Filed by Bowne Pure Compliance
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
(MARK ONE)
þ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY
PERIOD ENDED MARCH 31, 2008
OR
o 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, a
non-accelerated filer or a smaller reporting company. See the definitions of large accelerated filer, accelerated
filer and smaller reporting company in Rule 12b-2 of the Securities Exchange Act of 1934.
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Large Accelerated Filer þ
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Accelerated Filer o
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Non-Accelerated Filer o
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Smaller Reporting Company 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 28, 2008, the number of shares outstanding of the registrants common stock, par value $.01
per share, was 56,614,285.
LENNOX INTERNATIONAL INC.
FORM 10-Q
For the Three Months Ended March 31, 2008
INDEX
2
PART I FINANCIAL INFORMATION
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Item 1. |
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Financial Statements. |
LENNOX INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
As of March 31, 2008 and December 31, 2007
(In millions, except share and per share data)
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March 31, |
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December 31, |
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2008 |
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2007 |
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(unaudited) |
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ASSETS
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CURRENT ASSETS: |
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Cash and cash equivalents |
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$ |
120.3 |
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$ |
145.5 |
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Short-term investments |
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34.7 |
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27.7 |
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Accounts and notes receivable, net |
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490.8 |
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492.5 |
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Inventories, net |
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379.5 |
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325.7 |
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Deferred income taxes |
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25.1 |
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30.9 |
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Other assets |
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85.9 |
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48.4 |
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Total current assets |
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1,136.3 |
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1,070.7 |
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PROPERTY, PLANT AND EQUIPMENT, net |
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318.8 |
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317.9 |
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GOODWILL, net |
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264.5 |
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262.8 |
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DEFERRED INCOME TAXES |
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88.1 |
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94.0 |
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OTHER ASSETS |
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72.7 |
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69.2 |
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TOTAL ASSETS |
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$ |
1,880.4 |
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$ |
1,814.6 |
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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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$ |
5.5 |
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$ |
4.8 |
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Current maturities of long-term debt |
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36.4 |
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36.4 |
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Accounts payable |
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330.4 |
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289.8 |
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Accrued expenses |
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319.2 |
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352.1 |
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Income taxes payable |
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1.1 |
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Total current liabilities |
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691.5 |
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684.2 |
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LONG-TERM DEBT |
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359.7 |
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166.7 |
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POSTRETIREMENT BENEFITS, OTHER THAN PENSIONS |
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16.1 |
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16.2 |
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PENSIONS |
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34.3 |
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34.8 |
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OTHER LIABILITIES |
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109.8 |
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104.2 |
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Total liabilities |
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1,211.4 |
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1,006.1 |
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COMMITMENTS AND CONTINGENCIES |
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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, $.01 par value, 200,000,000 shares authorized,
83,546,395 shares and 81,897,439 shares issued for 2008
and 2007, respectively |
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0.8 |
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0.8 |
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Additional paid-in capital |
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788.4 |
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760.7 |
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Retained earnings |
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445.4 |
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447.4 |
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Accumulated other comprehensive income |
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81.5 |
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63.6 |
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Treasury stock, at cost, 24,866,016 shares and 19,844,677
shares for 2008
and 2007, respectively |
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(647.1 |
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(464.0 |
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Total stockholders equity |
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669.0 |
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808.5 |
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TOTAL LIABILITIES AND STOCKHOLDERS EQUITY |
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$ |
1,880.4 |
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$ |
1,814.6 |
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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, 2008 and 2007
(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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2008 |
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2007 |
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NET SALES |
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$ |
767.1 |
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$ |
791.5 |
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COST OF GOODS SOLD |
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564.3 |
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586.9 |
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Gross profit |
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202.8 |
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204.6 |
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OPERATING EXPENSES: |
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Selling, general and administrative expenses |
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193.7 |
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191.1 |
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(Gains), losses and other expenses, net |
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(3.3 |
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(0.7 |
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Restructuring charges |
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2.8 |
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2.3 |
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Equity in earnings of unconsolidated affiliates |
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(3.1 |
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(2.7 |
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Operational income |
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12.7 |
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14.6 |
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INTEREST EXPENSE, net |
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2.7 |
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0.9 |
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Income before income taxes |
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10.0 |
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13.7 |
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PROVISION FOR INCOME TAXES |
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3.7 |
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5.1 |
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Net income |
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$ |
6.3 |
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$ |
8.6 |
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NET INCOME PER SHARE: |
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Basic |
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$ |
0.10 |
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$ |
0.13 |
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Diluted |
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$ |
0.10 |
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$ |
0.12 |
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AVERAGE SHARES OUTSTANDING: |
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Basic |
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60.3 |
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67.5 |
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Diluted |
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62.7 |
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70.9 |
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CASH DIVIDENDS DECLARED PER SHARE |
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$ |
0.14 |
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$ |
0.13 |
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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, 2008 (unaudited) and the Year Ended December 31, 2007
(In millions, except per share data)
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Accumulated |
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Common Stock |
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Additional |
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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 AS OF 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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0.9 |
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0.9 |
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ADJUSTED BALANCE AS OF 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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$ |
313.4 |
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$ |
(5.1 |
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$ |
(210.4 |
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$ |
805.3 |
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Net income |
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169.0 |
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169.0 |
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$ |
169.0 |
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Dividends, $0.53 per share |
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(35.0 |
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(35.0 |
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Foreign currency translation adjustments, net |
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62.9 |
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62.9 |
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62.9 |
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Pension and postretirement liability changes, net of tax benefit of $0.0 |
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3.2 |
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3.2 |
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3.2 |
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Stock-based compensation expense |
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21.0 |
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21.0 |
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Reversal of previously recorded stock-based compensation expense
related to share-based awards canceled in restructuring |
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(2.1 |
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(2.1 |
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Derivatives, net of tax provision of $1.3 |
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2.6 |
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2.6 |
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2.6 |
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Common stock issued |
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4.9 |
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21.5 |
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21.5 |
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Treasury stock purchases |
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(253.6 |
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(253.6 |
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Tax benefits of stock-based compensation |
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20.1 |
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20.1 |
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Other tax-related items |
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(6.4 |
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(6.4 |
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Comprehensive income |
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$ |
237.7 |
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BALANCE AS OF DECEMBER 31, 2007 |
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81.9 |
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$ |
0.8 |
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$ |
760.7 |
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$ |
447.4 |
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$ |
63.6 |
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$ |
(464.0 |
) |
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$ |
808.5 |
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Net income |
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6.3 |
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6.3 |
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$ |
6.3 |
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Dividends, $0.14 per share |
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(8.3 |
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(8.3 |
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Foreign currency translation adjustments, net |
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9.2 |
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9.2 |
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9.2 |
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Stock-based compensation expense |
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3.2 |
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3.2 |
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Derivatives, net of tax provision of $4.8 |
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8.7 |
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8.7 |
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8.7 |
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Common stock issued |
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1.6 |
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12.3 |
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12.3 |
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Treasury stock purchases |
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(183.1 |
) |
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(183.1 |
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Tax benefits of stock-based compensation |
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12.2 |
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12.2 |
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Comprehensive income |
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$ |
24.2 |
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BALANCE AS OF MARCH 31, 2008 |
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83.5 |
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$ |
0.8 |
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$ |
788.4 |
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$ |
445.4 |
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$ |
81.5 |
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$ |
(647.1 |
) |
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$ |
669.0 |
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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, 2008 and 2007
(Unaudited, in millions)
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For the |
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Three Months Ended |
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|
March 31, |
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|
2008 |
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|
2007 |
|
CASH FLOWS FROM OPERATING ACTIVITIES: |
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Net income |
|
$ |
6.3 |
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|
$ |
8.6 |
|
Adjustments to reconcile net income to net cash used in operating activities: |
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Equity in earnings of unconsolidated affiliates |
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|
(3.1 |
) |
|
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(2.7 |
) |
Restructuring expenses, net of cash paid |
|
|
(1.1 |
) |
|
|
(1.8 |
) |
Unrealized gain on futures contracts |
|
|
(2.8 |
) |
|
|
(0.5 |
) |
Stock-based compensation expense |
|
|
3.2 |
|
|
|
6.2 |
|
Depreciation and amortization |
|
|
12.7 |
|
|
|
11.8 |
|
Capitalized interest |
|
|
(0.3 |
) |
|
|
(0.4 |
) |
Deferred income taxes |
|
|
7.2 |
|
|
|
2.8 |
|
Other items, net |
|
|
10.8 |
|
|
|
3.7 |
|
Changes in assets and liabilities, net of effects of acquisitions: |
|
|
|
|
|
|
|
|
Accounts and notes receivable |
|
|
5.5 |
|
|
|
2.8 |
|
Inventories |
|
|
(54.7 |
) |
|
|
(93.2 |
) |
Other current assets |
|
|
(13.6 |
) |
|
|
(3.2 |
) |
Accounts payable |
|
|
34.4 |
|
|
|
59.9 |
|
Accrued expenses |
|
|
(33.7 |
) |
|
|
(38.4 |
) |
Income taxes payable |
|
|
(15.4 |
) |
|
|
(35.3 |
) |
Long-term warranty, deferred income and other liabilities |
|
|
11.7 |
|
|
|
4.6 |
|
|
|
|
|
|
|
|
Net cash used in operating activities |
|
|
(32.9 |
) |
|
|
(75.1 |
) |
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES: |
|
|
|
|
|
|
|
|
Proceeds from the disposal of property, plant and equipment |
|
|
0.3 |
|
|
|
0.1 |
|
Purchases of property, plant and equipment |
|
|
(9.5 |
) |
|
|
(9.9 |
) |
Purchases of short-term investments |
|
|
(21.7 |
) |
|
|
|
|
Proceeds from sales and maturities of short-term investments |
|
|
14.9 |
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities |
|
|
(16.0 |
) |
|
|
(9.8 |
) |
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES: |
|
|
|
|
|
|
|
|
Short-term borrowings (payments), net |
|
|
0.5 |
|
|
|
(0.2 |
) |
Revolver long-term borrowings |
|
|
193.0 |
|
|
|
35.5 |
|
Proceeds from stock option exercises |
|
|
12.3 |
|
|
|
12.0 |
|
Repurchases of common stock |
|
|
(183.1 |
) |
|
|
(16.5 |
) |
Excess tax benefits related to share-based payments |
|
|
10.8 |
|
|
|
11.0 |
|
Cash dividends paid |
|
|
(8.7 |
) |
|
|
(8.7 |
) |
|
|
|
|
|
|
|
Net cash provided by financing activities |
|
|
24.8 |
|
|
|
33.1 |
|
|
|
|
|
|
|
|
|
|
DECREASE IN CASH AND CASH EQUIVALENTS |
|
|
(24.1 |
) |
|
|
(51.8 |
) |
EFFECT OF EXCHANGE RATES ON CASH AND CASH EQUIVALENTS |
|
|
(1.1 |
) |
|
|
1.1 |
|
CASH AND CASH EQUIVALENTS, beginning of period |
|
|
145.5 |
|
|
|
144.3 |
|
|
|
|
|
|
|
|
CASH AND CASH EQUIVALENTS, end of period |
|
$ |
120.3 |
|
|
$ |
93.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplementary disclosures of cash flow information: |
|
|
|
|
|
|
|
|
Cash paid during the period for: |
|
|
|
|
|
|
|
|
Interest |
|
$ |
2.5 |
|
|
$ |
0.3 |
|
|
|
|
|
|
|
|
Income taxes (net of refunds) |
|
$ |
5.9 |
|
|
$ |
28.9 |
|
|
|
|
|
|
|
|
Non-cash items: |
|
|
|
|
|
|
|
|
Impact of adoption of FIN No. 48 |
|
$ |
|
|
|
$ |
0.9 |
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
6
LENNOX INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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, 2008, the accompanying unaudited
Consolidated Statements of Operations for the three months ended March 31, 2008 and 2007, the accompanying unaudited
Consolidated Statement of Stockholders Equity for the three months ended March 31, 2008 and the accompanying unaudited
Consolidated Statements of Cash Flows for the three months ended March 31, 2008 and 2007 should be read in conjunction
with LIIs audited consolidated financial statements and footnotes as of December 31, 2007 and 2006 and for each year
in the three-year period ended December 31, 2007. 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.
Recently Adopted Accounting Pronouncements
Effective January 1, 2008, the Company adopted Statement of Financial Accounting Standards No. 157, Fair Value
Measurements (SFAS No. 157), which establishes a framework for measuring fair value in generally accepted accounting
principles, clarifies the definition of fair value within that framework, and expands disclosures about the use of fair
value measurements. SFAS No. 157 is effective for fiscal years beginning after November 15, 2007. However, in
February 2008, the Financial Accounting Standards Board
(FASB) issued FASB Staff Position No. FA5 157-2, Effective
Date of FASB Statement No. 157 (FSP No. 157-2), which deferred the effective date of SFAS No. 157 for one
year for non-financial assets and liabilities, except for certain
items that are recognized or disclosed at fair value in the financial
statements on a recurring basis (at least annually). The Company is
currently evaluating the impact of SFAS No. 157 on its Consolidated
Financial Statements for items within the scope of FSP No. 157-2,
which will become effective on January 1, 2009.
Effective January 1, 2008, the Company also adopted Statement of Financial Accounting Standards No. 159, The Fair
Value Option for Financial Assets and Financial Liabilities (SFAS No. 159). SFAS No. 159 allows an entity the
irrevocable option to elect fair value for the initial and subsequent measurement for certain financial assets and
liabilities on a contract-by-contract basis. The adoption of SFAS No.
159 had no impact on the Companys Consolidated Financial
Statements.
7
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 $19.1 million and $17.1 million as of March 31, 2008 and December 31, 2007, respectively, and
net of accounts receivable sold under an ongoing asset securitization arrangement, if any. As of March 31, 2008 and
December 31, 2007, 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 Sheets as of March
31, 2008 and December 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.
Components of inventories are as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
As of |
|
|
As of |
|
|
|
March 31, |
|
|
December 31, |
|
|
|
2008 |
|
|
2007 |
|
Finished goods |
|
$ |
288.8 |
|
|
$ |
247.7 |
|
Work in process |
|
|
13.3 |
|
|
|
10.5 |
|
Raw materials and repair parts |
|
|
150.4 |
|
|
|
137.9 |
|
|
|
|
|
|
|
|
|
|
|
452.5 |
|
|
|
396.1 |
|
Excess of current cost over last-in, first-out cost |
|
|
(73.0 |
) |
|
|
(70.4 |
) |
|
|
|
|
|
|
|
Total inventories |
|
$ |
379.5 |
|
|
$ |
325.7 |
|
|
|
|
|
|
|
|
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 2008 and
2007, 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, 2008, in total and by segment,
are as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at |
|
|
|
|
|
|
Balance at |
|
Segment |
|
December 31, 2007 |
|
|
Changes(1) |
|
|
March 31, 2008 |
|
Residential Heating & Cooling |
|
$ |
33.7 |
|
|
$ |
|
|
|
$ |
33.7 |
|
Commercial Heating & Cooling |
|
|
32.1 |
|
|
|
1.7 |
|
|
|
33.8 |
|
Service Experts |
|
|
112.5 |
|
|
|
(2.7 |
) |
|
|
109.8 |
|
Refrigeration |
|
|
84.5 |
|
|
|
2.7 |
|
|
|
87.2 |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
262.8 |
|
|
$ |
1.7 |
|
|
$ |
264.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Relate to changes in foreign currency translation rates. |
5. |
|
Short-Term Investments: |
The Companys captive insurance subsidiary (the Captive) holds debt securities, consisting of U.S. government
agency securities, corporate bonds, asset-backed securities, collateralized mortgage obligations and various
securitized debt instruments. In accordance with Statement of Financial Accounting Standards No. 115 (as amended),
Accounting for Certain Investments in Debt and Equity Securities, the Company classifies these investments as
available-for-sale. Any unrealized holding gains and losses are reported in Accumulated Other Comprehensive Income
(Loss) (AOCI), net of applicable taxes, until the gain or loss is realized. These instruments are not classified as
cash and cash equivalents as their original maturity dates are greater than three months. The Company places its
investments in high credit quality financial instruments only and limits the amount invested in any one institution or
in any one instrument.
8
As of March 31, 2008 and December 31, 2007, the Captive held approximately $34.7 million and $27.7 million,
respectively, of short-term investments. Unrealized losses included in AOCI in the accompanying Consolidated Balance
Sheets as of March 31, 2008 and December 31, 2007 were not material. Realized gains
and losses from the sale of securities were also not material for the three months ended March 31, 2008. The
maturities of these securities range from April 2008 to February 2011. It is the Captives intention that these
investments be available to support its current operations as needed. Due to the liquidity of these investments, they
are classified as current assets in the accompanying Consolidated Balance Sheets. For more information on the
valuation of these investments, see Note 16.
6. |
|
Cash, Lines of Credit and Financing Arrangements: |
The following tables summarize the Companys outstanding debt obligations and the classification in the
accompanying Consolidated Balance Sheets as of March 31, 2008 and December 31, 2007 (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-Term |
|
|
Current |
|
|
Long-Term |
|
|
|
|
Description of Obligation as of March 31, 2008 |
|
Debt |
|
|
Maturities |
|
|
Maturities |
|
|
Total |
|
Domestic promissory notes (1) |
|
$ |
|
|
|
$ |
36.1 |
|
|
$ |
35.0 |
|
|
$ |
71.1 |
|
Domestic revolving credit facility |
|
|
|
|
|
|
|
|
|
|
324.0 |
|
|
|
324.0 |
|
Other foreign obligations |
|
|
5.5 |
|
|
|
0.3 |
|
|
|
0.7 |
|
|
|
6.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Debt |
|
$ |
5.5 |
|
|
$ |
36.4 |
|
|
$ |
359.7 |
|
|
$ |
401.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-Term |
|
|
Current |
|
|
Long-Term |
|
|
|
|
Description of Obligation as of December 31, 2007 |
|
Debt |
|
|
Maturities |
|
|
Maturities |
|
|
Total |
|
Domestic promissory notes (1) |
|
$ |
|
|
|
$ |
36.1 |
|
|
$ |
35.0 |
|
|
$ |
71.1 |
|
Domestic revolving credit facility |
|
|
|
|
|
|
|
|
|
|
131.0 |
|
|
|
131.0 |
|
Other foreign obligations |
|
|
4.8 |
|
|
|
0.3 |
|
|
|
0.7 |
|
|
|
5.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Debt |
|
$ |
4.8 |
|
|
$ |
36.4 |
|
|
$ |
166.7 |
|
|
$ |
207.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Domestic promissory notes as of March 31, 2008 and December 31, 2007 consisted of the following (in
millions): |
|
|
|
|
|
|
|
|
|
|
|
March 31, |
|
|
December 31, |
|
|
|
2008 |
|
|
2007 |
|
6.73% promissory notes, payable $11.1 annually through 2008 |
|
$ |
11.1 |
|
|
$ |
11.1 |
|
6.75% promissory notes, payable in 2008 |
|
|
25.0 |
|
|
|
25.0 |
|
8.00% promissory note, payable in 2010 |
|
|
35.0 |
|
|
|
35.0 |
|
On October 12, 2007, the Company entered into the Third Amended and Restated Revolving Credit Facility Agreement
(the Credit Agreement), which contains a $650.0 million domestic revolving credit facility. The Credit Agreement
replaced the Companys previous domestic revolving credit facility, the Second Amended and Restated Credit Facility
Agreement, dated as of July 8, 2005. The Company made a $25.0 million prepayment on a domestic promissory note to
facilitate the amendment of the Credit Agreement, resulting in a make-whole payment of $0.2 million, which was
recognized as interest expense.
As of March 31, 2008, the Company had outstanding borrowings of $324.0 million under the $650.0 million domestic
revolving credit facility and $111.7 million was committed to standby letters of credit. All of the remaining $214.3
million was available for future borrowings after consideration of covenant limitations. The facility matures in
October 2012.
The domestic revolving credit facility includes a subfacility for swingline loans of up to $50 million and
provides for the issuance of letters of credit for the full amount of the credit facility. The revolving loans bear
interest at either (i) the Eurodollar rate plus a margin of between 0.5% and 1% that is based on the Companys Debt to
Adjusted EBITDA Ratio (as defined in the Credit Agreement) or (ii) the higher of (a) the Federal Funds Rate plus 0.5%
or (b) the prime rate set by Bank of America, N.A. The Company may prepay the revolving loans at any time without
premium or penalty, other than customary breakage costs in the case of Eurodollar loans. The Company will pay a
facility fee in the range of 0.125% to 0.25% based on the Companys Debt to Adjusted EBITDA Ratio. The Company will
also pay a letter of credit fee in the range of 0.5% to 1% based on the Companys Debt to Adjusted EBITDA Ratio, as
well as an additional issuance fee of 0.125% for letters of credit issued.
9
The Credit Agreement contains financial covenants relating to leverage and interest coverage. Other covenants
contained in the Credit Agreement restrict, among other things, mergers, asset dispositions, guarantees,
debt, liens, acquisitions, investments, affiliate transactions and the Companys ability to make restricted
payments.
The Credit Agreement contains customary events of default. If any event of default occurs and is continuing,
lenders with a majority of the aggregate commitments may require the administrative agent to terminate the Companys
right to borrow under the Credit Agreement and accelerate amounts due under the Credit Agreement (except for a
bankruptcy event of default, in which case such amounts will automatically become due and payable and the lenders
commitments will automatically terminate).
In addition to the financial covenants contained in the Credit Agreement outlined above, LIIs domestic promissory
notes contain certain financial covenant restrictions. As of March 31, 2008, LII believes it was in compliance with
all covenant requirements. The Companys revolving credit facility and promissory notes are guaranteed by the
Companys material subsidiaries.
The Company has additional borrowing capacity through several foreign facilities governed by agreements between
the Company and a syndicate of banks, used primarily to finance seasonal borrowing needs of its foreign subsidiaries.
LII had $6.5 million and $5.8 million of obligations outstanding through its foreign subsidiaries as of March 31, 2008
and December 31, 2007, respectively.
Under a revolving period asset securitization arrangement, the Company is eligible to transfer beneficial
interests in a portion of its trade accounts receivable to third parties in exchange for cash. The Companys continued
involvement in the transferred assets is limited to servicing. These transfers are accounted for as sales rather than
secured borrowings. The fair values assigned to the retained and transferred interests are based primarily on the
receivables carrying value given the short term to maturity and low credit risk. As of March 31, 2008 and December
31, 2007, the Company had not sold any beneficial interests in accounts receivable.
The Company considers all highly liquid temporary investments with original maturity dates of three months or less
to be cash equivalents. Cash and cash equivalents of $120.3 million and $145.5 million as of March 31, 2008 and
December 31, 2007, respectively, consisted of cash, overnight repurchase agreements and investment-grade securities and
are stated at cost, which approximates fair value.
As of March 31, 2008 and December 31, 2007, $16.3 million and $20.2 million, respectively, of cash and cash
equivalents were restricted primarily due to routine lockbox collections and letters of credit issued with respect to
the operations of the Captive, which expire on December 31, 2008. The restrictions related to lockbox collections
typically expire within three to five business days after receipt. The letter of credit restrictions can be
transferred to the Companys revolving lines of credit as needed.
The changes in the carrying amount of the Companys total product warranty liabilities for the three months ended
March 31, 2008 are as follows (in millions):
|
|
|
|
|
Total product warranty liability at December 31, 2007 |
|
$ |
98.4 |
|
Payments made in 2008 |
|
|
(5.9 |
) |
Changes resulting from issuance of new warranties |
|
|
6.5 |
|
Changes in estimates associated with pre-existing liabilities |
|
|
0.3 |
|
Changes in foreign currency translation rates |
|
|
0.4 |
|
|
|
|
|
Total product warranty liability at March 31, 2008 |
|
$ |
99.7 |
|
|
|
|
|
The change in product warranty liability that results from changes in estimates of warranties issued prior to 2008
was primarily due to revaluing warranty reserves based on higher material input costs. The current portion of product
warranty liabilities of $31.9 million and $33.8 million is included in Accrued Expenses and the long-term portion of
$67.8 million and $64.6 million is included in Other Liabilities in the accompanying Consolidated Balance Sheets as of
March 31, 2008 and December 31, 2007, respectively.
10
8. |
|
Pension and Postretirement Benefit Plans: |
The components of net periodic benefit cost were as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the |
|
|
|
Three Months Ended March 31, |
|
|
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
|
|
Pension Benefits |
|
|
Other Benefits |
|
Service cost |
|
$ |
1.8 |
|
|
$ |
1.8 |
|
|
$ |
0.2 |
|
|
$ |
0.2 |
|
Interest cost |
|
|
4.1 |
|
|
|
3.7 |
|
|
|
0.2 |
|
|
|
0.2 |
|
Expected return on plan assets |
|
|
(4.5 |
) |
|
|
(4.4 |
) |
|
|
|
|
|
|
|
|
Amortization of prior service cost |
|
|
0.1 |
|
|
|
0.2 |
|
|
|
(0.5 |
) |
|
|
(0.4 |
) |
Amortization of net loss |
|
|
1.2 |
|
|
|
1.2 |
|
|
|
0.3 |
|
|
|
0.2 |
|
Settlements and curtailments |
|
|
|
|
|
|
0.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net periodic benefit cost |
|
$ |
2.7 |
|
|
$ |
3.2 |
|
|
$ |
0.2 |
|
|
$ |
0.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9. |
|
Stock-Based Compensation: |
The Companys Amended and Restated 1998 Incentive Plan provides for various long-term incentive awards, which
include stock options, performance share units, restricted stock units and stock appreciation rights. A detailed
description of these awards is included in the Companys Annual Report on Form 10-K for the year ended December 31,
2007.
The Company accounts for stock-based awards under the provisions of Statement of Financial Accounting Standards
No. 123R, Share-Based Payment. Compensation expense of $3.2 million and $6.2 million was recognized for the three
months ended March 31, 2008 and 2007, respectively, and is included in Selling, General and Administrative Expenses in
the accompanying Consolidated Statements of Operations. The decrease in stock-based compensation expense was primarily
due to an increase in forfeiture rates and a decrease in the estimated pay-out percentage on outstanding performance
share units in the first quarter of 2008 as compared to the same period in 2007. Cash flows from the tax benefits of
tax deductions in excess of the compensation costs recognized for stock-based awards of $10.8 million and $11.0 million
were included in cash flows from financing activities for the three months ended March 31, 2008 and 2007, respectively.
The following tables summarize certain information concerning the Companys stock options, stock appreciation
rights, performance share units and restricted stock units as of March 31, 2008 (in millions, except per share data,
years, and forfeiture rates):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock |
|
|
|
Stock |
|
|
Appreciation |
|
|
|
Options |
|
|
Rights |
|
Shares outstanding |
|
|
1.4 |
|
|
|
1.9 |
|
Weighted-average exercise price per share outstanding |
|
$ |
15.45 |
|
|
$ |
30.15 |
|
Shares exercisable |
|
|
1.4 |
|
|
|
0.8 |
|
Weighted-average exercise price per exercisable share |
|
$ |
15.45 |
|
|
$ |
25.82 |
|
Unrecognized expense |
|
|
|
|
|
$ |
7.4 |
|
Expected weighted-average period to be recognized
(in years) |
|
|
|
|
|
|
2.2 |
|
Weighted-average estimated forfeiture rate |
|
|
|
|
|
|
15 |
% |
|
|
|
|
|
|
|
|
|
|
|
Performance |
|
|
Restricted |
|
|
|
Share Units |
|
|
Stock Units |
|
Nonvested units |
|
|
0.8 |
|
|
|
0.7 |
|
Weighted-average grant date fair value per unit |
|
$ |
27.16 |
|
|
$ |
31.78 |
|
Unrecognized expense |
|
$ |
13.8 |
|
|
$ |
11.2 |
|
Expected weighted-average period to be recognized
(in years) |
|
|
2.1 |
|
|
|
2.2 |
|
Weighted-average estimated forfeiture rate |
|
|
29 |
% |
|
|
16 |
% |
11
As of March 31, 2008, the Company had approximately $23.9 million in total gross unrecognized tax benefits. Of
this amount, $12.8 million (net of federal benefit on state issues), if recognized, would be recorded
through the statement of operations. Also included in the balance of unrecognized tax benefits as of March 31,
2008 are $3.2 million that, if recognized, would be recorded as an adjustment to goodwill and $6.4 million that, if
recognized, would be recorded as an adjustment to stockholders equity. In addition, the Company recognizes interest
and penalties accrued related to unrecognized tax benefits in income tax expense in accordance with FASB Interpretation
No. 48, Accounting for Uncertainty in Income Taxes an Interpretation of FASB Statement 109 (FIN No. 48). As of
March 31, 2008, the Company had recognized $1.9 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 2008. It is possible that a reduction in the unrecognized tax benefits may occur but an estimate of the
impact on the statement of operations cannot be made at this time.
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-U.S. income tax examinations by taxing authorities for years before 1999.
Since January 1, 2008, West Virginia has enacted legislation effective for tax years beginning on or after January
1, 2008 to adjust tax rates and require combined reporting in future years. The Company believes any adjustments will
be immaterial.
11. |
|
Restructuring Charges: |
Restructuring charges incurred include the following amounts for the three months ended March 31, 2008 and 2007
(in millions):
|
|
|
|
|
|
|
|
|
|
|
For the Three Months |
|
|
|
Ended March 31, |
|
|
|
2008 |
|
|
2007 |
|
Consolidation of U.S. Refrigeration operations |
|
$ |
1.3 |
|
|
$ |
|
|
Consolidation of Lennox Hearth Products operations |
|
|
1.2 |
|
|
|
|
|
Integration of Australia and New Zealand operations |
|
|
0.3 |
|
|
|
|
|
Allied Air Enterprises consolidation |
|
|
|
|
|
|
2.2 |
|
Pension settlement (1) |
|
|
|
|
|
|
0.7 |
|
Other |
|
|
|
|
|
|
(0.6 |
) |
|
|
|
|
|
|
|
Total |
|
$ |
2.8 |
|
|
$ |
2.3 |
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
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, 2008 (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as |
|
|
|
|
|
|
|
Reversal |
|
|
|
|
|
|
|
|
|
|
Balance as |
|
|
|
of |
|
|
Charged |
|
|
of Prior |
|
|
|
|
|
|
|
|
|
of |
|
|
|
December 31, |
|
|
to |
|
|
Period |
|
|
Cash |
|
|
Non-Cash |
|
|
March 31, |
|
Description of reserves |
|
2007 |
|
|
Earnings |
|
|
Charges |
|
|
Utilization |
|
|
Utilization |
|
|
2008 |
|
Severance and related
expense |
|
$ |
15.2 |
|
|
$ |
0.2 |
|
|
$ |
|
|
|
$ |
(1.9 |
) |
|
$ |
|
|
|
$ |
13.5 |
|
Equipment moves |
|
|
|
|
|
|
0.8 |
|
|
|
|
|
|
|
(0.8 |
) |
|
|
|
|
|
|
|
|
Recruiting and relocation |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lease termination |
|
|
1.5 |
|
|
|
|
|
|
|
|
|
|
|
(0.3 |
) |
|
|
|
|
|
|
1.2 |
|
Other |
|
|
|
|
|
|
1.8 |
|
|
|
|
|
|
|
(0.9 |
) |
|
|
(0.9 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total restructuring
reserves |
|
$ |
16.7 |
|
|
$ |
2.8 |
|
|
$ |
|
|
|
$ |
(3.9 |
) |
|
$ |
(0.9 |
) |
|
$ |
14.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12
In the fourth quarter of 2007, the Company announced plans to close its refrigeration operations in Danville,
Illinois and consolidate its Danville manufacturing, support and warehouse functions in its Tifton, Georgia and Stone
Mountain, Georgia operations. The consolidation is a phased process and is expected to be completed in the first
quarter of 2009. In connection with this consolidation project, the Company recorded pre-tax restructuring charges of
$1.3 million in its Refrigeration segment for the three months ended March 31, 2008. The restructuring charges
primarily related to costs to move certain equipment and disposal of certain long-lived assets, including charges of
$0.8 million of accelerated depreciation recorded in 2008 related to the reduction in useful lives and disposal of
certain long-lived assets. In addition to the amounts accrued as of March 31, 2008, the Company expects to incur
pre-tax restructuring charges of approximately $8.1 million over the next 12 months due to this consolidation project.
In the fourth quarter of 2007, the Companys Australian-based manufacturing facilities in Milperra assumed all
heat transfer equipment manufacturing, while the smaller coil production facility in New Zealand was closed. In
connection with this integration project, the Company recorded pre-tax restructuring charges of $0.3 million in its
Refrigeration segment for the three months ended March 31, 2008. The restructuring charges primarily related to
severance costs and disposal of certain long-lived assets. The integration was substantially complete as of March 31,
2008.
In the third quarter of 2007, the Company announced plans to close Lennox Hearth Products Inc.s operations in
Lynwood, California and consolidate its U.S. factory-built fireplace manufacturing operations in its facility in Union
City, Tennessee. In connection with this consolidation project, the Company recorded pre-tax restructuring charges of
$1.2 million in its Residential Heating & Cooling segment for the three months ended March 31, 2008. The restructuring
charges primarily related to costs to move equipment and the disposal of certain long-lived assets. The consolidation
was substantially complete as of March 31, 2008.
In 2006, the Company commenced consolidation of the manufacturing, distribution, research and development, and
administrative operations of Allied Air Enterprises Inc., the Companys two-step Residential Heating & Cooling
operations in South Carolina, and closure of its operations in Bellevue, Ohio. The consolidation was substantially
complete as of March 31, 2007. In connection with this consolidation project, the Company recorded pre-tax
restructuring charges of $2.2 million for the three months ended March 31, 2007.
A pension settlement loss of approximately $0.7 million is included in restructuring expense for the three months
ended March 31, 2007, which related to the Companys full funding of lump-sum pension payments to selected participants
in March 2007 as part of a prior restructuring initiative in 2001.
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.
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, 2008, the Company had 83,546,395 shares issued, of which
24,866,016 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, |
|
|
|
2008 |
|
|
2007 |
|
Net income |
|
$ |
6.3 |
|
|
$ |
8.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average shares outstanding basic |
|
|
60.3 |
|
|
|
67.5 |
|
Effect of diluted securities attributable to share-based
payments |
|
|
2.4 |
|
|
|
3.4 |
|
|
|
|
|
|
|
|
Weighted-average shares outstanding diluted |
|
|
62.7 |
|
|
|
70.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share |
|
$ |
0.10 |
|
|
$ |
0.12 |
|
|
|
|
|
|
|
|
13
Options to purchase 15,001 shares of common stock at prices ranging from $40.30 to $49.63 per share and options to
purchase 51,588 shares of common stock at prices ranging from $38.99 to $49.63 per share were outstanding for the three
months ended March 31, 2008 and March 31, 2007, respectively, but were not included in the diluted earnings per share
calculation because the assumed exercise of such options would have been anti-dilutive.
13. |
|
Comprehensive Income: |
Comprehensive income for the three months ended March 31, 2008 and 2007 was computed as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
For the |
|
|
|
Three Months Ended |
|
|
|
March 31, |
|
|
|
2008 |
|
|
2007 |
|
Net income |
|
$ |
6.3 |
|
|
$ |
8.6 |
|
Foreign currency translation adjustments |
|
|
9.2 |
|
|
|
7.4 |
|
Effective portion of gains on future contracts
designated as cash flow hedges |
|
|
8.7 |
|
|
|
5.4 |
|
|
|
|
|
|
|
|
Total comprehensive income |
|
$ |
24.2 |
|
|
$ |
21.4 |
|
|
|
|
|
|
|
|
14. |
|
Investments in Affiliates: |
Investments in affiliates in which the Company does not exercise control but has significant influence are
accounted for using the equity method of accounting. If the fair value of an investment in an affiliate is below its
carrying value and the difference is deemed to be other than temporary, the difference between the fair value and the
carrying value is charged to earnings.
Investments in affiliated companies accounted for under the equity method consist of a 24.5% common stock
ownership interest in Alliance Compressor LLC, a domestic joint venture engaged in the manufacture and sale of
compressors; a 50% common stock ownership in Frigus-Bohn S.A. de C.V., a Mexican joint venture that produces unit
coolers and condensing units; and a 13.05% common stock ownership interest in Kulthorn Kirby Public Company Limited, a
Thailand company engaged in the manufacture of compressors for refrigeration applications.
The Company recorded $3.1 million and $2.7 million of equity in the earnings of its unconsolidated affiliates for
the three months ended March 31, 2008 and 2007, 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, 2008 and December 31, 2007 of $55.3 million and $52.6 million,
respectively, is included in Long-Term Other Assets in the accompanying Consolidated Balance Sheets.
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.
14
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 is recorded, net of applicable
taxes, in AOCI, a component of Stockholders Equity in the accompanying Consolidated Balance Sheets. When net income
is affected by the variability of the underlying cash flow, the applicable offsetting amount of the gain or loss from
the futures contracts that is deferred in AOCI is released to
net income and is reported as a component of Cost of Goods Sold in the accompanying Consolidated Statements of
Operations. During the three months ended March 31, 2008 and 2007, ($2.1) million and $1.6 million, respectively, in
(gains), losses were 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, 2008 and 2007, net
gains of $0.1 million and $0.2 million, respectively, were 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 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, 2008 and 2007, net gains of $3.1 million and $0.8 million, respectively, were recognized
in earnings related to instruments not accounted for as cash flow
hedges. For more information on the valuation of these derivative instruments, see Note 16.
16. |
|
Fair Value Measurements: |
SFAS No. 157 defines fair value as the price that would be received to sell an asset or paid to transfer a
liability in an orderly transaction between market participants at the measurement date. SFAS No. 157 provides a
framework for measuring fair value, establishes a three-level hierarchy for fair value measurements based upon the
transparency of inputs to the valuation of an asset or liability as of the measurement date and requires consideration
of the Companys creditworthiness when valuing certain liabilities.
Fair Value Hierarchy
The three-level fair value hierarchy for disclosure of fair value measurements defined by SFAS No. 157 is as
follows:
|
|
|
|
|
Level 1
|
|
|
|
Quoted prices for identical
instruments in active markets at the measurement date. |
|
|
|
|
|
Level 2
|
|
|
|
Quoted prices for similar instruments in active markets; quoted
prices for identical or similar instruments in markets that are not
active; and model-derived valuations in which all significant
inputs and significant value drivers are observable in active
markets at the measurement date and for the anticipated term of the
instrument. |
|
|
|
|
|
Level 3
|
|
|
|
Valuations derived from valuation techniques in which one or more significant inputs or significant value
drivers are unobservable inputs that reflect the reporting entitys own assumptions about the assumptions market
participants would use in pricing the asset or liability developed based on the best information available in the
circumstances. |
Fair Value Techniques
The Companys valuation techniques are applied to all of the assets and liabilities carried at fair value as of
January 1, 2008, upon adoption of SFAS No. 157. Where available, the fair values are based upon quoted prices in active
markets. However, if quoted prices are not available, then the fair values are based upon quoted prices for similar
assets or liabilities or independently sourced market parameters, such as credit default swap spreads, yields curves,
reported trades, broker/dealer quotes, interest rates and benchmark securities. For assets and liabilities with a lack
of observable market activity, if any, the fair values are based upon discounted cash flow methodologies incorporating
assumptions that, in managements judgment, reflect the assumptions a marketplace participant would use. To ensure that
financial assets and liabilities are recorded at fair value, valuation adjustments may be required to reflect the
creditworthiness of either party and constraints on liquidity. Where appropriate, these amounts were incorporated into
the Companys valuations as of March 31, 2008, the
measurement date.
15
Assets and Liabilities Measured at Fair Value on a Recurring Basis
The following table presents the fair value hierarchy for those assets and liabilities measured at fair value on a
recurring basis as of March 31, 2008 (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements on a Recurring Basis as of March 31, 2008 |
|
|
|
|
|
|
|
Significant |
|
|
|
|
|
|
|
|
|
Quoted Prices in |
|
|
Other |
|
|
Significant |
|
|
|
|
|
|
Active Markets for |
|
|
Observable |
|
|
Unobservable |
|
|
|
|
|
|
Identical Assets |
|
|
Inputs |
|
|
Inputs |
|
|
|
|
|
|
(Level 1) |
|
|
(Level 2) |
|
|
(Level 3) |
|
|
Total |
|
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives,
net (1) |
|
$ |
|
|
|
$ |
14.3 |
|
|
$ |
|
|
|
$ |
14.3 |
|
Short-term investments |
|
|
|
|
|
|
34.7 |
|
|
|
|
|
|
|
34.7 |
|
|
|
|
(1) |
|
Derivatives are recorded in Other Current Assets and Other Non-Current Assets in the accompanying
Consolidated Balance Sheets. |
The Companys adoption of SFAS No. 157 has resulted in changes to the valuation techniques used by the Company
when determining the fair value of its derivative instruments. These derivatives are primarily valued using estimated
future cash flows that are based directly on observed prices from exchange-traded derivatives. The Company also takes
into account the counterpartys creditworthiness, or the Companys own creditworthiness, as appropriate. The
calculation of the credit adjustment for derivatives is based upon observable credit default swap spreads and
interpolation between these observable spreads for interim periods without observable spreads; however, these inputs
are insignificant to the fair value measurement. The effect of adopting these changes to the valuation techniques
resulted in a net credit adjustment to the fair value of the Companys derivative instruments of $0.1 million as of
March 31, 2008.
The majority of the Companys short-term investments are managed by professional investment advisors. The net
asset values are furnished in statements received from the investment advisor and reflect valuations based upon the
respective pricing policies utilized by the investment advisor. The Company has assessed the classification of the
inputs used to value these investments as Level 2 through examination of pricing policies and significant inputs and
through discussions with investment managers. The fair values of the
Companys short-term investments are based on several observable inputs including, but not
limited to, benchmark yields, reported trades, broker/dealer quotes, issuer spreads and benchmark securities. The
adoption of SFAS No. 157 resulted in no net changes to the valuations for these securities.
17. |
|
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, 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, 2008, the Company estimates that it will incur an additional
$7.8 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.
16
Environmental
Applicable environmental laws can potentially impose obligations on the Company to remediate hazardous substances
at the Companys properties, at properties formerly owned or operated by the Company and at facilities to which the
Company has sent or sends waste for treatment or disposal. The Company is aware of contamination at some facilities;
however, the Company does not presently believe that any future remediation costs at such facilities will be material
to the Companys results of operations. No amounts have been recorded for non-asset retirement obligation
environmental liabilities that are not probable or estimable.
At one site located in Brazil, the Company is currently evaluating the remediation efforts that may be required
under applicable environmental laws related to the release of certain hazardous materials. The Company currently
believes that the release of the hazardous materials occurred over an extended period of time, including a time when
the Company did not own the site. Extensive investigations have been performed and the Company continues to conduct
additional assessments of the site to help determine the possible remediation activities that may be conducted at this
site. Once the site assessments are completed and the possible remediation activities have been evaluated, the Company
plans to commence remediation efforts, pending any required approvals by local governmental authorities. As of March
31, 2008 and December 31, 2007, the Company had discounted
liabilities related to this matter of $2.0 million at each
balance sheet date. As of March 31, 2008 and December 31, 2007, $0.1 million and $1.9 million were recorded in Accrued Expenses
and Other Long-Term Liabilities, respectively, in the accompanying Consolidated Balance Sheets. The amount recorded as
of March 31, 2008 reflects an undiscounted liability of $2.4 million, which is discounted at approximately 8% as the
aggregate amount of the obligation and the amount and timing of cash payments are reliably determinable. If, after the
site assessments are completed, it is determined that remediation is more costly or local governmental authorities
require more costly remediation activities, the costs to contain or remediate the site could be as high as $3.1 million
(undiscounted). The Company is exploring options for recoveries.
The Company had additional reserves of approximately $3.7 million and $3.9 million related to various other
environmental matters recorded as of March 31, 2008 and December 31, 2007, respectively. Balances of approximately
$0.7 million and $2.0 million were recorded in Accrued Expenses as of March 31, 2008 and December 31, 2007,
respectively, in the Consolidated Balance Sheets. Balances of approximately $3.0 million and $1.9 million were
recorded in Other Liabilities as of March 31, 2008 and December 31, 2007, respectively, in the Consolidated Balance
Sheets. The amount recorded as of March 31, 2008 reflects undiscounted liabilities of approximately $6.4 million,
which are discounted at approximately 7% as the aggregate amount of the obligations and the amount and timing of cash
payments are reliably determinable.
Estimates
of future costs are subject to change due to changing environmental remediation regulations and/or site-specific requirements.
Litigation
The Company is involved in various claims and lawsuits incidental to its business. As previously reported, in
January 2003, the Company, along with one of its subsidiaries, Heatcraft Inc., was named in the following lawsuits in
connection with the Companys former heat transfer operations:
|
|
|
Lynette Brown, et al., vs. Koppers Industries, Inc., Heatcraft Inc., Lennox International Inc., et
al., Circuit Court of Washington County, Civil Action No. CI 2002-479; |
|
|
|
|
Likisha Booker, et al., vs. Koppers Industries, Inc., Heatcraft Inc., Lennox International Inc., et
al., Circuit Court of Holmes County; Civil Action No. 2002-549; |
|
|
|
|
Walter Crowder, et al., vs. Koppers Industries, Inc., Heatcraft Inc. and Lennox International Inc.,
et al., Circuit Court of Leflore County, Civil Action No. 2002-0225; and |
|
|
|
|
Benobe Beck, et al., vs. Koppers Industries, Inc., Heatcraft Inc. and Lennox International Inc., et
al., Circuit Court of the First Judicial District of Hinds County, No. 03-000030. |
17
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 15, 2008, plaintiffs counsel has requested the transfer of files regarding five individual plaintiffs from
the Booker case and five individual plaintiffs from the Crowder case. 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. 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.
18. |
|
Share Repurchase Plan: |
On July 25, 2007, LII announced that the Board of Directors approved a share repurchase plan, pursuant to which
the Company is authorized to repurchase up to $500 million of shares of its common stock through open market purchases
(the 2007 Share Repurchase Plan). LII is party to a written trading plan under Rule 10b5-1 of the Securities
Exchange Act of 1934, as amended (the 10b5-1 Plan), to facilitate share repurchases under the 2007 Share Repurchase
Plan. Prior to January 1, 2008, LII had repurchased 5,878,987 shares of common stock for approximately $203,347,263
under the 2007 Share Repurchase Plan. In the first quarter of 2008, LII repurchased shares of its common stock as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average Price |
|
|
Total Number of |
|
|
Approximate Dollar |
|
|
|
|
|
|
|
Paid per |
|
|
Shares Purchased |
|
|
Value of Shares that |
|
|
|
Total Number |
|
|
Share |
|
|
as Part of Publicly |
|
|
may yet be Purchased |
|
|
|
of Shares |
|
|
(including |
|
|
Announced Plans |
|
|
Under the Plans or |
|
Period |
|
Purchased
(1) |
|
|
fees) |
|
|
or Programs |
|
|
Programs |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January 1 through
January 31 |
|
|
1,951,792 |
|
|
$ |
36.51 |
|
|
|
1,926,669 |
|
|
$ |
226,412,444 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
February 1 through
February 29 |
|
|
1,419,035 |
|
|
$ |
37.24 |
|
|
|
1,409,415 |
|
|
$ |
173,925,208 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 1 through
March 31 |
|
|
1,650,512 |
|
|
$ |
35.75 |
|
|
|
1,394,678 |
|
|
$ |
123,905,357 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
5,021,339 |
|
|
$ |
36.47 |
|
|
|
4,730,762 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
In addition to purchases under the 2007 Share Repurchase Plan, this
column reflects the surrender to LII of 290,577 shares of common stock to
satisfy tax-withholding obligations in connection with the exercise of
stock appreciation rights and the distribution of shares of the Companys
common stock pursuant to vested performance share units. |
19. |
|
Reportable Business Segments: |
The Company operates 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 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 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 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.
18
Transactions between segments, such as products sold to Service Experts by the Residential Heating & Cooling
segment, are recorded on an arms-length basis using the market price for these products. The eliminations of these
intercompany sales and any associated profit are noted in the reconciliation of segment results to the income from
continuing operations before income taxes below.
The Company uses segment profit (loss) as the primary measure of profitability to evaluate operating performance
and to allocate capital resources. The Company defines segment profit (loss) as a segments income (loss) from
continuing operations before income taxes included in the accompanying Consolidated Statements of Operations, excluding
unusual and nonrecurring items; (gains), losses and other expenses, net; restructuring charges; goodwill impairment;
interest expense, net; and other expense (income), net; less (plus) realized gains (losses) on settled futures
contracts not designated as cash flow hedges and the ineffective portion of settled cash flow hedges; and less (plus)
foreign currency exchange gains (losses).
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, 2008 and 2007 are shown below (in millions):
|
|
|
|
|
|
|
|
|
|
|
For the |
|
|
|
Three Months Ended |
|
|
|
March 31, |
|
|
|
2008 |
|
|
2007 |
|
Net Sales |
|
|
|
|
|
|
|
|
Residential Heating & Cooling |
|
$ |
329.2 |
|
|
$ |
361.1 |
|
Commercial Heating & Cooling |
|
|
165.2 |
|
|
|
162.7 |
|
Service Experts |
|
|
140.1 |
|
|
|
143.9 |
|
Refrigeration |
|
|
154.8 |
|
|
|
141.3 |
|
Eliminations (1) |
|
|
(22.2 |
) |
|
|
(17.5 |
) |
|
|
|
|
|
|
|
|
|
$ |
767.1 |
|
|
$ |
791.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment Profit (Loss) |
|
|
|
|
|
|
|
|
Residential Heating & Cooling |
|
$ |
13.2 |
|
|
$ |
19.9 |
|
Commercial Heating & Cooling |
|
|
6.2 |
|
|
|
8.5 |
|
Service Experts |
|
|
(7.6 |
) |
|
|
(3.8 |
) |
Refrigeration |
|
|
14.8 |
|
|
|
12.5 |
|
Corporate and other |
|
|
(12.2 |
) |
|
|
(20.6 |
) |
Eliminations (1) |
|
|
(1.7 |
) |
|
|
(0.1 |
) |
|
|
|
|
|
|
|
Subtotal that includes segment profit and
eliminations |
|
|
12.7 |
|
|
|
16.4 |
|
Reconciliation to income before income taxes: |
|
|
|
|
|
|
|
|
(Gains), losses and other expenses, net |
|
|
(3.3 |
) |
|
|
(0.7 |
) |
Restructuring charges |
|
|
2.8 |
|
|
|
2.3 |
|
Interest expense, net |
|
|
2.7 |
|
|
|
0.9 |
|
Less: Realized gains on settled futures
contracts not designated as cash flow
hedges (2) |
|
|
0.4 |
|
|
|
0.5 |
|
Less: Foreign currency exchange gains
(losses) (2) |
|
|
0.1 |
|
|
|
(0.3 |
) |
|
|
|
|
|
|
|
|
|
$ |
10.0 |
|
|
$ |
13.7 |
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Eliminations consist of intercompany sales between business segments, such
as products sold to Service Experts by the Residential Heating & Cooling
segment. |
|
(2) |
|
Realized 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. |
19
Total assets by business segment as of March 31, 2008 and December 31, 2007 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, |
|
|
|
2008 |
|
|
2007 |
|
Total Assets |
|
|
|
|
|
|
|
|
Residential Heating & Cooling |
|
$ |
579.1 |
|
|
$ |
548.5 |
|
Commercial Heating & Cooling |
|
|
347.6 |
|
|
|
336.6 |
|
Service Experts |
|
|
203.5 |
|
|
|
200.4 |
|
Refrigeration |
|
|
409.3 |
|
|
|
388.1 |
|
Corporate and other |
|
|
355.5 |
|
|
|
349.6 |
|
Eliminations (1) |
|
|
(14.6 |
) |
|
|
(8.6 |
) |
|
|
|
|
|
|
|
Segment assets |
|
$ |
1,880.4 |
|
|
$ |
1,814.6 |
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Eliminations consist of net intercompany
receivables and intercompany profit included in
inventory from products sold between business
segments, such as products sold to Service Experts
by the Residential Heating & Cooling segment. |
20. |
|
Related Party Transactions: |
Thomas W. Booth, Steven R. Booth and John W. Norris, III, each a member of the Companys Board of Directors, John
W. Norris, Jr., the father of Mr. Norris, III, 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,
were, individually or through trust arrangements, shareholders 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. Upon completion of the transaction in September 2007,
LII acquired 2,695,770 shares of LII common stock owned by AOC in exchange for 2,239,563 newly issued shares of LII
common stock. The transaction reduced the number of outstanding shares of LII common stock by 456,207 shares, at
minimal cost to LII. Following the issuance and exchange of LII common stock, AOC distributed the newly acquired
shares of LII common stock pro rata to its shareholders. The issuance, exchange and liquidating distribution are
referred to as the AOC Transaction. There were no special benefits provided for any of the related persons
described above under the AOC Transaction. Each related persons participation in the AOC Transaction arose out of his
or her ownership of common stock of AOC and was on the same basis as all other shareholders of AOC.
20
|
|
|
Item 2. |
|
Managements Discussion and Analysis of Financial Condition and Results of Operations. |
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, 2007, 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 operate in four reportable business segments of the HVACR industry. The first reportable segment is
Residential Heating & Cooling, in which we manufacture and market a full line of heating, air conditioning and hearth
products for the residential replacement and new construction markets in the U.S. and Canada. The second reportable
segment is Commercial Heating & Cooling, in which we manufacture and sell rooftop products and related equipment for
light commercial applications in the U.S. and Canada and primarily rooftop products, chillers and air handlers in
Europe. The third reportable segment is Service Experts, which includes sales, installation, maintenance and repair
services for HVAC equipment by company-owned service centers in the U.S. and Canada. The fourth reportable segment is
Refrigeration, in which we manufacture and sell unit coolers, condensing units and other commercial refrigeration
products in the U.S. and international markets.
Our
products and services are sold through a combination of distributors, independent and company-owned dealer
service centers, other installing contractors, wholesalers, manufacturers representatives and original equipment
manufacturers and to national accounts. The demand for our products and services is seasonal and dependent on the
weather. Hotter than normal summers generate strong demand for replacement air conditioning and refrigeration products
and services and colder than normal winters have the same effect on heating products and services. Conversely, cooler
than normal summers and warmer than normal winters depress HVACR sales and services. In addition to weather, demand
for our products and services is influenced by national and regional economic and demographic factors, such as interest
rates, the availability of financing, regional population and employment trends, new construction, general economic
conditions and consumer spending habits and confidence.
The principal elements of cost of goods sold in our manufacturing operations are components, raw materials,
factory overhead, labor and estimated costs of warranty expense. In our Service Experts segment, the principal
components of cost of goods sold are equipment, parts and supplies and labor. The principal raw materials used in our
manufacturing processes are steel, copper and aluminum. Higher prices for these commodities and related components
continue to present a challenge to us and the HVACR industry in general. We partially mitigate the impact of higher
commodity prices through a combination of price increases, commodity contracts, improved production efficiency and cost
reduction initiatives.
We estimate approximately 30% of the sales of our Residential Heating & Cooling segment is for new construction,
with the balance attributable to repair, retrofit and replacement. With the current downturn in residential new
construction activity, we are continuing to see a decline in the demand for the products and services we sell into this
market.
Our fiscal year ends on December 31 and our interim fiscal quarters are each comprised of 13 weeks. For
convenience, throughout this Managements Discussion and Analysis of Financial Condition and Results of Operations, the
13-week periods comprising each fiscal quarter are denoted by the last day of the calendar quarter.
21
Company Highlights
|
|
|
Net sales for the three months ended March 31, 2008 were $767.1 million and were negatively impacted on a
year-over-year basis due primarily to unfavorable economic conditions in the U.S. and Southern Europe.
Foreign currency translation rates had a favorable impact on net sales in 2008. |
|
|
|
|
Operational income for the three months ended March 31, 2008 was $12.7 million. As a percentage of net
sales, operational income decreased from 1.8% in 2007 to 1.7% in 2008. |
|
|
|
|
Net income for the three months ended March 31, 2008 was $6.3 million. Diluted net income per share was
$0.10 per share in 2008, down from $0.12 per share in 2007. |
|
|
|
|
Cash used in operating activities was $32.9 million for the three months ended March 31, 2008, improved
from $75.1 million in 2007, primarily due to favorable changes in inventory and income taxes payable. |
Results of Operations
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, 2008 and 2007 (dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended March 31, |
|
|
|
2008 |
|
|
2007 |
|
|
|
Dollars |
|
|
Percent |
|
|
Dollars |
|
|
Percent |
|
Net sales |
|
$ |
767.1 |
|
|
|
100.0 |
% |
|
$ |
791.5 |
|
|
|
100.0 |
% |
Cost of goods sold |
|
|
564.3 |
|
|
|
73.6 |
|
|
|
586.9 |
|
|
|
74.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
202.8 |
|
|
|
26.4 |
|
|
|
204.6 |
|
|
|
25.8 |
|
Selling, general and administrative expenses |
|
|
193.7 |
|
|
|
25.3 |
|
|
|
191.1 |
|
|
|
24.1 |
|
(Gains), losses and other expenses, net |
|
|
(3.3 |
) |
|
|
(0.4 |
) |
|
|
(0.7 |
) |
|
|
(0.1 |
) |
Restructuring charges |
|
|
2.8 |
|
|
|
0.4 |
|
|
|
2.3 |
|
|
|
0.3 |
|
Equity in earnings of unconsolidated affiliates |
|
|
(3.1 |
) |
|
|
(0.4 |
) |
|
|
(2.7 |
) |
|
|
(0.3 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Operational income |
|
$ |
12.7 |
|
|
|
1.7 |
% |
|
$ |
14.6 |
|
|
|
1.8 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
6.3 |
|
|
|
0.8 |
% |
|
$ |
8.6 |
|
|
|
1.1 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table sets forth net sales by geographic market (dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended March 31, |
|
|
|
2008 |
|
|
2007 |
|
|
|
Dollars |
|
|
Percent |
|
|
Dollars |
|
|
Percent |
|
Geographic Market: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. |
|
$ |
534.3 |
|
|
|
69.7 |
% |
|
$ |
589.9 |
|
|
|
74.5 |
% |
Canada |
|
|
81.5 |
|
|
|
10.6 |
|
|
|
65.1 |
|
|
|
8.2 |
|
International |
|
|
151.3 |
|
|
|
19.7 |
|
|
|
136.5 |
|
|
|
17.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net sales |
|
$ |
767.1 |
|
|
|
100.0 |
% |
|
$ |
791.5 |
|
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, 2008 Compared to Three Months Ended March 31, 2007 Consolidated Results
Net Sales
Net sales decreased $24.4 million, or 3.1%, to $767.1 million for the three months ended March 31, 2008 from
$791.5 million for the three months ended March 31, 2007. Declines in unit volumes more than offset the $31.4 million
of favorable impact of foreign currency exchange rates. Our Residential Heating & Cooling and Service Experts segments
experienced decreases in sales due primarily to the weakened residential new construction market in the U.S. Our
Commercial Heating & Cooling segment experienced a decrease in unit volumes in our domestic and European operations
primarily due to unfavorable economic conditions. Sales for our Refrigeration segment were relatively flat
year-over-year.
22
Gross Profit
Gross profit was $202.8 million for the three months ended March 31, 2008 compared to $204.6 million for the three
months ended March 31, 2007, a decrease of $1.8 million. Gross profit margin increased to 26.4% for the first quarter
of 2008 compared to 25.8% in 2007 primarily due to favorable product mix and price increases implemented since the
first quarter of 2007.
Selling, General and Administrative Expenses
Selling, general and administrative (SG&A) expenses increased $2.6 million, or 1.4%, in 2008 and as a percentage
of total net sales increased to 25.3% for the first quarter of 2008 from 24.1% for the first quarter of 2007. The
increase in SG&A expenses was primarily due to a $7.2 million increase related to foreign currency exchange rates and
higher bad debt expense as weakness in the economy has impacted collection efforts in certain areas of the business.
These increases were partially offset by lower stock-based compensation expenses, a reduction in professional fees and
cost control measures.
(Gains), Losses and Other Expenses, Net
(Gains), losses and other expenses, net were $(3.3) million for the three months ended March 31, 2008 and $(0.7)
million for the three months ended March 31, 2007 and included the following (in millions):
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended |
|
|
|
March 31, |
|
|
|
2008 |
|
|
2007 |
|
Realized (gains) on settled future contracts not
designated as cash flow hedges |
|
$ |
(0.4 |
) |
|
$ |
(0.5 |
) |
Unrealized (gains) on unsettled future contracts not
designated as cash flow hedges |
|
|
(2.7 |
) |
|
|
(0.3 |
) |
Ineffective portion of (gains) on cash flow hedges |
|
|
(0.1 |
) |
|
|
(0.2 |
) |
Other items, net |
|
|
(0.1 |
) |
|
|
0.3 |
|
|
|
|
|
|
|
|
(Gains), losses and other expenses, net |
|
$ |
(3.3 |
) |
|
$ |
(0.7 |
) |
|
|
|
|
|
|
|
The increase in unrealized gains on settled future contracts not designated as cash flow hedges was primarily due
to increases in commodity prices during the three months ended March 31, 2008 as compared to the same period in 2007.
For more information see Note 15 in the Notes to our Consolidated Financial Statements.
Restructuring Charges
We recognized $2.8 million and $2.3 million in restructuring charges for the first quarter of 2008 and 2007,
respectively, as further discussed below.
On October 10, 2007, we announced plans to close our refrigeration operations in Danville, Illinois and
consolidate our Danville manufacturing, support, and warehouse functions in our Tifton, Georgia and Stone Mountain,
Georgia operations. The consolidation is a phased process and is expected to be completed in the first quarter of
2009. In connection with this consolidation project, we recorded pre-tax restructuring charges of $1.3 million for the
three months ended March 31, 2008. Over the next 12 months, we expect to incur pre-tax restructuring-related charges
of approximately $8.1 million related to this project. We expect
the consolidation will lead to annual pre-tax cost
reductions of over $6 million beginning in 2009.
In the third quarter of 2007, we announced plans to close our hearth products operations in Lynwood, California
and consolidate our U.S. factory-built fireplace manufacturing operations in our facility in Union City, Tennessee. In
connection with this consolidation project, we recorded pre-tax restructuring charges of $1.2 million in our
Residential Heating & Cooling segment for the three months ended March 31, 2008. The restructuring charges primarily
related to costs to move equipment and the disposal of certain long-lived assets. The consolidation was substantially
complete as of March 31, 2008. We currently anticipate the
consolidation will lead to annual cost reductions of over
$2.0 million beginning in April of 2008.
23
In the fourth quarter of 2007, our Australian-based manufacturing facilities in Milperra assumed all heat transfer
equipment manufacturing, while the smaller coil production facility in New Zealand was closed. In connection with this
integration project, we recorded pre-tax restructuring charges of $0.3 million in our
Refrigeration segment for the three months ended March 31, 2008. The restructuring charges primarily related to
severance costs and disposal of certain long-lived assets. The integration was substantially complete as of March 31,
2008.
Restructuring charges incurred in 2007 primarily related to the consolidation of our manufacturing, distribution,
research and development and administrative operations of our two-step operations into South Carolina and closing of
our current operations in Bellevue, Ohio. The restructuring of these operations was substantially complete as of March
31, 2007.
Equity in Earnings of Unconsolidated Affiliates
Investments
in affiliates in which we do not exercise control but have significant influence are
accounted for using the equity method of accounting. Equity in earnings of unconsolidated affiliates increased by $0.4
million to $3.1 million for the three months ended March 31, 2008 as compared to $2.7 million in 2007. The increase is
due to the performance of our unconsolidated affiliates.
Interest Expense, net
Interest expense, net, increased $1.8 million to $2.7 million for the three months ended March 31, 2008 from $0.9
million for the three months ended March 31, 2007. The increase in interest expense was primarily attributable to
higher debt balances as the result of our share repurchases. Additionally, interest income decreased during the
quarter ended March 31, 2008 as the average amount invested over the three months was less than that in the same period
in 2007 and due to lower rates in the first quarter of 2008 as compared to the prior year quarter.
Provision for Income Taxes
The provision for income taxes was $3.7 million for the three months ended March 31, 2008 compared to $5.1 million
for the three months ended March 31, 2007. The effective tax rate was 37.0% and 37.2% for the three months ended March
31, 2008 and March 31, 2007, 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, 2008 Compared to Three Months Ended March 31, 2007 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
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).
Residential Heating & Cooling
The following table details our Residential Heating & Cooling segments net sales and profit for the three months
ended March 31, 2008 and 2007 (dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
|
|
|
|
|
|
March 31, |
|
|
|
|
|
|
|
|
|
2008 |
|
|
2007 |
|
|
Difference |
|
|
% Change |
|
Net sales |
|
$ |
329.2 |
|
|
$ |
361.1 |
|
|
$ |
(31.9 |
) |
|
|
(8.8 |
)% |
Profit |
|
|
13.2 |
|
|
|
19.9 |
|
|
|
(6.7 |
) |
|
|
(33.7 |
) |
% of net sales |
|
|
4.0 |
% |
|
|
5.5 |
% |
|
|
|
|
|
|
|
|
Net sales in our Residential Heating & Cooling business segment decreased $31.9 million, or 8.8%, to $329.2
million for the three months ended March 31, 2008 from $361.1 million for the three months ended March 31, 2007. Due
to continuing weakness in the U.S. residential new construction market, unit volumes were down in the first quarter of
2008 as compared to the first quarter of 2007. Additionally, the slowdown in the U.S. economy led to a slight decline
in the replacement market on a year-over-year basis. The decrease related to
sales volumes was partially offset by favorable product mix.
24
Segment profit in Residential Heating & Cooling decreased 33.7% to $13.2 million for the first quarter of 2008
from $19.9 million in the prior year. Segment profit margins decreased from 5.5% for the first quarter of 2007 to 4.0%
for the first quarter of 2008. These decreases were primarily due to the unfavorable impact of lower unit volumes,
which were partially offset by favorable product mix and lower expenses due to cost reduction efforts. Higher bad debt
expenses, due to weakness in the U.S. economy, also had an unfavorable impact on profitability.
Commercial Heating & Cooling
The following table details our Commercial Heating & Cooling segments net sales and profit for the three months
ended March 31, 2008 and 2007 (dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
|
|
|
|
|
|
March 31, |
|
|
|
|
|
|
|
|
|
2008 |
|
|
2007 |
|
|
Difference |
|
|
% Change |
|
Net sales |
|
$ |
165.2 |
|
|
$ |
162.7 |
|
|
$ |
2.5 |
|
|
|
1.5 |
% |
Profit |
|
|
6.2 |
|
|
|
8.5 |
|
|
|
(2.3 |
) |
|
|
(27.1 |
) |
% of net sales |
|
|
3.8 |
% |
|
|
5.2 |
% |
|
|
|
|
|
|
|
|
Net sales in our Commercial Heating & Cooling segment increased $2.5 million, or 1.5%, to $165.2 million for the
three months ended March 31, 2008 from $162.7 million for the three months ended March 31, 2007. Our domestic
operations experienced reduced volumes on a year-over-year basis due to the weaknesses in the U.S. economy. These
reduced volumes were almost entirely offset by price increases and favorable product mix. Primarily due to weakness in
Southern Europe, unit volumes in our overseas operations were down in the first quarter of 2008 as compared to the
first quarter of 2007. The favorable impact of changes in foreign currency exchange rates increased net sales by $8.7
million.
Segment profit in Commercial Heating & Cooling decreased 27.1% to $6.2 million for the three months ended March
31, 2008 from $8.5 million for the three months ended March 31, 2007. As a percentage of net sales, segment profit
decreased from 5.2% in 2007 to 3.8% in 2008. The reduced segment profit was due primarily to operating losses in our
European operations due to planned infrastructure investments to support cost reduction efforts. These losses were
partially offset by favorable product mix in our domestic operations.
Service Experts
The following table details our Service Experts segments net sales and loss for the three months ended March 31,
2008 and 2007 (dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
|
|
|
|
|
|
March 31, |
|
|
|
|
|
|
|
|
|
2008 |
|
|
2007 |
|
|
Difference |
|
|
% Change |
|
Net sales |
|
$ |
140.1 |
|
|
$ |
143.9 |
|
|
$ |
(3.8 |
) |
|
|
(2.6 |
)% |
(Loss) |
|
|
(7.6 |
) |
|
|
(3.8 |
) |
|
|
(3.8 |
) |
|
|
(100.0 |
) |
% of net sales |
|
|
(5.4 |
)% |
|
|
(2.6 |
)% |
|
|
|
|
|
|
|
|
Net sales in our Service Experts segment decreased $3.8 million, or 2.6%, to $140.1 million for the three months
ended March 31, 2008 from $143.9 million for the three months ended March 31, 2007. The decrease in net sales was
primarily due to the decline in the residential new construction market in the U.S. and lower residential replacement
and service sales in the U.S. resulting from weakness in the economy. These decreases were partially offset by strong
residential new construction sales in Canada. The favorable impact of changes in foreign currency exchange rates
increased net sales by $4.9 million.
Segment loss in Service Experts increased $3.8 million to a $7.6 million loss for 2008 from a $3.8 million loss in
2007. The increase in segment loss was primarily due to lower sales volumes, higher operating costs resulting
primarily from increased fuel costs and higher administrative costs.
25
Refrigeration
The following table details our Refrigeration segments net sales and profit for the three months ended March 31,
2008 and 2007 (dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
|
|
|
|
|
|
March 31, |
|
|
|
|
|
|
|
|
|
2008 |
|
|
2007 |
|
|
Difference |
|
|
% Change |
|
Net sales |
|
$ |
154.8 |
|
|
$ |
141.3 |
|
|
$ |
13.5 |
|
|
|
9.6 |
% |
Profit |
|
|
14.8 |
|
|
|
12.5 |
|
|
|
2.3 |
|
|
|
18.4 |
|
% of net sales |
|
|
9.6 |
% |
|
|
8.8 |
% |
|
|
|
|
|
|
|
|
Net sales in our Refrigeration segment increased $13.5 million, or 9.6 %, to $154.8 million in 2008 from $141.3
million in 2007. Decreases in unit volumes in our European, Australian and domestic operations were almost entirely
offset by increases in unit volumes in South America and Asia and price increases in our domestic operations. Price
increases were implemented as the result of higher commodity and component costs. The favorable impact of changes in
foreign currency exchange rates increased net sales by $13.6 million.
Segment profit in Refrigeration increased $2.3 million to $14.8 million for the three months ended March 31, 2008
from $12.5 million for the three months ended March 31, 2007. Segment profit margins increased to 9.6% in 2008 from
8.8% in 2007. The increase in segment profit was primarily due to cost controls, especially for SG&A expenses, and the
favorable impact of foreign currency exchange rates.
Corporate and Other
Corporate and other costs decreased from $20.6 million in 2007 to $12.2 million in 2008. The decrease in costs
was primarily driven by expense reduction in compliance activities,
stock-based compensation and professional fees and
overall tight budgetary controls.
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, 2008, our debt-to-total-capital ratio was 38%, up from 15% as of March 31, 2007, primarily due to
an increase of $257 million in our outstanding debt balances as well a reduced stockholders equity balance due to
share repurchases. Higher debt was primarily due to an increase in borrowings to fund the repurchase of approximately
11.5 million shares of our common stock for $405.0 million since March 31, 2007 under our former and current share
repurchase plans.
The following table summarizes our cash activity for the three months ended March 31, 2008 and 2007 (in millions):
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
March 31, |
|
|
|
2008 |
|
|
2007 |
|
Net cash used in operating activities |
|
$ |
(32.9 |
) |
|
$ |
(75.1 |
) |
Net cash used in investing activities |
|
|
(16.0 |
) |
|
|
(9.8 |
) |
Net cash provided by financing activities |
|
|
24.8 |
|
|
|
33.1 |
|
Net Cash Used in Operating Activities
During the first three months of 2008, cash used in operating activities was $32.9 million compared to $75.1
million in 2007. Our cash used in operating activities is lower primarily due to a smaller use of cash from changes in
inventory and income taxes payable in the first quarter of 2008 versus the prior year. Seasonal increases in inventory
typically result in a use of cash in the first quarter of the year. However, the seasonal growth in inventory of $54.7
million for the first three months of 2008 was down when compared to
the $93.2 million of growth in the same period in 2007 due
to our adjustment to the preseason cooling equipment build to reflect the continued declines in the residential
markets. Changes in income taxes payable resulted in a smaller use of cash
in 2008 as compared to 2007 due to a larger payment of taxes in the first quarter of 2007 versus the first quarter
of 2008. These changes were partially offset by a smaller increase in accounts payable of $34.4 million during the
first quarter of 2008 as compared to $59.9 million in the same period in 2007, primarily due to lower production during
the quarter to better align inventory growth with sales expectations.
26
Net Cash Used in Investing Activities
Net cash used in investing activities was $16.0 million for the first three months of 2008 compared to $9.8
million in 2007. This increase was primarily driven by the net purchase of $6.8 million of short-term investments in
the first three months of 2008 compared to no purchases in the same period in 2007. Capital expenditures of $9.5
million and $9.9 million in 2008 and 2007, 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 Financing Activities
During the first three months of 2008, net cash provided by financing activities was $24.8 million compared to
$33.1 million used in 2007. We paid a total of $8.7 million in dividends on our common stock in the three months ended
March 31, 2008, which is unchanged from the same period in 2007. Net short-term and revolving long-term borrowings
totaled approximately $193.5 million in the first three months of 2008 as compared to $35.3 million for the same period
in 2007. During the three months ended March 31, 2008, we used approximately $183.1 million to repurchase 4,730,762
shares of our common stock under our share repurchase plan and 290,577 shares of our common stock to satisfy tax
withholding obligations in connection with the exercise of stock appreciation rights and the distribution of shares of
our common stock pursuant to vested performance share units.
The following tables summarize our outstanding debt obligations and the classification in the accompanying
Consolidated Balance Sheets as of March 31, 2008 and December 31, 2007 (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-Term |
|
|
Current |
|
|
Long-Term |
|
|
|
|
Description of Obligation as of March 31, 2008 |
|
Debt |
|
|
Maturities |
|
|
Maturities |
|
|
Total |
|
Domestic promissory notes (1) |
|
$ |
|
|
|
$ |
36.1 |
|
|
$ |
35.0 |
|
|
$ |
71.1 |
|
Domestic revolving credit facility |
|
|
|
|
|
|
|
|
|
|
324.0 |
|
|
|
324.0 |
|
Other foreign obligations |
|
|
5.5 |
|
|
|
0.3 |
|
|
|
0.7 |
|
|
|
6.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Debt |
|
$ |
5.5 |
|
|
$ |
36.4 |
|
|
$ |
359.7 |
|
|
$ |
401.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-Term |
|
|
Current |
|
|
Long-Term |
|
|
|
|
Description of Obligation as of December 31, 2007 |
|
Debt |
|
|
Maturities |
|
|
Maturities |
|
|
Total |
|
Domestic promissory notes (1) |
|
$ |
|
|
|
$ |
36.1 |
|
|
$ |
35.0 |
|
|
$ |
71.1 |
|
Domestic revolving credit facility |
|
|
|
|
|
|
|
|
|
|
131.0 |
|
|
|
131.0 |
|
Other foreign obligations |
|
|
4.8 |
|
|
|
0.3 |
|
|
|
0.7 |
|
|
|
5.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Debt |
|
$ |
4.8 |
|
|
$ |
36.4 |
|
|
$ |
166.7 |
|
|
$ |
207.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Domestic promissory notes as of March 31, 2008 and December 31, 2007 consisted of the
following (in millions): |
|
|
|
|
|
|
|
|
|
|
|
March 31, |
|
|
December 31, |
|
|
|
2008 |
|
|
2007 |
|
6.73% promissory notes, payable $11.1 annually through 2008 |
|
$ |
11.1 |
|
|
$ |
11.1 |
|
6.75% promissory notes, payable in 2008 |
|
|
25.0 |
|
|
|
25.0 |
|
8.00% promissory note, payable in 2010 |
|
|
35.0 |
|
|
|
35.0 |
|
On October 12, 2007, we entered into the Third Amended and Restated Revolving Credit Facility Agreement (the
Credit Agreement), which contains a $650.0 million domestic revolving credit facility. The Credit Agreement replaced
our previous domestic revolving credit facility, the Second Amended and Restated Credit Facility Agreement, dated as of
July 8, 2005.
As of March 31, 2008, we had outstanding borrowings of $324.0 million under the $650.0 million domestic revolving
credit facility and $111.7 million was committed to standby letters of credit. All of the remaining $214.3 million was
available for future borrowings after consideration of covenant limitations. The facility
matures in October 2012.
27
The domestic revolving credit facility includes a subfacility for swingline loans of up to $50 million and
provides for the issuance of letters of credit for the full amount of the credit facility. The revolving loans bear
interest at either (i) the Eurodollar rate plus a margin of between 0.5% and 1% that is based on our Debt to Adjusted
EBITDA Ratio (as defined in the Credit Agreement) or (ii) the higher of (a) the Federal Funds Rate plus 0.5% or (b) the
prime rate set by Bank of America, N.A. We may prepay the revolving loans at any time without premium or penalty,
other than customary breakage costs in the case of Eurodollar loans. We will pay a facility fee in the range of 0.125%
to 0.25% based on our Debt to Adjusted EBITDA Ratio. We will also pay a letter of credit fee in the range of 0.5% to
1% based on our Debt to Adjusted EBITDA Ratio, as well as an additional issuance fee of 0.125% for letters of credit
issued.
The Credit Agreement contains financial covenants relating to leverage and interest coverage. Other covenants
contained in the Credit Agreement restrict, among other things, mergers, asset dispositions, guarantees, debt, liens,
acquisitions, investments, affiliate transactions and our ability to make restricted payments.
The Credit Agreement contains customary events of default. If any event of default occurs and is continuing,
lenders with a majority of the aggregate commitments may require the administrative agent to terminate our right to
borrow under the Credit Agreement and accelerate amounts due under the Credit Agreement (except for a bankruptcy event
of default, in which case such amounts will automatically become due and payable and the lenders commitments will
automatically terminate).
In addition to the financial covenants contained in the Credit Agreement outlined above, our domestic promissory
notes contain certain financial covenant restrictions. As of March 31, 2008, we believe we were in compliance with all
covenant requirements. Our revolving credit facility and promissory notes are guaranteed by our material subsidiaries.
We have additional borrowing capacity through several foreign facilities governed by agreements between us and a
syndicate of banks, used primarily to finance seasonal borrowing needs of our foreign subsidiaries. We had $6.5
million and $5.8 million of obligations outstanding through our foreign subsidiaries as of March 31, 2008 and December
31, 2007, respectively.
Under a revolving period asset securitization arrangement, we are eligible to transfer beneficial interests in a
portion of our trade accounts receivable to third parties in exchange for cash. Our continued involvement in the
transferred assets is limited to servicing. These transfers are accounted for as sales rather than secured borrowings.
The fair values assigned to the retained and transferred interests are based primarily on the receivables carrying
value given the short term to maturity and low credit risk. As of March 31, 2008 and December 31, 2007, we had not
sold any beneficial interests in accounts receivable.
We consider all highly liquid temporary investments with original maturity dates of three months or less to be
cash equivalents. Cash and cash equivalents of $120.3 million and $145.5 million as of March 31, 2008 and December 31,
2007, respectively, consisted of cash, overnight repurchase agreements and investment grade securities and are stated
at cost, which approximates fair value.
As of March 31, 2008 and December 31, 2007, $16.3 million and $20.2 million, respectively, of cash and cash
equivalents were restricted primarily due to routine lockbox collections and letters of credit issued with respect to
the operations of our captive insurance subsidiary, which expire on December 31, 2008. The restrictions related to
lockbox collections typically expire within three to five business days after receipt. The letter of credit
restrictions can be transferred to our revolving lines of credit as needed.
On July 25, 2007, we announced that our Board of Directors approved a new share repurchase plan, pursuant to which
we are authorized to repurchase up to $500 million of shares of our common stock through open market purchases (the
2007 Share Repurchase Plan). Based on the closing price of our common stock on July 24, 2007, a $500 million
repurchase represented over 20% of our market capitalization. We are currently funding the stock repurchases through a
combination of cash from operations and third party borrowings. We plan to fully execute repurchases under the 2007
Share Repurchase Plan by the end of the second quarter of 2008.
We periodically review our capital structure, including our primary bank facility, to ensure that it has adequate
liquidity. We believe that cash flows from operations, as well as available borrowings under our revolving credit
facility and other existing sources of funding, will be sufficient to fund our operations for the
foreseeable future and share repurchases during the term of the 2007 Share Repurchase Plan.
28
Fair Value Measurements
Effective
January 1, 2008, we adopted Statement of Financial Accounting Standards
No. 157, Fair Value Measurements (“SFAS No. 157”),
which establishes a framework for measuring fair value in generally accepted
accounting principles, clarifies the definition of fair value within that
framework, and expands disclosures about the use of fair value measurements.
SFAS No. 157 is effective for fiscal years beginning after
November 15, 2007. However, in February 2008, the Financial Accounting
Standards Board (“FASB”) issued FASB Staff Position No. FAS
157-2, Effective Date of FASB Statement No. 157 (“FSP
No. 157-2”), which deferred the effective date of SFAS No. 157
for one year for non-financial assets and liabilities, except for certain items
that are recognized or disclosed at fair value in the financial statements on a
recurring basis (at least annually). We are currently evaluating the impact of
SFAS No. 157 on our Consolidated Financial Statements for items within the
scope of FSP No. 157-2, which will become effective on January 1,
2009.
Fair Value Hierarchy
The three-level fair
value hierarchy for disclosure of fair value measurements defined by SFAS
No. 157 is as follows:
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Level 1 -
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Quoted prices for identical instruments
in active markets at the measurement date.
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Level 2 -
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Quoted prices for similar
instruments in active markets; quoted prices for identical or similar
instruments in markets that are not active; and model-derived valuations in
which all significant inputs and significant value drivers are observable in
active markets at the measurement date and for the anticipated term of the
instrument.
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Level 3 -
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Valuations derived from valuation techniques in
which one or more significant inputs or significant value drivers are
unobservable inputs that reflect the reporting entity’s own
assumptions about the assumptions market participants would use in pricing the
asset or liability developed based on the best information available in the
circumstances. |
Fair Value Techniques
Our valuation
techniques are applied to all of the assets and liabilities carried at fair
value as of January 1, 2008, upon adoption of SFAS No. 157. Where
available, the fair values are based upon quoted prices in active markets.
However, if quoted prices are not available, then the fair values are based
upon quoted prices for similar assets or liabilities or independently sourced
market parameters, such as credit default swap spreads, yields curves, reported
trades, broker/dealer quotes, interest rates and benchmark securities. For
assets and liabilities with a lack of observable market activity, if any, the
fair values are based upon discounted cash flow methodologies incorporating
assumptions that, in our judgment, reflect the assumptions a marketplace
participant would use. To ensure that financial assets and liabilities are
recorded at fair value, valuation adjustments may be required to reflect the
creditworthiness of either party and constraints on liquidity. Where
appropriate, these amounts were incorporated into our valuations as of
March 31, 2008, the measurement date.
Our adoption of SFAS
No. 157 has resulted in changes to the valuation techniques used when
determining the fair value of our derivative instruments. These derivatives are
primarily valued using estimated future cash flows that are based directly on
observed prices from exchange-traded derivatives. We also take into account the
counterparty’s creditworthiness, or our own creditworthiness, as
appropriate. The calculation of the credit adjustment for derivatives is based
upon observable credit default swap spreads and interpolation between these
observable spreads for interim periods without observable spreads; however,
these inputs are insignificant to the fair value measurement. The effect of
adopting these changes to the valuation techniques resulted in a net credit
adjustment to the fair value of our derivative instruments of $0.1 million
as of March 31, 2008, the measurement date.
The majority of our
short-term investments are managed by professional investment advisors. The net
asset values are furnished in statements received from the investment advisor
and reflect valuations based upon the respective pricing policies utilized by
the investment advisor. We have assessed the classification of the inputs used
to value these investments as Level 2 through examination of pricing policies
and significant inputs and through discussions with investment managers. The
fair values of our short-term investments are based on several observable
inputs including, but not limited to, benchmark yields, reported trades,
broker/dealer quotes, issuer spreads and benchmark securities. The adoption of
SFAS No. 157 resulted in no net changes to the valuations for these
securities.
29
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:
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We are eligible to transfer beneficial interests in a portion of our trade accounts receivable to
third parties in exchange for cash through the use of a revolving period asset securitization
arrangement. Our continued involvement in the transferred assets is limited to servicing. These
transfers are accounted for as sales rather than secured borrowings and are reported as a reduction of
Accounts and Notes Receivable, Net in the Consolidated Balance Sheets. As of March 31, 2008 and
December 31, 2007, respectively, we had not sold any such accounts receivable. |
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We also lease real estate and machinery and equipment pursuant to leases that, in accordance with
generally accepted accounting principles, are not capitalized on the balance sheet, including
high-turnover equipment such as autos and service vehicles and short-lived equipment such as personal
computers. |
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Item 3. |
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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 U.S. dollars for financial reporting purposes based on the average exchange rate for the
period. Net sales from outside the United States represented 30.3% and 25.5% of total net sales for the three months
ended March 31, 2008 and 2007, respectively. Historically, foreign currency translation gains (losses) have not had a
material effect on our overall operations. As of March 31, 2008, the impact to net income of a 10% change in exchange
rates is estimated to be approximately $7.6 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, 2008, we had metal futures contracts maturing at various
dates through June 2009 with a fair value as an asset of $14.3 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.
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Item 4. |
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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, 2008 in alerting them in a timely
manner to material information required to be disclosed by us in the reports we file or submit 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, 2008, there were no changes in our internal control over financial reporting
that have materially affected, or are reasonably likely to materially affect, our internal control over financial
reporting.
30
PART II OTHER INFORMATION
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Item 1. |
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Legal Proceedings. |
There have been no significant changes concerning our legal proceedings since December 31, 2007. See Note 17 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.
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, 2007, 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 2007 Annual Report on Form 10-K.
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Item 2. |
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Unregistered Sales of Equity Securities and Use of Proceeds. |
The information set forth in Note 18 in the Notes to the Consolidated Financial Statements set forth in Part I,
Item 1, of this Quarterly Report on Form 10-Q regarding our repurchases of equity securities during the first quarter
of 2008 is incorporated in this Item 2 by reference.
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3.1
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Restated Certificate of Incorporation of 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). |
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3.2
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Amended and Restated Bylaws of LII (filed as Exhibit 3.1 to LIIs Current Report on Form 8-K filed on
July 26, 2007 and incorporated herein by reference). |
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4.1
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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). |
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4.2
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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). |
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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. |
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31.1
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Certification of the principal executive officer (filed herewith). |
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31.2
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Certification of the principal financial officer (filed herewith). |
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32.1
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Certification of the principal executive officer and the principal
financial officer pursuant to 18 U.S.C. Section 1350 (filed
herewith). |
31
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.
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LENNOX INTERNATIONAL INC.
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Date: May 1, 2008 |
/s/ Susan K. Carter
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Susan K. Carter |
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Chief Financial Officer
(on behalf of registrant and as principal financial officer) |
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32
EXHIBIT INDEX
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Exhibit No. |
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Description |
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3.1
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Restated Certificate of Incorporation of 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). |
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3.2
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Amended and Restated Bylaws of LII (filed as Exhibit 3.1 to LIIs Current Report on Form 8-K filed on
July 26, 2007 and incorporated herein by reference). |
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4.1
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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). |
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4.2
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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). |
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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. |
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31.1
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Certification of the principal executive officer (filed herewith). |
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31.2
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Certification of the principal financial officer (filed herewith). |
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32.1
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Certification of the principal executive officer and the principal
financial officer pursuant to 18 U.S.C. Section 1350 (filed
herewith). |
33