e10vq
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
(MARK ONE)
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þ |
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2007
OR
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o |
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number 001-15149
LENNOX INTERNATIONAL INC.
Incorporated pursuant to the Laws of the State of DELAWARE
Internal Revenue Service Employer Identification No. 42-0991521
2140 LAKE PARK BLVD.
RICHARDSON, TEXAS
75080
(972-497-5000)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (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 past 90 days. Yes
þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer or a non-accelerated filer. See definition of accelerated filer and large accelerated
filer in Rule 12b-2 of the Securities Exchange Act of 1934.
Large Accelerated Filer
þ Accelerated
Filer
o Non-Accelerated Filer o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Securities Exchange Act of 1934).
Yes o No þ
As of April 20, 2007, the number of shares outstanding of the registrants common stock, par
value $.01 per share, was 68,259,377.
LENNOX INTERNATIONAL INC.
FORM 10-Q
For the Three Months Ended March 31, 2007
INDEX
2
PART I FINANCIAL INFORMATION
Item 1. Financial Statements.
LENNOX INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED
BALANCE SHEETS
As of March 31, 2007 and December 31, 2006
(In millions, except share and per share data)
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March 31, |
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December 31, |
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2007 |
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2006 |
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(unaudited) |
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ASSETS
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CURRENT ASSETS: |
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Cash and cash equivalents |
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$ |
93.6 |
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$ |
144.3 |
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Accounts and notes receivable, net |
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502.3 |
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502.6 |
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Inventories |
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398.1 |
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305.5 |
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Deferred income taxes |
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21.3 |
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22.2 |
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Other assets |
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60.1 |
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43.8 |
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Total current assets |
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1,075.4 |
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1,018.4 |
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PROPERTY, PLANT AND EQUIPMENT, net |
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288.0 |
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288.2 |
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GOODWILL, net |
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242.2 |
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239.8 |
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DEFERRED INCOME TAXES |
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102.1 |
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104.3 |
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OTHER ASSETS |
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74.0 |
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69.1 |
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TOTAL ASSETS |
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$ |
1,781.7 |
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$ |
1,719.8 |
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LIABILITIES AND STOCKHOLDERS EQUITY
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CURRENT LIABILITIES: |
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Short-term debt |
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$ |
0.8 |
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$ |
1.0 |
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Current maturities of long-term debt |
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11.4 |
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11.4 |
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Accounts payable |
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342.2 |
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278.6 |
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Accrued expenses |
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285.7 |
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326.3 |
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Income taxes payable |
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33.8 |
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Total current liabilities |
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640.1 |
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651.1 |
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LONG-TERM DEBT |
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132.3 |
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96.8 |
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POSTRETIREMENT BENEFITS, OTHER THAN PENSIONS |
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12.7 |
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12.9 |
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PENSIONS |
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51.0 |
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49.6 |
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OTHER LIABILITIES |
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113.6 |
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105.0 |
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Total liabilities |
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949.7 |
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915.4 |
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COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS EQUITY: |
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Preferred stock, $.01 par value, 25,000,000 shares authorized,
no shares issued or outstanding |
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Common stock, $.01 par value, 200,000,000 shares authorized,
78,544,586 shares and 76,974,791 shares issued for 2007
and 2006, respectively |
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0.8 |
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0.8 |
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Additional paid-in capital |
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736.9 |
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706.6 |
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Retained earnings |
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313.5 |
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312.5 |
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Accumulated other comprehensive income (loss) |
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7.7 |
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(5.1 |
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Treasury stock, at cost, 10,288,970 shares and 9,818,904 for 2007
and 2006, respectively |
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(226.9 |
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(210.4 |
) |
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Total stockholders equity |
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832.0 |
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804.4 |
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TOTAL LIABILITIES AND STOCKHOLDERS EQUITY |
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$ |
1,781.7 |
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$ |
1,719.8 |
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The accompanying notes are an integral part of these consolidated financial statements.
3
LENNOX INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Three Months Ended March 31, 2007 and 2006
(Unaudited, in millions, except per share data)
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For the |
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Three Months Ended |
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March 31, |
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2007 |
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2006 |
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NET SALES |
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$ |
791.5 |
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$ |
808.4 |
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COST OF GOODS SOLD |
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586.9 |
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599.3 |
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Gross profit |
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204.6 |
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209.1 |
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OPERATING EXPENSES: |
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Selling, general and administrative expenses |
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191.1 |
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187.9 |
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(Gains), losses and other expenses, net |
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(0.7 |
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(17.1 |
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Restructuring charges |
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2.3 |
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6.3 |
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Equity in earnings of unconsolidated affiliates |
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(2.7 |
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(2.1 |
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Operational income |
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14.6 |
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34.1 |
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INTEREST EXPENSE, net |
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0.9 |
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0.6 |
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Income before income taxes |
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13.7 |
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33.5 |
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PROVISION FOR INCOME TAXES |
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5.1 |
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12.5 |
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Net income |
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$ |
8.6 |
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$ |
21.0 |
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NET INCOME PER SHARE: |
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Basic |
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$ |
0.13 |
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$ |
0.29 |
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Diluted |
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$ |
0.12 |
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$ |
0.28 |
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AVERAGE SHARES OUTSTANDING: |
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Basic |
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67.5 |
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71.3 |
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Diluted |
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70.9 |
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75.4 |
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CASH DIVIDENDS DECLARED PER SHARE |
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$ |
0.13 |
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$ |
0.11 |
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The accompanying notes are an integral part of these consolidated financial statements.
4
LENNOX INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY
For the Three Months Ended March 31, 2007 (unaudited) and the Year Ended December 31, 2006
(In millions, except per share data)
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Common Stock |
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Additional |
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Accumulated Other |
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Treasury |
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Total |
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Issued |
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Paid-In |
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Retained |
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Comprehensive |
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Stock |
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Stockholders |
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Comprehensive |
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Shares |
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Amount |
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Capital |
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Earnings |
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Income (Loss) |
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at Cost |
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Equity |
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Income (Loss) |
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BALANCE AT DECEMBER 31, 2005 |
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74.7 |
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$ |
0.7 |
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$ |
649.3 |
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$ |
191.0 |
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$ |
0.4 |
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$ |
(47.0 |
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$ |
794.4 |
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Impact of adjustments recorded under provisions of SAB No. 108 |
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(12.4 |
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(12.4 |
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ADJUSTED BALANCE AT JANUARY 1, 2006 |
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74.7 |
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$ |
0.7 |
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$ |
649.3 |
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$ |
178.6 |
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$ |
0.4 |
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$ |
(47.0 |
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$ |
782.0 |
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Net income |
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166.0 |
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166.0 |
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$ |
166.0 |
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Dividends, $0.46 per share |
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(32.1 |
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(32.1 |
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Foreign currency translation adjustments, net |
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20.8 |
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20.8 |
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20.8 |
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Minimum pension liability adjustments,
net of tax benefit of $2.0 (revised)(1) |
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4.0 |
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4.0 |
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4.0 |
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Stock-based compensation expense |
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24.4 |
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24.4 |
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Derivatives, net of tax provision of $1.0 |
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(1.9 |
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(1.9 |
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(1.9 |
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Common stock issued |
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2.3 |
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0.1 |
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19.7 |
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19.8 |
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Treasury stock purchases |
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(163.4 |
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(163.4 |
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Tax benefits of stock compensation |
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13.2 |
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13.2 |
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Comprehensive
income (revised)(1) |
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$ |
188.9 |
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Adjustments resulting from adoption of SFAS No. 158, net of
tax benefit of $15.0 (revised)(1) |
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(28.4 |
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(28.4 |
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BALANCE AT DECEMBER 31, 2006 |
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77.0 |
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$ |
0.8 |
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$ |
706.6 |
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$ |
312.5 |
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$ |
(5.1 |
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$ |
(210.4 |
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$ |
804.4 |
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Impact of adoption of FIN No. 48 |
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1.2 |
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1.2 |
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ADJUSTED BALANCE AT JANUARY 1, 2007 |
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77.0 |
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$ |
0.8 |
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$ |
706.6 |
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$ |
313.7 |
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$ |
(5.1 |
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$ |
(210.4 |
) |
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$ |
805.6 |
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Net income |
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8.6 |
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8.6 |
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$ |
8.6 |
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Dividends, $0.13 per share |
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(8.8 |
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(8.8 |
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Foreign currency translation adjustments, net |
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7.4 |
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7.4 |
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7.4 |
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Stock-based compensation expense |
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6.2 |
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6.2 |
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Tax benefits of stock compensation |
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12.1 |
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12.1 |
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Derivatives, net of tax provision of $2.6 |
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5.4 |
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5.4 |
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5.4 |
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Common stock issued |
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1.5 |
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12.0 |
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12.0 |
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Treasury stock purchases |
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(16.5 |
) |
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(16.5 |
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Comprehensive income |
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$ |
21.4 |
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BALANCE AT MARCH 31, 2007 |
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78.5 |
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$ |
0.8 |
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$ |
736.9 |
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$ |
313.5 |
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$ |
7.7 |
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$ |
(226.9 |
) |
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$ |
832.0 |
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(1) |
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The Consolidated Statement of Stockholders Equity for
the year ended December 31, 2006 in the Companys 2006 Form 10-K included
a charge of $28.4 million for the impact of adoption of Statement of Financial Standards No. 158,
Employers Accounting for
Defined Benefit Pension and Other Postretirement Plans An Amendment of FASB
Statements No. 87, 88, 106, and 132(R) (SFAS No. 158) as a component of
comprehensive income rather than
displaying the adoption impact as a separate component of accumulated other
comprehensive income (loss) (AOCI). This Consolidated Statement of
Stockholders Equity
for the year ended December 31, 2006 is included to enhance
disclosures for the adoption of SFAS No. 158 by
presenting the $28.4 million adoption impact as a separate component
of AOCI and a corresponding increase to 2006 comprehensive income.
The revision did not change net income, total
AOCI, or cash flows for the year ended December 31, 2006.
|
The accompanying notes are an integral part of these consolidated financial statements.
5
LENNOX INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Three Months Ended March 31, 2007 and 2006
(Unaudited, in millions)
|
|
|
|
|
|
|
|
|
|
|
For the |
|
|
|
Three Months Ended |
|
|
|
March 31, |
|
|
|
2007 |
|
|
2006 |
|
CASH FLOWS FROM OPERATING ACTIVITIES: |
|
|
|
|
|
|
|
|
Net income |
|
$ |
8.6 |
|
|
$ |
21.0 |
|
Adjustments to reconcile net income to net cash used in operating activities: |
|
|
|
|
|
|
|
|
Equity in earnings of unconsolidated affiliates |
|
|
(2.7 |
) |
|
|
(2.1 |
) |
Restructuring expenses, net of cash paid |
|
|
(1.8 |
) |
|
|
6.9 |
|
Unrealized gain on futures contracts |
|
|
(0.3 |
) |
|
|
(9.1 |
) |
Stock-based compensation expense |
|
|
6.2 |
|
|
|
7.8 |
|
Depreciation and amortization |
|
|
11.8 |
|
|
|
9.4 |
|
Capitalized interest |
|
|
(0.4 |
) |
|
|
(0.3 |
) |
Deferred income taxes |
|
|
2.8 |
|
|
|
5.0 |
|
Other (gains), losses and expenses, net |
|
|
3.7 |
|
|
|
0.4 |
|
Changes in
assets and liabilities, net of effects of acquisitions: |
|
|
|
|
|
|
|
|
Accounts and notes receivable |
|
|
2.8 |
|
|
|
13.2 |
|
Inventories |
|
|
(93.2 |
) |
|
|
(99.0 |
) |
Other current assets |
|
|
(3.2 |
) |
|
|
(5.2 |
) |
Accounts payable |
|
|
59.9 |
|
|
|
42.2 |
|
Accrued expenses |
|
|
(38.4 |
) |
|
|
(41.3 |
) |
Income taxes payable |
|
|
(35.3 |
) |
|
|
(2.8 |
) |
Long-term warranty, deferred income and other liabilities |
|
|
4.4 |
|
|
|
3.6 |
|
|
|
|
|
|
|
|
Net cash used in operating activities |
|
|
(75.1 |
) |
|
|
(50.3 |
) |
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES: |
|
|
|
|
|
|
|
|
Proceeds from the disposal of property, plant and equipment |
|
|
0.1 |
|
|
|
0.8 |
|
Purchases of property, plant and equipment |
|
|
(9.9 |
) |
|
|
(14.9 |
) |
Additional investment in affiliates |
|
|
|
|
|
|
(4.3 |
) |
|
|
|
|
|
|
|
Net cash used in investing activities |
|
|
(9.8 |
) |
|
|
(18.4 |
) |
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES: |
|
|
|
|
|
|
|
|
Short-term (payments) borrowings, net |
|
|
(0.2 |
) |
|
|
2.3 |
|
Long-term borrowings, net |
|
|
35.5 |
|
|
|
|
|
Proceeds from stock option exercises |
|
|
12.0 |
|
|
|
6.8 |
|
Repurchases of common stock |
|
|
(16.5 |
) |
|
|
(12.2 |
) |
Excess tax benefits related to share-based payments |
|
|
11.0 |
|
|
|
5.6 |
|
Cash dividends paid |
|
|
(8.7 |
) |
|
|
(7.8 |
) |
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities |
|
|
33.1 |
|
|
|
(5.3 |
) |
|
|
|
|
|
|
|
|
|
DECREASE IN CASH AND CASH EQUIVALENTS |
|
|
(51.8 |
) |
|
|
(74.0 |
) |
EFFECT OF EXCHANGE RATES ON CASH AND CASH EQUIVALENTS |
|
|
1.1 |
|
|
|
0.3 |
|
CASH AND CASH EQUIVALENTS, beginning of period |
|
|
144.3 |
|
|
|
213.5 |
|
|
|
|
|
|
|
|
CASH AND CASH EQUIVALENTS, end of period |
|
$ |
93.6 |
|
|
$ |
139.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplementary disclosures of cash flow information: |
|
|
|
|
|
|
|
|
Cash paid during the period for: |
|
|
|
|
|
|
|
|
Interest |
|
$ |
0.3 |
|
|
$ |
0.3 |
|
|
|
|
|
|
|
|
Income taxes (net of refunds) |
|
$ |
28.9 |
|
|
$ |
5.9 |
|
|
|
|
|
|
|
|
Non-cash items: |
|
|
|
|
|
|
|
|
Impact of adjustments recorded under provisions of SAB No. 108 |
|
$ |
|
|
|
$ |
(12.4 |
) |
|
|
|
|
|
|
|
Impact of adoption of FIN No. 48 |
|
$ |
1.2 |
|
|
$ |
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
6
LENNOX INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. General:
References in this Quarterly Report on Form 10-Q to we, our, us, LII or the Company
refer to Lennox International Inc. and its subsidiaries, unless the context requires otherwise.
Basis of Presentation
The accompanying unaudited Consolidated Balance Sheet as of March 31, 2007, the accompanying
unaudited Consolidated Statements of Operations for the three months
ended March 31, 2007 and 2006, the accompanying unaudited
Consolidated Statement of Stockholders Equity for the three
months ended March 31, 2007 and the accompanying unaudited Consolidated Statements of Cash Flows for the three months ended
March 31, 2007 and 2006 should be read in conjunction with LIIs audited consolidated financial
statements and footnotes as of December 31, 2006 and 2005 and for each year in the three year
period ended December 31, 2006. The accompanying unaudited consolidated financial statements of
LII have been prepared in accordance with generally accepted accounting principles for interim
financial information and in accordance with the instructions to Form 10-Q and Article 10 of
Regulation S-X. In the opinion of management, the accompanying consolidated financial statements
contain all material adjustments, consisting principally of normal recurring adjustments, necessary
for a fair presentation of the Companys financial position, results of operations and cash flows.
Certain information and footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been condensed or omitted pursuant to
applicable rules and regulations, although the Company believes that the disclosures herein are
adequate to make the information presented not misleading. The operating results for the interim
periods are not necessarily indicative of the results that may be expected for a full year.
The Companys fiscal year ends on December 31 and the Companys quarters are each comprised of
13 weeks. For convenience, throughout these financial statements, the 13 weeks comprising each
three-month period are denoted by the last day of the respective calendar quarter.
Use of Estimates
The preparation of financial statements in conformity with generally accepted accounting
principles requires management to make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Reclassifications
Certain prior-period balances in the accompanying condensed consolidated financial statements
have been reclassified to conform to the current periods presentation of financial information.
Shipping and handling costs related to post-production activities are included as a component of
Gross Profit in the accompanying Consolidated Statements of Operations. Such costs were previously
reported as part of Selling, General and Administrative Expenses.
Recently Adopted Accounting Pronouncements
Effective January 1, 2007, the Company adopted 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. For more information see Note 9.
2. Accounts and Notes Receivable:
Accounts and Notes Receivable have been reported in the accompanying Consolidated Balance
Sheets net of allowance for doubtful accounts of $16.3 million and $16.7 million as of March 31,
2007 and December 31,
7
2006, respectively, and net of accounts receivable sold under an ongoing
asset securitization arrangement, if any. As of March 31, 2007 and December 31, 2006, no accounts
receivable were sold under the Companys ongoing asset securitization arrangement. Additionally,
none of the accounts receivable as reported in the accompanying Consolidated Balance Sheet at March
31, 2007 represent retained interests in securitized receivables that have restricted disposition
rights per the terms of the asset securitization agreement and would not be available to satisfy
obligations to creditors. The Company has no significant concentration of credit risk within its
accounts and notes receivable.
3. Inventories:
Components of inventories are as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
As of |
|
|
As of |
|
|
|
March 31, |
|
|
December 31, |
|
|
|
2007 |
|
|
2006 |
|
Finished goods |
|
$ |
311.9 |
|
|
$ |
223.2 |
|
Repair parts |
|
|
46.2 |
|
|
|
43.3 |
|
Work in process |
|
|
10.5 |
|
|
|
8.1 |
|
Raw materials |
|
|
102.8 |
|
|
|
87.8 |
|
|
|
|
|
|
|
|
|
|
|
471.4 |
|
|
|
362.4 |
|
Excess of current cost over last-in, first-out cost |
|
|
(73.3 |
) |
|
|
(56.9 |
) |
|
|
|
|
|
|
|
Total inventories |
|
$ |
398.1 |
|
|
$ |
305.5 |
|
|
|
|
|
|
|
|
4. Goodwill:
The Company evaluates the impairment of goodwill under the guidance of Statement of Financial
Accounting Standards No. 142, Goodwill and Other Intangible Assets for each of its reporting units.
During the first quarter of 2007 and 2006, the Company performed its annual goodwill impairment
test and determined that no impairment charge was required.
The changes in the carrying amount of goodwill for the three months ended March 31, 2007, in
total and by segment, are as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at |
|
|
|
|
|
|
Balance at |
|
Segment |
|
December 31, 2006 |
|
|
Changes (1) |
|
|
March 31, 2007 |
|
Residential Heating & Cooling |
|
$ |
33.9 |
|
|
$ |
|
|
|
$ |
33.9 |
|
Commercial Heating & Cooling |
|
|
30.1 |
|
|
|
0.3 |
|
|
|
30.4 |
|
Service Experts |
|
|
97.9 |
|
|
|
0.8 |
|
|
|
98.7 |
|
Refrigeration |
|
|
77.9 |
|
|
|
1.3 |
|
|
|
79.2 |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
239.8 |
|
|
$ |
2.4 |
|
|
$ |
242.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Relate to changes in foreign currency translation rates. |
5. Cash, Lines of Credit and Financing Arrangements:
The Company has bank lines of credit aggregating $434.9 million, of which $36.3 million was
borrowed and outstanding and $92.3 million was committed to standby letters of credit at March 31,
2007. Of the remaining $306.3 million, the entire amount was available for future borrowings after
consideration of covenant limitations. Included in the lines of credit are several regional
facilities and a multi-currency facility governed by agreements between the Company and a syndicate
of banks. The revolving credit facility, which matures in July 2010, has a borrowing capacity of
$400 million. As of March 31, 2007 and December 31, 2006, the Company has unamortized debt
issuance costs of $1.7 million and $1.9 million, respectively, which are included in Other Assets
in the accompanying Consolidated Balance Sheets. The facility contains certain financial covenants
and bears interest at a rate equal to, at the Companys option, either (a) the greater of the
banks prime rate or the federal funds rate plus 0.5%, or (b) the London Interbank Offered Rate
plus a margin equal to 0.475% to 1.20%, depending upon the ratio of total funded debt-to-adjusted
earnings before interest, taxes, depreciation and amortization (Adjusted EBITDA), as defined in the facility. The Company pays a facility fee, depending upon the
ratio of total funded debt to Adjusted EBITDA, equal to 0.15% to 0.30% of the capacity. The
facility includes restrictive covenants that limit the Companys ability to incur additional
indebtedness, encumber its assets, sell its assets and make certain payments, including amounts for
share repurchases and dividends. The
8
Companys facility and promissory notes are guaranteed by the
Companys material subsidiaries. The facility requires that LII annually and quarterly deliver
financial statements, as well as compliance certificates, to the banks within specified time
periods.
As of March 31, 2007 and December 31, 2006, the Company had outstanding domestic promissory
notes totaling approximately $107.2 million. The term loans mature at various dates through 2010
and have interest rates ranging from 6.73% to 8.00%. In addition, LII has various other notes
outstanding through its foreign subsidiaries.
LIIs domestic revolving and term loans contain certain financial covenant restrictions. As
of March 31, 2007, LII believes it was in compliance with all covenant requirements. LII
periodically reviews its capital structure, including its primary bank facility, to ensure that it
has adequate liquidity. LII believes that cash flow from operations, as well as available
borrowings under its revolving credit facility and other sources of funding will be sufficient to
fund its operations for the foreseeable future.
Under a revolving period asset securitization arrangement, the Company transfers beneficial
interests in a portion of its trade accounts receivable to a third party in exchange for cash. The
Companys continued involvement in the transferred assets is limited to servicing. These transfers
are accounted for as sales rather than secured borrowings. The fair values assigned to the
retained and transferred interests are based primarily on the receivables carrying value given the
short term to maturity and low credit risk. As of March 31, 2007 and December 31, 2006, the
Company had not sold any beneficial interests in accounts receivable.
The Company has included in cash and cash equivalents in the accompanying unaudited
Consolidated Balance Sheet as of March 31, 2007, $16.2 million of restricted cash primarily related
to routine lockbox collections and letters of credit issued with respect to the operations of its
captive insurance subsidiary, which expire on December 31, 2007.
6. Product Warranties:
The changes in the carrying amount of the Companys total product warranty liabilities for the
three months ended March 31, 2007 are as follows (in millions):
|
|
|
|
|
Total product warranty liability at December 31, 2006 |
|
$ |
104.7 |
|
Payments made in 2007 |
|
|
(7.7 |
) |
Changes resulting from issuance of new warranties |
|
|
6.1 |
|
Changes in estimates associated with pre-existing warranties |
|
|
5.5 |
|
|
|
|
|
Total product warranty liability at March 31, 2007 |
|
$ |
108.6 |
|
|
|
|
|
The change in product warranty liability that results from changes in estimates of warranties
issued prior to 2007 was primarily due to revaluing warranty reserves based on higher material
input costs and changes in foreign currency translation rates. Product warranty liabilities are
included in Accrued Expenses and Other Liabilities in the accompanying Consolidated Balance Sheets.
7. Pension and Postretirement Benefit Plans:
The components of net periodic benefit cost were as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the |
|
|
|
Three Months Ended March 31, |
|
|
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
|
|
Pension Benefits |
|
|
Other Benefits |
|
Service cost |
|
$ |
1.8 |
|
|
$ |
1.9 |
|
|
$ |
0.2 |
|
|
$ |
0.3 |
|
Interest cost |
|
|
3.7 |
|
|
|
3.8 |
|
|
|
0.2 |
|
|
|
0.4 |
|
Expected return on plan assets |
|
|
(4.4 |
) |
|
|
(4.1 |
) |
|
|
|
|
|
|
|
|
Amortization of prior service cost |
|
|
0.2 |
|
|
|
0.3 |
|
|
|
(0.4 |
) |
|
|
(0.1 |
) |
Amortization of net loss |
|
|
1.2 |
|
|
|
1.5 |
|
|
|
0.2 |
|
|
|
0.2 |
|
Settlements or curtailments |
|
|
0.7 |
|
|
|
1.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net periodic pension cost |
|
$ |
3.2 |
|
|
$ |
5.3 |
|
|
$ |
0.2 |
|
|
$ |
0.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9
8. Stock-Based Compensation:
The Company accounts for stock-based awards under the provisions of Statement of Financial
Accounting Standards No. 123R, Share-Based Payment (SFAS No. 123R). Compensation expense of $6.2
million and $7.8 million was recognized for the three months ended March 31, 2007 and 2006,
respectively, and is included in Selling, General and Administrative Expenses in the accompanying
Consolidated Statements of Operations.
Incentive Plan
Under the Companys Amended and Restated 1998 Incentive Plan (the 1998 Incentive Plan), the
Company is authorized to issue awards for 24,254,706 shares of common stock. As of March 31, 2007,
awards for 21,878,359 shares of common stock had been granted and 4,337,907 shares had been
cancelled or repurchased under the 1998 Incentive Plan. Consequently, as of March 31, 2007, there
were 6,714,254 shares available for future issuance.
The 1998 Incentive Plan provides for various long-term incentive and retentive awards, which
include stock options, performance shares, restricted stock awards and stock appreciation rights.
A description of these long-term incentive and retentive awards and related activity within each is
provided below.
Stock Options
Under the 1998 Incentive Plan, the exercise price for stock options equals the stocks fair
value on the date of grant. Options granted prior to 1998 vested on the date of grant. Options
granted in 1998 and after vest over three years. Options issued prior to December 2000 expire
after ten years and options issued in December 2000 and after expire after seven years.
In addition to the options discussed above, there were 60,344 stock options outstanding as of
March 31, 2007 that were issued in connection with LIIs acquisition of Service Experts Inc. All
such options are fully vested.
No stock options were granted during the three months ended March 31, 2007 nor during the
three months ended March 31, 2006.
Upon the adoption of SFAS No. 123R, options granted prior to the date of adoption continue to
be amortized to expense using the graded method. For options granted after the date of adoption,
the fair value is amortized to expense ratably over the vesting period.
A summary of stock option activity for the three months ended March 31, 2007, follows (in
millions, except per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted- |
|
|
|
|
|
|
|
Average |
|
|
|
|
|
|
|
Exercise |
|
|
|
|
|
|
|
Price per |
|
|
|
Shares |
|
|
Share |
|
Outstanding at beginning of period |
|
|
4.0 |
|
|
$ |
14.63 |
|
Granted |
|
|
|
|
|
|
|
|
Exercised |
|
|
(1.0 |
) |
|
$ |
11.58 |
|
Forfeited |
|
|
(0.1 |
) |
|
$ |
37.38 |
|
|
|
|
|
|
|
|
|
Outstanding at end of period |
|
|
2.9 |
|
|
$ |
15.29 |
|
|
|
|
|
|
|
|
|
Exercisable at end of period |
|
|
2.8 |
|
|
$ |
15.15 |
|
|
|
|
|
|
|
|
|
The following table summarizes information about stock options outstanding as of March 31,
2007 (in millions, except per share data and years):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding |
|
Options Exercisable |
|
|
|
|
|
|
Weighted- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average |
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted- |
|
|
|
|
|
|
|
|
|
|
Remaining |
|
Weighted- |
|
|
|
|
|
|
|
|
|
Average |
|
Weighted- |
|
|
Range of |
|
|
|
|
|
Contractual |
|
Average |
|
Aggregate |
|
|
|
|
|
Remaining |
|
Average |
|
Aggregate |
Exercise Prices |
|
Number |
|
Term |
|
Exercise Price |
|
Intrinsic |
|
Number |
|
Contractual Life |
|
Exercise Price |
|
Intrinsic |
Per Share |
|
Outstanding |
|
(in years) |
|
Per Share |
|
Value |
|
Exercisable |
|
(in years) |
|
Per Share |
|
Value |
$7.875 - $49.63 |
|
|
2.9 |
|
|
|
2.4 |
|
|
$ |
15.29 |
|
|
$ |
59.6 |
|
|
|
2.8 |
|
|
|
2.3 |
|
|
$ |
15.15 |
|
|
$ |
57.8 |
|
10
As of March 31, 2007, there was approximately $0.2 million of unrecognized compensation
cost related to nonvested options and such cost is expected to be recognized over a
weighted-average period of 0.8 years. The Companys estimated forfeiture rate for stock options
was 8% as of March 31, 2007. Total compensation expense for stock options was $0.1 million and
$0.6 million for the three months ended March 31, 2007 and 2006, respectively.
The total intrinsic value of options exercised, the resulting tax deductions to realize tax
benefits, and the tax benefits in excess of the hypothetical deferred tax asset were as follows (in
millions):
|
|
|
|
|
|
|
|
|
|
|
For the |
|
|
Three Months Ended |
|
|
March 31, |
|
|
2007 |
|
2006 |
Intrinsic value of options exercised |
|
$ |
24.2 |
|
|
$ |
7.5 |
|
Realized tax benefits from tax deductions |
|
|
9.0 |
|
|
|
2.8 |
|
Tax benefits in excess of the hypothetical
deferred tax asset |
|
|
1.1 |
|
|
|
0.7 |
|
The Companys practice is to issue new shares of common stock to satisfy stock option
exercises.
Performance Shares
Under the 1998 Incentive Plan, performance shares are granted to certain employees at the
discretion of the Board of Directors in December of each year for a three-year performance period
beginning the following January 1st. Upon vesting, performance shares are converted to
an equal number of shares of the Companys common stock. Awards granted prior to 2003 vest after
ten years of employment at the target amount.
Upon the adoption of SFAS No. 123R, all of the performance share plans under the 1998
Incentive Plan were classified as equity based plans and the fair value of each award is the market
price of the stock on the date of grant and is amortized to expense ratably over the vesting
period. The stock-based compensation expense for any additional shares which may be earned is
estimated on the grant date based on the market price of the stock at the date of grant. The
number of shares expected to be earned will be adjusted, as necessary, to reflect the actual number
of shares awarded.
No performance shares were granted during the three months ended March 31, 2007 or 2006.
A summary of the status of the Companys nonvested performance share awards as of March 31,
2007 and changes during the three months ended March 31, 2007 is presented below (in millions,
except per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted- |
|
|
|
|
|
|
|
Average |
|
|
|
|
|
|
|
Grant Date |
|
|
|
|
|
|
|
Fair Value |
|
|
|
Shares |
|
|
per Share |
|
Nonvested performance share awards: |
|
|
|
|
|
|
|
|
Nonvested at beginning of period |
|
|
1.6 |
|
|
$ |
19.39 |
|
Granted |
|
|
|
|
|
|
|
|
Additional shares earned |
|
|
0.2 |
|
|
$ |
16.89 |
|
Vested |
|
|
(0.4 |
) |
|
$ |
16.89 |
|
Forfeited |
|
|
|
|
|
$ |
14.15 |
|
|
|
|
|
|
|
|
|
Nonvested at end of period |
|
|
1.4 |
|
|
$ |
19.83 |
|
|
|
|
|
|
|
|
|
As of March 31, 2007, there was approximately $17.4 million of total unrecognized compensation
cost related to nonvested performance share awards and such cost is expected to be recognized over
a weighted-average period of 2.1 years. The Companys estimated forfeiture rate for performance
shares was 18% as of March 31, 2007. Total compensation expense for performance share awards was
$3.7 million and $5.1 million for the three months ended March 31, 2007 and 2006, respectively.
The Companys practice is to issue new shares of common stock to satisfy performance share award
vestings.
11
The total intrinsic value of performance share awards vested, the resulting tax deductions to
realize tax benefits and the tax benefits in excess of the hypothetical deferred tax asset were as
follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
For the |
|
|
Three Months Ended |
|
|
March 31, |
|
|
2007 |
|
2006 |
Fair value of performance share awards vested |
|
$ |
13.1 |
|
|
$ |
17.5 |
|
Realized tax benefits from tax deductions |
|
|
4.9 |
|
|
|
6.5 |
|
Tax benefits in excess of the hypothetical
deferred tax asset |
|
|
|
|
|
|
|
|
Restricted Stock Awards
Under the 1998 Incentive Plan, restricted stock awards are issued to attract and retain key
Company executives. At the end of a three-year retention period, the award will vest and be
distributed to the participant provided that the participant has been an employee of the Company
continuously throughout the retention period.
Upon the adoption of SFAS No. 123R, all restricted stock plans under the 1998 Incentive Plan
were classified as equity based plans and the fair value of each award is the market price of the
Companys common stock on the date of grant, amortized to expense ratably over the vesting period.
The weighted-average fair value of restricted stock awards for 1,000 shares granted during the
three months ended March 31, 2007 was $35.81. The weighted-average fair value of restricted stock
awards for 2,414 shares granted during the three months ended March 31, 2006 was $31.95.
A summary of the status of the Companys nonvested restricted stock awards as of March 31,
2007 and changes during the three months ended March 31, 2007 is presented below (in millions,
except per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted- |
|
|
|
|
|
|
|
Average |
|
|
|
|
|
|
|
Grant Date |
|
|
|
|
|
|
|
Fair Value |
|
|
|
Shares |
|
|
per Share |
|
Nonvested restricted stock awards: |
|
|
|
|
|
|
|
|
Nonvested at beginning of period |
|
|
1.0 |
|
|
$ |
25.17 |
|
Granted |
|
|
|
|
|
$ |
35.81 |
|
Vested |
|
|
|
|
|
|
|
|
Forfeited |
|
|
|
|
|
$ |
24.38 |
|
|
|
|
|
|
|
|
|
Nonvested at end of period |
|
|
1.0 |
|
|
$ |
25.20 |
|
|
|
|
|
|
|
|
|
As of March 31, 2007, there was approximately $10.6 million of total unrecognized compensation
cost related to nonvested restricted stock awards and such cost is expected to be recognized over a
weighted-average period of 2.1 years. The Companys estimated forfeiture rate for restricted stock
awards was 13% as of March 31, 2007. Total compensation expense for restricted stock awards was
$1.7 million and $1.5 million for the three months ended March 31, 2007 and 2006, respectively.
The Companys practice is to issue new shares of common stock to satisfy restricted stock award
vestings.
During the three months ended March 31, 2007 and 2006, no restricted stock awards vested and
therefore there were no resulting tax deductions to realize tax benefits and no tax benefits in
excess of the hypothetical deferred tax asset.
Stock Appreciation Rights
In 2003, the Company began awarding stock appreciation rights under the 1998 Incentive Plan.
Each recipient is given the right to receive a value equal to the future appreciation of the
Companys stock price. The value is paid in Company stock. Stock appreciation rights vest in
one-third increments beginning with the first anniversary date after the grant date.
12
Upon the adoption of SFAS No. 123R, the compensation expense for awards granted prior to the
adoption is the fair value on the date of grant, recognized over the vesting period. The fair
value for these awards was estimated using the Black-Scholes-Merton valuation model and follows the
provisions of SFAS No. 123R and Staff Accounting Bulletin No. 107, Share-Based Payment. The
Company used historical data and other pertinent information to estimate the expected volatility
for the term of the award and the outstanding period of the award for separate groups of employees
that had similar historical exercise behavior. The risk free interest rate was based on the U.S.
Treasury yield curve in effect at the time of grant.
No stock appreciation rights were granted during the three months ended March 31, 2007. The
weighted-average fair value of 7,932 stock appreciation rights granted during the three months
ended March 31, 2006 was $8.43.
Upon the adoption of SFAS No. 123R, stock appreciation rights granted prior to the date of
adoption continue to be amortized to expense using the graded method. For stock appreciation
rights granted after the date of adoption, the fair value is amortized to expense ratably over the
vesting period.
A summary of stock appreciation rights activity for the three months ended March 31, 2007
follows (in millions, except per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted- |
|
|
|
|
|
|
|
Average |
|
|
|
|
|
|
|
Exercise Price |
|
|
|
Shares |
|
|
per Share |
|
Outstanding at beginning of period |
|
|
1.9 |
|
|
$ |
25.20 |
|
Granted |
|
|
|
|
|
|
|
|
Exercised |
|
|
(0.2 |
) |
|
$ |
18.02 |
|
Forfeited |
|
|
|
|
|
$ |
30.01 |
|
|
|
|
|
|
|
|
|
Outstanding at end of period |
|
|
1.7 |
|
|
$ |
26.18 |
|
|
|
|
|
|
|
|
|
Exercisable at end of period |
|
|
0.7 |
|
|
$ |
20.19 |
|
|
|
|
|
|
|
|
|
The following table summarizes information about stock appreciation rights outstanding as of
March 31, 2007 (in millions, except per share data and years):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock Appreciation Rights Outstanding |
|
Stock Appreciation Rights Exercisable |
|
|
|
|
|
|
Weighted- |
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted- |
|
|
|
|
|
|
|
|
|
|
Average |
|
|
|
|
|
|
|
|
|
|
|
|
|
Average |
|
Weighted- |
|
|
|
|
|
|
|
|
Remaining |
|
Weighted- |
|
|
|
|
|
|
|
|
|
Remaining |
|
Average |
|
|
Range of |
|
|
|
|
|
Contractual |
|
Average |
|
Aggregate |
|
|
|
|
|
Contractual |
|
Exercise |
|
Aggregate |
Exercise Prices |
|
Number |
|
Term |
|
Exercise Price |
|
Intrinsic |
|
Number |
|
Life |
|
Price Per |
|
Intrinsic |
Per Share |
|
Outstanding |
|
(in years) |
|
Per Share |
|
Value |
|
Exercisable |
|
(in years) |
|
Share |
|
Value |
$16.76 $31.945
|
|
|
1.7 |
|
|
|
5.5 |
|
|
$ |
26.18 |
|
|
$ |
15.8 |
|
|
|
0.7 |
|
|
|
4.2 |
|
|
$ |
20.19 |
|
|
$ |
10.5 |
|
As of March 31, 2007, there was approximately $5.3 million of unrecognized compensation
cost related to nonvested stock appreciation rights and such cost is expected to be recognized over
a weighted-average period of 2.3 years. The Companys estimated forfeiture rate for stock
appreciation rights was 14% as of March 31, 2007. Total compensation expense for stock appreciation rights was $0.7 million and $0.6 million for
the three months ended March 31, 2007 and 2006, respectively.
The total intrinsic value of stock appreciation rights exercised, the resulting tax deductions
to realize tax benefits and the tax benefits in excess of the hypothetical deferred tax asset were
as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
For the |
|
|
Three Months Ended |
|
|
March 31, |
|
|
2007 |
|
2006 |
Intrinsic value of stock appreciation rights exercised |
|
$ |
4.0 |
|
|
$ |
0.6 |
|
Realized tax benefits from tax deductions |
|
|
1.5 |
|
|
|
0.2 |
|
Tax benefits in excess of the hypothetical deferred tax asset |
|
|
|
|
|
|
0.1 |
|
The Companys practice is to issue new shares of common stock to satisfy stock appreciation
rights exercises.
13
9. Income Taxes:
As a result of the adoption of FIN No. 48, the Company recognized a $1.2 million decrease in
the liability for unrecognized tax benefits, which was accounted for as an increase to the January
1, 2007 retained earnings balance.
As of January 1, 2007, the Company has approximately $18.9 million in total gross unrecognized tax
benefits. Of this amount, $14.4 million (net of federal benefit on state issues) will be recognized
through the statement of operations and $3.2 million will be recognized through goodwill. In
addition, the Company recognizes interest and penalties accrued related to unrecognized tax
benefits in income tax expense in accordance with FIN No. 48. As of January 1, 2007, the Company
has recognized $1.2 million (net of federal tax benefits) in interest and penalties.
The Internal Revenue Service (IRS) completed its examination of the Companys consolidated
tax returns for the years 1999 2003 and issued a Revenue Agents Report (RAR) on April 6, 2006.
The IRS has proposed certain significant adjustments to the Companys insurance deductions and
research tax credits. The Company disagrees with the RAR, which is currently under review by the
administrative appeals division of the IRS, and anticipates resolution by the end of 2007. It is
possible that a reduction in the unrecognized tax benefits may occur but an estimate of the impact
on the statement of operations cannot be made at this time.
The Company is subject to examination by numerous taxing authorities in jurisdictions such as
Australia, Belgium, Canada, Germany, and the United States. The Company is generally no longer
subject to U.S. federal, state and local, or non-US income tax examinations by taxing authorities
for years before 1999.
In April 2007, New York enacted legislation effective for tax years beginning on or after
January 1, 2007. The significant provisions include the mandatory unitary combined reporting for
corporations that are taxable under the general corporation franchise tax, and several tax rate
reductions. The Company believes any adjustments will be immaterial.
10. Restructuring Charges:
Restructuring charges incurred include the following amounts for the three months ended March
31, 2007 and 2006 (in millions):
|
|
|
|
|
|
|
|
|
|
|
For the |
|
|
|
Three Months |
|
|
|
Ended March 31, |
|
|
|
2007 |
|
|
2006 |
|
Allied Air Enterprises consolidation |
|
$ |
2.2 |
|
|
$ |
7.1 |
|
Pension Settlement (A) |
|
|
0.7 |
|
|
|
|
|
Gain on sale of land |
|
|
|
|
|
|
(0.8 |
) |
Other |
|
|
(0.6 |
) |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
2.3 |
|
|
$ |
6.3 |
|
|
|
|
|
|
|
|
|
|
|
(A) |
|
Amount not reflected in restructuring reserves as this item
is related to the Companys pension obligation and is included
in pension liabilities as of March 31, 2007. |
The table below provides further analysis of the Companys restructuring reserves for the
three months ended March 31, 2007 (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reversal |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at |
|
|
Charged |
|
|
of Prior |
|
|
|
|
|
|
|
|
|
|
Balance at |
|
|
|
December 31, |
|
|
to |
|
|
Period |
|
|
Cash |
|
|
Non-Cash |
|
|
March 31, |
|
Description of reserves |
|
2006 |
|
|
Earnings |
|
|
Charges |
|
|
Utilization |
|
|
Utilization |
|
|
2007 |
|
Severance and related
expense |
|
$ |
1.8 |
|
|
$ |
0.2 |
|
|
$ |
|
|
|
$ |
(1.9 |
) |
|
$ |
|
|
|
$ |
0.1 |
|
Equipment moves |
|
|
|
|
|
|
0.9 |
|
|
|
|
|
|
|
(0.9 |
) |
|
|
|
|
|
|
|
|
Recruiting and relocation |
|
|
|
|
|
|
0.3 |
|
|
|
|
|
|
|
(0.3 |
) |
|
|
|
|
|
|
|
|
Lease termination |
|
|
1.5 |
|
|
|
|
|
|
|
|
|
|
|
(0.2 |
) |
|
|
|
|
|
|
1.3 |
|
Other |
|
|
0.8 |
|
|
|
0.8 |
|
|
|
(0.6 |
) |
|
|
(0.8 |
) |
|
|
|
|
|
|
0.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total restructuring
reserves |
|
$ |
4.1 |
|
|
$ |
2.2 |
|
|
$ |
(0.6 |
) |
|
$ |
(4.1 |
) |
|
$ |
|
|
|
$ |
1.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14
In February 2006, Allied Air Enterprises, a division of the Companys Residential Heating &
Cooling segment, announced that it had commenced plans to consolidate its manufacturing,
distribution, research & development, and administrative operations of the Companys two-step
Residential Heating & Cooling operations in South Carolina, and close its current operations in
Bellevue, Ohio. The consolidation was substantially complete as of March 31, 2007. In connection
with this consolidation project, the Company recorded pre-tax restructuring charges of $2.2 million
and $7.1 million for the three months ended March 31, 2007 and 2006, respectively. The amounts
recorded related primarily to severance and benefits and other exit costs incurred, including
charges of $0.9 million of accelerated depreciation recorded in the three months ended March 31,
2006 related to the reduction in useful lives and disposal of certain long-lived assets.
A pension settlement loss of approximately $0.7 million is included in restructuring expense
for the three months ended March 31, 2007. The pension settlement loss related to the Companys
full funding of lump sum pension payments to selected participants in March 2007.
During the three months ended March 31, 2007, the Company reversed to income approximately
$0.6 million of restructuring reserves that had been established in connection with a prior
restructuring initiative in 2001.
Also included in restructuring expense for the three months ended March 31, 2006 is a gain of
$0.8 million related to the sale of a parcel of land. The Company had reduced the carrying value
of the land to its then net realizable value in connection with a prior restructuring initiative of
its Service Experts operations in 2001.
11. Earnings per Share:
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 the Companys stock-based compensation plans. As of March
31, 2007, the Company had 78,544,586 shares issued of which 10,288,970 were held as treasury
shares. Diluted earnings per share are computed as follows (in millions, except per share data):
|
|
|
|
|
|
|
|
|
|
|
For the |
|
|
|
Three Months Ended |
|
|
|
March 31, |
|
|
|
2007 |
|
|
2006 |
|
Net income |
|
$ |
8.6 |
|
|
$ |
21.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average shares outstanding |
|
|
67.5 |
|
|
|
71.3 |
|
Effect of diluted securities attributable to share-based
payments |
|
|
3.4 |
|
|
|
4.1 |
|
|
|
|
|
|
|
|
Weighted-average shares outstanding, as adjusted |
|
|
70.9 |
|
|
|
75.4 |
|
|
|
|
|
|
|
|
Diluted earnings per share |
|
$ |
0.12 |
|
|
$ |
0.28 |
|
|
|
|
|
|
|
|
Options to purchase 51,588 shares of common stock at prices ranging from $38.99 to $49.63 per
share and options to purchase 87,491 shares of common stock at prices ranging from $37.92 to $49.63
per share were outstanding for the three months ended March 31, 2007 and March 31, 2006,
respectively, but were not included in the diluted earnings per share calculation because the
assumed exercise of such options would have been anti-dilutive.
12. Comprehensive Income:
Comprehensive income is computed as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
For the |
|
|
|
Three Months Ended |
|
|
|
March 31, |
|
|
|
2007 |
|
|
2006 |
|
Net income |
|
$ |
8.6 |
|
|
$ |
21.0 |
|
Foreign currency translation adjustments |
|
|
7.4 |
|
|
|
0.6 |
|
Effective portion of gains on future contracts
designated as cash flow hedges |
|
|
5.4 |
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income |
|
$ |
21.4 |
|
|
$ |
21.6 |
|
|
|
|
|
|
|
|
15
13. Investments in Affiliates:
Investments in affiliates in which the Company does not exercise control and has a 20% or more
voting interest are accounted for using the equity method of accounting. If the fair value of an
investment in an affiliate is below its carrying value and the difference is deemed to be other
than temporary, the difference between the fair value and the carrying value is charged to
earnings.
Investments in affiliated companies accounted for under the equity method consist of a 24.5%
common stock ownership interest in Alliance Compressor LLC, a joint venture engaged in the
manufacture and sale of compressors; a 50% common stock ownership in Frigus-Bohn S.A. de C.V., a
Mexican joint venture that produces unit coolers and condensing units; and a 21.75% common stock
ownership interest in Kulthorn Kirby Public Company Limited, a Thailand company engaged in the
manufacture of compressors for refrigeration applications.
The Company recorded $2.7 million and $2.1 million of equity in the earnings of its
unconsolidated affiliates for the three months ended March 31, 2007 and 2006, respectively, and has
included these amounts in Equity in Earnings of Unconsolidated Affiliates in the accompanying
Consolidated Statements of Operations. The carrying amount of investments in unconsolidated
affiliates as of March 31, 2007 and December 31, 2006 is $56.3 million and $52.4 million,
respectively, and is included in Long-term Other Assets in the accompanying Consolidated Balance
Sheets.
14. Derivatives:
LII utilizes a program to mitigate the exposure to volatility in the prices of certain
commodities the Company uses in its production process. The program includes the use of
futures contracts and fixed forward contracts. The intent of the program is to protect the
Companys operating margins and overall profitability from adverse price changes by entering into
derivative instruments.
The Company accounts for instruments that qualify as cash flow hedges utilizing Statement of
Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging
Activities, as amended (SFAS No. 133). Beginning in the fourth quarter of 2006, futures
contracts entered into that met established accounting criteria were formally designated as cash flow hedges. For futures contracts that
are designated and qualify as cash flow hedges, the Company assesses hedge effectiveness and
measures hedge ineffectiveness at least quarterly throughout the designated period. The effective
portion of the gain or loss on the futures contracts are recorded, net of applicable taxes, in
accumulated other comprehensive income (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. During the three months
ended March 31 2007, $1.6 million in losses was reclassified from AOCI to net income. Changes in
the fair value of futures contracts that do not effectively offset changes in the fair value of the
underlying hedged item throughout the designated hedge period (ineffectiveness) are recorded in
net income each period and are reported in (Gains), Losses, and Other Expenses, net in the
accompanying Consolidated Statements of Operations. For the three months ended March 31, 2007,
there was $0.2 million in gains recognized in net income representing hedge ineffectiveness.
The Company may enter into instruments that economically hedge certain of its risks, even
though hedge accounting does not apply or the Company elects not to apply hedge accounting under
SFAS No. 133 to such instruments. In these cases, there exists a natural hedging relationship in
which changes in the fair value of the instruments act as an economic
offset to changes in the fair value of the underlying item(s). Changes in the fair
16
value of instruments not designated as cash
flow hedges are recorded in net income throughout the term of the derivative instrument and are
reported in (Gains), Losses, and Other Expenses, net in the accompanying Consolidated Statements of
Operations. For the three months ended March 31, 2007 and 2006, net gains of $0.8 million and
$18.2 million, respectively, were recognized in earnings related to instruments not accounted for
as cash flow hedges.
15. Commitments and Contingencies:
Guarantees
On June 22, 2006, Lennox Procurement Company Inc. (Procurement), a wholly-owned subsidiary
of the Company, entered into a lease agreement with BTMU Capital Corporation (BTMUCC), pursuant
to which BTMUCC is leasing certain property located in Richardson, Texas to Procurement for a term
of seven years (the Lake Park Lease). The leased property consists of an office building of
approximately 192,000 square feet, which includes the Companys corporate headquarters, and land
and related improvements.
During the term, the Lake Park Lease requires Procurement to pay base rent in quarterly
installments, payable in arrears. At the end of the term, if Procurement is not in default,
Procurement must elect to do one of the following: (i) purchase the leased property for a net
price of approximately $41.2 million (the Lease Balance); (ii) make a final supplemental payment
to BTMUCC equal to approximately 82% of the Lease Balance and return the leased property to BTMUCC
in good condition; (iii) arrange a sale of the leased property to a third party; or (iv) renew the
Lake Park Lease under mutually agreeable terms. If Procurement elects to arrange a sale of the
leased property to a third party, then Procurement must pay to BTMUCC the amount (if any) by which
the Lease Balance exceeds the net sales proceeds paid by the third party; provided, however, that,
absent certain defaults, such amount cannot exceed approximately 82% of the Lease Balance. If the
net sales proceeds paid by the third party are greater than the Lease Balance, the excess sales
proceeds will be paid to Procurement.
Procurements obligations under the Lake Park Lease and related documents are secured by a
pledge of Procurements interest in the leased property. Procurements obligations under such
documents are also guaranteed by the Company pursuant to a Guaranty, dated as of June 22, 2006, in
favor of BTMUCC.
The Company is accounting for the Lake Park Lease as an operating lease.
The majority of the Service Experts segments motor vehicle fleet is leased through operating
leases. The lease terms are generally non-cancelable for the first 12-month term and then are
month-to-month, cancelable at the Companys option. While there are residual value guarantees on
these vehicles, the Company has not historically made significant payments to the lessors as the
leases are maintained until the fair value of the assets fully mitigates the Companys obligations
under the lease agreements. As of March 31, 2007, the Company estimates that it will incur an
additional $7.7 million above the contractual obligations on these leases until the fair
value of the leased vehicles fully mitigates the Companys residual value guarantee obligation
under the lease agreements.
Environmental
Applicable environmental laws can potentially impose obligations on the Company to remediate
hazardous substances at the Companys properties, at properties formerly owned or operated by the
Company and at facilities to which the Company has sent or sends waste for treatment or disposal.
The Company is aware of contamination at some facilities; however, the Company does not presently
believe that any future remediation costs at such facilities will be material to the Companys
results of operations. No amounts have been recorded for non-asset retirement obligation
environmental liabilities that are not probable or estimable.
At one site located in Brazil, the Company is currently evaluating the remediation efforts
that may be required by the applicable environmental laws related to the release of certain
hazardous materials. The Company currently believes that the release of the hazardous materials
occurred over an extended period of time, including a time when the Company did not own the site.
The Company plans to complete additional assessments of the site by the second quarter of 2007 to
help determine the possible remediation activities that may be conducted at this site. Once the
site assessments are completed and the possible remediation activities have been evaluated,
approval of the remediation plan by local governmental authorities will be required before such
activities can begin. The Company believes that containment is one of several viable options to
comply with local regulatory standards. As a result, the Company recorded a charge of
approximately $1.7 million in 2006 for estimated
17
containment costs at the site. During the three
months ended March 31, 2007, the Company recorded a charge of $0.2 million related to additional
site assessments. As of March 31, 2007 and December 31, 2006, the Company has discounted
liabilities recorded of approximately $1.9 million and $1.7 million related to this matter which
are included in Other Long Term Liabilities in the accompanying Consolidated Balance Sheets. These
liabilities are discounted at approximately 5% as the aggregate amount of the obligation and the
amount and timing of cash payments are reliably determinable. If, after the site assessments are
completed, it is determined that containment is more costly or the local governmental authorities
require more costly remediation activities, the costs to contain or remediate the site could be as
high as $5.2 million (undiscounted). The Company is exploring options for insurance recoveries and
recoveries from amounts held in escrow.
In connection with its previous investment in Outokumpu Heatcraft, the Company recorded
discounted liabilities of $2.6 million and $3.3 million related to joint remediation of certain
existing environmental matters as of March 31, 2007 and December 31, 2006, respectively. The
balances, which are recorded in Other Long Term Liabilities in the Consolidated Balance Sheets, are
discounted at approximately 5% as the aggregate amount of the obligation and the amount and timing
of cash payments are reliably determinable.
Estimates of future costs are subject to change due to prorated cleanup periods and changing
environmental remediation regulations.
Litigation
The Company is involved in various claims and lawsuits incidental to its business. As
previously reported, in January 2003, the Company, along with
one of its subsidiaries, Heatcraft
Inc., were named in the following lawsuits in connection with the Companys former heat transfer
operations:
|
|
|
Lynette Brown, et al., vs. Koppers Industries, Inc., Heatcraft Inc., Lennox
International Inc., et al., Circuit Court of Washington County, Civil Action No. CI
2002-479; |
|
|
|
|
Likisha Booker, et al., vs. Koppers Industries, Inc., Heatcraft Inc., Lennox
International Inc., et al., Circuit Court of Holmes County; Civil Action No.
2002-549; |
|
|
|
|
Walter Crowder, et al., vs. Koppers Industries, Inc., Heatcraft Inc. and Lennox
International Inc., et al., Circuit Court of Leflore County, Civil Action No.
2002-0225; and |
|
|
|
|
Benobe Beck, et al., vs. Koppers Industries, Inc., Heatcraft Inc. and Lennox
International Inc., et al., Circuit Court of the First Judicial District of Hinds
County, No. 03-000030. |
On behalf of approximately 100 plaintiffs, the lawsuits allege personal injury resulting from
alleged emissions of trichloroethylene, dichloroethylene, and vinyl chloride and other unspecified
emissions from the South Plant in Grenada, Mississippi, previously owned by Heatcraft Inc. Each
plaintiff seeks to recover actual and punitive damages. On Heatcraft Inc.s motion to transfer
venue, two of the four lawsuits (Booker and Crowder) were ordered severed and
transferred to Grenada County by the Mississippi Supreme Court, requiring plaintiffs counsel to
maintain a separate lawsuit for each of the individual plaintiffs named in these suits. To the
Companys knowledge, as of April 20, 2007, plaintiffs counsel has requested the transfer of files
regarding five individual plaintiffs from the Booker case and five individual plaintiffs
from the Crowder case. While at this time, only the Booker and Crowder
cases have been ordered severed and transferred by the Mississippi Supreme Court, LII expects the
Beck and Brown cases to be transferred, as well, in the near future. It is not
possible to predict with certainty the outcome of these matters or an estimate of any potential
loss. Based on present knowledge, management believes that it is unlikely that any final
resolution of these matters will result in a material liability.
16. Reportable Business Segments:
The Company operates in four reportable business segments of the heating, ventilation, air
conditioning and refrigeration (HVACR) markets. The first reportable segment is Residential
Heating & Cooling, in which LII manufactures and markets a full line of heating, air conditioning
and hearth products for the residential replacement and new construction markets in the United
States and Canada. The second reportable segment is Commercial Heating & Cooling, in which LII
manufactures and sells rooftop products and related equipment for commercial applications in the
United States 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
18
repair services for heating, ventilation and air conditioning (HVAC) equipment by LII-owned
service centers in the United States and Canada. The fourth reportable segment is Refrigeration,
which manufactures and sells unit coolers, condensing units and other commercial refrigeration
products in the United States and international markets.
Transactions between segments, such as products sold to Service Experts by the Residential
Heating & Cooling segment, are recorded on an arms-length basis using the market price for these
products. The eliminations of these intercompany sales and any associated profit are noted in the
reconciliation of segment results to the income from continuing operations before income taxes
below.
The Company uses segment profit (loss) as the primary measure of profitability to evaluate
operating performance and to allocate capital resources. The Company has changed its definition of
segment profit (loss) to include realized gains (losses) on settled futures contracts not
designated as cash flow hedges and foreign currency exchange gains (losses). Realized gains
(losses) on settled futures contracts not designated as cash flow hedges and foreign currency gains
(losses) are a component of (Gains), Losses and Other Expenses, net in the accompanying
Consolidated Statements of Operations. As a result of this change, the Company now defines segment
profit (loss) as a segments income (loss) from continuing operations before income taxes included
in the accompanying Consolidated Statements of Operations; excluding (gains), losses and other
expenses, net; restructuring charges; goodwill impairment; interest expense, net; and other
(income) expense, net; less (plus) realized gains (losses) on settled futures contracts not
designated as cash flow hedges and foreign currency exchange gains (losses).
The Companys corporate costs include those costs related to corporate functions such as
legal, internal audit, treasury, human resources, tax compliance and senior executive staff.
Corporate costs also include the long-term share-based incentive awards provided to employees
throughout LII. The Company recorded these share-based awards as Corporate costs as they are
determined at the discretion of the Board of Directors and based on the historical
practice of doing so for internal reporting purposes.
Net sales and segment profit (loss) by business segment, along with a reconciliation of
segment profit (loss) to net earnings (loss) for the three months ended March 31, 2007 and 2006,
are shown below (in millions):
|
|
|
|
|
|
|
|
|
|
|
For the |
|
|
|
Three Months Ended |
|
|
|
March 31, |
|
|
|
2007 |
|
|
2006 |
|
Net Sales |
|
|
|
|
|
|
|
|
Residential Heating & Cooling |
|
$ |
361.1 |
|
|
$ |
419.3 |
|
Commercial Heating & Cooling |
|
|
162.7 |
|
|
|
138.2 |
|
Service Experts |
|
|
143.9 |
|
|
|
141.0 |
|
Refrigeration |
|
|
141.3 |
|
|
|
126.5 |
|
Eliminations (1) |
|
|
(17.5 |
) |
|
|
(16.6 |
) |
|
|
|
|
|
|
|
|
|
$ |
791.5 |
|
|
$ |
808.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment Profit (Loss) |
|
|
|
|
|
|
|
|
Residential Heating & Cooling |
|
$ |
19.9 |
|
|
$ |
42.2 |
|
Commercial Heating & Cooling |
|
|
8.5 |
|
|
|
8.1 |
|
Service Experts |
|
|
(3.8 |
) |
|
|
(6.5 |
) |
Refrigeration |
|
|
12.5 |
|
|
|
12.1 |
|
Corporate and other |
|
|
(20.6 |
) |
|
|
(24.6 |
) |
Eliminations (1) |
|
|
(0.1 |
) |
|
|
0.1 |
|
|
|
|
|
|
|
|
Subtotal
that includes segment profit and eliminations |
|
|
16.4 |
|
|
|
31.4 |
|
|
|
|
|
|
|
|
|
|
Reconciliation to income before income taxes: |
|
|
|
|
|
|
|
|
(Gains), losses and other expenses, net |
|
|
(0.7 |
) |
|
|
(17.1 |
) |
Restructuring charges |
|
|
2.3 |
|
|
|
6.3 |
|
Interest expense, net |
|
|
0.9 |
|
|
|
0.6 |
|
|
|
|
|
|
|
|
Less: Realized gains on settled futures
contracts not designated as cash flow
hedges (2) |
|
|
0.5 |
|
|
|
9.1 |
|
Plus: Currency exchange loss (2) |
|
|
(0.3 |
) |
|
|
(1.0 |
) |
|
|
|
|
|
|
|
|
|
$ |
13.7 |
|
|
$ |
33.5 |
|
|
|
|
|
|
|
|
19
|
|
|
(1) |
|
Eliminations consist of intercompany sales between business segments, such as products
sold to Service Experts by the Residential Heating & Cooling segment. |
|
(2) |
|
Realized gains (losses) on settled futures contracts not designated as cash flow
hedges and foreign currency gains (losses) are a component of (Gains), Losses and Other
Expenses, net in the accompanying Consolidated Statements of Operations. |
Total assets by business segment as of March 31, 2007 and December 31, 2006 are shown below
(in millions). The assets in the Corporate segment are primarily comprised of cash, deferred tax
assets, and investments in consolidated subsidiaries. Assets recorded in the operating segments
represent those assets directly associated with those segments.
|
|
|
|
|
|
|
|
|
|
|
As of |
|
|
As of |
|
|
|
March 31, |
|
|
December 31, |
|
|
|
2007 |
|
|
2006 |
|
Total Assets
|
|
|
|
|
|
|
|
|
Residential Heating & Cooling |
|
$ |
654.1 |
|
|
$ |
587.0 |
|
Commercial Heating & Cooling |
|
|
301.1 |
|
|
|
285.7 |
|
Service Experts |
|
|
186.1 |
|
|
|
183.4 |
|
Refrigeration |
|
|
363.4 |
|
|
|
344.3 |
|
Corporate and other |
|
|
289.0 |
|
|
|
328.7 |
|
Eliminations (1) |
|
|
(12.0 |
) |
|
|
(9.3 |
) |
|
|
|
|
|
|
|
Segment Assets |
|
$ |
1,781.7 |
|
|
$ |
1,719.8 |
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Eliminations consist of net intercompany receivables and
intercompany profit included in inventory from products sold
between business segments, such as products sold to Service
Experts by the Residential Heating & Cooling segment. |
17. Related Party Transactions:
Thomas W. Booth, Stephen R. Booth and John W. Norris, III, each a member of the Companys
Board of Directors, John W. Norris, Jr., LIIs former Chairman of the Board, other former directors
of the Company, and Lynn B. Storey, the mother of Jeffrey D. Storey, M.D., a director of the
Company, as well as other stockholders of the Company who may be immediate family members of the
foregoing persons, are, individually or through trust arrangements, members of A.O.C. Corporation (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. As
soon as practicable following the issuance and exchange of LII
common stock, AOC will distribute 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 Restructuring. The effect of the AOC
Restructuring would be to reduce the number of outstanding shares of LII common stock by 456,181
shares at minimal cost to LII.
Consummation of the AOC Restructuring is subject to the satisfaction of certain conditions,
including (1) receipt of a private letter ruling from the IRS that the transaction would qualify as
a tax-free reorganization, (2) approval for listing on the New York Stock Exchange of the shares of
LII common stock to be issued in the AOC Restructuring, (3) approval by the holders of at least
two-thirds of the outstanding AOC stock entitled to vote thereon, (4) approval by a majority of the
votes cast by LIIs stockholders (provided that the total votes cast in respect of the proposal
represent more than 50% of all of LIIs outstanding common stock entitled to vote thereon) and (5)
execution of a registration rights agreement that would provide certain piggy back registration
rights to the AOC shareholders.
There are no special benefits provided for any of the related persons described above under
the AOC Restructuring. Each related persons participation in the AOC Restructuring arises out of
his or her ownership of common stock of AOC and will be on the same basis as all other shareholders
of AOC. As of March 31, 2007, the AOC Restructuring had not closed.
Thomas W. Booth, Stephen R. Booth and John W. Norris, III, each a member of the Companys
Board of Directors, John W. Norris, Jr., LIIs former Chairman of the Board, other former directors
of the Company, and Lynn B. Storey, the mother of Jeffrey D. Storey, M.D., a director of the
Company, as well as other stockholders of the Company who may be immediate family members of the
foregoing persons, are also, individually or through trust arrangements, members of AOC Land
Investment, L.L.C. (AOC Land). AOC Land owned 70% of AOC Development II, L.L.C. (AOC
Development), which owned substantially all of One Lake Park, L.L.C. (One Lake Park) prior to
the dissolution of AOC Development and One Lake Park in the second half of 2006. Beginning in
1998, the Company leased part of an office building in Richardson, Texas owned by One Lake Park for
use as its corporate headquarters. LII terminated these leases in June 2006. Lease payments for
the first three months of 2006 totaled approximately $0.6 million. LII believes that the terms of
its leases with One Lake Park were, at the time entered into, comparable to terms that could have
been obtained from unaffiliated third parties.
20
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations.
Forward-Looking Information
This Quarterly Report on Form 10-Q 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 Quarterly Report on Form 10-Q 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 Quarterly Report on Form 10-Q, the risk factors
set forth in Part I, Item 1A. Risk Factors in our Annual Report on Form 10-K for the year ended
December 31, 2006, and those set forth in Part II, Item 1A. Risk Factors of this report, if any,
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.
Overview
We participate in four reportable business segments of the heating, ventilation, air
conditioning and refrigeration (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 United States
and Canada. The second reportable segment is Commercial Heating & Cooling, in which we primarily
manufacture and sell rooftop products and related equipment for light commercial applications in
the United States 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 in the United
States and Canada. The fourth reportable segment is Refrigeration, in which we manufacture and
sell unit coolers, condensing units and other commercial refrigeration products in the United
States and international markets.
Our products and services are sold through a combination of distributors, independent and
Company-owned dealer service centers, other installing contractors, wholesalers, manufacturers
representatives, original equipment manufacturers and national accounts. The demand for our
products and services is seasonal and dependent on the weather. Hotter than normal summers
generate strong demand for replacement air conditioning and refrigeration products and services and
colder than normal winters have the same effect on heating products and services. Conversely,
cooler than normal summers and warmer than normal winters depress HVACR sales and services. In
addition to weather, demand for our products and services is influenced by national and regional
economic and demographic factors, such as interest rates, the availability of financing, regional
population and employment trends, new construction, general economic conditions and consumer
confidence.
The principal elements of cost of goods sold in our manufacturing operations are components,
raw materials, factory overhead, labor and estimated costs of warranty expense. In our Service
Experts segment, the principal components of cost of goods sold are equipment, parts and supplies
and labor. The principal raw materials used in our manufacturing processes are steel, copper and
aluminum. Higher prices for these commodities and related components continue to present a
challenge to us and the HVACR industry in general. We partially mitigate the impact of higher
commodity prices through a combination of price increases, commodity contracts, improved production
efficiency and cost reduction initiatives.
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.
21
Results of Operations
Overview of Results
|
|
|
Consolidated net sales for the first quarter of 2007
decreased 2.1% as compared to the first
quarter of 2006 primarily attributable to decreased sales of domestic residential heating,
air conditioning and hearth products due to the continued downturn in residential new
construction. Commercial Heating & Cooling, Service Experts, and Refrigeration all
recorded sales increases for the first quarter of 2007 as compared to the first quarter of
2006. |
|
|
|
|
Operational income for the first quarter of 2007 was $14.6 million as compared to $34.1
million for the first quarter of 2006 as our net sales decreased 2.1% and we recorded lower
gains on future contracts. In the first three months of 2007, we designated certain future
contracts as cash flow hedges, thereby reducing the amount of gains recognized during the
quarter as compared to 2006. |
|
|
|
|
Net income for the first quarter of 2007 decreased to $8.6 million from $21.0 million in
2006 primarily due to reduced sales and lower operating income. |
|
|
|
|
On March 19, 2007 we announced that Todd M. Bluedorn was appointed Chief Executive
Officer and elected to our Board of Directors, effective April 2, 2007. Mr. Bluedorn
succeeded Robert E. Schjerven, who has served as our Chief Executive Officer since 2001
and held multiple leadership positions since 1986. Mr. Schjerven resigned from our Board
of Directors effective April 2, 2007 but will continue to serve as our Chief Executive
Officer Emeritus through June 30, 2007, at which point he will retire. |
The following table presents certain information concerning our financial results, including
information presented as a percentage of net sales for the three months ended March 31, 2007 and
2006 (dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended March 31, |
|
|
|
2007 |
|
|
2006 |
|
|
|
Dollars |
|
|
Percent |
|
|
Dollars |
|
|
Percent |
|
Net sales |
|
$ |
791.5 |
|
|
|
100.0 |
% |
|
$ |
808.4 |
|
|
|
100.0 |
% |
Cost of goods sold |
|
|
586.9 |
|
|
|
74.2 |
|
|
|
599.3 |
|
|
|
74.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
204.6 |
|
|
|
25.8 |
|
|
|
209.1 |
|
|
|
25.9 |
|
Selling, general and administrative expenses |
|
|
191.1 |
|
|
|
24.1 |
|
|
|
187.9 |
|
|
|
23.2 |
|
(Gains), losses and other expenses, net |
|
|
(0.7 |
) |
|
|
(0.1 |
) |
|
|
(17.1 |
) |
|
|
(2.1 |
) |
Restructuring charges |
|
|
2.3 |
|
|
|
0.3 |
|
|
|
6.3 |
|
|
|
0.8 |
|
Equity in earnings of unconsolidated affiliates |
|
|
(2.7 |
) |
|
|
(0.3 |
) |
|
|
(2.1 |
) |
|
|
(0.2 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Operational income |
|
$ |
14.6 |
|
|
|
1.8 |
% |
|
$ |
34.1 |
|
|
|
4.2 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
8.6 |
|
|
|
1.1 |
% |
|
$ |
21.0 |
|
|
|
2.6 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table sets forth net sales by geographic market (dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended March 31, |
|
|
|
2007 |
|
|
2006 |
|
|
|
Dollars |
|
|
Percent |
|
|
Dollars |
|
|
Percent |
|
Geographic Market: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S |
|
$ |
589.9 |
|
|
|
74.5 |
% |
|
$ |
637.4 |
|
|
|
78.9 |
% |
Canada |
|
|
65.1 |
|
|
|
8.2 |
|
|
|
59.1 |
|
|
|
7.3 |
|
International |
|
|
136.5 |
|
|
|
17.3 |
|
|
|
111.9 |
|
|
|
13.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net sales |
|
$ |
791.5 |
|
|
|
100.0 |
% |
|
$ |
808.4 |
|
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, 2007 Compared to Three Months Ended March 31, 2006 Consolidated
Results
Net Sales
Net sales decreased $16.9 million, or 2.1%, to $791.5 million for the three months ended March
31, 2007 from $808.4 million for the three months ended March 31, 2006. The decrease in net sales
was primarily driven by lower sales in our Residential Heating & Cooling segment due to the
continued downturn in residential new construction. In the first three months of 2006, our
Residential Heating & Cooling segment experienced strong sales of HVAC equipment largely due to
above average demand as our customers purchased remaining 10 to 12 seasonal energy efficiency
rating, or SEER, residential central air conditioning products or purchased new residential
central air conditioning products meeting the minimum 13 SEER standard under the National Appliance
Energy Conservation Act of 1987, as amended (NAECA), which was effective as of January 23,
2006. The decrease in our Residential Heating & Cooling segment is partially offset by an increase
in sales in our other segments. The favorable impact of foreign currency translation increased net
sales by $8.8 million.
22
Gross Profit
Gross profit was $204.6 million for the three months ended March 31, 2007 compared to $209.1
million for the three months ended March 31, 2006, a decrease of $4.5 million. Gross profit margin
remained relatively flat at 25.8% for the three months ended March 31, 2007 compared to 25.9% in
2006 as our price increases were offset by increases in commodity and component costs.
Selling, General and Administrative Expenses
Selling, general and administrative (SG&A) expenses increased $3.2 million, or 1.7%, in
2007. Higher SG&A costs are attributable to increased salaries and benefits and an increase in
depreciation of IT assets. These increases were partially offset by a decrease in professional
fees. As a percentage of total net sales, SG&A expenses increased to 24.1% for the three months
ended March 31, 2007 from 23.2% for the three months ended March 31, 2006.
(Gains), Losses and Other Expenses, Net
(Gains), losses and other expenses, net were $(0.7) million for the three months ended March
31, 2007 and $(17.1) million for the three months ended March 31, 2006 and included the following
(in millions):
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended |
|
|
|
March 31, |
|
|
|
2007 |
|
|
2006 |
|
Realized (gains) on settled future contracts not
designated as cash flow hedges |
|
$ |
(0.5 |
) |
|
$ |
(9.1 |
) |
Unrealized (gains) on unsettled future contracts
not designated as cash flow hedges |
|
|
(0.3 |
) |
|
|
(9.1 |
) |
Ineffective portion of (gains) on cash flow hedges |
|
|
(0.2 |
) |
|
|
|
|
Other items, net |
|
|
0.3 |
|
|
|
1.1 |
|
|
|
|
|
|
|
|
(Gains), losses and other expenses, net |
|
$ |
(0.7 |
) |
|
$ |
(17.1 |
) |
|
|
|
|
|
|
|
Realized and unrealized gains on settled future contracts not designated as cash flow hedges
decreased as we had fewer future contracts not designated as cash flow hedges in the first three
months of 2007 compared to the same period in 2006. Beginning in the fourth quarter of 2006,
futures contracts entered into that met established accounting criteria were formally designated as
cash flow hedges. Additional decreases are due to differences in commodity markets for the three
months ended March 31, 2007 as compared to the same period in 2006. For more information see Note
14 in the Notes to our Consolidated Financial Statements.
Restructuring Charges
Restructuring charges decreased by $4.0 million to $2.3 million for the three months ended
March 31, 2007 from $6.3 million for the three months ended March 31, 2006. Restructuring charges
incurred in 2007 and in 2006 primarily relate to the consolidation of our manufacturing,
distribution, research and development and administrative operations of our two-step operations
into South Carolina and closing of our current operations in Bellevue, Ohio. The restructuring of
these operations was substantially complete as of March 31, 2007.
Equity in Earnings of Unconsolidated Affiliates
Investments in affiliates in which the Company does not exercise control and has a 20% or more
voting interest are accounted for using the equity method of accounting. Equity in earnings of
unconsolidated affiliates increased by $0.6 million to $2.7 million for the three months ended
March 31, 2007 as compared to $2.1 million in 2006. The increase is due to the performance of our
unconsolidated affiliates.
Interest Expense, net
Interest expense, net, increased $0.3 million to $0.9 million for the three months ended March
31, 2007 from $0.6 million for the three months ended March 31, 2006. The higher net interest
expense was due primarily to a decrease in interest income earned during the quarter ended March
31, 2007 as the average amount invested over the three months was less than that in the same period
in 2006.
23
Provision for Income Taxes
The provision for income taxes was $5.1 million for the three months ended March 31, 2007
compared to $12.5 million for the three months ended March 31, 2006. The effective tax rate was
37.2% and 37.3% for the three months ended March 31, 2007 and March 31, 2006, respectively. 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%.
Three Months Ended March 31, 2007 Compared to Three Months Ended March 31, 2006 Results by
Segment
The key performance indicators of our segments profitability are net sales and operational
profit. We define segment profit (loss) as a segments income (loss) from continuing operations
before income taxes included in the accompanying Consolidated Statements of Operations; excluding
(gains), losses and other expenses, net; restructuring charge; goodwill impairment; interest
expense, net; and other (income) expense, net; less (plus) realized gains (losses) on settled
futures contracts not designated as cash flow hedges and foreign currency exchange gains (losses).
Residential Heating & Cooling
The following table details our Residential Heating & Cooling segments net sales and profit
for the three months ended March 31, 2007 and 2006 (dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
|
|
|
March 31, |
|
|
|
|
|
|
2007 |
|
2006 |
|
Difference |
|
% Change |
Net sales |
|
$ |
361.1 |
|
|
$ |
419.3 |
|
|
$ |
(58.2 |
) |
|
|
(13.9 |
)% |
Profit |
|
|
19.9 |
|
|
|
42.2 |
|
|
|
(22.3 |
) |
|
|
(52.8 |
) |
% of net sales |
|
|
5.5 |
% |
|
|
10.1 |
% |
|
|
|
|
|
|
|
|
Net sales in our Residential Heating & Cooling business segment decreased $58.2 million, or
13.9%, to $361.1 million for the three months ended March 31, 2007 from $419.3 million for the
three months ended March 31, 2006. The decrease in net sales is primarily due to a decrease in
unit volumes. Net sales generally decreased across the residential HVAC industry due to depressed
residential new construction demand and unfavorable weather conditions. Additionally, in the first
three months of 2006 the residential HVAC industry experienced strong sales of equipment largely
due to above average demand as customers purchased remaining 10 to 12 SEER residential central air
conditioning products or purchased new residential central air conditioning products meeting the
minimum 13 SEER standard. We do not believe that we experienced as significant of a decrease as
compared to the residential HVAC industry. The decrease in net sales attributable to volumes was
partially offset by an increase in sales from price and favorable product mix changes.
Segment profit in Residential Heating & Cooling decreased 52.8% to $19.9 million for 2007 from
$42.2 million in 2006. The decrease in segment profit is primarily due to a decrease in volumes
partially offset by an increase in sales from price and product mix changes. Additionally, we
recorded higher warranty expenses due to the increased component costs for replacement parts.
Segment profit margins declined from 10.1% in 2006 to 5.5% in 2007. The decrease in segment profit
margins was due to an increase in commodity and component costs as well as essentially flat
operating expenses on lower revenue.
Commercial Heating & Cooling
The following table details our Commercial Heating & Cooling segments net sales and profit
for the three months ended March 31, 2007 and 2006 (dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
|
|
|
March 31, |
|
|
|
|
|
|
2007 |
|
2006 |
|
Difference |
|
% Change |
Net sales |
|
$ |
162.7 |
|
|
$ |
138.2 |
|
|
$ |
24.5 |
|
|
|
17.7 |
% |
Profit |
|
|
8.5 |
|
|
|
8.1 |
|
|
|
0.4 |
|
|
|
4.9 |
|
% of net sales |
|
|
5.2 |
% |
|
|
5.9 |
% |
|
|
|
|
|
|
|
|
24
Net sales in our Commercial Heating & Cooling segment increased $24.5 million, or 17.7%, to
$162.7 million for the three months ended March 31, 2007 from $138.2 million for the three months
ended March 31, 2006. The increase in net sales was due primarily to increased volumes in our
European operations combined with pricing increases in our domestic operations. The increase in
volumes in Europe is due to growth of two-step distribution sales and increased market growth in
Central and Eastern Europe. In addition, we increased our prices to commercial HVAC customers
beginning in the second quarter of 2006 to cover rising commodity and component costs.
Segment profit in Commercial Heating & Cooling increased 4.9% to $8.5 million for the three
months ended March 31, 2007 from $8.1 million for the three months ended March 31, 2006. As a
percentage of net sales, segment profit decreased from 5.9% in 2006 to 5.2% in 2007. The decline
in margins is primarily due to higher component costs resulting from increased commodity prices and
changes in our production mix.
Service Experts
The following table details our Service Experts segments net sales and loss for the three
months ended March 31, 2007 and 2006 (dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
|
|
|
March 31, |
|
|
|
|
|
|
2007 |
|
2006 |
|
Difference |
|
% Change |
Net sales |
|
$ |
143.9 |
|
|
$ |
141.0 |
|
|
$ |
2.9 |
|
|
|
2.1 |
% |
(Loss) |
|
|
(3.8 |
) |
|
|
(6.5 |
) |
|
|
2.7 |
|
|
|
41.5 |
|
% of net sales |
|
|
(2.6 |
)% |
|
|
(4.6 |
)% |
|
|
|
|
|
|
|
|
Net sales in our Service Experts segment increased $2.9 million, or 2.1%, to $143.9 million
for the three months ended March 31, 2007 from $141.0 million for the three months ended March 31,
2006. Increases in volumes for residential service and replacements offset a decrease in sales
caused by the decline in residential new construction. Commercial service and replacement volumes
decreased slightly but were partially offset by increases in commercial new construction volumes.
Segment loss in Service Experts decreased $2.7 million to $(3.8) million for 2007 from $(6.5)
million in 2006. The improvement in our margins is primarily driven by a change in product and
service mix as an increased percentage of our sales was from higher margin service and replacement
business.
Refrigeration
The following table details our Refrigeration segments net sales and profit for the three
months ended March 31, 2007 and 2006 (dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
|
|
|
March 31, |
|
|
|
|
|
|
2007 |
|
2006 |
|
Difference |
|
% Change |
Net sales |
|
$ |
141.3 |
|
|
$ |
126.5 |
|
|
$ |
14.8 |
|
|
|
11.7 |
% |
Profit |
|
|
12.5 |
|
|
|
12.1 |
|
|
|
0.4 |
|
|
|
3.3 |
|
% of net sales |
|
|
8.8 |
% |
|
|
9.6 |
% |
|
|
|
|
|
|
|
|
Net sales in our Refrigeration segment increased $14.8 million, or 11.7%, to $141.3 million in
2007 from $126.5 million in 2006. The increase in sales was due to strong performance across the
segment, led by increased sales in our European operations. Net sales in Europe increased primarily due to increased volumes
from strengthening market conditions and market share gains coupled with increased prices. The
favorable impact of foreign currency translation increased net sales by $5.8 million.
Segment profit in Refrigeration increased $0.4 million to $12.5 million for the three months
ended March 31, 2007 from $12.1 million for the three months ended March 31, 2006. Segment profit
margins decreased to 8.8% in 2007 from 9.6% in 2006. The decrease in margins is due to a change in
the product mix and geographic mix of our sales as we generated more sales in foreign markets which
have lower margins. In addition, our SG&A
25
expenses increased due to costs associated with
expanding our international operations, including our strategic growth initiatives in Asia.
Corporate and Other
Corporate and other costs decreased from $24.6 million in 2006 to $20.6 million in 2007. The
decrease in costs is primarily due to a reduction in professional fees as well as lower long-term
incentive plan expenses for our executive management.
Liquidity and Capital Resources
Our working capital and capital expenditure requirements are generally met through internally
generated funds, bank lines of credit and a revolving period asset securitization arrangement.
Working capital needs are generally greater in the first and second quarter due to the seasonal
nature of our business cycle.
As of March 31, 2007, our debt-to-total-capital ratio was 15%, up from 13% as of March 31,
2006, primarily due to an increase of $21.6 million in our outstanding debt balances. The higher
debt balance is primarily attributable to increased borrowings related to the use of cash from
operations and the repurchase of approximately 6.1 million shares for $163.1 million under the
stock repurchase program adopted by the Board of Directors in September 2005 (the 2005 Stock
Repurchase Program) since March 31, 2006.
The following table summarizes our cash activity for the three months ended March 31, 2007 and
2006 (in millions):
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
March 31, |
|
|
2007 |
|
2006 |
Net cash used in operating activities |
|
$ |
(75.1 |
) |
|
$ |
(50.3 |
) |
Net cash used in investing activities |
|
|
(9.8 |
) |
|
|
(18.4 |
) |
Net cash provided by (used in) financing activities |
|
|
33.1 |
|
|
|
(5.3 |
) |
Net Cash Used in Operating Activities
During the first three months of 2007, cash used in operating activities was $75.1 million
compared to $50.3 million in 2006. The increase in
cash used in operations is primarily due to the
timing of payment for income taxes. Our 2005 federal tax liability
was paid in its entirety during 2005. A portion of our 2006 federal tax liability was
deferred and paid in the first three months of 2007. Our cash used in operating activities is also
higher due to lower net income for the three months ended March 31, 2007 as compared to the same
period in 2006. In addition, the higher use of cash was due to increased cash payments for
restructuring activities in 2007. These changes were partially offset by a larger increase in
accounts payable during 2007 as compared to 2006.
Net Cash Used in Investing Activities
Net cash used in investing activities was $9.8 million for the first three months of 2007
compared to $18.4 million in 2006. Capital expenditures of $9.9 million and $14.9 million in 2007
and 2006, respectively, were primarily for purchases of production equipment in the manufacturing
plants in our Residential Heating & Cooling and Commercial Heating & Cooling segments.
Net Cash Provided by (Used in) Financing Activities
During the first three months of 2007, net cash provided by financing activities was $33.1
million compared to $5.3 million used in 2006. We paid a total of $8.7 million in dividends on
our common stock in the three months ended March 31, 2007 as compared to $7.8 million in 2006. The
increase in cash dividends paid was attributable to an increase in the quarterly cash dividend from
$0.11 to $0.13 per share of common stock, effective as of the dividend paid on January 12, 2007.
Net short-term and revolving long-term borrowings totaled approximately $35.3 million in the first
three months of 2007 as compared to $2.3 million for the same period in 2006. The increase in net
borrowings is primarily due to the repurchase of shares under the 2005 Stock Repurchase Program,
coupled with the seasonality of our working capital needs. During the three months ended March 31,
2007, we used approximately $14.4 million to repurchase 408,000 shares of our common stock under
the 2005 Stock Repurchase Program.
26
As of March 31, 2007, we had outstanding long-term debt obligations totaling $143.7 million.
The amount outstanding consisted primarily of outstanding domestic promissory notes with an
aggregate principal outstanding of $107.2 million. The promissory notes mature at various dates
through 2010 and have interest rates ranging from 6.73% to 8.00%.
We have bank lines of credit aggregating $434.9 million, of which $36.3 million was borrowed
and outstanding and $92.3 million was committed to standby letters of credit as of March 31, 2007.
Of the remaining $306.3 million, the entire amount was available for future borrowings after
consideration of covenant limitations. Included in the lines of credit are several regional
facilities and a multi-currency facility governed by agreements between us and a syndicate of
banks. The revolving credit facility, which matures in July 2010, has a borrowing capacity of $400
million. The facility contains certain financial covenants and bears interest at a rate equal to,
at our option, either (a) the greater of the banks prime rate or the federal funds rate plus 0.5%
or (b) the London Interbank Offered Rate plus a margin equal to 0.475% to 1.20% depending upon the
ratio of total funded debt-to-adjusted earnings before interest, taxes, depreciation and
amortization (Adjusted EBITDA), as defined in the facility. We pay a facility fee, depending
upon the ratio of total funded debt to Adjusted EBITDA, equal to 0.15% to 0.30% of the capacity.
The facility includes restrictive covenants that limit our ability to incur additional
indebtedness, encumber our assets, sell our assets and make certain payments, including amounts for
share repurchases and dividends. Our facility and promissory notes are guaranteed by our material
subsidiaries.
As of March 31, 2007, $16.2 million of cash and cash equivalents were restricted primarily due
to routine lockbox collections and letters of credit issued with respect to the operations of our
captive insurance subsidiary, which expire on December 31, 2007. These letter of credit
restrictions can be transferred to our revolving lines of credit as needed.
Our domestic revolving and term loans contain certain financial covenant restrictions. As of
March 31, 2007, we believe we were in compliance with all covenant requirements. We periodically
review our capital structure, including our primary bank facility, to ensure that it has adequate
liquidity. We believe that cash flow from operations, as well as available borrowings under our
revolving credit facility and other sources of funding, will be sufficient to fund our operations
for the foreseeable future.
Off-Balance Sheet Arrangements
In addition to the revolving and term loans described above, we utilize the following
financing arrangements in the course of funding our operations:
|
|
|
Trade accounts receivable are sold on a non-recourse basis to third parties. The
sales are reported as a reduction of Accounts and Notes Receivable, Net in the
Consolidated Balance Sheets. As of March 31, 2007 and December 31, 2006,
respectively, we had not sold any of such accounts receivable. If receivables are
sold, the related discount from face value is included in Selling, General and
Administrative Expense in the Consolidated Statements of Operations. |
|
|
|
|
We also lease real estate and machinery and equipment pursuant to leases that, in
accordance with Generally Accepted Accounting Principles (GAAP), 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. |
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
Our results of operations can be affected by changes in exchange rates. Net sales and
expenses in foreign currencies are translated into United States dollars for financial reporting
purposes based on the average exchange rate for the period. Net sales from outside the United
States represented 25.5% and 21.1% of total net sales for the three months ended March 31, 2007 and
2006, respectively. Historically, foreign currency transaction gains (losses) have not had a
material effect on our overall operations. The impact of a 10% change in exchange rates on income
from operations is estimated to be approximately $5.6 million on an annual basis.
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
March 31, 2007, we had metal futures contracts maturing at
27
various dates through June 2008 with a
fair value as an asset of $9.3 million. The impact of a 10% change in commodity prices would have
a significant impact on our results from operations on an annual basis, absent any other
contravening actions.
Our results of operations can be affected by changes in interest rates due to variable rates
of interest on our revolving credit facilities. A 10% change in interest rates would not be
material to our results of operations.
Item 4. 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 March 31, 2007 in alerting them in a timely
manner to material information required to be disclosed by us in the reports we filed or submitted
to the Securities and Exchange Commission under the Securities Exchange Act of 1934.
Changes in Internal Control Over Financial Reporting
During the quarter ended March 31, 2007, there were no changes in our internal controls over
financial reporting that have materially affected, or are reasonably likely to materially affect,
our internal controls over financial reporting.
28
PART II OTHER INFORMATION
Item 1. Legal Proceedings
There have been no significant changes concerning our legal proceedings since December 31,
2006. See Note 15 in the Notes to the Consolidated Financial Statements set forth in Part I, Item
1, of this Quarterly Report on Form 10-Q for additional discussion regarding legal proceedings.
Item 1A. Risk Factors.
In addition to the other information set forth in this Quarterly Report on Form 10-Q, you
should carefully consider the risk factors discussed in Part I, Item 1A. Risk Factors in our
Annual Report on Form 10-K for the year ended December 31, 2006, which could materially affect our
business, financial condition or results of operations. There have been no material changes in our
risk factors from those disclosed in our 2006 Annual Report on Form 10-K.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
ISSUER PURCHASES OF EQUITY SECURITIES (1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Number of |
|
|
Maximum Number |
|
|
|
|
|
|
|
|
|
|
|
Shares Purchased |
|
|
of Shares that may |
|
|
|
Total Number |
|
|
Average Price Paid |
|
|
as Part of Publicly |
|
|
yet be Purchased |
|
|
|
of Shares |
|
|
per Share |
|
|
Announced Plans |
|
|
Under the Plans or |
|
Period |
|
Purchased (2) |
|
|
(including fees) (2) |
|
|
or Programs (1) |
|
|
Programs (1) |
|
January 1 through
January 31 |
|
|
495 |
|
|
$ |
29.76 |
|
|
|
|
|
|
|
3,642,959 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
February 1 through
February 28 |
|
|
337,932 |
|
|
$ |
35.45 |
|
|
|
306,000 |
|
|
|
3,336,959 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 1 through
March 31 (3) |
|
|
131,639 |
|
|
$ |
33.96 |
|
|
|
102,000 |
|
|
|
3,234,959 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
470,066 |
|
|
$ |
35.02 |
|
|
|
408,000 |
|
|
|
3,234,959 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
On September 19, 2005, we announced that the Board of Directors authorized a stock
repurchase program, pursuant to which we may repurchase up to 10,000,000 shares of our
common stock, from time to time, through open market-purchases (the 2005 Stock Repurchase
Program). Prior to January 1, 2007, we had repurchased 6,357,041 shares of common stock
under the 2005 Stock Repurchase Program. |
|
(2) |
|
In addition to purchases under the 2005 Stock Repurchase Program, this column reflects
the surrender to us of 62,066 shares of common stock to satisfy tax withholding obligations
in connection with the exercise of stock appreciation rights and the payout of shares of
our common stock pursuant to vested performance share awards. |
|
(3) |
|
All purchases made by us under the 2005 Stock Repurchase Program during March 2007 were
settled in March 2007 but traded in February 2007. |
Item 6. Exhibits
|
|
|
|
|
3.1
|
|
|
|
Restated Certificate of Incorporation of the Lennox International Inc. (LII) (filed
as Exhibit 3.1 to LIIs Registration Statement on Form S-1 (Registration Statement No.
333-75725) filed on April 6, 1999 and incorporated herein by reference). |
|
|
|
|
|
3.2
|
|
|
|
Amended and Restated Bylaws of LII (filed as Exhibit 3.2 to LIIs Current Report on
Form 8-K filed on February 28, 2005 and incorporated herein by reference). |
29
|
|
|
|
|
4.1
|
|
|
|
Specimen Stock Certificate for the Common Stock, par value $.01 per share, of LII
(filed as Exhibit 4.1 to LIIs Amendment to Registration Statement on Form S-1/A
(Registration No. 333-75725) filed on June 16, 1999 and incorporated herein by reference). |
|
|
|
|
|
4.2
|
|
|
|
Rights Agreement, dated as of July 27, 2000, between LII and ChaseMellon Shareholder
Services, L.L.C., as Rights Agent, which includes as Exhibit A the form of Certificate of
Designations of Series A Junior Participating Preferred Stock setting forth the terms of the
Preferred Stock, as Exhibit B the form of Rights Certificate and as Exhibit C the Summary of
Rights to Purchase Preferred Stock (filed as Exhibit 4.1 to LIIs Current Report on Form 8-K
filed on July 28, 2000 and incorporated herein by reference). |
|
|
|
|
|
|
|
|
|
LII is a party to several debt instruments under which the total amount of
securities authorized under any such instrument does not exceed 10% of the total
assets of LII and its subsidiaries on a consolidated basis. Pursuant to
paragraph 4(iii)(A) of Item 601(b) of Regulation S-K, LII agrees to furnish a
copy of such instruments to the Securities and Exchange Commission upon request. |
|
|
|
|
|
10.1
|
|
|
|
Agreement and Plan of Reorganization, dated March 16, 2007, between Lennox International
Inc. and A.O.C. Corporation (filed as Exhibit 10.1 to LIIs Current Report on Form 8-K filed
on March 21, 2007 and incorporated herein by reference). |
|
|
|
|
|
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 the Company pursuant to
18 U.S.C. Section 1350 (filed herewith). |
30
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned thereunto duly authorized.
|
|
|
|
|
|
LENNOX INTERNATIONAL INC.
|
|
Date: April 27, 2007 |
/s/ Susan K. Carter
|
|
|
Susan K. Carter |
|
|
Chief Financial Officer
(on behalf of registrant and as principal financial officer) |
|
|
31