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, 2008
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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.
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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, 2008, the aggregate market value of the
common stock held by non-affiliates of the registrant was
approximately $1,210,568,000 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, 2008. As of
February 17, 2009, there were 55,119,211 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 2009 Annual Meeting of Stockholders to be
held on May 21, 2009 are incorporated by reference into
Part III of this report.
LENNOX
INTERNATIONAL INC.
FORM 10-K
For the Fiscal Year Ended December 31, 2008
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 2008 net sales by
segment. Segment financial data for 2008, 2007 and 2006,
including financial information about foreign and domestic
operations, is included in Note 21 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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2008 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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1,493.4
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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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835.3
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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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626.6
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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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618.2
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Eliminations
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(92.1
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Total
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$
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3,481.4
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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 portion of our outstanding common stock is currently
broadly distributed among descendants of, or persons otherwise
related to, D.W. Norris.
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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 North America. 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 independent 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
factory-built gas, wood-burning and electric fireplaces; free
standing wood-burning, pellet and gas stoves: wood-burning,
pellet and gas fireplace inserts; gas logs, venting products 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
Lennoxtm,
Superiortm,
Whitfieldtm,
Country
tm
Collection and
Securitytm
Chimneys brand names.
Commercial
Heating & Cooling
North America. In North America, we
manufacture and 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, total cost of ownership, 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 70 tons, and applied
systems with up to 200 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, Turkey and the Middle East.
Service
Experts
Approximately 116 (including seven service centers classified as
discontinued operations) 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
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customer service, a training program for new general managers,
common 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, air-cooled condensers,
condensing units and compressor racks of the same design and
quality as those manufactured by us in the U.S. This
venture product line is complemented with imports from the U.S.,
which are sold through the joint ventures distribution
network. We also own a 9% 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
market position through organic growth and acquisitions while
increasing our focus on cost reductions to drive margin
expansion and support growth into target business segments. This
strategy is supported by five strategic priorities that are
underlined by our values and our people. The five strategic
priorities are:
Innovative
Product and System Solutions
In all of our markets, we are continually building on 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 distribution network, 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.
Geographic
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 replacement 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 for reduced costs and improved
financial and operating performance. 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 reduce their costs and improve their quality and
delivery performance. We seek to accomplish this by employing
the same business excellence
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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.
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 $46.5 million, $43.0 million and
$42.2 million on research and development during 2008, 2007
and 2006, respectively. We operate a global engineering and
technology organization that focuses on new technology
invention, product development, and process improvements.
Intellectual property and innovative designs are leveraged
across our businesses. We leverage product development cycle
time improvement and product data management systems to
commercialize new products to market more rapidly. We use
advanced, commercially available computer-aided design,
computer-aided manufacturing, computational fluid dynamics and
other sophisticated design tools to streamline the design and
manufacturing processes. We use complex computer simulations and
analyses in the conceptual design phase before functional
prototypes are created.
We also operate a full line of prototype machine 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.
The North American HVAC market is driven by seasonal weather
patterns. HVAC products and services are sold year round, but
the volume and mix of product sales and service change
significantly by season. The industry ships roughly twice as
many units during June as it does in December. Overall, cooling
equipment represents a substantial portion of the annual HVAC
market. In between the heating season (roughly November through
February) and cooling season (roughly May through August) are
periods commonly referred to as shoulder seasons when the
distribution channel transitions its buying patterns from one
season to the next. These seasonal fluctuations in mix and
volume drive our sales and related segment profit, resulting in
somewhat higher sales in the second and third quarters due to
the larger cooling season relative to the heating season.
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. We
proactively obtain patents to further our strategic intellectual
property objectives. 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.
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 from 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); Ingersoll-Rand Company Limited
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(Trane, American Standard); Paloma Co., Ltd. (Rheem, Ruud);
Johnson Controls, Inc. (York, Weatherking); Nordyne
(Westinghouse, Frigidaire, Tappan, Philco, Kelvinator, Gibson);
HNI Corporation (Heatilator, Heat-n-Glo); and Monessen Hearth
Company (Majestic).
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Commercial Heating & Cooling United
Technologies Corp. (Carrier); Ingersoll-Rand Company Limited
(Trane); Johnson Controls, Inc. (York); AAON, Inc.; and Daikin
Industries, Ltd. (McQuay).
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Service Experts Local independent dealers; dealers
owned by utility companies, i.e. Direct Energy; and national
HVAC service providers such as Sears and American Residential
Services.
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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, 2008, we employed approximately
13,500 employees, of whom approximately 5,500 were salaried
and 8,000 were hourly. The number of hourly workers we employ
may vary in order to match our labor needs during periods of
fluctuating demand. Approximately 2,900 employees are
represented by unions. We believe our relationships with our
employees and with the unions representing our employees are
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.
Energy Efficiency. We are subject to appliance
efficiency regulations promulgated under NAECA and various state
regulations concerning the energy efficiency of our products.
The U.S. Department of Energy 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 residential
furnaces, air conditioners and heat pumps. 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 commenced
its revision of the residential air conditioner and heat pump
standards in 2008 with a likely effective date of 2016. 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 U.S. Department of Energy and
Congressional activities related to energy efficiency standards.
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 or Congress.
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 Montreal
Protocol and implementing regulations, the use of virgin HCFCs
in new pre-charged equipment within the U.S. must be phased
out by January 1, 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. The
U.S. Congress, Administration and other international
regulatory bodies are considering steps to limit the future use
of HFCs in our products and
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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 are in the
process of pilot testing remediation technology
on-site.
Commencement of full-scale remediation is planned for 2009. For
more information see Note 11 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 2008 New York Stock Exchange (the
NYSE) Annual CEO Certification regarding our
compliance with the NYSEs corporate governance listing
standards to the NYSE on June 9, 2008.
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:
|
|
|
|
|
|
|
Name
|
|
Age
|
|
Position
|
|
Todd M. Bluedorn
|
|
|
45
|
|
|
Chief Executive Officer
|
Prakash Bedapudi
|
|
|
42
|
|
|
Executive Vice President and Chief Technology Officer
|
Harry J. Bizios
|
|
|
59
|
|
|
Executive Vice President and President and Chief Operating
Officer, LII Commercial Heating & Cooling
|
Scott J. Boxer
|
|
|
58
|
|
|
Executive Vice President and President and Chief Operating
Officer, Service Experts
|
Susan K. Carter
|
|
|
50
|
|
|
Executive Vice President and Chief Financial Officer
|
David W. Moon
|
|
|
47
|
|
|
Executive Vice President and President and Chief Operating
Officer, LII Worldwide Refrigeration
|
Daniel M. Sessa
|
|
|
44
|
|
|
Executive Vice President and Chief Human Resources Officer
|
John D. Torres
|
|
|
50
|
|
|
Executive Vice President, Chief Legal Officer and Secretary
|
Douglas L. Young
|
|
|
46
|
|
|
Executive Vice President and President and Chief Operating
Officer, LII Residential Heating & Cooling
|
Roy A. Rumbough, Jr.
|
|
|
53
|
|
|
Vice President, Controller and Chief Accounting Officer
|
The following biographies describe the business experience of
our executive officers:
Todd M. Bluedorn became chief executive officer and was
elected to the Board of Directors of Lennox International in
April 2007. Prior to Lennox International, Mr. Bluedorn
served in numerous senior management positions for United
Technologies since 1995, including President, Americas - Otis
Elevator Company beginning in 2004; President, North
America Commercial Heating, Ventilation and Air
Conditioning for Carrier Corporation beginning in 2001; and
President, Hamilton Sundstrand Industrial beginning in 2000. He
began his professional career with McKinsey & Company
in 1992, after receiving an MBA from Harvard University in 1992
and serving in the United States Army as a combat engineer
officer and United States Army Ranger from 1985 to 1990. He also
holds a BS in Electrical Engineering from the United States
Military Academy at West Point.
Prakash Bedapudi became Executive Vice President and
Chief Technology Officer in July 2008. He had previously served
as vice president, global engineering and program management for
Trane Inc. Commercial Systems from 2006 through 2008, and as
vice president, engineering and technology for Tranes
Residential Systems division from 2003 through 2006. Prior to
his career at Trane, Mr. Bedapudi served in senior
engineering leadership positions for GE Transportation Systems,
a division of General Electric Company, and for Cummins Engine
Company. He holds a BS in Mechanical/Automotive Engineering from
Karnataka University, India and an MS in Mechanical/Aeronautical
Engineering from the University of Cincinnati.
Harry J. Bizios was appointed Executive Vice President
and President and Chief Operating Officer of LIIs
Commercial Heating & Cooling segment in October 2006.
Mr. Bizios had previously served as Vice President and
General Manager, LII 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 LII in 1976 as an industrial engineer at LIIs
manufacturing facility in Marshalltown, Iowa, subsequently
serving in several senior leadership roles before being
appointed Vice President and General Manager of Lennox
Industries Commercial from 1998 to 2003. He holds a BS in
Engineering Operations from Iowa State University.
Scott J. Boxer was appointed President and Chief
Operating Officer of LIIs Service Experts segment in July
2003. He served as President of Lennox Industries Inc., an LII
subsidiary, from 2000 to 2003. He joined LII in 1998
8
as Executive Vice President, Lennox Global Ltd. Prior to joining
LII, Mr. Boxer spent 26 years with York International
Corporation in various roles, including President, Unitary
Products Group Worldwide, where he directed residential and
light commercial heating and air conditioning operations.
Mr. Boxer previously served as an Executive Board Member of
the Air-Conditioning & Refrigeration Institute and
Chairman of the Board of Trustees of North American Technical
Excellence, Inc. He holds a BS in Industrial Engineering from
the University of Rhode Island.
Susan K. Carter was appointed LII Executive Vice
President and Chief Financial Officer in August 2004.
Ms. Carter also served as LII Treasurer from August 2004
through September 2005. Prior to joining LII, 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. She holds a BS in Accounting from Indiana
University and an MBA from Northern Illinois University.
David W. Moon was appointed Executive Vice President and
President and Chief Operating Officer of LIIs Worldwide
Refrigeration business in August 2006. Mr. Moon had
previously served as Vice President and General Manager of
Worldwide Refrigeration, Americas Operations since 2002. Prior
to serving in that position, he served as Managing Director in
Australia beginning in 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 LII 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 United States, Hong Kong, Taiwan and
Germany. He holds a BS in Civil Engineering and an MBA from
Texas A&M University.
Daniel M. Sessa was appointed Executive Vice President
and Chief Human Resources Officer in June 2007. Prior to joining
LII, Mr. Sessa served as Vice President, Human Resources
for Otis Elevator Company Americas from 2005 to
2007. From 2004 to 2005, Mr. Sessa served as Director,
Employee Benefits and Human Resources Systems for United
Technologies Corporation. He previously served as Director,
Human Resources for Pratt & Whitney from 2002 to 2004.
He holds a holds a JD from the Hofstra University School of Law
and a BA in Law & Society from the State University of
New York at Binghamton.
John D. Torres was appointed chief legal officer in
December 2008. He had previously served as senior vice
president, general counsel and secretary for Freescale
Semiconductor, a semiconductor manufacturer that was originally
part of Motorola. He joined Motorolas legal department as
senior counsel in 1996 and was appointed vice president, general
counsel of the companys semiconductor business in 2001.
Prior to joining Motorola, Mr. Torres served 13 years
in private practice in Phoenix, specializing in commercial law.
He holds a B.A. from Notre Dame and a J.D. from the University
of Chicago.
Douglas L. Young was appointed Executive Vice President
and President and Chief Operating Officer of LIIs
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
1999 to 2003. Prior to his career with LII, Mr. Young was
employed in the Appliances division of GE, where he held various
management positions before serving as General Manager of
Marketing for GE Appliance divisions retail group from
1997 to 1999 and as General Manager of Strategic Initiatives in
1999. He holds a BSBA from Creighton University and an MS in
Management from Purdue University.
Roy A. Rumbough, Jr. was appointed Vice President,
Controller and Chief Accounting Officer in July 2006. Prior to
joining LII, he served as Vice President, Corporate Controller
of Maytag Corporation, a position he held since 2002. From 1998
to 2002, he 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, he worked for Deloitte and
Touche, LLP. He holds a BA in Accounting from North Carolina
State University and an MBA from the Kellogg School of
Management, Northwestern University.
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.
Our
Operations are Subject to a Number of Economic Risks due to
Global General Business, Economic and Market
Conditions
As widely reported, financial markets in the United States,
Europe and Asia have been experiencing extreme disruption in
recent months, including, among other things, extreme volatility
in security prices, severely diminished liquidity and credit
availability, rating downgrades of certain investments and
declining valuations of others. Governments have taken
unprecedented actions intended to address extreme market
conditions that include severely restricted credit and declines
in real estate values. These economic developments affect
businesses such as ours in a number of ways. The current
tightening of credit in financial markets adversely affects the
ability of our customers to obtain financing for significant
purchases and operations and could result in a decrease in or
cancellation of orders for our products and services as well as
impact the ability of our customers to make payments. Similarly,
this tightening of credit may adversely affect our supplier base
and increase the potential for one or more of our suppliers to
experience financial distress or bankruptcy. Our global business
is also adversely affected by decreases in the general level of
economic activity, such as decreases in business and consumer
spending and construction activity. 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.
While currently these conditions have not impaired our ability
to access credit markets and finance our operations, there can
be no assurance that there will not be a further deterioration
in financial markets and confidence in the major economies where
we access credit. If such conditions continue, we may be unable
to obtain new debt or equity financing on acceptable terms or at
all, or to access amounts currently available under our domestic
revolving credit facility. Also, availability under our asset
securitization agreement may be adversely impacted by credit
quality and performance of our customer accounts receivable. The
availability under the asset securitization agreement is based
on the amount of accounts receivable that meet the eligibility
criteria of the asset securitization agreement. If receivable
losses increase or credit quality deteriorates, the amount of
eligible receivables could decline and, in turn, lower the
availability under the asset securitization.
10
We are unable to predict the likely duration and severity of the
current disruption in financial markets and adverse economic
conditions in the U.S. and other countries.
Our
Financial Performance Is Dependent on the Conditions of the U.S.
Construction Industry
Our business is affected by trends and uncertainties in the
U.S. construction industry. 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. We estimate approximately 25% of
the sales of our Residential Heating & Cooling segment
is for new construction, with the balance attributable to
repair, retrofit and replacement. Beginning in fiscal year 2006,
the U.S. housing industry began to experience a significant
downturn, resulting in a decline in the demand for the products
and services we sell into the residential new construction
market. Additionally, adverse economic conditions have caused a
decline in replacement purchases. These unprecedented market
challenges have affected, and will continue to materially
affect, our business, financial condition and results of
operations.
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
Have an Adverse Effect on Our Results of
Operations.
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 the results of operations.
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 Have an Adverse Effect on Our
Results of Operations.
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 effect on our
results of operations. 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 from our
assumptions.
11
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, all of
which could have an adverse effect on our results of operations.
There
Is No Guarantee That Our Efforts to Reduce Costs Will Be
Successful.
As part of our strategic priorities of manufacturing and
sourcing excellence and expense reduction, we have initiated
various manufacturing rationalization actions designed to lower
our cost structure. We also have begun to reorganize our North
American distribution network in order to better serve our
customers needs by deploying parts and equipment inventory
closer to them. We have also initiated a number of activities
that rationalize and reorganize various support and
administrative functions in order to reduce ongoing selling and
administrative expenses. If we cannot successfully implement
such restructuring strategies or other cost savings plans, we
may not achieve our expected costs savings in the time
anticipated, or at all. In such case, our results of operations
and profitability may be negatively impaired, making us less
competitive and potentially causing us to lose market share.
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, 2008, approximately 21% of our workforce
was unionized. While we believe our relationships with the
unions representing our employees are 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 results of operations.
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
12
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, 2008, we had goodwill of
$232.3 million on our Consolidated Balance Sheet. Any
future determination that an impairment of the value of goodwill
has occurred would require a write-down of the impaired portion
of 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.
13
The following chart lists our principal domestic and
international manufacturing, distribution and office facilities
as of February 2, 2009 and indicates the business segment
that uses such facilities, the approximate size of such
facilities and whether such facilities are owned or leased:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Type or Use
|
|
|
|
|
|
Location
|
|
Segment
|
|
of Facility
|
|
Approx. Sq. Ft.
|
|
|
Owned/Leased
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
Marshalltown, IA
|
|
Residential Heating & Cooling
|
|
Manufacturing
|
|
|
1,300
|
|
|
Owned & Leased
|
Blackville, SC
|
|
Residential Heating & Cooling
|
|
Manufacturing
|
|
|
375
|
|
|
Owned
|
Orangeburg, SC
|
|
Residential Heating & Cooling
|
|
Manufacturing
|
|
|
559
|
|
|
Owned
|
Columbia, SC
|
|
Residential Heating & Cooling
|
|
Business Unit Headquarters
|
|
|
63
|
|
|
Leased
|
Grenada, MS
|
|
Residential Heating & Cooling
|
|
Manufacturing & Business Unit Headquarters
|
|
|
300
|
|
|
Leased
|
Union City, TN
|
|
Residential Heating & Cooling
|
|
Manufacturing
|
|
|
295
|
|
|
Owned
|
Laval, Canada
|
|
Residential Heating & Cooling
|
|
Manufacturing
|
|
|
152
|
|
|
Owned
|
Saltillo, Mexico
|
|
Residential Heating & Cooling
|
|
Manufacturing
|
|
|
300
|
|
|
Owned
|
Auburn, WA
|
|
Residential Heating & Cooling
|
|
Manufacturing
|
|
|
80
|
|
|
Leased
|
Orange, CA
|
|
Residential Heating & Cooling
|
|
Business Unit Headquarters & Research & Development
|
|
|
67
|
|
|
Leased
|
Des Moines, IA(1)
|
|
Residential & Commercial Heating & Cooling
|
|
Manufacturing & Distribution
|
|
|
352
|
|
|
Leased
|
Stuttgart, AR
|
|
Commercial Heating & Cooling
|
|
Manufacturing
|
|
|
787
|
|
|
Owned
|
Prague, Czech Republic
|
|
Commercial Heating & Cooling
|
|
Manufacturing
|
|
|
161
|
|
|
Owned
|
Longvic, France
|
|
Commercial Heating & Cooling
|
|
Manufacturing
|
|
|
133
|
|
|
Owned
|
Mions, France
|
|
Commercial Heating & Cooling
|
|
Manufacturing
|
|
|
129
|
|
|
Owned
|
Burgos, Spain
|
|
Commercial Heating & Cooling
|
|
Manufacturing
|
|
|
71
|
|
|
Owned
|
Tifton, GA
|
|
Refrigeration
|
|
Manufacturing
|
|
|
599
|
|
|
Owned & Leased
|
Stone Mountain, GA
|
|
Refrigeration
|
|
Manufacturing
|
|
|
145
|
|
|
Owned
|
Milperra, Australia
|
|
Refrigeration
|
|
Manufacturing & Business Unit Headquarters
|
|
|
830
|
|
|
Owned
|
Genas, France
|
|
Refrigeration
|
|
Manufacturing, Distribution & Offices
|
|
|
175
|
|
|
Owned
|
San Jose dos Campos, Brazil
|
|
Refrigeration
|
|
Manufacturing, Warehousing & Offices
|
|
|
160
|
|
|
Owned
|
Danville, IL(2)
|
|
Refrigeration
|
|
Manufacturing
|
|
|
322
|
|
|
Owned
|
Barcelona, Spain
|
|
Refrigeration
|
|
Manufacturing, Distribution & Offices
|
|
|
65
|
|
|
Leased
|
Krunkel, Germany
|
|
Refrigeration
|
|
Manufacturing, Distribution & Offices
|
|
|
43
|
|
|
Owned
|
Wuxi, China
|
|
Refrigeration
|
|
Manufacturing, Warehousing & Offices
|
|
|
46
|
|
|
Owned
|
Carrollton, TX
|
|
Corporate and other
|
|
Research & Development
|
|
|
130
|
|
|
Owned
|
Richardson, TX
|
|
Corporate and other
|
|
Corporate Headquarters
|
|
|
311
|
|
|
Owned & Leased
|
|
|
|
(1) |
|
In 2008, we announced the gradual transitioning of all North
American Parts Center activities to other locations through
2010, and the closing of the North American Parts Center in
2010. Our repair parts manufacturing will be moved to
Marshalltown in the first quarter of 2009, and other functions
at the North American Parts Center will relocate as the regional
distribution centers come on line. The Des Moines sales office
and local distribution activities will remain in Des Moines. |
|
(2) |
|
In 2007, 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 of 2009. |
14
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 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. However,
certain production facilities are operating at less than full
capacity due to restructuring activities. See Note 18 to
the Consolidated Financial Statements for additional information
regarding restructuring activities.
In the fourth quarter of 2007, we expanded our manufacturing
facility in Tifton, Georgia. We plan to close our facility in
Danville, Illinois and consolidate the majority of our
manufacturing for Refrigeration in North America into the new
facility in Tifton, Georgia. The new facility is immediately
adjacent to our existing facility in Tifton and has increased
our manufacturing space to 599 thousand 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 2, 2009,
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 2008.
15
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 2008 and 2007 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Price Range Per Common Share
|
|
|
|
2008
|
|
|
2007
|
|
|
|
High
|
|
|
Low
|
|
|
High
|
|
|
Low
|
|
|
First Quarter
|
|
$
|
42.22
|
|
|
$
|
26.51
|
|
|
$
|
37.85
|
|
|
$
|
29.06
|
|
Second Quarter
|
|
|
38.48
|
|
|
|
25.17
|
|
|
|
37.28
|
|
|
|
31.46
|
|
Third Quarter
|
|
|
41.62
|
|
|
|
27.86
|
|
|
|
38.57
|
|
|
|
29.21
|
|
Fourth Quarter
|
|
|
34.12
|
|
|
|
19.72
|
|
|
|
41.96
|
|
|
|
30.17
|
|
Dividends
During 2008 and 2007, we declared quarterly cash dividends as
set forth below:
|
|
|
|
|
|
|
|
|
|
|
Dividends per
|
|
|
|
Common Share
|
|
|
|
2008
|
|
|
2007
|
|
|
First Quarter
|
|
$
|
0.14
|
|
|
$
|
0.13
|
|
Second Quarter
|
|
|
0.14
|
|
|
|
0.13
|
|
Third Quarter
|
|
|
0.14
|
|
|
|
0.13
|
|
Fourth Quarter
|
|
|
0.14
|
|
|
|
0.14
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year
|
|
$
|
0.56
|
|
|
$
|
0.53
|
|
|
|
|
|
|
|
|
|
|
The amount and timing of dividend payments are determined by our
Board of Directors and subject to certain restrictions under our
credit agreements. As of the close of business on
February 17, 2009, there were approximately 721 holders of
record of our common stock.
16
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, 2003 through
December 31, 2008. The graph assumes that $100 was invested
on December 31, 2003, with dividends reinvested. Peer group
returns are weighted by market capitalization. Our peer group
includes AAON, Inc., Ingersoll-Rand Company Limited, Comfort
Systems USA, Inc., United Technologies Corporation; Johnson
Controls Inc., and Watsco, Inc. The peer group changed in 2008
due to corporate consolidations and changes in public company
status.
Comparison
of 5 Year Cumulative Total Return
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 were
authorized to repurchase up to $500 million of shares of
our common stock through open market purchases (the
2007 Share Repurchase Plan). We were a party to
a written trading plan under
Rule 10b5-1
of the Securities Exchange Act of 1934, as amended, to
facilitate share repurchases under the 2007 Share
Repurchase Plan. We completed the 2007 Share Repurchase
Plan during the second quarter of 2008.
On June 2, 2008, we announced that our Board of Directors
approved a new share repurchase plan for $300 million,
pursuant to which we are authorized to repurchase shares of our
common stock through open market purchases (the
2008 Share Repurchase Plan). The
2008 Share Repurchase Program has no stated expiration
date. In the fourth quarter of 2008, we repurchased shares of
our common stock as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Approximate Dollar
|
|
|
|
|
|
|
|
|
|
Total Number of
|
|
|
Value of Shares that
|
|
|
|
|
|
|
|
|
|
Shares Purchased as
|
|
|
may yet be Purchased
|
|
|
|
Total Number
|
|
|
Average Price
|
|
|
Part of Publicly
|
|
|
Under the Plans or
|
|
|
|
of Shares
|
|
|
Paid per Share
|
|
|
Announced Plans or
|
|
|
Programs
|
|
|
|
Purchased (1)
|
|
|
(including fees)
|
|
|
Programs
|
|
|
(In millions)
|
|
|
October 1 through October 31
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
$
|
300.0
|
|
November 1 through November 30
|
|
|
221,954
|
|
|
$
|
22.05
|
|
|
|
221,107
|
|
|
$
|
295.1
|
|
December 1 through December 31
|
|
|
431,274
|
|
|
$
|
26.25
|
|
|
|
381,900
|
|
|
$
|
285.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
653,228
|
|
|
$
|
24.83
|
|
|
|
603,007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
In addition to purchases under the 2008 Share Repurchase
Plan, this column reflects the surrender to us of
50,221 shares of common stock to satisfy tax-withholding
obligations in connection with the exercise of stock
appreciation rights, restricted stock awards and the
distribution of shares of our common stock pursuant to vested
restricted stock units. |
17
|
|
Item 6.
|
Selected
Financial Data
|
The table below shows selected financial data for the five years
ended December 31, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For The Years Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
(In millions, except per share data)
|
|
|
Statements of Operations Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Sales
|
|
$
|
3,481.4
|
|
|
$
|
3,735.3
|
|
|
$
|
3,700.6
|
|
|
$
|
3,390.0
|
|
|
$
|
2,996.9
|
|
Operational Income (Loss) From Continuing Operations
|
|
|
220.1
|
|
|
|
266.6
|
|
|
|
224.6
|
|
|
|
251.0
|
|
|
|
(35.0
|
)
|
Income (Loss) From Continuing Operations
|
|
|
125.1
|
|
|
|
169.6
|
|
|
|
166.8
|
|
|
|
152.4
|
|
|
|
(93.7
|
)
|
Net Income (Loss)
|
|
|
122.8
|
|
|
|
169.0
|
|
|
|
166.0
|
|
|
|
150.7
|
|
|
|
(134.4
|
)
|
Diluted Earnings (Loss) Per Share From Continuing Operations
|
|
|
2.15
|
|
|
|
2.44
|
|
|
|
2.27
|
|
|
|
2.13
|
|
|
|
(1.56
|
)
|
Dividends Per Share
|
|
|
0.56
|
|
|
|
0.53
|
|
|
|
0.46
|
|
|
|
0.41
|
|
|
|
0.39
|
|
Other Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital Expenditures
|
|
$
|
62.1
|
|
|
$
|
70.2
|
|
|
$
|
74.8
|
|
|
$
|
63.3
|
|
|
$
|
40.3
|
|
Research and Development Expenses
|
|
|
46.5
|
|
|
|
43.0
|
|
|
|
42.2
|
|
|
|
40.3
|
|
|
|
37.6
|
|
Balance Sheet Data at Period End
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
$
|
1,659.5
|
|
|
$
|
1,814.6
|
|
|
$
|
1,719.8
|
|
|
$
|
1,737.6
|
|
|
$
|
1,518.6
|
|
Total Debt
|
|
|
420.4
|
|
|
|
207.9
|
|
|
|
109.2
|
|
|
|
120.5
|
|
|
|
310.5
|
|
Stockholders Equity
|
|
|
458.6
|
|
|
|
808.5
|
|
|
|
804.4
|
|
|
|
794.4
|
|
|
|
472.9
|
|
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. Our reportable segments include Residential
Heating & Cooling, Commercial Heating &
Cooling, Service Experts and Refrigeration. For more detailed
information regarding our reportable segments, see Note 21
in the Notes to our Consolidated Financial Statements.
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.
Warmer than normal summer temperatures generate strong demand
for replacement air conditioning and refrigeration products and
services and colder than normal winter temperatures 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 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
18
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. In
recent years, a trend towards higher prices for these
commodities and related components continues to present a
challenge to us and the HVACR industry in general. We partially
mitigate the impact of higher commodity prices through a
combination of price increases, commodity contracts, improved
production efficiency and cost reduction initiatives. We also
partially mitigate volatility in the prices of these commodities
by entering into futures contracts and fixed forward contracts.
We estimate approximately 25% 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 and
commercial new construction activity, we are seeing a decline in
the demand for the products and services we sell into these
markets.
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.
Impact of
Current Economic Environment on Our Business
In 2008, we faced unprecedented market challenges, particularly
in the latter months of the year. Tight credit markets
contributed to lower demand for housing that has resulted in far
fewer starts in residential new construction and lower existing
home sales. In addition to Residential Heating &
Cooling, the global economic downturn also negatively impacted
our Commercial Heating & Cooling, Refrigeration, and
Service Experts businesses. We continued to execute on our
strategic priorities to win new business, capture opportunities
in the replacement market, and lower our cost structure for the
current market conditions.
The reduction in sales volumes has resulted in accelerated
efforts in the areas of restructuring of operations throughout
our business and implementing cost control measures. These
actions will reduce our operating costs, increase our ability to
adjust to lower demand levels and changing market conditions
while we continue to focus on providing our customers a high
level of value and service. We believe that when market
conditions recover, we will be well-positioned with significant
upside leverage in our business model. During 2008, we recorded
restructuring charges of $30.4 million. Manufacturing
rationalization has been the focus of our efforts to date and
includes the move of the production of value products to low
cost locations, such as Mexico and China. New restructuring
activities include the reorganization of our North American
distribution network in order to reduce costs and improve
service to our customers. We continued our focus on controlling
administrative costs and implemented measures to realign
employee benefits and incentive compensation with current
economic conditions.
Commodity costs also have fluctuated substantially during 2008,
with significant increased costs for copper, aluminum and steel
for much of the year and steep declines late in the year. We
utilized our commodity hedging program in order to mitigate the
volatility in prices. While we benefited from the cost averaging
while commodity prices increased, the reverse is true when
prices decline. At year-end we posted $37.9 million of
collateral for margin calls on our cash flow hedges. The cash
flow impact of this hedge collateral should reverse during 2009
as the related hedges expire.
During 2008, we were able to return significant amounts of cash
to shareholders through our share repurchase programs. While we
borrowed a portion of the funds used to execute these
repurchases, overall low interest rates make the repurchase
attractive. The repurchase also lowers our overall cost of
capital. As of December 31, 2008, we are in compliance with
all of our debt covenants. Additionally, lower interest rates in
the commercial paper market allowed us to utilize our asset
securitization facility and we sold $30.0 million of our
accounts receivable late in the year. Our cash generation
continues to be strong as we were able to adjust to the current
market conditions with an emphasis on working capital management
through our accounts receivable collections and inventory
controls.
Although our overall exposure to declines in security market
values is somewhat limited, the rapid declines in the overall
equity markets had a direct impact on our pension obligation.
The market values of our pension plan assets declined
substantially as a result of the market decline. As a result of
the decrease in the plan assets and an increase in the benefit
obligation, the funded status of our pension plans decreased by
$74.1 million. In order to mitigate the effects of asset
losses, we made an additional voluntary contribution of
$20.0 million to our pension
19
plans during the fourth quarter of 2008 and we currently plan to
make additional voluntary contributions of $20.0 million to
$40.0 million throughout 2009.
Key
Financial Statistics
|
|
|
|
|
Net sales for the year ended December 31, 2008 were
$3,481.4 million and were adversely impacted on a
year-over-year
basis primarily by lower volumes in the U.S. residential
new construction market. Price increases and foreign currency
translation rates had a favorable impact on net sales in 2008
and therefore partially offset the decline in sales volumes.
|
|
|
|
Operational income for the year ended December 31, 2008 was
$220.1 million. As a percentage of net sales, operational
income decreased to 6.3% in 2008 from 7.1% in 2007. The decline
in operational income margins was primarily due to lower sales
volumes and increased commodity and other manufacturing costs
which were partially offset by price increases.
|
|
|
|
Net income for 2008 was $122.8 million. Basic earnings per
share from continuing operations was $2.21 in 2008 as compared
to $2.56 in 2007. Diluted earnings per share from continuing
operations was $2.15 per share in 2008, down from $2.44 per
share in 2007. Both basic and diluted earnings per share from
continuing operations were favorably impacted by approximately
$0.35 per share due to the effect of our previous share
repurchases.
|
|
|
|
Cash provided by operating activities was $183.2 million
for the year ended December 31, 2008 compared to
$239.9 million in 2007. Cash provided by operating
activities was lower primarily due to lower net income,
collateral posted related to commodity hedges and voluntary
pension contributions. These were partially offset by increased
collections of accounts receivable and cash inflows from our
asset securitization program.
|
|
|
|
In 2008, Lennox returned to shareholders $311.3 million
through share repurchases and $32.4 million through cash
dividends.
|
Results
of Operations
The following table provides a summary of our financial results,
including information presented as a percentage of net sales
(dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
Dollars
|
|
|
Percent
|
|
|
Dollars
|
|
|
Percent
|
|
|
Dollars
|
|
|
Percent
|
|
|
Net sales
|
|
$
|
3,481.4
|
|
|
|
100.0
|
%
|
|
$
|
3,735.3
|
|
|
|
100.0
|
%
|
|
$
|
3,700.6
|
|
|
|
100.0
|
%
|
Cost of goods sold
|
|
|
2,507.9
|
|
|
|
72.0
|
|
|
|
2,687.4
|
|
|
|
71.9
|
|
|
|
2,745.3
|
|
|
|
74.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
973.5
|
|
|
|
28.0
|
|
|
|
1,047.9
|
|
|
|
28.1
|
|
|
|
955.3
|
|
|
|
25.8
|
|
Selling, general and administrative expenses
|
|
|
724.4
|
|
|
|
20.8
|
|
|
|
773.4
|
|
|
|
20.8
|
|
|
|
772.2
|
|
|
|
20.9
|
|
Gains and other expenses, net
|
|
|
(1.9
|
)
|
|
|
(0.1
|
)
|
|
|
(6.7
|
)
|
|
|
(0.2
|
)
|
|
|
(46.8
|
)
|
|
|
(1.3
|
)
|
Restructuring charges
|
|
|
30.4
|
|
|
|
0.9
|
|
|
|
25.2
|
|
|
|
0.7
|
|
|
|
13.3
|
|
|
|
0.4
|
|
Impairment of equity method investment
|
|
|
9.1
|
|
|
|
0.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from equity method investments
|
|
|
(8.6
|
)
|
|
|
(0.2
|
)
|
|
|
(10.6
|
)
|
|
|
(0.3
|
)
|
|
|
(8.0
|
)
|
|
|
(0.2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operational income
|
|
$
|
220.1
|
|
|
|
6.3
|
%
|
|
$
|
266.6
|
|
|
|
7.1
|
%
|
|
$
|
224.6
|
|
|
|
6.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
122.8
|
|
|
|
3.5
|
%
|
|
$
|
169.0
|
|
|
|
4.5
|
%
|
|
$
|
166.0
|
|
|
|
4.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
20
The following table sets forth net sales by geographic market
(dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
Dollars
|
|
|
Percent
|
|
|
Dollars
|
|
|
Percent
|
|
|
Dollars
|
|
|
Percent
|
|
|
Geographic Market:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
|
|
$
|
2,442.3
|
|
|
|
70.2
|
%
|
|
$
|
2,717.4
|
|
|
|
72.7
|
%
|
|
$
|
2,858.5
|
|
|
|
77.2
|
%
|
Canada
|
|
|
391.1
|
|
|
|
11.2
|
|
|
|
381.3
|
|
|
|
10.2
|
|
|
|
321.1
|
|
|
|
8.7
|
|
International
|
|
|
648.0
|
|
|
|
18.6
|
|
|
|
636.6
|
|
|
|
17.1
|
|
|
|
521.0
|
|
|
|
14.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net sales
|
|
$
|
3,481.4
|
|
|
|
100.0
|
%
|
|
$
|
3,735.3
|
|
|
|
100.0
|
%
|
|
$
|
3,700.6
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year
Ended December 31, 2008 Compared to Year Ended
December 31, 2007 Consolidated
Results
Net
Sales
Net sales decreased $253.9 million, or 6.8%, for 2008 as
compared to 2007. The decrease in net sales was due to a
decrease in sales volumes across all segments, but was primarily
caused by lower volumes related to U.S. residential and
commercial new construction. Our Residential Heating &
Cooling and Service Experts segments experienced decreases in
sales due primarily to the weakened U.S. residential new
construction market. Our Commercial Heating & Cooling
segment experienced a smaller decrease in unit volumes than our
Residential Heating & Cooling segment as the decline
in the commercial market trailed the residential new
construction market. Declines in unit volumes were also
partially offset by moderate price increases, a slight favorable
change in sales mix and $32.9 million of favorable impact
of foreign currency exchange rates.
Gross
Profit
Gross profit margin remained relatively flat at 28.0% for 2008
compared to 28.1% for 2007. Gross profit margins were negatively
impacted by the decreased sales volumes and increased commodity
costs experienced for much of 2008. Also, 2007 gross
margins contained a one-time favorable warranty program
adjustment of $16.9 million. Sales mix partially offset
these negative impacts as Residential Heating &
Cooling customers purchased a higher percentage of our premium
product offerings. We also were successful in increasing the
price of our products to incorporate increases in costs related
to commodities and fuel. The changes in foreign currency
exchange rates did not have a material impact on our gross
margins. Also favorably impacting gross margins was a
$4.6 million reduction in salaries and wages expense
related to a change in our vacation policy.
While we realized savings from previously announced and
implemented restructurings and cost reduction programs, the full
effect on gross margins was mitigated by manufacturing
inefficiencies that were incurred related to those activities.
These inefficiencies were related to the move of certain
manufacturing operations to Saltillo, Mexico and other
manufacturing rationalization activities.
Selling,
General and Administrative Expenses
SG&A expenses for the year decreased by $49.0 million
in 2008 compared to 2007. As a percentage of total net sales,
SG&A expenses were 20.8% for both 2008 and 2007. The
decrease in SG&A expenses was primarily due to cost control
measures and the operation of incentive compensation plans that:
|
|
|
|
|
Lowered short-term incentives, including profit sharing, due to
certain performance targets not being met in 2008, whereas in
2007 virtually all targets were met or exceeded.
|
|
|
|
Decreased long-term incentive stock-based compensation primarily
due to reduced projected future payout percentages and increased
forfeiture rates.
|
|
|
|
Reduced professional fees due to limits on third-party spending
for services.
|
|
|
|
Lowered commission expense due to lower sales volumes.
|
|
|
|
Decreased pension expense due to lower settlement charges in
2008 as compared to 2007.
|
21
|
|
|
|
|
Decreased salaries and wages expense due to a change in our
vacation policy whereby vacation no longer vests or accrues for
the current year as of December 31 of the previous year.
Employees now earn vacation throughout the year the vacation is
taken. The change in policy reduced SG&A expenses by
$9.9 million.
|
|
|
|
Decreased salaries and wages expense due to a reduction in
salaried headcount.
|
These decreases in SG&A expenses were partially offset by
an increase in bad debt expense as a result of increased
economic pressure on our customers, the impact of foreign
currency exchange rates as the dollar weakened against
currencies in some of the foreign countries where we operate,
and increased research and development spending.
Gains and
Other Expenses, Net
Gains and other expenses, net for 2008 and 2007 included the
following (in millions):
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended
|
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
Realized losses (gains) on settled futures contracts
|
|
$
|
0.9
|
|
|
$
|
(3.9
|
)
|
Unrealized losses on unsettled futures contracts not designated
as cash flow hedges
|
|
|
5.1
|
|
|
|
3.1
|
|
Gains on disposals of fixed assets
|
|
|
(4.8
|
)
|
|
|
(0.3
|
)
|
Foreign currency exchange gains
|
|
|
(3.2
|
)
|
|
|
(6.2
|
)
|
Other items, net
|
|
|
0.1
|
|
|
|
0.6
|
|
|
|
|
|
|
|
|
|
|
Gains and other expenses, net
|
|
$
|
(1.9
|
)
|
|
$
|
(6.7
|
)
|
|
|
|
|
|
|
|
|
|
The changes in gains and losses on futures contracts were
primarily due to decreases in commodity prices relative to the
futures contract prices during 2008 as compared to 2007. For
more information, see Note 9 in the Notes to the
Consolidated Financial Statements. Gains on disposals of fixed
assets included gains recorded on the sale-leaseback of two
properties located in North America.
Restructuring
Charges
As part of our strategic priorities of manufacturing and
sourcing excellence, distribution excellence and expense
reduction, we have initiated actions designed to improve the
delivery of our products to customers and also to lower our cost
structure. We have initiated new manufacturing rationalization
actions in 2008 and also have begun to reorganize our North
American distribution network in order to better serve our
customers needs by deploying parts and equipment inventory
closer to them. We have also initiated a number of activities
that rationalize and reorganize various support and
administrative functions in order to reduce ongoing selling and
administrative expenses. We have increased our focus on
restructuring activities as we adjust our cost structure in
response to economic conditions.
In 2008 and 2007, we incurred restructuring charges consisting
of:
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended
|
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
Manufacturing rationalizations
|
|
$
|
19.7
|
|
|
$
|
15.8
|
|
Reorganization of distribution network
|
|
|
2.9
|
|
|
|
|
|
Reorganizations of corporate and business unit administrative
functions
|
|
|
7.8
|
|
|
|
10.0
|
|
Other
|
|
|
|
|
|
|
(0.6
|
)
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
30.4
|
|
|
$
|
25.2
|
|
|
|
|
|
|
|
|
|
|
22
For further detail regarding restructuring reserves and
individual restructuring actions, see Note 18 in the Notes
to our Consolidated Financial Statements.
Manufacturing Rationalizations
The restructuring charges incurred in 2008 related to
manufacturing rationalizations included $6.4 million of
severance and related charges, $4.0 million of asset
write-offs and accelerated depreciation, $3.0 million of
equipment move charges and $6.3 million of other costs.
These other costs were primarily manufacturing inefficiencies
caused by decreased volumes at affected facilities and inventory
move costs. Restructuring charges incurred related to
manufacturing rationalizations during 2007 related primarily to
the closures of the Danville, Lynwood, and Bellevue, Ohio
operations. To date and in total, we have incurred
$31.0 million of restructuring charges related to
manufacturing rationalizations for projects that were in process
during 2008. Of that amount, $12.0 million was severance
costs, $5.2 million was asset write-offs and accelerated
depreciation, $3.7 million of equipment move charges,
$2.7 million of pension curtailments, other personnel
related charges of $0.6 million, and other charges,
including manufacturing inefficiencies and inventory move costs
of $6.8 million.
In the future, we expect to incur additional charges of
$2.7 million related to the projects that were in process
during 2008. Of the additional charges expected,
$1.0 million is accelerated depreciation and, therefore, a
non-cash charge.
On February 5, 2009 we also announced plans to consolidate
operations from our Blackville, South Carolina facility into our
current operations in Orangeburg, South Carolina and Saltillo,
Mexico to improve our operating efficiency, eliminate redundant
fixed costs and provide customers with improved service. The
transition is expected to take place in phases and is expected
to be completed within two years. We expect to incur
restructuring charges of about $12.0 million related to
this consolidation, primarily in the first quarter of 2009.
These charges are anticipated to include severance of
$3.5 million, losses on disposal of certain long-lived
assets and relocation costs for equipment and inventory of about
$6.5 million and other costs of $2.0 million. We
expect short-term cash outlays of $6.6 million related to
this project. Annual savings beginning in 2011 are expected to
be approximately $5.0 million.
Reorganization of North American Distribution Network
In the fourth quarter of 2008, we commenced the transition of
activities currently performed at our North American Parts
Center in Des Moines, Iowa to other locations, including our
North American Distribution Center in Marshalltown, Iowa. The
transition is expected to be completed in the first quarter of
2010. To date and in total, we have incurred $2.9 million
of restructuring charges related to the reorganization of our
North American distribution network. Of that amount
$2.8 million was severance costs and $0.1 million was
a pension curtailment.
In the future, we expect to incur additional charges of
$2.0 million related to this project consisting of
$0.9 million in severance, $0.4 million in relocation
costs, $0.4 million in equipment move costs, and
$0.3 million of other costs. Of the additional charges
expected, $0.1 million is accelerated depreciation and,
therefore, a non-cash charge. We anticipate that we will
initiate additional restructuring activities in this area as we
seek to further enhance our North American distribution network.
Reorganizations of Support and Administrative Functions
The restructuring charges incurred in 2008 related to the
reorganization of support and administrative functions included
$5.8 million of severance and related charges,
$0.8 million of asset write-offs and accelerated
depreciation, $0.3 million of lease termination costs and
$0.9 million of other costs. Restructuring charges in 2007
primarily related to the elimination of the position of chief
administrative officer. In connection with this action, we
recorded an $8.0 million liability to settle the terms of
his employment agreement, of which $6.6 million, net of
$1.4 million of previously recorded stock-based
compensation expense, was recorded in the second quarter of
2007. The final settlement of this matter occurred and an amount
equal to the liability recorded was paid during the second
quarter of 2008.
To date and in total, we have incurred $18.2 million of
restructuring charges related to reorganizations of support and
administrative functions for projects that were in process
during 2008. Of that amount, $15.4 million
23
was severance costs, $0.8 million was asset write-offs and
accelerated depreciation, $1.1 million lease termination
costs, and the remainder of $0.9 million was other charges.
In the future, we expect to incur additional charges of
$1.7 million related to these projects. Of the additional
charges expected, $0.1 million is accelerated depreciation
and, therefore, a non-cash charge.
Cash Used in Restructuring Activities, Future Charges and
Expense Savings
Total cash paid for restructuring activities during 2008 was
$29.8 million, a significant increase over the 2007 amount
of $10.6 million. A significant portion of this amount
related to increased restructuring activities and was primarily
composed of severance payments related to the elimination of the
position of chief administrative officer and severance related
to manufacturing rationalizations and administrative
reorganizations. We use operating cash as the funding source for
restructuring activities.
We anticipate incurring approximately $6.4 million of
future restructuring charges relating to projects that were in
process during 2008. Of that amount, about $1.2 million
will be non-cash charges for accelerated depreciation and
impairments. Future cash outlays for restructuring activities
that are currently in progress are estimated to be
$16.7 million. These restructuring charges and cash outlays
will be incurred generally within the next year.
In 2008 we realized approximately $7.3 million of
incremental expense savings from our restructuring activities
and we expect to realize an additional $18.8 million of
expense savings in 2009.
Results
from Equity Method and Other Equity Investments
Investments where we do not exercise control but have
significant influence are accounted for using the equity method
of accounting. Income from equity method investments decreased
to $8.6 million in 2008 when compared to $10.6 million
in 2007 primarily due to the lowered performance of our
U.S. joint venture in compressor manufacturing due to a
reduction in our volume of purchases from such joint venture.
In 2008, we also recorded $9.1 million of impairment
charges related to our investment in a joint venture in
Thailand. The carrying value of this investment at year-end was
$1.8 million and, due to a loss of significant influence
over the venture, it will no longer be accounted for under the
equity method.
Interest
Expense, Net
Interest expense, net, increased to $13.7 million in 2008
from $6.8 million in 2007. The increase in interest expense
was primarily attributable to higher debt balances as the result
of increased borrowing related to our share repurchases during
the first two quarters of 2008 of $296.7 million.
Offsetting the increase in the average amounts borrowed was a
decrease in the average interest rate paid on variable rate debt.
Provision
for Income Taxes
The provision for income taxes was $81.2 million in 2008
compared to $89.5 million in 2007. The effective tax rate
was 39.4% for 2008 as compared to 34.5% for 2007. Our effective
rates differ from the statutory federal rate of 35% for certain
items, such as 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%. Our
effective rate was also impacted in 2008 by a non-deductible
impairment charge and foreign operating losses for which no tax
benefits have been recognized. These two items combined add
approximately 3.2 percentage points to our effective tax
rate.
24
Year
Ended December 31, 2008 Compared to Year Ended
December 31, 2007 Results by
Segment
Residential
Heating & Cooling
The following table summarizes our Residential
Heating & Cooling segments net sales and profit
for 2008 and 2007 (dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
Difference
|
|
|
% Change
|
|
|
Net sales
|
|
$
|
1,493.4
|
|
|
$
|
1,669.6
|
|
|
$
|
(176.2
|
)
|
|
|
(10.6
|
)%
|
Profit
|
|
|
145.8
|
|
|
|
174.4
|
|
|
|
(28.6
|
)
|
|
|
(16.4
|
)
|
% of net sales
|
|
|
9.8
|
%
|
|
|
10.4
|
%
|
|
|
|
|
|
|
|
|
The decrease in net sales was due to continuing weakness in the
U.S. residential new construction market and softer
replacement business as consumers remain cautious in the current
economic environment. We believe that unit volumes were
generally lower across the residential HVAC industry. An
additional impact on volume for our value product offerings is
that a higher number of consumers in difficult market conditions
are electing to repair versus replace their HVAC equipment. As a
result, unit volumes were down in 2008 as compared to 2007. The
decrease related to sales volumes was partially offset by
favorable product mix shift towards our premium products and
price increases. We believe that customers with disposable
income are moving towards higher efficiency premium systems.
Segment profit decreased primarily due to the unfavorable impact
of lower unit volumes, increased commodity costs and higher
freight costs. These unfavorable impacts to segment profit were
partially offset by favorable product mix, price increases and
lower expenses due to lower sales volumes and also from cost
controls and programs that resulted in lower personnel-related
and incentive compensation expenses.
In 2007, a favorable 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.
While the Residential Heating & Cooling segment
realized savings from previously announced and implemented
restructurings and cost reduction programs, the full effect on
gross margins was mitigated by some manufacturing inefficiencies
related to those activities.
Commercial
Heating & Cooling
The following table summarizes our Commercial
Heating & Cooling segments net sales and profit
for 2008 and 2007 (dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
Difference
|
|
|
% Change
|
|
|
Net sales
|
|
$
|
835.3
|
|
|
$
|
875.0
|
|
|
$
|
(39.7
|
)
|
|
|
(4.5
|
)%
|
Profit
|
|
|
93.3
|
|
|
|
101.0
|
|
|
|
(7.7
|
)
|
|
|
(7.6
|
)
|
% of net sales
|
|
|
11.2
|
%
|
|
|
11.5
|
%
|
|
|
|
|
|
|
|
|
Our domestic operations experienced lower sales volumes on a
year-over-year
basis primarily due to the softening in our retail national
account business as customers extended times between scheduled
unit replacements and deferred new store openings. These
reductions were partially offset by price increases. Sales mix
was slightly unfavorable. Sales mix was positive for the first
three quarters due to the relatively high levels of newly
introduced premium product during the early part of the year.
The favorable impact of changes in foreign currency exchange
rates increased net sales by $17.2 million.
The reduced segment profit was due primarily to lower sales
volumes, increased commodity costs, and higher freight and
distribution costs. Sales mix remained relatively flat for the
year. The decreases noted above were partially offset by price
increases and reduced manufacturing costs primarily in our
domestic operations, lower
25
commissions and selling expenses, and lower administrative
expenses from cost controls and programs that resulted in lower
personnel-related and incentive compensation expenses.
Service
Experts
The following table summarizes our Service Experts
segments net sales and profit from continuing operations
for 2008 and 2007 (dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
Difference
|
|
|
% Change
|
|
|
Net sales
|
|
$
|
626.6
|
|
|
$
|
667.1
|
|
|
$
|
(40.5
|
)
|
|
|
(6.1
|
)%
|
Profit
|
|
|
20.0
|
|
|
|
26.1
|
|
|
|
(6.1
|
)
|
|
|
(23.4
|
)
|
% of net sales
|
|
|
3.2
|
%
|
|
|
3.9
|
%
|
|
|
|
|
|
|
|
|
The decrease in net sales was primarily due to the decline in
the residential new construction and residential service and
replacement markets resulting from the weakness of the
U.S. economy. This was primarily due to volume as both
price and sales mix were relatively flat.
The decrease in segment profit was primarily due to the decrease
in sales volume, unfavorable sales mix within the residential
service and replacement market, and higher
year-over-year
customer contact center implementation costs. Sales mix
adversely impacted segment profit due to a decrease in
replacement sales as customers decided to repair units instead
of replace them. These factors were offset by lower commissions
due to lower sales volumes, lower advertising expenditures and
cost controls and programs that resulted in lower
personnel-related and incentive compensation expenses.
Near the end of 2008, we announced plans to exit seven
unprofitable service centers. As a result, we have reclassified
losses incurred related to these service centers in 2008 of
$2.0 million to discontinued operations. This compares with
losses incurred in 2007 of $0.9 million. We anticipate that
theses centers will be disposed of in a relatively short period.
Also, included in discontinued operations was a
$1.7 million charge for litigation related to the sale of a
service center in 2004 that was included in discontinued
operations. These amounts have been excluded from Service
Experts operating profit in both periods presented.
Refrigeration
The following table summarizes our Refrigeration segments
net sales and profit for 2008 and 2007 (dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
Difference
|
|
|
% Change
|
|
|
Net sales
|
|
$
|
618.2
|
|
|
$
|
607.7
|
|
|
$
|
10.5
|
|
|
|
1.7
|
%
|
Profit
|
|
|
60.2
|
|
|
|
61.5
|
|
|
|
(1.3
|
)
|
|
|
(2.1
|
)
|
% of net sales
|
|
|
9.7
|
%
|
|
|
10.1
|
%
|
|
|
|
|
|
|
|
|
Net sales increased due to the favorable impact of changes in
foreign currency exchange rates of $14.9 million and
moderate price increases implemented primarily in our domestic
and Australian operations as a result of higher commodity and
component costs. These favorable items were partially offset by
moderate decreases in unit volumes in all of the geographic
areas where the Refrigeration segment operates.
The decrease in segment profit was primarily due to lower sales
volumes, increased commodity costs and manufacturing
inefficiencies that resulted primarily from manufacturing
rationalization activities at affected locations. These
unfavorable impacts to segment profit were partially offset by
the price increases noted above, favorable foreign currency
exchange rates, and lower administrative expenses due to cost
controls and programs that resulted in lower personnel-related
and incentive compensation expenses.
26
While the Refrigeration segment realized savings from previously
announced and implemented restructurings and cost reduction
programs, the full effect on our gross margins was not apparent
due to manufacturing inefficiencies that were incurred related
to those activities.
Corporate
and Other
Corporate and other expenses decreased to $53.8 million in
2008 from $85.0 million in 2007. The decrease was primarily
driven by a reduction in both short-term and long-term incentive
compensation due to decreased financial performance, expense
reduction in professional fees related to compliance activities,
changes in employee benefits, foreign currency gains and overall
tight budgetary controls. The decrease in long-term stock-based
compensation expense was primarily due to an increase in
forfeiture rates and a decrease in the estimated pay-out
percentage on outstanding performance share units in 2008 as
compared to 2007. A portion of the decrease in Corporate and
Other expenses was composed of the favorable
catch-up
adjustment related to foreign currency in the second quarter and
a reduction in salaries and wages expense caused by a change to
our vacation policy.
Year
Ended December 31, 2007 Compared to Year Ended
December 31, 2006 Consolidated
Results
Net
Sales
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 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 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
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 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
costs, as well as other cost management and strategic cost
reduction savings.
27
Gains and
Other Expenses, net
Gains and other expenses, net for 2007 and 2006 include the
following (in millions):
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
Realized gains on settled futures contracts
|
|
$
|
(3.9
|
)
|
|
$
|
(66.0
|
)
|
Unrealized losses on unsettled futures contracts not designated
as cash flow hedges
|
|
|
3.1
|
|
|
|
20.8
|
|
Gains on disposals of fixed assets
|
|
|
(0.3
|
)
|
|
|
(0.2
|
)
|
Foreign currency exchange gains
|
|
|
(6.2
|
)
|
|
|
(0.9
|
)
|
Other items, net
|
|
|
0.6
|
|
|
|
(0.5
|
)
|
|
|
|
|
|
|
|
|
|
Gains and other expenses, net
|
|
$
|
(6.7
|
)
|
|
$
|
(46.8
|
)
|
|
|
|
|
|
|
|
|
|
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 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 and Other Expenses, net.
Restructuring
Charges
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 the
fourth quarter of 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 second quarter of 2009.
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 was
a phased process and was completed at the end of the second
quarter of 2008.
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 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
sub-lease
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
28
net present value of the remaining lease payments on the
operating lease, net of
sub-lease
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
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.
Results
from Equity Method Investments
Investments in affiliates in which we do not exercise control
but have significant influence are accounted for using the
equity method of accounting. The increase in income from equity
method investments 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
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
$89.5 million in 2007 compared to a provision for income
taxes on continuing operations of $52.9 million in 2006.
The effective tax rate on continuing operations was 34.5% and
24.1% in 2007 and 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
profitability are net sales and profit. For more detailed
information regarding how we define segment income or loss, see
Note 21 in the Notes to our Consolidated Financial
Statements. In 2007, a $16.9 million warranty program
adjustment was not included in segment profit as it is
considered an unusual and nonrecurring item.
29
Residential
Heating & Cooling
The following table summarizes our Residential
Heating & Cooling segments net sales and profit
for 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 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.
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 summarizes our Commercial
Heating & Cooling segments net sales and profit
for 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
|
%
|
|
|
|
|
|
|
|
|
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.
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.
Service
Experts
The following table summarizes our Service Experts
segments net sales and profit from continuing operations
for 2007 and 2006 (dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
Difference
|
|
|
% Change
|
|
|
Net sales
|
|
$
|
667.1
|
|
|
$
|
639.2
|
|
|
$
|
27.9
|
|
|
|
4.4
|
%
|
Profit
|
|
|
26.1
|
|
|
|
19.4
|
|
|
|
6.7
|
|
|
|
34.5
|
|
% of net sales
|
|
|
3.9
|
%
|
|
|
3.0
|
%
|
|
|
|
|
|
|
|
|
30
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.
The increase in segment profit is primarily attributable to a
favorable change in sales and service mix and increased sales.
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 summarizes our Refrigeration segments
net sales and profit for 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
|
%
|
|
|
|
|
|
|
|
|
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.
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 $97.5 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 initiatives. These
decreases were partially offset by one-time retirement benefit
settlement charges with former executives.
Accounting
for Futures Contracts
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 met the criteria to qualify for hedge accounting under
SFAS No. 133 were designated as cash flow hedges and
were accounted for in accordance with the standard. For more
information see Note 9 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 futures 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 and Other
Expenses, net in the accompanying Consolidated Statements of
Operations. See Note 21 to our Consolidated Financial
Statements for more information and a reconciliation of segment
profit to net income.
31
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 quarters due to the seasonal nature of our business cycle.
As of December 31, 2008, our
debt-to-total-capital
ratio was 48%, up from 20% as of December 31, 2007,
primarily due to increased debt to partially fund our repurchase
of $311.3 million of our common stock in 2008 under our
share repurchase plans. These share repurchases also reduced
stockholders equity by that same amount and therefore
increased financial leverage.
Our stockholders equity also decreased during 2008 due to
changes in AOCI. We incurred comprehensive losses related to
foreign currency translation adjustments, net of
$84.9 million as the U.S. Dollar strengthened against
the currencies in the areas of the world where we operate. We
also recorded $55.9 million comprehensive losses, net of
tax, related to our pension and postretirement plans as pension
plan asset values declined due to overall security market
declines. Additionally, we incurred comprehensive losses of
$21.3 million, net of tax, on our commodity hedge
derivatives as commodity prices declined significantly in the
fourth quarter of 2008.
The following table summarizes our cash activity for 2008, 2007
and 2006 (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(In millions)
|
|
|
Net cash provided by operating activities
|
|
$
|
183.2
|
|
|
$
|
239.9
|
|
|
$
|
200.7
|
|
Net cash used in investing activities
|
|
|
(66.5
|
)
|
|
|
(97.6
|
)
|
|
|
(95.5
|
)
|
Net cash used in financing activities
|
|
|
(132.0
|
)
|
|
|
(152.7
|
)
|
|
|
(175.5
|
)
|
Net cash
provided by operating activities
During 2008 cash provided by operating activities was
$183.2 million compared to $239.9 million in 2007 and
$200.7 million in 2006. One of the primary reasons for the
decrease in cash provided by operations in 2008 was a change in
net income which declined to $122.8 million in 2008 from
$169.0 million in 2007.
There were several other events that significantly impacted our
cash flows from operations during 2008. We used cash for our
commodity hedges in 2008 of $37.9 million as compared to
none in 2007. We posted this as collateral with the counterparty
as a result of losses on our commodity hedge derivatives. As a
result of the decline in the fair value of our pension plan
assets, we also made a voluntary contribution of
$20.0 million to the U.S. defined benefit programs in
2008. We also increased the pace of our restructuring activities
and the cash use related to these activities increased.
Partially offsetting these uses of cash was the proceeds from
sales of accounts receivable under our asset securitization
program of $30.0 million in 2008 compared to none in 2007.
Improvements in working capital had a positive impact on cash
flow from operations. Accounts receivable improved with a
decrease of $54.4 million in 2008 compared to a
$22.4 million decrease in 2007. Inventory improved with a
decrease of $15.0 million in 2008 compared to an increase
of $6.7 million in 2007. The favorable impacts of inventory
and accounts receivable were partially offset by changes in
accounts payable, which decreased to a $44.2 million cash
use in 2008 from a $0.1 million source of cash in 2007.
Other key impacts included a non-cash impairment of an equity
method investment in 2008 of $9.1 million and a
$16.9 million reduction from a one-time warranty program
adjustment in 2007.
As of December 31, 2008, we had approximately
$14.1 million in unfunded postretirement benefit
obligations that relate to our medical and life insurance
benefits to eligible employees. We do not intend to pre-fund
these obligations at this time. Benefits provided under these
plans have been and will continue to be paid as they arise. Our
employer contributions were $2.2 million, $2.3 million
and $2.7 million in 2008, 2007 and 2006, respectively.
Based on current information, we do not expect a significant
change in 2009 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.
32
Net cash
used in investing activities
Net cash used in investing activities was $66.5 million in
2008 compared to $97.6 million and $95.5 million in
2007 and 2006, respectively. Capital expenditures of
$62.1 million, $70.2 million and $74.8 million in
2008, 2007 and 2006, 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) spending for our Saltillo, Mexico
facility. Net cash used in investing activities for the year
ended December 31, 2008 included $5.5 million for net
short-term investments compared to $27.4 million in 2007,
and $4.7 million for investments in affiliates in 2008
consisting of (i) an acquisition of a third-party entity
that is immaterial and (ii) additional investments in
unconsolidated affiliates. 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.
Investing activities for 2008 also included the proceeds from
the sale-leaseback from two properties that are part of our
North American operations of $5.5 million.
Net cash
used in financing activities
Net cash used in financing activities was $132.0 million in
2008 compared to $152.7 million and $175.5 million in
2007 and 2006, respectively. We paid a total of
$32.4 million in dividends on our common stock in 2008 as
compared to $35.0 million and $31.3 million in 2007
and 2006, respectively. The primary reason for the decrease in
cash dividends paid is the reduction in outstanding shares due
to the repurchase of common stock under our share repurchase
program, partially offset by the increase in the quarterly cash
dividend from $0.13 to $0.14 per share of common stock,
effective as of the dividend paid on January 18, 2008. Net
borrowings of long-term debt, short-term borrowings and
revolving long-term borrowings totaled approximately
$178.5 million in 2008 as compared to net borrowings of
$98.3 million in 2007. During 2008, we used approximately
$311.3 million to repurchase approximately
8,907,650 shares of our common stock under our share
repurchase plans. We also purchased approximately
356,731 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 tables summarize our outstanding debt obligations
and the classification in the accompanying Consolidated Balance
Sheets as of December 31, 2008 and 2007 (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Description of Obligation
|
|
Short-Term
|
|
|
Current
|
|
|
Long-Term
|
|
|
|
|
As of December 31, 2008
|
|
Debt
|
|
|
Maturities
|
|
|
Maturities
|
|
|
Total
|
|
|
Domestic promissory notes(1)
|
|
$
|
|
|
|
$
|
|
|
|
$
|
35.0
|
|
|
$
|
35.0
|
|
Domestic revolving credit facility
|
|
|
|
|
|
|
|
|
|
|
359.8
|
|
|
|
359.8
|
|
Capital lease obligations
|
|
|
|
|
|
|
0.3
|
|
|
|
18.6
|
|
|
|
18.9
|
|
Other obligations
|
|
|
6.1
|
|
|
|
0.3
|
|
|
|
0.3
|
|
|
|
6.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Debt
|
|
$
|
6.1
|
|
|
$
|
0.6
|
|
|
$
|
413.7
|
|
|
$
|
420.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Description of Obligation
|
|
Short-Term
|
|
|
Current
|
|
|
Long-Term
|
|
|
|
|
As of December 31, 2007
|
|
Debt
|
|
|
Maturities
|
|
|
Maturities
|
|
|
Total
|
|
|
Domestic promissory notes(1)
|
|
$
|
|
|
|
$
|
36.1
|
|
|
$
|
35.0
|
|
|
$
|
71.1
|
|
Domestic revolving credit facility
|
|
|
|
|
|
|
|
|
|
|
131.0
|
|
|
|
131.0
|
|
Other obligations
|
|
|
4.8
|
|
|
|
0.3
|
|
|
|
0.7
|
|
|
|
5.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Debt
|
|
$
|
4.8
|
|
|
$
|
36.4
|
|
|
$
|
166.7
|
|
|
$
|
207.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Domestic promissory notes consisted of the following (in
millions): |
33
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended
|
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
6.73% promissory notes, payable $11.1 annually through 2008
|
|
$
|
|
|
|
$
|
11.1
|
|
6.75% promissory notes, payable in 2008
|
|
|
|
|
|
|
25.0
|
|
8.00% promissory note, payable in 2010
|
|
|
35.0
|
|
|
|
35.0
|
|
|
|
|
|
|
|
|
|
|
Total domestic promissory notes
|
|
$
|
35.0
|
|
|
$
|
71.1
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2008, we had outstanding long-term debt
obligations totaling $414.3 million, which increased from
$203.1 million as of December 31, 2007. The amount
outstanding as of December 31, 2008 consisted primarily of
outstanding borrowings of $359.8 million under our domestic
revolving credit facility which matures in 2012 and a promissory
note with an aggregate principal amount outstanding of
$35.0 million. The promissory note matures in 2010 and has
an interest rate of 8.0%. The increase in total debt outstanding
was primarily the result of borrowing to fund share repurchases
made in 2008 and 2007.
On October 12, 2007, we entered into the Third Amended and
Restated Revolving Credit Facility Agreement (the Credit
Agreement), with a group of eighteen investment grade
national banks, which contains a $650.0 million domestic
revolving credit facility. The Credit 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, 2008, we had outstanding borrowings of
$359.8 million under the $650.0 million domestic
revolving credit facility and $116.6 million was committed
to standby letters of credit. All of the remaining
$173.6 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% or (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 pay
a facility fee in the range of 0.125% to 0.25% based on our Debt
to Adjusted EBITDA Ratio. We 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 an additional issuance fee of 0.125% for letters of
credit issued. Our weighted average borrowing rate on the
facility was 2.26% as of December 31, 2008.
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 most restrictive financial covenant
requires us to maintain a Consolidated Indebtedness to Adjusted
EBITDA Ratio of no more than 3.50 to 1.
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, 2008, 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
34
$6.7 million and $5.8 million of obligations
outstanding through our foreign subsidiaries as of
December 31, 2008 and 2007, respectively. Available
capacity at December 31, 2008 on foreign facilities was
$26.0 million.
Under a revolving period asset securitization arrangement
(ASA), 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. The ASA provides
for a maximum securitization amount of $125 million or 100%
of the net pool balance as defined by the ASA. However,
eligibility for securitization is limited based on the quality
of the accounts receivable and is calculated monthly. The
beneficial interest sold cannot exceed the maximum amount even
if our qualifying accounts receivable is greater than the
maximum amount at any point in time. The eligible amounts
available were as follows (in millions):
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
For The Years Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
Eligible amount available under the ASA on qualified accounts
receivable
|
|
$
|
91.0
|
|
|
|
|
|
|
$
|
102.7
|
|
Beneficial interest sold
|
|
|
(30.0
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Remaining amount available
|
|
$
|
61.0
|
|
|
|
|
|
|
$
|
102.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2008, $7.1 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, 2009, and will be renewed upon expiration.
These letters of credit restrictions can be transferred to our
revolving lines of credit as needed.
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. The repurchases under the 2007 Share
Repurchase Plan were fully executed by the end of the second
quarter of 2008.
On June 2, 2008, we announced that our Board of Directors
approved a new share repurchase plan, pursuant to which we are
authorized to repurchase up to $300 million of shares of
our common stock through open market purchases (the
2008 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 2008 Share Repurchase Plan.
During the third quarter of 2008, we amended the lease agreement
for our corporate headquarters. While the same party continues
to be the lessor under the lease, the amendment, among other
things, replaced the debt participant and moderately increased
the rent payments. The amendment also provides for consistency
of financial covenants with our revolving credit agreement and
we are in compliance with these financial covenants. The lease
will continue to be accounted for as an operating lease.
During 2008, we expanded our Tifton, Georgia manufacturing
facility using the proceeds from Industrial Development Bonds
(IDBs). We entered into a lease agreement with the
owner of the property and the issuer of the IDBs, and through
our lease payments fund the interest payments to investors in
the IDBs. We also guaranteed the repayment of the IDBs and
entered into letters of credit totaling $15.5 million to
fund a potential repurchase of the IDBs in the event that
investors exercised their right to tender the IDBs to the
Trustee. As of December 31, 2008, we recorded both a
long-term asset and a corresponding long-term obligation of
$15.3 million related to these transactions.
As a result of the recent declines in the securities markets as
a whole, the fair value of pension plan assets has also
declined. In 2008, we made a $20.0 million voluntary
contribution to our plans. A continued decline in fair value of
our pension plan assets could result in increased pension
contributions.
35
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:
|
|
|
|
|
Transfers of accounts receivable under the ASA are accounted for
as sales rather than secured borrowings and are reported as a
reduction of Accounts and Notes Receivable, Net in the
Consolidated Balance Sheets. As of December 31, 2008, we
sold $30.0 million in beneficial interest and had not sold
any as of December 31, 2007.
|
|
|
|
We also lease real estate and machinery and equipment pursuant
to operating leases that 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 leases generated rent expense of approximately
$64.2 million, $64.4 million and $54.1 million in
2008, 2007 and 2006, respectively.
|
Contractual
Obligations
Summarized below are our contractual obligations as of
December 31, 2008 (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due by Period
|
|
|
|
|
|
|
1 Year
|
|
|
2-3
|
|
|
4-5
|
|
|
After
|
|
|
|
Total
|
|
|
or Less
|
|
|
Years
|
|
|
Years
|
|
|
5 Years
|
|
|
Total debt obligations
|
|
$
|
420.4
|
|
|
$
|
6.7
|
|
|
$
|
37.3
|
|
|
$
|
360.9
|
|
|
$
|
15.5
|
|
Operating leases
|
|
|
163.6
|
|
|
|
53.1
|
|
|
|
68.0
|
|
|
|
30.3
|
|
|
|
12.2
|
|
Purchase obligations
|
|
|
9.0
|
|
|
|
9.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated interest payments on long-term debt
|
|
|
81.8
|
|
|
|
16.9
|
|
|
|
41.2
|
|
|
|
19.1
|
|
|
|
4.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total contractual obligations
|
|
$
|
674.8
|
|
|
$
|
85.7
|
|
|
$
|
146.5
|
|
|
$
|
410.3
|
|
|
$
|
32.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2008, the liability for uncertain tax
positions, including interest and penalties, was
$15.8 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 in which
these liabilities might be paid.
Purchase obligations consist of aluminum commitments. The above
table does not include retirement, postretirement and warranty
liabilities because it is not certain when these liabilities
will become due. On December 30, 2008, we made a voluntary
contribution of $20.0 million and as a result there are no
minimum required contributions for our U.S. qualified
pension plans in 2009. However, we currently plan to make
additional voluntary contributions of $20.0 million to
$40.0 million for our global plans throughout 2009. We also
estimate that our 2009 contribution to the postretirement
benefit plan will be approximately $1.6 million. For
additional information regarding our contractual obligations,
see Note 11, Note 12 and Note 13 of the Notes to
the Consolidated Financial Statements. Contractual obligations
related to capital leases as of December 31, 2008 were
included as part of long-term debt in the table above.
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,
2008, we estimate that we will incur an additional
$7.5 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.
Fair
Value Measurements
Effective January 1, 2008, we adopted Statement of
Financial Accounting Standards No. 157, Fair Value
Measurements (SFAS No. 157), which
establishes a framework for measuring fair value 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
Financial
36
Accounting Standards Board (FASB) issued FASB Staff
Position
No. FAS 157-2,
Effective Date of FASB Statement No. 157 (FSP
No. 157-2),
which deferred the effective date of SFAS No. 157 for
one year for non-financial assets and liabilities, except for
certain items that are recognized or disclosed at fair value in
the financial statements on a recurring basis (at least
annually). We are currently evaluating the impact of
SFAS No. 157 on our Consolidated Financial Statements
for items within the scope of FSP
No. 157-2,
which became effective on January 1, 2009.
Fair
Value Hierarchy
The three-level fair value hierarchy for disclosure of fair
value measurements defined by SFAS No. 157 is as
follows:
|
|
|
|
|
Level 1
|
|
|
|
Quoted prices for identical instruments in active markets
at the measurement date.
|
Level 2
|
|
|
|
Quoted prices for similar instruments in active markets;
quoted prices for identical or similar instruments in markets
that are not active; and model-derived valuations in which all
significant inputs and significant value drivers are
observable in active markets at the measurement date and
for the anticipated term of the instrument.
|
Level 3
|
|
|
|
Valuations derived from valuation techniques in which one or
more significant inputs or significant value drivers are
unobservable inputs that reflect the reporting
entitys own assumptions about the assumptions market
participants would use in pricing the asset or liability
developed based on the best information available in the
circumstances.
|
Fair
Value Techniques
Our valuation techniques are applied to all of the assets and
liabilities carried at fair value as of January 1, 2008,
upon adoption of SFAS No. 157. Where available, the
fair values are based upon quoted prices in active markets.
However, if quoted prices are not available, then the fair
values are based upon quoted prices for similar assets or
liabilities or independently sourced market parameters, such as
credit default swap spreads, yield curves, reported trades,
broker/dealer quotes, interest rates and benchmark securities.
For assets and liabilities with a lack of observable market
activity, if any, the fair values are based upon discounted cash
flow methodologies incorporating assumptions that, in our
judgment, reflect the assumptions a marketplace participant
would use. To ensure that financial assets and liabilities are
recorded at fair value, valuation adjustments may be required to
reflect either partys creditworthiness and ability to pay.
Where appropriate, these amounts were incorporated into our
valuations as of December 31, 2008, the measurement date.
Our adoption of SFAS No. 157 has resulted in changes
to the valuation techniques used when determining the fair value
of our derivative instruments. These derivatives are primarily
valued using estimated future cash flows that are based directly
on observed prices from exchange-traded derivatives and,
therefore, have been classified as Level 2. We also take
into account the counterpartys creditworthiness, or our
own creditworthiness, as appropriate. An adjustment has been
recorded in order to reflect the risk of credit default, but
these adjustments have been insignificant to the overall value
of the derivatives. The effect of adopting these changes to the
valuation techniques was not material.
The majority of our short-term investments are managed by
professional investment advisors. The net asset values are
furnished in statements received from the investment advisor and
reflect valuations based upon the respective pricing policies
utilized by the investment advisor. We have assessed the
classification of the inputs used to value these investments as
Level 2 through examination of pricing policies and
significant inputs and through discussions with investment
managers. The fair values of our short-term investments are
based on several observable inputs including, but not limited
to, benchmark yields, reported trades, broker/dealer quotes,
issuer spreads and benchmark securities. The adoption of
SFAS No. 157 resulted in no net changes to the
valuations for these securities.
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
37
period. During 2008, 2007 and 2006, net sales from outside the
U.S. represented 29.8%, 27.3% and 22.8%, 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, 2008, the impact to net
income of a 10% change in exchange rates is estimated to be
approximately $5.5 million.
We enter into commodity futures contracts to stabilize prices
expected 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, 2008, we had metal
futures contracts maturing at various dates through May 2010
with a fair value liability of $39.4 million. The impact of
a 10% change in commodity prices would not have a significant
impact on our results from operations on an annual basis, absent
any other contravening actions.
Our results of operations can be affected by changes in interest
rates due to variable rates of interest on our revolving credit
facilities. A 100 basis point change in interest rates
would impact our results of operations by approximately
$2.1 million.
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:
|
|
|
|
|
allowance for doubtful accounts;
|
|
|
|
goodwill and other intangible assets;
|
|
|
|
product warranties;
|
|
|
|
pension and postretirement benefits;
|
|
|
|
stock-based compensation;
|
|
|
|
self-insurance expense.
|
|
|
|
derivative accounting; and
|
|
|
|
income taxes.
|
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.
Allowance
for Doubtful Accounts
The overall allowance for doubtful accounts is maintained at a
level deemed appropriate based on historical and other factors
that affect our cash collections. Such factors include the
historical trends of bad debt write-offs and recovery of
previously written-off accounts, the current aging of customer
accounts, the financial strength of customers and projected
economic and market conditions. The evaluation of these factors
involves complex, subjective judgments. Due to the challenging
market conditions in our end markets in recent years, our bad
debt expense and amount of write-offs has moderately increased.
We continue to monitor our customers creditworthiness and
do not believe that we are exposed to any concentrations of
credit risk with those customers. Thus, changes in these factors
or changes in economic circumstances may significantly impact
our consolidated financial statements.
Goodwill
and Other Intangible Assets
We test goodwill 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 used
to estimated fair value are based on
38
assumptions regarding each reporting units estimated
projected future cash flows and the estimated weighted-average
cost of capital that a market participant would use in
evaluating the reporting unit in a purchase transaction. 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
performing these impairment tests, we take steps to ensure that
appropriate and reasonable cash flow projections and assumptions
are used. We reconcile our estimated enterprise value to our
market capitalization and determine the reasonableness of the
cost of capital used by comparing to market data. We also
perform sensitivity analyses on the key assumptions used, such
as the weighted-average cost of capital and terminal growth
rates.
We also monitor economic, legal, regulatory and other factors
for Lennox as a whole and for each reporting unit between annual
impairment tests to ensure that there are no indicators that
make it more likely than not that there has been a decline in
the fair value of the reporting unit below its carrying value.
Specifically, we monitor industry trends, our market
capitalization, recent and forecasted financial performance of
our reporting units, and the timing and nature of our
restructuring activities. While our recent financial performance
is below historical levels, we do not currently believe that
there are any indicators of impairment. If these estimates or
the related assumptions change, we may be required to record
non-cash impairment charges for these assets in the future.
Product
Warranties
The estimate of our liability for future warranty costs requires
us to make significant assumptions about the amount, timing and
nature of the costs we will incur in the future. We review the
assumptions used to determine the liability periodically and we
adjust our assumptions based upon factors such as actual failure
rates and cost experience. Numerous factors could affect actual
failure rates and cost experience, including the amount and
timing of new product introductions, changes in manufacturing
techniques or locations, components or suppliers used. In recent
years, changes in the warranty liability as the result of the
issuance of new warranties and the payments made have remained
relatively stable. Should actual warranty costs differ from our
estimates, we may be required to record adjustments to accruals
and expense in the future. For more information see Note 11
in the Notes to the Consolidated Financial Statements.
Pensions
and Postretirement Benefits
We have domestic and foreign pension plans covering essentially
all employees and we also maintain an unfunded postretirement
benefit plan, which provides certain medical and life insurance
benefits to eligible employees. In 2008, we selected 8.25% as
the assumed long-term rate of return on assets, which is
consistent with our 2007 estimate. These are long-term estimates
of equity values and are not dependent on short-term variations
of the equity markets. Due to the significant recent declines in
security market values in 2008 we experienced a loss in asset
values of $59.3 million. The loss does not immediately
impact our earnings as it is deferred in AOCI and will be
amortized into net periodic benefit cost over the estimated
service period of covered employees of 14.2 years. However,
the loss is recognized as an immediate increase to our benefit
obligations. We also selected assumed discount rates of 6.27%
for pension benefits and 6.42% for other benefits. Our assumed
discount rates are selected using the yield curve for
high-quality corporate bonds, which is dependent upon risk-free
interest rates and current credit market conditions.
The assumed long-term rate of return on assets and the discount
rate have significant effects on the amounts reported for our
defined benefit plans. A 25 basis point decrease in the
long-term rate of return on assets or discount rate would have
the following effects (in millions):
|
|
|
|
|
|
|
|
|
|
|
25 Basis Point
|
|
|
|
|
|
|
Decrease in Long-
|
|
|
25 Basis Point
|
|
|
|
Term Rate of
|
|
|
Decrease in
|
|
|
|
Return
|
|
|
Discount Rate
|
|
|
Effect on net periodic benefit cost
|
|
$
|
0.5
|
|
|
$
|
0.5
|
|
Effect on the postretirement benefit obligations
|
|
|
N/A
|
|
|
|
7.1
|
|
39
Assumed healthcare cost trend rates have a significant effect on
the amounts reported for our healthcare plan. For 2008, our
assumed healthcare cost trend rate was 8.50%. A one
percentage-point change in assumed healthcare cost trend rates
would have the following effects (in millions):
|
|
|
|
|
|
|
|
|
|
|
1-Percentage-Point
|
|
|
1-Percentage-Point
|
|
|
|
Increase
|
|
|
Decrease
|
|
|
Effect on total of service and interest cost
|
|
$
|
0.2
|
|
|
$
|
(0.2
|
)
|
Effect on the postretirement benefit obligation
|
|
|
1.5
|
|
|
|
(1.3
|
)
|
Should actual results differ from our estimates and assumptions,
revisions to the benefit plan liabilities and the related
expenses would be required. For more information see
Note 13 in the Notes to our Consolidated Financial
Statements.
Stock-Based
Compensation
Determining the amount of expense for stock-based compensation,
as well as the associated impact to our financial statements,
requires us to develop estimates of the fair value of
stock-based compensation expense. The stock-based compensation
expense that we record related to our performance share units is
highly dependent upon the achievement of performance goals and
forfeiture rates. These objectively determinable performance
goals include measures based upon return on invested capital and
growth in net income. If we do not achieve the goals specified,
the stock-based compensation expense is not recorded or recorded
at lower achievement rates and previous estimates may be
revised. Similarly, should we exceed our goals; we may be
required to record additional stock-based compensation expense.
The most significant factors of the stock-based compensation
expense related to stock appreciation right awards that require
estimates or projections include the expected volatility of our
stock price and expected lives of the stock appreciation rights.
The expected lives of 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 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. The
self-insurance expense and liabilities are primarily determined
based on our historical claims information, as well as industry
factors and trends. 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. In
recent years, our actual claims experience has been trending
favorably and, therefore, both self-insurance expense and the
related liability have decreased. To the extent actuarial
assumptions change and claims experience rates differ from
historical rates, our liability may change.
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. Fluctuations in metal commodity prices
impact the value of the derivative instruments that we hold.
When metal commodity prices rise, the fair value of our futures
contracts increases and conversely, when commodity prices fall,
the fair value of our futures contracts decreases. Late in 2008,
metal prices fell significantly and as a result, we recorded
derivative losses of $21.3 million in AOCI. We do not
expect similar drops in metal commodity prices in the
foreseeable future. Historically, hedge ineffectiveness has not
been significant. We are required to prepare and maintain
contemporaneous documentation for futures contracts to be
formally designated as cash flow hedges. Our failure to comply
with the strict documentation requirements could result in the
de-designation of cash flow hedges, which may significantly
impact our consolidated financial statements.
40
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.
|
|
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.
41
|
|
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, 2008, 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, 2008, 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, 2008, a copy of which is included herein.
42
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, 2008 and 2007, and the related consolidated
statements of operations, stockholders equity and
comprehensive income and cash flows for each of the years in the
three-year period ended December 31, 2008. In connection
with our audits of the consolidated financial statements, we
have also audited the financial statement schedule. We have also
audited Lennox International Inc.s internal control over
financial reporting as of December 31, 2008, based on
criteria established in Internal Control
Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO). Lennox
International Inc.s management is responsible for these
consolidated financial statements, the financial statement
schedule, 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, the financial
statement schedule and the effectiveness of 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, 2008 and 2007, and the results of their
operations and their cash flows for each of the years in the
three-year period ended December 31, 2008, in conformity
with U.S. generally accepted accounting principles. 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, 2008,
43
based on criteria established in Internal Control
Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission.
The Company adopted the provisions of Statement of Financial
Accounting Standards No. 158, Employers Accounting
for Defined Benefit Pension and Other Postretirement Plans,
effective December 31, 2006, and the Company adopted
the provisions of Financial Accounting Standards Board
Interpretation No. 48, Accounting for Uncertainty in
Income Taxes an Interpretation of FASB Statement
No. 109, effective January 1, 2007.
Dallas, Texas
February 26, 2009
44
LENNOX
INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
As of December 31, 2008 and 2007
(In millions, except share and per share data)
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
ASSETS
|
CURRENT ASSETS:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
122.1
|
|
|
$
|
145.5
|
|
Short-term investments
|
|
|
33.4
|
|
|
|
27.7
|
|
Accounts and notes receivable, net
|
|
|
369.6
|
|
|
|
492.0
|
|
Inventories, net
|
|
|
298.3
|
|
|
|
325.2
|
|
Deferred income taxes
|
|
|
24.2
|
|
|
|
30.9
|
|
Other assets
|
|
|
87.4
|
|
|
|
49.4
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
935.0
|
|
|
|
1,070.7
|
|
PROPERTY, PLANT AND EQUIPMENT, net
|
|
|
329.5
|
|
|
|
317.8
|
|
GOODWILL
|
|
|
232.3
|
|
|
|
262.8
|
|
DEFERRED INCOME TAXES
|
|
|
113.5
|
|
|
|
94.0
|
|
OTHER ASSETS, net
|
|
|
49.2
|
|
|
|
69.3
|
|
|
|
|
|
|
|
|
|
|
TOTAL ASSETS
|
|
$
|
1,659.5
|
|
|
$
|
1,814.6
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY
|
CURRENT LIABILITIES:
|
|
|
|
|
|
|
|
|
Short-term debt
|
|
$
|
6.1
|
|
|
$
|
4.8
|
|
Current maturities of long-term debt
|
|
|
0.6
|
|
|
|
36.4
|
|
Accounts payable
|
|
|
234.5
|
|
|
|
289.2
|
|
Accrued expenses
|
|
|
331.1
|
|
|
|
352.7
|
|
Income taxes payable
|
|
|
3.7
|
|
|
|
1.1
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
576.0
|
|
|
|
684.2
|
|
LONG-TERM DEBT
|
|
|
413.7
|
|
|
|
166.7
|
|
POSTRETIREMENT BENEFITS, OTHER THAN PENSIONS
|
|
|
12.5
|
|
|
|
16.2
|
|
PENSIONS
|
|
|
107.7
|
|
|
|
34.8
|
|
OTHER LIABILITIES
|
|
|
91.0
|
|
|
|
104.2
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
1,200.9
|
|
|
|
1,006.1
|
|
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, 84,215,904 shares and 81,897,439 shares issued
for 2008 and 2007, respectively
|
|
|
0.8
|
|
|
|
0.8
|
|
Additional paid-in capital
|
|
|
805.6
|
|
|
|
760.7
|
|
Retained earnings
|
|
|
538.8
|
|
|
|
447.4
|
|
Accumulated other comprehensive (loss) income
|
|
|
(98.8
|
)
|
|
|
63.6
|
|
Treasury stock, at cost, 29,109,058 shares and
19,844,677 shares for 2008 and 2007, respectively
|
|
|
(787.8
|
)
|
|
|
(464.0
|
)
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
458.6
|
|
|
|
808.5
|
|
|
|
|
|
|
|
|
|
|
TOTAL LIABILITIES AND STOCKHOLDERS EQUITY
|
|
$
|
1,659.5
|
|
|
$
|
1,814.6
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
45
LENNOX
INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended December 31, 2008, 2007 and 2006
(In millions, except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
NET SALES
|
|
$
|
3,481.4
|
|
|
$
|
3,735.3
|
|
|
$
|
3,700.6
|
|
COST OF GOODS SOLD
|
|
|
2,507.9
|
|
|
|
2,687.4
|
|
|
|
2,745.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
973.5
|
|
|
|
1,047.9
|
|
|
|
955.3
|
|
OPERATING EXPENSES:
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative expenses
|
|
|
724.4
|
|
|
|
773.4
|
|
|
|
772.2
|
|
Gains and other expenses, net
|
|
|
(1.9
|
)
|
|
|
(6.7
|
)
|
|
|
(46.8
|
)
|
Restructuring charges
|
|
|
30.4
|
|
|
|
25.2
|
|
|
|
13.3
|
|
Impairment of equity method investment
|
|
|
9.1
|
|
|
|
|
|
|
|
|
|
Income from equity method investments
|
|
|
(8.6
|
)
|
|
|
(10.6
|
)
|
|
|
(8.0
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operational income from continuing operations
|
|
|
220.1
|
|
|
|
266.6
|
|
|
|
224.6
|
|
INTEREST EXPENSE, net
|
|
|
13.7
|
|
|
|
6.8
|
|
|
|
4.4
|
|
OTHER EXPENSE, net
|
|
|
0.1
|
|
|
|
0.7
|
|
|
|
0.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations before income taxes
|
|
|
206.3
|
|
|
|
259.1
|
|
|
|
219.7
|
|
PROVISION FOR INCOME TAXES
|
|
|
81.2
|
|
|
|
89.5
|
|
|
|
52.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
|
125.1
|
|
|
|
169.6
|
|
|
|
166.8
|
|
DISCONTINUED OPERATIONS:
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from discontinued operations
|
|
|
3.7
|
|
|
|
0.9
|
|
|
|
1.3
|
|
Income tax benefit
|
|
|
(1.4
|
)
|
|
|
(0.3
|
)
|
|
|
(0.5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from discontinued operations
|
|
|
2.3
|
|
|
|
0.6
|
|
|
|
0.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
122.8
|
|
|
$
|
169.0
|
|
|
$
|
166.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EARNINGS PER SHARE BASIC:
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
$
|
2.21
|
|
|
$
|
2.56
|
|
|
$
|
2.38
|
|
Loss from discontinued operations
|
|
|
(0.04
|
)
|
|
|
(0.01
|
)
|
|
|
(0.01
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
2.17
|
|
|
$
|
2.55
|
|
|
$
|
2.37
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EARNINGS PER SHARE DILUTED:
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
$
|
2.15
|
|
|
$
|
2.44
|
|
|
$
|
2.27
|
|
Loss from discontinued operations
|
|
|
(0.04
|
)
|
|
|
(0.01
|
)
|
|
|
(0.01
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
2.11
|
|
|
$
|
2.43
|
|
|
$
|
2.26
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AVERAGE SHARES OUTSTANDING:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
56.7
|
|
|
|
66.4
|
|
|
|
69.9
|
|
Diluted
|
|
|
58.3
|
|
|
|
69.4
|
|
|
|
73.5
|
|
CASH DIVIDENDS DECLARED PER SHARE
|
|
$
|
0.56
|
|
|
$
|
0.53
|
|
|
$
|
0.46
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
46
LENNOX
INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY AND
COMPREHENSIVE INCOME (LOSS)
For the Years Ended December 31, 2008, 2007 and 2006
(In millions, except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock
|
|
|
Additional
|
|
|
|
|
|
Other
|
|
|
Treasury
|
|
|
Total
|
|
|
|
|
|
|
Issued
|
|
|
Paid-In
|
|
|
Retained
|
|
|
Comprehensive
|
|
|
Stock
|
|
|
Stockholders
|
|
|
Comprehensive
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Earnings
|
|
|
Income (Loss)
|
|
|
at Cost
|
|
|
Equity
|
|
|
Income (Loss)
|
|
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
122.8
|
|
|
|
|
|
|
|
|
|
|
|
122.8
|
|
|
$
|
122.8
|
|
Dividends, $0.56 per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(31.4
|
)
|
|
|
|
|
|
|
|
|
|
|
(31.4
|
)
|
|
|
|
|
Foreign currency translation adjustments, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(84.9
|
)
|
|
|
|
|
|
|
(84.9
|
)
|
|
|
(84.9
|
)
|
Pension and postretirement liability changes, net of tax benefit
of $35.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(55.9
|
)
|
|
|
|
|
|
|
(55.9
|
)
|
|
|
(55.9
|
)
|
Stock-based compensation expense
|
|
|
|
|
|
|
|
|
|
|
11.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11.8
|
|
|
|
|
|
Derivatives and other, net of tax provision of $12.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(21.6
|
)
|
|
|
|
|
|
|
(21.6
|
)
|
|
|
(21.6
|
)
|
Common stock issued
|
|
|
2.3
|
|
|
|
|
|
|
|
19.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
19.7
|
|
|
|
|
|
Treasury stock purchases
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(323.8
|
)
|
|
|
(323.8
|
)
|
|
|
|
|
Tax benefits of stock-based compensation
|
|
|
|
|
|
|
|
|
|
|
13.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(39.6
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE AS OF DECEMBER 31, 2008
|
|
|
84.2
|
|
|
$
|
0.8
|
|
|
$
|
805.6
|
|
|
$
|
538.8
|
|
|
$
|
(98.8
|
)
|
|
$
|
(787.8
|
)
|
|
$
|
458.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
47
LENNOX
INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 2008, 2007 and 2006
(In millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
CASH FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
122.8
|
|
|
$
|
169.0
|
|
|
$
|
166.0
|
|
Adjustments to reconcile net income to net cash provided by
operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from equity method investments
|
|
|
(8.6
|
)
|
|
|
(10.6
|
)
|
|
|
(8.0
|
)
|
Dividends from affiliates
|
|
|
14.3
|
|
|
|
12.3
|
|
|
|
5.4
|
|
Restructuring expenses, net of cash paid
|
|
|
0.6
|
|
|
|
14.8
|
|
|
|
7.3
|
|
Impairment of equity method investment
|
|
|
9.1
|
|
|
|
|
|
|
|
|
|
Unrealized loss on futures contracts
|
|
|
5.1
|
|
|
|
3.3
|
|
|
|
20.8
|
|
Collateral posted for hedges
|
|
|
(37.9
|
)
|
|
|
|
|
|
|
|
|
Stock-based compensation expense
|
|
|
11.8
|
|
|
|
21.0
|
|
|
|
24.4
|
|
Depreciation and amortization
|
|
|
50.6
|
|
|
|
48.8
|
|
|
|
44.3
|
|
Proceeds from sales of accounts receivable under asset
securitization
|
|
|
30.0
|
|
|
|
|
|
|
|
|
|
Deferred income taxes
|
|
|
25.0
|
|
|
|
5.7
|
|
|
|
(26.3
|
)
|
Pension contributions, net of expense
|
|
|
(19.5
|
)
|
|
|
(6.6
|
)
|
|
|
6.7
|
|
Other items, net
|
|
|
4.6
|
|
|
|
9.5
|
|
|
|
1.2
|
|
Changes in assets and liabilities, net of effects of
acquisitions and divestitures:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts and notes receivable
|
|
|
54.4
|
|
|
|
22.4
|
|
|
|
11.1
|
|
Inventories
|
|
|
15.0
|
|
|
|
(6.7
|
)
|
|
|
(47.3
|
)
|
Other current assets
|
|
|
(0.6
|
)
|
|
|
(5.9
|
)
|
|
|
(0.8
|
)
|
Accounts payable
|
|
|
(44.2
|
)
|
|
|
0.1
|
|
|
|
(25.9
|
)
|
Accrued expenses
|
|
|
(41.7
|
)
|
|
|
3.5
|
|
|
|
(4.3
|
)
|
Income taxes payable and receivable
|
|
|
(1.7
|
)
|
|
|
(25.5
|
)
|
|
|
11.0
|
|
Other
|
|
|
(5.9
|
)
|
|
|
(15.2
|
)
|
|
|
15.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
183.2
|
|
|
|
239.9
|
|
|
|
200.7
|
|
CASH FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from the disposal of property, plant and equipment
|
|
|
5.8
|
|
|
|
0.8
|
|
|
|
3.5
|
|
Purchases of property, plant and equipment
|
|
|
(62.1
|
)
|
|
|
(70.2
|
)
|
|
|
(74.8
|
)
|
Additional investments in affiliates
|
|
|
(4.7
|
)
|
|
|
(0.8
|
)
|
|
|
(24.2
|
)
|
Purchases of short-term investments
|
|
|
(64.2
|
)
|
|
|
(42.5
|
)
|
|
|
|
|
Proceeds from sales and maturities of short-term investments
|
|
|
58.7
|
|
|
|
15.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(66.5
|
)
|
|
|
(97.6
|
)
|
|
|
(95.5
|
)
|
CASH FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term borrowings (payments), net
|
|
|
1.4
|
|
|
|
3.4
|
|
|
|
(0.4
|
)
|
Proceeds from capital lease
|
|
|
15.3
|
|
|
|
|
|
|
|
|
|
Long-term payments
|
|
|
(36.4
|
)
|
|
|
(36.1
|
)
|
|
|
(11.2
|
)
|
Revolver long-term borrowings
|
|
|
213.5
|
|
|
|
131.0
|
|
|
|
|
|
Proceeds from stock option exercises
|
|
|
19.7
|
|
|
|
21.5
|
|
|
|
19.8
|
|
Payments of deferred financing costs
|
|
|
(0.3
|
)
|
|
|
(1.8
|
)
|
|
|
(0.3
|
)
|
Repurchases of common stock
|
|
|
(323.8
|
)
|
|
|
(253.6
|
)
|
|
|
(163.4
|
)
|
Excess tax benefits related to share-based payments
|
|
|
11.0
|
|
|
|
17.9
|
|
|
|
11.3
|
|
Cash dividends paid
|
|
|
(32.4
|
)
|
|
|
(35.0
|
)
|
|
|
(31.3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in financing activities
|
|
|
(132.0
|
)
|
|
|
(152.7
|
)
|
|
|
(175.5
|
)
|
DECREASE IN CASH AND CASH EQUIVALENTS
|
|
|
(15.3
|
)
|
|
|
(10.4
|
)
|
|
|
(70.3
|
)
|
EFFECT OF EXCHANGE RATES ON CASH AND CASH EQUIVALENTS
|
|
|
(8.1
|
)
|
|
|
11.6
|
|
|
|
1.1
|
|
CASH AND CASH EQUIVALENTS, beginning of year
|
|
|
145.5
|
|
|
|
144.3
|
|
|
|
213.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH AND CASH EQUIVALENTS, end of year
|
|
$
|
122.1
|
|
|
$
|
145.5
|
|
|
$
|
144.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplementary disclosures of cash flow information:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid during the year for:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
|
|
$
|
17.6
|
|
|
$
|
11.4
|
|
|
$
|
10.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income taxes (net of refunds)
|
|
$
|
41.9
|
|
|
$
|
91.3
|
|
|
$
|
43.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-cash items:
|
|
|
|
|
|
|
|
|
|
|
|
|
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.
48
LENNOX
INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
For the
Years Ended December 31, 2008, 2007 and 2006
Lennox International Inc., a Delaware corporation, through its
subsidiaries (referred to herein as we,
our, us, LII or the
Company), is 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 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
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 21 for financial
information regarding our reportable segments.
We sell our 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.
|
|
2.
|
Summary
of Significant Accounting Policies:
|
Principles
of Consolidation
The consolidated financial statements include the accounts of
Lennox International Inc. and the accounts of our majority-owned
subsidiary businesses and are consolidated in conformity with
General Accepted Accounting Principles in the United States of
America (U.S. GAAP). All intercompany
transactions, profits and balances have been eliminated.
Cash
and Cash Equivalents
We consider all highly liquid temporary investments with
original maturity dates of three months or less to be cash
equivalents. Cash and cash equivalents consisted of cash,
overnight repurchase agreements and investment grade securities
and are stated at cost, which approximates fair value.
As of December 31, 2008 and 2007, $7.1 million and
$20.2 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 our
captive insurance subsidiary (the Captive), which
expire on December 31, 2009. These letters of credit
restrictions can be transferred to our revolving credit facility
as needed.
Accounts
and Notes Receivable
Accounts and notes receivable are shown in the accompanying
Consolidated Balance Sheets, net of allowance for doubtful
accounts and net of accounts receivable sold under our asset
securitization arrangement, if any. The allowance for doubtful
accounts is generally established during the period in which
receivables are recognized and is maintained at a level deemed
appropriate 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. We determine the delinquency status of
receivables predominantly based on contractual terms and write
off uncollectible receivables after managements review of
factors that affect collectibility as noted above, among other
49
LENNOX
INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
considerations. We have no significant concentrations of credit
risk within our accounts and notes receivable. Detailed
information regarding the allowance for doubtful accounts is
provided below (in millions):
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
Allowance for doubtful accounts
|
|
$
|
18.6
|
|
|
$
|
17.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Provision for bad debts
|
|
$
|
17.4
|
|
|
$
|
10.4
|
|
|
$
|
6.6
|
|
Inventories
Inventory costs include material, labor, depreciation and plant
overhead. Inventories of $129.0 million and
$130.6 million as of December 31, 2008 and 2007,
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. We elected
to use the LIFO cost method for our 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, we
began adopting the FIFO cost method for all new domestic
manufacturing operations (primarily acquisitions). Our operating
entities with a previous LIFO election continue to use the LIFO
cost method. We also use the FIFO cost method for all of our
foreign-based manufacturing facilities as well as our Service
Experts segment, whose inventory is limited to service parts and
finished goods. LIFO inventory liquidations did not have a
material impact on gross profit during the years ended
December 31, 2008, 2007, and 2006.
Property,
Plant and Equipment
Property, plant and equipment are stated at cost, net of
accumulated depreciation. Expenditures that increase the utility
or extend the useful lives of fixed assets 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
|
We periodically review 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, we compare the estimated expected future
undiscounted cash flows 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.
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 are instead tested for impairment at least annually. We
complete our annual goodwill impairment tests in the first
quarter of each fiscal year and continuously monitor our
operations for indicators of goodwill impairment based on
current market conditions.
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 our projected future cash
flows and the estimated weighted-average cost of capital of
market participants. The estimated weighted-average cost of
50
LENNOX
INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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 our annual impairment tests, we
determined that no impairment of our goodwill existed as of
December 31, 2008, 2007 or 2006.
In assessing the fair value of our goodwill, we 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, we may be
required to record impairment charges for these assets in the
future.
Intangible
and Other Assets
We require that intangible assets with estimable useful lives be
amortized over their respective estimated useful lives to their
estimated residual values.
Identifiable intangible and other assets that have finite useful
lives are amortized over their useful lives as follows:
|
|
|
Asset
|
|
Useful Life
|
|
Deferred financing costs
|
|
Effective interest method
|
Customer relationships
|
|
Straight-line method up to 10 years
|
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 undiscounted future cash flows identified
with each intangible 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 our other intangibles, we must
make assumptions that a market participant would make 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, we may be required to record
impairment charges for these assets in the future.
Product
Warranties
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
also provide lifetime warranties for heat exchangers. A
liability for estimated warranty expense is recorded on the date
that revenue is recognized. Our estimates of future warranty
costs are determined for each product line. The number of units
that we expect to repair or replace 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. 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. Estimated future warranty costs are 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.
Pensions
and Postretirement Benefits
We provide pension and postretirement medical benefits to
eligible domestic and foreign employees and recognize pension
and postretirement benefit costs over the estimated service life
of those employees. We also recognize the funded status of our
benefit plans, as measured at year-end by the difference between
plan assets at fair value and the benefit obligation, in the
Consolidated Balance Sheets. Changes in the funded status are
recognized in the year in which the changes occur through
Accumulated Other Comprehensive Income (AOCI). Actuarial gains
or losses are amortized into net period benefit cost over the
estimated service life of covered employees.
51
LENNOX
INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The benefit plan assets and liabilities reflect assumptions
about the long-range performance of our benefit plans. Should
actual results differ from managements estimates,
revisions to the benefit plan assets and liabilities would be
required. For additional disclosures on pension and
postretirement medical benefits, including how we determine the
assumptions used, see Note 13.
Self-Insurance
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 also maintain
third-party coverage for risks not retained within our large
deductible or captive insurance plans. Self-insurance expense
and liabilities are determined based on our historical claims
information, as well as industry factors and trends. As of
December 31, 2008, 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 2008 and prior years. The majority of our
self-insured risks (excluding auto liability and physical
damage) will be paid over an extended period of time.
Actual payments for claims reserved as of December 31,
2008 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.
Derivatives
We use futures contracts and fixed forward contracts to mitigate
the exposure to volatility in commodity prices. We hedge only
exposures in the ordinary course of business and do not hold or
trade derivatives for profit. All derivatives are recognized in
the Consolidated Balance Sheets at fair value. Classification of
each hedging instrument is based upon whether the maturity of
the instrument is less than or greater than 12 months.
We selectively hedge anticipated transactions that are subject
to commodity price exposure. Instruments that meet established
accounting criteria are formally designated as cash flow hedges.
If the hedging relationship ceases to be highly effective or it
becomes probable that an expected transaction will no longer
occur, future gains or losses on the derivative are recorded in
Gains and Other Expenses, net in the accompanying Consolidated
Statements of Operations.
We may enter into instruments that economically hedge certain of
our risks, even though hedge accounting does not apply or we
elect not to apply hedge accounting. The fair value of the
instruments, 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 9.
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, we adopted FIN No. 48. As a
result of the adoption of FIN No. 48, we 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 10.
52
LENNOX
INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
We recognize interest and penalties accrued related to
unrecognized tax benefits in income tax expense in accordance
with FIN No. 48.
Revenue
Recognition
Our 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 our 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. We have experienced returns for miscellaneous
reasons and we record a reserve for these returns based on
historical experience for such returns at the time we recognize
revenue. Our historical rate of returns are insignificant as a
percentage of sales.
Our 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.
We engage in cooperative advertising, customer rebate, cash
discount and other miscellaneous programs that result in
payments or credits being issued to its customer. Our 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. Under these cooperative advertising programs, we
receive, or will receive, an indentifiable benefit (goods or
services) in exchange for the consideration given.
Cost
of Goods Sold
The principal components of cost of goods sold in our
manufacturing operations are component costs, raw materials,
factory overhead, labor and estimated costs of warranty expense.
These principal components of cost include inbound freight
charges, purchasing, receiving and inspection costs, internal
transfer costs and warehousing costs through the manufacturing
process. In our Service Experts segment, the principal
components of cost of goods sold are equipment, vehicle costs,
parts and supplies and labor.
Selling,
General and Administrative Expenses
SG&A expenses include all other payroll and benefit costs,
advertising, commissions, research and development, information
technology costs and other selling, general and administrative
related costs such as insurance, travel, and non-production
depreciation and rent.
Stock-Based
Compensation
We recognize compensation expense for stock-based arrangements
over the required employee service periods. We base stock-based
compensation costs on the estimated grant-date fair value of the
stock-based awards that are expected to ultimately vest and
adjust expected vesting rates to actual rates as additional
information becomes known. We also adjust performance
achievement rates based on our best estimates of those rates at
the end of the performance period.
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 and
Other Expenses, net in the accompanying Consolidated Statements
of Operations.
53
LENNOX
INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Use of
Estimates
The preparation of financial statements in conformity with
U.S. GAAP requires us to make estimates and assumptions
about future events. These estimates and the underlying
assumptions affect the amounts of assets and liabilities
reported, disclosures about contingent assets and liabilities,
and reported amounts of revenues and expenses. Such estimates
include the valuation of accounts receivable, inventories,
goodwill, intangible assets, and other long-lived assets, legal
contingencies, guarantee obligations, indemnifications, and
assumptions used in the calculation of income taxes, pension and
postretirement medical benefits, among others. These estimates
and assumptions are based on our best estimates and judgment.
We evaluate our estimates and assumptions on an ongoing basis
using historical experience and other factors, including the
current economic environment. We believe these estimates and
assumptions to be reasonable under the circumstances and adjust
such estimates and assumptions when facts and circumstances
dictate. Declines in the residential new construction market and
other consumer spending, volatile equity, foreign currency, and
commodity markets, have combined to increase the uncertainty
inherent in such estimates and assumptions. As future events and
their effects cannot be determined with precision, actual
results could differ significantly from these estimates. Changes
in those estimates resulting from continuing changes in the
economic environment will be reflected in the financial
statements in future periods.
Reclassifications
Certain amounts have been reclassified from the prior year
presentation to conform to the current year presentation.
Recently
Adopted Accounting Pronouncements
Effective January 1, 2008, we adopted 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. However, in February 2008, the
Financial Accounting Standards Board (FASB) issued
FASB Staff Position
No. FAS 157-2,
Effective Date of FASB Statement No. 157 (FSP
No. 157-2),
which deferred the effective date of SFAS No. 157 for
one year for non-financial assets and liabilities, except for
certain items that are recognized or disclosed at fair value in
the financial statements on a recurring basis (at least
annually). We are currently evaluating the impact of
SFAS No. 157 on our consolidated financial statements
for items within the scope of FSP
No. 157-2,
which will become effective on January 1, 2009.
|
|
3.
|
Short-term
Investments
|
Our captive insurance company held all of the short-term
investments reported on our Consolidated Balance Sheets.
Unrealized losses included in AOCI in the accompanying
Consolidated Balance Sheet as of December 31, 2008 and 2007
were not material. Realized gains and losses from the sale of
securities were also not material for 2008 and 2007. The
maturities of these securities range from January 2009 to
December 2011.
For more information on the valuation of these investments, see
Note 22.
54
LENNOX
INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Components of inventories are as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended
|
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
Finished goods
|
|
$
|
232.8
|
|
|
$
|
247.6
|
|
Work in process
|
|
|
8.4
|
|
|
|
10.5
|
|
Raw materials and repair parts
|
|
|
132.9
|
|
|
|
137.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
374.1
|
|
|
|
395.6
|
|
Excess of current cost over
last-in,
first-out cost
|
|
|
(75.8
|
)
|
|
|
(70.4
|
)
|
|
|
|
|
|
|
|
|
|
Total inventories
|
|
$
|
298.3
|
|
|
$
|
325.2
|
|
|
|
|
|
|
|
|
|
|
Repair parts are primarily utilized in service operations and to
fulfill our warranty obligations.
|
|
5.
|
Property,
Plant and Equipment:
|
Components of property, plant and equipment are as follows (in
millions):
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended
|
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
Land
|
|
$
|
35.6
|
|
|
$
|
37.1
|
|
Buildings and improvements
|
|
|
237.8
|
|
|
|
209.1
|
|
Machinery and equipment
|
|
|
561.8
|
|
|
|
550.6
|
|
Construction in progress and equipment not yet in service
|
|
|
38.8
|
|
|
|
42.4
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
874.0
|
|
|
|
839.2
|
|
Less-accumulated depreciation
|
|
|
(544.5
|
)
|
|
|
(521.4
|
)
|
|
|
|
|
|
|
|
|
|
Property, plant and equipment, net
|
|
$
|
329.5
|
|
|
$
|
317.8
|
|
|
|
|
|
|
|
|
|
|
The balances above include buildings and improvements and
machinery and equipment under capital lease obligations of
$18.6 million, net of accumulated depreciation of
$3.4 million for the year ended December 31, 2008.
Capital lease assets were not material as of December 31,
2007.
|
|
6.
|
Goodwill,
Intangible and Other Assets:
|
Goodwill
The changes in the carrying amount of goodwill related to
continuing operations, by segment, are as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of
|
|
|
|
|
|
Balance as of
|
|
|
|
|
|
Balance as of
|
|
|
|
December 31,
|
|
|
|
|
|
December 31,
|
|
|
|
|
|
December 31,
|
|
|
|
2006
|
|
|
Changes(1)
|
|
|
2007
|
|
|
Changes(2)
|
|
|
2008
|
|
|
Residential Heating & Cooling
|
|
$
|
33.9
|
|
|
$
|
(0.2
|
)
|
|
$
|
33.7
|
|
|
$
|
|
|
|
$
|
33.7
|
|
Commercial Heating & Cooling
|
|
|
30.1
|
|
|
|
2.0
|
|
|
|
32.1
|
|
|
|
(0.9
|
)
|
|
|
31.2
|
|
Service Experts
|
|
|
97.9
|
|
|
|
14.6
|
|
|
|
112.5
|
|
|
|
(18.7
|
)
|
|
|
93.8
|
|
Refrigeration
|
|
|
77.9
|
|
|
|
6.6
|
|
|
|
84.5
|
|
|
|
(10.9
|
)
|
|
|
73.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
239.8
|
|
|
$
|
23.0
|
|
|
$
|
262.8
|
|
|
$
|
(30.5
|
)
|
|
$
|
232.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
55
LENNOX
INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
(1) |
|
Changes in 2007 primarily relate to changes in foreign currency
translation rates. |
|
(2) |
|
Changes in 2008 primarily relate to changes in foreign currency
translation rates. Changes in 2008 also include an increase in
goodwill of $2.6 million related to an acquisition and a
decrease related to an adjustment of income tax contingencies
related to a previous acquisition. Both of these goodwill
adjustments were recorded in our Service Experts segment. |
Intangible
and Other Assets
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 (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
Gross
|
|
|
Accumulated
|
|
|
Net
|
|
|
Gross
|
|
|
Accumulated
|
|
|
Net
|
|
|
|
Amount
|
|
|
Amortization
|
|
|
Amount
|
|
|
Amount
|
|
|
Amortization
|
|
|
Amount
|
|
|
Deferred financing costs
|
|
$
|
7.2
|
|
|
$
|
(4.8
|
)
|
|
$
|
2.4
|
|
|
$
|
7.0
|
|
|
$
|
(4.1
|
)
|
|
$
|
2.9
|
|
Customer relationships
|
|
|
3.3
|
|
|
|
(0.7
|
)
|
|
|
2.6
|
|
|
|
3.3
|
|
|
|
(0.4
|
)
|
|
|
2.9
|
|
Other
|
|
|
5.1
|
|
|
|
(3.8
|
)
|
|
|
1.3
|
|
|
|
4.7
|
|
|
|
(3.6
|
)
|
|
|
1.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
15.6
|
|
|
$
|
(9.3
|
)
|
|
$
|
6.3
|
|
|
$
|
15.0
|
|
|
$
|
(8.1
|
)
|
|
$
|
6.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of intangible assets was as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Amortization expense
|
|
$
|
1.5
|
|
|
$
|
1.4
|
|
|
$
|
1.4
|
|
Estimated intangible amortization expense for the next five
years is as follows (in millions):
|
|
|
|
|
2009
|
|
$
|
1.5
|
|
2010
|
|
|
1.3
|
|
2011
|
|
|
1.1
|
|
2012
|
|
|
0.8
|
|
2013
|
|
|
0.4
|
|
As of December 31, 2008 and 2007, we had $4.8 million
of intangible assets primarily consisting of trademarks, which
are not subject to amortization.
|
|
7.
|
Joint
Ventures and Other Equity Investment:
|
Joint
Ventures
We participate in two joint ventures; the largest is located in
the U.S. and the other in Mexico. These joint ventures are
engaged in the manufacture and sale of compressors, unit coolers
and condensing units. Because we exert significant influence
over these affiliates based upon 25% and 50% ownership, but do
not control them due to venture partner participation, they have
been accounted for under the equity method and their financial
position and results of operations are not consolidated. We
purchase compressors from our U.S. joint venture for use in
certain of our products.
The combined balance of equity method investments included in
Other Assets, net totaled (in millions):
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
Other Assets, net
|
|
$
|
32.0
|
|
|
$
|
52.6
|
|
56
LENNOX
INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Purchases of compressors from our U.S. joint venture that
were included in Cost of Goods Sold in the Consolidated
Statements of Operations were approximately (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Purchases of compressors
|
|
$
|
123.2
|
|
|
$
|
164.9
|
|
|
$
|
163.1
|
|
During 2008, the Company loaned $1.6 million on a
short-term basis to its joint venture in Mexico due to that
entitys temporary cash needs related to margin calls on
forward commodity contracts. The joint venture partner loaned
equal amounts under identical terms to the joint venture; and
therefore, the investment continues to be recorded under the
equity method.
During 2008, the investment balance in our Mexican joint venture
was significantly impacted by changes in currency exchange rates
as the Mexican Peso weakened against the U.S. Dollar. The
loss in investment value due to currency translation of
$4.1 million was recorded in Accumulated Other
Comprehensive Income.
Other
Investment
LII also has an investment in a compressor manufacturer located
in Thailand. During 2008, under the equity method we recorded
investment losses of $0.3 million and dividends of
$1.1 million as reductions to the investment balance. We
also recorded $9.1 million of impairment charges related to
this investment.
The investees financial results were adversely impacted by
increases in commodity costs, unfavorable currency exchange
fluctuations, and difficulties integrating past acquisitions.
Furthermore, the joint venture began a strategy of expansion
during the fourth quarter and executed a rights offering to
existing shareholders to fund its plans. We did not agree with
the plans for expansion, were unable to influence the investee
not to pursue this strategy and therefore did not participate in
the rights offering. These economic factors, the unsuccessful
attempt to influence the investees business strategy,
together with a change in management intent regarding holding
its investment until recovery prompted the
other-than-temporary
impairment charges. These charges reflect the decrease in the
fair value of the investment below its carrying value that we
believe is not recoverable in the near term.
Also, as a result of the rights offering, our percentage of
equity ownership declined from 13% to 9%. While formerly
accounted for under the equity method, the investment of
$1.8 million was accounted for at year-end as an
available-for-sale
marketable equity security. The fair value of the investment was
measured based upon the quoted market price of the
investees common stock as listed on the Stock Exchange of
Thailand multiplied by the number of shares owned. For more
information on the valuation of this investment see Note 22.
57
LENNOX
INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
8.
|
Current
Accrued Expenses:
|
Significant components of current accrued expenses are presented
below (in millions):
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended
|
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
Accrued compensation and benefits
|
|
$
|
66.6
|
|
|
$
|
112.9
|
|
Insurance reserves
|
|
|
72.3
|
|
|
|
66.2
|
|
Deferred income
|
|
|
33.6
|
|
|
|
37.7
|
|
Accrued warranties
|
|
|
30.2
|
|
|
|
33.7
|
|
Accrued rebates and promotions
|
|
|
30.9
|
|
|
|
35.5
|
|
Commodity hedge liability
|
|
|
36.5
|
|
|
|
2.2
|
|
Other
|
|
|
57.8
|
|
|
|
62.6
|
|
|
|
|
|
|
|
|
|
|
Total continuing operations accrued expenses
|
|
$
|
327.9
|
|
|
$
|
350.8
|
|
Discontinued operations accrued expenses
|
|
|
3.2
|
|
|
|
1.9
|
|
|
|
|
|
|
|
|
|
|
Total current accrued expenses
|
|
$
|
331.1
|
|
|
$
|
352.7
|
|
|
|
|
|
|
|
|
|
|
Objectives
and Strategies for Using Derivative Instruments
We utilize a hedging program to mitigate the exposure to
volatility in the prices of metal commodities we use in our
production processes. The hedging program includes the use of
futures contracts and we enter into these contracts based on our
hedging strategy. We use a dollar cost averaging strategy for
our hedge program. As part of this strategy, a higher percentage
of commodity price exposures are hedged near term with lower
percentages hedged at future dates. This strategy provides us
with protection against extreme near-term price volatility
caused by market speculators and market forces, such as supply
variation, while allowing us to participate in downward market
price movements. Upon entering into futures contracts we lock in
prices and are exposed to derivative losses should the metal
commodity prices decrease and gains should the metal prices
increase. During 2008, metal commodity prices decreased
significantly in a short time horizon, which resulted in
significant derivative losses. As a result of these losses we
were required to post collateral of $37.9 million. This
transaction was treated as a prepaid expense and recorded in
Other Assets in the accompanying Consolidated Balance Sheets.
The unrealized derivative losses were recorded in AOCI.
We are required to recognize all derivative instruments as
either assets or liabilities at fair value in the Consolidated
Balance Sheets. We designate domestic copper commodity futures
contracts as cash flow hedges of forecasted purchases of
commodities. To qualify for hedge accounting, we require that
the futures contracts be effective in reducing the risk exposure
that they are designed to hedge and that it is probable that the
underlying transaction will occur. For instruments designated as
cash flow hedges, we 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.
We may also enter into instruments that economically hedge
certain of our risks, even though hedge accounting does not
apply or we elect not to apply hedge accounting to these
instruments. The fair value of the instruments act as an
economic offset to changes in the fair value of the underlying
item(s).
58
LENNOX
INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
We monitor our derivative positions and credit ratings of our
counterparties and do not anticipate losses due to counterparty
non-performance.
Cash
Flow Hedges
For futures contracts that are designated and qualify as cash
flow hedges, we assess hedge effectiveness and measure hedge
ineffectiveness at least quarterly throughout the hedge
designation 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.
Ineffectiveness is recorded in net income each period and
reported in Gains and Other Expenses, net in the accompanying
Consolidated Statements of Operations. If the hedging
relationship ceases to be highly effective or it becomes
probable that an expected transaction will no longer occur, the
net gain or loss shall remain in accumulated other comprehensive
income and will be reclassified into earnings when net income is
affected b the variability of the underlying cash flow.
We included (gains) losses in AOCI in connection with our cash
flow hedges. These (gains) losses are expected to be
reclassified to net income within the next 18 months based
on the prices of the commodities at settlement date. Assuming
that commodity prices remain constant, $19.7 million of
derivative losses are expected to be reclassified into earnings
within the next 12 months. Derivative instruments that are
designated as cash flow hedges and are in place as of
December 31, 2008 are scheduled to mature through May 2010.
We recorded the following amounts (in millions):
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended
|
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
Losses (Gains) included in AOCI, net of tax
|
|
$
|
21.3
|
|
|
$
|
(0.4
|
)
|
Tax (Benefit) Provision
|
|
|
(11.9
|
)
|
|
|
0.2
|
|
As of December 31, 2008, we had 23.1 million pounds of
outstanding copper commodity futures contracts that were entered
into to hedge forecasted purchases designated as cash flow
hedges.
Derivatives
not Designated as Cash Flow Hedges
For derivatives not designated as cash flow hedges we follow the
same hedging strategy as for derivatives designated as cash flow
hedges. We elect not to designate these derivatives as cash flow
hedges at inception of the arrangement. 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 and Other Expenses, net in
the accompanying Consolidated Statements of Operations.
As of December 31, 2008, we had 2.9 million pounds of
outstanding copper and 3.2 million pounds of outstanding
aluminum commodity futures contracts that were entered into to
hedge forecasted purchases not designated as cash flow hedges.
59
LENNOX
INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Information
About the Location and Amounts of Derivative
Instruments
For information on the location and amounts of derivative fair
values in the Consolidated Balance Sheets and derivative gains
and losses in the Consolidated Statements of Operations, see the
tabular information presented below (in millions):
Fair
Values of Derivative Instruments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
Balance Sheet
|
|
|
|
|
Balance Sheet
|
|
|
|
Asset Derivatives
|
|
Location
|
|
Fair Value
|
|
|
Location
|
|
Fair Value
|
|
|
Derivatives designated as hedging instruments under
SFAS No. 133
|
|
|
|
|
|
|
|
|
|
|
|
|
Commodity contracts
|
|
Other Assets
|
|
$
|
|
|
|
Other Assets
|
|
$
|
0.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Asset for Derivatives
|
|
|
|
$
|
|
|
|
|
|
$
|
0.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liability Derivatives
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives designated as hedging instruments under
SFAS No. 133
|
|
|
|
|
|
|
|
|
|
|
|
|
Commodity contracts
|
|
Accrued
Expenses
|
|
$
|
31.0
|
|
|
Accrued
Expenses
|
|
$
|
1.6
|
|
Commodity contracts
|
|
Other Liabilities
|
|
|
2.6
|
|
|
Other Liabilities
|
|
|
0.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
33.6
|
|
|
|
|
$
|
1.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives not designated as hedging instruments under
SFAS No. 133
|
|
|
|
|
|
|
|
|
|
|
|
|
Commodity contracts
|
|
Accrued
Expenses
|
|
$
|
5.5
|
|
|
Accrued
Expenses
|
|
$
|
0.6
|
|
Commodity contracts
|
|
Other Liabilities
|
|
|
0.3
|
|
|
Other Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
5.8
|
|
|
|
|
$
|
0.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Liability for Derivatives
|
|
|
|
$
|
39.4
|
|
|
|
|
$
|
2.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
Effect of Derivative Instruments on the Consolidated Statements
of Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount of (Gain) or Loss Reclassified
|
|
|
|
Location of (Gain) or Loss
|
|
|
from AOCI into Income
|
|
Derivatives in SFAS No.
|
|
Reclassified
|
|
|
(Effective Portion)
|
|
133 Cash Flow Hedging
|
|
from AOCI into Income
|
|
|
For The Years Ended December 31,
|
|
Relationships
|
|
(Effective Portion)
|
|
|
2008
|
|
|
2007
|
|
|
2006(1)
|
|
|
Commodity Contracts
|
|
|
Cost of Goods Sold
|
|
|
$
|
(7.0
|
)
|
|
$
|
(6.2
|
)
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount of (Gain) or Loss Recognized
|
|
Derivatives in SFAS No.
|
|
Location of (Gain) or Loss Recognized
|
|
|
in Income on Derivatives (Ineffective Portion)
|
|
133 Cash Flow Hedging
|
|
in Income on Derivatives (Ineffective
|
|
|
For The Years Ended December 31,
|
|
Relationships
|
|
Portion)
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Commodity Contracts
|
|
|
Gains and Other Expenses, net
|
|
|
$
|
0.3
|
|
|
$
|
(0.2
|
)
|
|
$
|
|
|
60
LENNOX
INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount of (Gain) or Loss
|
|
Derivatives Not
|
|
|
|
|
Recognized in Income on
|
|
Designated as Hedging
|
|
Location of (Gain) or Loss
|
|
|
Derivatives
|
|
Instruments under
|
|
Recognized in Income on
|
|
|
For the Years Ended December 31,
|
|
SFAS No. 133
|
|
Derivatives
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Commodity Contracts
|
|
|
Gains and Other Expenses, net
|
|
|
$
|
0.6
|
|
|
$
|
(0.7
|
)
|
|
$
|
(45.2
|
)
|
|
|
|
(1) |
|
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. |
We report cash flows arising from our hedging instruments
consistent with the classifications of cash flows from the
underlying hedged items. Accordingly, cash flows associated with
our derivative programs are classified in cash flows from
operating activities in the accompanying Consolidated Statements
of Cash Flows.
For more information on the valuation of these derivative
instruments, see Note 22.
Our income tax provision (benefits) from continuing operations
consisted of the following (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Current:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
32.5
|
|
|
$
|
59.0
|
|
|
$
|
50.3
|
|
State
|
|
|
5.9
|
|
|
|
6.8
|
|
|
|
5.5
|
|
Foreign
|
|
|
11.1
|
|
|
|
18.6
|
|
|
|
9.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current
|
|
|
49.5
|
|
|
|
84.4
|
|
|
|
65.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
27.1
|
|
|
|
(1.7
|
)
|
|
|
0.3
|
|
State
|
|
|
4.2
|
|
|
|
1.2
|
|
|
|
(3.6
|
)
|
Foreign
|
|
|
0.4
|
|
|
|
5.6
|
|
|
|
(9.4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deferred
|
|
|
31.7
|
|
|
|
5.1
|
|
|
|
(12.7
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total income tax provision
|
|
$
|
81.2
|
|
|
$
|
89.5
|
|
|
$
|
52.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations before income taxes was
comprised of the following (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Domestic
|
|
$
|
187.1
|
|
|
$
|
193.3
|
|
|
$
|
173.7
|
|
Foreign
|
|
|
19.2
|
|
|
|
65.8
|
|
|
|
46.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
206.3
|
|
|
$
|
259.1
|
|
|
$
|
219.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
61
LENNOX
INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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 is summarized as
follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Provision at the U.S. statutory rate of 35%
|
|
$
|
72.2
|
|
|
$
|
90.7
|
|
|
$
|
76.9
|
|
Increase (reduction) in tax expense resulting from:
|
|
|
|
|
|
|
|
|
|
|
|
|
State income tax, net of federal income tax benefit
|
|
|
7.7
|
|
|
|
5.2
|
|
|
|
3.9
|
|
Other permanent items
|
|
|
(1.2
|
)
|
|
|
(4.0
|
)
|
|
|
6.5
|
|
Research tax credit
|
|
|
|
|
|
|
(0.3
|
)
|
|
|
(0.9
|
)
|
Decrease in tax audit reserves
|
|
|
|
|
|
|
|
|
|
|
(14.3
|
)
|
Change in valuation allowance
|
|
|
1.1
|
|
|
|
(4.0
|
)
|
|
|
(19.3
|
)
|
Foreign taxes at rates other than 35% and miscellaneous
|
|
|
|
|
|
|
|
|
|
|
|
|
other
|
|
|
1.4
|
|
|
|
1.9
|
|
|
|
0.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total income tax provision
|
|
$
|
81.2
|
|
|
$
|
89.5
|
|
|
$
|
52.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
classification of the asset or liability generating the deferred
tax. The deferred tax provision for the periods shown represents
the effect of changes in the amounts of temporary differences
during those periods.
62
LENNOX
INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Deferred tax assets (liabilities) were comprised of the
following (in millions):
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended
|
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
Gross deferred tax assets:
|
|
|
|
|
|
|
|
|
Warranties
|
|
$
|
33.0
|
|
|
$
|
33.4
|
|
Net operating losses (foreign and U.S. state)
|
|
|
41.6
|
|
|
|
45.6
|
|
Postretirement and pension benefits
|
|
|
45.0
|
|
|
|
18.3
|
|
Inventory reserves
|
|
|
1.4
|
|
|
|
6.8
|
|
Receivables allowance
|
|
|
5.0
|
|
|
|
4.6
|
|
Compensation liabilities
|
|
|
23.9
|
|
|
|
33.8
|
|
Deferred income
|
|
|
8.3
|
|
|
|
9.1
|
|
Intangibles
|
|
|
0.4
|
|
|
|
5.2
|
|
Other
|
|
|
32.4
|
|
|
|
20.5
|
|
|
|
|
|
|
|
|
|
|
Total deferred tax assets
|
|
|
191.0
|
|
|
|
177.3
|
|
Valuation allowance
|
|
|
(28.7
|
)
|
|
|
(29.0
|
)
|
|
|
|
|
|
|
|
|
|
Total deferred tax assets, net of valuation allowance
|
|
|
162.3
|
|
|
|
148.3
|
|
Gross deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
(14.6
|
)
|
|
|
(12.4
|
)
|
Insurance liabilities
|
|
|
(2.8
|
)
|
|
|
(2.7
|
)
|
Other
|
|
|
(7.7
|
)
|
|
|
(8.6
|
)
|
|
|
|
|
|
|
|
|
|
Total deferred tax liabilities
|
|
|
(25.1
|
)
|
|
|
(23.7
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred tax assets
|
|
$
|
137.2
|
|
|
$
|
124.6
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2008, we had $10.9 million and
$30.7 million in tax effected state and foreign net
operating loss carryforwards, respectively. The state and
foreign net operating loss carryforwards begin expiring in 2009.
The deferred tax asset valuation allowance relates primarily to
the operating loss carryforwards 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, we
consider whether it is more likely than not that some portion or
all of the deferred tax assets will not be realized. We consider
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, we
believe it is more likely than not that we will realize the
benefits of these deductible differences, net of the existing
valuation allowances, as of December 31, 2008.
In order to realize the net deferred tax asset, we will need to
generate future foreign taxable income of approximately
$62.8 million during the periods in which those temporary
differences become deductible. We do not need to generate any
additional federal income as we have sufficient carryback
capacity to fully realize the federal deferred tax asset.
U.S. taxable income for the years ended December 31,
2008 and 2007 was $58.1 million and $131.4 million,
respectively.
No provision has been made for income taxes which may become
payable upon distribution of our foreign subsidiaries
earnings. It is not practicable to estimate the amount of tax
that might be payable because our intent is to permanently
reinvest these earnings or to repatriate earnings when it is tax
effective to do so.
63
LENNOX
INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Effective January 1, 2007, we 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.
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
|
|
|
|
|
|
|
Increases related to prior year tax positions
|
|
|
0.2
|
|
Decreases related to prior year tax positions
|
|
|
(0.1
|
)
|
Increases related to current year tax positions
|
|
|
0.4
|
|
Settlements
|
|
|
(9.5
|
)
|
|
|
|
|
|
Balance as of December 31, 2008
|
|
$
|
14.9
|
|
|
|
|
|
|
Included in the balance of unrecognized tax benefits as of
December 31, 2008 are potential benefits of
$6.9 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, 2008 are liabilities of $6.4 million
that, if recognized, would be recorded as an adjustment to
stockholders equity. As of December 31, 2008, we had
recognized $0.9 million (net of federal tax benefits) in
interest and penalties in income tax expense in accordance with
FIN No. 48.
We are subject to examination by numerous taxing authorities in
jurisdictions such as Australia, Belgium, Canada, Germany, and
the U.S. We are 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 our consolidated tax returns for the years
1999 2003 and issued a Revenue Agents Report
(RAR) on April 6, 2006. We reached a settlement
with the IRS in December 2008 that resulted in an immaterial
impact to the Consolidated Statements of Operations.
The IRS has also completed its examination of our consolidated
tax returns for the years
2004-2005
and issued an RAR on July 31, 2008. The IRS has proposed
certain significant adjustments to our insurance deductions and
research credits. We disagree with the RAR and have requested a
review by the administrative appeals division of the IRS.
During 2008, West Virginia, Colorado, Kansas and Massachusetts
enacted legislation effective for tax years beginning on or
after January 1, 2008, including adjustments to tax rates,
requirements for combined reporting in future years and changes
to apportionment methods. We determined the impact of these
changes to be immaterial.
64
LENNOX
INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
11.
|
Commitments
and Contingencies:
|
Leases
The approximate minimum commitments under all non-cancelable
leases outstanding as of December 31, 2008 are as follows
(in millions):
|
|
|
|
|
|
|
|
|
|
|
Operating
|
|
|
Capital
|
|
|
|
Leases
|
|
|
Leases
|
|
|
2009
|
|
$
|
53.1
|
|
|
$
|
0.9
|
|
2010
|
|
|
40.5
|
|
|
|
1.0
|
|
2011
|
|
|
27.5
|
|
|
|
1.0
|
|
2012
|
|
|
18.5
|
|
|
|
1.0
|
|
2013
|
|
|
11.8
|
|
|
|
1.0
|
|
Thereafter
|
|
|
12.2
|
|
|
|
20.5
|
|
|
|
|
|
|
|
|
|
|
Total minimum lease payments
|
|
$
|
163.6
|
|
|
|
25.4
|
|
|
|
|
|
|
|
|
|
|
Less amount representing interest
|
|
|
|
|
|
|
6.5
|
|
|
|
|
|
|
|
|
|
|
Present value of minimum payments
|
|
|
|
|
|
$
|
18.9
|
|
|
|
|
|
|
|
|
|
|
On June 22, 2006, we entered into an agreement with a
financial institution to lease our corporate headquarters in
Richardson, Texas for a term of seven years (the Lake Park
Lease). The leased property consists of an office building
of approximately 192,000 square feet, land and related
improvements. During the term, the Lake Park Lease requires us
to pay base rent in quarterly installments, payable in arrears.
At the end of the term, we must do one of the following:
(i) purchase the property for approximately
$41.2 million; (ii) make a final payment under the
lease equal to approximately 82% of the Lease Balance and return
the property to the financial institution in good condition;
(iii) arrange for the sale of the leased property to a
third party; or (iv) renew the lease under mutually
agreeable terms. If we elect to sell the property to a third
party and the sales proceeds are less than the Lease Balance, we
must pay any such deficit to the financial institution. Any such
payment cannot exceed 82% of the Lease Balance.
Our obligations under the Lake Park Lease are secured by a
pledge of our interest in the leased property and are also
guaranteed by us and certain of our subsidiaries. The Lake Park
Lease, as amended, contains restrictive covenants that are
consistent with those of our revolving credit agreement. We are
in compliance with these financial covenants as of
December 31, 2008. The Lake Park Lease is accounted for 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 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,
2008, we estimate that we will incur an additional
$7.5 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.
Environmental
Applicable environmental laws can potentially 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 facilities; however, we do
not presently believe that any future remediation costs at such
facilities will be material to our results of operations. No
amounts have been recorded for non-asset retirement obligation
environmental liabilities that are not probable or estimable.
65
LENNOX
INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Brazil
Environmental Reserve
At one site located in Brazil, we are currently evaluating the
remediation efforts that may be required under 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 are in the process of
pilot testing remediation technology
on-site.
Commencement of full-scale remediation is planned in 2009. The
amount and timing of cash payments are reliably determinable and
therefore we have recorded environmental reserves at their
present values.
The following information relates to the Brazil environmental
reserve (in millions except percentages):
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended
|
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
Discounted liabilities recorded in:
|
|
|
|
|
|
|
|
|
Accrued Expenses
|
|
$
|
0.8
|
|
|
$
|
0.1
|
|
Other Long-Term Liabilities
|
|
|
0.6
|
|
|
|
1.9
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1.4
|
|
|
$
|
2.0
|
|
|
|
|
|
|
|
|
|
|
Undiscounted liabilities
|
|
$
|
1.6
|
|
|
$
|
2.5
|
|
Discount rate
|
|
|
11.1
|
%
|
|
|
8.0
|
%
|
Additional
Environmental Reserves
We maintain environmental reserves for additional sites that are
not individually significant. The following information relates
to additional environmental reserves (in millions except
percentages):
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended
|
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
Discounted liabilities recorded in:
|
|
|
|
|
|
|
|
|
Accrued Expenses
|
|
$
|
0.6
|
|
|
$
|
2.0
|
|
Other Long-Term Liabilities
|
|
|
2.1
|
|
|
|
1.9
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2.7
|
|
|
$
|
3.9
|
|
|
|
|
|
|
|
|
|
|
Undiscounted liabilities
|
|
$
|
4.1
|
|
|
$
|
6.4
|
|
Discount rate
|
|
|
7.8
|
%
|
|
|
6.0
|
%
|
Estimates of future costs are subject to change due to changing
environmental remediation regulations
and/or
site-specific requirements.
66
LENNOX
INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Product
Warranties
Total liabilities for estimated warranty are included in the
following captions on the accompanying Consolidated Balance
Sheets (in millions):
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
Accrued Expenses
|
|
$
|
30.2
|
|
|
$
|
33.7
|
|
Other Liabilities
|
|
|
64.3
|
|
|
|
64.6
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
94.5
|
|
|
$
|
98.3
|
|
|
|
|
|
|
|
|
|
|
The changes in the total warranty liabilities for the years
ended December 31, 2008 and 2007 were as follows (in
millions):
|
|
|
|
|
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
|
|
|
6.3
|
|
Changes in foreign currency translation rates
|
|
|
2.5
|
|
Warranty program adjustment(1)
|
|
|
(16.9
|
)
|
|
|
|
|
|
Total warranty liability as of December 31, 2007
|
|
$
|
98.3
|
|
|
|
|
|
|
Payments made in 2008
|
|
|
(27.0
|
)
|
Changes resulting from issuance of new warranties
|
|
|
32.3
|
|
Changes in estimates associated with pre-existing liabilities
|
|
|
(6.4
|
)
|
Changes in foreign currency translation rates
|
|
|
(2.7
|
)
|
|
|
|
|
|
Total warranty liability as of December 31, 2008
|
|
$
|
94.5
|
|
|
|
|
|
|
|
|
|
(1) |
|
In the fourth quarter of 2007, we made a change to the way we
fulfill warranty obligations on the Pulse furnace, which was
produced from 1982 to 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. |
Litigation
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.
|
67
LENNOX
INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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 2, 2009,
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.
12. Long-Term
Debt, Lines of Credit and Asset Securitization:
Long
Term Debt and Lines of Credit
The following tables summarize our outstanding debt obligations
and the classification in the accompanying Consolidated Balance
Sheet (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Description of Obligation
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2008
|
|
Short-Term Debt
|
|
|
Current Maturities
|
|
|
Long-Term Maturities
|
|
|
Total
|
|
|
Domestic promissory notes(1)
|
|
$
|
|
|
|
$
|
|
|
|
$
|
35.0
|
|
|
$
|
35.0
|
|
Domestic revolving credit facility
|
|
|
|
|
|
|
|
|
|
|
359.8
|
|
|
|
359.8
|
|
Capital lease obligations
|
|
|
|
|
|
|
0.3
|
|
|
|
18.6
|
|
|
|
18.9
|
|
Other obligations
|
|
|
6.1
|
|
|
|
0.3
|
|
|
|
0.3
|
|
|
|
6.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total debt
|
|
$
|
6.1
|
|
|
$
|
0.6
|
|
|
$
|
413.7
|
|
|
$
|
420.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 obligations
|
|
|
4.8
|
|
|
|
0.3
|
|
|
|
0.7
|
|
|
|
5.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total debt
|
|
$
|
4.8
|
|
|
$
|
36.4
|
|
|
$
|
166.7
|
|
|
$
|
207.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Domestic promissory notes consisted of the following (in
millions): |
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended
|
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
6.73% promissory notes, payable $11.1 annually through 2008
|
|
$
|
|
|
|
$
|
11.1
|
|
6.75% promissory notes, payable in 2008
|
|
|
|
|
|
|
25.0
|
|
8.00% promissory note, payable in 2010
|
|
|
35.0
|
|
|
|
35.0
|
|
|
|
|
|
|
|
|
|
|
Total domestic promissory notes
|
|
$
|
35.0
|
|
|
$
|
71.1
|
|
|
|
|
|
|
|
|
|
|
68
LENNOX
INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
As of December 31, 2008, the aggregate amounts of required
principal payments on long-term debt are as follows (in
millions):
|
|
|
|
|
2009
|
|
$
|
0.6
|
|
2010
|
|
|
36.8
|
|
2011
|
|
|
0.5
|
|
2012
|
|
|
360.4
|
|
2013
|
|
|
0.5
|
|
Thereafter
|
|
|
15.5
|
|
On October 12, 2007, we entered into the Third Amended and
Restated Revolving Credit Facility Agreement (the Credit
Agreement), with a group of eighteen investment grade
national banks, which contains a $650.0 million domestic
revolving credit facility. The Credit Agreement replaced our
previous domestic revolving credit facility, the Second Amended
and Restated Credit Facility Agreement, dated as of July 8,
2005. We 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, 2008, we had outstanding borrowings of
$359.8 million under the $650.0 million domestic
revolving credit facility and $116.6 million was committed
to standby letters of credit. All of the remaining
$173.6 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% or (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 pay
a facility fee in the range of 0.125% to 0.25% based on our Debt
to Adjusted EBITDA Ratio. We 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 an additional issuance fee of 0.125% for letters of
credit issued. Our weighted average borrowing rate on the
facility was 2.26% as of December 31, 2008.
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 most restrictive financial covenant
requires us to maintain a Consolidated Indebtedness to Adjusted
EBITDA Ratio of no more than 3.50 to 1.
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 contain
certain financial covenant restrictions. As of December 31,
2008, we were in compliance with all covenant requirements. Our
revolving credit 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 $6.7 million and
$5.8 million of obligations outstanding through our foreign
subsidiaries as of December 31, 2008 and 2007,
respectively. Available capacity at December 31, 2008 on
foreign facilities was $26.0 million.
During 2008 we expanded our Tifton, Georgia manufacturing
facility using the proceeds from Industrial Development Bonds
(IDBs). We entered into a lease agreement with the
owner of the property and the issuer of the IDBs, and through
our lease payments fund the interest payments to investors in
the IDBs. We also guaranteed the repayment of the IDBs and
entered into letters of credit totaling $15.5 million to
fund a potential repurchase of the IDBs in the event that
investors exercised their
69
LENNOX
INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
right to tender the IDBs to the Trustee. At December 31,
2008 we recorded both a capital lease asset and a corresponding
long-term obligation of $15.3 million related to these
transactions.
Credit
Rating
At December 31, 2008, our senior credit rating was Ba1,
with a stable outlook, by Moodys and BB+, with a stable
outlook, by Standard & Poors Rating Group
(S&P).
Asset
Securitization
Under a revolving period asset securitization arrangement
(ASA), we are eligible to sell beneficial interests
in a portion of our trade accounts receivable to participating
financial institutions for cash. The arrangement expires
November 25, 2009, and is subject to renewal. Our continued
involvement in the transferred assets is limited to servicing,
which includes collection and administration of the transferred
beneficial interests. The accounts receivable sold under the ASA
are high quality domestic customer accounts that have not aged
significantly and the program takes into account an allowance
for uncollectable accounts. The receivables represented by the
retained interest that we service are exposed to the risk of
loss for any uncollectible amounts in the pool of receivables
sold under the ASA. The fair values assigned to the retained and
transferred interests are based on the sold accounts receivable
carrying value given the short term to maturity and low credit
risk.
The ASA contains certain restrictive covenants relating to the
quality of our accounts receivable and cross-default provisions
with our Credit Agreement. The administrative agent under the
ASA is also a participant in our Credit Agreement. The
participating financial institution has an investment grade
credit rating. We continue to evaluate its credit rating and
have no reason to believe it will not perform under the ASA. As
of December 31, 2008, we were in compliance with all
covenant requirements.
The ASA provides for a maximum securitization amount of
$125.0 million or 100% of the net pool balance as defined
by the ASA. However, eligibility for securitization is limited
based on the quality of the accounts receivable and is
calculated monthly. The beneficial interest sold cannot exceed
the maximum amount even if our qualifying accounts receivable is
greater than the maximum amount at any point in time. The
eligible amounts available were as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
Eligible amount available under the ASA on qualified accounts
receivable
|
|
$
|
91.0
|
|
|
$
|
102.7
|
|
Beneficial interest sold
|
|
|
(30.0
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Remaining amount available
|
|
$
|
61.0
|
|
|
$
|
102.7
|
|
|
|
|
|
|
|
|
|
|
Under the ASA we pay certain discount fees to use the program
and have the facility available to us. These fees relate to both
the used and unused portions of the securitization. The used fee
is based on the beneficial interest sold and calculated on the
average floating commercial paper rate determined by the
purchaser of the beneficial interest. The rate as of
December 31, 2008 was 2.14%. The unused fee is based on
103% of the maximum available amount less the beneficial
interest sold and calculated at 0.3% fixed rate throughout the
term of the agreement. We recorded these fees in Selling,
General and Administrative Expenses in the accompanying
Consolidated Statements of Operations. The amounts recorded were
as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Discount fees
|
|
$
|
0.2
|
|
|
$
|
0.2
|
|
|
$
|
0.3
|
|
The sale of the beneficial interest occurred close to year-end,
therefore the fee for using the facility in 2008 was based on a
short period of time.
70
LENNOX
INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
13.
|
Employee
Benefit Plans:
|
Defined
Contribution Plans
We maintain noncontributory profit sharing plans for our
eligible domestic and Canadian salaried employees. These plans
are discretionary, as our contributions are determined annually
by the Board of Directors. We also sponsor several 401(k) plans
with employer contribution-matching requirements. We recorded
the following (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Provisions for profit sharing contributions
|
|
$
|
3.0
|
|
|
$
|
8.0
|
|
|
$
|
12.0
|
|
Contributions to 401(k) plans
|
|
$
|
1.6
|
|
|
$
|
1.7
|
|
|
$
|
1.6
|
|
Pension
and Postretirement Benefit Plans
We provide pension and postretirement medical benefits to
eligible domestic and foreign employees. In the third quarter of
2008, we announced that we were freezing our defined benefit
pension and profit sharing plans for our domestic and Canadian
salaried employees and moving to an enhanced 401(k) plan in 2009
for our domestic salaried employees and 2010 for our Canadian
salaried employees. We also maintain an unfunded postretirement
benefit plan, which provides certain medical and life insurance
benefits to eligible employees. In 2006, we 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
us 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 will still exist in 2010 and
eligible nonunion participants will still be able to receive
group coverage rates. However, we will no longer be paying any
portion of the participants premiums.
71
LENNOX
INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following tables set forth amounts recognized in our
financial statements and the plans funded status (dollars
in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Benefits
|
|
|
Other Benefits
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
Accumulated benefit obligation
|
|
$
|
280.1
|
|
|
$
|
252.1
|
|
|
$
|
N/A
|
|
|
$
|
N/A
|
|
Changes in projected benefit obligation:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefit obligation at beginning of year
|
|
|
261.1
|
|
|
|
269.4
|
|
|
|
17.7
|
|
|
|
14.9
|
|
Service cost
|
|
|
6.8
|
|
|
|
6.9
|
|
|
|
0.7
|
|
|
|
0.6
|
|
Interest cost
|
|
|
16.4
|
|
|
|
14.9
|
|
|
|
0.8
|
|
|
|
0.8
|
|
Plan participants contributions
|
|
|
0.1
|
|
|
|
0.1
|
|
|
|
0.9
|
|
|
|
1.5
|
|
Amendments
|
|
|
|
|
|
|
0.6
|
|
|
|
(2.5
|
)
|
|
|
|
|
Actuarial loss (gain)
|
|
|
32.1
|
|
|
|
(0.1
|
)
|
|
|
(0.4
|
)
|
|
|
3.7
|
|
Effect of exchange rates
|
|
|
(8.3
|
)
|
|
|
3.6
|
|
|
|
|
|
|
|
|
|
Settlements and curtailments
|
|
|
(7.1
|
)
|
|
|
(20.3
|
)
|
|
|
|
|
|
|
|
|
Benefits paid
|
|
|
(16.5
|
)
|
|
|
(14.0
|
)
|
|
|
(3.1
|
)
|
|
|
(3.8
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefit obligation at end of year
|
|
$
|
284.6
|
|
|
$
|
261.1
|
|
|
$
|
14.1
|
|
|
$
|
17.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Changes in plan assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of plan assets at beginning of year
|
|
$
|
224.6
|
|
|
$
|
218.4
|
|
|
$
|
|
|
|
$
|
|
|
Actual (loss) return on plan assets
|
|
|
(59.3
|
)
|
|
|
11.9
|
|
|
|
|
|
|
|
|
|
Employer contribution
|
|
|
33.4
|
|
|
|
25.6
|
|
|
|
2.2
|
|
|
|
2.3
|
|
Plan participants contributions
|
|
|
0.1
|
|
|
|
0.1
|
|
|
|
0.9
|
|
|
|
1.5
|
|
Effect of exchange rates
|
|
|
(6.0
|
)
|
|
|
2.7
|
|
|
|
|
|
|
|
|
|
Plan settlements
|
|
|
(2.3
|
)
|
|
|
(20.1
|
)
|
|
|
|
|
|
|
|
|
Benefits paid
|
|
|
(16.5
|
)
|
|
|
(14.0
|
)
|
|
|
(3.1
|
)
|
|
|
(3.8
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of plan assets at end of year
|
|
|
174.0
|
|
|
|
224.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Funded status / net amount recognized
|
|
$
|
(110.6
|
)
|
|
$
|
(36.5
|
)
|
|
$
|
(14.1
|
)
|
|
$
|
(17.7
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net amount recognized consists of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liability
|
|
$
|
(2.9
|
)
|
|
$
|
(1.7
|
)
|
|
$
|
(1.6
|
)
|
|
$
|
(1.5
|
)
|
Non-current liability
|
|
|
(107.7
|
)
|
|
|
(34.8
|
)
|
|
|
(12.5
|
)
|
|
|
(16.2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net amount recognized
|
|
$
|
(110.6
|
)
|
|
$
|
(36.5
|
)
|
|
$
|
(14.1
|
)
|
|
$
|
(17.7
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Included in the Non-Current Pension Liability on the
Consolidated Balance Sheets were plans with an over-funded
position of $0.2 million and $3.5 million as of
December 31, 2008 and 2007, respectively (in millions).
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended
|
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
Pension plans with a benefit obligation in excess of plan
assets:
|
|
|
|
|
|
|
|
|
Projected benefit obligation
|
|
$
|
284.0
|
|
|
$
|
153.6
|
|
Accumulated benefit obligation
|
|
|
279.5
|
|
|
|
147.5
|
|
Fair value of plan assets
|
|
|
173.3
|
|
|
|
113.5
|
|
Our
U.S.-based
pension plans comprised approximately 90% of the projected
benefit obligation and 88% of plan assets as of
December 31, 2008.
72
LENNOX
INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Benefits
|
|
|
Other Benefits
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Components of net periodic benefit
cost as of December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service cost
|
|
$
|
6.8
|
|
|
$
|
6.9
|
|
|
$
|
7.1
|
|
|
$
|
0.8
|
|
|
$
|
0.6
|
|
|
$
|
1.2
|
|
Interest cost
|
|
|
16.4
|
|
|
|
14.9
|
|
|
|
14.8
|
|
|
|
0.8
|
|
|
|
0.8
|
|
|
|
1.4
|
|
Expected return on plan assets
|
|
|
(17.6
|
)
|
|
|
(17.2
|
)
|
|
|
(16.0
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of prior service cost
|
|
|
0.6
|
|
|
|
0.9
|
|
|
|
0.9
|
|
|
|
(1.9
|
)
|
|
|
(1.7
|
)
|
|
|
(0.6
|
)
|
Recognized actuarial loss
|
|
|
4.6
|
|
|
|
4.8
|
|
|
|
6.3
|
|
|
|
1.1
|
|
|
|
1.0
|
|
|
|
0.8
|
|
Recognized transition obligation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Settlements and curtailments
|
|
|
3.1
|
|
|
|
8.7
|
|
|
|
1.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic benefit cost
|
|
$
|
13.9
|
|
|
$
|
19.0
|
|
|
$
|
15.0
|
|
|
$
|
0.8
|
|
|
$
|
0.7
|
|
|
$
|
2.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table sets forth amounts recognized in AOCI in our
financial statements for 2008 and 2007 (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Benefits
|
|
|
Other Benefits
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
Amounts recognized in other comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prior service costs
|
|
$
|
(4.5
|
)
|
|
$
|
(6.2
|
)
|
|
$
|
19.0
|
|
|
$
|
18.4
|
|
|
|
|
|
Actuarial loss
|
|
|
(172.5
|
)
|
|
|
(77.6
|
)
|
|
|
(19.5
|
)
|
|
|
(21.0
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal
|
|
|
(177.0
|
)
|
|
|
(83.8
|
)
|
|
|
(0.5
|
)
|
|
|
(2.6
|
)
|
|
|
|
|
Deferred taxes
|
|
|
65.8
|
|
|
|
29.8
|
|
|
|
0.2
|
|
|
|
1.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net amount recognized
|
|
$
|
(111.2
|
)
|
|
$
|
(54.0
|
)
|
|
$
|
(0.3
|
)
|
|
$
|
(1.6
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Changes recognized in other comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current year prior service costs
|
|
$
|
0.1
|
|
|
$
|
0.6
|
|
|
|
(2.6
|
)
|
|
$
|
|
|
|
|
|
|
Current year actuarial loss (gain)
|
|
|
104.3
|
|
|
|
5.1
|
|
|
|
(0.4
|
)
|
|
|
3.6
|
|
|
|
|
|
Effect of exchange rates
|
|
|
(2.9
|
)
|
|
|
1.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of prior service credits (costs)
|
|
|
(1.8
|
)
|
|
|
(2.8
|
)
|
|
|
2.0
|
|
|
|
1.7
|
|
|
|
|
|
Amortization of actuarial loss
|
|
|
(6.6
|
)
|
|
|
(11.5
|
)
|
|
|
(1.1
|
)
|
|
|
(1.0
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total recognized in other comprehensive income
|
|
$
|
93.1
|
|
|
$
|
(7.4
|
)
|
|
$
|
(2.1
|
)
|
|
$
|
4.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total recognized in net periodic benefit cost and other
comprehensive income
|
|
$
|
107.0
|
|
|
$
|
11.6
|
|
|
$
|
(1.3
|
)
|
|
$
|
5.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The estimated prior service (costs) credits and actuarial gains
(losses) that will be amortized from AOCI in 2009 are
$(0.5) million and $(9.2) million, respectively, for
pension benefits and $2.0 million and $(1.2) million,
respectively, for other benefits.
73
LENNOX
INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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 2008 and 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Benefits
|
|
|
Other Benefits
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
Weighted-average assumptions used to determine benefit
obligations as of December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discount rate
|
|
|
6.27
|
%
|
|
|
6.48
|
%
|
|
|
6.42
|
%
|
|
|
6.36
|
%
|
Rate of compensation increase
|
|
|
4.35
|
|
|
|
4.32
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Benefits
|
|
|
Other Benefits
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Weighted-average assumptions used to determine net periodic
benefit cost for the years ended December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discount rate
|
|
|
6.48
|
%
|
|
|
5.89
|
%
|
|
|
5.75
|
%
|
|
|
6.36
|
%
|
|
|
5.82
|
%
|
|
|
5.75
|
%
|
Expected long-term return on plan assets
|
|
|
8.25
|
|
|
|
8.25
|
|
|
|
8.25
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rate of compensation increase
|
|
|
4.35
|
|
|
|
4.30
|
|
|
|
4.28
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 2008 and 2007:
|
|
|
|
|
|
|
|
|
|
|
Pension Benefits
|
|
|
|
2008
|
|
|
2007
|
|
|
Weighted-average assumptions used to determine benefit
obligations as of December 31:
|
|
|
|
|
|
|
|
|
Discount rate
|
|
|
6.59
|
%
|
|
|
5.47
|
%
|
Rate of compensation increase
|
|
|
3.87
|
|
|
|
4.17
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Benefits
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Weighted-average assumptions used to determine net periodic
benefit cost for the years ended December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
Discount rate
|
|
|
5.60
|
%
|
|
|
5.14
|
%
|
|
|
4.74
|
%
|
Expected long-term return on plan assets
|
|
|
6.50
|
|
|
|
6.69
|
|
|
|
6.87
|
|
Rate of compensation increase
|
|
|
4.17
|
|
|
|
4.00
|
|
|
|
4.00
|
|
To develop the expected long-term rate of return on assets
assumption for the U.S. plans, we 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, we performed an analysis in
which the duration of projected cash flows from defined benefit
and retiree healthcare 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 6.27% discount rate assumption
for the pension benefits and 6.42% for the other benefits. A
similar process was followed for the
non-U.S.-based
plans.
74
LENNOX
INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
Assumed health care cost trend rates as of December 31:
|
|
|
|
|
|
|
|
|
Health care cost trend rate assumed for next year
|
|
|
8.5
|
%
|
|
|
8.5
|
%
|
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
|
|
|
2015
|
|
|
|
2014
|
|
Assumed health care cost trend rates have a significant effect
on the amounts reported for our healthcare plan. A one
percentage-point change in assumed healthcare 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
|
|
$
|
0.2
|
|
|
$
|
(0.2
|
)
|
Effect on the postretirement benefit obligation
|
|
|
1.5
|
|
|
|
(1.3
|
)
|
Our U.S.-based pension plans weighted-average asset
allocations as of December 31, 2008 and 2007, by asset
category, are as follows:
|
|
|
|
|
|
|
|
|
|
|
Plan Assets as of December 31,
|
|
Asset Category
|
|
2008
|
|
|
2007
|
|
|
Domestic equity
|
|
|
44.7
|
%
|
|
|
51.8
|
%
|
International equity
|
|
|
12.7
|
|
|
|
14.7
|
|
Investment grade bonds
|
|
|
26.3
|
|
|
|
30.1
|
|
Money market/cash/annuities
|
|
|
16.3
|
|
|
|
3.4
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
Plan investments are invested within the following range targets:
|
|
|
|
|
|
|
|
|
Target
|
|
|
+ / -
|
|
Domestic equity
|
|
|
53.0
|
%
|
|
+ / −4.0%
|
International equity
|
|
|
15.0
|
%
|
|
+ / −1.5%
|
Investment grade bonds
|
|
|
30.0
|
%
|
|
+ / − 3.0%
|
Money market/cash/annuities
|
|
|
2.0
|
%
|
|
+0.5% / −1.5%
|
We made a voluntary contribution of $20.0 million on
December 30, 2008, which was not reinvested by
December 31, 2008. As a result, the weighted average asset
allocations for 2008 are not in line with our target allocations.
The plans investment advisors have discretion within the
above ranges. Investments are rebalanced based upon our
guidelines with input from our 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. As a
result of our $20.0 million contribution in December 2008,
there are no minimum required contributions for our
U.S. qualified pension plans in 2009. However, we are
planning to make additional voluntary contributions of
$20.0 million to $40.0 million for our global plans
throughout 2009. We also estimate that our 2009 contribution to
the postretirement benefit plan will be approximately
$1.6 million.
Expected future benefit payments are shown in the table below
(in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2009
|
|
|
2010
|
|
|
2011
|
|
|
2012
|
|
|
2013
|
|
|
2014-2018
|
|
|
Pension benefits
|
|
$
|
16.1
|
|
|
$
|
15.6
|
|
|
$
|
16.3
|
|
|
$
|
21.5
|
|
|
$
|
19.2
|
|
|
$
|
101.2
|
|
Other benefits
|
|
|
1.6
|
|
|
|
1.0
|
|
|
|
1.0
|
|
|
|
1.0
|
|
|
|
1.0
|
|
|
|
6.3
|
|
75
LENNOX
INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
14.
|
Comprehensive
Income (Loss):
|
Our accumulated balances, shown net of tax for each
classification of comprehensive income (loss) are as follows (in
millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
|
|
|
|
|
|
|
|
|
|
|
|
|
Currency
|
|
|
Pension and
|
|
|
|
|
|
|
|
|
|
Translation
|
|
|
Postretirement
|
|
|
Derivatives
|
|
|
|
|
|
|
Adjustment
|
|
|
Liability
|
|
|
and Other
|
|
|
Total
|
|
|
December 31, 2005
|
|
$
|
35.0
|
|
|
$
|
(34.4
|
)
|
|
$
|
(0.2
|
)
|
|
$
|
0.4
|
|
Net change in currency translation and pension and
postretirement liability during 2006
|
|
|
20.8
|
|
|
|
(24.4
|
)
|
|
|
|
|
|
|
(3.6
|
)
|
Net change associated with 2006 derivative transactions
|
|
|
|
|
|
|
|
|
|
|
(1.9
|
)
|
|
|
(1.9
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2006
|
|
|
55.8
|
|
|
|
(58.8
|
)
|
|
|
(2.1
|
)
|
|
|
(5.1
|
)
|
Net change in currency translation and pension and
postretirement liability during 2007
|
|
|
62.9
|
|
|
|
3.2
|
|
|
|
|
|
|
|
66.1
|
|
Net change associated with 2007 derivative and other transactions
|
|
|
|
|
|
|
|
|
|
|
9.0
|
|
|
|
9.0
|
|
Reclassification of derivative gains into earnings
|
|
|
|
|
|
|
|
|
|
|
(6.4
|
)
|
|
|
(6.4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2007
|
|
|
118.7
|
|
|
|
(55.6
|
)
|
|
|
0.5
|
|
|
|
63.6
|
|
Net change in currency translation and pension and
postretirement liability during 2008
|
|
|
(84.9
|
)
|
|
|
(55.9
|
)
|
|
|
|
|
|
|
(140.8
|
)
|
Net change associated with 2008 derivative and other transactions
|
|
|
|
|
|
|
|
|
|
|
(14.9
|
)
|
|
|
(14.9
|
)
|
Reclassification of derivative gains into earnings
|
|
|
|
|
|
|
|
|
|
|
(6.7
|
)
|
|
|
(6.7
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2008
|
|
$
|
33.8
|
|
|
$
|
(111.5
|
)
|
|
$
|
(21.1
|
)
|
|
$
|
(98.8
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15.
|
Treasury
Stock and Share Repurchases:
|
Treasury
Stock
On March 16, 2007, we entered into an agreement with the
shareholders of A.O.C. Corporation (AOC) to issue up
to 2,239,589 shares of our common stock in exchange for
2,695,770 shares of LII common stock owned by AOC. This
transaction was completed in September 2007. We 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 our
common stock by 456,207 shares, at minimal cost to us.
Share
Repurchases
On June 2, 2008, we announced that our Board of Directors
approved a new share repurchase plan for $300.0 million,
pursuant to which we are authorized to repurchase shares of our
common stock through open market purchases (the
2008 Share Repurchase Plan). During 2008, we
purchased 603,007 shares of our common stock for
$14.7 million at an average price of $24.32 per share,
including commissions, under the 2008 Share Repurchase
Plan, representing approximately 4.9% of the $300.0 million
repurchase authorization.
As previously announced, on July 25, 2007, our Board of
Directors approved a share repurchase plan, pursuant to which we
were authorized to repurchase up to $500.0 million of
shares of our common stock through open market purchases (the
2007 Share Repurchase Plan). Based on the
closing price of our common stock on July 24, 2007, a
$500.0 million repurchase represented over 20% of our
market capitalization. We repurchased a total of
14,183,630 shares of common stock for $500.0 million
at an average price of $35.25 per share, including commissions,
under the 2007 Share Repurchase Plan, with
76
LENNOX
INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
8,304,643 shares repurchased in 2008 and 5,878,987 in 2007.
We completed the 2007 Share Repurchase Plan during the
second quarter of 2008.
The 2007 Share Repurchase Plan terminated and replaced our
former share repurchase plan, announced in 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 our assessment of our
liquidity needs and investment requirements and opportunities.
We 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.
On July 27, 2000, our Board of Directors declared a
dividend of one right (Right) for each outstanding
share of our common stock to stockholders of record at the close
of business on August 7, 2000. Each Right entitles the
registered holder to purchase 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 Rights will separate from the
common stock and a distribution date will occur, with certain
exceptions, upon the earlier of ten days following a public
announcement that a person or group has acquired 15% or more of
the outstanding shares of common stock, or the commencement of a
tender offer. The rights are not exercisable until the
distribution date and will expire at the close of business on
July 27, 2010, unless earlier redeemed or exchanged by us.
|
|
17.
|
Stock-Based
Compensation Plans:
|
Stock-Based Compensation expense is included in SG&A
Expenses in the accompanying Consolidated Statements of
Operations as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
|
2008
|
|
2007
|
|
2006
|
|
Compensation expense(1)
|
|
$
|
11.8
|
|
|
$
|
21.0
|
|
|
$
|
24.4
|
|
|
|
|
(1) |
|
Stock-Based Compensation expense is recorded in our Corporate
and other business segment. |
Excess tax benefits classified as a financing cash inflow in the
accompanying Consolidated Statements of Cash Flows were as
follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
|
2008
|
|
2007
|
|
2006
|
|
Excess tax benefits
|
|
$
|
11.0
|
|
|
$
|
17.9
|
|
|
$
|
11.3
|
|
Incentive
Plan
Under the Amended and Restated 1998 Incentive Plan (the
1998 Incentive Plan), we are authorized to issue
awards for 24,254,706 shares of common stock. As of
December 31, 2008, awards for 19,708,186 shares of
common stock had been granted, net of cancellations and
repurchases. Consequently, as of December 31, 2008, there
were 4,546,520 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.
77
LENNOX
INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Performance
Share Units
Total compensation expense for performance share units was
$3.4 million, $11.5 million and $14.0 million for
the years ended December 31, 2008, 2007 and 2006,
respectively. The weighted-average fair value of performance
share units granted during the years ended December 31,
2008, 2007 and 2006 was $28.48, $34.71 and $30.85 per share,
respectively.
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 our common stock. Outstanding
awards granted prior to 2003 vest after ten years of service at
the target amount.
Performance share 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 our common stock, ranging from 0%
to 100% of the units granted, depending on LIIs
performance over the three-year performance period.
Performance share units under the 1998 Incentive Plan are
classified as equity awards, 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 after 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 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.
A summary of the status of our undistributed performance share
units as of December 31, 2008, and changes during the year
then ended, is presented below (in millions, except per share
data):
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2008
|
|
|
|
|
|
|
Weighted- Average
|
|
|
|
|
|
|
Grant Date
|
|
|
|
Shares
|
|
|
Fair Value per Share
|
|
|
Undistributed performance share units:
|
|
|
|
|
|
|
|
|
Undistributed as of December 31, 2007
|
|
|
1.3
|
|
|
$
|
24.66
|
|
Granted
|
|
|
0.3
|
|
|
|
28.48
|
|
Additional shares earned
|
|
|
0.4
|
|
|
|
19.37
|
|
Distributed
|
|
|
(0.8
|
)
|
|
|
19.37
|
|
Forfeited
|
|
|
(0.2
|
)
|
|
|
26.68
|
|
|
|
|
|
|
|
|
|
|
Undistributed as of December 31, 2008(1)
|
|
|
1.0
|
|
|
|
27.66
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Undistributed performance share units as of December 31,
2008 include approximately 0.9 million units with a
weighted-average grant date fair value of $27.40 per share that
had not yet vested. |
As of December 31, 2008, we had approximately
$11.8 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. Our estimated forfeiture rate for performance
share units was 28% as of December 31, 2008.
78
LENNOX
INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The total fair value of performance share units distributed and
the resulting tax deductions to realize tax benefits were as
follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Fair value of performance share units distributed
|
|
$
|
28.2
|
|
|
$
|
13.1
|
|
|
$
|
17.5
|
|
Realized tax benefits from tax deductions
|
|
|
10.7
|
|
|
|
5.0
|
|
|
|
6.5
|
|
Our practice is to issue new shares of common stock to satisfy
performance share unit distributions.
Restricted
Stock Units
Total compensation expense for restricted stock units was
$4.6 million, $6.3 million and $6.8 million for
the years ended December 31, 2008, 2007 and 2006,
respectively. The weighted-average fair value of restricted
stock units granted during the years ended December 31,
2008, 2007 and 2006 was $29.07, $34.74 and $30.28 per share,
respectively.
Under the 1998 Incentive Plan, restricted stock units are issued
to attract and retain key employees. Generally, at the end of a
three-year retention period, the units will vest and be
distributed in shares of our common stock to the participant.
Restricted stock units under the 1998 Incentive Plan are
classified as equity awards, 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 after 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 compensation expense
ratably over the service period.
A summary of the status of our nonvested restricted stock units
as of December 31, 2008 and changes during the year then
ended is presented below (in millions, except per share data):
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2008
|
|
|
|
|
|
|
Weighted-Average
|
|
|
|
|
|
|
Grant Date
|
|
|
|
Shares
|
|
|
Fair Value per Share
|
|
|
Nonvested restricted stock units:
|
|
|
|
|
|
|
|
|
Nonvested as of December 31, 2007
|
|
|
0.8
|
|
|
$
|
31.76
|
|
Granted
|
|
|
0.3
|
|
|
|
29.07
|
|
Vested
|
|
|
(0.2
|
)
|
|
|
29.36
|
|
Forfeited
|
|
|
(0.1
|
)
|
|
|
31.40
|
|
|
|
|
|
|
|
|
|
|
Nonvested as of December 31, 2008
|
|
|
0.8
|
|
|
|
31.34
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2008, we had approximately
$13.7 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
2.3 years. Our estimated forfeiture rate for restricted
stock units was 17% as of December 31, 2008.
The total fair value of restricted stock units vested and the
resulting tax deductions to realize tax benefits were as follows
(in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Fair value of restricted stock units vested
|
|
$
|
6.4
|
|
|
$
|
12.8
|
|
|
$
|
7.5
|
|
Realized tax benefits from tax deductions
|
|
|
2.4
|
|
|
|
4.8
|
|
|
|
2.8
|
|
Our practice is to issue new shares of common stock to satisfy
restricted stock unit vestings.
79
LENNOX
INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Stock
Appreciation Rights
Total compensation expense for stock appreciation rights was
$3.8 million, $2.5 million and $2.9 million for
the years ended December 31, 2008, 2007 and 2006,
respectively. The weighted-average fair value of stock
appreciation rights granted during the years ended
December 31, 2008, 2007 and 2006 was $6.84, $8.43 and $8.60
per share, respectively.
In 2003, we began awarding stock appreciation rights. Each
recipient is given the right to receive a value
equal to the future appreciation of our common stock price. The
value is paid in shares of our common stock. Stock appreciation
rights generally vest in one-third increments beginning on the
first anniversary date after the grant date, and expire after
seven years.
Compensation expense for stock appreciation rights granted is
based on the fair value on the date of grant and is recognized
over the service period. The fair value for these awards is
estimated using the Black-Scholes-Merton valuation model. We use
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 have 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.
The fair value of each stock appreciation right granted in 2008,
2007 and 2006 is estimated on the date of grant using the
following weighted-average assumptions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Expected dividend yield
|
|
|
2.05
|
%
|
|
|
1.69
|
%
|
|
|
1.69
|
%
|
Risk-free interest rate
|
|
|
1.40
|
%
|
|
|
3.27
|
%
|
|
|
4.53
|
%
|
Expected volatility
|
|
|
34.08
|
%
|
|
|
28.42
|
%
|
|
|
30.04
|
%
|
Expected life (in years)
|
|
|
4.18
|
|
|
|
4.35
|
|
|
|
4.57
|
|
A summary of stock appreciation rights activity are as follows
(in millions, except per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
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
|
|
|
2.2
|
|
|
$
|
29.14
|
|
|
|
1.9
|
|
|
$
|
25.20
|
|
|
|
1.5
|
|
|
$
|
22.22
|
|
Granted
|
|
|
1.0
|
|
|
|
28.36
|
|
|
|
0.7
|
|
|
|
34.60
|
|
|
|
0.6
|
|
|
|
30.86
|
|
Exercised
|
|
|
(0.3
|
)
|
|
|
21.68
|
|
|
|
(0.3
|
)
|
|
|
18.57
|
|
|
|
(0.1
|
)
|
|
|
16.76
|
|
Forfeited
|
|
|
(0.2
|
)
|
|
|
32.68
|
|
|
|
(0.1
|
)
|
|
|
30.47
|
|
|
|
(0.1
|
)
|
|
|
23.81
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at end of year
|
|
|
2.7
|
|
|
$
|
29.59
|
|
|
|
2.2
|
|
|
$
|
29.14
|
|
|
|
1.9
|
|
|
$
|
25.20
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at end of year
|
|
|
1.1
|
|
|
$
|
28.65
|
|
|
|
1.0
|
|
|
$
|
24.40
|
|
|
|
0.9
|
|
|
$
|
19.63
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table summarizes information about stock
appreciation rights outstanding as of December 31, 2008 (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
|
|
|
|
|
|
$16.76-37.11
|
|
|
2.7
|
|
|
|
5.5
|
|
|
$
|
29.59
|
|
|
$
|
8.9
|
|
|
|
1.1
|
|
|
|
4.2
|
|
|
$
|
28.65
|
|
|
$
|
4.7
|
|
|
|
|
|
80
LENNOX
INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
As of December 31, 2008, we had approximately
$9.9 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. Our
estimated forfeiture rate for stock appreciation rights was 15%
as of December 31, 2008.
The total intrinsic value of stock appreciation rights exercised
and the resulting tax deductions to realize tax benefits were as
follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Intrinsic value of stock appreciation rights exercised
|
|
$
|
5.5
|
|
|
$
|
5.6
|
|
|
$
|
1.4
|
|
Realized tax benefits from tax deductions
|
|
|
2.1
|
|
|
|
2.1
|
|
|
|
0.5
|
|
Our practice is to issue new shares of common stock to satisfy
the exercise of stock appreciation rights.
Stock
Options
Total compensation expense recognized for stock options was
$0.7 million for both 2007 and 2006.
Under the 1998 Incentive Plan, the exercise price for stock
options equals the stocks 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, 2008, there were also 5,958 stock
options outstanding that were issued in connection with our
acquisition of Service Experts Inc. No stock options were
granted in 2008, 2007 and 2006
A summary of stock option activity is as follows (in millions,
except per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
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
|
|
|
2.2
|
|
|
$
|
15.93
|
|
|
|
4.0
|
|
|
$
|
14.63
|
|
|
|
5.4
|
|
|
$
|
14.81
|
|
Exercised
|
|
|
(1.2
|
)
|
|
|
16.47
|
|
|
|
(1.8
|
)
|
|
|
12.12
|
|
|
|
(1.4
|
)
|
|
|
14.01
|
|
Forfeited
|
|
|
|
|
|
|
16.37
|
|
|
|
|
|
|
|
19.37
|
|
|
|
|
|
|
|
18.36
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at end of year
|
|
|
1.0
|
|
|
$
|
14.20
|
|
|
|
2.2
|
|
|
$
|
15.93
|
|
|
|
4.0
|
|
|
$
|
14.63
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at end of year
|
|
|
1.0
|
|
|
$
|
14.20
|
|
|
|
2.2
|
|
|
$
|
15.93
|
|
|
|
3.9
|
|
|
$
|
14.50
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table summarizes information about stock options
outstanding as of December 31, 2008 (in millions, except
per share data and years):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding
|
|
|
Options 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
|
|
|
|
|
|
$10.313 19.365
|
|
|
1.0
|
|
|
|
1.5
|
|
|
$
|
14.20
|
|
|
$
|
18.0
|
|
|
|
1.0
|
|
|
|
1.5
|
|
|
$
|
14.20
|
|
|
$
|
18.0
|
|
|
|
|
|
As of December 31, 2008, we had no unrecognized
compensation cost related to nonvested options and no
compensation was recorded in 2008 as all outstanding stock
options were fully vested.
81
LENNOX
INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Intrinsic value of options exercised
|
|
$
|
23.1
|
|
|
$
|
39.8
|
|
|
$
|
22.9
|
|
Realized tax benefits from tax deductions
|
|
|
8.8
|
|
|
|
15.1
|
|
|
|
8.5
|
|
Tax benefits in excess of the hypothetical deferred tax asset
|
|
|
2.4
|
|
|
|
2.2
|
|
|
|
2.0
|
|
Our practice is to issue new shares of common stock to satisfy
the exercise of options.
|
|
18.
|
Restructuring
Charges:
|
As part of our strategic priorities of manufacturing and
sourcing excellence and expense reduction, we have initiated
various manufacturing rationalization actions designed to lower
our cost structure. We also have begun to reorganize our North
American distribution network in order to better serve our
customers needs by deploying parts and equipment inventory
closer to them. We have also initiated a number of activities
that rationalize and reorganize various support and
administrative functions to reduce ongoing selling and
administrative expenses.
Information
on Total Restructuring Charges and Related
Reserves
Restructuring charges incurred as a result of the actions
include the following amounts (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Manufacturing rationalizations
|
|
$
|
19.7
|
|
|
$
|
15.8
|
|
|
$
|
17.1
|
|
Reorganization of distribution network
|
|
|
2.9
|
|
|
|
|
|
|
|
|
|
Reorganizations of corporate and business unit administrative
functions
|
|
|
7.8
|
|
|
|
10.0
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
(0.6
|
)
|
|
|
(3.8
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
30.4
|
|
|
$
|
25.2
|
|
|
$
|
13.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructuring charges for manufacturing rationalizations include
pension curtailment charges of $0.9 million for 2008,
$2.0 million for 2007 and $1.9 million in 2006 that
have not been reflected in restructuring reserves as these items
relate to our pension obligation. These amounts also include
pension settlement charges of $0.2 million in 2008 and
$0.7 million in 2007.
In 2007, we reorganized our corporate administrative function
and eliminated the position of chief administrative officer. In
connection with this action, we recorded an $8.0 million
liability to settle the terms of his employment agreement, of
which $6.6 million, net of $1.4 million of previously
recorded stock-based compensation expense, was recorded in the
second quarter of 2007. The final settlement of this matter
occurred and an amount equal to the liability recorded was paid
during the second quarter of 2008.
In 2006, we commenced consolidation of the manufacturing,
distribution, research and development and administrative
operations of Allied Air Enterprises Inc., our two-step
Residential Heating & Cooling operations in South
Carolina, and closure of our operations in Bellevue, Ohio. The
consolidation was substantially complete in the first quarter of
2007.
The reduction to restructuring charges presented for 2006 was
not reflected in restructuring reserves as this item was
composed of gains on sales of fixed assets that we recognized as
an offset to restructuring charges incurred.
82
LENNOX
INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Restructuring reserves are included in Accrued Expenses in the
accompanying Consolidated Balance Sheets. The table below
details activity within the restructuring reserves for the years
ended December 31, 2008 and 2007 (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of
|
|
|
Charged
|
|
|
|
|
|
Non-Cash
|
|
|
Balance as of
|
|
|
|
December 31,
|
|
|
to
|
|
|
Cash
|
|
|
Utilization and
|
|
|
December 31,
|
|
Description of Reserves
|
|
2007
|
|
|
Earnings
|
|
|
Utilization
|
|
|
Other
|
|
|
2008
|
|
|
Severance and related expense
|
|
$
|
15.2
|
|
|
$
|
15.0
|
|
|
$
|
(20.9
|
)
|
|
$
|
|
|
|
$
|
9.3
|
|
Asset write-offs and accelerated depreciation
|
|
|
|
|
|
|
4.8
|
|
|
|
|
|
|
|
(4.8
|
)
|
|
|
|
|
Equipment moves
|
|
|
|
|
|
|
3.0
|
|
|
|
(3.0
|
)
|
|
|
|
|
|
|
|
|
Lease termination
|
|
|
1.5
|
|
|
|
0.3
|
|
|
|
(1.2
|
)
|
|
|
|
|
|
|
0.6
|
|
Other(1)
|
|
|
|
|
|
|
7.3
|
|
|
|
(4.7
|
)
|
|
|
(1.6
|
)
|
|
|
1.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total restructuring reserves
|
|
$
|
16.7
|
|
|
$
|
30.4
|
|
|
$
|
(29.8
|
)
|
|
$
|
(6.4
|
)
|
|
$
|
10.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Charges classified as Other include
$2.3 million of manufacturing inefficiencies,
$1.6 million third-party services related to restructuring
activities and $0.8 million of costs for moving inventories. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of
|
|
|
|
|
|
|
|
|
Non-Cash
|
|
|
Balance as of
|
|
|
|
December 31,
|
|
|
Charged
|
|
|
Cash
|
|
|
Utilization
|
|
|
December 31,
|
|
Description of Reserves
|
|
2006
|
|
|
to Earnings
|
|
|
Utilization
|
|
|
and Other
|
|
|
2007
|
|
|
Severance and related expense
|
|
$
|
1.8
|
|
|
$
|
15.9
|
|
|
$
|
(4.6
|
)
|
|
$
|
2.1
|
|
|
$
|
15.2
|
|
Asset write-offs and accelerated depreciation
|
|
|
|
|
|
|
1.2
|
|
|
|
|
|
|
|
(1.2
|
)
|
|
|
|
|
Equipment moves
|
|
|
|
|
|
|
1.7
|
|
|
|
(1.7
|
)
|
|
|
|
|
|
|
|
|
Lease termination
|
|
|
1.5
|
|
|
|
1.1
|
|
|
|
(1.1
|
)
|
|
|
|
|
|
|
1.5
|
|
Other
|
|
|
0.8
|
|
|
|
5.3
|
|
|
|
(3.2
|
)
|
|
|
(2.9
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total restructuring reserves
|
|
$
|
4.1
|
|
|
$
|
25.2
|
|
|
$
|
(10.6
|
)
|
|
$
|
(2.0
|
)
|
|
$
|
16.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Manufacturing
Rationalization Activities
Information regarding the restructuring charges related to
manufacturing rationalizations is as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Charges
|
|
|
Charges
|
|
|
Total Charges
|
|
|
|
Incurred in
|
|
|
Incurred to
|
|
|
Expected to be
|
|
|
|
2008
|
|
|
Date
|
|
|
Incurred
|
|
|
Severance and related expense
|
|
$
|
6.4
|
|
|
$
|
12.0
|
|
|
$
|
12.0
|
|
Asset write-offs and accelerated depreciation
|
|
|
4.0
|
|
|
|
5.2
|
|
|
|
6.2
|
|
Equipment moves
|
|
|
3.0
|
|
|
|
3.7
|
|
|
|
4.8
|
|
Other
|
|
|
6.3
|
|
|
|
10.1
|
|
|
|
10.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
19.7
|
|
|
$
|
31.0
|
|
|
$
|
33.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructuring expense for manufacturing rationalization
activities related to the following:
|
|
|
|
|
In the third quarter of 2008, we commenced the transition of
production of certain Refrigeration products currently
manufactured near Madrid, Spain to another facility in Genas,
France. The transition was completed in the fourth quarter of
2008. Total restructuring charges recorded in 2008 related to
this action were $0.9 million.
|
|
|
|
In the third quarter of 2008, we commenced the transition of
production of certain Residential Heating & Cooling
products currently manufactured in Blackville, South Carolina to
another facility in Orangeburg, South Carolina. The transition
is expected to be completed by the second quarter of 2009. Total
restructuring charges recorded in 2008 related to this action
were $0.6 million.
|
83
LENNOX
INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
In the second quarter of 2008, we announced the transition of
production of selected Refrigeration products currently
manufactured in Milperra, Australia to its sister facility in
Wuxi, China. The transition is expected to be complete by the
fourth quarter of 2009. Total restructuring charges recorded in
2008 related to this action were $3.1 million.
|
|
|
|
In the second quarter of 2008, we announced the transition of
production of certain Residential Heating & Cooling
products from our Marshalltown, Iowa manufacturing facility to
our new manufacturing operation in Saltillo, Mexico. The
transition is expected to be completed by the second quarter of
2009. Total restructuring charges recorded in 2008 related to
this action were $3.4 million.
|
|
|
|
In the fourth quarter of 2007, we announced plans to close our
Refrigeration operations in Danville, Illinois and consolidate
Danville manufacturing, support and warehouse functions in our
Tifton, Georgia and Stone Mountain, Georgia operations. The
transition is expected to be completed by the second quarter of
2009. Total restructuring charges recorded in 2008 related to
this action were $9.8 million.
|
|
|
|
In the third quarter of 2007, we announced plans to close Lennox
Hearth Products Inc.s operations in Lynwood, California,
part of our Residential Heating & Cooling operations,
and consolidate our U.S. factory-built fireplace
manufacturing operations in our facility in Union City,
Tennessee. The transition is expected to be completed by the
third quarter of 2009. Total restructuring charges recorded in
2008 related to this action were $1.6 million.
|
|
|
|
Other restructuring charges incurred for manufacturing
rationalizations in 2008 were $0.3 million.
|
Reorganization
of Distribution Network
Information regarding the restructuring charges related to
reorganizations of our North American distribution network is as
follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Charges
|
|
|
Charges
|
|
|
Total Charges
|
|
|
|
Incurred in
|
|
|
Incurred to
|
|
|
Expected to be
|
|
|
|
2008
|
|
|
Date
|
|
|
Incurred
|
|
|
Severance and related expense
|
|
$
|
2.8
|
|
|
$
|
2.8
|
|
|
$
|
3.6
|
|
Asset write-offs and accelerated depreciation
|
|
|
|
|
|
|
|
|
|
|
0.1
|
|
Equipment moves
|
|
|
|
|
|
|
|
|
|
|
0.4
|
|
Other
|
|
|
0.1
|
|
|
|
0.1
|
|
|
|
0.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
2.9
|
|
|
$
|
2.9
|
|
|
$
|
4.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In the fourth quarter of 2008, we commenced the transition of
activities currently performed at our North American Parts
Center in Des Moines, Iowa to other locations, including our
North American Distribution Center in Marshalltown, Iowa. The
transition is expected to be completed in the first quarter of
2010.
Reorganizations
of Corporate and Business Unit Administrative
Functions
Information regarding the restructuring charges related to the
reorganization of the support and administrative functions is as
follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Charges
|
|
|
Charges
|
|
|
Total Charges
|
|
|
|
Incurred in
|
|
|
Incurred to
|
|
|
Expected to be
|
|
|
|
2008
|
|
|
Date
|
|
|
Incurred
|
|
|
Severance and related expense
|
|
$
|
5.8
|
|
|
$
|
15.4
|
|
|
$
|
16.0
|
|
Asset write-offs and accelerated depreciation
|
|
|
0.8
|
|
|
|
0.8
|
|
|
|
0.9
|
|
Lease termination
|
|
|
0.3
|
|
|
|
1.1
|
|
|
|
1.8
|
|
Other
|
|
|
0.9
|
|
|
|
0.9
|
|
|
|
1.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
7.8
|
|
|
$
|
18.2
|
|
|
$
|
19.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
84
LENNOX
INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
We incurred costs related to the following restructuring actions
in our support and administrative activities:
|
|
|
|
|
In the third quarter of 2008, the Commercial business unit
reorganized its sales support and administrative functions in
Northern Europe. This action is expected to be completed by the
second quarter of 2009. Total restructuring charges recorded in
2008 related to this action were $4.1 million.
|
|
|
|
During the second quarter of 2008, we began to rationalize our
corporate administrative functions, primarily in the human
resources and information technology areas. These activities
were complete as of the fourth quarter of 2008. Total
restructuring charges recorded in 2008 related to this action
were $1.1 million.
|
|
|
|
In the second quarter of 2008, the Service Experts business unit
reorganized its sales support function into a centralized
customer contact center. This action was complete as of the
fourth quarter of 2008. Total restructuring charges recorded in
2008 related to this action were $0.7 million.
|
|
|
|
During the third quarter of 2007, the Refrigeration business
unit took actions to eliminate administrative positions in
Australia and New Zealand. This action is expected to be
completed by the fourth quarter of 2009. Total restructuring
charges recorded in 2008 related to this action were
$0.6 million.
|
|
|
|
Other restructuring charges incurred related to administrative
and support functions in 2008 were $1.3 million.
|
|
|
19.
|
Discontinued
Operations:
|
Service
Experts Discontinued Operations
In the fourth quarter of 2008, our executive management approved
a plan to discontinue operations of seven service centers within
our Service Experts business segment. We decided to sell these
seven centers due to current economic conditions and a history
of operating losses. It is our intent to sell these service
centers to interested third party buyers during the first
quarter of 2009. The related assets and liabilities for these
service centers have been classified as current assets and
liabilities in the accompanying Consolidated Balance Sheets.
The operating results of these centers have been classified as a
Discontinued Operations in the accompanying Consolidated
Statements of Operations and prior period results have been
reclassified to conform to the current period presentation.
A summary of net trade sales and pre-tax operating losses are
detailed below (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Net trade sales
|
|
$
|
12.2
|
|
|
$
|
14.4
|
|
|
$
|
14.9
|
|
Pre-tax operating loss(1)
|
|
|
(3.7
|
)
|
|
|
(0.9
|
)
|
|
|
(1.3
|
)
|
The assets and liabilities of the discontinued operations are
presented as follows in the accompanying Consolidated Balance
Sheets (in millions):
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
Assets of discontinued operations:
|
|
|
|
|
|
|
|
|
Other assets
|
|
$
|
0.8
|
|
|
$
|
1.1
|
|
Liabilities of discontinued operations:
|
|
|
|
|
|
|
|
|
Accrued expenses(1)
|
|
$
|
3.2
|
|
|
$
|
1.9
|
|
|
|
|
(1) |
|
Included in the 2008 pre-tax operating loss and accrued expenses
is a $1.7 million charge for litigation related to the sale
of a service center in 2004 that was included in discontinued
operations. |
85
LENNOX
INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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 by the sum of the weighted-average number of shares
and the number of equivalent shares assumed outstanding, if
dilutive, under our stock-based compensation plans. As of
December 31, 2008, we had 84,215,904 shares issued of
which 29,109,058 were held as treasury shares.
The computations of basic and diluted earnings per share for
Income from Continuing Operations were as follows (in millions,
except per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Net income
|
|
$
|
122.8
|
|
|
$
|
169.0
|
|
|
$
|
166.0
|
|
Add: Loss from discontinued operations
|
|
|
2.3
|
|
|
|
0.6
|
|
|
|
0.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
$
|
125.1
|
|
|
$
|
169.6
|
|
|
$
|
166.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average shares outstanding basic
|
|
|
56.7
|
|
|
|
66.4
|
|
|
|
69.9
|
|
Effect of dilutive securities
|
|
|
1.6
|
|
|
|
3.0
|
|
|
|
3.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average shares outstanding diluted
|
|
|
58.3
|
|
|
|
69.4
|
|
|
|
73.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share from continuing operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
2.21
|
|
|
$
|
2.56
|
|
|
$
|
2.38
|
|
Diluted
|
|
$
|
2.15
|
|
|
$
|
2.44
|
|
|
$
|
2.27
|
|
Additionally, options to purchase common stock were outstanding,
but not included in the diluted earnings per share calculation
because the assumed exercise of such options would have been
anti-dilutive. The details are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Options to purchase common stock (number of shares)
|
|
|
668,451
|
|
|
|
125,852
|
|
|
|
754,114
|
|
Price ranges per share
|
|
$
|
34.52 to $37.11
|
|
|
$
|
34.52 to $49.63
|
|
|
$
|
29.36 to $49.63
|
|
86
LENNOX
INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
21. Reportable
Business Segments:
We operate in four reportable business segments of the heating,
ventilation, air conditioning and refrigeration
(HVACR) industry. Our segments are organized
primarily by the nature of the products and services provided.
The table below details the nature of the operations of each
reportable segment:
|
|
|
|
|
|
|
Segment
|
|
Product or Services
|
|
Markets Served
|
|
Geographic Areas
|
|
Residential Heating & Cooling
|
|
Heating
Air Conditioning
Hearth Products
|
|
Residential Replacement
Residential New Construction
|
|
United States
Canada
|
Commercial Heating & Cooling
|
|
Rooftop Products Chillers
Air Handlers
|
|
Light Commercial
|
|
United States
Canada
Europe
|
Service Experts
|
|
Equipment Sales Installation Maintenance
Repair
|
|
Residential
Light Commercial
|
|
United States
Canada
|
Refrigeration
|
|
Unit Coolers Condensing Units Other Commercial Refrigeration
Products
|
|
Light Commercial
|
|
United States
Canada
Europe
Asia Pacific
South America
|
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.
We use segment profit or loss as the primary measure of
profitability to evaluate operating performance and to allocate
capital resources. We define segment profit or loss as a
segments income or loss from continuing operations before
income taxes included in the accompanying Consolidated
Statements of Operations:
Excluding:
|
|
|
|
|
Gains and/or
losses and other expenses, net except for gains
and/or
losses on the sale of fixed assets.
|
|
|
|
Restructuring charges.
|
|
|
|
Goodwill and equity method investment impairments.
|
|
|
|
Interest expense, net.
|
|
|
|
Other expense, net.
|
Less amounts included in Gains and Other Expenses, net:
|
|
|
|
|
Realized gains
and/or
losses on settled futures contracts.
|
|
|
|
Foreign currency exchange gains
and/or
losses.
|
In 2007, a favorable warranty program adjustment of
$16.9 million was not included in segment profit as it is
considered an unusual and nonrecurring item.
Our 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. We 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.
87
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
are shown below (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Net Sales
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential Heating & Cooling
|
|
$
|
1,493.4
|
|
|
$
|
1,669.6
|
|
|
$
|
1,861.2
|
|
Commercial Heating & Cooling
|
|
|
835.3
|
|
|
|
875.0
|
|
|
|
751.2
|
|
Service Experts
|
|
|
626.6
|
|
|
|
667.1
|
|
|
|
639.2
|
|
Refrigeration
|
|
|
618.2
|
|
|
|
607.7
|
|
|
|
529.9
|
|
Eliminations(1)
|
|
|
(92.1
|
)
|
|
|
(84.1
|
)
|
|
|
(80.9
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
3,481.4
|
|
|
$
|
3,735.3
|
|
|
$
|
3,700.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment Profit (Loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential Heating & Cooling
|
|
$
|
145.8
|
|
|
$
|
174.4
|
|
|
$
|
211.6
|
|
Commercial Heating & Cooling
|
|
|
93.3
|
|
|
|
101.0
|
|
|
|
72.6
|
|
Service Experts
|
|
|
20.0
|
|
|
|
26.1
|
|
|
|
19.4
|
|
Refrigeration
|
|
|
60.2
|
|
|
|
61.5
|
|
|
|
51.9
|
|
Corporate and other
|
|
|
(53.8
|
)
|
|
|
(85.0
|
)
|
|
|
(97.5
|
)
|
Eliminations(1)
|
|
|
(0.6
|
)
|
|
|
0.6
|
|
|
|
0.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal that includes segment profit and eliminations
|
|
|
264.9
|
|
|
|
278.6
|
|
|
|
258.2
|
|
Reconciliation to income from continuing operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
Warranty program adjustment
|
|
|
|
|
|
|
(16.9
|
)
|
|
|
|
|
Losses, (gains) and other expenses, net of gain on sale of fixed
assets
|
|
|
3.0
|
|
|
|
(6.4
|
)
|
|
|
(46.6
|
)
|
Restructuring charges
|
|
|
30.4
|
|
|
|
25.2
|
|
|
|
13.3
|
|
Impairment of equity method investment
|
|
|
9.1
|
|
|
|
|
|
|
|
|
|
Interest expense, net
|
|
|
13.7
|
|
|
|
6.8
|
|
|
|
4.4
|
|
Other expense, net
|
|
|
0.1
|
|
|
|
0.7
|
|
|
|
0.5
|
|
Less: Realized (losses) gains on settled futures contracts(2)
|
|
|
(0.9
|
)
|
|
|
3.9
|
|
|
|
66.0
|
|
Less: Foreign currency exchange gains(2)
|
|
|
3.2
|
|
|
|
6.2
|
|
|
|
0.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
206.3
|
|
|
$
|
259.1
|
|
|
$
|
219.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Eliminations consist of intercompany sales between business
segments, such as products sold to Service Experts by the
Residential Heating & Cooling segment. |
|
(2) |
|
Realized (losses) gains on settled futures contracts, the
ineffective portion of settled cash flow hedges and foreign
currency exchange gains are components of Gains and Other
Expenses, net in the accompanying Consolidated Statements of
Operations. |
Included in our Residential Heating & Cooling business
segment profit for 2008 is a gain on the sale of fixed assets of
$4.1 million. The gains or losses in our other business
segments were immaterial for 2008, 2007 and 2006.
On a consolidated basis, no revenues from transactions with a
single customer were 10% or greater of our consolidated net
sales for any of the periods presented.
Total assets by business segment 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.
88
LENNOX
INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended
|
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
Total Assets
|
|
|
|
|
|
|
|
|
Residential Heating & Cooling
|
|
$
|
492.1
|
|
|
$
|
548.5
|
|
Commercial Heating & Cooling
|
|
|
319.0
|
|
|
|
336.6
|
|
Service Experts
|
|
|
170.6
|
|
|
|
199.3
|
|
Refrigeration
|
|
|
340.4
|
|
|
|
388.1
|
|
Corporate and other
|
|
|
345.3
|
|
|
|
349.6
|
|
Eliminations(1)
|
|
|
(8.7
|
)
|
|
|
(8.6
|
)
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
|
1,658.7
|
|
|
|
1,813.5
|
|
Discontinued operations (See Note 19)
|
|
|
0.8
|
|
|
|
1.1
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
1,659.5
|
|
|
$
|
1,814.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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 are shown below
(in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended
|
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Capital Expenditures
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential Heating & Cooling
|
|
$
|
33.2
|
|
|
$
|
21.8
|
|
|
$
|
30.6
|
|
Commercial Heating & Cooling
|
|
|
7.0
|
|
|
|
24.1
|
|
|
|
11.3
|
|
Service Experts
|
|
|
0.3
|
|
|
|
1.8
|
|
|
|
2.5
|
|
Refrigeration
|
|
|
7.6
|
|
|
|
9.7
|
|
|
|
10.0
|
|
Corporate and other
|
|
|
14.0
|
|
|
|
12.8
|
|
|
|
20.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total capital expenditures
|
|
$
|
62.1
|
|
|
$
|
70.2
|
|
|
$
|
74.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Excluded from capital expenditures for 2008 are capital leases
of $7.4 million and $14.6 million relating to our
Residential Heating & Cooling and Refrigeration
business segment, respectively. There were no capital leases in
2007.
The depreciation and amortization expense by business segment
are shown below (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Depreciation and Amortization
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential Heating & Cooling
|
|
$
|
22.2
|
|
|
$
|
22.1
|
|
|
$
|
21.5
|
|
Commercial Heating & Cooling
|
|
|
8.2
|
|
|
|
7.4
|
|
|
|
6.2
|
|
Service Experts
|
|
|
1.9
|
|
|
|
2.1
|
|
|
|
2.2
|
|
Refrigeration
|
|
|
9.2
|
|
|
|
8.7
|
|
|
|
7.9
|
|
Corporate and other
|
|
|
9.1
|
|
|
|
8.5
|
|
|
|
6.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total depreciation and amortization
|
|
$
|
50.6
|
|
|
$
|
48.8
|
|
|
$
|
44.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
89
LENNOX
INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The equity method investees are shown below (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Income from Equity Method Investments
|
|
|
|
|
|
|
|
|
|
|
|
|
Refrigeration
|
|
$
|
1.3
|
|
|
$
|
1.5
|
|
|
$
|
1.2
|
|
Corporate and other
|
|
|
7.3
|
|
|
|
9.1
|
|
|
|
6.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
8.6
|
|
|
$
|
10.6
|
|
|
$
|
8.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table sets forth certain financial information
relating to our operations by geographic area based on the
domicile of our operations (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Net Sales to External Customers by Point of Shipment
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
2,442.3
|
|
|
$
|
2,717.4
|
|
|
$
|
2,858.5
|
|
Canada
|
|
|
391.1
|
|
|
|
381.3
|
|
|
|
321.1
|
|
International
|
|
|
648.0
|
|
|
|
636.6
|
|
|
|
521.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net sales to external customers
|
|
$
|
3,481.4
|
|
|
$
|
3,735.3
|
|
|
$
|
3,700.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
Property, Plant and Equipment, net
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
233.3
|
|
|
$
|
226.7
|
|
Canada
|
|
|
6.7
|
|
|
|
10.3
|
|
Mexico
|
|
|
24.5
|
|
|
|
8.5
|
|
International
|
|
|
65.0
|
|
|
|
72.3
|
|
|
|
|
|
|
|
|
|
|
Total property, plant and equipment, net
|
|
$
|
329.5
|
|
|
$
|
317.8
|
|
|
|
|
|
|
|
|
|
|
|
|
22.
|
Fair
Value Measurements:
|
SFAS No. 157 defines fair value as the price that
would be received to sell an asset or paid to transfer a
liability in an orderly transaction between market participants
at the measurement date. SFAS No. 157 provides a
framework for measuring fair value, establishes a three-level
hierarchy for fair value measurements based upon the
transparency of inputs to the valuation of an asset or liability
as of the measurement date and requires consideration of our
creditworthiness when valuing certain liabilities.
Fair
Value Hierarchy
The three-level fair value hierarchy for disclosure of fair
value measurements defined by SFAS No. 157 is as
follows:
Level 1 Quoted prices for identical
instruments in active markets at the measurement date.
Level 2 Quoted prices for similar
instruments in active markets; quoted prices for identical
or similar instruments in markets that are not active; and
model-derived valuations in which all significant inputs and
significant value drivers are observable in active
markets at the measurement date and for the anticipated term of
the instrument.
Level 3 Valuations derived from
valuation techniques in which one or more significant inputs or
significant value drivers are unobservable inputs that
reflect the reporting entitys own assumptions about the
assumptions market participants would use in pricing the asset
or liability developed based on the best information available
in the circumstances.
90
LENNOX
INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Fair
Value Techniques
Our valuation techniques are applied to all of the assets and
liabilities carried at fair value as of January 1, 2008,
upon adoption of SFAS No. 157. Where available, the
fair values are based upon quoted prices in active markets.
However, if quoted prices are not available, then the fair
values are based upon quoted prices for similar assets or
liabilities or independently sourced market parameters, such as
credit default swap spreads, yield curves, reported trades,
broker/dealer quotes, interest rates and benchmark securities.
For assets and liabilities with a lack of observable market
activity, if any, the fair values are based upon discounted cash
flow methodologies incorporating assumptions that, in our
judgment, reflect the assumptions a marketplace participant
would use. To ensure that financial assets and liabilities are
recorded at fair value, valuation adjustments may be required to
reflect either partys creditworthiness and ability to pay.
Where appropriate, these amounts were incorporated into our
valuations as of December 31, 2008, the measurement date.
Assets
and Liabilities Measured at Fair Value on a Recurring
Basis
The following table presents the fair value hierarchy for those
assets and liabilities measured at fair value on a recurring
basis (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements on a Recurring Basis as of
|
|
|
|
December 31, 2008
|
|
|
|
Quoted Prices in
|
|
|
Significant
|
|
|
|
|
|
|
|
|
|
Active Markets
|
|
|
Other
|
|
|
Significant
|
|
|
|
|
|
|
for
|
|
|
Observable
|
|
|
Unobservable
|
|
|
|
|
|
|
Identical Assets
|
|
|
Inputs
|
|
|
Inputs
|
|
|
|
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
|
Total
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term investments
|
|
$
|
|
|
|
$
|
33.4
|
|
|
$
|
|
|
|
$
|
33.4
|
|
Investment in marketable equity securities(1)
|
|
|
1.8
|
|
|
|
|
|
|
|
|
|
|
|
1.8
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives, net(2)
|
|
$
|
|
|
|
$
|
39.4
|
|
|
$
|
|
|
|
$
|
39.4
|
|
|
|
|
(1) |
|
Investment in marketable equity securities is recorded in Other
Long-term Assets in the accompanying Consolidated Balance
Sheets. See Note 7 for more information. |
|
(2) |
|
Derivatives are recorded in Accrued Expenses and Other
Liabilities in the accompanying Consolidated Balance Sheets. See
Note 9 for more information. |
Our adoption of SFAS No. 157 resulted in changes to
the valuation techniques used by us when determining the fair
value of our derivative instruments. These derivatives are
primarily valued using estimated future cash flows that are
based directly on observed prices from exchange-traded
derivatives and therefore have been classified as Level 2.
We also take into account the counterpartys
creditworthiness, or our own creditworthiness, as appropriate.
We have incorporated these changes to the valuation of our
derivative instruments and the balance as of December 31,
2008 reflects the risk of our credit default.
The majority of our short-term investments are managed by
professional investment advisors. The net asset values are
furnished in statements received from the investment advisor and
reflect valuations based upon the respective pricing policies
utilized by the investment advisor. We have assessed the
classification of the inputs used to value these investments as
Level 2 through examination of pricing policies and
significant inputs and through discussions with investment
managers. The fair values of our short-term investments are
based on several observable inputs including, but not limited
to, benchmark yields, reported trades, broker/dealer quotes,
issuer spreads and benchmark securities. These investments
consist of U.S. government and government agency
securities, corporate bonds, asset-backed securities,
collateralized mortgage obligations and various securitized debt
instruments. The majority of these investments are of high
quality, with 85% having AAA ratings. The adoption of
SFAS No. 157 resulted in no net changes to the
valuations for these securities.
91
LENNOX
INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Other
Fair Value Measurements
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 our 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 $460.3 million and $204.5 million as
of December 31, 2008 and 2007, respectively. The fair
values presented are estimates and are not necessarily
indicative of amounts for which we could settle such instruments
currently or indicative of our intent or ability to dispose of
or liquidate them.
|
|
23.
|
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 (in millions, except per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Sales
|
|
|
Gross Profit
|
|
|
Net Income
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
First Quarter
|
|
$
|
764.5
|
|
|
$
|
788.4
|
|
|
$
|
202.0
|
|
|
$
|
203.5
|
|
|
$
|
6.3
|
|
|
$
|
8.6
|
|
Second Quarter
|
|
|
999.6
|
|
|
|
1,037.8
|
|
|
|
286.4
|
|
|
|
287.8
|
|
|
|
51.2
|
|
|
|
60.3
|
|
Third Quarter
|
|
|
970.9
|
|
|
|
1,026.3
|
|
|
|
280.2
|
|
|
|
292.5
|
|
|
|
54.9
|
|
|
|
61.2
|
|
Fourth Quarter
|
|
|
746.4
|
|
|
|
882.8
|
|
|
|
204.9
|
|
|
|
264.1
|
|
|
|
10.4
|
|
|
|
38.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
Diluted
|
|
|
|
|
|
|
Earnings per
|
|
|
Earnings per
|
|
|
Dividends per
|
|
|
|
Common Share
|
|
|
Common Share
|
|
|
Common Share
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
First Quarter
|
|
$
|
0.10
|
|
|
$
|
0.13
|
|
|
$
|
0.10
|
|
|
$
|
0.12
|
|
|
$
|
0.14
|
|
|
$
|
0.13
|
|
Second Quarter
|
|
|
0.91
|
|
|
|
0.89
|
|
|
|
0.88
|
|
|
|
0.85
|
|
|
|
0.14
|
|
|
|
0.13
|
|
Third Quarter
|
|
|
0.99
|
|
|
|
0.92
|
|
|
|
0.96
|
|
|
|
0.88
|
|
|
|
0.14
|
|
|
|
0.13
|
|
Fourth Quarter
|
|
|
0.19
|
|
|
|
0.61
|
|
|
|
0.18
|
|
|
|
0.59
|
|
|
|
0.14
|
|
|
|
0.14
|
|
|
|
24.
|
Gains and
Other Expenses, net:
|
Gains and other expenses, net were as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Realized losses (gains) on settled futures contracts
|
|
$
|
0.9
|
|
|
$
|
(3.9
|
)
|
|
$
|
(66.0
|
)
|
Unrealized losses on unsettled futures contracts not designated
as cash flow hedges
|
|
|
5.1
|
|
|
|
3.1
|
|
|
|
20.8
|
|
Gains on disposals of fixed assets
|
|
|
(4.8
|
)
|
|
|
(0.3
|
)
|
|
|
(0.2
|
)
|
Foreign currency exchange gains
|
|
|
(3.2
|
)
|
|
|
(6.2
|
)
|
|
|
(0.9
|
)
|
Other items, net
|
|
|
0.1
|
|
|
|
0.6
|
|
|
|
(0.5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gains and other expenses, net
|
|
$
|
(1.9
|
)
|
|
$
|
(6.7
|
)
|
|
$
|
(46.8
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
92
LENNOX
INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
25.
|
Supplemental
Information:
|
Research
and Development
Research and development costs are expensed as incurred.
Expenses relating to research and product development activities
were as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
|
2008
|
|
2007
|
|
2006
|
|
Research and development
|
|
$
|
46.5
|
|
|
$
|
43.0
|
|
|
$
|
42.2
|
|
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 as
follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Advertising, promotions and marketing
|
|
$
|
72.3
|
|
|
$
|
73.8
|
|
|
$
|
79.0
|
|
Leases
We have various leases relating principally to the use of
operating facilities and vehicles. 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. Rent
expense was approximately as follows (in millions).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
|
2008
|
|
2007
|
|
2006
|
|
Rent expense
|
|
$
|
64.2
|
|
|
$
|
64.4
|
|
|
$
|
54.1
|
|
Interest
Expense, net
The components of Interest Expense, net were as follows (in
millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Interest expense, net of capitalized interest
|
|
$
|
17.5
|
|
|
$
|
10.7
|
|
|
$
|
10.1
|
|
Interest income
|
|
$
|
3.8
|
|
|
$
|
3.9
|
|
|
$
|
5.7
|
|
|
|
26.
|
Related
Party Transactions:
|
Thomas W. Booth, Stephen R. Booth and John W. Norris, III,
each a member of our 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
93
LENNOX
INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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.
|
|
27.
|
Subsequent
Event (unaudited):
|
On February 4, 2009 we announced plans to consolidate
operations from our Blackville, South Carolina facility into our
current operations in Orangeburg, South Carolina and Saltillo,
Mexico to improve our operating efficiency, eliminate redundant
fixed costs, and provide customers with improved service. The
transition is expected to take place in phases and is expected
to be completed within two years. We expect to incur
restructuring charges of about $12.0 million, primarily in
the first quarter of 2009. These charges are anticipated to
include severance of $3.5 million, losses on disposal of
certain long-lived assets and relocation costs for equipment and
inventory of about $6.5 million and other costs of
$2.0 million. We expect short-term cash outlays of
$6.6 million related to this project.
94
|
|
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,
2008, 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,
2008 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 2009 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 2009 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 2009 Proxy Statement captioned
Section 16(a) Beneficial Ownership Reporting
Compliance is incorporated in this Item 10 by
reference.
The section of our 2009 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 2009 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.
95
|
|
Item 11.
|
Executive
Compensation
|
The sections of our 2009 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 2009 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 2009 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 2009 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, 2008 and 2007
|
|
|
|
Consolidated Statements of Operations for the Years Ended
December 31, 2008, 2007 and 2006
|
|
|
|
Consolidated Statements of Stockholders Equity for the
Years Ended December 31, 2008, 2007 and 2006
|
|
|
|
Consolidated Statements of Cash Flows for the Years Ended
December 31, 2008, 2007 and 2006
|
|
|
|
Notes to Consolidated Financial Statements for the Years Ended
December 31, 2008, 2007 and 2006
|
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, 2008, 2007,
and 2006 (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.
96
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 26, 2009
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 26, 2009
|
|
|
|
|
|
/s/ Susan
K. Carter
Susan
K. Carter
|
|
Executive Vice President and Chief Financial Officer (Principal
Financial Officer)
|
|
February 26, 2009
|
|
|
|
|
|
/s/ Roy
A. Rumbough
Roy
A. Rumbough
|
|
Vice President, Controller and Chief Accounting Officer
(Principal Accounting Officer)
|
|
February 26, 2009
|
|
|
|
|
|
/s/ Richard
L. Thompson
Richard
L. Thompson
|
|
Chairman of the Board of Directors
|
|
February 26, 2009
|
|
|
|
|
|
/s/ Linda
G. Alvarado
Linda
G. Alvarado
|
|
Director
|
|
February 26, 2009
|
|
|
|
|
|
/s/ Steven
R. Booth
Steven
R. Booth
|
|
Director
|
|
February 26, 2009
|
|
|
|
|
|
/s/ James
J. Byrne
James
J. Byrne
|
|
Director
|
|
February 26, 2009
|
|
|
|
|
|
/s/ Janet
K. Cooper
Janet
K. Cooper
|
|
Director
|
|
February 26, 2009
|
|
|
|
|
|
/s/ C.L.
(Jerry) Henry
C.L.
(Jerry) Henry
|
|
Director
|
|
February 26, 2009
|
|
|
|
|
|
/s/ John
E. Major
John
E. Major
|
|
Director
|
|
February 26, 2009
|
97
|
|
|
|
|
|
|
Signature
|
|
Title
|
|
Date
|
|
|
|
|
|
|
/s/ John
W. Norris, III
John
W. Norris, III
|
|
Director
|
|
February 26, 2009
|
|
|
|
|
|
/s/ Paul
W. Schmidt
Paul
W. Schmidt
|
|
Director
|
|
February 26, 2009
|
|
|
|
|
|
/s/ Terry
D. Stinson
Terry
D. Stinson
|
|
Director
|
|
February 26, 2009
|
|
|
|
|
|
/s/ Jeffrey
D. Storey, MD
Jeffrey
D. Storey, MD
|
|
Director
|
|
February 26, 2009
|
98
LENNOX
INTERNATIONAL INC.
SCHEDULE II VALUATION AND QUALIFYING
ACCOUNTS AND RESERVES
For the Years Ended December 31, 2008, 2007 and 2006
(In Millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additions
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at
|
|
|
Charged
|
|
|
|
|
|
|
|
|
|
|
|
Balance
|
|
|
|
Beginning
|
|
|
to Cost and
|
|
|
|
|
|
|
|
|
|
|
|
at end
|
|
|
|
of Year
|
|
|
Expenses
|
|
|
Write-offs
|
|
|
Recoveries
|
|
|
Other
|
|
|
of Year
|
|
|
2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for doubtful accounts
|
|
$
|
16.6
|
|
|
$
|
6.6
|
|
|
$
|
(7.6
|
)
|
|
$
|
0.8
|
|
|
$
|
0.3
|
|
|
$
|
16.7
|
|
2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for doubtful accounts
|
|
$
|
16.7
|
|
|
$
|
10.4
|
|
|
$
|
(10.4
|
)
|
|
$
|
0.8
|
|
|
$
|
(0.4
|
)
|
|
$
|
17.1
|
|
2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for doubtful accounts
|
|
$
|
17.1
|
|
|
$
|
17.4
|
|
|
$
|
(15.3
|
)
|
|
$
|
0.9
|
|
|
$
|
(1.5
|
)
|
|
$
|
18.6
|
|
99
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 23, 2008 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 (File No. 001-15149) filed on July 28,
2000 and incorporated herein by reference).
|
|
|
|
|
LII is a party to a debt instrument under which the total amount
of securities authorized under 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
instrument to the Securities and Exchange Commission upon
request.
|
|
10
|
.1
|
|
Seventh Amendment to Second Amended and Restated Receivables
Purchase Agreement (the Amendment) dated as of
November 26, 2008, by and among Lennox Industries Inc. LPAC
Corp., Market Street Funding LLC, the investors named in the
Second Amended and Restated Receivables Purchase Agreement, PNC
Bank, National Association, YC SUSI Trust, Bank of America,
National Association and The Yorktown Investors (as defined in
the Second Amended and Restated Receivables Purchase Agreement)
and consented to by LII (filed as Exhibit 10.1 to LIIs
Current Report on Form 8-K filed on December 2, 2008 and
incorporated herein by reference).
|
|
10
|
.2
|
|
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
|
.3
|
|
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).
|
|
10
|
.4
|
|
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
|
.5
|
|
First Omnibus Amendment to Operative Documents, dated as of
September 22, 2008, among LII, Lennox Procurement Company Inc.,
Lennox Industries Inc., Allied Air Enterprises Inc., Service
Experts LLC, Lennox Global Ltd., BTMU Capital Corporation and
Compass Bank (filed as Exhibit 10.1 to LIIs Current Report
on Form 8-K filed on September 25, 2008 and incorporated herein
by reference).
|
|
10
|
.6
|
|
Subsidiary Guaranty, dated as of September 22, 2008, made by
LII, Allied Air Enterprises Inc., Service Experts LLC. and
Lennox Global Ltd., as guarantors, in favor of BTMU Capital
Corporation and the other parties specified therein (filed as
Exhibit 10.2 to LIIs Current Report on Form 8-K filed on
September 25, 2008 and incorporated herein by reference).
|
|
10
|
.7*
|
|
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
|
.8*
|
|
Form of 2009 Long-Term Incentive Award Agreement for U.S.
Employees of LII under the 1998 Incentive Plan of LII (filed as
Exhibit 10.4 to LIIs Current Report on Form 8-K filed on
December 17, 2008 and incorporated herein by reference).
|
|
10
|
.9*
|
|
Form of 2009 Long-Term Incentive Award Agreement Non-Employee
Director under the 1998 Incentive Plan of LII (filed herewith).
|
100
|
|
|
|
|
Exhibit
|
|
|
Number
|
|
Exhibit Name
|
|
|
10
|
.10*
|
|
Lennox International Inc. Profit Sharing Restoration Plan, as
amended and restated effective January 1, 2009 (filed as
Exhibit 10.3 to LIIs Current Report on Form 8-K filed on
December 17, 2008 and incorporated herein by reference).
|
|
10
|
.11*
|
|
Lennox International Inc. Supplemental Executive Retirement
Plan, as amended and restated effective January 1, 2009 (filed
as Exhibit 10.2 to LIIs Current Report on Form 8-K filed
on December 17, 2008 and incorporated herein by reference).
|
|
10
|
.12*
|
|
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
|
.13*
|
|
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
|
.14*
|
|
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
|
. 15*
|
|
Form of Change of Control Employment 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 17, 2008 and incorporated herein by reference).
|
|
10
|
.16*
|
|
Summary of Fiscal 2008 Target Short-Term Incentive Percentages
for the Named Executive Officers of LII (filed in LIIs
Current Report on Form 8-K filed on December 17, 2008 and
incorporated herein by reference).
|
|
10
|
.17*
|
|
Lennox International Inc. Directors Retirement Plan (as
Amended and Restated as of January 1, 2008) (filed as Exhibit
10.43 to LIIs Annual Report on Form 10-K for the year
ended December 31, 2007 and incorporated herein by reference).
|
|
10
|
.18*
|
|
Lennox International Inc. 2007 Long-Term Incentive Award
Agreement, Non-Employee Directors, dated as of December 7, 2007
(filed as Exhibit 10.42 to LIIs Annual Report on Form 10-K
for the year ended December 31, 2007 and incorporated herein by
reference).
|
|
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. |
101