease income on the
facility. In 2007, we entered into a
sub-lease
agreement for the idle facility. As a result, we recorded a
restructuring charge to reflect the net present value of the
remaining lease payments on the operating lease, net of sublease
income on the facility. The operating lease and
sub-lease
both expire in June 2011.
In 2006, we commenced consolidation of the manufacturing,
distribution, research & development, and
administrative operations of Allied Air Enterprises Inc., our
two-step Residential Heating & Cooling operations, in
21
South Carolina, and closure of our operations in Bellevue, Ohio.
The consolidation was substantially completed during the first
quarter of 2007.
A pension settlement loss is included in restructuring expense
for the year ended December 31, 2007. The pension
settlement loss related to our full funding of lump sum pension
payments to selected participants in March 2007.
A gain related to the sale of a facility in Canada is included
in restructuring expense for the year ended December 31,
2006. The sale of the Canadian facility occurred in 2003 and the
resulting gain was deferred pending approval of a Canadian
regulatory agency, which occurred in December 2006.
Also included in restructuring expense for the year ended
December 31, 2006 is a gain of $0.8 million related to
the sale of a parcel of land.
Equity in
Earnings of Unconsolidated Affiliates
Investments in affiliates in which we do not exercise control
but have significant influence are accounted for using the
equity method of accounting. Equity in earnings of
unconsolidated affiliates increased by $2.6 million to
$10.6 million in 2007 as compared to $8.0 million in
2006. The increase is due to the performance of our
unconsolidated affiliates, primarily Alliance Compressor LLC, a
domestic joint venture engaged in the manufacture and sale of
compressors.
Interest
Expense, net
Interest expense, net, increased $2.4 million to
$6.8 million for the year ended December 31, 2007 from
$4.4 million for the year ended December 31, 2006. The
increase in interest expense was due primarily to higher debt
balances as the result of our share repurchases coupled with a
decrease in interest income. Interest income decreased due to
lower average investment balances and lower rates of return in
2007 as compared to 2006.
Provision
for Income Taxes
The provision for income taxes on continuing operations was
$89.2 million for the year ended December 31, 2007
compared to a provision for income taxes on continuing
operations of $52.4 million for the year ended
December 31, 2006. The effective tax rate on continuing
operations was 34.5% and 24.0% for the years ended
December 31, 2007 and December 31, 2006, respectively.
The increase in our provision for taxes is primarily due to
non-recurring tax benefits realized in 2006 from the release of
contingency reserves established in prior years and the
revaluation of deferred tax valuation allowances. Our effective
rates differ from the statutory federal rate of 35% for other
items, including revaluation of deferred tax valuation
allowances, state and local taxes, non-deductible expenses,
foreign operating losses for which no tax benefits have been
recognized and foreign taxes at rates other than 35%.
Year
Ended December 31, 2007 Compared to Year Ended
December 31, 2006 Results by
Segment
The key performance indicators of our segments are net sales and
operational profit. We define segment profit (loss) as a
segments income (loss) from continuing operations before
income taxes included in the accompanying Consolidated
Statements of Operations excluding unusual and nonrecurring
items; (gains), losses and other expenses, net; restructuring
charges; goodwill impairment; interest expense, net; and other
expense (income), net; less (plus) realized gains (losses) on
settled futures contracts not designated as cash flow hedges and
the ineffective portion of settled cash flow hedges; and less
(plus) foreign currency exchange gains (losses). In 2007, a
$16.9 million warranty program adjustment was not included
in segment profit as it is considered an unusual and
nonrecurring item.
22
Residential
Heating & Cooling
The following table details our Residential Heating &
Cooling segments net sales and profit for the years ended
December 31, 2007 and 2006 (dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
Difference
|
|
|
% Change
|
|
|
Net sales
|
|
$
|
1,669.6
|
|
|
$
|
1,861.2
|
|
|
$
|
(191.6
|
)
|
|
|
(10.3
|
)%
|
Profit
|
|
|
174.4
|
|
|
|
211.6
|
|
|
|
(37.2
|
)
|
|
|
(17.6
|
)
|
% of net sales
|
|
|
10.4
|
%
|
|
|
11.4
|
%
|
|
|
|
|
|
|
|
|
Net sales in our Residential Heating & Cooling
business segment decreased $191.6 million, or 10.3%, to
$1,669.6 million for the year ended December 31, 2007
from $1,861.2 million for the year ended December 31,
2006. Net sales decreased primarily due to reduced unit volumes
impacted by the decline in demand in the U.S. residential
new construction market. Additionally, we experienced a decrease
in volumes in U.S. replacement market sales attributable to
softening U.S. economic conditions. Decreases related to
sales volumes were partially offset by price increases, which
were implemented as the result of increases in commodity and
component costs.
Segment profit in Residential Heating & Cooling
decreased 17.6% to $174.4 million for 2007 from
$211.6 million in 2006. The decrease in segment profit was
primarily due to a decrease in sales volumes that was partially
offset by favorable pricing and product mix. Price increases and
cost mitigation programs were more effective in offsetting the
impact of increases in commodity and component costs in 2007 as
compared to 2006. In 2007, a warranty program adjustment of
$16.9 million was not included in our Residential
Heating & Cooling segments profit as it is
considered an unusual and nonrecurring item.
Commercial
Heating & Cooling
The following table details our Commercial Heating &
Cooling segments net sales and profit for the years ended
December 31, 2007 and 2006 (dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
Difference
|
|
|
% Change
|
|
|
Net sales
|
|
$
|
875.0
|
|
|
$
|
751.2
|
|
|
$
|
123.8
|
|
|
|
16.5
|
%
|
Profit
|
|
|
101.0
|
|
|
|
72.6
|
|
|
|
28.4
|
|
|
|
39.1
|
|
% of net sales
|
|
|
11.5
|
%
|
|
|
9.7
|
%
|
|
|
|
|
|
|
|
|
Net sales in our Commercial Heating & Cooling segment
increased $123.8 million, or 16.5%, to $875.0 million
for the year ended December 31, 2007 from
$751.2 million for the year ended December 31, 2006.
The increase in net sales was due primarily to price increases
throughout the segment combined with a favorable product mix in
our domestic operations and an increase in sales volumes in
Europe. An increase in demand for higher efficiency units and
customized products, as well as a favorable mix in the new
construction markets drove the change in domestic product mix.
Volume growth in our European operations primarily related to
emerging markets in Eastern Europe. The favorable impact of
changes in foreign currency exchange rates increased net sales
by $26.2 million.
Segment profit in Commercial Heating & Cooling
increased 39.1% to $101.0 million for the year ended
December 31, 2007 from $72.6 million for the year
ended December 31, 2006. As a percentage of net sales,
segment profit increased from 9.7% in 2006 to 11.5% in 2007. A
favorable mix of higher margin products in our domestic
operations is the primary reason for the increase in segment
profit. Additionally, an increase in volume in our European
operations contributed to the increase in segment profit. Price
increases effectively offset increases in commodity and
component costs.
23
Service
Experts
The following table details our Service Experts segments
net sales and profit for the years ended December 31, 2007
and 2006 (dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
Difference
|
|
|
% Change
|
|
|
Net sales
|
|
$
|
681.5
|
|
|
$
|
654.1
|
|
|
$
|
27.4
|
|
|
|
4.2
|
%
|
Profit (loss)
|
|
|
25.2
|
|
|
|
18.2
|
|
|
|
7.0
|
|
|
|
38.5
|
|
% of net sales
|
|
|
3.7
|
%
|
|
|
2.8
|
%
|
|
|
|
|
|
|
|
|
Net sales in our Service Experts segment increased
$27.4 million, or 4.2%, to $681.5 million for the year
ended December 31, 2007 from $654.1 million for the
year ended December 31, 2006. The increase in net sales was
driven by favorable residential service and replacement sales,
which provided over half of the total segment sales in 2007 and
2006. Residential service and replacement sales increased year
over year, more than offsetting a decline in residential and
commercial new construction sales and commercial service and
replacement sales. Favorable market conditions increased
residential new construction sales in our Canadian operations,
partially offsetting a decrease in U.S. residential new
construction sales. The favorable impact of the change in
foreign currency exchange rates increased net sales by
$8.7 million.
Segment profit in Service Experts increased 38.5%, or
$7.0 million, to $25.2 million for 2007 from
$18.2 million in 2006. The increase in segment profit is
primarily attributable to a favorable change in sales and
service mix and increased sales. As a percentage of net sales,
segment profit increased to 3.7% in 2007 from 2.8% in 2006. In
2007, the higher margin residential service and replacement
business was a greater portion of our segment sales as a
percentage of total net sales. Our increase in segment profit
was partially offset by higher selling and administrative costs
in 2007 as compared to 2006.
Refrigeration
The following table details our Refrigeration segments net
sales and profit for the years ended December 31, 2007 and
2006 (dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
Difference
|
|
|
% Change
|
|
|
Net sales
|
|
$
|
607.7
|
|
|
$
|
529.9
|
|
|
$
|
77.8
|
|
|
|
14.7
|
%
|
Profit
|
|
|
61.5
|
|
|
|
51.9
|
|
|
|
9.6
|
|
|
|
18.5
|
|
% of net sales
|
|
|
10.1
|
%
|
|
|
9.8
|
%
|
|
|
|
|
|
|
|
|
Net sales in our Refrigeration segment increased
$77.8 million, or 14.7%, to $607.7 million in 2007
from $529.9 million in 2006. The increase in sales was
primarily due to increased volumes. An increase in exports in
South America from our Brazilian operations and favorable market
conditions in both Europe and Australia contributed to growth in
volume. Sales also benefited from increased pricing in both
international and domestic markets as prices were increased to
offset higher commodity and component costs. The favorable
impact of the change in foreign currency exchange rates
increased net sales by $37.0 million.
Segment profit in Refrigeration increased 18.5% to
$61.5 million for the year ended December 31, 2007
from $51.9 million for the year ended December 31,
2006. The increase in segment profit primarily related to
increased sales volumes. Additionally, price increases were
effective in offsetting the increase in commodity and component
costs. The increase in segment profit was partially offset by
changes in the geographical mix of the sales of our products.
Corporate
and Other
Corporate and other costs decreased from $98.2 million in
2006 to $85.0 million in 2007. The decrease was primarily
due to lower personnel costs, lower professional fees and travel
costs, as well as other cost reduction
24
initiatives. These decreases were partially offset by one-time
retirement benefit settlement charges with former executives.
Year
Ended December 31, 2006 Compared to Year Ended
December 31, 2005 Consolidated
Results
Net
Sales
Net sales increased $310.1 million, or 9.1%, to
$3,715.4 million for the year ended December 31, 2006
from $3,405.3 million for the year ended December 31,
2005. The increase in net sales was primarily due to increased
prices in response to an increase in commodity costs across our
segments in 2006. Additionally, net sales increased as we sold
more expensive HVAC products meeting the NAECA 13 SEER energy
efficiency standard. The favorable impact of foreign currency
translation increased net sales by $25.4 million.
Gross
Profit
Gross profit was $960.0 million for the year ended
December 31, 2006 compared to $945.1 million for the
year ended December 31, 2005, an increase of
$14.9 million. Gross profit margin declined to 25.8% for
the year ended December 31, 2006 from 27.8% in 2005. The
decline in gross profit margin was largely due to an increase in
costs for commodities and related components experienced by our
manufacturing businesses for the year ended December 31,
2006 as compared to 2005. Margins were also impacted as a higher
proportion of our sales came from more price competitive markets.
Selling,
General and Administrative Expenses
SG&A expenses increased $24.3 million, or 3.2%, in
2006. However, as a percentage of total net sales, SG&A
expenses declined to 20.9% for the year ended December 31,
2006 from 22.1% for the year ended December 31, 2005.
Higher SG&A costs are attributable to an incremental
increase in selling expenses in 2006, including an increase in
commissions and salaries.
(Gains),
Losses, and Other Expenses, net
(Gains), losses and other expenses, net for the years ended
December 31, 2006 and 2005 include the following (in
millions):
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended
|
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
Realized (gains) on settled futures contracts not designated as
cash flow hedges
|
|
$
|
(66.0
|
)
|
|
$
|
(16.7
|
)
|
Unrealized losses on unsettled futures contracts not designated
as cash flow hedges
|
|
|
20.8
|
|
|
|
(23.3
|
)
|
Foreign currency exchange gains
|
|
|
(0.9
|
)
|
|
|
2.7
|
|
Gain on sale of LIIs 45% interest in its heat transfer
joint venture to Outokumpu
|
|
|
|
|
|
|
(9.3
|
)
|
Estimated on-going remediation costs in conjunction with joint
remediation agreement with Outokumpu
|
|
|
|
|
|
|
2.2
|
|
Other items, net
|
|
|
(0.5
|
)
|
|
|
(3.1
|
)
|
|
|
|
|
|
|
|
|
|
(Gains), losses and other expenses, net
|
|
$
|
(46.6
|
)
|
|
$
|
(47.5
|
)
|
|
|
|
|
|
|
|
|
|
Restructuring
Charges
Restructuring charges increased by $10.9 million to
$13.3 million for the year ended December 31, 2006
from $2.4 million for the year ended December 31,
2005. Restructuring charges incurred in 2006 primarily related
to the consolidation of our manufacturing, distribution,
research and development, and administrative operations of our
two-step operations into South Carolina and closing of our
current operations in Bellevue, Ohio. The charges incurred in
2005 related to the closing of one of our facilities in
Burlington, Washington.
25
Equity in
Earnings of Unconsolidated Affiliates
Investments in affiliates in which we do not exercise control
but have significant influence are accounted for using the
equity method of accounting. Equity in earnings of
unconsolidated affiliates decreased by $6.2 million to
$8.0 million in 2006 as compared to $14.2 million in
2005. The decrease is due to the divestiture of our heat
transfer joint venture in 2005 and the performance of our
affiliates.
Interest
Expense, Net
Interest expense, net, decreased $11.0 million to
$4.4 million for the year ended December 31, 2006 from
$15.4 million for the year ended December 31, 2005.
The lower interest expense was due primarily to lower average
debt levels as all of our outstanding 6.25% convertible
subordinated notes (Convertible Notes) were
converted to shares of our common stock on October 7, 2005.
Interest income earned increased on higher average cash and cash
equivalent balances and higher short-term investment rate
increases.
Provision
for Income Taxes
The provision for income taxes on continuing operations was
$52.4 million for the year ended December 31, 2006
compared to a provision for income taxes on continuing
operations of $83.0 million for the year ended
December 31, 2005. The effective tax rate on continuing
operations was 24.0% and 35.3% for the years ended
December 31, 2006 and December 31, 2005, respectively.
The decrease in our provision for taxes is primarily due to net
tax benefits from the release of tax contingency reserves
established in prior years and the revaluation of deferred tax
asset valuation allowances. Our effective rates differ from the
statutory federal rate of 35% for other reasons, in addition to
those stated above, including state and local taxes,
non-deductible expenses, foreign operating losses for which no
tax benefits have been recognized and foreign taxes at rates
other than 35%.
Year
Ended December 31, 2006 Compared to Year Ended
December 31, 2005 Results by
Segment
Residential
Heating & Cooling
The following table details our Residential Heating &
Cooling segments net sales and profit for the years ended
December 31, 2006 and 2005 (dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
Difference
|
|
|
% Change
|
|
|
Net sales
|
|
$
|
1,861.2
|
|
|
$
|
1,698.5
|
|
|
$
|
162.7
|
|
|
|
9.6
|
%
|
Profit
|
|
|
211.6
|
|
|
|
206.3
|
|
|
|
5.3
|
|
|
|
2.6
|
|
% of net sales
|
|
|
11.4
|
%
|
|
|
12.1
|
%
|
|
|
|
|
|
|
|
|
Net sales in our Residential Heating & Cooling
business segment increased $162.7 million, or 9.6%, to
$1,861.2 million for the year ended December 31, 2006
from $1,698.5 million for year ended December 31,
2005. Net sales increased due to an increase in prices in
response to higher commodity and component costs and the impact
of shipping more expensive HVAC products meeting the NAECA 13
SEER energy efficiency standard. However, the increases in sales
were partially offset by a decline in unit volumes. Management
believes that the North American Residential HVAC Industry
experienced a mid-teen percentage drop in shipments in 2006 as
compared to 2005 due to the strong cooling season in 2005 and
the increase in products shipped in the fourth quarter of 2005
in advance of the January 2006 effective date for the NAECA 13
SEER energy efficiency standard. We do not believe we
experienced as much of a decline in units shipped as compared to
the industry average.
Segment profit in Residential Heating & Cooling
increased 2.6% to $211.6 million for 2006 from
$206.3 million in 2005. Cost of goods sold increased with
higher commodity and component costs. Operating expenses
increased as we strategically increased our presence in the
larger sunbelt markets. We experienced higher freight costs from
shipping larger HVAC products meeting the NAECA 13 SEER energy
efficiency standard. Segment profits were negatively impacted in
2006 by operating inefficiencies resulting from industry-wide
component availability issues for cooling products as well as
the relocation of production from Ohio to South Carolina
26
consistent with our restructuring plans. Warranty expense
increased in 2006 related to warranty reserve adjustments. An
increase in the realized gains on settled future contracts
offset a portion of the segments increased costs.
Commercial
Heating & Cooling
The following table details our Commercial Heating &
Cooling segments net sales and profit for the years ended
December 31, 2006 and 2005 (dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
Difference
|
|
|
% Change
|
|
|
Net sales
|
|
$
|
751.2
|
|
|
$
|
675.1
|
|
|
$
|
76.1
|
|
|
|
11.3
|
%
|
Profit
|
|
|
72.6
|
|
|
|
56.3
|
|
|
|
16.3
|
|
|
|
29.0
|
|
% of net sales
|
|
|
9.7
|
%
|
|
|
8.3
|
%
|
|
|
|
|
|
|
|
|
Net sales in our Commercial Heating & Cooling segment
increased $76.1 million, or 11.3%, to $751.2 million
for the year ended December 31, 2006 from
$675.1 million for the year ended December 31, 2005.
The increase in net sales was due primarily to increased volumes
coupled with higher prices. Volumes were higher in both the
domestic and European markets with strong European sales growth,
particularly in our two-step distribution channels. Prices
increased in 2006 in response to higher commodity and component
costs. Net sales were slightly higher in the segments
European operations.
Segment profit in Commercial Heating & Cooling
increased 29.0% to $72.6 million for the year ended
December 31, 2006 from $56.3 million for the year
ended December 31, 2005. Price increases effectively offset
increases in commodity and component costs. Selling and
distribution expenses were higher for the year ended
December 31, 2006 due to strategic efforts to leverage
expanded distribution capabilities to shorten delivery times and
due to an increase in unit volumes. As a percentage of net
sales, selling and distribution costs remained consistent.
Margins were favorably impacted by an increase in the realized
gains on settled futures contracts.
Service
Experts
The following table details our Service Experts segments
net sales and profit for the years ended December 31, 2006
and 2005 (dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
Difference
|
|
|
% Change
|
|
|
Net sales
|
|
$
|
654.1
|
|
|
$
|
641.4
|
|
|
$
|
12.7
|
|
|
|
2.0
|
%
|
Profit (loss)
|
|
|
18.2
|
|
|
|
15.8
|
|
|
|
2.4
|
|
|
|
15.2
|
|
% of net sales
|
|
|
2.8
|
%
|
|
|
2.5
|
%
|
|
|
|
|
|
|
|
|
Net sales in our Service Experts segment increased
$12.7 million, or 2.0%, to $654.1 million for the year
ended December 31, 2006 from $641.4 million for the
year ended December 31, 2005. Declines in the residential
new construction market were offset by growth in the residential
and commercial service and replacement markets. The improvement
in net sales also reflects the favorable impact of foreign
currency fluctuations.
Segment profit in Service Experts increased $2.4 million to
$18.2 million for 2006 from $15.8 million in 2005.
Cost of goods sold increased proportionately to the increase in
net sales. However, profit margins remained relatively flat due
to increased administrative expenses primarily resulting from an
increase in insurance costs and salaries and benefits.
27
Refrigeration
The following table details our Refrigeration segments net
sales and profit for the years ended December 31, 2006 and
2005 (dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
Difference
|
|
|
% Change
|
|
|
Net sales
|
|
$
|
529.9
|
|
|
$
|
470.2
|
|
|
$
|
59.7
|
|
|
|
12.7
|
%
|
Profit
|
|
|
51.9
|
|
|
|
44.1
|
|
|
|
7.8
|
|
|
|
17.7
|
|
% of net sales
|
|
|
9.8
|
%
|
|
|
9.4
|
%
|
|
|
|
|
|
|
|
|
Net sales in our Refrigeration segment increased
$59.7 million, or 12.7%, to $529.9 million in 2006
from $470.2 million in 2005. The increase in sales is due
to volume growth coupled with price increases. Volumes in North
and South America increased primarily due to growth in original
equipment manufacturer sales that service the supermarket,
walk-in refrigeration and cold storage market segments. European
volumes grew primarily due to new product development and
enhanced market penetration. Sales in our Australian operations
were stronger due to market growth and greater geographical
coverage. Price increases also favorably impacted net sales.
These increases were partially offset by lower sales in the
segments southeast Asia markets.
Segment profit in Refrigeration increased 17.7% to
$51.9 million for the year ended December 31, 2006
from $44.1 million for the year ended December 31,
2005. Cost of goods sold increased due to higher commodity and
component costs. SG&A expenses increased in 2006 due to
increased volumes and with the implementation of our strategic
growth initiative in Asia. Income from investments in joint
ventures decreased. Margins were favorably impacted by an
increase in the realized gains on settled futures contracts.
Corporate
and Other
Corporate and other costs decreased from $103.1 million in
2005 to $98.2 million in 2006. Increases in corporate and
other costs due to insurance and information technology expenses
were more than offset by reduced long-term incentive costs and
slightly higher allocation of costs to our operating segments.
Adoption
of SAB No. 108
During the fourth quarter of 2006, we adopted Staff Accounting
Bulletin No. 108, Considering the Effects of Prior
Year Misstatements when Quantifying Misstatements in Current
Year Financial Statements
(SAB No. 108). The transition
provisions of SAB No. 108 permitted us to adjust for
the cumulative effect in retained earnings for immaterial errors
relating to prior periods. In accordance with
SAB No. 108, we reduced retained earnings as of
January 1, 2006 by $12.4 million to reflect
understatements in product warranty liabilities caused by
misstatements that occurred in prior years. The resulting
adjustments did not affect previously reported cash flows from
operations and the impact on prior years financial
position and results of operations was immaterial. See
Note 2 to the Consolidated Financial Statements for more
information. The total cumulative impact is as follows (in
millions):
|
|
|
|
|
Retained earnings
|
|
$
|
12.4
|
|
Deferred income taxes
|
|
|
7.2
|
|
Product warranty liability
|
|
|
(19.6
|
)
|
Accounting
for Futures Contracts
In connection with our 2005 year-end procedures related to
the accounting for futures contracts for copper and aluminum, we
determined that certain of our futures contracts previously
designated as cash flow hedges did not qualify for hedge
accounting under Statement of Financial Accounting Standards
No. 133, Accounting for Derivative Instruments and
Hedging Activities (SFAS No. 133), as
our documentation did not meet the criteria specified by
SFAS No. 133 in order for the hedging instruments to
qualify for cash flow designation. This determination resulted
in two different types of adjustments to our quarterly
consolidated financial statements for the year ended
December 31, 2005.
28
First, we recorded an unrealized gain of $23.3 million
pre-tax, or $14.9 million after-tax, related to open
futures contracts, in (Gains), Losses and Other Expenses, net in
the accompanying Consolidated Statements of Operations. We had
previously recorded this unrealized gain in AOCI in the
accompanying Consolidated Balance Sheets. Second, we realized
gains of $16.7 million pre-tax, or $10.7 million
after-tax, related to settled futures contracts, which are also
recorded in (Gains), Losses and Other Expenses, net in the
accompanying Consolidated Statements of Operations. These
adjustments did not affect our cash flows and the impact on
results for all periods presented prior to 2005 was not material.
In 2006 we redesigned our policies, procedures, and controls
with respect to our commodity hedging activities. Accordingly,
futures contracts entered into in the fourth quarter of 2006
that meet the criteria to qualify for hedge accounting under
SFAS No. 133 were designated as cash flow hedges and
are accounted for in accordance with the standard. For more
information see Note 10 to our Consolidated Financial
Statements.
Realized gains and losses on settled futures contracts are a
component of segment profit (loss). Unrealized gains and losses
on open future contracts are excluded from segment profit (loss)
as they are subject to changes in fair value until their
settlement date. Both realized and unrealized gains and losses
on futures contracts are a component of (Gains), Losses and
Other Expenses, net in the accompanying Consolidated Statements
of Operations. See Note 20 to our Consolidated Financial
Statements for more information and a reconciliation of segment
profit to net income.
Liquidity
and Capital Resources
Our working capital and capital expenditure requirements are
generally met through internally generated funds, bank lines of
credit and a revolving period asset securitization arrangement.
Working capital needs are generally greater in the first and
second quarter due to the seasonal nature of our business cycle.
As of December 31, 2007, our
debt-to-total-capital
ratio was 20%, up from 12% as of December 31, 2006,
primarily due to increased debt to partially fund our repurchase
of $246.7 million of our common stock in 2007 under our
share repurchase plans.
The following table summarizes our cash activity for 2007, 2006
and 2005 (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(In millions)
|
|
|
Net cash provided by operating activities
|
|
$
|
238.1
|
|
|
$
|
199.7
|
|
|
$
|
228.7
|
|
Net cash used in investing activities
|
|
|
(95.8
|
)
|
|
|
(94.5
|
)
|
|
|
(20.8
|
)
|
Net cash used in financing activities
|
|
|
(152.7
|
)
|
|
|
(175.5
|
)
|
|
|
(56.9
|
)
|
Net cash
provided by operating activities
During 2007, cash provided by operating activities was
$238.1 million compared to $199.7 million in 2006 and
$228.7 million in 2005. The primary reason for the increase
in cash provided by operations in 2007 was a change in inventory
from an increase of $6.7 million in 2007 compared to an
increase of $47.3 million in 2006. Inventory increased in
2007 to support increased sales levels in three of our business
segments and due to higher costs to manufacture our products,
particularly in our Commercial Heating & Cooling
segment. However, inventory increased more in 2006 largely due
to (i) a planned increase in finished goods to manage
through the consolidation of Allied Air Enterprises Inc.,
(ii) increased costs to manufacture 13 SEER units, and
(iii) higher commodity costs impacting raw material
inventory costs during 2006. In addition, accounts payable
improved to a $0.1 million increase from a
$25.9 million decline in 2006. The 2006 decline was due to
lower production in the late fourth quarter to limit inventory
growth. Accounts receivable improved with a decrease of
$22.4 million in 2007 compared to an $11.1 million
decrease in 2006. The favorable impacts of inventory, accounts
payable, and accounts receivable were partially offset by
changes in warranty accruals from a decrease of
$3.7 million in 2007 compared to an increase of
$19.0 million in 2006, a $16.9 million reduction from
a one-time warranty program adjustment in 2007, and unrealized
losses on futures contracts in 2007 declining to
$3.3 million from $20.8 million in 2006.
As of December 31, 2007, we had approximately
$17.7 million in unfunded post retirement benefit
obligations that relate to our medical and life insurance
benefits to eligible employees. We do not intend to pre-fund
these
29
obligations at this time. Benefits provided under these plans
have been and will continue to be paid as they arise. Our
employer contributions were $2.3 million, $2.7 million
and $2.4 million in 2007, 2006 and 2005, respectively.
Based on current information, we do not expect a significant
change in 2008 and future years, nor do we expect the usage of
cash required to pay the benefits under these plans to impact
our ability to operate.
Net cash
used in investing activities
Net cash used in investing activities was $95.8 million in
2007 compared to $94.5 million and $20.8 million in
2006 and 2005, respectively. Capital expenditures of
$68.4 million, $73.8 million and $63.3 million in
2007, 2006 and 2005, respectively, resulted primarily from
(i) purchases of production equipment in our Residential
Heating & Cooling and Commercial Heating &
Cooling segments, (ii) expenditures for plant
consolidations, and (iii) initial spending in 2007 for our
Saltillo, Mexico facility. Net cash used in investing activities
for the year ended December 31, 2007 included
$27.4 million for net short term investments. Net cash used
in investing activities in 2006 included additional investments
in affiliates consisting of (i) strategic acquisitions of
third-party entities that are immaterial both individually and
in the aggregate and (ii) additional investments in
unconsolidated affiliates. Net cash used in investing activities
for the year ended December 31, 2005 included
$39.3 million of proceeds from the sale of our 45% interest
in our heat transfer joint venture to Outokumpu Copper Products
OY of Finland.
Net cash
used in financing activities
Net cash used in financing activities was $152.7 million in
2007 compared to $175.5 million and $56.9 million in
2006 and 2005, respectively. We paid a total of
$35.0 million in dividends on our common stock in 2007 as
compared to $31.3 million and $24.8 million in 2006
and 2005, respectively. The primary reasons for the increase in
cash dividends paid are the increase in the quarterly cash
dividend from $0.11 to $0.13 per share of common stock,
effective as of the dividend paid on January 12, 2007, and
the full conversion of our Convertible Notes in October 2005,
which is partially offset by repurchases of our common stock
under our share repurchase plans. Net borrowings of long-term
debt, short-term borrowings and revolving long-term borrowings
totaled approximately $98.3 million in 2007 as compared to
net repayments of $11.6 million and $45.5 million in
2006 and 2005, respectively. During 2007, we used approximately
$253.6 million to repurchase approximately
7,137,000 shares of our common stock under our share
repurchase plans, including the 2007 Share Repurchase Plan,
and approximately 193,000 shares of our common stock to
satisfy tax withholding obligations in connection with the
exercise of stock appreciation rights, the payout of shares of
our common stock pursuant to vested performance share awards and
the vesting of restricted stock awards.
The following table summarizes our outstanding debt obligations
as of December 31, 2007 and the classification in the
accompanying Consolidated Balance Sheet (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Description of Obligation
|
|
Short-Term Debt
|
|
|
Current Maturities
|
|
|
Long-Term Maturities
|
|
|
Total
|
|
|
Domestic promissory notes
|
|
$
|
|
|
|
$
|
36.1
|
|
|
$
|
35.0
|
|
|
$
|
71.1
|
|
Domestic revolving credit facility
|
|
|
|
|
|
|
|
|
|
|
131.0
|
|
|
|
131.0
|
|
Other foreign obligations
|
|
|
4.8
|
|
|
|
0.3
|
|
|
|
0.7
|
|
|
|
5.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Debt
|
|
$
|
4.8
|
|
|
$
|
36.4
|
|
|
$
|
166.7
|
|
|
$
|
207.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2007, we had outstanding long-term debt
obligations totaling $203.1 million, which increased from
$108.2 million and $119.3 million as of
December 31, 2006 and 2005, respectively. The amount
outstanding as of December 31, 2007 consisted primarily of
outstanding borrowings of $131.0 million under our domestic
revolving credit facility which matures in 2012 and promissory
notes with an aggregate principal outstanding of
$71.1 million. The promissory notes mature at various dates
through 2010 and have interest rates ranging from 6.73% to
8.00%. The increase in total debt outstanding was primarily the
result of share repurchases made in 2007.
On October 12, 2007, we entered into the Third Amended and
Restated Revolving Credit Facility Agreement (the Credit
Agreement), which contains a $650.0 million domestic
revolving credit facility. The Credit
30
Agreement replaced our previous domestic revolving credit
facility, the Second Amended and Restated Credit Facility
Agreement, dated as of July 8, 2005.
As of December 31, 2007, we had outstanding borrowings of
$131.0 million under the $650.0 million domestic
revolving credit facility and $118.4 million was committed
to standby letters of credit. All of the remaining
$400.6 million was available for future borrowings after
consideration of covenant limitations. The facility matures in
October 2012.
The domestic revolving credit facility includes a subfacility
for swingline loans of up to $50 million and provides for
the issuance of letters of credit for the full amount of the
credit facility. The revolving loans bear interest at either
(i) the Eurodollar rate plus a margin of between 0.5% and
1% that is based on our Debt to Adjusted EBITDA Ratio (as
defined in the Credit Agreement) or (ii) the higher of
(a) the Federal Funds Rate plus 0.5% and (b) the prime
rate set by Bank of America, N.A. We may prepay the revolving
loans at any time without premium or penalty, other than
customary breakage costs in the case of Eurodollar loans. We
will pay a facility fee in the range of 0.125% to 0.25% based on
our Debt to Adjusted EBITDA Ratio. We will also pay a letter of
credit fee in the range of 0.5% to 1% based on our Debt to
Adjusted EBITDA Ratio, as well as additional issuance fee of
0.125% for letters of credit issued.
The Credit Agreement contains financial covenants relating to
leverage and interest coverage. Other covenants contained in the
Credit Agreement restrict, among other things, mergers, asset
dispositions, guarantees, debt, liens, acquisitions,
investments, affiliate transactions and our ability to make
restricted payments.
The Credit Agreement contains customary events of default. If
any event of default occurs and is continuing, lenders with a
majority of the aggregate commitments may require the
administrative agent to terminate our right to borrow under the
Credit Agreement and accelerate amounts due under the Credit
Agreement (except for a bankruptcy event of default, in which
case such amounts will automatically become due and payable and
the lenders commitments will automatically terminate).
In addition to the financial covenants contained in the Credit
Agreement outlined above, our domestic promissory notes also
contain certain financial covenant restrictions. As of
December 31, 2007, we believe we were in compliance with
all covenant requirements. Our obligations under the facility
and promissory notes are guaranteed by our material subsidiaries.
We have additional borrowing capacity through several foreign
facilities governed by agreements between us and a syndicate of
banks, used primarily to finance seasonal borrowing needs of our
foreign subsidiaries. We had $5.8 million and
$2.0 million of obligations outstanding through our foreign
subsidiaries as of December 31, 2007 and 2006, respectively.
Under a revolving period asset securitization arrangement, we
are eligible to transfer beneficial interests in a portion of
our trade accounts receivable to third parties in exchange for
cash. Our continued involvement in the transferred assets is
limited to servicing. These transfers are accounted for as sales
rather than secured borrowings. The fair values assigned to the
retained and transferred interests are based primarily on the
receivables carrying value given the short term to
maturity and low credit risk. As of December 31, 2007 and
2006, we had not sold any beneficial interests in accounts
receivable.
As of December 31, 2007, $20.2 million of cash and
cash equivalents were restricted primarily due to routine
lockbox collections and letters of credit issued with respect to
the operations of our captive insurance subsidiary, which expire
on December 31, 2008. These letter of credit restrictions
can be transferred to our revolving lines of credit as needed.
On September 7, 2005, we called for redemption all of our
Convertible Notes on October 7, 2005. The redemption price
was 103.571% of the principal amount. As of September 7,
2005, there was $143.75 million aggregate principal amount
of Convertible Notes outstanding, which could be converted into
our common stock at a rate of 55.2868 shares of common
stock per $1,000 principal amount of Convertible Notes at any
time before the close of business on the business day prior to
the redemption date. As of October 6, 2005, the holders of
all of the Convertible Notes had converted the Convertible Notes
into an aggregate of approximately 7.9 million shares of
common stock.
31
On July 25, 2007, we announced that our Board of Directors
approved the 2007 Share Repurchase Plan, pursuant to which
we are authorized to repurchase up to $500 million of
shares of our common stock through open market purchases. Based
on the closing price of our common stock on July 24, 2007,
a $500 million repurchase represented over 20% of our
market capitalization. We are currently funding the stock
repurchases through a combination of cash from operations and
third party borrowings. We plan to fully execute repurchases
under the 2007 Share Repurchase Plan by the end of the
third quarter of 2008. During 2007, we purchased
5,878,987 shares of our common stock for
$203.3 million at an average price of $34.59 per share,
including commissions, under the 2007 Share Repurchase
Plan, representing approximately 41% of the $500 million
repurchase authorization.
The 2007 Share Repurchase Plan terminated and replaced our
former share repurchase plan, announced on September 19,
2005, pursuant to which we were authorized to repurchase up to
ten million shares of our common stock (the
2005 Share Repurchase Plan). Purchases under
the 2005 Share Repurchase Plan were made on an open-market
basis at prevailing market prices. The timing of any repurchases
depended on market conditions, the market price of our common
stock and managements assessment of our liquidity needs
and investment requirements and opportunities. We repurchased a
total of 7,615,041 shares of our common stock for
$211.7 million at an average price of $27.80 per share,
including commissions, under the 2005 Share Repurchase Plan.
We periodically review our capital structure, including our
primary bank facility, to ensure that it has adequate liquidity.
We believe that cash flows from operations, as well as available
borrowings under our revolving credit facility and other
existing sources of funding, will be sufficient to fund our
operations for the foreseeable future and the share repurchases
during the term of the 2007 Share Repurchase Plan.
Off-Balance
Sheet Arrangements
In addition to the revolving and term loans described above, we
utilize the following financing arrangements in the course of
funding our operations:
|
|
|
|
|
Trade accounts receivable may be sold on a non-recourse basis to
third parties. The sales are reported as a reduction of Accounts
and Notes Receivable, net in the Consolidated Balance Sheets. As
of December 31, 2007 and 2006, we had not sold any of such
accounts receivable.
|
|
|
|
We also lease real estate and machinery and equipment pursuant
to leases that, in accordance with Generally Accepted Accounting
Principles, are not capitalized on the balance sheet, including
high-turnover equipment such as autos and service vehicles and
short-lived equipment such as personal computers. These
operating leases generated rent expense of approximately
$64.4 million, $54.1 million and $52.9 million in
2007, 2006 and 2005, respectively.
|
Contractual
Obligations
Summarized below are our long-term payment obligations as of
December 31, 2007 (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due by Period
|
|
|
|
|
|
|
1 Year
|
|
|
2-3
|
|
|
4-5
|
|
|
After
|
|
|
|
Total
|
|
|
or Less
|
|
|
Years
|
|
|
Years
|
|
|
5 Years
|
|
|
Long-term debt
|
|
$
|
203.1
|
|
|
$
|
36.4
|
|
|
$
|
35.6
|
|
|
$
|
131.1
|
|
|
$
|
|
|
Operating leases
|
|
|
160.1
|
|
|
|
48.4
|
|
|
|
64.5
|
|
|
|
31.4
|
|
|
|
15.8
|
|
Purchase obligations
|
|
|
32.4
|
|
|
|
32.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated interest payments on long-term debt
|
|
|
54.6
|
|
|
|
13.4
|
|
|
|
23.1
|
|
|
|
17.3
|
|
|
|
0.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total contractual obligations
|
|
$
|
450.2
|
|
|
$
|
130.6
|
|
|
$
|
123.2
|
|
|
$
|
179.8
|
|
|
$
|
16.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2007, the liability for uncertain tax
positions, including interest and penalties, was
$25.5 million. Due to the uncertainty regarding the timing
of payments associated with these liabilities, we are unable to
make a reasonable estimate of the amount and period for which
these liabilities might be paid.
Purchase obligations consist primarily of aluminum commitments
of $23.8 million. The above table does not include
retirement, postretirement and warranty liabilities because it
is not certain when these liabilities will
32
become due. For additional information regarding our contractual
obligations, see Note 2, Note 9 and Note 19 of
the Notes to our Consolidated Financial Statements. Contractual
obligations related to capital leases as of December 31,
2007, were not material for any future period.
The majority of our Service Experts segments motor vehicle
fleet is leased through operating leases. The lease terms are
generally non-cancelable for the first
12-month
term and then are
month-to-month,
cancelable at our option. While there are residual value
guarantees on these vehicles, we have not historically made
significant payments to the lessors as the leases are maintained
until the fair value of the assets fully mitigates our
obligations under the lease agreements. As of December 31,
2007, we estimate that we will incur an additional
$7.2 million above the contractual obligations on these
leases until the fair value of the leased vehicles fully
mitigates our residual value guarantee obligation under the
lease agreements.
Market
Risk
Our results of operations can be affected by changes in exchange
rates. Net sales and expenses in foreign currencies are
translated into U.S. dollars for financial reporting
purposes based on the average exchange rate for the period.
During 2007, 2006 and 2005, net sales from outside the
U.S. represented 27.1%, 22.7% and 22.6%, respectively, of
our total net sales. Historically, foreign currency transaction
gains (losses) have not had a material effect on our overall
operations. As of December 31, 2007, the impact to net
income of a 10% change in exchange rates is estimated to be
approximately $7.7 million.
Our results of operations can be affected by changes in interest
rates due to variable rates of interest on our revolving credit
facilities. A 10% change in interest rates would not be material
to our results of operations.
Currently, we utilize various alternatives to mitigate higher
raw material costs, including cash flow and economic hedges and
fixed forward contracts. We enter into commodity futures
contracts to stabilize prices to be paid for raw materials and
parts containing high copper and aluminum content. These
contracts are for quantities equal to, or less than, quantities
expected to be consumed in future production. As of
December 31, 2007, we had metal futures contracts maturing
at various dates through May 2009 with a fair value as a
liability of $2.3 million. The impact of a 10% change in
commodity prices would have a significant impact on our results
from operations on an annual basis, absent any other
contravening actions.
Critical
Accounting Policies
The preparation of financial statements requires the use of
judgments and estimates. The critical accounting policies are
described below to provide a better understanding of how we
develop our judgments about future events and related
estimations and how such policies can impact our financial
statements. A critical accounting policy is one that requires
difficult, subjective or complex estimates and assessments and
is fundamental to the results of operations. We consider our
most critical accounting policies to be:
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|
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|
|
product warranties;
|
|
|
|
goodwill and other intangible assets;
|
|
|
|
allowance for doubtful accounts;
|
|
|
|
pension and postretirement benefits;
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|
|
|
stock-based compensation;
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|
|
|
self-insurance expense;
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|
|
|
income taxes; and
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|
|
|
derivative accounting.
|
This discussion and analysis should be read in conjunction with
our Consolidated Financial Statements and related Notes in
Item 8. Financial Statements and Supplementary
Data.
33
Product
Warranties
For some of our HVAC products, we provide warranty terms ranging
from one to 20 years to customers for certain components.
For select products, we have provided lifetime warranties for
heat exchangers. A liability for estimated warranty expense is
recorded on the date that revenue is recognized. Our estimate of
future warranty costs is determined for each product line. The
number of units that are expected to be repaired or replaced is
determined by applying the estimated failure rate, which is
generally based on historical experience, to the number of units
that have been sold and are still under warranty. The estimated
units to be repaired under warranty are multiplied by the
average cost to repair or replace such products to determine our
estimated future warranty cost. We do not discount product
warranty liabilities as the amounts are not fixed and the timing
of future cash payments is neither fixed nor reliably
determinable. We also provide for specifically identified
warranty obligations.
Our estimated future warranty costs require significant
assumptions about what costs will be incurred in the future and
is subject to adjustment from time to time depending on changes
in factors such as actual failure rate and cost experience.
Should actual warranty costs differ from our estimates, we may
be required to record adjustments to accruals and expense in the
future. The subsequent costs incurred for warranty claims serve
to reduce the accrued product warranty liability. For more
information see Note 2 in the Notes to our Consolidated
Financial Statements.
Goodwill
and Other Intangible Assets
Goodwill and intangible assets acquired in a purchase business
combination and determined to have an indefinite useful life are
not amortized, but instead tested for impairment at least
annually by reporting unit in accordance with the provisions of
Statement of Financial Accounting Standards No. 142,
Goodwill and Other Intangible Assets
(SFAS No. 142). SFAS No. 142
also requires that intangible assets with estimable useful lives
be amortized over their respective estimated useful lives to
their estimated residual values, and reviewed for impairment in
accordance with Statement of Financial Accounting Standards
No. 144, Accounting for Impairment or Disposal of
Long-Lived Assets.
Goodwill is tested for impairment by reporting unit at least
annually in the first quarter of each fiscal year. We estimate
reporting unit fair values using standard business valuation
techniques such as discounted cash flows and reference to
comparable business transactions. The discounted cash flows fair
value estimates are based on managements projected future
cash flows and the estimated weighted-average cost of capital.
The estimated weighted-average cost of capital is based on the
risk-free interest rate and other factors such as equity risk
premiums and the ratio of total debt and equity capital.
In addition, we periodically review intangible assets with
estimable useful lives for impairment as events or changes in
circumstances indicate that the carrying amount of such assets
might not be recoverable. In order to assess recoverability, we
compare the estimated expected future cash flows (undiscounted
and without interest charges) identified with each long-lived
asset or related asset grouping to the carrying amount of such
assets. For purposes of such comparisons, portions of goodwill
are attributed to related long-lived assets and identifiable
intangible assets based upon relative fair values of such assets
at acquisition. If the expected future cash flows do not exceed
the carrying value of the asset or assets being reviewed, an
impairment loss is recognized based on the excess of the
carrying amount of the impaired assets over their fair value.
We must make assumptions regarding estimated future cash flows
and other factors to determine the fair value of the respective
assets in assessing the fair value of our goodwill and other
intangibles. If these estimates or the related assumptions
change, we may be required to record non-cash impairment charges
for these assets in the future.
Allowance
for Doubtful Accounts
The allowance for doubtful accounts is generally established
during the period in which receivables are recognized and is
maintained at a level deemed appropriate by management based on
historical and other factors that affect collectibility. Such
factors include the historical trends of write-offs and recovery
of previously written-off accounts, the financial strength of
the customer and projected economic and market conditions. The
evaluation
34
of these factors involves complex, subjective judgments. Thus,
changes in these factors or changes in economic circumstances
may significantly impact our consolidated financial statements.
Pensions
and Postretirement Benefits
We have domestic and foreign pension plans covering essentially
all employees. We also maintain an unfunded postretirement
benefit plan, which provides certain medical and life insurance
benefits to eligible employees. The pension plans are accounted
for under provisions of Statement of Financial Accounting
Standards No. 87, Employers Accounting for
Pensions, as amended by Statement of Financial Accounting
Standards No. 158, Employers Accounting for
Defined Benefit Pension and Other Postretirement Plans
(SFAS No. 158). The postretirement
benefit plan is accounted for under the provisions of
SFAS No. 106, Employers Accounting for
Postretirement Benefits Other than Pensions, as amended by
SFAS No. 158.
U.S.-based
pension plans comprised approximately 85% of the projected
benefit obligation and 87% of plan assets as of
December 31, 2007. The
U.S.-based
benefit plan assets and liabilities included in our Consolidated
Financial Statements and associated Notes reflect
managements assessment as to the long-range performance of
our benefit plans, using the following assumptions:
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|
|
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|
|
|
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|
|
|
|
Pension Benefits
|
|
|
Other Benefits
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
Weighted-average assumptions as of December 31:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discount rate
|
|
|
6.48
|
%
|
|
|
5.89
|
%
|
|
|
6.36
|
%
|
|
|
5.82
|
%
|
Expected return on plan assets
|
|
|
8.25
|
|
|
|
8.25
|
|
|
|
|
|
|
|
|
|
To develop the expected long-term rate of return on assets
assumption for
U.S.-based
plans, we considered the historical returns and the future
expectations for returns for each asset class, as well as the
target asset allocation of the pension portfolio and the effect
of periodic rebalancing. These results were adjusted for the
payment of reasonable expenses of the plan from plan assets.
This resulted in the selection of the 8.25% long-term rate of
return on assets assumption. A similar process was followed for
the
non-U.S.-based
plans. Should actual results differ from our estimates,
revisions to the benefit plan assets and liabilities would be
required.
To select a discount rate for the purpose of valuing the plan
obligations for
U.S.-based
plans, we performed an analysis in which the duration of
projected cash flows from defined benefit and retiree health
care plans were matched with a yield curve based on the
appropriate universe of high-quality corporate bonds that were
available. We used the results of the yield curve analysis to
select the discount rate that matched the duration and payment
stream of the benefits in each plan. This resulted in the
selection of the 6.48% and 6.36% discount rate assumption for
pension benefits and other benefits, respectively. A similar
process was followed for the
non-U.S.-based
plans. Should actual results differ from our estimates,
revisions to the benefit plan liabilities would be required.
For more information see Note 9 in the Notes to our
Consolidated Financial Statements.
Stock-Based
Compensation
The implementation of Statement of Financial Accounting
Standards No. 123R, Share-Based Payment, on
July 1, 2005, regarding stock-based compensation changed
our financial statements as detailed in Note 2 and
Note 14 to our Consolidated Financial Statements.
Determining the amount of expense for stock-based compensation,
as well as the associated impact to our balance sheets and
statements of cash flows, requires us to develop estimates of
the fair value of stock-based compensation expense. The most
significant factors of that expense that require estimates or
projections include the expected volatility, expected lives and
estimated forfeiture rates of stock-based awards.
For grants made prior to July 1, 2005, an analysis of
historical volatility was used to develop the estimate of
expected volatility. Effective July 1, 2005, we changed our
method of determining expected volatility on all stock option
and stock appreciation rights granted after that date to
consider a combination of historical stock price data and other
pertinent information.
35
The expected lives of stock options and stock appreciation
rights are determined based on historical exercise experience
and estimated forfeiture rates are derived from historical
forfeiture patterns. We believe the historical experience method
is the best estimate of future exercise patterns and forfeitures
currently available.
Self-Insurance
Expense
We use a combination of third party insurance and self-insurance
plans (large deductible or captive) to provide protection
against claims relating to workers compensation, general
liability, product liability, property damage, aviation
liability, directors and officers liability, auto
liability, physical damage and other exposures. We maintain
third party coverage for risks not retained within our large
deductible or captive insurance plans.
The expense and liabilities are determined based on our
historical claims information, as well as industry factors and
trends in the level of such claims and payments.
As of December 31, 2007, our self-insurance and captive
reserves, calculated on an undiscounted basis, represent the
best estimate of the future payments to be made on losses
reported and unreported for 2007 and prior years. The majority
of our self-insured risks (excluding auto liability and physical
damage) have relatively long payout patterns. Pursuant to our
accounting policy, we do not discount our self-insurance or
captive reserves. We maintain safety and manufacturing programs
that are designed to improve the safety and effectiveness of our
business processes and, as a result, reduce the level and
severity of our various self-insurance risks.
Our reserves for self-insurance and captive risks totaled
$60.8 million and $58.2 million as of
December 31, 2007 and 2006, respectively. Actual payments
for claims reserved as of December 31, 2007 may vary
depending on various factors including the development and
ultimate settlement of reported and unreported claims. To the
extent actuarial assumptions change and claims experience rates
differ from historical rates, our liability may change.
Income
Taxes
In determining income for financial statement purposes, we must
make certain estimates and judgments in the calculation of tax
provisions and the resultant tax liabilities and in the
recoverability of deferred tax assets that arise from temporary
differences between the tax and financial statement recognition
of revenue and expense.
In the ordinary course of global business, there may be many
transactions and calculations where the ultimate tax outcome is
uncertain. The calculation of tax liabilities involves dealing
with uncertainties in the application of complex tax laws. We
recognize potential liabilities for anticipated tax audit issues
in the U.S. and other tax jurisdictions based on an
estimate of the ultimate resolution of whether, and the extent
to which, additional taxes will be due. Although we believe the
estimates are reasonable, no assurance can be given that the
final outcome of these matters will not be different than what
is reflected in the historical income tax provisions and
accruals.
As part of our financial process, we must assess the likelihood
that our deferred tax assets can be recovered. If recovery is
not likely, the provision for taxes must be increased by
recording a reserve in the form of a valuation allowance for the
deferred tax assets that are estimated not to be ultimately
recoverable. In this process, certain relevant criteria are
evaluated including the existence of deferred tax liabilities
that can be used to absorb deferred tax assets, the taxable
income in prior carryback years that can be used to absorb net
operating losses and credit carrybacks and taxable income in
future years. Our judgment regarding future taxable income may
change due to future market conditions, changes in U.S. or
international tax laws and other factors. These changes, if any,
may require material adjustments to these deferred tax assets
and an accompanying reduction or increase in net income in the
period when such determinations are made.
In addition to the risks to the effective tax rate described
above, the effective tax rate reflected in forward-looking
statements is based on current tax law. Any significant changes
in the tax laws could affect these estimates.
Derivative
Accounting
We use futures contracts and fixed forward contracts to mitigate
our exposure to volatility in commodity prices in the ordinary
course of business. Futures contracts that meet established
accounting criteria are formally designated as cash flow hedges.
We account for instruments that qualify as cash flow hedges
utilizing SFAS No. 133.
36
In accounting for cash flow hedges, we must make estimates about
future prices of commodities and component parts used in our
manufacturing process. Pricing structure changes could result in
increased levels of ineffectiveness which could significantly
impact our consolidated results.
SFAS No. 133 contains strict requirements for
preparation of contemporaneous documentation in order for
futures contracts to be formally designated as cash flow hedges.
Our failure to comply with the strict documentation requirements
could result in de-designation of cash flow hedges, which may
significantly impact our consolidated financial statements.
Recent
Accounting Pronouncements
In September 2006, the Financial Accounting Standards Board
(FASB) issued Statement of Financial Accounting
Standards No. 157, Fair Value Measurements
(SFAS No. 157), which establishes a
framework for measuring fair value in generally accepted
accounting principles, clarifies the definition of fair value
within that framework, and expands disclosures about the use of
fair value measurements. SFAS No. 157 is effective for
fiscal years beginning after November 15, 2007. However, in
February 2008, the FASB deferred the effective date of
SFAS No. 157 for one year for certain nonfinancial
assets and liabilities. We are currently evaluating the standard
and do not believe that the initial adoption of
SFAS No. 157 will have a material impact on our
consolidated financial statements.
In February 2007, the FASB issued Statement of Financial
Accounting Standards No. 159, The Fair Value Option for
Financial Assets and Financial Liabilities Including
an Amendment of FASB Statement No. 115
(SFAS No. 159), which permits an
entity to choose to measure eligible financial instruments and
certain other items at fair value. Subsequent measurements for
the financial instruments and other items an entity elects to
fair value will be recognized in earnings at each reporting
date. SFAS No. 159 also establishes presentation and
disclosure requirements designed to facilitate comparisons
between entities that choose different measurement attributes
for similar types of assets and liabilities.
SFAS No. 159 is effective for fiscal years beginning
after November 15, 2007. We are currently evaluating the
standard and do not believe that the initial adoption of
SFAS No. 159 will have a material impact on our
consolidated financial statements.
|
|
Item 7A.
|
Quantitative
and Qualitative Disclosures About Market Risk
|
The information required by this item is included under the
caption Market Risk in Item 7 above.
37
|
|
Item 8.
|
Financial
Statements and Supplementary Data
|
MANAGEMENTS
REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Management of Lennox International Inc. (the
Company) is responsible for establishing and
maintaining adequate internal control over financial reporting
and for the assessment of the effectiveness of internal control
over financial reporting. As defined by the Securities and
Exchange Commission, internal control over financial reporting
is a process designed by, or under the supervision of, the
Companys principal executive and principal financial
officers, and effected by the Companys Board of Directors,
management and other personnel, to provide reasonable assurance
regarding the reliability of financial reporting and the
preparation of the consolidated financial statements in
accordance with U.S. generally accepted accounting
principles.
The Companys internal control over financial reporting
includes written policies and procedures that (1) pertain
to the maintenance of records that, in reasonable detail,
accurately and fairly reflect the Companys transactions
and dispositions of the Companys assets; (2) provide
reasonable assurance that transactions are recorded as necessary
to permit preparation of the financial statements in accordance
with generally accepted accounting principles, and that receipts
and expenditures of the Company are being made only in
accordance with authorization of management and directors of the
Company; and (3) provide reasonable assurance regarding
prevention or timely detection of unauthorized acquisition, use,
or disposition of the Companys 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.
Management has undertaken an assessment of the effectiveness of
the Companys internal control over financial reporting as
of December 31, 2007, based on criteria established in
Internal Control Integrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway
Commission. Managements assessment included an evaluation
of the design of the Companys internal control over
financial reporting and testing of the operational effectiveness
of those controls.
Based on this assessment, management has concluded that as of
December 31, 2007, the Companys internal control over
financial reporting was effective to provide reasonable
assurance regarding the reliability of financial reporting and
the preparation of financial statements for external purposes in
accordance with U.S. generally accepted accounting
principles.
KPMG LLP, the independent registered public accounting firm that
audited the Companys consolidated financial statements,
has issued an audit report including an opinion on the
effectiveness of internal control over financial reporting as of
December 31, 2007, a copy of which is included herein.
38
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders
Lennox International Inc.:
We have audited the accompanying consolidated balance sheets of
Lennox International Inc. and subsidiaries (the Company) as of
December 31, 2007 and 2006, and the related consolidated
statements of operations, stockholders equity and cash
flows for each of the years in the three-year period ended
December 31, 2007. In connection with our audits of the
consolidated financial statements, we have also audited
financial statement schedule II. We also have audited
Lennox International Inc.s internal control over financial
reporting as of December 31, 2007, based on criteria
established in Internal Control Integrated
Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission. Lennox International
Inc.s management is responsible for these consolidated
financial statements, financial statement schedule II, for
maintaining effective internal control over financial reporting,
and for its assessment of the effectiveness of internal control
over financial reporting, included in the accompanying
Managements Report on Internal Control Over Financial
Reporting. Our responsibility is to express an opinion on these
consolidated financial statements and an opinion on the
Companys internal control over financial reporting based
on our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are
free of material misstatement and whether effective internal
control over financial reporting was maintained in all material
respects. Our audits of the consolidated financial statements
included examining, on a test basis, evidence supporting the
amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement
presentation. Our audit of internal control over financial
reporting included obtaining an understanding of internal
control over financial reporting, assessing the risk that a
material weakness exists, and testing and evaluating the design
and operating effectiveness of internal control based on the
assessed risk. Our audits also included performing such other
procedures as we considered necessary in the circumstances. We
believe that our audits provide a reasonable basis for our
opinions.
A companys 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 companys
internal control over financial reporting includes those
policies and procedures that (1) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the
Company; (2) 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 (3) provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the
Companys 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.
In our opinion, the consolidated financial statements referred
to above present fairly, in all material respects, the financial
position of Lennox International Inc. and subsidiaries as of
December 31, 2007 and 2006, and the results of their
operations and their cash flows for each of the years in the
three-year period ended December 31, 2007, in conformity
with accounting principles generally accepted in the United
States of America. Also in our opinion, the related financial
statement schedule, when considered in relation to the basic
consolidated financial statements taken as a whole, presents
fairly, in all material respects, the information set forth
therein. Also in our opinion, Lennox International Inc.
maintained, in all material respects, effective internal control
over financial reporting as of December 31, 2007, based on
criteria established in Internal Control
Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission.
39
As discussed in Note 2 to the consolidated financial
statements, effective January 1, 2006, the Company adopted
the provision of Securities and Exchange Commission Staff
Accounting Bulletin No. 108, Considering the
Effects of Prior Year Misstatements when Quantifying
Misstatements in Current Year Financial Statements,
effective December 31, 2006, the Company adopted the
provisions of Statement of Financial Accounting Standards
No. 158, Employers Accounting for Defined Benefit
Pension and Other Postretirement Plans, and effective
January 1, 2007, the Company adopted FASB Interpretation
No. 48, Accounting for Uncertainty in Income
Taxes an Interpretation of FASB Statement
No. 109.
Dallas, Texas
February 27, 2008
40
LENNOX
INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
As of December 31, 2007 and 2006
(In millions, except share and per share data)
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
ASSETS
|
CURRENT ASSETS:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
145.5
|
|
|
$
|
144.3
|
|
Short-term investments
|
|
|
27.7
|
|
|
|
|
|
Accounts and notes receivable, net
|
|
|
492.5
|
|
|
|
502.6
|
|
Inventories, net
|
|
|
325.7
|
|
|
|
305.5
|
|
Deferred income taxes
|
|
|
30.9
|
|
|
|
22.2
|
|
Other assets
|
|
|
48.4
|
|
|
|
43.8
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
1,070.7
|
|
|
|
1,018.4
|
|
PROPERTY, PLANT AND EQUIPMENT, net
|
|
|
317.9
|
|
|
|
288.2
|
|
GOODWILL, net
|
|
|
262.8
|
|
|
|
239.8
|
|
DEFERRED INCOME TAXES
|
|
|
94.0
|
|
|
|
104.3
|
|
OTHER ASSETS
|
|
|
69.2
|
|
|
|
69.1
|
|
|
|
|
|
|
|
|
|
|
TOTAL ASSETS
|
|
$
|
1,814.6
|
|
|
$
|
1,719.8
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY
|
CURRENT LIABILITIES:
|
|
|
|
|
|
|
|
|
Short-term debt
|
|
$
|
4.8
|
|
|
$
|
1.0
|
|
Current maturities of long-term debt
|
|
|
36.4
|
|
|
|
11.4
|
|
Accounts payable
|
|
|
289.8
|
|
|
|
278.6
|
|
Accrued expenses
|
|
|
352.1
|
|
|
|
326.3
|
|
Income taxes payable
|
|
|
1.1
|
|
|
|
33.8
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
684.2
|
|
|
|
651.1
|
|
LONG-TERM DEBT
|
|
|
166.7
|
|
|
|
96.8
|
|
POSTRETIREMENT BENEFITS, OTHER THAN PENSIONS
|
|
|
16.2
|
|
|
|
12.9
|
|
PENSIONS
|
|
|
34.8
|
|
|
|
49.6
|
|
OTHER LIABILITIES
|
|
|
104.2
|
|
|
|
105.0
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
1,006.1
|
|
|
|
915.4
|
|
COMMITMENTS AND CONTINGENCIES
|
|
|
|
|
|
|
|
|
STOCKHOLDERS EQUITY:
|
|
|
|
|
|
|
|
|
Preferred stock, $.01 par value, 25,000,000 shares
authorized, no shares issued or outstanding
|
|
|
|
|
|
|
|
|
Common stock, $.01 par value, 200,000,000 shares
authorized, 81,897,439 shares and 76,974,791 shares
issued for 2007 and 2006, respectively
|
|
|
0.8
|
|
|
|
0.8
|
|
Additional paid-in capital
|
|
|
760.7
|
|
|
|
706.6
|
|
Retained earnings
|
|
|
447.4
|
|
|
|
312.5
|
|
Accumulated other comprehensive income (loss)
|
|
|
63.6
|
|
|
|
(5.1
|
)
|
Treasury stock, at cost, 19,844,677 shares and
9,818,904 shares for 2007 and 2006, respectively
|
|
|
(464.0
|
)
|
|
|
(210.4
|
)
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
808.5
|
|
|
|
804.4
|
|
|
|
|
|
|
|
|
|
|
TOTAL LIABILITIES AND STOCKHOLDERS EQUITY
|
|
$
|
1,814.6
|
|
|
$
|
1,719.8
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
41
LENNOX
INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended December 31, 2007, 2006 and 2005
(In millions, except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
NET SALES
|
|
$
|
3,749.7
|
|
|
$
|
3,715.4
|
|
|
$
|
3,405.3
|
|
COST OF GOODS SOLD
|
|
|
2,697.1
|
|
|
|
2,755.4
|
|
|
|
2,460.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
1,052.6
|
|
|
|
960.0
|
|
|
|
945.1
|
|
OPERATING EXPENSES:
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative expenses
|
|
|
778.7
|
|
|
|
778.0
|
|
|
|
753.7
|
|
(Gains), losses and other expenses, net
|
|
|
(6.4
|
)
|
|
|
(46.6
|
)
|
|
|
(47.5
|
)
|
Restructuring charges
|
|
|
25.2
|
|
|
|
13.3
|
|
|
|
2.4
|
|
Equity in earnings of unconsolidated affiliates
|
|
|
(10.6
|
)
|
|
|
(8.0
|
)
|
|
|
(14.2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operational income from continuing operations
|
|
|
265.7
|
|
|
|
223.3
|
|
|
|
250.7
|
|
INTEREST EXPENSE, net
|
|
|
6.8
|
|
|
|
4.4
|
|
|
|
15.4
|
|
OTHER (INCOME) EXPENSE, net
|
|
|
0.7
|
|
|
|
0.5
|
|
|
|
0.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations before income taxes and
cumulative effect of accounting change
|
|
|
258.2
|
|
|
|
218.4
|
|
|
|
235.0
|
|
PROVISION FOR INCOME TAXES
|
|
|
89.2
|
|
|
|
52.4
|
|
|
|
83.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations before cumulative effect of
accounting change
|
|
|
169.0
|
|
|
|
166.0
|
|
|
|
152.0
|
|
CUMULATIVE EFFECT OF ACCOUNTING CHANGE, NET
|
|
|
|
|
|
|
|
|
|
|
(0.1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
|
169.0
|
|
|
|
166.0
|
|
|
|
152.1
|
|
DISCONTINUED OPERATIONS:
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations of discontinued operations
|
|
|
|
|
|
|
|
|
|
|
2.0
|
|
Income tax benefit
|
|
|
|
|
|
|
|
|
|
|
(0.5
|
)
|
Loss on disposal of discontinued operations
|
|
|
|
|
|
|
|
|
|
|
0.1
|
|
Income tax benefit
|
|
|
|
|
|
|
|
|
|
|
(0.2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from discontinued operations
|
|
|
|
|
|
|
|
|
|
|
1.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
169.0
|
|
|
$
|
166.0
|
|
|
$
|
150.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME PER SHARE FROM CONTINUING OPERATIONS BEFORE CUMULATIVE
EFFECT OF ACCOUNTING CHANGE:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
2.55
|
|
|
$
|
2.37
|
|
|
$
|
2.37
|
|
Diluted
|
|
$
|
2.43
|
|
|
$
|
2.26
|
|
|
$
|
2.13
|
|
CUMULATIVE EFFECT OF ACCOUNTING CHANGE PER SHARE:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
Diluted
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
INCOME PER SHARE FROM CONTINUING OPERATIONS:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
2.55
|
|
|
$
|
2.37
|
|
|
$
|
2.37
|
|
Diluted
|
|
$
|
2.43
|
|
|
$
|
2.26
|
|
|
$
|
2.13
|
|
(LOSS) PER SHARE FROM DISCONTINUED OPERATIONS:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
|
|
|
$
|
|
|
|
$
|
(0.02
|
)
|
Diluted
|
|
$
|
|
|
|
$
|
|
|
|
$
|
(0.02
|
)
|
NET INCOME PER SHARE:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
2.55
|
|
|
$
|
2.37
|
|
|
$
|
2.35
|
|
Diluted
|
|
$
|
2.43
|
|
|
$
|
2.26
|
|
|
$
|
2.11
|
|
AVERAGE SHARES OUTSTANDING:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
66.4
|
|
|
|
69.9
|
|
|
|
64.2
|
|
Diluted
|
|
|
69.4
|
|
|
|
73.5
|
|
|
|
73.7
|
|
CASH DIVIDENDS DECLARED PER SHARE
|
|
$
|
0.53
|
|
|
$
|
0.46
|
|
|
$
|
0.41
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
42
LENNOX
INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY
For the Years Ended December 31, 2007, 2006 and 2005
(In millions, except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock
|
|
|
Additional
|
|
|
|
|
|
Accumulated Other
|
|
|
|
|
|
Treasury
|
|
|
Total
|
|
|
|
|
|
|
Issued
|
|
|
Paid-In
|
|
|
|
|
|
Comprehensive
|
|
|
Deferred
|
|
|
Stock
|
|
|
Stockholders
|
|
|
Comprehensive
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Retained Earnings
|
|
|
Income (Loss)
|
|
|
Compensation
|
|
|
at Cost
|
|
|
Equity
|
|
|
Income (Loss)
|
|
|
BALANCE AS OF DECEMBER 31, 2004
|
|
|
66.4
|
|
|
$
|
0.7
|
|
|
$
|
454.1
|
|
|
$
|
66.8
|
|
|
$
|
0.7
|
|
|
$
|
(18.2
|
)
|
|
$
|
(31.2
|
)
|
|
$
|
472.9
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
150.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
150.7
|
|
|
$
|
150.7
|
|
Dividends, $0.41 per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(26.5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(26.5
|
)
|
|
|
|
|
Foreign currency translation adjustments, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(10.9
|
)
|
|
|
|
|
|
|
|
|
|
|
(10.9
|
)
|
|
|
(10.9
|
)
|
Minimum pension liability adjustments, net of tax benefit of $9.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
17.0
|
|
|
|
|
|
|
|
|
|
|
|
17.0
|
|
|
|
17.0
|
|
Adoption of Statement of Financial Accounting Standard
No. 123R
|
|
|
(2.3
|
)
|
|
|
|
|
|
|
(2.6
|
)
|
|
|
|
|
|
|
|
|
|
|
7.4
|
|
|
|
|
|
|
|
4.8
|
|
|
|
|
|
Stock-based compensation expense
|
|
|
|
|
|
|
|
|
|
|
18.0
|
|
|
|
|
|
|
|
|
|
|
|
10.8
|
|
|
|
|
|
|
|
28.8
|
|
|
|
|
|
Derivatives, net of tax provision of $3.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(6.4
|
)
|
|
|
|
|
|
|
|
|
|
|
(6.4
|
)
|
|
|
(6.4
|
)
|
Common stock issued
|
|
|
2.7
|
|
|
|
|
|
|
|
25.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
25.8
|
|
|
|
|
|
Redemption of convertible notes
|
|
|
7.9
|
|
|
|
|
|
|
|
144.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
144.3
|
|
|
|
|
|
Treasury stock purchases
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(15.8
|
)
|
|
|
(15.8
|
)
|
|
|
|
|
Tax benefits of stock-based compensation
|
|
|
|
|
|
|
|
|
|
|
9.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
150.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE AS OF DECEMBER 31, 2005
|
|
|
74.7
|
|
|
$
|
0.7
|
|
|
$
|
649.3
|
|
|
$
|
191.0
|
|
|
$
|
0.4
|
|
|
$
|
|
|
|
$
|
(47.0
|
)
|
|
$
|
794.4
|
|
|
|
|
|
Impact of adjustments recorded under provisions of
SAB No. 108
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(12.4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(12.4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ADJUSTED BALANCE AS OF JANUARY 1, 2006
|
|
|
74.7
|
|
|
$
|
0.7
|
|
|
$
|
649.3
|
|
|
$
|
178.6
|
|
|
$
|
0.4
|
|
|
$
|
|
|
|
$
|
(47.0
|
)
|
|
$
|
782.0
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
166.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
166.0
|
|
|
$
|
166.0
|
|
Dividends, $0.46 per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(32.1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(32.1
|
)
|
|
|
|
|
Foreign currency translation adjustments, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
20.8
|
|
|
|
|
|
|
|
|
|
|
|
20.8
|
|
|
|
20.8
|
|
Minimum pension liability adjustments, net of tax benefit of $2.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4.0
|
|
|
|
|
|
|
|
|
|
|
|
4.0
|
|
|
|
4.0
|
|
Stock-based compensation expense
|
|
|
|
|
|
|
|
|
|
|
24.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
24.4
|
|
|
|
|
|
Derivatives, net of tax provision of $1.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1.9
|
)
|
|
|
|
|
|
|
|
|
|
|
(1.9
|
)
|
|
|
(1.9
|
)
|
Common stock issued
|
|
|
2.3
|
|
|
|
0.1
|
|
|
|
19.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
19.8
|
|
|
|
|
|
Treasury stock purchases
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(163.4
|
)
|
|
|
(163.4
|
)
|
|
|
|
|
Tax benefits of stock-based compensation
|
|
|
|
|
|
|
|
|
|
|
13.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
188.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjustments resulting from adoption of SFAS No. 158,
net of tax benefit of $15.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(28.4
|
)
|
|
|
|
|
|
|
|
|
|
|
(28.4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE AS OF DECEMBER 31, 2006
|
|
|
77.0
|
|
|
$
|
0.8
|
|
|
$
|
706.6
|
|
|
$
|
312.5
|
|
|
$
|
(5.1
|
)
|
|
$
|
|
|
|
$
|
(210.4
|
)
|
|
$
|
804.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impact of adoption of FIN No. 48
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ADJUSTED BALANCE AS OF JANUARY 1, 2007
|
|
|
77.0
|
|
|
$
|
0.8
|
|
|
$
|
706.6
|
|
|
$
|
313.4
|
|
|
$
|
(5.1
|
)
|
|
$
|
|
|
|
$
|
(210.4
|
)
|
|
|
805.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
169.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
169.0
|
|
|
$
|
169.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends, $0.53 per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(35.0
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(35.0
|
)
|
|
|
|
|
Foreign currency translation adjustments, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
62.9
|
|
|
|
|
|
|
|
|
|
|
|
62.9
|
|
|
|
62.9
|
|
Pension and postretirement liability changes, net of tax benefit
of $0.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3.2
|
|
|
|
|
|
|
|
|
|
|
|
3.2
|
|
|
|
3.2
|
|
Stock-based compensation expense
|
|
|
|
|
|
|
|
|
|
|
21.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
21.0
|
|
|
|
|
|
Reversal of previously recorded stock-based compensation expense
related to share-based awards canceled in restructuring
|
|
|
|
|
|
|
|
|
|
|
(2.1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2.1
|
)
|
|
|
|
|
Derivatives, net of tax provision of $1.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2.6
|
|
|
|
|
|
|
|
|
|
|
|
2.6
|
|
|
|
2.6
|
|
Common stock issued
|
|
|
4.9
|
|
|
|
|
|
|
|
21.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
21.5
|
|
|
|
|
|
Treasury stock purchases
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(253.6
|
)
|
|
|
(253.6
|
)
|
|
|
|
|
Tax benefits of stock-based compensation
|
|
|
|
|
|
|
|
|
|
|
20.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
20.1
|
|
|
|
|
|
Other tax related items
|
|
|
|
|
|
|
|
|
|
|
(6.4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(6.4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
237.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE AS OF DECEMBER 31, 2007
|
|
|
81.9
|
|
|
$
|
0.8
|
|
|
$
|
760.7
|
|
|
$
|
447.4
|
|
|
$
|
63.6
|
|
|
$
|
|
|
|
$
|
(464.0
|
)
|
|
$
|
808.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
43
LENNOX
INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 2007, 2006 and 2005
(In millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For The Years Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
CASH FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
169.0
|
|
|
$
|
166.0
|
|
|
$
|
150.7
|
|
Adjustments to reconcile net income to net cash provided by
operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity in earnings of unconsolidated affiliates
|
|
|
(10.6
|
)
|
|
|
(8.0
|
)
|
|
|
(14.2
|
)
|
Dividends from affiliates
|
|
|
12.3
|
|
|
|
5.4
|
|
|
|
|
|
Minority interest
|
|
|
0.7
|
|
|
|
0.5
|
|
|
|
0.3
|
|
Restructuring expenses, net of cash paid
|
|
|
14.8
|
|
|
|
7.3
|
|
|
|
0.7
|
|
Warranty program adjustment
|
|
|
(16.9
|
)
|
|
|
|
|
|
|
|
|
Unrealized loss (gain) on futures contracts
|
|
|
3.3
|
|
|
|
20.8
|
|
|
|
(23.3
|
)
|
Stock-based compensation expense
|
|
|
21.0
|
|
|
|
24.4
|
|
|
|
28.8
|
|
Depreciation and amortization
|
|
|
48.8
|
|
|
|
44.3
|
|
|
|
37.4
|
|
Capitalized interest
|
|
|
(1.8
|
)
|
|
|
(1.0
|
)
|
|
|
|
|
Deferred income taxes
|
|
|
5.7
|
|
|
|
(26.3
|
)
|
|
|
11.9
|
|
Other items, net
|
|
|
8.8
|
|
|
|
0.7
|
|
|
|
(2.9
|
)
|
Changes in assets and liabilities, net of effects of
acquisitions and divestitures:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts and notes receivable
|
|
|
22.4
|
|
|
|
11.1
|
|
|
|
(53.6
|
)
|
Inventories
|
|
|
(6.7
|
)
|
|
|
(47.3
|
)
|
|
|
0.1
|
|
Other current assets
|
|
|
(5.9
|
)
|
|
|
(0.8
|
)
|
|
|
(16.2
|
)
|
Accounts payable
|
|
|
0.1
|
|
|
|
(25.9
|
)
|
|
|
64.4
|
|
Accrued expenses
|
|
|
2.3
|
|
|
|
(1.5
|
)
|
|
|
40.5
|
|
Income taxes payable and receivable
|
|
|
(25.5
|
)
|
|
|
11.0
|
|
|
|
23.1
|
|
Long-term warranty, deferred income and other liabilities
|
|
|
(3.7
|
)
|
|
|
19.0
|
|
|
|
(16.9
|
)
|
Net cash used in operating activities from discontinued
operations
|
|
|
|
|
|
|
|
|
|
|
(2.1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
238.1
|
|
|
|
199.7
|
|
|
|
228.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from the disposal of property, plant and equipment
|
|
|
0.8
|
|
|
|
3.5
|
|
|
|
0.7
|
|
Purchases of property, plant and equipment
|
|
|
(68.4
|
)
|
|
|
(73.8
|
)
|
|
|
(63.3
|
)
|
Additional investments in affiliates
|
|
|
(0.8
|
)
|
|
|
(24.2
|
)
|
|
|
|
|
Purchases of short-term investments
|
|
|
(42.5
|
)
|
|
|
|
|
|
|
|
|
Proceeds from sales and maturities of short-term investments
|
|
|
15.1
|
|
|
|
|
|
|
|
|
|
Proceeds from disposal of investments (continuing operations)
|
|
|
|
|
|
|
|
|
|
|
39.3
|
|
Net cash provided by investing activities from discontinued
operations
|
|
|
|
|
|
|
|
|
|
|
2.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(95.8
|
)
|
|
|
(94.5
|
)
|
|
|
(20.8
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term borrowings (payments), net
|
|
|
3.4
|
|
|
|
(0.4
|
)
|
|
|
(4.2
|
)
|
Net payments on long-term debt
|
|
|
(36.1
|
)
|
|
|
(11.2
|
)
|
|
|
(36.3
|
)
|
Revolver long-term borrowings (payments), net
|
|
|
131.0
|
|
|
|
|
|
|
|
(5.0
|
)
|
Proceeds from stock option exercises
|
|
|
21.5
|
|
|
|
19.8
|
|
|
|
25.8
|
|
Payments of deferred financing costs
|
|
|
(1.8
|
)
|
|
|
(0.3
|
)
|
|
|
(1.7
|
)
|
Repurchases of common stock
|
|
|
(253.6
|
)
|
|
|
(163.4
|
)
|
|
|
(15.8
|
)
|
Excess tax benefits related to share-based payments
|
|
|
17.9
|
|
|
|
11.3
|
|
|
|
5.1
|
|
Cash dividends paid
|
|
|
(35.0
|
)
|
|
|
(31.3
|
)
|
|
|
(24.8
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in financing activities
|
|
|
(152.7
|
)
|
|
|
(175.5
|
)
|
|
|
(56.9
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS
|
|
|
(10.4
|
)
|
|
|
(70.3
|
)
|
|
|
151.0
|
|
EFFECT OF EXCHANGE RATES ON CASH AND CASH EQUIVALENTS
|
|
|
11.6
|
|
|
|
1.1
|
|
|
|
1.6
|
|
CASH AND CASH EQUIVALENTS, beginning of year
|
|
|
144.3
|
|
|
|
213.5
|
|
|
|
60.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH AND CASH EQUIVALENTS, end of year
|
|
$
|
145.5
|
|
|
$
|
144.3
|
|
|
$
|
213.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplementary disclosures of cash flow information:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid during the year for:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
|
|
$
|
11.4
|
|
|
$
|
10.0
|
|
|
$
|
16.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income taxes (net of refunds)
|
|
$
|
91.3
|
|
|
$
|
43.8
|
|
|
$
|
66.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-cash items:
|
|
|
|
|
|
|
|
|
|
|
|
|
Redemption of Convertible Notes
|
|
$
|
|
|
|
$
|
|
|
|
$
|
144.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impact of adjustments recorded under provisions of
SAB No. 108
|
|
$
|
|
|
|
$
|
12.4
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impact of adoption of FIN No. 48
|
|
$
|
0.9
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
44
LENNOX
INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 2007, 2006 and 2005
1. Nature
of Operations:
Lennox International Inc., a Delaware corporation, through its
subsidiaries (the Company or LII), is a
leading global provider of climate control solutions. The
Company designs, manufactures and markets a broad range of
products for the heating, ventilation, air conditioning and
refrigeration (HVACR) markets. The Company operates
in four reportable business segments of the HVACR industry. The
first reportable segment is Residential Heating &
Cooling, in which LII manufactures and markets a full line of
heating, air conditioning and hearth products for the
residential replacement and new construction markets in the
U.S. and Canada. The second reportable segment is
Commercial Heating & Cooling, in which LII
manufactures and sells rooftop products and related equipment
for light commercial applications in the U.S. and Canada
and primarily rooftop products, chillers and air handlers in
Europe. The third reportable segment is Service Experts, which
includes sales, installation, maintenance, and repair services
for heating, ventilation, and air conditioning
(HVAC) equipment by Company-owned service centers in
the U.S. and Canada. The fourth reportable segment is
Refrigeration, which manufactures and sells unit coolers,
condensing units and other commercial refrigeration products in
the U.S. and international markets. See Note 20 for
financial information regarding the Companys reportable
segments.
The Company sells its products and services through a
combination of distributors, independent and Company-owned
dealer service centers, other installing contractors,
wholesalers, manufacturers representatives, original
equipment manufacturers and to national accounts.
As of December 31, 2007, approximately 20% of the
Companys employees were represented by collective
bargaining agreements. The Company believes its relationships
with the unions representing its employees are generally good
and does not anticipate any material adverse consequences
resulting from negotiations to renew any collective bargaining
agreements.
2. Summary
of Significant Accounting Policies:
Principles
of Consolidation
The consolidated financial statements include the accounts of
Lennox International Inc. and its majority-owned subsidiaries.
All intercompany transactions and balances have been eliminated.
Cash
and Cash Equivalents
The Company considers all highly liquid temporary investments
with original maturity dates of three months or less to be cash
equivalents. Cash and cash equivalents of $145.5 million
and $144.3 million as of December 31, 2007 and 2006,
respectively, consisted of cash, overnight repurchase agreements
and investment grade securities and are stated at cost, which
approximates fair value.
As of December 31, 2007 and 2006, $20.2 million and
$14.8 million, respectively, of cash and cash equivalents
were restricted primarily due to routine lockbox collections and
letters of credit issued with respect to the operations of the
Companys captive insurance subsidiary (the
Captive), which expire on December 31, 2008.
These letter of credit restrictions can be transferred to the
Companys revolving lines of credit as needed.
Short-term
Investments
The Captive holds debt securities, consisting of
U.S. Treasury securities, U.S. government agency
securities, corporate bonds, commercial paper, and various
securitized debt instruments. In accordance with Statement of
Financial Accounting Standards No. 115 (as amended),
Accounting for Certain Investments in Debt and Equity
Securities, the Company classifies these investments as
available-for-sale and carries them at amortized cost, which
approximates fair value. Any unrealized holding gains and losses
are reported in Accumulated Other Comprehensive Income
(AOCI), net of applicable taxes, until the gain or
loss is realized. These instruments are not
45
LENNOX
INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
classified as cash and cash equivalents as their original
maturity dates are greater than three months. The Company places
its investments in high credit quality financial instruments
only and limits the amount invested in any one institution or in
any one instrument.
As of December 31, 2007, the Captive held approximately
$27.7 million of short-term investments. The Company did
not hold these types of investments as of December 31,
2006. Unrealized losses included in AOCI in the accompanying
Consolidated Balance Sheet as of December 31, 2007 were not
material. Realized gains and losses from the sale of securities
were also not material for 2007. The maturities of these
securities range from January 2008 to February 2011. However, it
is the Captives intention that these investments be
available to support its current operations as needed. Due to
the liquidity of these investments, they are classified as
current assets in the accompanying Consolidated Balance Sheets.
Accounts
and Notes Receivable
Accounts and notes receivable are shown in the accompanying
Consolidated Balance Sheets, net of allowance for doubtful
accounts of $17.1 million and $16.7 million, as of
December 31, 2007 and 2006, respectively. The allowance for
doubtful accounts is generally established during the period in
which receivables are recognized and is maintained at a level
deemed appropriate by management based on historical and other
factors that affect collectibility. Such factors include the
historical trends of write-offs and recovery of previously
written-off accounts, the financial strength of the customer and
projected economic and market conditions. The Company determines
the delinquency status of receivables generally based on
contractual terms and writes off uncollectible receivables after
managements review of factors that affect collectibility
as noted above, among other considerations. The Company has no
significant concentration of credit risk within its accounts and
notes receivable.
Inventories
Inventory costs include material, labor, depreciation and plant
overhead. Inventories of $130.6 million and
$134.0 million as of December 31, 2007 and 2006,
respectively, were valued at the lower of cost or market using
the last-in,
first-out (LIFO) cost method. The remaining portion of the
inventory is valued at the lower of cost or market with cost
being determined either on the
first-in,
first-out (FIFO) basis or average cost. The Company elected to
use the LIFO cost method for the Companys domestic
manufacturing companies in 1974 and continued to elect the LIFO
cost method for new operations through the late 1980s. The types
of inventory include raw materials, purchased components,
work-in-process,
repair parts and finished goods. Starting in the late 1990s, the
Company began adopting the FIFO cost method for all new domestic
manufacturing operations (primarily acquisitions). The
Companys operating entities with a previous LIFO election
continue to use the LIFO cost method. The Company also uses the
FIFO cost method for all of the Companys foreign-based
manufacturing facilities as well as the Companys Service
Experts segment, whose inventory is limited to service parts and
finished goods. LIFO inventory liquidations did not have a
material impact on gross margins during the years ended
December 31, 2007, 2006, and 2005.
Property,
Plant and Equipment
Property, plant and equipment are stated at cost, net of
accumulated depreciation. Expenditures for renewals and
betterments are capitalized and expenditures for maintenance and
repairs are charged to expense as incurred. Depreciation is
computed using the straight-line method over the following
estimated useful lives:
|
|
|
|
|
Buildings and improvements
|
|
|
2 to 40 years
|
|
Machinery and equipment
|
|
|
1 to 15 years
|
|
The Company periodically reviews long-lived assets for
impairment as events or changes in circumstances indicate that
the carrying amount of such assets might not be recoverable. In
order to assess recoverability, the Company compares the
estimated expected future cash flows (undiscounted and without
interest charges) identified
46
LENNOX
INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
with each long-lived asset or related asset grouping to the
carrying amount of such assets. If the expected future cash
flows do not exceed the carrying value of the asset or assets
being reviewed, an impairment loss is recognized based on the
excess of the carrying amount of the impaired assets over their
fair value.
In March 2005, the Financial Accounting Standards Board
(FASB) issued FASB Interpretation No. 47,
Accounting for Conditional Asset Retirement
Obligations An Interpretation of FASB Statement
No. 143 (FIN No. 47), which was
effective for the Company as of December 31, 2005. This
interpretation provides additional guidance as to when companies
should record the fair value of a liability for a conditional
asset retirement obligation when there is uncertainty about the
timing or method of settlement of the obligation. The cumulative
effect of the change in accounting related to the adoption of
FIN No. 47 was not material for the year ended
December 31, 2005. There were no material changes in
conditional asset retirement obligations during 2007 or 2006.
Goodwill
Goodwill represents the excess of cost over fair value of assets
of acquired businesses. Goodwill and intangible assets
determined to have an indefinite useful life are not amortized,
but instead tested for impairment at least annually in
accordance with the provisions of Statement of Financial
Accounting Standards No. 142, Goodwill and Other
Intangible Assets (SFAS No. 142).
Goodwill is tested at least annually by reporting unit for
impairment. The Company completes its annual goodwill impairment
tests in the first quarter of each fiscal year.
The Company estimates reporting unit fair values using standard
business valuation techniques such as discounted cash flows and
reference to comparable business transactions. The discounted
cash flows fair value estimates are based on managements
projected future cash flows and the estimated weighted-average
cost of capital. The estimated weighted-average cost of capital
is based on the risk-free interest rate and other factors such
as equity risk premiums and the ratio of total debt and equity
capital.
Based on the results of its annual impairment tests required by
SFAS No. 142, the Company determined that no
impairment of its goodwill existed as of December 31, 2007,
2006 or 2005.
In assessing the fair value of its goodwill, the Company must
make assumptions regarding estimated future cash flows and other
factors to determine the fair value of the respective assets. If
these estimates or the related assumptions change, the Company
may be required to record impairment charges for these assets in
the future.
Intangible
and Other Assets
SFAS No. 142 requires that intangible assets with
estimable useful lives be amortized over their respective
estimated useful lives to their estimated residual values, and
reviewed for impairment in accordance with Statement of
Financial Accounting Standards No. 144, Accounting for
Impairment or Disposal of Long-Lived Assets
(SFAS No. 144).
Identifiable intangible and other assets subject to amortization
are recorded in Other Assets in the accompanying Consolidated
Balance Sheets and were comprised of the following as of
December 31, 2007 and 2006 (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
|
Gross
|
|
|
Accumulated
|
|
|
Net
|
|
|
Gross
|
|
|
Accumulated
|
|
|
Net
|
|
|
|
Amount
|
|
|
Amortization
|
|
|
Amount
|
|
|
Amount
|
|
|
Amortization
|
|
|
Amount
|
|
|
Deferred financing costs
|
|
$
|
7.0
|
|
|
$
|
(4.1
|
)
|
|
$
|
2.9
|
|
|
$
|
5.2
|
|
|
$
|
(3.3
|
)
|
|
$
|
1.9
|
|
Customer relationships
|
|
|
3.3
|
|
|
|
(0.4
|
)
|
|
|
2.9
|
|
|
|
3.3
|
|
|
|
(0.1
|
)
|
|
|
3.2
|
|
Other
|
|
|
4.7
|
|
|
|
(3.6
|
)
|
|
|
1.1
|
|
|
|
5.0
|
|
|
|
(3.2
|
)
|
|
|
1.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
15.0
|
|
|
$
|
(8.1
|
)
|
|
$
|
6.9
|
|
|
$
|
13.5
|
|
|
$
|
(6.6
|
)
|
|
$
|
6.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
47
LENNOX
INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Amortization of intangible assets for the years ended
December 31, 2007, 2006 and 2005 was $1.4 million,
$1.4 million and $1.9 million, respectively. Estimated
intangible amortization expense for the next five years is as
follows (in millions):
|
|
|
|
|
2008
|
|
$
|
1.4
|
|
2009
|
|
|
1.2
|
|
2010
|
|
|
1.2
|
|
2011
|
|
|
1.0
|
|
2012
|
|
|
0.8
|
|
As of December 31, 2007 and 2006 the Company had
$4.8 million and $4.3 million of intangible assets,
respectively, primarily consisting of trademarks, which are not
subject to amortization.
Identifiable intangible and other assets that have finite useful
lives are amortized over their useful lives as follows:
|
|
|
Asset
|
|
Useful Life
|
|
Deferred financing costs
|
|
Straight-line method over terms of the related debt
|
Customer relationships
|
|
Straight-line method up to 10 years
|
The Company periodically reviews long-lived assets with
estimable useful lives for impairment as events or changes in
circumstances indicate that the carrying amount of such assets
might not be recoverable. In order to assess recoverability, the
Company compares the estimated expected future cash flows
(undiscounted and without interest charges) identified with each
long-lived asset or related asset grouping to the carrying
amount of such assets. If the expected future cash flows do not
exceed the carrying value of the asset or assets being reviewed,
an impairment loss is recognized based on the excess of the
carrying amount of the impaired assets over their fair value.
In assessing the fair value of its other intangibles, the
Company must make assumptions regarding estimated future cash
flows and other factors to determine the fair value of the
respective assets. If these estimates or the related assumptions
change, the Company may be required to record impairment charges
for these assets in the future.
Investments
in Affiliates
Investments in affiliates in which the Company does not exercise
control but has significant influence are accounted for using
the equity method of accounting. If the fair value of an
investment in an affiliate is below its carrying value and the
difference is deemed to be other than temporary, the difference
between the fair value and the carrying value is charged to
earnings.
Investments in affiliated companies accounted for under the
equity method consist of a 24.5% common stock ownership interest
in Alliance Compressor LLC, a domestic joint venture engaged in
the manufacture and sale of compressors; a 50% common stock
ownership in Frigus-Bohn S.A. de C.V., a Mexican joint venture
that produces unit coolers and condensing units; and a 13.05%
common stock ownership interest in Kulthorn Kirby Public Company
Limited, a Thailand company engaged in the manufacture of
compressors for refrigeration applications.
As of December 31, 2004, the Company held a 45% common
stock ownership interest in Outokumpu Heatcraft, a joint venture
engaged in the manufacture and sale of heat transfer components,
primarily coils. The Company accounted for its investment in
Outokumpu Heatcraft using the equity method. On June 7,
2005, the Company completed the sale of its interest in the heat
transfer joint venture to Outokumpu Copper Products OY of
Finland (Outokumpu) for $39.3 million pursuant
to which it recorded a pre-tax gain of $9.3 million, which
is included in (Gains), Losses and Other Expenses, net in the
accompanying Consolidated Statements of Operations. In
connection with the sale, the Company entered into an agreement
with Outokumpu related to joint remediation of certain existing
environmental matters. In conjunction with the new agreement,
the Company updated its estimate
48
LENNOX
INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
of its portion of the on-going remediation costs and recorded
expenses of $2.2 million for the year ended
December 31, 2005.
The Company recorded $10.6 million, $8.0 million and
$14.2 million of equity in the earnings of these affiliates
for the years ended December 31, 2007, 2006 and 2005,
respectively, and included these amounts in Equity in Earnings
of Unconsolidated Affiliates in the accompanying Consolidated
Statements of Operations. The carrying amount of investments in
affiliates as of December 31, 2007 and 2006 of
$52.6 million and $52.4 million, respectively, is
included in long-term Other Assets in the accompanying
Consolidated Balance Sheets.
Product
Warranties
For some of LIIs HVAC products, the Company provides
warranty terms ranging from one to 20 years to customers
for certain components such as compressors or heat exchangers.
For select products, LII has provided lifetime warranties for
heat exchangers. A liability for estimated warranty expense is
recorded on the date that revenue is recognized. The
Companys estimate of future warranty costs is determined
for each product line. The number of units that are expected to
be repaired or replaced is determined by applying the estimated
failure rate, which is generally based on historical experience,
to the number of units that have been sold and are still under
warranty. The estimated units to be repaired under warranty are
multiplied by the average cost to repair or replace such
products to determine the estimated future warranty cost. The
Company does not discount product warranty liabilities as the
amounts are not fixed and the timing of future cash payments is
neither fixed nor reliably determinable. The Company also
provides for specifically identified warranty obligations. The
Companys estimated future warranty cost is subject to
adjustment from time to time depending on changes in actual
failure rate and cost experience. Subsequent costs incurred for
warranty claims serve to reduce the accrued product warranty
liability.
Total liabilities for estimated warranty expense were
$98.4 million and $104.7 million as of
December 31, 2007 and 2006, respectively, and are included
in the following captions on the accompanying Consolidated
Balance Sheets (in millions):
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
Accrued Expenses
|
|
$
|
33.8
|
|
|
$
|
27.2
|
|
Other Liabilities
|
|
|
64.6
|
|
|
|
77.5
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
98.4
|
|
|
$
|
104.7
|
|
|
|
|
|
|
|
|
|
|
49
LENNOX
INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The changes in the carrying amount of the Companys total
warranty liabilities for the years ended December 31, 2007
and 2006 were as follows (in millions):
|
|
|
|
|
Total warranty liability as of December 31, 2005
|
|
$
|
80.9
|
|
Errors in estimates associated with pre-existing liabilities
recorded under the provisions of SAB No. 108
|
|
|
19.6
|
|
Payments made in 2006
|
|
|
(33.2
|
)
|
Changes resulting from issuance of new warranties
|
|
|
33.6
|
|
Changes in estimates associated with pre-existing liabilities
|
|
|
3.2
|
|
Changes in foreign currency translation rates
|
|
|
0.6
|
|
|
|
|
|
|
Total warranty liability as of December 31, 2006
|
|
$
|
104.7
|
|
|
|
|
|
|
Payments made in 2007
|
|
|
(29.5
|
)
|
Changes resulting from issuance of new warranties
|
|
|
31.2
|
|
Changes in estimates associated with pre-existing liabilities
|
|
|
6.4
|
|
Changes in foreign currency translation rates
|
|
|
2.5
|
|
Warranty program adjustment(1)
|
|
|
(16.9
|
)
|
|
|
|
|
|
Total warranty liability as of December 31, 2007
|
|
$
|
98.4
|
|
|
|
|
|
|
|
|
|
(1) |
|
In the fourth quarter of 2007, the Company made a change to the
way it fulfills warranty obligations on the Pulse furnace, which
was produced from
1982-1999.
Under the terms of the revised warranty program, the customer
pays a discounted price for a warranty replacement unit upon
failure of the heat exchanger. |
See further discussion on the adjustments recorded under the
provisions of Staff Accounting Bulletin No. 108,
Considering the Effects of Prior Year Misstatements when
Quantifying Misstatements in Current Year Financial Statements
(SAB No. 108), below.
Adoption
of SAB No. 108
During the fourth quarter of 2006, the Company adopted
SAB No. 108. The transition provisions of
SAB No. 108 permit the Company to adjust for the
cumulative effect in retained earnings for immaterial errors
relating to prior periods. In accordance with
SAB No. 108, the Company reduced retained earnings as
of January 1, 2006 by $12.4 million to reflect
understatements in product warranty liabilities caused by
misstatements that occurred in prior years. The resulting
adjustments do not affect previously reported cash flows from
operations and the impact on prior years financial
position and results of operations was immaterial. The total
cumulative impact is as follows (in millions):
|
|
|
|
|
Retained earnings
|
|
$
|
12.4
|
|
Deferred income taxes
|
|
|
7.2
|
|
Product warranty liability
|
|
|
(19.6
|
)
|
Pensions
and Postretirement Benefits
LII has domestic and foreign pension plans covering nearly all
employees. The Company also maintains an unfunded postretirement
benefit plan, which provides certain medical and life insurance
benefits to eligible employees.
In September 2006, the FASB issued Statement of Financial
Accounting Standards No. 158, Employers Accounting
for Defined Benefit Pension and Other Postretirement Plans (an
amendment of FASB Statements No. 87, 88, 106, and 132R)
(SFAS No. 158), which requires plan
sponsors of defined benefit pension and other
50
LENNOX
INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
postretirement benefit plans (collectively, postretirement
benefit plans) to recognize the funded status of their
postretirement benefit plans in the statement of financial
position, measure the fair value of plan assets and benefit
obligations as of the date of the fiscal year-end statement of
financial position, and provide additional disclosures. On
December 31, 2006, the Company adopted the recognition and
disclosure provisions of SFAS No. 158. The effect of
adopting SFAS No. 158 on the Companys financial
condition as of December 31, 2006 has been included in the
accompanying consolidated financial statements.
The Companys pension plans are accounted for under the
provisions of SFAS No. 158. The postretirement benefit
plan is accounted for under the provisions of
SFAS No. 106, Employers Accounting for
Postretirement Benefits Other than Pensions, as amended by
SFAS No. 158.
The benefit plan assets and liabilities included in the
accompanying consolidated financial statements and related notes
reflect assumptions to the long-range performance of the
Companys benefit plans. Should actual results differ from
managements estimates, revisions to the benefit plan
assets and liabilities would be required.
Self-Insurance
The Company uses a combination of third party insurance and
self-insurance plans (large deductible or captive) to provide
protection against claims relating to workers
compensation, general liability, product liability, property
damage, aviation liability, directors and officers
liability, auto liability, physical damage and other exposures.
LII maintains third party coverage for risks not retained within
its large deductible or captive insurance plans.
Self-insurance expense and liabilities are determined based on
the Companys historical claims information, as well as
industry factors and trends in the level of such claims and
payments.
As of December 31, 2007, self-insurance and captive
reserves, calculated on an undiscounted basis, represent the
best estimate of the future payments to be made on losses
reported and unreported for 2007 and prior years. The majority
of LIIs self-insured risks (excluding auto liability and
physical damage) have relatively long payout patterns. The
Company does not discount its self-insurance or captive reserves.
Actual payments for claims reserved as of December 31,
2007 may vary depending on various factors including the
development and ultimate settlement of reported and unreported
claims. To the extent actuarial assumptions change and claims
experience rates differ from historical rates, the
Companys liability may change.
Environmental
Obligations
The Company accounts for environmental obligations in accordance
with American Institute of Certified Public Accountants
Statement of Position
96-1,
Environmental Remediation Liabilities. The Company
accrues for losses associated with environmental obligations
when such losses are probable and reasonably estimable. Accruals
for estimated losses from environmental obligations generally
are recognized no later than completion of the remedial
feasibility study. Such accruals are adjusted as further
information develops or circumstances change. Costs of future
expenditures for environmental obligations are discounted to
their present value when the amounts are fixed and the timing of
future cash payments are reliably determinable. Recoveries of
environmental remediation and containment costs from other
parties are recognized as assets when their receipt is deemed
probable. For more information see Note 19.
Derivatives
The Company uses futures contracts and fixed forward contracts
to mitigate the exposure to volatility in commodity prices. The
Company hedges only exposures in the ordinary course of business
and does not hold or trade derivatives for profit. All
derivatives are recognized in the Consolidated Balance Sheet at
fair value and are reported in Current Other Assets, Long-term
Other Assets, Accrued Expenses, or Other Liabilities.
Classification of
51
LENNOX
INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
each hedging instrument is based upon whether the maturity of
the instrument is less than or greater than 12 months.
Instruments that meet established accounting criteria are
formally designated as cash flow hedges. The Company accounts
for instruments that qualify as cash flow hedges utilizing
Statement of Financial Accounting Standards No. 133,
Accounting for Derivative Instruments and Hedging
Activities, as amended (SFAS No. 133).
However, the Company may enter into instruments that
economically hedge certain of its risks, even though hedge
accounting does not apply or the Company elects not to apply
hedge accounting under SFAS No. 133. In these cases,
there exists a natural hedging relationship in which changes in
the fair value of the instrument, which are recognized currently
in net income, act as an economic offset to changes in the fair
value of the underlying hedged item(s). For more information see
Note 10.
Income
Taxes
Income taxes are accounted for under the asset and liability
method. Deferred tax assets and liabilities are recognized for
the future tax consequences attributable to differences between
the financial statement carrying amounts of existing assets and
liabilities and their respective tax bases and operating loss
and tax credit carry forwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to
apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect
of a change in tax rates on deferred tax assets and liabilities
is recognized in income in the period that includes the
enactment date.
In June 2006, the FASB issued FASB Interpretation No. 48,
Accounting for Uncertainty in Income Taxes an
Interpretation of FASB Statement 109
(FIN No. 48). FIN No. 48
clarifies the accounting for income taxes by prescribing a
minimum threshold that a tax position is required to meet before
being recognized in the financial statements.
FIN No. 48 also provides guidance on derecognition,
measurement, classification, interest and penalties, accounting
for interim periods, disclosure and transition. Effective
January 1, 2007, the Company adopted FIN No. 48.
As a result of the adoption of FIN No. 48, the Company
recognized a $0.9 million decrease in the liability for
unrecognized tax benefits, which was accounted for as an
increase to the January 1, 2007 retained earnings balance.
For more information see Note 15.
The Company recognizes interest and penalties accrued related to
unrecognized tax benefits in income tax expense in accordance
with FIN No. 48.
Revenue
Recognition
The Companys Residential Heating & Cooling,
Commercial Heating & Cooling and Refrigeration
segments revenue recognition practices depend upon the
shipping terms for each transaction. Shipping terms are
primarily FOB Shipping Point and, therefore, revenues are
recognized for these transactions when products are shipped to
customers and title passes. However, certain customers in the
Companys smaller operations, primarily outside of North
America, have shipping terms where title and risk of ownership
do not transfer until the product is delivered to the customer.
For these transactions, revenues are recognized on the date that
the product is received and accepted by such customers. LII has
experienced returns for miscellaneous reasons and records a
reserve for these returns based on historical experience for
such returns at the time the Company recognizes revenue. The
Companys historical rate of returns is insignificant as a
percentage of sales.
The Companys Service Experts segment recognizes sales,
installation, maintenance and repair revenues at the time the
services are completed. The Service Experts segment also
provides HVAC system design and installation services under
fixed-price contracts, which may extend up to one year. Revenue
for these services is recognized using the
percentage-of-completion method, based on the percentage of
incurred contract costs-to-date in relation to total estimated
contract costs, after giving effect to the most recent estimates
of total cost. The effect of changes to total estimated contract
revenue or cost is recognized in the period such changes are
determined. Provisions for estimated losses on individual
contracts are made in the first period in which the loss becomes
probable.
52
LENNOX
INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The Company engages in cooperative advertising, customer rebate,
cash discount and other miscellaneous programs that result in
payments or credits being issued to its customers. The
Companys policy is to record the discounts and incentives
as a reduction of sales when the sales are recorded, with the
exception of certain cooperative advertising expenditures that
are charged to Selling, General and Administrative
(SG&A) Expenses. The amounts charged to
SG&A Expenses were approximately $10.2 million,
$11.8 million and $11.7 million for the years ended
December 31, 2007, 2006 and 2005, respectively. Under these
cooperative advertising programs, the Company receives, or will
receive, an identifiable benefit (goods or services) in exchange
for the consideration given. The identified benefit is
sufficiently separable from the customers purchase of the
Companys products such that the Company could have entered
into an exchange transaction with a party other than the
customer in order to receive the benefit. Additionally, the
Company can reasonably estimate the fair value of the benefit
that the Company receives, or will receive, and the amount of
the consideration paid by the Company does not exceed the
estimated fair value of the benefit received.
Cost
of Goods Sold
The principal components of cost of goods sold in the
Companys manufacturing operations are component costs, raw
materials, factory overhead, labor and estimated costs of
warranty expense. In the Companys Service Experts segment,
the principal components of cost of goods sold are equipment,
parts and supplies and labor. These principal components of
costs include inbound freight charges, purchasing, receiving and
inspection costs, internal transfer costs and warehousing costs
through the manufacturing process.
Selling,
General and Administrative Expenses
SG&A expenses include (a) all other payroll and
benefit costs; (b) advertising; (c) general selling
and administrative costs, which include research and development
and information technology costs; and (d) other selling,
general and administrative related costs such as insurance,
travel, and non-production depreciation and rent.
Stock-Based
Compensation
Effective July 1, 2005, the Company adopted the fair value
recognition provisions of Statement of Financial Accounting
Standards No. 123R, Share-Based Payment
(SFAS No. 123R), using the
modified-prospective-transition method. Under that transition
method, compensation cost recognized in the second half of 2005
included: (a) compensation cost for all share-based
payments granted prior to, but not yet vested as of July 1,
2005, based on the grant date fair value estimated in accordance
with the original provisions of Statement of Financial
Accounting Standards No. 123, Accounting for Stock-Based
Compensation (SFAS No. 123), and
(b) compensation cost for all share-based payments granted
subsequent to July 1, 2005, based on the grant-date fair
value estimated in accordance with the provisions of
SFAS No. 123R. Prior to July 1, 2005, the Company
accounted for stock-based awards under the intrinsic value
method, which follows the recognition and measurement principles
of Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees and Related
Interpretations (APB No. 25), as permitted
by SFAS No. 123. In accordance with
SFAS No. 123R, results for prior periods have not been
restated. Compensation expense of $21.0 million,
$24.4 million and $28.8 million was recognized for the
years ended December 31, 2007, 2006 and 2005, respectively,
and is included in SG&A Expenses in the accompanying
Consolidated Statements of Operations. The cumulative effect of
the change in accounting related to the adoption of
SFAS No. 123R was not material for the year ended
December 31, 2005.
Prior to the adoption of SFAS No. 123R, the Company
presented all tax benefits of deductions resulting from the
exercise of stock options as operating cash flows in the
Consolidated Statements of Cash Flows. SFAS No. 123R
requires the cash flows from the tax benefits of tax deductions
in excess of the compensation cost recognized for those options
(excess tax benefits) to be classified as financing
cash flows. The adoption of SFAS No. 123R resulted in
excess tax benefits of $17.9 million, $11.3 million
and $5.1 million being classified as a financing cash
53
LENNOX
INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
inflow in the accompanying Consolidated Statements of Cash Flows
for the years ended December 31, 2007, 2006 and 2005,
respectively.
Had the Company used the fair value based accounting method for
stock-based compensation expense described by
SFAS No. 123 for the period beginning January 1,
2005 through June 30, 2005, the Companys diluted net
income (loss) per common and equivalent share for the year ended
December 31, 2005, would have been as set forth in the
table below (in millions, except per share data). As of
July 1, 2005, the Company adopted SFAS No. 123R
thereby eliminating pro forma disclosure for periods following
such adoption. For purposes of this pro forma disclosure, the
value of the options is estimated using a Black-Scholes-Merton
option valuation model and amortized to expense over the
options vesting periods.
|
|
|
|
|
|
|
For the Year Ended
|
|
|
|
December 31, 2005
|
|
|
Net income, as reported
|
|
$
|
150.7
|
|
Add: Reported stock-based compensation expense, net of taxes
|
|
|
18.4
|
|
Deduct: Fair value based compensation expense, net of taxes
|
|
|
(19.4
|
)
|
|
|
|
|
|
Net income (loss), pro-forma
|
|
$
|
149.7
|
|
|
|
|
|
|
Earnings per share:
|
|
|
|
|
Basic, as reported
|
|
$
|
2.35
|
|
Basic, pro forma
|
|
$
|
2.33
|
|
Diluted, as reported
|
|
$
|
2.11
|
|
Diluted, pro forma
|
|
$
|
2.09
|
|
Research
and Development
Research and development costs are expensed as incurred. The
Company expended approximately $43.0 million,
$42.2 million and $40.3 million for the years ended
December 31, 2007, 2006 and 2005, respectively, for
research and product development activities. Research and
development costs are included in SG&A Expenses in the
accompanying Consolidated Statements of Operations.
Advertising
The costs of advertising, promotion and marketing programs are
charged to operations in the period incurred. Expenses relating
to advertising, promotions and marketing programs were
$73.8 million, $79.0 million and $79.6 million
for the years ended December 31, 2007, 2006 and 2005,
respectively, and are included in SG&A Expenses in the
accompanying Consolidated Statements of Operations.
Leases
The Company has various leases relating principally to the use
of operating facilities and vehicles. Rent expense for 2007,
2006 and 2005 was approximately $64.4 million,
$54.1 million and $52.9 million, respectively. Leases
with step rent provisions and escalation clauses are accounted
for on a straight-line basis. Minimum lease payments that are
dependent on an existing index or rate, such as the consumer
price index or prime interest rate, are included based on the
index or rate existing at the inception of the lease and are
adjusted for subsequent changes in the index or rate as they
occur.
54
LENNOX
INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(Gains),
Losses and Other Expenses, net
(Gains), losses and other expenses, net were
($6.4) million, ($46.6) million and
($47.5) million for the years ended December 31, 2007,
2006 and 2005, respectively and included the following (in
millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Realized gains on settled futures contracts not designated as
cash flow hedges
|
|
$
|
(3.8
|
)
|
|
$
|
(66.0
|
)
|
|
$
|
(16.7
|
)
|
Ineffective portion of gains on settled cash flow hedges
|
|
|
(0.1
|
)
|
|
|
|
|
|
|
|
|
Unrealized losses (gains) on unsettled futures contracts not
designated as cash flow hedges
|
|
|
3.1
|
|
|
|
20.8
|
|
|
|
(23.3
|
)
|
Ineffective portion of losses on unsettled cash flow hedges
|
|
|
0.2
|
|
|
|
|
|
|
|
|
|
Foreign currency exchange (gains) losses
|
|
|
(6.2
|
)
|
|
|
(0.9
|
)
|
|
|
2.7
|
|
Gain on sale of LIIs 45% interest in its heat transfer
joint venture to Outokumpu
|
|
|
|
|
|
|
|
|
|
|
(9.3
|
)
|
Estimated on-going remediation costs in conjunction with the
joint remediation agreement LII entered into with Outokumpu
|
|
|
|
|
|
|
|
|
|
|
2.2
|
|
Other items, net
|
|
|
0.4
|
|
|
|
(0.5
|
)
|
|
|
(3.1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Gains), losses and other expenses, net
|
|
$
|
(6.4
|
)
|
|
$
|
(46.6
|
)
|
|
$
|
(47.5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
Expense, net
The Company incurred $10.7 million, $10.1 million, and
$19.6 million in interest expense, net of capitalized
interest, while earning $3.9 million, $5.7 million,
and $4.2 million in interest income for the years ended
December 31, 2007, 2006 and 2005, respectively.
Translation
of Foreign Currencies
All assets and liabilities of foreign subsidiaries and joint
ventures are translated into U.S. dollars using rates of
exchange in effect at the balance sheet date. Revenues and
expenses are translated at average exchange rates during the
respective years. The unrealized translation gains and losses
are included in AOCI in the accompanying Consolidated Balance
Sheets. Transaction gains and losses are included in (Gains),
Losses, and Other Expenses, net in the accompanying Consolidated
Balance Sheets.
Use of
Estimates
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
Reclassifications
Certain amounts have been reclassified from the prior year
presentation to conform to the current year presentation.
55
LENNOX
INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Components of inventories are as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
Finished goods
|
|
$
|
247.7
|
|
|
$
|
223.2
|
|
Work in process
|
|
|
10.5
|
|
|
|
8.1
|
|
Raw materials and repair parts
|
|
|
137.9
|
|
|
|
131.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
396.1
|
|
|
|
362.4
|
|
Excess of current cost over
last-in,
first-out cost
|
|
|
(70.4
|
)
|
|
|
(56.9
|
)
|
|
|
|
|
|
|
|
|
|
Total inventories
|
|
$
|
325.7
|
|
|
$
|
305.5
|
|
|
|
|
|
|
|
|
|
|
Repair parts are primarily utilized in service operations and to
fulfill the Companys warranty obligations.
|
|
4.
|
Property,
Plant and Equipment:
|
Components of property, plant and equipment are as follows (in
millions):
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
Land
|
|
$
|
37.1
|
|
|
$
|
32.7
|
|
Buildings and improvements
|
|
|
209.2
|
|
|
|
181.6
|
|
Machinery and equipment
|
|
|
551.0
|
|
|
|
526.6
|
|
Construction in progress and equipment not yet in service
|
|
|
42.4
|
|
|
|
36.1
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
839.7
|
|
|
|
777.0
|
|
Less-accumulated depreciation
|
|
|
(521.8
|
)
|
|
|
(488.8
|
)
|
|
|
|
|
|
|
|
|
|
Property, plant and equipment, net
|
|
$
|
317.9
|
|
|
$
|
288.2
|
|
|
|
|
|
|
|
|
|
|
The changes in the carrying amount of goodwill related to
continuing operations for the years ended December 31, 2007
and 2006, by segment, are as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of
|
|
|
|
|
|
Balance as of
|
|
|
|
|
|
Balance as of
|
|
|
|
December 31,
|
|
|
|
|
|
December 31,
|
|
|
|
|
|
December 31,
|
|
|
|
2005
|
|
|
Changes(1)
|
|
|
2006
|
|
|
Changes(2)
|
|
|
2007
|
|
|
Segment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential Heating & Cooling
|
|
$
|
26.1
|
|
|
$
|
7.8
|
|
|
$
|
33.9
|
|
|
$
|
(0.2
|
)
|
|
$
|
33.7
|
|
Commercial Heating & Cooling
|
|
|
28.2
|
|
|
|
1.9
|
|
|
|
30.1
|
|
|
|
2.0
|
|
|
|
32.1
|
|
Service Experts
|
|
|
98.2
|
|
|
|
(0.3
|
)
|
|
|
97.9
|
|
|
|
14.6
|
|
|
|
112.5
|
|
Refrigeration
|
|
|
71.4
|
|
|
|
6.5
|
|
|
|
77.9
|
|
|
|
6.6
|
|
|
|
84.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
223.9
|
|
|
$
|
15.9
|
|
|
$
|
239.8
|
|
|
$
|
23.0
|
|
|
$
|
262.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Changes in 2006 primarily relate to insignificant business
acquisitions and changes in foreign currency translation rates. |
|
(2) |
|
Changes in 2007 primarily relate to changes in foreign currency
translation rates. |
56
LENNOX
INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
6.
|
Current
Accrued Expenses:
|
Significant components of current accrued expenses as of
December 31, 2007 and 2006 are presented below (in
millions):
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
Accrued wages
|
|
$
|
109.9
|
|
|
$
|
113.4
|
|
Insurance reserves
|
|
|
66.2
|
|
|
|
63.0
|
|
Deferred income
|
|
|
38.8
|
|
|
|
36.6
|
|
Accrued warranties
|
|
|
33.8
|
|
|
|
27.2
|
|
Accrued rebates and promotions
|
|
|
35.5
|
|
|
|
33.9
|
|
Other
|
|
|
67.9
|
|
|
|
52.2
|
|
|
|
|
|
|
|
|
|
|
Total current accrued expenses
|
|
$
|
352.1
|
|
|
$
|
326.3
|
|
|
|
|
|
|
|
|
|
|
|
|
7.
|
Long-Term
Debt and Lines of Credit:
|
The following tables summarize the Companys outstanding
debt obligations and the classification in the accompanying
Consolidated Balance Sheet as of December 31, 2007 and 2006
(in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Description of Obligation
|
|
|
|
|
|
|
|
|
|
|
|
|
as of December 31, 2007
|
|
Short-Term Debt
|
|
|
Current Maturities
|
|
|
Long-Term Maturities
|
|
|
Total
|
|
|
Domestic promissory notes(1)
|
|
$
|
|
|
|
$
|
36.1
|
|
|
$
|
35.0
|
|
|
$
|
71.1
|
|
Domestic revolving credit facility
|
|
|
|
|
|
|
|
|
|
|
131.0
|
|
|
|
131.0
|
|
Other foreign obligations
|
|
|
4.8
|
|
|
|
0.3
|
|
|
|
0.7
|
|
|
|
5.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Debt
|
|
$
|
4.8
|
|
|
$
|
36.4
|
|
|
$
|
166.7
|
|
|
$
|
207.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Description of Obligation
|
|
|
|
|
|
|
|
|
|
|
|
|
as of December 31, 2006
|
|
Short-Term Debt
|
|
|
Current Maturities
|
|
|
Long-Term Maturities
|
|
|
Total
|
|
|
Domestic promissory notes(1)
|
|
$
|
|
|
|
$
|
11.1
|
|
|
$
|
96.1
|
|
|
$
|
107.2
|
|
Domestic revolving credit facility
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other foreign obligations
|
|
|
1.0
|
|
|
|
0.3
|
|
|
|
0.7
|
|
|
|
2.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Debt
|
|
$
|
1.0
|
|
|
$
|
11.4
|
|
|
$
|
96.8
|
|
|
$
|
109.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Domestic promissory notes as of December 31, 2007 and 2006
consisted of the following (in millions): |
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
6.73% promissory notes, payable $11.1 annually through 2008
|
|
$
|
11.1
|
|
|
$
|
22.2
|
|
6.75% promissory notes, payable in 2008
|
|
|
25.0
|
|
|
|
50.0
|
|
8.00% promissory note, payable in 2010
|
|
|
35.0
|
|
|
|
35.0
|
|
57
LENNOX
INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
As of December 31, 2007, the aggregate amounts of required
principal payments on long-term debt are as follows (in
millions):
|
|
|
|
|
2008
|
|
$
|
36.4
|
|
2009
|
|
|
0.3
|
|
2010
|
|
|
35.3
|
|
2011
|
|
|
0.1
|
|
2012
|
|
|
131.0
|
|
Thereafter
|
|
|
|
|
On October 12, 2007, the Company entered into the Third
Amended and Restated Revolving Credit Facility Agreement (the
Credit Agreement),which contains a
$650.0 million domestic revolving credit facility. The
Credit Agreement replaced the Companys previous domestic
revolving credit facility, the Second Amended and Restated
Credit Facility Agreement, dated as of July 8, 2005. The
Company made a $25 million prepayment on a domestic
promissory note to facilitate the amendment of the Credit
Agreement, resulting in a make-whole payment of
$0.2 million which was recognized as interest expense.
As of December 31, 2007, the Company had outstanding
borrowings of $131.0 million under the $650.0 million
domestic revolving credit facility and $118.4 million was
committed to standby letters of credit. All of the remaining
$400.6 million was available for future borrowings after
consideration of covenant limitations. The facility matures in
October 2012.
The domestic revolving credit facility includes a subfacility
for swingline loans of up to $50 million and provides for
the issuance of letters of credit for the full amount of the
credit facility. The revolving loans bear interest at either
(i) the Eurodollar rate plus a margin of between 0.5% and
1% that is based on the Companys Debt to Adjusted EBITDA
Ratio (as defined in the Credit Agreement) or (ii) the
higher of (a) the Federal Funds Rate plus 0.5% and
(b) the prime rate set by Bank of America, N.A. The Company
may prepay the revolving loans at any time without premium or
penalty, other than customary breakage costs in the case of
Eurodollar loans. The Company will pay a facility fee in the
range of 0.125% to 0.25% based on the Companys Debt to
Adjusted EBITDA Ratio. The Company will also pay a letter of
credit fee in the range of 0.5% to 1% based on the
Companys Debt to Adjusted EBITDA Ratio, as well as an
additional issuance fee of 0.125% for letters of credit issued.
The Credit Agreement contains financial covenants relating to
leverage and interest coverage. Other covenants contained in the
Credit Agreement restrict, among other things, mergers, asset
dispositions, guarantees, debt, liens, acquisitions,
investments, affiliate transactions and the Companys
ability to make restricted payments.
The Credit Agreement contains customary events of default. If
any event of default occurs and is continuing, lenders with a
majority of the aggregate commitments may require the
administrative agent to terminate the Companys right to
borrow under the Credit Agreement and accelerate amounts due
under the Credit Agreement (except for a bankruptcy event of
default, in which case such amounts will automatically become
due and payable and the lenders commitments will
automatically terminate).
In addition to the financial covenants contained in the Credit
Agreement outlined above, LIIs domestic promissory notes
contain certain financial covenant restrictions. As of
December 31, 2007, LII believes it was in compliance with
all covenant requirements. The Companys revolving credit
facility and promissory notes are guaranteed by the
Companys material subsidiaries.
The Company has additional borrowing capacity through several
foreign facilities governed by agreements between the Company
and a syndicate of banks, used primarily to finance seasonal
borrowing needs of its foreign subsidiaries. LII had
$5.8 million and $2.0 million of obligations
outstanding through its foreign subsidiaries as of
December 31, 2007 and 2006, respectively.
58
LENNOX
INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Under a revolving period asset securitization arrangement, the
Company is eligible to transfer beneficial interests in a
portion of its trade accounts receivable to third parties in
exchange for cash. The Companys continued involvement in
the transferred assets is limited to servicing. These transfers
are accounted for as sales rather than secured borrowings. The
fair values assigned to the retained and transferred interests
are based primarily on the receivables carrying value
given the short term to maturity and low credit risk. As of
December 31, 2007 and 2006, the Company had not sold any
beneficial interests in accounts receivable.
On September 7, 2005, the Company called for redemption of
all of its outstanding 6.25% convertible subordinated notes
(Convertible Notes) on October 7, 2005. The
redemption price was 103.571% of the principal amount. As of
September 7, 2005, there was $143.75 million aggregate
principal amount of Convertible Notes outstanding, which could
be converted into the Companys common stock at a rate of
55.2868 shares of common stock per $1,000 principal amount
of Convertible Notes at any time before the close of business on
the business day prior to the redemption date. As of
October 6, 2005, the holders of all of the Convertible
Notes had converted the Convertible Notes into an aggregate of
approximately 7.9 million shares of common stock.
|
|
8.
|
Fair
Value of Financial Instruments:
|
The carrying amounts of cash and cash equivalents, accounts and
notes receivable, net, accounts payable and other current
liabilities approximate fair value due to the short maturities
of these instruments. The fair values of each of the
Companys long-term debt instruments are based on the
quoted market prices for the same issues or on the amount of
future cash flows associated with each instrument using current
market rates for debt instruments of similar maturities and
credit risk. The estimated fair value of non-convertible
long-term debt (including current maturities) was
$204.5 million and $111.1 million as of
December 31, 2007 and 2006, respectively. The fair values
presented are estimates and are not necessarily indicative of
amounts for which the Company could settle such instruments
currently or indicative of the intent or ability of the Company
to dispose of or liquidate them.
|
|
9.
|
Employee
Benefit Plans:
|
Profit
Sharing Plans
The Company maintains noncontributory profit sharing plans for
its eligible domestic and Canadian salaried employees. These
plans are discretionary, as the Companys contributions are
determined annually by the Board of Directors. Provisions for
contributions to the plans totaled $8.0 million,
$12.0 million and $14.0 million in the years ended
December 31, 2007, 2006 and 2005, respectively. The Company
also sponsors several 401(k) plans with employer
contribution-matching requirements. The Company contributed
$1.7 million, $1.6 million and $1.6 million in
the years ended December 31, 2007, 2006 and 2005,
respectively, to these 401(k) plans.
Pension
and Postretirement Benefit Plans
The Company has domestic and foreign pension plans covering
nearly all employees. The Company also maintains an unfunded
postretirement benefit plan, which provides certain medical and
life insurance benefits to eligible employees. In 2006, the
Company amended the postretirement benefit plan to
(i) eliminate post-65 coverage for current and future
nonunion retirees and (ii) gradually shift the pre-65
medical coverage cost from the Company to participants starting
in 2007 such that by 2010, pre-65 retirees would be paying 100%
of the cost. As a result of this amendment, the postretirement
plan would still exist in 2010 and eligible nonunion
participants would still be able to receive group coverage
rates, however the Company would no longer be paying any portion
of the participants premiums.
59
LENNOX
INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following tables set forth amounts recognized in the
Companys financial statements and the plans funded
status for 2007 and 2006 (dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Benefits
|
|
|
Other Benefits
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
Accumulated benefit obligation
|
|
$
|
252.1
|
|
|
$
|
264.3
|
|
|
$
|
N/A
|
|
|
$
|
N/A
|
|
Changes in projected benefit obligation:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefit obligation at beginning of year
|
|
|
269.4
|
|
|
|
269.7
|
|
|
|
14.9
|
|
|
|
27.1
|
|
Service cost
|
|
|
6.9
|
|
|
|
7.1
|
|
|
|
0.6
|
|
|
|
1.2
|
|
Interest cost
|
|
|
14.9
|
|
|
|
14.8
|
|
|
|
0.8
|
|
|
|
1.4
|
|
Plan participants contributions
|
|
|
0.1
|
|
|
|
0.1
|
|
|
|
1.5
|
|
|
|
2.1
|
|
Amendments
|
|
|
0.6
|
|
|
|
|
|
|
|
|
|
|
|
(15.9
|
)
|
Actuarial loss (gain)
|
|
|
3.5
|
|
|
|
(8.2
|
)
|
|
|
3.7
|
|
|
|
3.7
|
|
Settlements and curtailments
|
|
|
(20.3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefits paid
|
|
|
(14.0
|
)
|
|
|
(14.1
|
)
|
|
|
(3.8
|
)
|
|
|
(4.7
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefit obligation at end of year
|
|
|
261.1
|
|
|
|
269.4
|
|
|
|
17.7
|
|
|
|
14.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Changes in plan assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of plan assets at beginning of year
|
|
$
|
218.4
|
|
|
$
|
200.1
|
|
|
$
|
|
|
|
$
|
|
|
Actual return on plan assets
|
|
|
11.9
|
|
|
|
19.6
|
|
|
|
|
|
|
|
|
|
Employer contribution
|
|
|
6.2
|
|
|
|
8.3
|
|
|
|
2.3
|
|
|
|
2.6
|
|
Plan participants contributions
|
|
|
0.1
|
|
|
|
0.1
|
|
|
|
1.5
|
|
|
|
2.1
|
|
Effect of exchange rates
|
|
|
2.7
|
|
|
|
1.3
|
|
|
|
|
|
|
|
|
|
Annuity purchase
|
|
|
(2.2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefits paid
|
|
|
(12.5
|
)
|
|
|
(11.0
|
)
|
|
|
(3.8
|
)
|
|
|
(4.7
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of plan assets at end of year
|
|
|
224.6
|
|
|
|
218.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Funded status / net amount recognized
|
|
$
|
(36.5
|
)
|
|
$
|
(51.0
|
)
|
|
$
|
(17.7
|
)
|
|
$
|
(14.9
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net amount recognized consists of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liability
|
|
$
|
(1.7
|
)
|
|
$
|
(1.4
|
)
|
|
$
|
(1.5
|
)
|
|
$
|
(2.0
|
)
|
Non-current liability
|
|
|
(34.8
|
)
|
|
|
(49.6
|
)
|
|
|
(16.2
|
)
|
|
|
(12.9
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net amount recognized
|
|
$
|
(36.5
|
)
|
|
$
|
(51.0
|
)
|
|
$
|
(17.7
|
)
|
|
$
|
(14.9
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Included in the Non-Current Pension Liability on the
Consolidated Balance Sheets was one plan with an over-funded
position of $3.4 million and $3.8 million as of
December 31, 2007 and 2006, respectively.
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
Pension plans with a benefit obligation in excess of plan
assets:
|
|
|
|
|
|
|
|
|
Projected benefit obligation
|
|
$
|
154.4
|
|
|
$
|
163.6
|
|
Accumulated benefit obligation
|
|
|
148.4
|
|
|
|
155.8
|
|
Fair value of plan assets
|
|
|
114.6
|
|
|
|
105.8
|
|
The Companys
U.S.-based
pension plans comprised approximately 85% of the projected
benefit obligation and 87% of plan assets as of
December 31, 2007.
60
LENNOX
INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Benefits
|
|
|
Other Benefits
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Components of net periodic benefit cost as of December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service cost
|
|
$
|
6.9
|
|
|
$
|
7.1
|
|
|
$
|
7.0
|
|
|
$
|
0.6
|
|
|
$
|
1.2
|
|
|
$
|
1.2
|
|
Interest cost
|
|
|
14.9
|
|
|
|
14.8
|
|
|
|
13.1
|
|
|
|
0.8
|
|
|
|
1.4
|
|
|
|
1.6
|
|
Expected return on plan assets
|
|
|
(17.2
|
)
|
|
|
(16.0
|
)
|
|
|
(13.7
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of prior service cost
|
|
|
0.9
|
|
|
|
0.9
|
|
|
|
1.0
|
|
|
|
(1.7
|
)
|
|
|
(0.6
|
)
|
|
|
(0.5
|
)
|
Recognized actuarial loss
|
|
|
4.8
|
|
|
|
6.3
|
|
|
|
3.5
|
|
|
|
1.0
|
|
|
|
0.8
|
|
|
|
1.0
|
|
Recognized transition obligation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Settlements and curtailments
|
|
|
8.7
|
|
|
|
1.9
|
|
|
|
0.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic benefit cost
|
|
$
|
19.0
|
|
|
$
|
15.0
|
|
|
$
|
11.0
|
|
|
$
|
0.7
|
|
|
$
|
2.8
|
|
|
$
|
3.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table sets forth amounts recognized in AOCI in the
Companys financial statements for 2007 and 2006 (in
millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Benefits
|
|
|
Other Benefits
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
Amounts recognized in other comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prior service costs
|
|
$
|
(6.2
|
)
|
|
$
|
(8.5
|
)
|
|
$
|
18.4
|
|
|
$
|
20.1
|
|
Actuarial loss
|
|
|
(77.7
|
)
|
|
|
(82.8
|
)
|
|
|
(21.0
|
)
|
|
|
(18.4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal
|
|
|
(83.9
|
)
|
|
|
(91.3
|
)
|
|
|
(2.6
|
)
|
|
|
1.7
|
|
Deferred taxes
|
|
|
29.8
|
|
|
|
31.4
|
|
|
|
1.0
|
|
|
|
(0.6
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net amount recognized
|
|
$
|
(54.1
|
)
|
|
$
|
(59.9
|
)
|
|
$
|
(1.6
|
)
|
|
$
|
1.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Changes recognized in other comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current year prior service costs
|
|
$
|
0.5
|
|
|
|
N/A
|
|
|
$
|
|
|
|
|
N/A
|
|
Current year actuarial loss
|
|
|
6.4
|
|
|
|
N/A
|
|
|
|
3.6
|
|
|
|
N/A
|
|
Amortization of prior service (costs) credits
|
|
|
(2.8
|
)
|
|
|
N/A
|
|
|
|
1.7
|
|
|
|
N/A
|
|
Amortization of actuarial loss
|
|
|
(11.5
|
)
|
|
|
N/A
|
|
|
|
(1.0
|
)
|
|
|
N/A
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total recognized in other comprehensive income
|
|
$
|
(7.4
|
)
|
|
|
N/A
|
|
|
$
|
4.3
|
|
|
|
N/A
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total recognized in net periodic benefit cost and other
comprehensive income
|
|
$
|
11.6
|
|
|
|
N/A
|
|
|
$
|
5.0
|
|
|
|
N/A
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The estimated prior service costs (credits) and actuarial
(gains) losses that will be amortized from AOCI in 2008 are
$0.6 million and $5.6 million, respectively, for
pension benefits and ($1.7) million and $1.2 million,
respectively, for other benefits.
The following tables set forth the weighted-average assumptions
used to determine Benefit Obligations and Net Periodic Benefit
Cost for the
U.S.-based
plans in 2007 and 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Benefits
|
|
|
Other Benefits
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
Weighted-average assumptions used to determine benefit
obligations as of December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discount rate
|
|
|
6.48
|
%
|
|
|
5.89
|
%
|
|
|
6.36
|
%
|
|
|
5.82
|
%
|
Rate of compensation increase
|
|
|
4.32
|
|
|
|
4.30
|
|
|
|
|
|
|
|
|
|
61
LENNOX
INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Benefits
|
|
|
Other Benefits
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Weighted-average assumptions used to determine net periodic
benefit cost for the years ended December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discount rate
|
|
|
5.89
|
%
|
|
|
5.75
|
%
|
|
|
5.75
|
%
|
|
|
5.82
|
%
|
|
|
5.75
|
%
|
|
|
5.75
|
%
|
Expected long-term return on plan assets
|
|
|
8.25
|
|
|
|
8.25
|
|
|
|
8.25
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rate of compensation increase
|
|
|
4.30
|
|
|
|
4.28
|
|
|
|
4.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following tables set forth the weighted-average assumptions
used to determine Benefit Obligations and Net Periodic Benefit
Cost for the
non-U.S.-based
plans in 2007 and 2006:
|
|
|
|
|
|
|
|
|
|
|
Pension Benefits
|
|
|
|
2007
|
|
|
2006
|
|
|
Weighted-average assumptions used to determine benefit
obligations as of December 31:
|
|
|
|
|
|
|
|
|
Discount rate
|
|
|
5.47
|
%
|
|
|
5.14
|
%
|
Rate of compensation increase
|
|
|
4.17
|
|
|
|
4.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Benefits
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Weighted-average assumptions used to determine net periodic
benefit cost for the years ended December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
Discount rate
|
|
|
5.14
|
%
|
|
|
4.74
|
%
|
|
|
5.40
|
%
|
Expected long-term return on plan assets
|
|
|
6.69
|
|
|
|
6.87
|
|
|
|
6.71
|
|
Rate of compensation increase
|
|
|
4.00
|
|
|
|
4.00
|
|
|
|
4.00
|
|
To develop the expected long-term rate of return on assets
assumption for the U.S. plans, the Company considered the
historical returns and the future expectations for returns for
each asset category, as well as the target asset allocation of
the pension portfolio and the effect of periodic rebalancing.
These results were adjusted for the payment of reasonable
expenses of the plan from plan assets. This resulted in the
selection of the 8.25% long-term rate of return on assets
assumption. A similar process was followed for the
non-U.S.-based
plans.
To select a discount rate for the purpose of valuing the plan
obligations for the U.S. plans, the Company performed an
analysis in which the duration of projected cash flows from
defined benefit and retiree health care plans were matched with
a yield curve based on the appropriate universe of high-quality
corporate bonds that were available. The Company used the
results of the yield curve analysis to select the discount rate
that matched the duration and payment stream of the benefits in
each plan. This resulted in the selection of the 6.48% discount
rate assumption for the pension benefits and 6.36% for the other
benefits. A similar process was followed for the
non-U.S.-based
plans.
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
Assumed health care cost trend rates as of December 31:
|
|
|
|
|
|
|
|
|
Health care cost trend rate assumed for next year
|
|
|
8.5
|
%
|
|
|
9.5
|
%
|
Rate to which the cost rate is assumed to decline (the ultimate
trend rate)
|
|
|
5.0
|
%
|
|
|
5.0
|
%
|
Year that the rate reaches the ultimate trend rate
|
|
|
2014
|
|
|
|
2014
|
|
62
LENNOX
INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Assumed health care cost trend rates have a significant effect
on the amounts reported for the Companys health care plan.
A one percentage-point change in assumed health care cost trend
rates would have the following effects (in millions):
|
|
|
|
|
|
|
|
|
|
|
1-Percentage-
|
|
|
1-Percentage-
|
|
|
|
Point Increase
|
|
|
Point Decrease
|
|
|
Effect on total of service and interest cost
|
|
$
|
0.1
|
|
|
$
|
(0.1
|
)
|
Effect on the post-retirement benefit obligation
|
|
|
1.8
|
|
|
|
(1.5
|
)
|
The Companys
U.S.-based
pension plans weighted-average asset allocations as of
December 31, 2007 and 2006, by asset category, are as
follows:
|
|
|
|
|
|
|
|
|
|
|
Plan Assets as of December 31,
|
|
Asset Category
|
|
2007
|
|
|
2006
|
|
|
Domestic equity
|
|
|
51.8
|
%
|
|
|
56.0
|
%
|
International equity
|
|
|
14.7
|
|
|
|
10.5
|
|
Investment grade bonds
|
|
|
30.1
|
|
|
|
28.7
|
|
Money market/cash/annuities
|
|
|
3.4
|
|
|
|
4.8
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
Plan investments are invested within the following range targets:
|
|
|
|
|
|
|
|
|
Target
|
|
|
+ / −
|
|
Domestic equity
|
|
|
53.0
|
%
|
|
+ / −4%
|
International equity
|
|
|
15.0
|
|
|
+ / −1.5%
|
Investment grade bonds
|
|
|
30.0
|
|
|
+ / −3%
|
Money market/cash/annuities
|
|
|
2.0
|
|
|
+0.5% / −1.5%
|
The plans investment advisors have discretion within the
above ranges. Investments are rebalanced based upon guidelines
developed by the Company with input from its consultants and
investment advisers. Additional contributions are invested under
the same guidelines and may be used to rebalance the portfolio.
The investment allocation and individual investments are chosen
with regard to the duration of the obligations under the plan.
The Company estimates its 2008 minimum required contribution to
its pension plans will be $10.7 million. The Company will
evaluate additional voluntary pension contributions throughout
2008; however, no voluntary contributions for 2008 are planned
at this time. The Company estimates its 2008 contribution to its
postretirement benefit plan to be approximately
$2.2 million.
Expected future benefit payments are shown in the table below
(in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
2011
|
|
|
2012
|
|
|
2013-2017
|
|
|
Pension benefits
|
|
$
|
14.2
|
|
|
$
|
14.7
|
|
|
$
|
15.2
|
|
|
$
|
15.9
|
|
|
$
|
20.5
|
|
|
$
|
96.4
|
|
Other benefits
|
|
|
2.2
|
|
|
|
1.1
|
|
|
|
1.1
|
|
|
|
1.1
|
|
|
|
1.1
|
|
|
|
7.4
|
|
LII utilizes a hedging program to mitigate the exposure to
volatility in the prices of certain commodities the Company uses
in its production process. The hedging program includes the use
of futures contracts and fixed forward contracts. The intent of
the hedging program is to protect the Companys operating
margins and overall profitability from adverse price changes by
entering into derivative instruments.
To qualify for hedge accounting in accordance with
SFAS No. 133, the Company requires that the futures
contracts be effective in reducing the risk exposure that they
are designed to hedge and that it is probable that the
63
LENNOX
INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
underlying transaction will occur. For instruments designated as
cash flow hedges, the Company must formally document, at
inception of the arrangement, the relationship between the
hedging instrument and the hedged item, including the risk
management objective, the hedging strategy for use of the hedged
instrument, and how hedge effectiveness is being assessed. This
documentation includes linking the instruments that are
designated as cash flow hedges to forecasted transactions. These
criteria demonstrate that the futures contracts are expected to
be highly effective at offsetting changes in the cash flows of
the hedged item, both at inception and on an ongoing basis.
Beginning in the fourth quarter of 2006, futures contracts
entered into that meet established accounting criteria are
formally designated as cash flow hedges.
The Company monitors its derivative positions and credit ratings
of its counterparties and does not anticipate losses due to
counterparties non-performance.
For futures contracts that are designated and qualify as cash
flow hedges, the Company assesses hedge effectiveness and
measures hedge ineffectiveness at least quarterly throughout the
designated period. The effective portion of the gain or loss on
the futures contracts is recorded, net of applicable taxes, in
AOCI, a component of Stockholders Equity in the
accompanying Consolidated Balance Sheets. When net income is
affected by the variability of the underlying cash flow, the
applicable offsetting amount of the gain or loss from the
futures contracts that is deferred in AOCI is released to net
income and is reported as a component of Cost of Goods Sold in
the accompanying Consolidated Statements of Operations. Changes
in the fair value of futures contracts that do not effectively
offset changes in the fair value of the underlying hedged item
throughout the designated hedge period
(ineffectiveness) are recorded in net income each
period and are reported in (Gains), Losses, and Other Expenses,
net in the accompanying Consolidated Statements of Operations.
For the years ended December 31, 2007 and 2006, there was
no significant gain or loss recognized in net income
representing hedge ineffectiveness or excluded from the
assessment of hedge effectiveness. For the year ended
December 31, 2007, there were $6.2 million in gains
reclassified from AOCI to net income. No gains or losses were
reclassified from AOCI to net income during 2006 as none of the
futures contracts for cash flow hedges had settled.
The Company included (gains) losses of ($0.4) million and
$1.9 million, net of tax provision (benefit) of
$0.2 million and ($1.0) million, in AOCI in connection
with its cash flow hedges as of December 31, 2007 and 2006,
respectively. These (gains) losses are expected to be
reclassified to net income within the next 18 months. Cash
flow derivative instruments in place as of December 31,
2007 are scheduled to mature through May 2009.
The Company may enter into instruments that economically hedge
certain of its risks, even though hedge accounting does not
apply or the Company elects not to apply hedge accounting under
SFAS No. 133 to these instruments. In these cases,
there exists a natural hedging relationship in which changes in
the fair value of the instruments act as an economic offset to
changes in the fair value of the underlying item(s). Changes in
the fair value of instruments not designated as cash flow hedges
are recorded in net income throughout the term of the derivative
instrument and are reported in (Gains), Losses, and Other
Expenses, net in the accompanying Consolidated Statements of
Operations. For the years ended December 31, 2007, 2006,
and 2005, $0.7 million, $45.2 million, and
$40.0 million in net gains, respectively, were recognized
in earnings related to instruments not accounted for as cash
flow hedges.
The Company reports cash flows arising from the Companys
hedging instruments consistent with the classifications of cash
flows from the underlying hedged items. Accordingly, cash flows
associated with the Companys derivative programs are
classified in cash flows from operating activities in the
accompanying Consolidated Statements of Cash Flows.
64
LENNOX
INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
11.
|
Comprehensive
Income:
|
The Companys accumulated balances, shown net of tax for
each classification of comprehensive income (loss) as of
December 31, 2007, 2006 and 2005, are as follows (in
millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
|
|
|
|
|
|
|
|
|
|
|
|
|
Currency
|
|
|
Pension and
|
|
|
|
|
|
|
|
|
|
Translation
|
|
|
Postretirement
|
|
|
|
|
|
|
|
|
|
Adjustment
|
|
|
Liability
|
|
|
Hedges
|
|
|
Total
|
|
|
December 31, 2004
|
|
$
|
45.9
|
|
|
$
|
(51.4
|
)
|
|
$
|
6.2
|
|
|
$
|
0.7
|
|
Net change during 2005
|
|
|
(10.9
|
)
|
|
|
17.0
|
|
|
|
(6.4
|
)
|
|
|
(0.3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2005
|
|
$
|
35.0
|
|
|
$
|
(34.4
|
)
|
|
$
|
(0.2
|
)
|
|
$
|
0.4
|
|
Net change during 2006
|
|
|
20.8
|
|
|
|
(24.4
|
)
|
|
|
(1.9
|
)
|
|
|
(5.5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2006
|
|
$
|
55.8
|
|
|
$
|
(58.8
|
)
|
|
$
|
(2.1
|
)
|
|
$
|
(5.1
|
)
|
Net change during 2007
|
|
|
62.9
|
|
|
|
3.2
|
|
|
|
2.6
|
|
|
|
68.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2007
|
|
$
|
118.7
|
|
|
$
|
(55.6
|
)
|
|
$
|
0.5
|
|
|
$
|
63.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
On July 25, 2007, the Company announced that its Board of
Directors approved a share repurchase plan, pursuant to which
LII is authorized to repurchase up to $500 million of
shares of its common stock through open market purchases (the
2007 Share Repurchase Plan). Based on the
closing price of LIIs common stock on July 24, 2007,
a $500 million repurchase represented over 20% of the
Companys market capitalization. The Company intends to
fully execute repurchases under the 2007 Share Repurchase
Plan by the end of the third quarter of 2008. During 2007, the
Company purchased 5,878,987 shares of its common stock for
$203.3 million at an average price of $34.59 per share,
including commissions, under the 2007 Share Repurchase
Plan, representing approximately 41% of the $500 million
repurchase authorization.
The 2007 Share Repurchase Plan terminated and replaced our
former share repurchase plan, announced in 2005, pursuant to
which the Company was authorized to repurchase up to ten million
shares of its common stock (the 2005 Share Repurchase
Plan). Purchases under the 2005 Share Repurchase Plan
were made on an open-market basis at prevailing market prices.
The timing of any repurchases depended on market conditions, the
market price of LIIs common stock and managements
assessment of the Companys liquidity needs and investment
requirements and opportunities. The Company repurchased a total
of 7,615,041 shares of common stock for $211.7 million
at an average price of $27.80 per share, including commissions,
under the 2005 Share Repurchase Plan, with
1,258,000 shares repurchased in 2007.
As previously announced, on March 16, 2007, LII entered
into an agreement with the shareholders of A.O.C. Corporation
(AOC) to issue up to 2,239,589 shares of LII
common stock in exchange for 2,695,770 shares of LII common
stock owned by AOC. This transaction was completed in September
2007. LII acquired 2,695,770 shares of LII common stock
owned by AOC in exchange for 2,239,563 newly issued LII common
shares. The transaction reduced the number of outstanding shares
of LII common stock by 456,207 shares, at minimal cost to
LII.
On July 27, 2000, the Board of Directors of the Company
declared a dividend of one right (Right) for each
outstanding share of its common stock to stockholders of record
at the close of business on August 7, 2000. Each Right
entitles the registered holder to purchase from the Company a
unit consisting of one one-hundredth of a share (a
Fractional Share) of Series A Junior
Participating Preferred Stock, par value $.01 per share, at a
purchase price of $75.00 per Fractional Share, subject to
adjustment. The description and terms of the Rights are set
forth in a Rights Agreement dated as of July 27, 2000.
65
LENNOX
INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
14.
|
Stock-Based
Compensation Plans:
|
Incentive
Plan
Under the Companys Amended and Restated 1998 Incentive
Plan (the 1998 Incentive Plan), the Company is
authorized to issue awards for 24,254,706 shares of common
stock. As of December 31, 2007, awards for
23,201,225 shares of common stock had been granted and
4,880,523 shares had been cancelled or repurchased under
the 1998 Incentive Plan. Consequently, as of December 31,
2007, there were 5,934,004 shares available for future
issuance.
The 1998 Incentive Plan provides for various long-term incentive
awards, which include stock options, performance share units,
restricted stock units and stock appreciation rights. A
description of these long-term incentive awards and related
activity within each award category is provided below.
Stock
Options
Under the 1998 Incentive Plan, the exercise price for stock
options equals the stocks fair market value on the date of
grant. Options granted prior to 1998 vested on the date of
grant. Options granted in 1998 and after generally vest over
three years. Options issued prior to December 2000 generally
expire after ten years and options issued in December 2000 and
after generally expire after seven years.
As of December 31, 2007, there were also 49,141 stock
options outstanding that were issued in connection with
LIIs acquisition of Service Experts Inc. All such options
are fully vested.
Prior to the adoption of SFAS No. 123R, and in
accordance with APB No. 25, no stock-based compensation
cost was reflected in net income for grants of stock options to
employees because the Company granted stock options with an
exercise price equal to the fair market value of the stock on
the date of grant. For footnote disclosures under
SFAS No. 123, the fair value of each option award was
estimated on the date of grant using a Black-Scholes-Merton
option valuation model that incorporated the assumptions noted
below. Estimates of fair value are not intended to predict
actual future events or the value ultimately realized by
employees who receive equity awards. Subsequent events are not
indicative of the reasonableness of the original estimates made
by the Company. Under SFAS No. 123, the Company used
historical stock price data to estimate the expected volatility
for the options and the full contractual term to estimate
expected life. The risk free interest rate was based on
zero-coupon U.S. Treasury instruments with a remaining term
equal to the expected life of the stock option at the time of
grant.
No stock options were granted during 2007 and 2006. During the
year ended December 31, 2005, the Company granted stock
options to purchase 2,964 shares of common stock prior to
June 30 which were accounted for in accordance with APB
No. 25. Therefore, no stock-based compensation expense was
reflected in net income for the granting of these stock options
at the time of grant, as the stock options were granted to
employees and the exercise price for such options was equal to
the fair market value of the stock on the date of grant.
Prior to the adoption of SFAS No. 123R, the fair value
of an option was amortized to expense in the pro forma footnote
disclosure using the graded method. Upon the adoption of
SFAS No. 123R, options granted prior to the date of
adoption continue to be amortized to expense using the graded
method.
66
LENNOX
INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
A summary of stock option activity for the years ended
December 31, 2007, 2006 and 2005 follows (in millions,
except per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
Average
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
Exercise
|
|
|
|
|
|
Exercise
|
|
|
|
|
|
Exercise
|
|
|
|
|
|
|
Price per
|
|
|
|
|
|
Price per
|
|
|
|
|
|
Price per
|
|
|
|
Shares
|
|
|
Share
|
|
|
Shares
|
|
|
Share
|
|
|
Shares
|
|
|
Share
|
|
|
Outstanding at beginning of year
|
|
|
4.0
|
|
|
$
|
14.63
|
|
|
|
5.4
|
|
|
$
|
14.81
|
|
|
|
7.5
|
|
|
$
|
14.00
|
|
Granted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
21.57
|
|
Exercised
|
|
|
(1.8
|
)
|
|
|
12.12
|
|
|
|
(1.4
|
)
|
|
|
14.01
|
|
|
|
(2.0
|
)
|
|
|
12.52
|
|
Forfeited
|
|
|
|
|
|
|
19.37
|
|
|
|
|
|
|
|
18.36
|
|
|
|
(0.1
|
)
|
|
|
16.38
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at end of year
|
|
|
2.2
|
|
|
$
|
15.93
|
|
|
|
4.0
|
|
|
$
|
14.63
|
|
|
|
5.4
|
|
|
$
|
14.81
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at end of year
|
|
|
2.2
|
|
|
$
|
15.93
|
|
|
|
3.9
|
|
|
$
|
14.50
|
|
|
|
5.1
|
|
|
$
|
14.58
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of options granted
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
$
|
7.50
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table summarizes information about stock options
outstanding as of December 31, 2007 (in millions, except
per share data and years):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding
|
|
|
Options Exercisable
|
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
|
|
|
Remaining
|
|
|
Weighted-
|
|
|
|
|
|
|
|
|
Remaining
|
|
|
Weighted-
|
|
|
|
|
|
|
|
|
|
Contractual
|
|
|
Average
|
|
|
Aggregate
|
|
|
|
|
|
Contractual
|
|
|
Average
|
|
|
Aggregate
|
|
Range of Exercise
|
|
Number
|
|
|
Term
|
|
|
Exercise Price
|
|
|
Intrinsic
|
|
|
Number
|
|
|
Life
|
|
|
Exercise Price
|
|
|
Intrinsic
|
|
Prices Per Share
|
|
Outstanding
|
|
|
(in years)
|
|
|
per Share
|
|
|
Value
|
|
|
Exercisable
|
|
|
(in years)
|
|
|
Per Share
|
|
|
Value
|
|
|
$10.313 $49.630
|
|
|
2.2
|
|
|
|
1.8
|
|
|
$
|
15.93
|
|
|
$
|
56.0
|
|
|
|
2.2
|
|
|
|
1.8
|
|
|
$
|
15.93
|
|
|
$
|
56.0
|
|
The fair value of each option grant is estimated on the date of
grant using the Black-Scholes-Merton option-pricing model with
the following weighted-average assumptions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Expected dividend yield
|
|
|
|
|
|
|
|
|
|
|
2.13
|
%
|
Risk-free interest rate
|
|
|
|
|
|
|
|
|
|
|
4.33
|
%
|
Expected volatility
|
|
|
|
|
|
|
|
|
|
|
40.0
|
%
|
Expected life (in years)
|
|
|
|
|
|
|
|
|
|
|
7
|
|
As of December 31, 2007, the Company had no unrecognized
compensation cost related to nonvested options as all
outstanding stock options were fully vested. Total compensation
expense for stock options was $0.7 million,
$0.7 million and $1.3 million for the years ended
December 31, 2007, 2006, and 2005, respectively.
The total intrinsic value of options exercised, the resulting
tax deductions to realize tax benefits and the tax benefits in
excess of the hypothetical deferred tax asset were as follows
(in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Intrinsic value of options exercised
|
|
$
|
39.8
|
|
|
$
|
22.9
|
|
|
$
|
23.6
|
|
Realized tax benefits from tax deductions
|
|
|
15.1
|
|
|
|
8.5
|
|
|
|
8.8
|
|
Tax benefits in excess of the hypothetical deferred tax asset
|
|
|
2.2
|
|
|
|
2.0
|
|
|
|
1.7
|
|
67
LENNOX
INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The Companys practice is to issue new shares of common
stock to satisfy the exercise of options.
Performance
Share Units
Under the 1998 Incentive Plan, performance share units are
granted to certain employees at the discretion of the Board of
Directors with a three-year performance period beginning
January 1st of each year. Upon meeting the performance
and vesting criteria, performance share units are converted to
an equal number of shares of the Companys common stock.
Outstanding awards granted prior to 2003 vest after ten years of
service at the target amount.
Prior to the adoption of SFAS No. 123R, and in
accordance with APB No. 25, compensation expense for
performance share units granted prior to 2003 was measured based
on the market price of the Companys common stock on the
date of grant and recognized over the performance period.
Beginning in 2003, the Company changed the vesting of
performance share units such that the units vest if, at the end
of the three-year performance period, at least the threshold
performance level has been attained. To the extent that the
payout level attained is less than 100%, the difference between
100% and the units earned and distributed will be forfeited.
Eligible participants may also earn additional units of the
Companys common stock, ranging from 0% to 100% of the
units granted, depending on the Companys performance over
the three-year performance period. Prior to the adoption of
SFAS No. 123R, and in accordance with APB No. 25,
compensation expense was measured by applying the market price
of the Companys stock at the end of each reporting period
to the number of units expected to be earned.
Upon the adoption of SFAS No. 123R, all of the
performance share units under the 1998 Incentive Plan were
classified as equity based, with the fair value of each unit
equal to the average of the high and low market price of the
stock on the date of grant for units granted prior to December
2007. The fair value of units granted in December 2007 is the
average of the high and low market price of the stock on the
date of grant discounted by the expected dividend rate over the
service period. Units are amortized to expense ratably over the
service period. The stock-based compensation expense for any
additional units which may be earned is estimated each reporting
period based on the fair value of the stock at the date of
grant. The number of units expected to be earned will be
adjusted, as necessary, to reflect the actual number of units
awarded.
The weighted-average fair value of performance share units
granted during the years ended December 31, 2007, 2006 and
2005 was $34.71, $30.85 and $29.36 per share, respectively.
A summary of the status of the Companys undistributed
performance share units as of December 31, 2007 and changes
during the year ended December 31, 2007 is presented below
(in millions, except per share data):
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2007
|
|
|
|
|
|
|
Weighted-Average
|
|
|
|
|
|
|
Grant Date
|
|
|
|
Shares
|
|
|
Fair Value Per Share
|
|
|
Undistributed performance share units:
|
|
|
|
|
|
|
|
|
Undistributed as of December 31, 2006
|
|
|
1.6
|
|
|
$
|
19.39
|
|
Granted
|
|
|
0.3
|
|
|
$
|
34.71
|
|
Additional shares earned
|
|
|
0.2
|
|
|
$
|
16.89
|
|
Distributed
|
|
|
(0.4
|
)
|
|
$
|
16.89
|
|
Forfeited
|
|
|
(0.4
|
)
|
|
$
|
13.69
|
|
|
|
|
|
|
|
|
|
|
Undistributed as of December 31, 2007(1)
|
|
|
1.3
|
|
|
$
|
24.66
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Undistributed performance share units as of December 31,
2007 include approximately 0.9 million units with a
weighted-average grant date fair value of $26.72 per share that
had not yet vested. |
68
LENNOX
INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
As of December 31, 2007, the Company had approximately
$16.6 million of total unrecognized compensation cost
related to nonvested performance share units. Such cost is
expected to be recognized over a weighted-average period of
2.3 years. The Companys estimated forfeiture rate for
performance share units was 20% as of December 31, 2007.
Total compensation expense for performance share units was
$11.5 million, $14.0 million and $19.6 million
for the years ended December 31, 2007, 2006 and 2005,
respectively.
The total fair value of performance share units distributed, the
resulting tax deductions to realize tax benefits and the tax
benefits in excess of the hypothetical deferred tax asset were
as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
|
|
Fair value of performance share units distributed
|
|
$
|
13.1
|
|
|
$
|
17.5
|
|
|
$
|
|
|
|
|
|
|
Realized tax benefits from tax deductions
|
|
|
5.0
|
|
|
|
6.5
|
|
|
|
|
|
|
|
|
|
Tax benefits in excess of the hypothetical deferred tax asset
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Companys practice is to issue new shares of common
stock to satisfy performance share unit distributions.
Restricted
Stock Units
Under the 1998 Incentive Plan, restricted stock units are issued
to attract and retain key Company employees. Generally, at the
end of a three-year retention period, the units will vest and be
distributed in shares of LII common stock to the participant
provided that the participant has been an employee of the
Company or one of its wholly owned subsidiaries continuously
throughout the retention period. Prior to the adoption of
SFAS No. 123R, and in accordance with APB No. 25,
compensation expense for restricted stock units was measured
based on the market price of the Companys common stock on
the date of grant and was recognized on a straight-line basis
over the performance period.
Upon the adoption of SFAS No. 123R, all restricted
stock units under the 1998 Incentive Plan were classified as
equity based, with the fair value of each unit equal to the
average of the high and low market price of the stock on the
date of grant for units granted prior to December 2007. The fair
value of units granted in December 2007 is the average of the
high and low market price of the stock on the date of grant
discounted by the expected dividend rate over the service
period. Units are amortized to expense ratably over the service
period.
The weighted-average fair value of restricted stock units
granted during the years ended December 31, 2007, 2006 and
2005 was $34.74, $30.28 and $28.76 per share, respectively.
A summary of the status of the Companys nonvested
restricted stock units as of December 31, 2007 and changes
during the year ended December 31, 2007 is presented below
(in millions, except per share data):
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2007
|
|
|
|
|
|
|
Weighted-Average
|
|
|
|
|
|
|
Grant Date
|
|
|
|
Shares
|
|
|
Fair Value per Share
|
|
|
Nonvested restricted stock units:
|
|
|
|
|
|
|
|
|
Nonvested as of December 31, 2006
|
|
|
1.0
|
|
|
$
|
25.17
|
|
Granted
|
|
|
0.3
|
|
|
$
|
34.74
|
|
Vested
|
|
|
(0.4
|
)
|
|
$
|
19.33
|
|
Forfeited
|
|
|
(0.1
|
)
|
|
$
|
25.85
|
|
|
|
|
|
|
|
|
|
|
Nonvested as of December 31, 2007
|
|
|
0.8
|
|
|
$
|
31.76
|
|
|
|
|
|
|
|
|
|
|
69
LENNOX
INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
As of December 31, 2007, the Company had approximately
$13.0 million of total unrecognized compensation cost
related to nonvested restricted stock units. Such cost is
expected to be recognized over a weighted-average period of
2.4 years. The Companys estimated forfeiture rate for
restricted stock units was 12% as of December 31, 2007.
Total compensation expense for restricted stock units was
$6.3 million, $6.8 million and $5.3 million for
the years ended December 31, 2007, 2006 and 2005,
respectively.
The total fair value of restricted stock units vested, the
resulting tax deductions to realize tax benefits and the tax
benefits in excess of the hypothetical deferred tax asset were
as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Fair value of restricted stock units vested
|
|
$
|
12.8
|
|
|
$
|
7.5
|
|
|
$
|
5.8
|
|
Realized tax benefits from tax deductions
|
|
|
4.8
|
|
|
|
2.8
|
|
|
|
2.2
|
|
Tax benefit in excess of the hypothetical deferred tax asset
|
|
|
|
|
|
|
|
|
|
|
|
|
The Companys practice is to issue new shares of common
stock to satisfy restricted stock unit vestings.
Stock
Appreciation Rights
In 2003, the Company began awarding stock appreciation rights.
Each recipient is given the right to receive a value
equal to the future appreciation of the Companys stock
price. The value is paid in Company stock. Stock appreciation
rights generally vest in one-third increments beginning on the
first anniversary date after the grant date.
Prior to the adoption of SFAS No. 123R, compensation
expense for stock appreciation rights was measured by applying
the increase in the market price of the Companys stock at
the end of the period to the number of awards.
Upon the adoption of SFAS No. 123R, compensation
expense for stock appreciation rights granted prior to and after
the adoption of SFAS No. 123R was based on the fair
value on the date of grant, recognized over the service period.
The fair value for these awards was estimated using the
Black-Scholes-Merton valuation model and follows the provisions
of SFAS No. 123R and SAB No. 107. The
Company used historical stock price data and other pertinent
information to estimate the expected volatility and the
outstanding period of the award for separate groups of employees
that had similar historical exercise behavior to estimate
expected life. The risk free interest rate was based on
zero-coupon U.S. Treasury instruments with a remaining term
equal to the expected life of the stock appreciation right at
the time of grant.
Prior to the adoption of SFAS No. 123R, the fair value
of a stock appreciation right was amortized to expense using the
graded method. Upon the adoption of SFAS No. 123R,
stock appreciation rights granted prior to the date of adoption
will continue to be amortized to expense using the graded
method. For stock appreciation rights granted after the date of
adoption, the fair value will be amortized to expense ratably
over the service period.
The weighted-average fair value of stock appreciation rights
granted during the years ended December 31, 2007, 2006 and
2005 was $8.43, $8.60 and $8.65 per share, respectively.
The fair value of each stock appreciation right granted in 2007,
2006 and after June 30, 2005 through December 31, 2005
is estimated on the date of grant using the Black-Scholes-Merton
option pricing model with the following weighted-average
assumptions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Expected dividend yield
|
|
|
1.69
|
%
|
|
|
1.69
|
%
|
|
|
1.50
|
%
|
Risk-free interest rate
|
|
|
3.27
|
%
|
|
|
4.53
|
%
|
|
|
4.39
|
%
|
Expected volatility
|
|
|
28.42
|
%
|
|
|
30.04
|
%
|
|
|
31.90
|
%
|
Expected life (in years)
|
|
|
4.35
|
|
|
|
4.57
|
|
|
|
4.53
|
|
70
LENNOX
INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
A summary of stock appreciation rights activity for the years
ended December 31, 2007, 2006 and 2005 follows (in
millions, except per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For The Years Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
Average
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
Exercise
|
|
|
|
|
|
Exercise
|
|
|
|
|
|
Exercise
|
|
|
|
|
|
|
Price Per
|
|
|
|
|
|
Price Per
|
|
|
|
|
|
Price Per
|
|
|
|
Shares
|
|
|
Share
|
|
|
Shares
|
|
|
Share
|
|
|
Shares
|
|
|
Share
|
|
|
Outstanding at beginning of year
|
|
|
1.9
|
|
|
$
|
25.20
|
|
|
|
1.5
|
|
|
$
|
22.22
|
|
|
|
1.0
|
|
|
$
|
16.82
|
|
Granted
|
|
|
0.7
|
|
|
|
34.60
|
|
|
|
0.6
|
|
|
|
30.86
|
|
|
|
0.7
|
|
|
|
29.36
|
|
Exercised
|
|
|
(0.3
|
)
|
|
|
18.57
|
|
|
|
(0.1
|
)
|
|
|
16.76
|
|
|
|
(0.1
|
)
|
|
|
16.76
|
|
Forfeited
|
|
|
(0.1
|
)
|
|
|
30.47
|
|
|
|
(0.1
|
)
|
|
|
23.81
|
|
|
|
(0.1
|
)
|
|
|
16.76
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at end of year
|
|
|
2.2
|
|
|
$
|
29.14
|
|
|
|
1.9
|
|
|
$
|
25.20
|
|
|
|
1.5
|
|
|
$
|
22.22
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at end of year
|
|
|
1.0
|
|
|
$
|
24.40
|
|
|
|
0.9
|
|
|
$
|
19.63
|
|
|
|
0.5
|
|
|
$
|
16.83
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table summarizes information about stock
appreciation rights outstanding as of December 31, 2007 (in
millions, except per share data and years):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock Appreciation Rights Outstanding
|
|
|
Stock Appreciation Rights Exercisable
|
|
|
|
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Weighted-
|
|
|
|
|
|
|
|
|
Average
|
|
|
Weighted-
|
|
|
|
|
|
|
|
|
|
|
|
|
Remaining
|
|
|
Average
|
|
|
|
|
|
|
|
|
Remaining
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
|
|
|
Contractual
|
|
|
Exercise
|
|
|
Aggregate
|
|
|
|
|
|
Contractual
|
|
|
Exercise
|
|
|
Aggregate
|
|
|
|
|
Range of Exercise
|
|
Number
|
|
|
Term
|
|
|
Price per
|
|
|
Intrinsic
|
|
|
Number
|
|
|
Life
|
|
|
Price per
|
|
|
Intrinsic
|
|
|
|
|
Prices per Share
|
|
Outstanding
|
|
|
(in years)
|
|
|
Share
|
|
|
Value
|
|
|
Exercisable
|
|
|
(in years)
|
|
|
Share
|
|
|
Value
|
|
|
|
|
|
$16.76 $35.82
|
|
|
2.2
|
|
|
|
5.5
|
|
|
$
|
29.14
|
|
|
$
|
27.1
|
|
|
|
1.0
|
|
|
|
4.3
|
|
|
$
|
24.40
|
|
|
$
|
16.4
|
|
|
|
|
|
As of December 31, 2007, the Company had approximately
$8.5 million of unrecognized compensation cost related to
nonvested stock appreciation rights. Such cost is expected to be
recognized over a weighted-average period of 2.4 years. The
Companys estimated forfeiture rate for stock appreciation
rights was 15% as of December 31, 2007. Total compensation
expense for stock appreciation rights was $2.5 million,
$2.9 million and $2.6 million for the years ended
December 31, 2007, 2006 and 2005, respectively.
The total intrinsic value of stock appreciation rights
exercised, the resulting tax deductions to realize tax benefits
and the tax benefits in excess of the hypothetical deferred tax
asset were as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Intrinsic Value of Stock Appreciation Rights Exercised
|
|
$
|
5.6
|
|
|
$
|
1.4
|
|
|
$
|
0.8
|
|
Realized Tax Benefits from Tax Deductions
|
|
|
2.1
|
|
|
|
0.5
|
|
|
|
0.3
|
|
Tax Benefits in Excess of the Hypothetical Deferred Tax Asset
|
|
|
|
|
|
|
|
|
|
|
|
|
The Companys practice is to issue new shares of common
stock to satisfy the exercise of stock appreciation rights.
71
LENNOX
INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The Companys income tax provision from continuing
operations for the years ended December 31, 2007, 2006 and
2005 consisted of the following (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Current:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
58.7
|
|
|
$
|
49.8
|
|
|
$
|
63.9
|
|
State
|
|
|
6.7
|
|
|
|
5.5
|
|
|
|
7.2
|
|
Foreign
|
|
|
18.7
|
|
|
|
9.8
|
|
|
|
14.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current
|
|
|
84.1
|
|
|
|
65.1
|
|
|
|
85.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
(1.7
|
)
|
|
|
0.3
|
|
|
|
(3.1
|
)
|
State
|
|
|
1.2
|
|
|
|
(3.6
|
)
|
|
|
4.1
|
|
Foreign
|
|
|
5.6
|
|
|
|
(9.4
|
)
|
|
|
(3.4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deferred
|
|
|
5.1
|
|
|
|
(12.7
|
)
|
|
|
(2.4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total income tax provision
|
|
$
|
89.2
|
|
|
$
|
52.4
|
|
|
$
|
83.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations before income taxes and
cumulative effect of accounting change was comprised of the
following for the years ended December 31, 2007, 2006 and
2005 (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Domestic
|
|
$
|
192.4
|
|
|
$
|
172.4
|
|
|
$
|
195.3
|
|
Foreign
|
|
|
65.8
|
|
|
|
46.0
|
|
|
|
39.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
258.2
|
|
|
$
|
218.4
|
|
|
$
|
235.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The difference between the income tax provision from continuing
operations computed at the statutory federal income tax rate and
the financial statement provision for taxes for the years ended
December 31, 2007, 2006 and 2005 is summarized as follows
(in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Provision at the U.S. statutory rate of 35%
|
|
$
|
90.4
|
|
|
$
|
76.4
|
|
|
$
|
82.3
|
|
Increase (reduction) in tax expense resulting from:
|
|
|
|
|
|
|
|
|
|
|
|
|
State income tax, net of federal income tax benefit
|
|
|
5.2
|
|
|
|
3.9
|
|
|
|
7.3
|
|
Other permanent items
|
|
|
(4.0
|
)
|
|
|
6.5
|
|
|
|
(3.1
|
)
|
Research tax credit
|
|
|
(0.3
|
)
|
|
|
(0.9
|
)
|
|
|
(0.7
|
)
|
Decrease in tax audit reserves
|
|
|
|
|
|
|
(14.3
|
)
|
|
|
|
|
Change in valuation allowance
|
|
|
(4.0
|
)
|
|
|
(19.3
|
)
|
|
|
|
|
Foreign taxes at rates other than 35% and miscellaneous other
|
|
|
1.9
|
|
|
|
0.1
|
|
|
|
(2.8
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total income tax provision
|
|
$
|
89.2
|
|
|
$
|
52.4
|
|
|
$
|
83.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The 2006 decrease in tax audit reserves is primarily due to the
release of tax contingency reserves established in prior years
in connection with recently completed examinations.
72
LENNOX
INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Deferred income taxes reflect the tax consequences on future
years of temporary differences between the tax basis of assets
and liabilities and their financial reporting basis and are
reflected as current or non-current depending on the timing of
the expected realization. The deferred tax provision for the
periods shown represents the effect of changes in the amounts of
temporary differences during those periods.
Deferred tax assets (liabilities), as determined under the
provisions of Statement of Financial Accounting Standards
No. 109, Accounting for Income Taxes, were comprised
of the following as of December 31, 2007 and 2006 (in
millions):
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
Gross deferred tax assets:
|
|
|
|
|
|
|
|
|
Warranties
|
|
$
|
33.4
|
|
|
$
|
36.6
|
|
Net operating losses (foreign and U.S. state)
|
|
|
45.6
|
|
|
|
52.7
|
|
Postretirement and pension benefits
|
|
|
18.3
|
|
|
|
22.6
|
|
Inventory reserves
|
|
|
6.8
|
|
|
|
4.9
|
|
Receivables allowance
|
|
|
4.6
|
|
|
|
4.2
|
|
Compensation liabilities
|
|
|
33.8
|
|
|
|
32.3
|
|
Deferred income
|
|
|
9.1
|
|
|
|
9.0
|
|
Intangibles
|
|
|
5.2
|
|
|
|
9.6
|
|
Other
|
|
|
20.5
|
|
|
|
15.2
|
|
|
|
|
|
|
|
|
|
|
Total deferred tax assets
|
|
|
177.3
|
|
|
|
187.1
|
|
Valuation allowance
|
|
|
(29.0
|
)
|
|
|
(32.8
|
)
|
|
|
|
|
|
|
|
|
|
Total deferred tax assets, net of valuation allowance
|
|
|
148.3
|
|
|
|
154.3
|
|
Gross deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
(12.4
|
)
|
|
|
(8.9
|
)
|
Insurance liabilities
|
|
|
(2.7
|
)
|
|
|
(9.0
|
)
|
Other
|
|
|
(8.6
|
)
|
|
|
(9.9
|
)
|
|
|
|
|
|
|
|
|
|
Total deferred tax liabilities
|
|
|
(23.7
|
)
|
|
|
(27.8
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred tax assets
|
|
$
|
124.6
|
|
|
$
|
126.5
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2007, the Company had $11.7 million
and $33.9 million in tax effected state and foreign net
operating loss carryforwards, respectively. The state and
foreign net operating loss carryforwards begin expiring in 2008.
The deferred tax asset valuation allowance relates primarily to
the operating loss carry forwards in various states in the
U.S. and in European tax jurisdictions. The decrease in the
valuation allowance is primarily the result of foreign and state
losses previously not benefited and currency fluctuation.
In assessing the realizability of deferred tax assets,
management considers whether it is more likely than not that
some portion or all of the deferred tax assets will not be
realized. Management considers the reversal of existing taxable
temporary differences, projected future taxable income, and tax
planning strategies in making this assessment. Based upon the
level of historical taxable income and projections for future
taxable income over the periods in which the deferred tax assets
are deductible, management believes it is more likely than not
that the Company will realize the benefits of these deductible
differences, net of the existing valuation allowances as of
December 31, 2007.
In order to realize the net deferred tax asset, the Company will
need to generate future foreign taxable income of approximately
$77.6 million during the periods in which those temporary
differences become deductible. The Company does not need to
generate any additional federal income as it has sufficient
carryback capacity to fully
73
LENNOX
INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
realize the federal deferred tax asset. U.S. taxable income
for the years ended December 31, 2007 and 2006 was
$133.8 million and $165.8 million, respectively.
No provision has been made for income taxes which may become
payable upon distribution of the Companys foreign
subsidiaries earnings. It is not practicable to estimate
the amount of tax that might be payable because
managements intent is to permanently reinvest these
earnings or to repatriate earnings when it is tax effective to
do so.
Effective January 1, 2007, the Company adopted
FIN No. 48. In June 2006, the FASB issued
FIN No. 48 to clarify the accounting for income taxes
by prescribing a minimum threshold that a tax position is
required to meet before being recognized in the financial
statements. FIN No. 48 also provides guidance on
derecognition, measurement, classification, interest and
penalties, accounting for interim periods, disclosure and
transition.
As a result of the adoption of FIN No. 48, the Company
recognized a $0.9 million decrease in the liability for
unrecognized tax benefits, which was accounted for as an
increase to the January 1, 2007 retained earnings balance.
As of January 1, 2007, the Company had approximately
$20.3 million in total gross unrecognized tax benefits. Of
this amount, $14.8 million (net of federal benefit on state
issues) will be recognized through the statement of operations,
$3.2 million will be recognized through goodwill and
$1.0 million will be recognized through stockholders
equity. In addition, the Company recognizes interest and
penalties accrued related to unrecognized tax benefits in income
tax expense in accordance with FIN No. 48. As of
January 1, 2007, the Company had recognized
$1.2 million (net of federal tax benefits) in interest and
penalties.
A reconciliation of the beginning and ending amount of
unrecognized tax benefits is as follows (in millions):
|
|
|
|
|
Balance as of January 1, 2007
|
|
$
|
20.3
|
|
Increases related to prior year tax positions
|
|
|
0.5
|
|
Decreases related to prior year tax positions
|
|
|
(0.3
|
)
|
Increases related to current year tax positions
|
|
|
6.1
|
|
Settlements
|
|
|
(2.7
|
)
|
|
|
|
|
|
Balance as of December 31, 2007
|
|
$
|
23.9
|
|
|
|
|
|
|
Included in the balance of unrecognized tax benefits as of
December 31, 2007, are potential benefits of
$12.8 million that, if recognized, would affect the
effective tax rate on income from continuing operations. Also
included in the balance of unrecognized tax benefits as of
December 31, 2007, are liabilities of $3.2 million
that, if recognized, would be recorded as an adjustment to
goodwill and $6.4 million that, if recognized, would be
recorded as an adjustment to stockholders equity. As of
December 31, 2007, the Company had recognized
$1.7 million (net of federal tax benefits) in interest and
penalties in income tax expense in accordance with
FIN No. 48.
The Company is subject to examination by numerous taxing
authorities in jurisdictions such as Australia, Belgium, Canada,
Germany, and the U.S. The Company is generally no longer
subject to U.S. federal, state and local, or
non-U.S. income
tax examinations by taxing authorities for years before 1999.
The Internal Revenue Service (IRS) completed its
examination of the Companys consolidated tax returns for
the years 1999 2003 and issued a Revenue
Agents Report (RAR) on April 6, 2006. The
IRS has proposed certain significant adjustments to the
Companys insurance deductions and research tax credits.
The Company disagrees with the RAR, which is currently under
review by the administrative appeals division of the IRS, and
anticipates resolution by the end of 2008. It is possible that a
reduction in the unrecognized tax benefits may occur but an
estimate of the impact on the statement of operations cannot be
made at this time.
During 2007, Michigan, New York, South Carolina, West Virginia
and a number of foreign jurisdictions enacted legislation
effective for tax years beginning on or after January 1,
2007. The Company determined the impact of these changes to be
immaterial.
74
LENNOX
INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
16.
|
Restructuring
Charges:
|
Restructuring charges incurred for the years ended
December 31, 2007, 2006 and 2005 include the following
amounts (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Integration of Australia and New Zealand operations
|
|
$
|
0.7
|
|
|
$
|
|
|
|
$
|
|
|
Consolidation of U.S. Refrigeration operations(1)
|
|
|
7.6
|
|
|
|
|
|
|
|
|
|
Consolidation of Lennox Hearth Products operations
|
|
|
3.3
|
|
|
|
|
|
|
|
|
|
Reorganization of corporate functions
|
|
|
10.0
|
|
|
|
|
|
|
|
|
|
Lennox Hearth Products production relocation
|
|
|
0.3
|
|
|
|
1.2
|
|
|
|
2.4
|
|
Allied Air Enterprises consolidation(2)
|
|
|
3.2
|
|
|
|
15.9
|
|
|
|
|
|
Pension settlement(3)
|
|
|
0.7
|
|
|
|
|
|
|
|
|
|
Gain on sale of facility(4)
|
|
|
|
|
|
|
(3.0
|
)
|
|
|
|
|
Gain on sale of land(4)
|
|
|
|
|
|
|
(0.8
|
)
|
|
|
|
|
Other
|
|
|
(0.6
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
25.2
|
|
|
$
|
13.3
|
|
|
$
|
2.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Amount includes $2.0 million of pension curtailment that is
not reflected in restructuring reserves as this item is included
in the Companys pension obligation. |
|
(2) |
|
The 2006 amount includes $1.9 million of pension
curtailment that is not reflected in restructuring reserves as
this item is included in the Companys pension obligation. |
|
(3) |
|
Amount not reflected in restructuring reserves as this item is
included in the Companys pension obligation. |
|
(4) |
|
Amount not reflected in restructuring reserves as this item is a
gain the Company recognized. |
Restructuring accruals are included in Accrued Expenses in the
accompanying Consolidated Balance Sheets. The table below
provides further analysis of the Companys restructuring
reserves for the years ended December 31, 2006 and 2007,
respectively (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of
|
|
|
|
|
|
Reversal
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of
|
|
Description of
|
|
December 31,
|
|
|
Charged
|
|
|
of Prior Period
|
|
|
Cash
|
|
|
Non-cash
|
|
|
|
|
|
December 31,
|
|
Reserves
|
|
2005
|
|
|
to Earnings
|
|
|
Charges
|
|
|
Utilization
|
|
|
Utilization
|
|
|
Other
|
|
|
2006
|
|
|
Severance and related expense
|
|
$
|
0.2
|
|
|
$
|
5.2
|
|
|
$
|
|
|
|
$
|
(3.6
|
)
|
|
$
|
|
|
|
$
|
|
|
|
$
|
1.8
|
|
Equipment moves
|
|
|
|
|
|
|
1.6
|
|
|
|
|
|
|
|
(1.6
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Recruiting and relocation
|
|
|
|
|
|
|
1.1
|
|
|
|
|
|
|
|
(1.1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Lease termination
|
|
|
0.8
|
|
|
|
1.2
|
|
|
|
|
|
|
|
(0.5
|
)
|
|
|
|
|
|
|
|
|
|
|
1.5
|
|
Other
|
|
|
0.6
|
|
|
|
6.1
|
|
|
|
|
|
|
|
(1.1
|
)
|
|
|
(4.8
|
)
|
|
|
|
|
|
|
0.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total restructuring reserves
|
|
$
|
1.6
|
|
|
$
|
15.2
|
|
|
$
|
|
|
|
$
|
(7.9
|
)
|
|
$
|
(4.8
|
)
|
|
$
|
|
|
|
$
|
4.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
75
LENNOX
INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of
|
|
|
|
|
|
Reversal
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of
|
|
Description of
|
|
December 31,
|
|
|
Charged
|
|
|
of Prior
|
|
|
Cash
|
|
|
Non-cash
|
|
|
|
|
|
December 31,
|
|
Reserves
|
|
2006
|
|
|
to Earnings
|
|
|
Period Charges
|
|
|
Utilization
|
|
|
Utilization
|
|
|
Other
|
|
|
2007
|
|
|
Severance and related expense
|
|
$
|
1.8
|
|
|
$
|
15.9
|
|
|
$
|
|
|
|
$
|
(4.6
|
)
|
|
$
|
|
|
|
$
|
2.1
|
|
|
$
|
15.2
|
|
Equipment moves
|
|
|
|
|
|
|
1.7
|
|
|
|
|
|
|
|
(1.7
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Recruiting and relocation
|
|
|
|
|
|
|
0.7
|
|
|
|
|
|
|
|
(0.7
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Lease termination
|
|
|
1.5
|
|
|
|
1.1
|
|
|
|
|
|
|
|
(1.1
|
)
|
|
|
|
|
|
|
|
|
|
|
1.5
|
|
Other
|
|
|
0.8
|
|
|
|
3.7
|
|
|
|
(0.6
|
)
|
|
|
(2.5
|
)
|
|
|
(1.4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total restructuring reserves
|
|
$
|
4.1
|
|
|
$
|
23.1
|
|
|
$
|
(0.6
|
)
|
|
$
|
(10.6
|
)
|
|
$
|
(1.4
|
)
|
|
$
|
2.1
|
|
|
$
|
16.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In the fourth quarter of 2007, the Companys
Australian-based manufacturing facilities in Milperra assumed
all heat transfer equipment manufacturing, while the smaller
coil production facility in New Zealand was closed. In
connection with this integration project, the Company recorded
pre-tax restructuring charges of $0.7 million in its
Refrigeration segment for the year ended December 31, 2007.
The restructuring charges primarily related to severance related
costs and disposal of certain long-lived assets. The integration
was substantially complete as of December 31, 2007.
In the fourth quarter of 2007, the Company announced plans to
close its refrigeration operations in Danville, Illinois and
consolidate its Danville manufacturing, support, and warehouse
functions in its Tifton, Georgia and Stone Mountain, Georgia
operations. The consolidation is a phased process and is
expected to be completed in the first quarter of 2009. In
connection with this consolidation project, the Company recorded
pre-tax restructuring charges of $7.6 million in its
Refrigeration segment for the year ended December 31, 2007.
The restructuring charges primarily related to severance related
costs, pension curtailment and disposal of certain long-lived
assets, including charges of $0.8 million of accelerated
depreciation recorded in 2007 related to the reduction in useful
lives and disposal of certain long-lived assets. In addition to
the amounts accrued as of December 31, 2007, the Company
expects to incur pre-tax restructuring charges of approximately
$10.0 million over the next 15 months due to this
consolidation project.
In the third quarter of 2007, the Company announced plans to
close Lennox Hearth Products Inc.s operations in Lynwood,
California and consolidate its U.S. factory-built fireplace
manufacturing operations in its facility in Union City,
Tennessee. The consolidation will be a phased process and is
expected to be completed by the end of the second quarter of
2008. In connection with this consolidation project, the Company
recorded pre-tax restructuring charges of $3.3 million in
its Residential Heating & Cooling segment for the year
ended December 31, 2007. The restructuring charges
primarily related to severance related costs, costs to move
equipment and the disposal of certain long-lived assets. In
addition to the amounts accrued as of December 31, 2007,
the Company expects to incur pre-tax restructuring charges of
approximately $1.6 million over the next three months due
to this consolidation project.
In 2007, the Company took steps to reorganize the corporate
function and in the second quarter of 2007 eliminated the
position of chief administrative officer. As a result, LII
reached a negotiated settlement with its former chief
administrative officer with respect to the Companys
obligations under his employment agreement. In connection with
the settlement, the Company recorded pre-tax restructuring
charges of $7.7 million during the year ended
December 31, 2007, which represented $9.1 million to
settle the employment agreement, net of a $1.4 million
reversal of previously recorded stock-based compensation
expense. In the fourth quarter of 2007, the Company eliminated
two additional positions and, as a result, recorded pre-tax
restructuring charges of $2.3 million.
In 2005, the Company relocated Lennox Hearth Products
Inc.s Whitfield pellet stove and Lennox cast iron product
lines from Burlington, Washington to a third party production
facility in Juarez, Mexico, discontinued its
76
LENNOX
INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
existing steel wood stove line manufactured in Burlington, and
closed the Burlington facility. In connection with the plant
closure, the Company recorded pre-tax restructuring-related
charges of $2.4 million for the year ended
December 31, 2005 in its Residential Heating &
Cooling segment. During 2006, the Company recorded a pre-tax
restructuring charge of approximately $1.2 million related
to an operating lease on the idle facility in Burlington. The
charge reflected the net present value of the remaining lease
payments on the operating lease, net of estimated sublease
income on the facility. In 2007, the Company entered into a
sub-lease agreement for the idle facility. As a result, the
Company recorded a pre-tax restructuring charge of approximately
$0.3 million to reflect the net present value of the
remaining lease payments on the operating lease, net of sublease
income on the facility. The operating lease and sub-lease both
expire in June 2011.
In 2006, the Company commenced consolidation of the
manufacturing, distribution, research & development,
and administrative operations of Allied Air Enterprises Inc.,
the Companys two-step Residential Heating &
Cooling operations, in South Carolina, and closure of its
operations in Bellevue, Ohio. The consolidation was
substantially completed during the first quarter of 2007. The
amounts recorded related primarily to severance and benefits and
other exit costs incurred, including charges of
$4.8 million of accelerated depreciation recorded in 2006
related to the reduction in useful lives and disposal of certain
long-lived assets.
A pension settlement loss of approximately $0.7 million is
included in the Companys Residential Heating &
Cooling segments restructuring expense for the year ended
December 31, 2007, which related to the Companys full
funding of lump sum pension payments to selected participants in
March 2007.
A gain of approximately $3.0 million related to the sale of
a facility in Canada is also included in restructuring expense
for the year ended December 31, 2006. The sale of the
Canadian facility occurred in 2003 and the resulting gain was
deferred pending approval of a Canadian regulatory agency, which
occurred in December 2006. The Company had reduced the carrying
value of the facility to its then net realizable value in
connection with a prior restructuring initiative of its Service
Experts operations in 2001.
Also included in restructuring expense for the year ended
December 31, 2006 is a gain of $0.8 million related to
the sale of a parcel of land. The Company had reduced the
carrying value of the land to its then net realizable value in
connection with a prior restructuring initiative of its Service
Experts operations in 2001.
Sale
of Interest in Heat Transfer Joint Venture
On June 7, 2005, the Company completed the sale of its 45%
interest in its heat transfer joint venture to Outokumpu for
$39.3 million pursuant to which the Company recorded a
pre-tax gain of $9.3 million, which is included in (Gains),
Losses and Other Expenses, net in the accompanying Consolidated
Statements of Operations. In connection with the sale, the
Company entered into an agreement with Outokumpu related to
joint remediation of certain existing environmental matters. In
conjunction with the new agreement, the Company updated its
estimate of its portion of the on-going remediation costs and
recorded expenses of $2.2 million for the year ended
December 31, 2005.
Service
Experts Discontinued Operations
In the first quarter of 2004, the Companys Board of
Directors approved a turnaround plan designed to improve the
performance of its Service Experts business segment. The plan
realigned Service Experts dealer service centers to focus
on service and replacement opportunities in the residential and
light commercial markets. The Company identified approximately
130 centers, whose primary business is residential and light
commercial service and replacement. These centers comprise the
ongoing Service Experts business segment. As of
December 31, 2004, the Company had divested the remaining
centers that no longer matched the realigned business model. The
operating results of the centers that are no longer a part of
Service Experts are classified as a Discontinued Operation in
the accompanying Consolidated Statements of Operations.
77
LENNOX
INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
A summary of net trade sales, pre-tax operating results and
pre-tax loss on disposal of assets for the years ended
December 31, 2007, 2006 and 2005 are detailed below (in
millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discontinued Operations
|
|
|
|
For the Years
|
|
|
|
Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Net trade sales
|
|
$
|
|
|
|
$
|
|
|
|
$
|
0.2
|
|
Pre-tax loss operating results
|
|
|
|
|
|
|
|
|
|
|
(2.0
|
)
|
Pre-tax loss on disposal of assets
|
|
|
|
|
|
|
|
|
|
|
(0.1
|
)
|
The following table details the Companys pre-tax loss from
discontinued operations for the years ended December 31,
2007, 2006 and 2005 (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative
|
|
|
|
|
|
|
Incurred
|
|
|
|
For the Years Ended
|
|
|
through
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2007
|
|
|
Goodwill impairment
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
14.8
|
|
Impairment of property, plant and equipment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3.1
|
|
Operating loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14.9
|
|
Other divestiture costs
|
|
|
|
|
|
|
|
|
|
|
2.0
|
|
|
|
8.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal
|
|
|
|
|
|
|
|
|
|
|
2.0
|
|
|
|
40.9
|
|
Loss on disposal of centers
|
|
|
|
|
|
|
|
|
|
|
0.1
|
|
|
|
15.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loss from discontinued
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
operations
|
|
$
|
|
|
|
$
|
|
|
|
$
|
2.1
|
|
|
$
|
55.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The income tax benefit on discontinued operations was
$0.7 million for the year ended December 31, 2005.
Through December 31, 2007, proceeds from the divestiture of
the Service Experts centers described above totaled
$25.8 million. No proceeds were received in 2007 or 2006.
Basic earnings per share are computed by dividing net income by
the weighted-average number of common shares outstanding during
the period. Diluted earnings per share are computed by dividing
net income, adjusted for the interest expense and amortization
of deferred financing costs associated with the Companys
Convertible Notes by the sum of the weighted-average number of
shares and the number of equivalent shares assumed outstanding,
if dilutive, under the Companys stock based compensation
plans and Convertible Notes. Emerging Issues Task Force Issue
04-8, The
Effect of Contingently Convertible Debt on Diluted Earnings per
Share, requires that contingently convertible debt
securities with a market price trigger be included in diluted
earnings per share, if they are dilutive, regardless of whether
the market price trigger has been met. As of December 31,
2007, the Company had
78
LENNOX
INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
81,897,439 shares outstanding of which 19,844,677 were held
as treasury shares. Diluted earnings per share for the years
ended December 31, 2007, 2006 and 2005 were computed as
follows (in millions, except per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Net income
|
|
$
|
169.0
|
|
|
$
|
166.0
|
|
|
$
|
150.7
|
|
Add: After-tax interest expense and amortization of deferred
financing costs on the Convertible Notes
|
|
|
|
|
|
|
|
|
|
|
4.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income, as adjusted
|
|
$
|
169.0
|
|
|
$
|
166.0
|
|
|
$
|
155.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average shares outstanding basic
|
|
|
66.4
|
|
|
|
69.9
|
|
|
|
64.2
|
|
Effect of dilutive securities attributable to Convertible Notes
|
|
|
|
|
|
|
|
|
|
|
6.0
|
|
Effect of diluted securities attributable to stock options,
stock appreciation rights, restricted stock units and
performance
share units
|
|
|
3.0
|
|
|
|
3.6
|
|
|
|
3.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average shares outstanding diluted
|
|
|
69.4
|
|
|
|
73.5
|
|
|
|
73.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share
|
|
$
|
2.43
|
|
|
$
|
2.26
|
|
|
$
|
2.11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additionally, options to purchase 125,852 shares of common
stock at prices ranging from $34.52 per share to $49.63 per
share, options to purchase 754,114 shares of common stock
at prices ranging from $29.36 per share to $49.63 per share and
options to purchase 111,064 shares of common stock at
prices ranging from $24.91 per share to $49.63 per share were
outstanding for the years ended December 31, 2007, 2006 and
2005, respectively, but were not included in the diluted
earnings per share calculation because the assumed exercise of
such options would have been anti-dilutive.
|
|
19.
|
Commitments
and Contingencies:
|
Operating
Leases
The approximate minimum commitments under all non-cancelable
leases outstanding as of December 31, 2007 are as follows
(in millions):
|
|
|
|
|
2008
|
|
$
|
48.4
|
|
2009
|
|
|
38.0
|
|
2010
|
|
|
26.5
|
|
2011
|
|
|
18.0
|
|
2012
|
|
|
13.4
|
|
Thereafter
|
|
|
15.8
|
|
On June 22, 2006, Lennox Procurement Company Inc.
(Procurement), a wholly-owned subsidiary of the
Company, entered into a lease agreement with BTMU Capital
Corporation (BTMUCC), pursuant to which BTMUCC is
leasing certain property located in Richardson, Texas to
Procurement for a term of seven years (the Lake Park
Lease). The leased property consists of an office building
of approximately 192,000 square feet, which includes the
Companys corporate headquarters, and land and related
improvements. The Lake Park Lease replaced the Companys
previous lease agreements (with a remaining
19-year
duration at the time of termination) with One Lake Park, L.L.C.
(One Lake Park) covering space in the leased
property, which agreements have been terminated. Certain members
of the Companys Board of Directors, as well as other
stockholders of the Company who may be immediate family members
of such directors, are individually or through trust
arrangements, members of AOC Land Investment, L.L.C., an
affiliate of One Lake Park.
79
LENNOX
INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
During the term, the Lake Park Lease requires Procurement to pay
base rent in quarterly installments, payable in arrears. At the
end of the term, if Procurement is not in default, Procurement
may elect to do any of the following and must do one of the
following: (i) purchase the leased property for a net price
of approximately $41.2 million (the Lease
Balance); (ii) make a final supplemental payment to
BTMUCC equal to approximately 82% of the Lease Balance and
return the leased property to BTMUCC in good condition;
(iii) arrange a sale of the leased property to a third
party; or (iv) renew the Lake Park Lease under mutually
agreeable terms. If Procurement elects to arrange a sale of the
Leased Property to a third party, then Procurement must pay to
BTMUCC the amount (if any) by which the Lease Balance exceeds
the net sales proceeds paid by the third party; provided,
however, that, absent certain defaults, such amount cannot
exceed approximately 82% of the Lease Balance. If the net sales
proceeds paid by the third party are greater than the Lease
Balance, the excess sales proceeds will be paid to Procurement.
Procurements obligations under the Lake Park Lease and
related documents are secured by a pledge of Procurements
interest in the leased property. Procurements obligations
under such documents are also guaranteed by the Company pursuant
to a Guaranty, dated as of June 22, 2006, in favor of
BTMUCC.
The Company is accounting for the Lake Park Lease as an
operating lease.
The majority of the Service Experts segments motor vehicle
fleet is leased through operating leases. The lease terms are
generally non-cancelable for the first
12-month
term and then are month-to-month, cancelable at the
Companys option. While there are residual value guarantees
on these vehicles, the Company has not historically made
significant payments to the lessors as the leases are maintained
until the fair value of the assets fully mitigates the
Companys obligations under the lease agreements. As of
December 31, 2007, the Company estimates that it will incur
an additional $7.2 million above the contractual
obligations on these leases until the fair value of the leased
vehicles fully mitigates the Companys residual value
guarantee obligation under the lease agreements.
Environmental
Applicable environmental laws can potentially impose obligations
on the Company to remediate hazardous substances at the
Companys properties, at properties formerly owned or
operated by the Company, and at facilities to which the Company
has sent or sends waste for treatment or disposal. The Company
is aware of contamination at some facilities; however, the
Company does not presently believe that any future remediation
costs at such facilities will be material to the Companys
results of operations. No amounts have been recorded for
non-asset retirement obligation environmental liabilities that
are not probable or estimable.
At one site located in Brazil, the Company is currently
evaluating the remediation efforts that may be required under
applicable environmental laws related to the release of certain
hazardous materials. The Company currently believes that the
release of the hazardous materials occurred over an extended
period of time, including a time when the Company did not own
the site. Extensive investigations have been performed and the
Company continues to conduct additional assessments of the site
to help determine the possible remediation activities that may
be conducted at this site. Once the site assessments are
completed and the possible remediation activities have been
evaluated, the Company plans to commence remediation efforts,
pending any required approvals by local governmental
authorities. Based on initial remediation evaluations the
Company recorded an expense of approximately $1.7 million
in December 2006. As of December 31, 2007 and 2006, the
Company had discounted liabilities related to this matter of
$2.0 million and $1.7 million, respectively. As of
December 31, 2007, $0.1 million and $1.9 million
were recorded in Accrued Expenses and Other Long Term
Liabilities, respectively, in the accompanying Consolidated
Balance Sheets while as of December 31, 2006,
$1.7 million was recorded in Other Long Term Liabilities.
The amount recorded as of December 31, 2007 reflects an
undiscounted liability of $2.5 million which is discounted
at approximately 8% as the aggregate amount of the obligation
and the amount and timing of cash payments are reliably
determinable. If, after the site assessments are completed, it
is determined that remediation is more costly or the local
governmental authorities require more costly remediation
activities, the costs to contain or remediate the site could be
as high as $3.1 million (undiscounted). The Company is
exploring options for recoveries.
80
LENNOX
INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The Company had additional reserves of approximately
$3.9 million and $4.8 million related to various other
environmental matters recorded as of December 31, 2007 and
2006, respectively. Balances of approximately $2.0 million
and $1.5 million were recorded in Accrued Expenses as of
December 31, 2007 and 2006, respectively, in the
Consolidated Balance Sheets. Balances of approximately
$1.9 million and $3.3 million were recorded in Other
Liabilities as of December 31, 2007 and 2006, respectively,
in the Consolidated Balance Sheets. The amount recorded as of
December 31, 2007 reflects undiscounted liabilities of
approximately $6.4 million, which are discounted at
approximately 6% as the aggregate amount of the obligations and
the amount and timing of cash payments are reliably determinable.
Estimates of future costs are subject to change due to changing
environmental remediation regulations
and/or
requirements.
Litigation
The Company is involved in various claims and lawsuits
incidental to its business. As previously reported, in January
2003, the Company, along with one of its subsidiaries, Heatcraft
Inc., was named in the following lawsuits in connection with the
Companys former heat transfer operations:
|
|
|
|
|
Lynette Brown, et al., vs. Koppers Industries, Inc.,
Heatcraft Inc., Lennox International Inc., et
al.,
Circuit Court of Washington County, Civil Action No. CI
2002-479;
|
|
|
|
Likisha Booker, et al., vs. Koppers Industries, Inc.,
Heatcraft Inc., Lennox International Inc., et
al.,
Circuit Court of Holmes County; Civil Action
No. 2002-549;
|
|
|
|
Walter Crowder, et al., vs. Koppers Industries, Inc.,
Heatcraft Inc. and Lennox International Inc., et
al.,
Circuit Court of Leflore County, Civil Action
No. 2002-0225; and
|
|
|
|
Benobe Beck, et al., vs. Koppers Industries, Inc., Heatcraft
Inc. and Lennox International Inc., et al.,
Circuit Court of the First Judicial District of Hinds County,
No. 03-000030.
|
On behalf of approximately 100 plaintiffs, the lawsuits allege
personal injury resulting from alleged emissions of
trichloroethylene, dichloroethylene, and vinyl chloride and
other unspecified emissions from the South Plant in Grenada,
Mississippi, previously owned by Heatcraft Inc. Each plaintiff
seeks to recover actual and punitive damages. On Heatcraft
Inc.s motion to transfer venue, two of the four lawsuits
(Booker and Crowder) were ordered severed and
transferred to Grenada County by the Mississippi Supreme Court,
requiring plaintiffs counsel to maintain a separate
lawsuit for each of the individual plaintiffs named in these
suits. To the Companys knowledge, as of February 1,
2008, plaintiffs counsel has requested the transfer of
files regarding five individual plaintiffs from the
Booker case and five individual plaintiffs from the
Crowder case. Additionally, LII has joined in motions to
dismiss filed by co-defendants in the four original lawsuits.
These motions, which are still pending, seek dismissal (rather
than transfer), without prejudice to refiling in Grenada County,
of all cases not yet transferred to Grenada County. It is not
possible to predict with certainty the outcome of these matters
or an estimate of any potential loss. Based on current
negotiations, management believes that it is unlikely that any
final resolution of these matters will have a material impact on
the Companys financial statements.
|
|
20.
|
Reportable
Business Segments:
|
The Company operates in four reportable business segments of the
HVACR industry. The first reportable segment is Residential
Heating & Cooling, in which LII manufactures and
markets a full line of heating, air conditioning and hearth
products for the residential replacement and new construction
markets in the U.S. and Canada. The second reportable
segment is Commercial Heating & Cooling, in which LII
manufactures and sells rooftop products and related equipment
for light commercial applications in the U.S. and Canada
and primarily rooftop products, chillers and air handlers in
Europe. The third reportable segment is Service Experts, which
includes sales, installation, maintenance and repair services
for heating, ventilation and air conditioning (HVAC)
81
LENNOX
INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
equipment by LII-owned service centers in the U.S. and
Canada. The fourth reportable segment is Refrigeration, which
manufactures and sells unit coolers, condensing units and other
commercial refrigeration products in the U.S. and
international markets.
Transactions between segments, such as products sold to Service
Experts by the Residential Heating & Cooling segment,
are recorded on an arms-length basis using the market price for
these products. The eliminations of these intercompany sales and
any associated profit are noted in the reconciliation of segment
results to the income from continuing operations before income
taxes below.
The Company uses segment profit (loss) as the primary measure of
profitability to evaluate operating performance and to allocate
capital resources. The Company defines segment profit (loss) as
a segments income (loss) from continuing operations before
income taxes included in the accompanying Consolidated
Statements of Operations excluding unusual and nonrecurring
items; (gains), losses and other expenses, net; restructuring
charges; goodwill impairment; interest expense, net; and other
expense (income), net; less (plus) realized gains (losses) on
settled futures contracts not designated as cash flow hedges and
the ineffective portion of settled cash flow hedges; and less
(plus) foreign currency exchange gains (losses). In 2007, a
warranty program adjustment of $16.9 million was not
included in segment profit as it is considered an unusual and
nonrecurring item.
The Companys corporate costs include those costs related
to corporate functions such as legal, internal audit, treasury,
human resources, tax compliance and senior executive staff.
Corporate costs also include the long-term share-based incentive
awards provided to employees throughout LII. The Company
recorded these share-based awards as Corporate costs as they are
determined at the discretion of the Board of Directors and based
on the historical practice of doing so for internal reporting
purposes.
82
LENNOX
INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Net sales and segment profit (loss) by business segment, along
with a reconciliation of segment profit (loss) to net earnings
for the years ended December 31, 2007, 2006 and 2005 are
shown below (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Net Sales
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential Heating & Cooling
|
|
$
|
1,669.6
|
|
|
$
|
1,861.2
|
|
|
$
|
1,698.5
|
|
Commercial Heating & Cooling
|
|
|
875.0
|
|
|
|
751.2
|
|
|
|
675.1
|
|
Service Experts
|
|
|
681.5
|
|
|
|
654.1
|
|
|
|
641.4
|
|
Refrigeration
|
|
|
607.7
|
|
|
|
529.9
|
|
|
|
470.2
|
|
Eliminations(1)
|
|
|
(84.1
|
)
|
|
|
(81.0
|
)
|
|
|
(79.9
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
3,749.7
|
|
|
$
|
3,715.4
|
|
|
$
|
3,405.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment Profit (Loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential Heating & Cooling
|
|
$
|
174.4
|
|
|
$
|
211.6
|
|
|
$
|
206.3
|
|
Commercial Heating & Cooling
|
|
|
101.0
|
|
|
|
72.6
|
|
|
|
56.3
|
|
Service Experts
|
|
|
25.2
|
|
|
|
18.2
|
|
|
|
15.8
|
|
Refrigeration
|
|
|
61.5
|
|
|
|
51.9
|
|
|
|
44.1
|
|
Corporate and other
|
|
|
(85.0
|
)
|
|
|
(98.2
|
)
|
|
|
(103.1
|
)
|
Eliminations(1)
|
|
|
0.6
|
|
|
|
0.8
|
|
|
|
0.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal that includes segment profit and eliminations
|
|
|
277.7
|
|
|
|
256.9
|
|
|
|
219.6
|
|
Reconciliation to income from continuing operations before
income taxes:
|
|
|
|
|
|
|
|
|
|
|
|
|
Warranty program adjustment
|
|
|
(16.9
|
)
|
|
|
|
|
|
|
|
|
(Gains), losses and other expenses, net
|
|
|
(6.4
|
)
|
|
|
(46.6
|
)
|
|
|
(47.5
|
)
|
Restructuring charges
|
|
|
25.2
|
|
|
|
13.3
|
|
|
|
2.4
|
|
Interest expense, net
|
|
|
6.8
|
|
|
|
4.4
|
|
|
|
15.4
|
|
Other (income) expense, net
|
|
|
0.7
|
|
|
|
0.5
|
|
|
|
0.3
|
|
Less: Realized gains on settled futures contracts not designated
as cash flow hedges and the ineffective portion of settled cash
flow hedges(2)
|
|
|
3.9
|
|
|
|
66.0
|
|
|
|
16.7
|
|
Less: Foreign currency exchange gains (losses)(2)
|
|
|
6.2
|
|
|
|
0.9
|
|
|
|
(2.7
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
258.2
|
|
|
$
|
218.4
|
|
|
$
|
235.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Eliminations consist of intercompany sales between business
segments, such as products sold to Service Experts by the
Residential Heating & Cooling segment. |
|
(2) |
|
Realized gains (losses) on settled futures contracts not
designated as cash flow hedges, the ineffective portion of
settled cash flow hedges and foreign currency exchange gains
(losses) are components of (Gains), Losses and Other Expenses,
net in the accompanying Consolidated Statements of Operations. |
On a consolidated basis, no revenues from transactions with a
single customer were 10% or greater of the Companys
consolidated net sales for any of the periods presented.
83
LENNOX
INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Total assets by business segment as of December 31, 2007
and 2006 are shown below (in millions). The assets in the
Corporate segment are primarily comprised of cash, short-term
investments and deferred tax assets. Assets recorded in the
operating segments represent those assets directly associated
with those segments.
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
Total Assets
|
|
|
|
|
|
|
|
|
Residential Heating & Cooling
|
|
$
|
548.5
|
|
|
$
|
587.0
|
|
Commercial Heating & Cooling
|
|
|
336.6
|
|
|
|
285.7
|
|
Service Experts
|
|
|
200.4
|
|
|
|
183.4
|
|
Refrigeration
|
|
|
388.1
|
|
|
|
344.3
|
|
Corporate and other
|
|
|
349.6
|
|
|
|
328.7
|
|
Eliminations(1)
|
|
|
(8.6
|
)
|
|
|
(9.3
|
)
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
1,814.6
|
|
|
$
|
1,719.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Eliminations consist of net intercompany receivables and
intercompany profit included in inventory from products sold
between business segments, such as products sold to Service
Experts by the Residential Heating & Cooling segment. |
Total capital expenditures by business segment for the years
ended December 31, 2007, 2006 and 2005 are shown below (in
millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Capital Expenditures
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential Heating & Cooling
|
|
$
|
21.8
|
|
|
$
|
30.6
|
|
|
$
|
34.7
|
|
Commercial Heating & Cooling
|
|
|
24.1
|
|
|
|
11.3
|
|
|
|
8.6
|
|
Service Experts
|
|
|
1.8
|
|
|
|
2.5
|
|
|
|
2.0
|
|
Refrigeration
|
|
|
9.7
|
|
|
|
10.0
|
|
|
|
9.5
|
|
Corporate and other
|
|
|
11.0
|
|
|
|
19.4
|
|
|
|
8.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total capital expenditures
|
|
$
|
68.4
|
|
|
$
|
73.8
|
|
|
$
|
63.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The depreciation and amortization expense by business segment
for the years ended December 31, 2007, 2006 and 2005 are
shown below (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Depreciation and Amortization
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential Heating & Cooling
|
|
$
|
22.1
|
|
|
$
|
21.5
|
|
|
$
|
16.9
|
|
Commercial Heating & Cooling
|
|
|
7.4
|
|
|
|
6.2
|
|
|
|
4.5
|
|
Service Experts
|
|
|
2.1
|
|
|
|
2.2
|
|
|
|
2.9
|
|
Refrigeration
|
|
|
8.7
|
|
|
|
7.9
|
|
|
|
7.3
|
|
Corporate and other
|
|
|
8.5
|
|
|
|
6.5
|
|
|
|
5.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total depreciation and amortization
|
|
$
|
48.8
|
|
|
$
|
44.3
|
|
|
$
|
37.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
84
LENNOX
INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following table sets forth certain financial information
relating to the Companys operations by geographic area
based on the domicile of the Companys operations (in
millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended
|
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Net Sales to External Customers
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
2,731.8
|
|
|
$
|
2,873.4
|
|
|
$
|
2,637.0
|
|
Canada
|
|
|
381.3
|
|
|
|
321.0
|
|
|
|
298.4
|
|
International
|
|
|
636.6
|
|
|
|
521.0
|
|
|
|
469.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net sales to external customers
|
|
$
|
3,749.7
|
|
|
$
|
3,715.4
|
|
|
$
|
3,405.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
Property, Plant and Equipment, net
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
226.8
|
|
|
$
|
218.0
|
|
Canada
|
|
|
10.3
|
|
|
|
9.4
|
|
Mexico
|
|
|
8.5
|
|
|
|
|
|
International
|
|
|
72.3
|
|
|
|
60.8
|
|
|
|
|
|
|
|
|
|
|
Total property, plant and equipment, net
|
|
$
|
317.9
|
|
|
$
|
288.2
|
|
|
|
|
|
|
|
|
|
|
|
|
21.
|
Related
Party Transactions:
|
Thomas W. Booth, Stephen R. Booth and John W. Norris, III,
each a member of the Companys Board of Directors, John W.
Norris, Jr., LIIs former Chairman of the Board, other
former directors of the Company, and Lynn B. Storey, the mother
of Jeffrey D. Storey, M.D., a director of the Company, as
well as other stockholders of the Company who may be immediate
family members of the foregoing persons, are, individually or
through trust arrangements, shareholders of AOC. As previously
announced, on March 16, 2007, LII entered into an agreement
with AOC to issue up to 2,239,589 shares of LII common
stock in exchange for 2,695,770 shares of LII common stock
owned by AOC. This transaction was completed in September 2007.
LII acquired 2,695,770 shares of LII common stock owned by
AOC in exchange for 2,239,563 newly issued LII common shares.
The transaction reduced the number of outstanding shares of LII
common stock by 456,207 shares, at minimal cost to LII.
Following the issuance and exchange of LII common stock, AOC
distributed the newly acquired shares of LII common stock pro
rata to its shareholders. The issuance, exchange and liquidating
distribution are referred to herein as the AOC
Transaction.
There were no special benefits provided for any of the related
persons described above under the AOC Transaction. Each related
persons participation in the AOC Transaction arose out of
his or her ownership of common stock of AOC and was on the same
basis as all other shareholders of AOC.
Thomas W. Booth, Stephen R. Booth and John W. Norris, III,
each a member of the Companys Board of Directors, John W.
Norris, Jr., LIIs former Chairman of the Board, other
former directors of the Company, and Lynn B. Storey, the mother
of Jeffrey D. Storey, M.D., a director of the Company, as
well as other stockholders of the Company who may be immediate
family members of the foregoing persons, are also, individually
or through trust arrangements, members of AOC Land Investment,
L.L.C. (AOC Land). AOC Land owned 70% of AOC
Development II, L.L.C. (AOC Development), which
owned substantially all of One Lake Park, L.L.C. (One Lake
Park) prior to the dissolution of AOC Development and One
Lake Park in the second half of 2006. Beginning in 1998, the
Company leased part of an office building in Richardson, Texas
owned by One Lake Park for use as its corporate headquarters.
LII terminated these leases in June 2006. Lease payments for
2006 and 2005 totaled
85
LENNOX
INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
approximately $1.4 million and $2.9 million,
respectively. LII believes that the terms of its leases with One
Lake Park were, at the time entered into, comparable to terms
that could have been obtained from unaffiliated third parties.
In December 2006, the Companys Board of Directors adopted
the Lennox International Inc. Related Party Transactions Policy,
pursuant to which all related party transactions must be
approved. Prior to adopting a formal written policy, the Company
did not enter into any transactions in which its directors,
executive officers or principal stockholders and their
affiliates had a material interest unless such transactions were
approved by a majority of the disinterested members of the Board
of Directors and were on terms that were no less favorable to
the Company than those that it could obtain from unaffiliated
third parties.
|
|
22.
|
Quarterly
Financial Information (unaudited):
|
Financial
results
The following tables provide information on net sales, gross
profit, net income, earnings per share and dividends per share
by quarter for 2007 and 2006 (in millions, except per share
data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Sales
|
|
|
Gross Profit
|
|
|
Net Income
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
First Quarter
|
|
$
|
791.5
|
|
|
$
|
808.4
|
|
|
$
|
204.6
|
|
|
$
|
209.1
|
|
|
$
|
8.6
|
|
|
$
|
21.0
|
|
Second Quarter
|
|
|
1,041.8
|
|
|
|
1,012.9
|
|
|
|
289.1
|
|
|
|
270.3
|
|
|
|
60.3
|
|
|
|
68.3
|
|
Third Quarter
|
|
|
1,029.8
|
|
|
|
1,020.3
|
|
|
|
293.6
|
|
|
|
256.8
|
|
|
|
61.2
|
|
|
|
35.6
|
|
Fourth Quarter
|
|
|
886.6
|
|
|
|
873.7
|
|
|
|
265.3
|
|
|
|
223.8
|
|
|
|
38.9
|
|
|
|
41.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
Diluted
|
|
|
|
|
|
|
Earnings Per
|
|
|
Earnings Per
|
|
|
Dividends Per
|
|
|
|
Common Share
|
|
|
Common Share
|
|
|
Common Share
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
First Quarter
|
|
$
|
0.13
|
|
|
$
|
0.29
|
|
|
$
|
0.12
|
|
|
$
|
0.28
|
|
|
$
|
0.13
|
|
|
$
|
0.11
|
|
Second Quarter
|
|
|
0.89
|
|
|
|
0.96
|
|
|
|
0.85
|
|
|
|
0.91
|
|
|
|
0.13
|
|
|
|
0.11
|
|
Third Quarter
|
|
|
0.92
|
|
|
|
0.51
|
|
|
|
0.88
|
|
|
|
0.49
|
|
|
|
0.13
|
|
|
|
0.11
|
|
Fourth Quarter
|
|
|
0.61
|
|
|
|
0.61
|
|
|
|
0.59
|
|
|
|
0.58
|
|
|
|
0.14
|
|
|
|
0.13
|
|
Stock
Prices
The following table provides information regarding the high and
low sales prices for the Companys common stock by quarter
for 2007 and 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Price Range Per Common Share
|
|
|
|
2007
|
|
|
2006
|
|
|
|
High
|
|
|
Low
|
|
|
High
|
|
|
Low
|
|
|
First Quarter
|
|
$
|
37.85
|
|
|
$
|
29.06
|
|
|
$
|
32.63
|
|
|
$
|
27.90
|
|
Second Quarter
|
|
|
37.28
|
|
|
|
31.46
|
|
|
|
34.76
|
|
|
|
22.92
|
|
Third Quarter
|
|
|
38.57
|
|
|
|
29.21
|
|
|
|
26.68
|
|
|
|
21.15
|
|
Fourth Quarter
|
|
|
41.96
|
|
|
|
30.17
|
|
|
|
31.39
|
|
|
|
22.44
|
|
86
|
|
Item 9.
|
Changes
in and Disagreements with Accountants on Accounting and
Financial Disclosure
|
None.
|
|
Item 9A.
|
Controls
and Procedures
|
Disclosure
Controls and Procedures
We carried out an evaluation, under the supervision and with the
participation of our current management, including our Chief
Executive Officer and Chief Financial Officer (our principal
executive officer and principal financial officer,
respectively), of the effectiveness of our disclosure controls
and procedures as of the end of the period covered by this
report. Based on that evaluation, the Chief Executive Officer
and Chief Financial Officer have concluded that our disclosure
controls and procedures were effective as of December 31,
2007, in alerting them in a timely manner to material
information required to be disclosed by us in the reports we
file with or submit to the Securities and Exchange Commission
under the Securities Exchange Act of 1934.
Managements
Annual Report on Internal Control Over Financial
Reporting
See Managements Report on Internal Control Over
Financial Reporting included in Item 8
Financial Statements and Supplementary Data.
Attestation
Report of the Independent Registered Public Accounting
Firm
See Report of Independent Registered Public Accounting
Firm included in Item 8 Financial Statements
and Supplementary Data.
Changes
in Internal Control Over Financial Reporting
There were no changes during the quarter ended December 31,
2007 in our internal control over financial reporting that have
materially affected, or are reasonably likely to materially
affect, our internal control over financial reporting.
|
|
Item 9B.
|
Other
Information
|
None.
PART III
|
|
Item 10.
|
Directors,
Executive Officers and Corporate Governance
|
The section of our 2008 Proxy Statement captioned
Proposal 1: Election of Directors identifies
members of our Board of Directors and nominees for election to
the Board of Directors at our 2008 Annual Meeting, and is
incorporated in this Item 10 by reference.
Part I, Item 1 Business Executive
Officers of the Company of this Annual Report on
Form 10-K
identifies our executive officers and is incorporated in this
Item 10 by reference.
The section of our 2008 Proxy Statement captioned
Section 16(a) Beneficial Ownership Reporting
Compliance is incorporated in this Item 10 by
reference.
The section of our 2008 Proxy Statement captioned
Corporate Governance - Board of Directors and Board
Committees Audit Committee identifies members
of the Audit Committee of our Board of Directors and our audit
committee financial expert, and is incorporated in this
Item 10 by reference.
The section of our 2008 Proxy Statement captioned
Corporate Governance - Other Corporate Governance
Policies Code of Conduct and Code of Ethical
Conduct includes information regarding our Code of Conduct
and Code of Ethical Conduct and is incorporated in this
Item 10 by reference.
87
|
|
Item 11.
|
Executive
Compensation
|
The sections of our 2008 Proxy Statement captioned
Executive Compensation, Director
Compensation and Certain Relationships and Related
Party Transactions Compensation Committee Interlocks
and Insider Participation are incorporated in this
Item 11 by reference.
|
|
Item 12.
|
Security
Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters
|
The sections of our 2008 Proxy Statement captioned Equity
Compensation Plan Information and Ownership of
Common Stock are incorporated in this Item 12 by
reference.
|
|
Item 13.
|
Certain
Relationships and Related Transactions, and Director
Independence
|
The sections of our 2008 Proxy Statement captioned
Corporate Governance Director
Independence and Certain Relationships and Related
Party Transactions are incorporated in this Item 13
by reference.
|
|
Item 14.
|
Principal
Accounting Fees and Services
|
The section of our 2008 Proxy Statement captioned
Independent Registered Public Accountants is
incorporated in this Item 14 by reference.
PART IV
|
|
Item 15.
|
Exhibits,
Financial Statement Schedules
|
Financial
Statements
The following financial statements are included in Part II,
Item 8 of this Annual Report on
Form 10-K:
|
|
|
|
|
Report of Independent Registered Public Accounting Firm
|
|
|
|
Consolidated Balance Sheets as of December 31, 2007 and 2006
|
|
|
|
Consolidated Statements of Operations for the Years Ended
December 31, 2007, 2006 and 2005
|
|
|
|
Consolidated Statements of Stockholders Equity for the
Years Ended December 31, 2007, 2006 and 2005
|
|
|
|
Consolidated Statements of Cash Flows for the Years Ended
December 31, 2007, 2006 and 2005
|
|
|
|
Notes to Consolidated Financial Statements for the Years Ended
December 31, 2007, 2006 and 2005
|
Financial
Statement Schedules
The following financial statement schedules are included in this
Annual Report on
Form 10-K:
|
|
|
|
|
Report of Independent Registered Public Accounting Firm (see
Part II, Item 8 of this Annual Report on
Form 10-K).
|
|
|
|
Schedule II Valuation and Qualifying Accounts
and Reserves for the Years Ended December 31, 2007, 2006,
and 2005 (see Schedule II immediately following the
signature page of this Annual Report on Form
10-K).
|
Financial statement schedules not included in this Annual Report
on
Form 10-K
have been omitted because they are not applicable or the
required information is shown in the Consolidated Financial
Statements or Notes thereto.
Exhibits
A list of the exhibits required to be filed or furnished as part
of this Annual Report on
Form 10-K
is set forth in the Index to Exhibits, which immediately
precedes such exhibits, and is incorporated herein by reference.
88
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
LENNOX INTERNATIONAL INC.
Todd M. Bluedorn
Chief Executive Officer
February 28, 2008
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons
on behalf of the registrant in the capacities and on the dates
indicated.
|
|
|
|
|
|
|
Signature
|
|
Title
|
|
Date
|
|
|
|
|
|
|
/s/ Todd
M. Bluedorn
Todd
M. Bluedorn
|
|
Chief Executive Officer and Director (Principal Executive
Officer)
|
|
February 28, 2008
|
|
|
|
|
|
/s/ Susan
K. Carter
Susan
K. Carter
|
|
Executive Vice President and Chief Financial Officer (Principal
Financial Officer)
|
|
February 28, 2008
|
|
|
|
|
|
/s/ Roy
A. Rumbough
Roy
A. Rumbough
|
|
Vice President, Controller and Chief Accounting Officer
(Principal Accounting Officer)
|
|
February 28, 2008
|
|
|
|
|
|
/s/ Richard
L. Thompson
Richard
L. Thompson
|
|
Chairman of the Board of Directors
|
|
February 28, 2008
|
|
|
|
|
|
/s/ Linda
G. Alvarado
Linda
G. Alvarado
|
|
Director
|
|
February 28, 2008
|
|
|
|
|
|
/s/ Steven
R. Booth
Steven
R. Booth
|
|
Director
|
|
February 28, 2008
|
|
|
|
|
|
/s/ Thomas
W. Booth
Thomas
W. Booth
|
|
Director
|
|
February 28, 2008
|
|
|
|
|
|
/s/ James
J. Byrne
James
J. Byrne
|
|
Director
|
|
February 28, 2008
|
|
|
|
|
|
/s/ Janet
K. Cooper
Janet
K. Cooper
|
|
Director
|
|
February 28, 2008
|
|
|
|
|
|
/s/ C.L.
(Jerry) Henry
C.L.
(Jerry) Henry
|
|
Director
|
|
February 28, 2008
|
|
|
|
|
|
/s/ John
E. Major
John
E. Major
|
|
Director
|
|
February 28, 2008
|
|
|
|
|
|
|
|
Signature
|
|
Title
|
|
Date
|
|
|
|
|
|
|
/s/ John
W. Norris, III
John
W. Norris, III
|
|
Director
|
|
February 28, 2008
|
|
|
|
|
|
/s/ Paul
W. Schmidt
Paul
W. Schmidt
|
|
Director
|
|
February 28, 2008
|
|
|
|
|
|
/s/ Terry
D. Stinson
Terry
D. Stinson
|
|
Director
|
|
February 28, 2008
|
|
|
|
|
|
/s/ Jeffrey
D. Storey, MD
Jeffrey
D. Storey, MD
|
|
Director
|
|
February 28, 2008
|
LENNOX
INTERNATIONAL INC.
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
For the Years Ended December 31, 2007, 2006 and 2005
(In Millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additions
|
|
|
|
|
|
|
|
|
|
|
|
|
Charged to
|
|
|
|
|
|
Balance
|
|
|
|
Balance at
|
|
|
Cost and
|
|
|
|
|
|
at End
|
|
|
|
Beginning of Year
|
|
|
Expenses
|
|
|
Deductions(1)
|
|
|
of Year
|
|
|
2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for doubtful accounts
|
|
$
|
18.5
|
|
|
$
|
6.7
|
|
|
$
|
(8.5
|
)
|
|
$
|
16.7
|
|
2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for doubtful accounts
|
|
$
|
16.7
|
|
|
$
|
6.6
|
|
|
$
|
(6.6
|
)
|
|
$
|
16.7
|
|
2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for doubtful accounts
|
|
$
|
16.7
|
|
|
$
|
10.4
|
|
|
$
|
(10.0
|
)
|
|
$
|
17.1
|
|
|
|
|
(1) |
|
Uncollectible accounts charged off, net of recoveries and the
effect of foreign currency translation. |
INDEX TO
EXHIBITS
|
|
|
|
|
Exhibit
|
|
|
Number
|
|
Exhibit Name
|
|
|
3
|
.1
|
|
Restated Certificate of Incorporation of Lennox International
Inc. (LII) (filed as Exhibit 3.1 to LIIs
Registration Statement on
Form S-1
(Registration
No. 333-75725)
filed on April 6, 1999 and incorporated herein by
reference).
|
|
3
|
.2
|
|
Amended and Restated Bylaws of LII (filed as Exhibit 3.1 to
LIIs Current Report on
Form 8-K
filed on July 26, 2007 and incorporated herein by
reference).
|
|
4
|
.1
|
|
Specimen Stock Certificate for the Common Stock, par value $.01
per share, of LII (filed as Exhibit 4.1 to LIIs
Amendment to Registration Statement on
Form S-1/A
(Registration
No. 333-75725)
filed on June 16, 1999 and incorporated herein by
reference).
|
|
4
|
.2
|
|
Rights Agreement, dated as of July 27, 2000, between LII
and ChaseMellon Shareholder Services, L.L.C., as Rights Agent,
which includes as Exhibit A the form of Certificate of
Designations of Series A Junior Participating Preferred
Stock setting forth the terms of the Preferred Stock, as
Exhibit B the form of Rights Certificate and as
Exhibit C the Summary of Rights to Purchase Preferred Stock
(filed as Exhibit 4.1 to LIIs Current Report on
Form 8-K
filed on July 28, 2000 and incorporated herein by
reference).
|
|
|
|
|
LII is a party to several debt instruments under which the total
amount of securities authorized under any such instrument does
not exceed 10% of the total assets of LII and its subsidiaries
on a consolidated basis. Pursuant to paragraph 4(iii)(A) of
Item 601(b) of
Regulation S-K,
LII agrees to furnish a copy of such instruments to the
Securities and Exchange Commission upon request.
|
|
10
|
.1
|
|
Second Amended and Restated Receivables Purchase Agreement,
dated as of June 16, 2003, by and among LPAC Corp., Lennox
Industries Inc., Blue Ridge Asset Funding Corporation, Liberty
Street Funding Corp., the Liberty Street Investors named
therein, The Bank of Nova Scotia and Wachovia Bank, N.A. (filed
as Exhibit 10.1 to LIIs Quarterly Report on
Form 10-Q
for the quarter ended June 30, 2003 and incorporated herein
by reference).
|
|
10
|
.2
|
|
Fourth Amendment to Second Amended and Restated Receivables
Purchase Agreement, dated as of June 11, 2004, by and among
Lennox Industries Inc., LPAC Corp., Liberty Street Funding
Corp., the investors named in the Second Amended and Restated
Receivables Purchase Agreement, as amended (the Purchase
Agreement), The Bank of Nova Scotia, YC SUSI Trust, Bank
of America, N.A. and The Yorktown Investors (as defined in
Purchase Agreement) (filed as Exhibit 10.3 to LIIs
Annual Report on
Form 10-K
for the year ended December 31, 2003 and incorporated
herein by reference).
|
|
10
|
.3
|
|
Fifth Amendment to Second Amended and Restated Receivables
Purchase Agreement, dated as of December 20, 2004, by and
among Lennox Industries Inc., LPAC Corp., Liberty Street Funding
Corp., the investors named in the Purchase Agreement, The Bank
of Nova Scotia, YC SUSI Trust, Bank of America, N.A. and The
Yorktown Investors (as defined in the Purchase Agreement) (filed
as Exhibit 10.1 to LIIs
Form 8-K
filed December 21, 2004 and incorporated herein by
reference).
|
|
10
|
.4
|
|
Sixth Amendment to Second Amended and Restated Receivables
Purchase Agreement, dated December 14, 2005, by and among
Lennox Industries Inc., LPAC Corp., Liberty Street Funding
Corp., the investors named in the Purchase Agreement, The Bank
of Nova Scotia, YC SUSI Trust, Bank of America, National
Association and the Yorktown Investors (as defined in the
Purchase Agreement) (filed as Exhibit 10.1 to LIIs
Form 8-K
filed December 20, 2005 and incorporated herein by
reference).
|
|
10
|
.5
|
|
Assignment and Assumption Agreement, dated as of May 5,
2004, by and among EagleFunding Capital Corporation and YC SUSI
Trust, Fleet National Bank and Bank of America, N.A., Fleet
Securities, Inc. and Bank of America, N.A., The Bank of Nova
Scotia and LPAC Corp. (filed as Exhibit 10.10 to LIIs
Annual Report on
Form 10-K
for the year ended December 31, 2003 and incorporated
herein by reference).
|
|
10
|
.6
|
|
Purchase and Sale Agreement, dated as of June 19, 2000, by
and among Lennox Industries Inc., Heatcraft Inc. and LPAC Corp.
(filed as Exhibit 10.1 to LIIs Quarterly Report on
Form 10-Q
for the quarter ended June 30, 2000 and incorporated herein
by reference).
|
|
10
|
.7
|
|
First Amendment to Purchase and Sale Agreement, dated as of
June 7, 2002, among Lennox Industries Inc., Heatcraft Inc.,
Armstrong Air Conditioning Inc. and LPAC Corp. (filed as
Exhibit 10.2 to LIIs Quarterly Report on
Form 10-Q
for the quarter ended June 30, 2002 and incorporated herein
by reference).
|
|
|
|
|
|
Exhibit
|
|
|
Number
|
|
Exhibit Name
|
|
|
10
|
.8
|
|
Second Amendment to Purchase and Sale Agreement, dated as of
June 16, 2003, by and among LPAC Corp., Lennox Industries
Inc., Armstrong Air Conditioning Inc., Advanced Distributor
Products LLC and Heatcraft Refrigeration Products LLC (filed as
Exhibit 10.2 to LIIs Quarterly Report on
Form 10-Q
for the quarter ended June 30, 2003 and incorporated herein
by reference).
|
|
10
|
.9
|
|
Omnibus Amendment Number One to the Amended and Restated
Receivables Purchase Agreement and the Purchase and Sale
Agreement, dated as of January 31, 2003, by and among
Lennox Industries Inc., Heatcraft Inc., Armstrong Air
Conditioning Inc., Advanced Distributor Products LLC, Heatcraft
Refrigeration Products LLC, LPAC Corp., Blue Ridge Asset Funding
Corporation and Wachovia Bank, N.A. (filed as Exhibit 10.12
to LIIs Annual Report on
Form 10-K
for the year ended December 31, 2002 and incorporated
herein by reference).
|
|
10
|
.10
|
|
First Omnibus Amendment to Transaction Documents, dated as of
December 31, 2003, among LII, Lennox Industries Inc.,
Advanced Distributor Products LLC, Heatcraft Refrigeration
Products LLC, LPAC Corp., Blue Ridge Asset Funding Corporation,
Wachovia Bank, N.A., Liberty Street Funding Corp., The Bank of
Nova Scotia, EagleFunding Capital Corporation, Fleet National
Bank, Fleet Securities Inc., and The Liberty Street Investors
(as defined therein) (filed as Exhibit 10.9 to LIIs
Annual Report on
Form 10-K
for the year ended December 31, 2003 and incorporated
herein by reference).
|
|
10
|
.11
|
|
Second Omnibus Amendment to Second Amended and Restated
Receivables Purchase Agreement, as amended, and Purchase and
Sale Agreement, as amended, dated December 14, 2006, by and
among Lennox Industries Inc., Advance Distributor Products LLC,
Heatcraft Refrigeration Products LLC, LPAC Corp., Liberty Street
Funding Corp., the investors named in the Second Amended and
Restated Receivables Purchase Agreement, as amended, The Bank of
Nova Scotia, YC SUSI Trust, Bank of America, National
Association and the Yorktown Investors (filed as
Exhibit 10.1 to LIIs Current Report on
Form 8-K
filed on December 20, 2006 and incorporated herein by
reference).
|
|
10
|
.12
|
|
Third Omnibus Amendment to Transaction Documents, dated
December 13, 2007, by and among Lennox Industries Inc.,
Heatcraft Refrigeration Products LLC, LPAC Corp., YC SUSI Trust,
Bank of America, National Association, Market Street Funding
LLC, PNC Bank, National Association, Liberty Street Funding LLC
and The Bank of Nova Scotia and consented to by LII (filed as
Exhibit 10.1 to LIIs Current Report on
Form 8-K
filed on December 18, 2007 and incorporated herein by
reference).
|
|
10
|
.13
|
|
Second Amended and Restated Credit Agreement, dated July 8,
2005, among LII, Bank of America, N.A., as administrative agent,
JPMorgan Chase Bank, N.A., as syndication agent, Banc of America
Securities LLC and J.P. Morgan Securities, Inc., as Joint
Lead Arrangers, and the other Lenders party thereto (filed as
Exhibit 10.1 to LIIs Current Report on
Form 8-K
filed on July 12, 2005 and incorporated herein by
reference).
|
|
10
|
.14
|
|
Second Amended and Restated Pledge Agreement, dated July 8,
2005, between LII and Bank of America, N.A., as collateral agent
for itself and other creditors of LII under the Second Amended
and Restated Credit Agreement (filed as Exhibit 10.2 to
LIIs Current Report on
Form 8-K
filed on July 12, 2005 and incorporated herein by
reference).
|
|
10
|
.15
|
|
First Amendment to Second Amended and Restated Revolving Credit
Facility Agreement, dated August 17, 2006, among LII, Bank
of America, N.A. as administrative agent, and the Lenders party
thereto (filed as Exhibit 10.1 to LIIs Current Report
on
Form 8-K
filed on August 23, 2006 and incorporated herein by
reference).
|
|
10
|
.16
|
|
Third Amendment to Second Amended and Restated Revolving Credit
Agreement, dated August 3, 2007, among LII, Bank of
America, N.A., as administrative agent, and the Lenders party
thereto (filed as Exhibit 10.1 to LIIs Current Report
on
Form 8-K
filed on August 3, 2007 and incorporated herein by
reference).
|
|
10
|
.17
|
|
Third Amended and, Restated Credit Agreement dated
October 12, 2007, among LII, Bank of America, N.A., as
administrative agent, swingline lender and issuing bank,
JPMorgan Chase Bank, N.A. and Wachovia Bank, National
Association, as co-syndication agents, and the Lenders party
thereto (filed as Exhibit 10.1 to LIIs Current Report
on
Form 8-K
filed on October 15, 2007 and incorporated herein by
reference).
|
|
10
|
.18
|
|
Lease Agreement, dated as of June 22, 2006, by and between
BTMU Capital Corporation, as lessor, and Lennox Procurement
Company Inc., as lessee (filed as Exhibit 10.1 to
LIIs Current Report on
Form 8-K
filed on June 28, 2006 and incorporated herein by
reference).
|
|
|
|
|
|
Exhibit
|
|
|
Number
|
|
Exhibit Name
|
|
|
10
|
.19
|
|
Participation Agreement, dated as of June 22, 2006, by and
among Lennox Procurement Company Inc., as lessee, Lennox
International Inc., as guarantor, BTMU Capital Corporation, as
lessor, and MHCB (USA) Leasing and Finance Corporation, as
initial holder of all of the notes and administrative agent
(filed as Exhibit 10.2 to LIIs Current Report on
Form 8-K
filed on June 28, 2006 and incorporated herein by
reference).
|
|
10
|
.20
|
|
Memorandum of Lease, Deed of Trust, Assignment of Leases and
Rents, Security Agreement and Fixture Filing, dated as of
June 22, 2006, by and among Lennox Procurement Company
Inc., BTMU Capital Corporation and Jeffrey L. Bell, as Deed of
Trust Trustee, for the benefit of BTMU Capital Corporation
(filed as Exhibit 10.3 to LIIs Current Report on
Form 8-K
filed on June 28, 2006 and incorporated herein by
reference).
|
|
10
|
.21
|
|
Guaranty, dated as of June 22, 2006, from Lennox
International Inc., as guarantor, to BTMU Capital Corporation,
as lessor, and the other parties specified therein (filed as
Exhibit 10.4 to LIIs Current Report on
Form 8-K
filed on June 28, 2006 and incorporated herein by
reference).
|
|
10
|
.22*
|
|
Amended and Restated 1998 Incentive Plan of Lennox International
Inc. (filed as Exhibit 10.1 to LIIs Quarterly Report
on
Form 10-Q
for the quarter ended March 31, 2005 and incorporated
herein by reference).
|
|
10
|
.23*
|
|
Form of Performance Share Program Award Agreement under the 1998
Incentive Plan of LII (filed as Exhibit 10.3 to LIIs
Current Report on
Form 8-K
filed on December 13, 2005 and incorporated herein by
reference).
|
|
10
|
.24*
|
|
Form of Employee Restricted Stock Grant Agreement under the 1998
Incentive Plan of LII (filed as Exhibit 10.4 to LIIs
Current Report on
Form 8-K
filed on December 13, 2005 and incorporated herein by
reference).
|
|
10
|
.25*
|
|
Form of Employee Stock Appreciation Rights Agreement under the
1998 Incentive Plan of LII (filed as Exhibit 10.5 to
LIIs Current Report on
Form 8-K
filed on December 13, 2005 and incorporated herein by
reference).
|
|
10
|
.26*
|
|
Form of 2007 Long-Term Incentive Award Agreement for U.S.
Employees under the 1998 Incentive Plan of LII (filed as
Exhibit 10.6 to LIIs Current Report on
Form 8-K
filed on December 12, 2007 and incorporated herein by
reference).
|
|
10
|
.27*
|
|
Form of Non-Employee Director Restricted Stock Grant Agreement
under the 1998 Incentive Plan of LII (filed herewith).
|
|
10
|
.28*
|
|
Form of Non-Employee Director Stock Appreciation Rights
Agreement under the 1998 Incentive Plan of LII (filed as
Exhibit 10.7 to LIIs Current Report on
Form 8-K
filed on December 13, 2005 and incorporated herein by
reference).
|
|
10
|
.29*
|
|
Lennox International Inc. Profit Sharing Restoration Plan (filed
as Exhibit 10.9 to LIIs Registration Statement on
Form S-1
(Registration
No. 333-75725)
filed on April 6, 1999 and incorporated herein by
reference).
|
|
10
|
.30*
|
|
Lennox International Inc. Profit Sharing Restoration Plan, as
Amended and Restated Effective as of January 1, 2008 (filed
as Exhibit 10.4 to LIIs Current Report on
Form 8-K
filed on December 12, 2007 and incorporated herein by
reference).
|
|
10
|
.31*
|
|
Lennox International Inc. Supplemental Executive Retirement Plan
(filed as Exhibit 10.10 to LIIs Registration
Statement on
Form S-1
(Registration
No. 333-75725)
filed on April 6, 1999 and incorporated herein by
reference).
|
|
10
|
.32*
|
|
Lennox International Inc. Supplemental Executive Retirement
Plan, as Amended and Restated as of January 1, 2008 (filed
as Exhibit 10.3 to LIIs Current Report on
Form 8-K
filed on December 12, 2007 and incorporated herein by
reference).
|
|
10
|
.33*
|
|
Lennox International Inc. Non-employee Directors
Compensation and Deferral Plan (filed as Exhibit 10.22 to
LIIs Annual Report on
Form 10-K
for the year ended December 31, 2002 and incorporated
herein by reference).
|
|
10
|
.34*
|
|
Amendment to the Lennox International Inc. Non-employee
Directors Compensation and Deferral Plan, dated
May 17, 2002 (filed as Exhibit 10.23 to LIIs
Annual Report on
Form 10-K
for the year ended December 31, 2002 and incorporated
herein by reference).
|
|
|
|
|
|
Exhibit
|
|
|
Number
|
|
Exhibit Name
|
|
|
10
|
.35*
|
|
Form of Indemnification Agreement entered into between LII and
certain executive officers and directors of LII (filed as
Exhibit 10.15 to LIIs Registration Statement on
Form S-1
(Registration
No. 333-75725)
filed on April 6, 1999 and incorporated herein by
reference).
|
|
10
|
.36*
|
|
Form of Employment Agreement entered into between LII and
certain executive officers of LII (filed as Exhibit 10.30
to LIIs Annual Report on
Form 10-K
for the year ended December 31, 2006 and incorporated
herein by reference).
|
|
10
|
.37*
|
|
Amendment to Employment Agreement, dated March 20, 2006,
between the Company and Harry J. Ashenhurst (filed as
Exhibit 10.1 to LIIs Current Report on
Form 8-K
filed on October 24, 2006 and incorporated herein by
reference).
|
|
10
|
.38*
|
|
Form of Amendment to Employment Agreement entered into between
LII and certain executive officers of LII (filed as
Exhibit 10.2 to LIIs Current Report on
Form 8-K
filed on December 12, 2007 and incorporated herein by
reference).
|
|
10
|
. 39*
|
|
Form of Change of Control Employment Agreement entered into
between LII and certain executive officers of LII (filed as
Exhibit 10.31 to LIIs Annual Report on
Form 10-K
for the year ended December 31, 2006 and incorporated
herein by reference).
|
|
10
|
.40*
|
|
Form of Change of Control Employment Agreement entered into
between LII and each of Susan K. Carter and William F. Stoll,
Jr. (filed as Exhibit 10.1 to LIIs Current Report on
Form 8-K
filed on August 31, 2005 and incorporated herein by
reference).
|
|
10
|
.41*
|
|
Form of Amendment to Change of Control Agreement entered into
between LII and certain executive officers of LII (filed as
Exhibit 10.1 to LIIs Current Report on
Form 8-K
filed on December 12, 2007 and incorporated herein by
reference).
|
|
10
|
.42*
|
|
Summary of Fiscal 2008 Target Short-Term Incentive Percentages
for the Named Executive Officers of LII (filed as
Exhibit 10.5 to LIIs Current Report on
Form 8-K
filed on December 12, 2007 and incorporated herein by
reference).
|
|
10
|
.43*
|
|
Lennox International Inc. Directors Retirement Plan (as
Amended and Restated as of January 1, 2008) (filed
herewith).
|
|
21
|
.1
|
|
Subsidiaries of LII (filed herewith).
|
|
23
|
.1
|
|
Consent of KPMG LLP (filed herewith).
|
|
31
|
.1
|
|
Certification of the principal executive officer (filed
herewith).
|
|
31
|
.2
|
|
Certification of the principal financial officer (filed
herewith).
|
|
32
|
.1
|
|
Certification of the principal executive officer and the
principal financial officer of LII pursuant to 18 U.S.C.
Section 1350 (filed herewith).
|
|
|
|
* |
|
Management contract or compensatory plan or arrangement. |