Filed by Bowne Pure Compliance
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
(MARK ONE)
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þ |
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 |
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2008
OR
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o |
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 |
For
the transition period from
to
Commission file number 001-15149
LENNOX INTERNATIONAL INC.
Incorporated pursuant to the Laws of the State of DELAWARE
Internal Revenue Service Employer Identification No. 42-0991521
2140 LAKE PARK BLVD.
RICHARDSON, TEXAS
75080
(972-497-5000)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, 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 October 22, 2008, the number of shares outstanding of the registrants common stock, par
value $.01 per share, was 55,364,621.
LENNOX INTERNATIONAL INC.
FORM 10-Q
For the Three and Nine Months Ended September 30, 2008
INDEX
2
PART I FINANCIAL INFORMATION
Item 1. Financial Statements.
LENNOX INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
As of September 30, 2008 and December 31, 2007
(In millions, except share and per share data)
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September 30, |
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December 31, |
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2008 |
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2007 |
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(unaudited) |
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ASSETS
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CURRENT ASSETS: |
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Cash and cash equivalents |
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$ |
107.1 |
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$ |
145.5 |
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Short-term investments |
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34.0 |
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27.7 |
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Accounts and notes receivable, net |
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552.6 |
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492.5 |
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Inventories, net |
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353.1 |
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325.7 |
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Deferred income taxes |
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30.6 |
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30.9 |
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Other assets |
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49.2 |
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48.4 |
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Total current assets |
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1,126.6 |
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1,070.7 |
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PROPERTY, PLANT AND EQUIPMENT, net |
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334.9 |
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317.9 |
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GOODWILL, net |
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256.2 |
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262.8 |
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DEFERRED INCOME TAXES |
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82.3 |
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94.0 |
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OTHER ASSETS |
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73.8 |
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69.2 |
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TOTAL ASSETS |
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$ |
1,873.8 |
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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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$ |
5.4 |
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$ |
4.8 |
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Current maturities of long-term debt |
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11.2 |
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36.4 |
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Accounts payable |
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349.0 |
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289.8 |
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Accrued expenses |
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342.6 |
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352.1 |
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Income taxes payable |
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16.3 |
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1.1 |
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Total current liabilities |
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724.5 |
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684.2 |
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LONG-TERM DEBT |
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384.9 |
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166.7 |
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POSTRETIREMENT BENEFITS, OTHER THAN PENSIONS |
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15.5 |
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16.2 |
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PENSIONS |
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34.0 |
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34.8 |
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OTHER LIABILITIES |
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109.6 |
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104.2 |
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Total liabilities |
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1,268.5 |
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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, $.01 par value, 200,000,000 shares authorized,
83,816,213 shares and 81,897,439 shares issued for 2008
and 2007, respectively |
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0.8 |
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0.8 |
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Additional paid-in capital |
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799.2 |
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760.7 |
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Retained earnings |
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536.1 |
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447.4 |
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Accumulated other comprehensive income |
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40.8 |
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63.6 |
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Treasury stock, at cost, 28,455,830 shares and 19,844,677 shares for 2008
and 2007, respectively |
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(771.6 |
) |
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(464.0 |
) |
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Total stockholders equity |
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605.3 |
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808.5 |
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TOTAL LIABILITIES AND STOCKHOLDERS EQUITY |
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$ |
1,873.8 |
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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 and Nine Months Ended September 30, 2008 and 2007
(Unaudited, in millions, except per share data)
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For the |
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For the |
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Three Months Ended |
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Nine Months Ended |
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September 30, |
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September 30, |
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2008 |
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2007 |
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2008 |
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2007 |
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NET SALES |
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$ |
974.0 |
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$ |
1,029.8 |
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$ |
2,744.0 |
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$ |
2,863.1 |
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COST OF GOODS SOLD |
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692.8 |
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736.2 |
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1,972.8 |
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2,075.8 |
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Gross profit |
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281.2 |
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293.6 |
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771.2 |
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787.3 |
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OPERATING EXPENSES: |
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Selling, general and administrative expenses |
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180.5 |
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194.3 |
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570.8 |
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582.7 |
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Losses (gains) and other expenses, net |
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3.2 |
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(1.2 |
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(4.6 |
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(5.2 |
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Restructuring charges |
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8.4 |
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4.3 |
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18.9 |
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14.2 |
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Impairment of equity method investment |
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2.3 |
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Income from equity method investments |
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(2.0 |
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(2.7 |
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(8.0 |
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(8.9 |
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Operational income |
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91.1 |
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98.9 |
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191.8 |
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204.5 |
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INTEREST EXPENSE, net |
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3.8 |
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1.9 |
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10.3 |
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4.8 |
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OTHER EXPENSE, NET |
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0.1 |
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0.2 |
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0.2 |
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0.3 |
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Income before income taxes |
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87.2 |
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96.8 |
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181.3 |
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199.4 |
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PROVISION FOR INCOME TAXES |
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32.3 |
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35.6 |
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68.9 |
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69.3 |
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Net income |
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$ |
54.9 |
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$ |
61.2 |
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$ |
112.4 |
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$ |
130.1 |
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NET INCOME PER SHARE: |
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Basic |
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$ |
0.99 |
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$ |
0.92 |
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$ |
1.96 |
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$ |
1.93 |
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Diluted |
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$ |
0.96 |
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$ |
0.88 |
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$ |
1.90 |
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$ |
1.84 |
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AVERAGE SHARES OUTSTANDING: |
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Basic |
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55.3 |
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66.6 |
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57.2 |
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67.4 |
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Diluted |
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57.0 |
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69.8 |
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59.1 |
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70.7 |
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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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$ |
0.42 |
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$ |
0.39 |
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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 AND COMPREHENSIVE INCOME
For the Nine Months Ended September 30, 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 |
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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 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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112.4 |
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112.4 |
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$ |
112.4 |
|
Dividends, $0.42 per share |
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(23.7 |
) |
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(23.7 |
) |
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Foreign currency translation adjustments, net |
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(19.3 |
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(19.3 |
) |
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(19.3 |
) |
Stock-based compensation expense |
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8.3 |
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8.3 |
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Derivatives, net of tax of $1.8 |
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(3.5 |
) |
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(3.5 |
) |
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(3.5 |
) |
Common stock issued |
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1.9 |
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16.1 |
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16.1 |
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Treasury stock purchases |
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(307.6 |
) |
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(307.6 |
) |
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Tax benefits of stock-based compensation |
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14.1 |
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14.1 |
|
|
|
|
|
Comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
89.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE AS OF SEPTEMBER 30, 2008 |
|
|
83.8 |
|
|
|
0.8 |
|
|
|
799.2 |
|
|
|
536.1 |
|
|
|
40.8 |
|
|
|
(771.6 |
) |
|
|
605.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 Nine Months Ended September 30, 2008 and 2007
(Unaudited, in millions)
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
|
2007 |
|
CASH FLOWS FROM OPERATING ACTIVITIES: |
|
|
|
|
|
|
|
|
Net income |
|
$ |
112.4 |
|
|
$ |
130.1 |
|
Adjustments to reconcile net income to net cash provided by operating activities: |
|
|
|
|
|
|
|
|
Minority interest |
|
|
0.2 |
|
|
|
0.3 |
|
Income from equity method investments |
|
|
(8.0 |
) |
|
|
(8.9 |
) |
Restructuring expenses, net of cash paid |
|
|
(3.2 |
) |
|
|
8.0 |
|
Impairment of equity method investment |
|
|
2.3 |
|
|
|
|
|
Unrealized loss on futures contracts |
|
|
0.4 |
|
|
|
1.1 |
|
Stock-based compensation expense |
|
|
8.3 |
|
|
|
16.6 |
|
Depreciation and amortization |
|
|
38.4 |
|
|
|
35.9 |
|
Capitalized interest |
|
|
(1.0 |
) |
|
|
(1.2 |
) |
Deferred income taxes |
|
|
6.8 |
|
|
|
5.1 |
|
Other items, net |
|
|
9.7 |
|
|
|
10.7 |
|
Changes in assets and liabilities: |
|
|
|
|
|
|
|
|
Accounts and notes receivable |
|
|
(79.4 |
) |
|
|
(111.3 |
) |
Inventories |
|
|
(34.1 |
) |
|
|
(45.1 |
) |
Other current assets |
|
|
(1.7 |
) |
|
|
(6.7 |
) |
Accounts payable |
|
|
69.3 |
|
|
|
67.4 |
|
Accrued expenses |
|
|
(1.0 |
) |
|
|
3.7 |
|
Income taxes |
|
|
21.5 |
|
|
|
(2.4 |
) |
Long-term warranty, deferred income and other liabilities |
|
|
(2.1 |
) |
|
|
7.2 |
|
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
|
138.8 |
|
|
|
110.5 |
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES: |
|
|
|
|
|
|
|
|
Proceeds from the disposal of property, plant and equipment |
|
|
0.5 |
|
|
|
0.5 |
|
Purchases of property, plant and equipment |
|
|
(37.3 |
) |
|
|
(44.5 |
) |
Purchases of short-term investments |
|
|
(53.4 |
) |
|
|
(32.4 |
) |
Proceeds from sales and maturities of short-term investments |
|
|
46.7 |
|
|
|
7.4 |
|
|
|
|
|
|
|
|
Net cash used in investing activities |
|
|
(43.5 |
) |
|
|
(69.0 |
) |
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES: |
|
|
|
|
|
|
|
|
Short-term borrowings, net |
|
|
0.1 |
|
|
|
2.8 |
|
Long-term payments, net |
|
|
(25.2 |
) |
|
|
|
|
Revolver long-term borrowings |
|
|
202.0 |
|
|
|
48.5 |
|
Proceeds from stock option exercises |
|
|
16.1 |
|
|
|
18.6 |
|
Payments of deferred financing costs |
|
|
|
|
|
|
(0.3 |
) |
Repurchases of common stock |
|
|
(307.6 |
) |
|
|
(150.5 |
) |
Excess tax benefits related to share-based payments |
|
|
12.1 |
|
|
|
14.5 |
|
Cash dividends paid |
|
|
(32.4 |
) |
|
|
(35.0 |
) |
|
|
|
|
|
|
|
Net cash used in financing activities |
|
|
(134.9 |
) |
|
|
(101.4 |
) |
|
|
|
|
|
|
|
|
|
DECREASE IN CASH AND CASH EQUIVALENTS |
|
|
(39.6 |
) |
|
|
(59.9 |
) |
EFFECT OF EXCHANGE RATES ON CASH AND CASH EQUIVALENTS |
|
|
1.2 |
|
|
|
9.1 |
|
CASH AND CASH EQUIVALENTS, beginning of period |
|
|
145.5 |
|
|
|
144.3 |
|
|
|
|
|
|
|
|
CASH AND CASH EQUIVALENTS, end of period |
|
$ |
107.1 |
|
|
$ |
93.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplementary disclosures of cash flow information: |
|
|
|
|
|
|
|
|
Cash paid during the period for: |
|
|
|
|
|
|
|
|
Interest |
|
$ |
11.7 |
|
|
$ |
5.3 |
|
|
|
|
|
|
|
|
Income taxes (net of refunds) |
|
$ |
27.6 |
|
|
$ |
57.2 |
|
|
|
|
|
|
|
|
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)
1. General:
References in this Quarterly Report on Form 10-Q to we, our, us, LII or the Company
refer to Lennox International Inc. and its subsidiaries, unless the context requires otherwise.
Basis of Presentation
The accompanying unaudited Consolidated Balance Sheet as of September 30, 2008, the
accompanying unaudited Consolidated Statements of Operations for the three and nine months ended
September 30, 2008 and 2007, the accompanying unaudited Consolidated Statement of Stockholders
Equity for the nine months ended September 30, 2008 and the accompanying unaudited Consolidated
Statements of Cash Flows for the nine months ended September 30, 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. The presentation of financial
statements requires the use of management estimates and 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.
Reclassifications
Certain prior-period balances in the accompanying 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. 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).
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
Newly Issued Accounting Pronouncements
In March 2008, the FASB issued Statement of Financial Accounting Standards No. 161,
Disclosures about Derivative Instruments and Hedging Activities (SFAS No. 161). SFAS No. 161
amends and expands the disclosure requirements of Statement of Financial Accounting Standards No.
133, Accounting for Derivative Instruments and Hedging Activities
(SFAS
No. 133), to provide
enhanced disclosures about (a) how and why an entity uses derivative instruments, (b) how
derivative instruments and related hedged items are accounted for under SFAS No. 133 and its
related interpretations, and (c) how derivative instruments and related hedged items affect an
entitys financial position, results of operations, and cash flows. In order to meet these expanded
disclosure objectives, SFAS No. 161 requires entities to disclose the objectives and strategies for
using derivatives, information about the volume of derivative activity, fair value amounts of and
gains and losses on derivative instruments in tabular format, and credit-risk contingent features
in derivative agreements. SFAS No. 161 is effective for financial statements issued for fiscal
years and interim periods beginning after November 15, 2008. Early application is permitted.
Management is currently evaluating the effects that SFAS No. 161 will have on its disclosure of
derivatives and hedging activities in the consolidated financial statements.
2. Accounts and Notes Receivable:
Accounts and Notes Receivable have been reported in the accompanying Consolidated Balance
Sheets net of the allowance for doubtful accounts and net of accounts receivable sold under an ongoing
asset securitization arrangement, if any. Detailed information regarding the allowance for doubtful
accounts is provided below (in millions):
|
|
|
|
|
|
|
|
|
|
|
As of |
|
|
As of |
|
|
|
September 30, |
|
|
December 31, |
|
|
|
2008 |
|
|
2007 |
|
Allowance for doubtful accounts |
|
$ |
19.2 |
|
|
$ |
17.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the |
|
|
For the |
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
Provision for bad debts |
|
$ |
3.1 |
|
|
$ |
1.7 |
|
|
$ |
13.6 |
|
|
$ |
6.5 |
|
None of the accounts receivable as reported in the accompanying Consolidated Balance Sheets as
of September 30, 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.
3. Inventories:
Components of inventories are as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
As of |
|
|
As of |
|
|
|
September 30, |
|
|
December 31, |
|
|
|
2008 |
|
|
2007 |
|
Finished goods |
|
$ |
266.9 |
|
|
$ |
247.7 |
|
Work in process |
|
|
11.9 |
|
|
|
10.5 |
|
Raw materials and repair parts |
|
|
148.1 |
|
|
|
137.9 |
|
|
|
|
|
|
|
|
|
|
|
426.9 |
|
|
|
396.1 |
|
Excess of current cost over last-in, first-out cost |
|
|
(73.8 |
) |
|
|
(70.4 |
) |
|
|
|
|
|
|
|
Total inventories |
|
$ |
353.1 |
|
|
$ |
325.7 |
|
|
|
|
|
|
|
|
8
4. Goodwill:
The changes in the carrying amount of goodwill for the nine months ended September 30, 2008,
in total and by segment, are as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at |
|
|
|
|
|
|
Balance at |
|
|
|
December 31, |
|
|
|
|
|
|
September 30, |
|
Segment |
|
2007 |
|
|
Changes
(1) |
|
|
2008 |
|
Residential Heating & Cooling |
|
$ |
33.7 |
|
|
$ |
|
|
|
$ |
33.7 |
|
Commercial Heating & Cooling |
|
|
32.1 |
|
|
|
|
|
|
|
32.1 |
|
Service Experts |
|
|
112.5 |
|
|
|
(3.8 |
) |
|
|
108.7 |
|
Refrigeration |
|
|
84.5 |
|
|
|
(2.8 |
) |
|
|
81.7 |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
262.8 |
|
|
$ |
(6.6 |
) |
|
$ |
256.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Related 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 and 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 (AOCI), net of applicable taxes, until the gain or loss is realized. The
Company places its investments in high credit quality financial instruments only and limits the
amount invested in any one institution or in any one instrument.
As of September 30, 2008 and December 31, 2007, the Captive held approximately $34.0 million
and $27.7 million, respectively, of short-term investments. Unrealized gains or losses included in
AOCI in the accompanying Consolidated Balance Sheets as of September 30, 2008 and December 31, 2007
were not material. Realized gains and losses from the sale of securities were also not material
for the three or nine months ended September 30, 2008 and 2007. The maturities of these securities
range from October 2008 to April 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 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 $107.1 million and
$145.5 million as of September 30, 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 September 30, 2008 and December 31, 2007, $20.7 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, and will be renewed upon expiration. 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 following tables summarize the Companys outstanding debt obligations and the
classification in the accompanying Consolidated Balance Sheets as of September 30, 2008 and
December 31, 2007 (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Description of Obligation |
|
Short-Term |
|
|
Current |
|
|
Long-Term |
|
|
|
|
As of September 30, 2008 |
|
Debt |
|
|
Maturities |
|
|
Maturities |
|
|
Total |
|
Domestic promissory notes (1) |
|
$ |
|
|
|
|
11.1 |
|
|
|
35.0 |
|
|
|
46.1 |
|
Domestic revolving credit facility |
|
|
|
|
|
|
|
|
|
|
333.0 |
|
|
|
333.0 |
|
Other obligations |
|
|
5.4 |
|
|
|
0.1 |
|
|
|
16.9 |
|
|
|
22.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total debt |
|
$ |
5.4 |
|
|
|
11.2 |
|
|
|
384.9 |
|
|
|
401.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Description of Obligation |
|
Short-Term |
|
|
Current |
|
|
Long-Term |
|
|
|
|
As of December 31, 2007 |
|
Debt |
|
|
Maturities |
|
|
Maturities |
|
|
Total |
|
Domestic promissory notes (1) |
|
$ |
|
|
|
$ |
36.1 |
|
|
$ |
35.0 |
|
|
$ |
71.1 |
|
Domestic revolving credit facility |
|
|
|
|
|
|
|
|
|
|
131.0 |
|
|
|
131.0 |
|
Other obligations |
|
|
4.8 |
|
|
|
0.3 |
|
|
|
0.7 |
|
|
|
5.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total debt |
|
$ |
4.8 |
|
|
$ |
36.4 |
|
|
$ |
166.7 |
|
|
$ |
207.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9
|
|
|
(1) |
|
Domestic promissory notes as of September 30, 2008 and December 31, 2007 consisted of
the following (in millions): |
|
|
|
|
|
|
|
|
|
|
|
As of |
|
|
As of |
|
|
|
September 30, |
|
|
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 |
|
8.00% promissory note, payable in 2010 |
|
|
35.0 |
|
|
|
35.0 |
|
|
|
|
|
|
|
|
Total domestic promissory notes |
|
$ |
46.1 |
|
|
$ |
71.1 |
|
|
|
|
|
|
|
|
As of September 30, 2008, the Company had outstanding borrowings of $333.0 million under the
$650.0 million domestic revolving credit facility and $115.6 million was committed to standby
letters of credit. All of the remaining $201.4 million was available for future borrowings after
consideration of covenant limitations. The facility matures in October 2012.
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 $6.1 million and $5.8 million of obligations
outstanding through its foreign subsidiaries as of September 30, 2008 and December 31, 2007,
respectively.
During the nine months ended September 30, 2008, the Company expanded its Tifton, Georgia
manufacturing facility using the proceeds from Industrial Development Bonds (IDBs). The Company
entered into a lease agreement with the owner of the property and the issuer of the IDBs, and
through its lease payments funds the interest payments to investors in the IDBs. The Company also
guaranteed the repayment of the IDBs and entered into letters of credit totaling $16.3 million to
fund a potential repurchase of the IDBs in the event that investors exercised their right to tender
the IDBs to the Trustee. At September 30, 2008, the Company recorded both a long-term asset and a
corresponding long-term obligation of $16.3 million related to these transactions.
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 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
transferred interests are based primarily on the receivables carrying value given the short-term
maturity and low credit risk. At September 30, 2008 and December 31, 2007, the Company had not sold
any beneficial interests in accounts receivable. The maximum amount available under the
securitization arrangement depends on the amount of qualifying accounts receivable. The maximum
amount available was $119.5 million and $102.7 million as of September 30, 2008 and December 31,
2007, respectively.
7. Product Warranties:
The changes in the carrying amount of the Companys total product warranty liabilities for the
nine months ended September 30, 2008 are as follows (in millions):
|
|
|
|
|
Total product warranty liability at December 31, 2007 |
|
$ |
98.4 |
|
Changes resulting from issuance of new warranties |
|
|
24.1 |
|
Payments made in 2008 |
|
|
(21.4 |
) |
Changes in estimates associated with pre-existing liabilities |
|
|
(4.5 |
) |
Changes in foreign currency translation rates |
|
|
(0.5 |
) |
|
|
|
|
Total product warranty liability at September 30, 2008 |
|
$ |
96.1 |
|
|
|
|
|
The decreases in estimates of warranties issued prior to 2008 were primarily due to lower
failure rates. The product warranty liabilities are recorded as follows in the accompanying
Consolidated Balance Sheets (in millions):
|
|
|
|
|
|
|
|
|
|
|
As of |
|
|
As of |
|
|
|
September 30, |
|
|
December 31, |
|
|
|
2008 |
|
|
2007 |
|
Short-term warranty liability: |
|
|
|
|
|
|
|
|
Accrued expenses |
|
$ |
30.3 |
|
|
$ |
33.8 |
|
|
|
|
|
|
|
|
|
|
Long-term warranty liability: |
|
|
|
|
|
|
|
|
Other liabilities |
|
$ |
65.8 |
|
|
$ |
64.6 |
|
10
8. Pension and Postretirement Benefit Plans:
The components of net periodic benefit cost were as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the |
|
|
|
Three Months Ended September 30, |
|
|
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
|
|
Pension Benefits |
|
|
Other Benefits |
|
Service cost |
|
$ |
1.8 |
|
|
$ |
1.7 |
|
|
$ |
0.2 |
|
|
$ |
0.2 |
|
Interest cost |
|
|
4.2 |
|
|
|
3.7 |
|
|
|
0.2 |
|
|
|
0.2 |
|
Expected return on plan assets |
|
|
(4.6 |
) |
|
|
(4.2 |
) |
|
|
|
|
|
|
|
|
Amortization of prior service cost |
|
|
0.1 |
|
|
|
0.2 |
|
|
|
(0.5 |
) |
|
|
(0.4 |
) |
Amortization of net loss |
|
|
1.2 |
|
|
|
1.1 |
|
|
|
0.3 |
|
|
|
0.2 |
|
Settlements or curtailments(1) |
|
|
0.6 |
|
|
|
3.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net periodic pension cost |
|
$ |
3.3 |
|
|
$ |
6.4 |
|
|
$ |
0.2 |
|
|
$ |
0.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the |
|
|
|
Nine Months Ended September 30, |
|
|
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
|
|
Pension Benefits |
|
|
Other Benefits |
|
Service cost |
|
$ |
5.2 |
|
|
$ |
5.3 |
|
|
$ |
0.6 |
|
|
$ |
0.5 |
|
Interest cost |
|
|
12.4 |
|
|
|
11.2 |
|
|
|
0.6 |
|
|
|
0.6 |
|
Expected return on plan assets |
|
|
(13.6 |
) |
|
|
(13.0 |
) |
|
|
|
|
|
|
|
|
Amortization of prior service cost |
|
|
0.5 |
|
|
|
0.7 |
|
|
|
(1.5 |
) |
|
|
(1.3 |
) |
Amortization of net loss |
|
|
3.6 |
|
|
|
3.5 |
|
|
|
0.9 |
|
|
|
0.8 |
|
Settlements or curtailments(1) |
|
|
2.2 |
|
|
|
4.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net periodic pension cost |
|
$ |
10.3 |
|
|
$ |
12.3 |
|
|
$ |
0.6 |
|
|
$ |
0.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes $0.4 million of pension settlement charges for the three months ended
September 30, 2008, which was included in restructuring charges and pension obligation.
Also includes $1.2 million and $0.7 million of pension curtailment and settlement
charges for the nine months ended September 30, 2008 and 2007, which were included in
the restructuring charges and pension obligation. See Note 11 for additional
information. |
In the third quarter of 2008, the Company announced that it was freezing its pension and
profit sharing plans for salaried employees in the U.S. and Canada and moving to an enhanced 401(k)
plan in 2009. Curtailment charges of $0.2 million were recorded in conjunction with this
announcement.
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.
Compensation expense of $1.7 million and $3.3 million and $8.3 million and $16.6 million was
recognized for the three months and the nine months ended September 30, 2008 and 2007,
respectively, and were 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 nine months of 2008 as compared to the same
period in 2007.
11
The following tables summarize information concerning the Companys stock options, stock
appreciation rights, performance share units and restricted stock units as of September 30, 2008
(in millions, except per share data, years, and forfeiture rates):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock |
|
|
|
Stock |
|
|
Appreciation |
|
|
|
Options |
|
|
Rights |
|
Shares outstanding |
|
|
1.2 |
|
|
|
1.8 |
|
Weighted-average exercise price per share outstanding |
|
$ |
14.82 |
|
|
$ |
30.34 |
|
Shares exercisable |
|
|
1.2 |
|
|
|
0.7 |
|
Weighted-average exercise price per exercisable share |
|
$ |
14.82 |
|
|
$ |
25.91 |
|
Unrecognized expense |
|
$ |
|
|
|
$ |
5.5 |
|
Expected
weighted-average period to be recognized (in years) |
|
|
|
|
|
|
1.8 |
|
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 |
|
$ |
27.51 |
|
|
$ |
32.30 |
|
Unrecognized expense |
|
$ |
8.0 |
|
|
$ |
8.7 |
|
Expected weighted-average period to be recognized
(in years) |
|
|
1.7 |
|
|
|
1.8 |
|
Weighted-average estimated forfeiture rate |
|
|
30 |
% |
|
|
20 |
% |
10. Income Taxes:
As of September 30, 2008, the Company had approximately $23.8 million in total gross
unrecognized tax benefits. Of this amount, $12.7 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 September 30, 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 September 30, 2008, the Company had recognized $3.0 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 Company has reached a settlement agreement in principle and anticipates final approval
from the IRS by the end of 2008. The Company believes the impact on the statement of operations
will be immaterial.
The IRS has also completed its examination of the Companys consolidated tax returns for the
years 2004 2005 and issued an RAR on July 31, 2008. The IRS has proposed certain significant
adjustments to the Companys insurance deductions and research tax credits. The Company disagrees
with the RAR and has requested a review by the administrative appeals division of the IRS.
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, Colorado, Kansas and Massachusetts have enacted
legislation effective for tax years beginning on or after January 1, 2008, including adjustments to
tax rates, requirements for combined reporting in future years and changes to apportionment
methods. The Company believes any adjustments will be immaterial.
11. Restructuring Charges:
As part of the Companys strategic priorities of manufacturing and sourcing excellence and
expense reduction, the Company has initiated various manufacturing rationalization and cost
reduction actions, and incurred restructuring charges related to those actions.
12
Restructuring charges incurred include the following amounts for the three and nine months
ended September 30, 2008 and 2007 (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the |
|
|
For the |
|
|
|
Three Months Ended September 30, |
|
|
Nine Months Ended September 30, |
|
|
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
Manufacturing rationalizations (1) |
|
$ |
4.7 |
|
|
$ |
2.7 |
|
|
$ |
14.3 |
|
|
$ |
5.9 |
|
Reorganizations of corporate and business
unit administrative functions |
|
|
3.7 |
|
|
|
1.1 |
|
|
|
4.6 |
|
|
|
7.7 |
|
Pension settlement (2) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.7 |
|
Other |
|
|
|
|
|
|
0.5 |
|
|
|
|
|
|
|
(0.1 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
8.4 |
|
|
$ |
4.3 |
|
|
$ |
18.9 |
|
|
$ |
14.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Amount includes $0.4 million and $1.2 million of pension curtailment and settlement charges for the three
and nine months ended September 30, 2008, that are not reflected in restructuring reserves as these items are
related to the Companys pension obligation. See Note 8 for additional information. |
|
(2) |
|
Amount not reflected in restructuring reserves as this item is included in the Companys pension obligation. |
The table below details activity within the Companys restructuring reserves for the nine
months ended September 30, 2008 (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of |
|
|
Charged |
|
|
|
|
|
|
|
|
|
|
Balance as of |
|
|
|
December 31, |
|
|
to |
|
|
Cash |
|
|
Non-Cash |
|
|
September 30, |
|
Description of Reserves |
|
2007 |
|
|
Earnings |
|
|
Utilization |
|
|
Utilization |
|
|
2008 |
|
Severance and related expense |
|
$ |
15.2 |
|
|
$ |
10.1 |
|
|
$ |
(18.3 |
) |
|
$ |
|
|
|
$ |
7.0 |
|
Asset write-offs and accelerated depreciation |
|
|
|
|
|
|
2.7 |
|
|
|
|
|
|
|
(2.7 |
) |
|
|
|
|
Equipment moves |
|
|
|
|
|
|
1.8 |
|
|
|
(1.8 |
) |
|
|
|
|
|
|
|
|
Lease termination |
|
|
1.5 |
|
|
|
|
|
|
|
(0.9 |
) |
|
|
|
|
|
|
0.6 |
|
Other (3) |
|
|
|
|
|
|
4.3 |
|
|
|
(1.1 |
) |
|
|
(1.4 |
) |
|
|
1.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total restructuring reserves |
|
$ |
16.7 |
|
|
$ |
18.9 |
|
|
$ |
(22.1 |
) |
|
$ |
(4.1 |
) |
|
$ |
9.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3) |
|
Amount charged to earnings includes $1.3 million of manufacturing
inefficiencies and $1.3 million of other transition costs associated with
manufacturing rationalization activities. |
Manufacturing Rationalization Activities
In the third quarter of 2008, the Company commenced the transition of production of certain
Refrigeration products currently manufactured near Madrid, Spain to another facility in Genas,
France. The Company recorded severance charges of $0.7 million related to this action for the
three and nine months ended September 30, 2008. The total restructuring charges expected to be
incurred related to this action total $0.9 million and the transition is expected to be completed
by December 2008.
In the third quarter of 2008, the Company commenced the transition of production of certain
Residential Heating & Cooling products currently manufactured in Blackville, South Carolina to
another facility in Orangeburg, South Carolina. The Company recorded severance charges of $0.5
million related to this action during the three and nine months ended September 30, 2008. The
transition is expected to be completed by April 2009.
In the third quarter of 2008, the Company continued several miscellaneous actions to lower its
fixed costs in its Residential Heating and Cooling and Refrigeration businesses and incurred
restructuring charges of $0.2 million. For the nine months ended September 30, 2008, the
restructuring charges related to these actions totaled $0.4 million and were composed of severance.
In the second quarter of 2008, the Company announced the transition of production of selected
Refrigeration products currently manufactured in Milperra, Australia to its sister facility in
Wuxi, China. The Company recorded restructuring charges of $3.0 million during the nine months
ended September 30, 2008, for those positions now located in Milperra that will be eliminated. The
total restructuring charges expected to be incurred related to this action are $4.8 million and the
transition is anticipated to extend through the first half of 2009.
Also in the second quarter of 2008, the Company announced the transition of production of
certain Residential Heating & Cooling products from its Marshalltown, Iowa manufacturing facility
to its new manufacturing operation in Saltillo, Mexico. The transition is anticipated to extend
through the first half of 2009. As a result of the transition, certain manufacturing positions now
located in Marshalltown will be eliminated. Costs associated with the transition primarily consist
of severance, pension curtailment and equipment moving expenses. In connection with the
transition, the Company recorded restructuring charges of $0.4 million for the three months ended
and $2.1 million for the nine months ended September 30, 2008, including a pension curtailment
charge of $0.8 million. In addition to the amounts accrued as of September 30, 2008, the Company
expects to incur restructuring charges of approximately $0.4 million over the remainder of this
project.
13
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 restructuring charges of $2.9 million and $5.8
million for the three and nine months ended September 30, 2008, respectively. The restructuring
charges primarily related to costs to move certain equipment and disposal of certain long-lived
assets, including charges of $2.3 million of accelerated depreciation recorded in the first nine
months of 2008 related to the reduction in useful lives and disposal of certain long-lived assets.
In addition to the amounts accrued as of September 30, 2008, the Company expects to incur future
restructuring charges of approximately $4.6 million over the remainder of this project.
In the third quarter of 2007, the Company announced plans to close Lennox Hearth Products
Inc.s operations in Lynwood, California, part of its Residential Heating & Cooling operations, 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 restructuring
charges of $1.7 million for the nine months ended September 30, 2008. The Company also recorded
$2.4 million of restructuring charges in connection with this action for the three months and nine
months ended September 30, 2007. 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 June 30, 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. In connection with this consolidation project, the Company recorded restructuring
charges of $0.3 million and $3.2 million for the three and nine months ended September 30, 2007.
The consolidation was substantially complete as of March 31, 2007.
Reorganizations of Corporate and Business Unit Administrative Functions and Other
In the third quarter of 2008, the Company consolidated and reorganized the administrative
functions of its Commercial business unit in Northern Europe. As a result of this action, the
Company recorded a restructuring charge for severance of $2.6 million. The cost of this action is
expected to total $4.9 million. The total cost is expected to be composed of severance and
employee-related costs of $3.3 million, lease termination costs of $0.9 million, and other costs of
$0.7 million. This action is expected to be completed by December 2008.
During the third quarter of 2008, as part of its overall cost reduction initiatives, the
Company took actions to eliminate administrative positions in its Refrigeration business unit in
Europe. As a result, the Company recorded $0.4 million as severance in restructuring charges.
Additionally, during the second quarter of 2008, the Company eliminated positions at its Corporate
headquarters and Brazilian operations and recorded $0.7 million of severance as restructuring
charges.
In the third quarter of 2008, the Company continued to reorganize its Service Experts business
unit and recorded $0.2 million of restructuring charges related to this action. Restructuring
charges related to this action recorded for the nine months ended September 30, 2008 totaled $0.4
million and were composed of severance. The total restructuring charges related to this action is
expected to be $0.6 million.
A pension settlement loss of approximately $0.4 million is included in restructuring expense
for the three and nine months ended September 30, 2008. The pension settlement is related to
previous actions taken to reorganize the Companys administrative functions in 2007.
In the second quarter of 2007, the Company reorganized its corporate administrative function
and eliminated the position of chief administrative officer. In connection with this action, the
Company recorded an $8.0 million liability to settle the terms of his employment agreement, of
which $6.6 million, net of $1.4 million of previously recorded stock-based compensation expense,
was recorded in the second quarter of 2007. The final settlement of this matter occurred and an
amount equal to the liability recorded was paid during the three months ended June 30, 2008.
14
Additionally, a pension settlement loss of approximately $0.7 million is included in
restructuring expense for the nine months ended September 30, 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.
12. Earnings per Share:
Diluted earnings per share are computed as follows (in millions, except per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the |
|
|
For the |
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
Net income |
|
$ |
54.9 |
|
|
$ |
61.2 |
|
|
$ |
112.4 |
|
|
$ |
130.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average shares outstanding basic |
|
|
55.3 |
|
|
|
66.6 |
|
|
|
57.2 |
|
|
|
67.4 |
|
Effect of diluted securities attributable
to stock-based payments |
|
|
1.7 |
|
|
|
3.2 |
|
|
|
1.9 |
|
|
|
3.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average shares outstanding diluted |
|
|
57.0 |
|
|
|
69.8 |
|
|
|
59.1 |
|
|
|
70.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share |
|
$ |
0.96 |
|
|
$ |
0.88 |
|
|
$ |
1.90 |
|
|
$ |
1.84 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options to purchase 67,078 shares of common stock at prices ranging from $35.82 to $43.66 per
share and options to purchase 99,278 shares of common stock at prices ranging from $35.82 to $49.63
per share were outstanding for the nine months ended September 30, 2008 and 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 was as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the |
|
|
For the |
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
Net income |
|
$ |
54.9 |
|
|
$ |
61.2 |
|
|
$ |
112.4 |
|
|
$ |
130.1 |
|
Foreign currency translation adjustments |
|
|
(35.2 |
) |
|
|
26.4 |
|
|
|
(19.3 |
) |
|
|
57.1 |
|
Effective portion of (losses) gains on
futures contracts designated as cash
flow hedges |
|
|
(9.6 |
) |
|
|
1.7 |
|
|
|
(3.5 |
) |
|
|
9.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income |
|
$ |
10.1 |
|
|
$ |
89.3 |
|
|
$ |
89.6 |
|
|
$ |
197.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14. Investments in Affiliates:
The Company participates in two joint ventures and has an investment in an affiliate that are
located in the U.S., Mexico, and Thailand. These affiliates are engaged in the manufacture and sale
of compressors, unit coolers and condensing units. As of September 30, 2008, the Companys
percentage of ownership interest in these affiliates ranges from 13% to 50%. Because the Company
exerts significant influence over these affiliates, but does not control them, the investments have
been accounted for under the equity method and their financial position and results of operations
are not consolidated.
The Company recorded the following amounts of investment income from these equity method
investments in the Consolidated Statements of Operations (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the |
|
|
For the |
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
Income from equity method investments |
|
$ |
2.0 |
|
|
$ |
2.7 |
|
|
$ |
8.0 |
|
|
$ |
8.9 |
|
15
The combined balance of the Companys equity method investments included in Other Long-Term
Assets totaled (in millions):
|
|
|
|
|
|
|
|
|
|
|
As of |
|
|
As of |
|
|
|
September 30, |
|
|
December 31, |
|
|
|
2008 |
|
|
2007 |
|
Other Long-Term Assets |
|
$ |
58.3 |
|
|
$ |
52.6 |
|
During the nine months ended September 30, 2008, the Company recorded a $2.3 million
impairment charge related to the investment in its joint venture in Thailand. The joint ventures
financial results were adversely impacted by recent increases in commodity costs, unfavorable
currency exchange fluctuations, and difficulties integrating past acquisitions, which prompted the
impairment charge. This charge reflects recent indications of a decrease in the fair value of the
investment below its carrying value that the Company believes is not recoverable in the near term.
15. Derivatives:
LII utilizes a program to mitigate the exposure to volatility in the prices of certain
commodities the Company uses in its production process. The program includes the use of futures
contracts and fixed forward contracts. The intent of the program is to protect the Companys
operating margins and overall profitability from adverse price changes by entering into derivative
instruments.
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. The Company reclassified the following
amounts (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the |
|
|
For the |
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
Gains reclassified from AOCI to net income |
|
$ |
2.6 |
|
|
$ |
3.2 |
|
|
$ |
10.5 |
|
|
$ |
4.6 |
|
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 Losses (Gains) and Other Expenses, net
in the accompanying Consolidated Statements of
Operations. For the three and nine months ended September 30, 2008 and 2007, hedge
ineffectiveness recognized in net income was not material.
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 Losses (Gains) and Other Expenses, net in the accompanying Consolidated Statements of
Operations. The Company recorded the following amounts (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the |
|
|
For the |
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
Amounts recorded in
Losses (Gains) and
Other Expenses, net |
|
$ |
2.7 |
|
|
$ |
(0.4 |
) |
|
$ |
(0.6 |
) |
|
$ |
(2.2 |
) |
For more information on the valuation of these derivative instruments, see Note 16.
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, yield curves, reported trades,
broker/dealer quotes, interest rates and benchmark securities. For assets and liabilities with a
lack of observable market activity, if any, the fair values are based upon discounted cash flow
methodologies incorporating assumptions that, in 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 either partys creditworthiness and
ability to pay. Where appropriate, these amounts were incorporated into the Companys valuations as
of September 30, 2008, the measurement date.
Assets and Liabilities Measured at Fair Value on a Recurring Basis
The following table presents the fair value hierarchy for those assets and liabilities
measured at fair value on a recurring basis as of September 30, 2008 (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements on a Recurring Basis as of |
|
|
|
September 30, 2008 |
|
|
|
|
|
|
|
Significant |
|
|
|
|
|
|
|
|
|
Quoted Prices in |
|
|
Other |
|
|
Significant |
|
|
|
|
|
|
Active Markets for |
|
|
Observable |
|
|
Unobservable |
|
|
|
|
|
|
Identical Assets |
|
|
Inputs |
|
|
Inputs |
|
|
|
|
|
|
(Level 1) |
|
|
(Level 2) |
|
|
(Level 3) |
|
|
Total |
|
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term investments |
|
$ |
|
|
|
$ |
34.0 |
|
|
$ |
|
|
|
$ |
34.0 |
|
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives, net (1) |
|
|
|
|
|
|
6.3 |
|
|
|
|
|
|
|
6.3 |
|
|
|
|
(1) |
|
Derivatives are recorded in Accrued Expenses and Other Liabilities in the accompanying Consolidated
Balance Sheets. |
The Companys adoption of SFAS No. 157 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 and therefore have been classified as Level 2. The Company also takes
into account the counterpartys creditworthiness, or the Companys own creditworthiness, as
appropriate. An adjustment has been recorded in order to reflect the risk of
credit default, but these adjustments have been insignificant to the overall value of the derivatives.
The effect of adopting these changes to the valuation techniques was not material.
17
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. 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 and certain of its subsidiaries
pursuant to a Guaranty, dated as of June 22, 2006, in favor of BTMUCC.
On September 22, 2008, Procurement amended the Lake Park Lease agreement. While BTMUCC
continues to be the lessor under the lease, the amendment, among other things, replaced the debt
participant and moderately increased the rent payments. The amendment also provides for
consistency of financial covenants with the Companys revolving credit agreement and the Company is
in compliance with these financial covenants as of September 30, 2008. The lease will continue to
be accounted for as an operating lease.
The majority of the Service Experts segments motor vehicle fleet is leased through operating
leases. The lease terms are generally non-cancelable for the first 12-month term and then are
month-to-month, cancelable at 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 September 30, 2008, the Company estimates that it will incur an
additional $8.6 million above the contractual obligations on these leases until the fair value of
the leased vehicles fully mitigates the Companys residual value guarantee obligation under the
lease agreements.
Environmental
Applicable environmental laws can potentially impose obligations on the Company to remediate
hazardous substances at the Companys properties, at properties formerly owned or operated by the
Company and at facilities to which the Company has sent or sends waste for treatment or disposal.
The Company is aware of contamination at some facilities; however, the Company does not presently
believe that any future remediation costs at such facilities will be material to the Companys
results of operations. No amounts have been recorded for non-asset retirement obligation
environmental liabilities that are not probable or estimable.
Brazil Environmental Reserve
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. 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. The amount and timing of cash payments are reliably determinable
and therefore the Company has recorded its environmental reserves at their present values. The
maximum reasonably possible loss presented in the table below is the amount that could be paid if,
after the site assessments are completed, it is determined that remediation is more costly or local
governmental authorities require more costly remediation activities.
18
The following information relates to the Brazil environmental reserve (in millions except
percentages):
|
|
|
|
|
|
|
|
|
|
|
As of |
|
|
As of |
|
|
|
September 30, |
|
|
December 31, |
|
|
|
2008 |
|
|
2007 |
|
Discounted liabilities recorded in: |
|
|
|
|
|
|
|
|
Accrued Expenses |
|
$ |
0.2 |
|
|
$ |
0.1 |
|
Other Long-Term Liabilities |
|
|
1.5 |
|
|
|
1.9 |
|
|
|
|
|
|
|
|
|
|
$ |
1.7 |
|
|
$ |
2.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Undiscounted liabilities |
|
$ |
1.9 |
|
|
$ |
2.5 |
|
Discount rate |
|
|
11.0 |
% |
|
|
8.0 |
% |
Maximum reasonably possible loss |
|
$ |
3.1 |
|
|
$ |
3.1 |
|
Additional Environmental Reserves
The Company maintains environmental reserves for additional sites that are not individually
significant. The following information relates to additional environmental reserves (in millions
except percentages):
|
|
|
|
|
|
|
|
|
|
|
As of |
|
|
As of |
|
|
|
September 30, |
|
|
December 31, |
|
|
|
2008 |
|
|
2007 |
|
Discounted liabilities recorded in: |
|
|
|
|
|
|
|
|
Accrued Expenses |
|
$ |
0.3 |
|
|
$ |
2.0 |
|
Other Long-Term Liabilities |
|
|
3.4 |
|
|
|
1.9 |
|
|
|
|
|
|
|
|
|
|
$ |
3.7 |
|
|
$ |
3.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Undiscounted liabilities |
|
$ |
6.3 |
|
|
$ |
6.4 |
|
Discount rate |
|
|
6.0 |
% |
|
|
6.0 |
% |
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. |
19
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 alleged 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 October 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. 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 June 2, 2008, the Company announced that its Board of Directors approved a new share
repurchase plan for $300 million, pursuant to which the Company is authorized to repurchase shares
of its common stock through open market purchases (the 2008 Share Repurchase Plan). However, LII
has not completed any repurchases under the 2008 Share Repurchase Plan. On July 25, 2007, LII
announced that the Board of Directors approved a share repurchase plan, pursuant to which the
Company was authorized to repurchase up to $500 million of shares of its common stock through open
market purchases (the 2007 Share Repurchase Plan). LII was a party to a written trading plan
under Rule 10b5-1 of the Securities Exchange Act of 1934, as amended, to facilitate share
repurchases under the 2007 Share Repurchase Plan. LII completed the 2007 Share Repurchase Plan
during the second quarter of 2008. In the third quarter of 2008, LII repurchased shares of its
common stock as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Approximate Dollar |
|
|
|
|
|
|
|
|
|
|
|
Total Number of |
|
|
Value of Shares that |
|
|
|
|
|
|
|
Average Price |
|
|
Shares Purchased |
|
|
may yet be Purchased |
|
|
|
Total Number |
|
|
Paid per |
|
|
As Part of Publicly |
|
|
Under the Plans or |
|
|
|
of Shares |
|
|
Share |
|
|
Announced Plans |
|
|
Programs |
|
Period |
|
Purchased (1) |
|
|
(including fees) |
|
|
or Programs |
|
|
(in millions) |
|
July 1 through July 31 |
|
|
898 |
|
|
$ |
34.80 |
|
|
|
|
|
|
$ |
300.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
August 1 through
August 31 |
|
|
2,456 |
|
|
$ |
37.62 |
|
|
|
|
|
|
$ |
300.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 1 through
September 30 |
|
|
11,533 |
|
|
$ |
37.50 |
|
|
|
|
|
|
$ |
300.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14,887 |
|
|
$ |
37.36 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Since there were no repurchases under the 2008 Share Repurchase Plan
in the third quarter of 2008, this column reflects the surrender to
LII of 14,887 shares of common stock to satisfy tax-withholding
obligations in connection with the exercise of stock appreciation
rights and restricted stock awards. |
19. Reportable Business Segments:
The Company operates in four reportable business segments of the heating, ventilation, air
conditioning and refrigeration (HVACR) industry. The table below details the nature of the
operations of each reportable segment:
|
|
|
|
|
|
|
Segment |
|
Product or Services |
|
Markets Served |
|
Geographic Areas |
|
|
|
|
|
|
|
Residential Heating
& Cooling
|
|
Heating
Air Conditioning
Hearth Products
|
|
Residential Replacement
Residential New Construction
|
|
United States
Canada |
|
|
|
|
|
|
|
Commercial Heating
& Cooling
|
|
Rooftop Products
Chillers
Air Handlers
|
|
Light Commercial
|
|
United States
Canada
Europe |
|
|
|
|
|
|
|
Service Experts
|
|
Equipment Sales
Installation
Maintenance
Repair
|
|
Residential
Light Commercial
|
|
United States
Canada |
|
|
|
|
|
|
|
Refrigeration
|
|
Unit Coolers
Condensing Units
Other Commercial
Refrigeration
Products
|
|
Light Commercial
|
|
United States
Canada
Europe
Asia Pacific
South America |
20
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 before income taxes below.
The Company uses segment profit or loss as the primary measure of profitability to evaluate
operating performance and to allocate capital resources. The Company defines segment profit or
loss as a segments income or loss from continuing operations before income taxes included in the
accompanying Consolidated Statements of Operations:
Excluding:
|
|
|
Gains and/or losses and other expenses, net. |
|
|
|
|
Restructuring charges. |
|
|
|
|
Goodwill and equity method investment impairments. |
|
|
|
|
Interest expense, net. |
|
|
|
|
Other expense, net. |
Less amounts included in Losses (Gains) and Other Expenses, net:
|
|
|
Realized gains and/or losses on settled futures contracts not designated as cash flow hedges. |
|
|
|
|
Foreign currency exchange gains and/or 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 or loss by business segment, along with a reconciliation of
segment profit or loss to net earnings or loss, for the three and nine months ended September 30,
2008 and 2007 are shown below (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the |
|
|
For the |
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
Net Sales: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential Heating & Cooling |
|
$ |
414.0 |
|
|
$ |
456.5 |
|
|
$ |
1,193.9 |
|
|
$ |
1,315.5 |
|
Commercial Heating & Cooling |
|
|
251.4 |
|
|
|
255.1 |
|
|
|
646.1 |
|
|
|
650.6 |
|
Service Experts |
|
|
168.0 |
|
|
|
183.9 |
|
|
|
491.0 |
|
|
|
512.0 |
|
Refrigeration |
|
|
162.9 |
|
|
|
157.5 |
|
|
|
486.8 |
|
|
|
450.1 |
|
Eliminations (1) |
|
|
(22.3 |
) |
|
|
(23.2 |
) |
|
|
(73.8 |
) |
|
|
(65.1 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
974.0 |
|
|
$ |
1,029.8 |
|
|
$ |
2,744.0 |
|
|
$ |
2,863.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment Profit (Loss): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential Heating & Cooling |
|
$ |
55.3 |
|
|
$ |
63.7 |
|
|
$ |
118.5 |
|
|
$ |
143.2 |
|
Commercial Heating & Cooling |
|
|
40.3 |
|
|
|
37.8 |
|
|
|
73.2 |
|
|
|
76.6 |
|
Service Experts |
|
|
4.5 |
|
|
|
9.2 |
|
|
|
10.8 |
|
|
|
18.4 |
|
Refrigeration |
|
|
16.7 |
|
|
|
17.8 |
|
|
|
48.9 |
|
|
|
46.6 |
|
Corporate and other |
|
|
(16.3 |
) |
|
|
(23.4 |
) |
|
|
(37.2 |
) |
|
|
(64.2 |
) |
Eliminations (1) |
|
|
1.8 |
|
|
|
|
|
|
|
(0.3 |
) |
|
|
(0.2 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal that includes segment profit
and eliminations |
|
|
102.3 |
|
|
|
105.1 |
|
|
|
213.9 |
|
|
|
220.4 |
|
21
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the |
|
|
For the |
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
Reconciliation to income before income
taxes: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Losses (gains) and other expenses, net |
|
|
3.2 |
|
|
|
(1.2 |
) |
|
|
(4.6 |
) |
|
|
(5.2 |
) |
Restructuring charges |
|
|
8.4 |
|
|
|
4.3 |
|
|
|
18.9 |
|
|
|
14.2 |
|
Impairment of equity method investment |
|
|
|
|
|
|
|
|
|
|
2.3 |
|
|
|
|
|
Interest expense, net |
|
|
3.8 |
|
|
|
1.9 |
|
|
|
10.3 |
|
|
|
4.8 |
|
Other expense, net |
|
|
0.1 |
|
|
|
0.2 |
|
|
|
0.2 |
|
|
|
0.3 |
|
Less: Realized gains on settled
futures contracts not designated as
cash flow hedges (2) |
|
|
0.1 |
|
|
|
1.5 |
|
|
|
1.2 |
|
|
|
3.2 |
|
Less:
Foreign currency exchange (losses) gains (2)
|
|
|
(0.5 |
) |
|
|
1.6 |
|
|
|
4.3 |
|
|
|
3.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
87.2 |
|
|
$ |
96.8 |
|
|
$ |
181.3 |
|
|
$ |
199.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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 on settled futures contracts not designated as cash flow hedges and
foreign currency gains are a component of Losses (Gains) and
Other Expenses, net in the accompanying Consolidated Statements of Operations. |
Total assets by business segment as of September 30, 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 |
|
|
|
September 30, |
|
|
December 31, |
|
|
|
2008 |
|
|
2007 |
|
Total Assets: |
|
|
|
|
|
|
|
|
Residential Heating & Cooling |
|
$ |
585.1 |
|
|
$ |
548.5 |
|
Commercial Heating & Cooling |
|
|
386.4 |
|
|
|
336.6 |
|
Service Experts |
|
|
204.7 |
|
|
|
200.4 |
|
Refrigeration |
|
|
399.3 |
|
|
|
388.1 |
|
Corporate and other |
|
|
309.6 |
|
|
|
349.6 |
|
Eliminations (1) |
|
|
(11.3 |
) |
|
|
(8.6 |
) |
|
|
|
|
|
|
|
Segment assets |
|
$ |
1,873.8 |
|
|
$ |
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. |
22
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. Our reportable
segments include Residential Heating & Cooling, Commercial Heating & Cooling, Service Experts and
Refrigeration. For more detailed information regarding our reportable segments, see Note 19 in the
Notes to our Consolidated Financial Statements.
Our products and services are sold through a combination of distributors, independent and
company-owned dealer service centers, other installing contractors, wholesalers, manufacturers
representatives and original equipment manufacturers and to national accounts. The demand for our
products and services is seasonal and dependent on the weather. Warmer than normal summer
temperatures generate strong demand for replacement air conditioning and refrigeration products and
services and colder than normal winter temperatures have the same effect on heating products and
services. Conversely, cooler than normal summers and warmer than normal winters depress HVACR
sales and services. In addition to weather, demand for our products and services is influenced by
national and regional economic and demographic factors, such as interest rates, the availability of
financing, regional population and employment trends, new construction, general economic conditions
and consumer spending habits and confidence.
The principal elements of cost of goods sold in our manufacturing operations are components,
raw materials, labor, factory overhead 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, improved production efficiency and cost
reduction initiatives. We also partially mitigate volatility in the prices of these commodities by
entering into futures contracts and fixed forward contracts.
We estimate approximately 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 discussion, the 13-week periods comprising each fiscal
quarter are denoted by the last day of the calendar quarter.
23
Company Highlights
|
|
|
Net sales for the third quarter of 2008 were $974.0 million and were adversely impacted
on a year-over-year basis primarily by lower volumes in the U.S. residential new
construction market. Foreign currency translation rates had a favorable impact on net
sales in 2008 and therefore partially offset the decline in sales volumes. |
|
|
|
Operational income for the third quarter of 2008 was $91.1 million. As a percentage of
net sales, operational
income decreased to 9.4% in the third quarter of 2008 from 9.6% in the same period of 2007. |
|
|
|
Net income for the third quarter of 2008 was $54.9 million, compared to net income of
$61.2 million in the same period of 2007. Diluted net income per share was $0.96 per share
for the third quarter of 2008, up from $0.88 per share in the same period of 2007. The
increase in the diluted net income per share was primarily due to the effect of our
previous share repurchases. |
|
|
|
Cash provided by operating activities was $138.8 million for the first three quarters of
2008, improved from $110.5 million in the same period of 2007, primarily due to favorable
working capital changes and the timing of tax payments. |
Results of Operations
The following table presents certain information concerning our financial results, including
information presented as a percentage of net sales for the third quarter ended and year-to-date
through September 30, 2008 and 2007 (dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Third Quarter |
|
|
Year-to-Date September 30, |
|
|
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
|
|
Dollars |
|
|
Percent |
|
|
Dollars |
|
|
Percent |
|
|
Dollars |
|
|
Percent |
|
|
Dollars |
|
|
Percent |
|
Net sales |
|
$ |
974.0 |
|
|
|
100.0 |
% |
|
$ |
1,029.8 |
|
|
|
100.0 |
% |
|
$ |
2,744.0 |
|
|
|
100.0 |
% |
|
$ |
2,863.1 |
|
|
|
100.0 |
% |
Cost of goods sold |
|
|
692.8 |
|
|
|
71.1 |
|
|
|
736.2 |
|
|
|
71.5 |
|
|
|
1,972.8 |
|
|
|
72.0 |
|
|
|
2,075.8 |
|
|
|
72.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
281.2 |
|
|
|
28.9 |
|
|
|
293.6 |
|
|
|
28.5 |
|
|
|
771.2 |
|
|
|
28.0 |
|
|
|
787.3 |
|
|
|
27.5 |
|
Selling, general and
administrative expenses |
|
|
180.5 |
|
|
|
18.5 |
|
|
|
194.3 |
|
|
|
18.9 |
|
|
|
570.8 |
|
|
|
20.8 |
|
|
|
582.7 |
|
|
|
20.4 |
|
Losses (gains) and other
expenses, net |
|
|
3.2 |
|
|
|
0.3 |
|
|
|
(1.2 |
) |
|
|
(0.1 |
) |
|
|
(4.6 |
) |
|
|
(0.2 |
) |
|
|
(5.2 |
) |
|
|
(0.2 |
) |
Restructuring charges |
|
|
8.4 |
|
|
|
0.9 |
|
|
|
4.3 |
|
|
|
0.4 |
|
|
|
18.9 |
|
|
|
0.7 |
|
|
|
14.2 |
|
|
|
0.5 |
|
Impairment of equity
method investment |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2.3 |
|
|
|
0.1 |
|
|
|
|
|
|
|
|
|
Income from equity
method investments |
|
|
(2.0 |
) |
|
|
(0.2 |
) |
|
|
(2.7 |
) |
|
|
(0.3 |
) |
|
|
(8.0 |
) |
|
|
(0.3 |
) |
|
|
(8.9 |
) |
|
|
(0.3 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operational income |
|
$ |
91.1 |
|
|
|
9.4 |
% |
|
$ |
98.9 |
|
|
|
9.6 |
% |
|
$ |
191.8 |
|
|
|
6.9 |
% |
|
$ |
204.5 |
|
|
|
7.1 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
54.9 |
|
|
|
5.6 |
% |
|
$ |
61.2 |
|
|
|
5.9 |
% |
|
$ |
112.4 |
|
|
|
4.1 |
% |
|
$ |
130.1 |
|
|
|
4.5 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table sets forth net sales by geographic market (dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Third Quarter |
|
|
Year-to-Date September 30, |
|
|
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
|
|
Dollars |
|
|
Percent |
|
|
Dollars |
|
|
Percent |
|
|
Dollars |
|
|
Percent |
|
|
Dollars |
|
|
Percent |
|
Geographic Market: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. |
|
$ |
688.5 |
|
|
|
70.7 |
% |
|
$ |
758.0 |
|
|
|
73.6 |
% |
|
$ |
1,937.4 |
|
|
|
70.6 |
% |
|
$ |
2,130.8 |
|
|
|
74.4 |
% |
Canada |
|
|
110.0 |
|
|
|
11.3 |
|
|
|
108.4 |
|
|
|
10.5 |
|
|
|
297.0 |
|
|
|
10.8 |
|
|
|
270.7 |
|
|
|
9.5 |
|
International |
|
|
175.5 |
|
|
|
18.0 |
|
|
|
163.4 |
|
|
|
15.9 |
|
|
|
509.6 |
|
|
|
18.6 |
|
|
|
461.6 |
|
|
|
16.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net sales |
|
$ |
974.0 |
|
|
|
100.0 |
% |
|
$ |
1,029.8 |
|
|
|
100.0 |
% |
|
$ |
2,744.0 |
|
|
|
100.0 |
% |
|
$ |
2,863.1 |
|
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Third Quarter 2008 Compared to Third Quarter 2007 Consolidated Results
Net Sales
Net sales decreased $55.8 million, or 5.4%, for the third quarter of 2008 as compared to the
same period in 2007. Declines in unit volumes were partially offset by the $15.5 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. Our Commercial Heating & Cooling segment experienced a small decrease in unit
volumes in our domestic operations within that segment primarily due to unfavorable economic
conditions. Offsetting these decreases was an increase in sales for our Refrigeration segment
that was primarily due to favorable foreign currency exchange rates.
24
Gross Profit
Gross profit decreased $12.4 million for the third quarter of 2008 as compared to the same
period of 2007. Gross profit margin increased to 28.9% for the third quarter of 2008 compared to
28.5% for the same period of 2007, primarily due to improved manufacturing efficiencies and price
increases that offset increases in commodity costs and the cost effects of the decline in volume.
Selling, General and Administrative Expenses
Selling, general and administrative (SG&A) expenses decreased $13.8 million, or 7.1%, in the
third quarter of 2008, and as a percentage of total net sales decreased to18.5% for the third
quarter of 2008 from 18.9% for the same period of 2007. The decrease in SG&A expenses was
primarily due to lower advertising and promotional costs, commissions, stock-based and incentive
compensation expenses, pension costs, group insurance and other cost control measures, which were
partially offset by increased expenses related to domestic bad debts and research and development.
Losses (Gains) and Other Expenses, Net
Losses (Gains) and other expenses, net for the third quarter of 2008 and 2007 included the
following (in millions):
|
|
|
|
|
|
|
|
|
|
|
Third Quarter |
|
|
|
2008 |
|
|
2007 |
|
Realized gains on settled futures contracts not
designated as cash flow hedges |
|
$ |
(0.1 |
) |
|
$ |
(1.4 |
) |
Unrealized losses on unsettled futures contracts
not designated as cash flow hedges |
|
|
2.8 |
|
|
|
1.0 |
|
Ineffective portion of losses on cash flow hedges |
|
|
0.1 |
|
|
|
0.3 |
|
Other items, net |
|
|
0.4 |
|
|
|
(1.1 |
) |
|
|
|
|
|
|
|
Losses (gains) and other expenses, net |
|
$ |
3.2 |
|
|
$ |
(1.2 |
) |
|
|
|
|
|
|
|
The decrease in realized gains and the increase in unrealized losses on futures contracts were
primarily due to decreases in commodity prices relative to the futures contract prices during the
third quarter of 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
As part of the Companys strategic priorities of manufacturing and sourcing excellence and
expense reduction, management has initiated various manufacturing rationalization and cost
reduction actions and incurred restructuring charges related to those actions. Management
continues to evaluate the business and the business environment, and therefore, there may be
additional future restructuring charges for new manufacturing rationalization and cost reduction
activities as well as changes in estimates to amounts previously recorded, as payments are made or
actions are completed. As a result of the restructuring activities that have been completed or
are in progress, the Company estimates incremental pre-tax savings of approximately $20.0 million
in 2009.
We recognized $8.4 million and $4.3 million in restructuring charges for the third quarters
of 2008 and 2007, respectively. Restructuring charges incurred during the third quarter of 2008
primarily related to manufacturing rationalization activities.
As part of our ongoing cost reduction initiatives in our manufacturing operations, in the
third quarter of 2008, we commenced the transition of production of certain Refrigeration products
currently manufactured near Madrid, Spain to another facility in Genas, France and incurred $0.7
million in restructuring charges related to this action. We also commenced the transition of
production of certain Residential Heating & Cooling products currently manufactured in Blackville,
South Carolina to another facility in Orangeburg, South Carolina and recorded severance charges of
$0.5 million related to this action. We incurred additional restructuring charges of $2.9 million
related to the previously announced closing of our Refrigeration operations in Danville, Illinois
and the consolidation of our Danville manufacturing, support, and warehouse functions into our
Tifton, Georgia and Stone Mountain, Georgia operations. Estimated future restructuring charges
related to these manufacturing rationalization activities are estimated to be $7.4 million at
September 30, 2008.
25
We also restructured certain administrative functions during the third quarter of 2008. We
consolidated and reorganized the administrative functions of our Commercial business unit in
Northern Europe and recorded a restructuring charge for severance of $2.6 million related to this
action. We also took actions to eliminate administrative positions in our Refrigeration business
unit in Europe and recorded $0.4 million as severance in restructuring charges. Estimated future
restructuring charges related to the consolidation and reorganization of administrative functions
are estimated to be $2.5 million at September 30, 2008.
In the third quarter of 2007, we recorded $2.4 million of restructuring charges in connection
with the consolidation of our Hearth Products manufacturing operations into our facility in Union
City, Tennessee. Restructuring charges incurred during the third quarter of 2007 also included a
$1.1 million charge related to the reorganization of our corporate administrative function.
Total cash paid for restructuring activities during the third quarter of 2008 was $5.7
million. This amount was primarily composed of severance payments related to our manufacturing
rationalizations and reorganizations of administrative functions.
Results from Equity Method Investments
Investments in affiliates in which we do not exercise control but have significant influence
are accounted for using the equity method of accounting. Income from equity method investments
decreased to $2.0 million for the third quarter of 2008 as compared to $2.7 million during the same
period in 2007. This decrease was primarily due to the performance of our U.S. joint venture in
compressor manufacturing.
Interest Expense, net
Interest expense, net, increased $1.9 million to $3.8 million for the third quarter of 2008
from $1.9 million for the same period in 2007. The increase in interest expense was primarily
attributable to higher debt balances as the result of borrowing related to our share repurchases.
Provision for Income Taxes
The provision for income taxes was $32.3 million for the third quarter of 2008 compared to
$35.6 million for the same period in 2007. The effective tax rate was 37.0% and 36.8% for the
third quarters of 2008 and 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%. We anticipate that our effective rate for the full year 2008 will be approximately
37%.
Third Quarter 2008 Compared to Third Quarter 2007 Results by Segment
The key performance indicators of our segments profitability are net sales and profit. For
more detailed information regarding how we define segment income or loss, see Note 19 in the Notes
to our Consolidated Financial Statements.
Residential Heating & Cooling
The following table details our Residential Heating & Cooling segments net sales and profit
for the third quarters of 2008 and 2007 (dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Third Quarter |
|
|
|
|
|
|
|
|
|
2008 |
|
|
2007 |
|
|
Difference |
|
|
% Change |
|
Net sales |
|
$ |
414.0 |
|
|
$ |
456.5 |
|
|
$ |
(42.5 |
) |
|
|
(9.3 |
)% |
Profit |
|
|
55.3 |
|
|
|
63.7 |
|
|
|
(8.4 |
) |
|
|
(13.2 |
) |
% of net sales |
|
|
13.4 |
% |
|
|
14.0 |
% |
|
|
|
|
|
|
|
|
The decrease in net sales was due to continuing weakness in the U.S. residential new
construction market. As a result, unit volumes were down in the third quarter of 2008 as compared
to the third quarter of 2007. The decrease related to sales volumes was partially offset by
favorable product mix towards our premium products and price increases. Also, fewer cooling days
due to milder temperatures in the quarter unfavorably affected our replacement business.
26
Segment profit decreased primarily due to the unfavorable impact of lower unit volumes,
increased commodity costs, higher freight costs and increased bad debt expense, which were
partially offset by favorable product mix, price increases and lower expenses due to cost reduction
efforts.
Commercial Heating & Cooling
The following table details our Commercial Heating & Cooling segments net sales and profit
for the third quarters of 2008 and 2007 (dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Third Quarter |
|
|
|
|
|
|
|
|
|
2008 |
|
|
2007 |
|
|
Difference |
|
|
% Change |
|
Net sales |
|
$ |
251.4 |
|
|
$ |
255.1 |
|
|
$ |
(3.7 |
) |
|
|
(1.5 |
)% |
Profit |
|
|
40.3 |
|
|
|
37.8 |
|
|
|
2.5 |
|
|
|
6.6 |
|
% of net sales |
|
|
16.0 |
% |
|
|
14.8 |
% |
|
|
|
|
|
|
|
|
Our domestic operations experienced unfavorable sales mix as the prior years results
contained a relatively high level of newly introduced premium products that did not recur in the
current year quarter. Additionally, volumes were lower on a year-over-year basis primarily due to
the continued softening in our retail national account business as customers deferred new store
openings. The unfavorable product mix and reduced volumes were partially offset by moderate price
increases. Strong sales volumes in Europe also partially offset the softness in our domestic
sales. The favorable impact of changes in foreign currency exchange rates increased net sales by
$7.6 million.
The increase in segment profit was due primarily to moderate price increases, reduced
manufacturing and administrative costs primarily in our domestic operations and lower commissions.
These were partially offset by unfavorable product mix, increased commodity costs and lower sales
volumes.
Service Experts
The following table details our Service Experts segments net sales and profit for the third
quarters of 2008 and 2007 (dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Third Quarter |
|
|
|
|
|
|
|
|
|
2008 |
|
|
2007 |
|
|
Difference |
|
|
% Change |
|
Net sales |
|
$ |
168.0 |
|
|
$ |
183.9 |
|
|
$ |
(15.9 |
) |
|
|
(8.6 |
)% |
Profit |
|
|
4.5 |
|
|
|
9.2 |
|
|
|
(4.7 |
) |
|
|
(51.1 |
) |
% of net sales |
|
|
2.7 |
% |
|
|
5.0 |
% |
|
|
|
|
|
|
|
|
The decrease in net sales was primarily due to decline in the residential new construction
market and residential service and replacement market resulting from the weakness of the U.S.
economy. Sales volumes for the quarter were also negatively impacted by milder temperatures than
normal during the quarter.
The decrease in segment profit was primarily due to the decrease in sales volume, unfavorable
sales mix and higher year-over-year customer contact center implementation costs. Sales mix
adversely impacted segment profit due to a decrease in replacement sales as customers opted to
repair units instead of replace them. These factors were offset by lower commissions due to lower
volumes, lower advertising expenditures and cost controls that resulted in lower personnel-related
expense.
Refrigeration
The following table details our Refrigeration segments net sales and profit for the third
quarters of 2008 and 2007 (dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Third Quarter |
|
|
|
|
|
|
|
|
|
2008 |
|
|
2007 |
|
|
Difference |
|
|
% Change |
|
Net sales |
|
$ |
162.9 |
|
|
$ |
157.5 |
|
|
$ |
5.4 |
|
|
|
3.4 |
% |
Profit |
|
|
16.7 |
|
|
|
17.8 |
|
|
|
(1.1 |
) |
|
|
(6.2 |
) |
% of net sales |
|
|
10.3 |
% |
|
|
11.3 |
% |
|
|
|
|
|
|
|
|
27
Net sales increased due to a favorable impact of changes in foreign currency exchange rates of
$6.9 million and
moderate price increases implemented primarily in our domestic operations as a result of
higher commodity and component costs. These favorable items were partially offset by decreases in
unit volumes in our South American, European, Australian and domestic operations.
The decrease in segment profit was primarily due to lower sales volumes, increased commodity
costs and manufacturing inefficiencies primarily as a result of manufacturing rationalization
activities at affected locations. These unfavorable impacts to segment profit were partially
offset by the price increases noted above, favorable foreign currency exchange rates, and lower
administrative expenses due to tight cost controls.
Corporate and Other
Corporate and other expenses decreased to $16.3 million in 2008 from $23.4 million in 2007.
The decrease was primarily driven by reduced stock-based and incentive compensation expenses,
pension costs, group insurance and other cost control measures, which were partially offset by
increased expense related to foreign currency exchange rates. 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 third quarter of 2008 as
compared to the same period in 2007. The decrease in pension costs was primarily due to
settlement charges taken in the prior year quarter.
Year-to-Date Through September 30, 2008 Compared to Year-to-Date Through September 30, 2007
Consolidated Results
Net Sales
Our Residential and Commercial Heating & Cooling and Service Experts segments had decreases in
net sales resulting from lower unit volumes and overall unfavorable product mix changes, offset by
moderate price increases. Net sales increased in our Refrigeration segment largely due to
favorable changes in foreign currency exchange rates. The favorable impact of foreign currency
translation increased consolidated net sales by $80.0 million.
Gross Profit
Year-to-date gross profit margin increased by 0.5% for 2008 compared to 2007 due to
manufacturing efficiencies. Price increases partially offset increases in commodity and component
costs.
Selling, General and Administrative Expenses
SG&A expenses for the first three quarters decreased to $570.8 million in 2008 compared to
$582.7 million in 2007. As a percentage of total net sales, SG&A expenses were 20.8% for 2008 and
20.4% for 2007. The decrease in SG&A expenses was primarily due to lower stock-based and incentive
compensation expenses, legal and professional fees, commissions, group insurance, advertising and
promotional costs, pension costs and favorable foreign currency exchange rates. These decreases in
expenses relative to the prior period in 2007 were partially offset by increased selling, bad debt
and research and development expenses.
Losses (Gains) and Other Expenses, Net
Losses (Gains) and other expenses, net for the first three quarters of 2008 and 2007 included
the following (in millions):
|
|
|
|
|
|
|
|
|
|
|
Year-to-date September 30, |
|
|
|
2008 |
|
|
2007 |
|
Realized gains on settled futures contracts not
designated as cash flow hedges |
|
$ |
(1.2 |
) |
|
$ |
(3.1 |
) |
Unrealized losses on unsettled futures contracts
not designated as cash flow hedges |
|
|
0.5 |
|
|
|
0.9 |
|
Ineffective portion of losses on cash flow hedges |
|
|
0.1 |
|
|
|
0.1 |
|
Other items, net |
|
|
(4.0 |
) |
|
|
(3.1 |
) |
|
|
|
|
|
|
|
Losses (Gains) and other expenses, net |
|
$ |
(4.6 |
) |
|
$ |
(5.2 |
) |
|
|
|
|
|
|
|
28
The decrease in realized gains on settled futures contracts not designated as cash flow hedges
was primarily due to
decreases in commodity prices relative to the futures contract prices during the first three
quarters of 2008 as compared to the same period in 2007. For more information, see Note 15 in the
Notes to our Consolidated Financial Statements. The increase in other items was primarily due to a
favorable catch-up adjustment of $4.5 million related to foreign currency fluctuations on
intercompany loans.
Restructuring Charges
We recognized $18.9 million and $14.2 million in restructuring charges in the first three
quarters of 2008 and 2007, respectively. Restructuring charges incurred during the first three
quarters of 2008 primarily related to manufacturing rationalization activities.
As part of our ongoing cost reduction initiatives in our manufacturing operations, during the
first three quarters of 2008, we incurred restructuring charges of $5.8 million related to the
previously announced closing of our Refrigeration operations in Danville, Illinois and the
consolidation of our Danville manufacturing, support, and warehouse functions into our Tifton,
Georgia and Stone Mountain, Georgia operations. Additionally, we began the transition of
production of selected Refrigeration products currently manufactured in Milperra, Australia to a
sister facility in Wuxi, China and incurred $3.0 million in restructuring charges related to this
action. We announced plans to transition production of certain Residential Heating & Cooling
products from our Marshalltown, Iowa manufacturing facility to our new manufacturing operation in
Saltillo, Mexico and recorded $2.1 million of restructuring charges in connection with this
activity. We also recorded additional restructuring charges of $1.7 million in 2008 related to the
previously announced closure of our Lynwood, California operations and consolidation of our U.S.
factory-built fireplace manufacturing operations in our facility in Union City, Tennessee. We
commenced the transition of production of certain Refrigeration products currently manufactured
near Madrid, Spain to another facility in Genas, France and incurred $0.7 million in restructuring
charges related to this action. We also commenced the transition of production of certain
Residential Heating & Cooling products currently manufactured in Blackville, South Carolina to
another facility in Orangeburg, South Carolina and recorded severance charges of $0.5 million
related to this action.
We also restructured certain administrative functions during the third quarter of 2008. In
the third quarter of 2008, we consolidated and reorganized the administrative functions of our
Commercial business unit in Northern Europe and recorded a restructuring charge for severance of
$2.6 million related to this action. We also took actions to eliminate administrative positions
in our Refrigeration business unit in Europe and at our corporate headquarters and recorded $0.8
million as severance in restructuring charges.
Restructuring charges incurred during the first three quarters of 2007 primarily related to
the reorganization of our corporate administrative function and manufacturing rationalization
activities, including the consolidation of our U.S. factory-built fireplace manufacturing
operations and the Allied Air Enterprises consolidation.
Total cash paid for restructuring activities during the first three quarters of 2008 was $22.1
million. This amount was primarily composed of severance payments related to the elimination of the
position of chief administrative officer and severance related to manufacturing rationalizations
and corporate reorganizations.
Results from Equity Method Investments
Investments in affiliates in which we do not exercise control but have significant influence
are accounted for using the equity method of accounting. Income from equity method investments
decreased to $8.0 million for the first three quarters of 2008 as compared to $8.9 million in the
same period of 2007. The decrease was due to the performance of our U.S. joint venture in
compressor manufacturing.
During the first three quarters of 2008, we also recorded a $2.3 million impairment charge
related to our investment in a joint venture in Thailand.
Interest Expense, Net
Interest expense, net, increased $5.5 million to $10.3 million for the first three quarters of
2008 from $4.8 million for the same period in 2007. The increase in interest expense was primarily
attributable to higher debt balances as the result of increased borrowing related to our share
repurchases.
29
Provision for Income Taxes
The provision for income taxes was $68.9 million for the first three quarters of 2008 compared
to $69.3 million for the same period in 2007. The effective tax rate was 38.0% and 34.8% for the
first three quarters of 2008 and 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%. Our effective rate was also impacted in 2008 by a non-deductible impairment charge
and in 2007 by a $3.2 million benefit from a change in estimated gain from the prior year. We
anticipate that our effective rate for the full year 2008 will be approximately 37%.
Year-to-Date Through September 30, 2008 Compared to Year-to-Date Through September 30, 2007
Results by Segment
Residential Heating & Cooling
The following table details our Residential Heating & Cooling segments year-to-date net sales
and profit for 2008 and 2007 (dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year-to-date |
|
|
|
|
|
|
|
|
|
September 30, |
|
|
|
|
|
|
|
|
|
2008 |
|
|
2007 |
|
|
Difference |
|
|
% Change |
|
Net sales |
|
$ |
1,193.9 |
|
|
$ |
1,315.5 |
|
|
$ |
(121.6 |
) |
|
|
(9.2 |
)% |
Profit |
|
|
118.5 |
|
|
|
143.2 |
|
|
|
(24.7 |
) |
|
|
(17.2 |
) |
% of net sales |
|
|
9.9 |
% |
|
|
10.9 |
% |
|
|
|
|
|
|
|
|
The decrease in net sales was primarily due to a decrease in unit volumes. Unit volumes were
generally lower across the residential HVAC industry due to softness in the residential new
construction market. The decrease was partially offset by a favorable change in product mix
towards our premium products and moderate price increases. The favorable impact of changes in
foreign currency exchange rates increased net sales by $10.0 million.
Segment profit decreased primarily due to the unfavorable impact of lower unit volumes,
increased commodity costs and increased bad debt expense, which were partially offset by favorable
product mix, price increases and a reduction in warranty expense due to lower expected failure
rates and lower expenses due to cost reduction efforts.
Commercial Heating & Cooling
The following table details our Commercial Heating & Cooling segments year-to-date net sales
and profit for 2008 and 2007 (dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year-to-date |
|
|
|
|
|
|
|
|
|
September 30, |
|
|
|
|
|
|
|
|
|
2008 |
|
|
2007 |
|
|
Difference |
|
|
% Change |
|
Net sales |
|
$ |
646.1 |
|
|
$ |
650.6 |
|
|
$ |
(4.5 |
) |
|
|
(0.7 |
)% |
Profit |
|
|
73.2 |
|
|
|
76.6 |
|
|
|
(3.4 |
) |
|
|
(4.4 |
) |
% of net sales |
|
|
11.3 |
% |
|
|
11.8 |
% |
|
|
|
|
|
|
|
|
Our domestic operations experienced lower sales volumes on a year-over-year basis primarily
due to the softening in our retail national account business as customers deferred new store
openings. These reductions were partially offset by price increases. The favorable impact of
changes in foreign currency exchange rates increased net sales by $28.1 million.
The reduced segment profit was due primarily to lower sales volumes, increased commodity
costs, overall unfavorable mix and higher freight and distribution costs. These were partially
offset by price increases and reduced manufacturing costs primarily in our domestic operations.
30
Service Experts
The following table details our Service Experts segments year-to-date net sales and profit
for 2008 and 2007 (dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year-to-date |
|
|
|
|
|
|
|
|
|
September 30, |
|
|
|
|
|
|
|
|
|
2008 |
|
|
2007 |
|
|
Difference |
|
|
% Change |
|
Net sales |
|
$ |
491.0 |
|
|
$ |
512.0 |
|
|
$ |
(21.0 |
) |
|
|
(4.1 |
)% |
Profit |
|
|
10.8 |
|
|
|
18.4 |
|
|
|
(7.6 |
) |
|
|
(41.3 |
) |
% of net sales |
|
|
2.2 |
% |
|
|
3.6 |
% |
|
|
|
|
|
|
|
|
The decrease in net sales was primarily due to the decline in the residential new construction
and residential service and replacement markets resulting from the weakness of the U.S. economy.
The favorable impact of changes in foreign currency exchange rates increased net sales by $8.4
million.
The decrease in segment profit was primarily due to lower sales volumes, lower margins, higher
legal costs and higher customer contact center implementation costs. These were offset by lower
commissions due to lower volumes, lower advertising expenditures and tight cost controls that
resulted in lower personnel-related expense.
Refrigeration
The following table details our Refrigeration segments year-to-date net sales and profit for
2008 and 2007 (dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year-to-date |
|
|
|
|
|
|
|
|
|
September 30, |
|
|
|
|
|
|
|
|
|
2008 |
|
|
2007 |
|
|
Difference |
|
|
% Change |
|
Net sales |
|
$ |
486.8 |
|
|
$ |
450.1 |
|
|
$ |
36.7 |
|
|
|
8.2 |
% |
Profit |
|
|
48.9 |
|
|
|
46.6 |
|
|
|
2.3 |
|
|
|
4.9 |
|
% of net sales |
|
|
10.0 |
% |
|
|
10.4 |
% |
|
|
|
|
|
|
|
|
Net sales increased due to a favorable impact of changes in foreign currency exchange rates of
$34.7 million. This favorable impact was supplemented by price increases in our domestic
operations. Price increases were implemented as the result of higher commodity and component
costs. These favorable items were partially offset by decreases in unit volumes in our European
and Australian operations.
The increase in segment profit was primarily due to the impact of price increases and
favorable foreign currency exchange rates noted above. These favorable impacts to segment profit
were partially offset by the effects of volume decreases, increased commodity costs and
manufacturing inefficiencies.
Corporate and Other
Corporate and other expenses decreased to $37.2 million in 2008 from $64.2 million in 2007.
The decrease was primarily driven by expense reduction in compliance activities, stock-based and
incentive compensation, professional fees, foreign currency gains and overall tight budgetary
controls. 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 nine months of 2008 as compared to the same period in 2007. A portion of
the decrease in Corporate and other expenses was composed of the favorable catch-up adjustment
related to foreign currency in the second quarter.
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 third quarter due to the seasonal
nature of our business cycle.
As of September 30, 2008, our financial leverage increased compared to September 30, 2007,
primarily due to an increase of $241.0 million in our outstanding debt balances as well as 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 14.2 million shares of our common
stock for $500 million since June 30, 2007 under our share repurchase plan that concluded in the
second quarter of 2008.
31
The following table summarizes our cash activity for the three quarters ended September 30,
2008 and 2007 (in
millions):
|
|
|
|
|
|
|
|
|
|
|
Year-to-date |
|
|
|
September 30, |
|
|
|
2008 |
|
|
2007 |
|
Net cash provided by operating activities |
|
$ |
138.8 |
|
|
$ |
110.5 |
|
Net cash used in investing activities |
|
|
(43.5 |
) |
|
|
(69.0 |
) |
Net cash used in financing activities |
|
|
(134.9 |
) |
|
|
(101.4 |
) |
Net Cash Provided by Operating Activities
Net cash provided by operating activities was $138.8 million compared to $110.5 million in
2007. The favorable comparison of cash from operating activities was due to a reduced use of cash
for accounts receivable, inventory, and income taxes payable in the first three quarters of 2008
compared to the same period in 2007. Seasonal increases in inventory and accounts receivable
typically result in a use of cash through the first three quarters of the year. However, the
seasonal growth in inventory of $34.1 million for the first nine months of 2008 was lower than the
$45.1 million growth in the same period in 2007 due to our planned adjustments to the production
and inventory levels to reflect the continued declines in the residential markets. The seasonal
growth in accounts receivable of $79.4 million for the first three quarters of 2008 was also lower
than the $111.3 million growth in the same period in 2007 primarily due to an increased focus on
collection activities and, to a lesser extent, lower net sales. Lower income tax payments in the
first three quarters of 2008, as compared to the same period in 2007, enhanced operating cash
flows. These changes were partially offset by increased payments for restructuring activities for
the first three quarters of 2008 compared to the same period in 2007.
Net Cash Used in Investing Activities
Net cash used in investing activities was $43.5 million in the first three quarters of 2008
compared to $69.0 million in the same period in 2007. This decrease was primarily driven by the
net purchases of short-term investments of $6.7 million in the first three quarters of 2008
compared to net purchases of $25.0 million in the same period in 2007. Capital expenditures of
$37.3 million and $44.5 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 Used in Financing Activities
Net cash used in financing activities was $134.9 million in the first three quarters of 2008
compared to $101.4 million in the same period in 2007. We paid a total of $32.4 million in
dividends on our common stock in the first three quarters of 2008 compared to $35.0 million for the
same period in 2007. Net short-term and revolving long-term borrowings totaled approximately
$176.9 million in the first three quarters of 2008 as compared to $51.3 million for the same period
in 2007. During the first three quarters of 2008, we used approximately $307.6 million to
repurchase 8,304,643 shares of our common stock under our share repurchase plan and 306,510 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 September 30, 2008 and December 31, 2007 (in
millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Description of Obligation |
|
Short-Term |
|
|
Current |
|
|
Long-Term |
|
|
|
|
As of September 30, 2008 |
|
Debt |
|
|
Maturities |
|
|
Maturities |
|
|
Total |
|
Domestic promissory notes (1) |
|
$ |
|
|
|
$ |
11.1 |
|
|
$ |
35.0 |
|
|
$ |
46.1 |
|
Domestic revolving credit facility |
|
|
|
|
|
|
|
|
|
|
333.0 |
|
|
|
333.0 |
|
Other obligations |
|
|
5.4 |
|
|
|
0.1 |
|
|
|
16.9 |
|
|
|
22.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Debt |
|
$ |
5.4 |
|
|
$ |
11.2 |
|
|
$ |
384.9 |
|
|
$ |
401.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Description of Obligation |
|
Short-Term |
|
|
Current |
|
|
Long-Term |
|
|
|
|
As of December 31, 2007 |
|
Debt |
|
|
Maturities |
|
|
Maturities |
|
|
Total |
|
Domestic promissory notes (1) |
|
$ |
|
|
|
$ |
36.1 |
|
|
$ |
35.0 |
|
|
$ |
71.1 |
|
Domestic revolving credit facility |
|
|
|
|
|
|
|
|
|
|
131.0 |
|
|
|
131.0 |
|
Other obligations |
|
|
4.8 |
|
|
|
0.3 |
|
|
|
0.7 |
|
|
|
5.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Debt |
|
$ |
4.8 |
|
|
$ |
36.4 |
|
|
$ |
166.7 |
|
|
$ |
207.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
32
|
|
|
(1) |
|
Domestic promissory notes as of September 30, 2008 and December 31, 2007 consisted of
the following (in millions): |
|
|
|
|
|
|
|
|
|
|
|
As of |
|
|
As of |
|
|
|
September 30, |
|
|
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 |
|
8.00% promissory note, payable in 2010 |
|
|
35.0 |
|
|
|
35.0 |
|
|
|
|
|
|
|
|
Total domestic promissory notes |
|
$ |
46.1 |
|
|
$ |
71.1 |
|
|
|
|
|
|
|
|
Credit Agreements
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. During the fourth
quarter of 2007, we 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. During the second quarter of 2008, we made a final $25.0 million
payment on the domestic promissory note.
As of September 30, 2008, we had outstanding borrowings of $333.0 million under the $650.0
million domestic revolving credit facility and $115.6 million was committed to standby letters of
credit. All of the remaining $201.4 million was available for future borrowings after
consideration of covenant limitations. The facility matures in October 2012.
The domestic revolving credit facility includes a subfacility for swingline loans of up to $50
million and provides for the issuance of letters of credit for the full amount of the credit
facility. The revolving loans bear interest at either (i) the Eurodollar rate plus a margin of
between 0.5% and 1% that is based on our Debt to Adjusted EBITDA Ratio (as defined in the Credit
Agreement) or (ii) the higher of (a) the Federal Funds Rate plus 0.5% and (b) the prime rate set by
Bank of America, N.A. We may prepay the revolving loans at any time without premium or penalty,
other than customary breakage costs in the case of Eurodollar loans. We will pay a facility fee in
the range of 0.125% to 0.25% based on our Debt to Adjusted EBITDA Ratio. We will also pay a letter
of credit fee in the range of 0.5% to 1% based on our Debt to Adjusted EBITDA Ratio, as well as 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 September 30,
2008, we were in compliance with all covenant requirements. Our revolving credit facility and
promissory notes are guaranteed by our material subsidiaries.
We have additional borrowing capacity through several foreign facilities governed by
agreements between the company and a syndicate of banks, used primarily to finance the seasonal
borrowing needs of our foreign subsidiaries. We had $6.1 million and $5.8 million of obligations
outstanding through our foreign subsidiaries as of September 30, 2008 and December 31, 2007,
respectively.
33
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 September 30, 2008 and December 31, 2007, we had not sold any
beneficial interests in accounts receivable. The maximum amount available under the securitization
arrangement depends on the amount of qualifying accounts receivable. The maximum amount available
was $119.5 million and $102.7 million as of September 30, 2008 and December 31, 2007, respectively.
Cash and Short-Term Investments
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 $107.1 million and $145.5
million as of September 30, 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 September 30, 2008 and December 31, 2007, $20.7 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, and will be renewed upon expiration. These letter of credit
restrictions can be transferred to our revolving lines of credit as needed.
Share Repurchases and Available Liquidity
On July 25, 2007, we announced that our Board of Directors approved a share repurchase plan,
pursuant to which we were authorized to repurchase up to $500 million of shares of our common stock
through open market purchases (the 2007 Share Repurchase Plan). Based on the closing price of our
common stock on July 24, 2007, a $500 million repurchase represented over 20% of our market
capitalization. The repurchases under the 2007 Share Repurchase Plan were fully executed by the
end of the second quarter of 2008.
On June 2, 2008, we announced that our Board of Directors approved a new share repurchase
plan, pursuant to which we are authorized to repurchase up to $300 million of shares of our common
stock through open market purchases (the 2008 Share Repurchase Plan).
We periodically review our capital structure, including our primary bank facility, to ensure
that it has adequate liquidity. We also monitor the credit ratings and other relevant public
information for the banks participating in our bank facility to assess the continued availability
of lending capacity. 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 2008
Share Repurchase Plan.
During the third quarter of 2008, we amended the lease agreement for our corporate
headquarters. While the same party continues to be the lessor under the lease, the amendment,
among other things, replaced the debt participant and moderately increased the rent payments. The
amendment also provides for consistency of financial covenants with our revolving credit agreement
and we are in compliance with these financial covenants. The lease will continue to be accounted
for as an operating lease.
During the nine months ended September 30, 2008, we expanded our Tifton, Georgia manufacturing
facility using the proceeds from Industrial Development Bonds (IDBs). We entered into a lease
agreement with the owner of the property and the issuer of the IDBs, and through our lease payments
fund the interest payments to investors in the IDBs. We also guaranteed the repayment of the IDBs
and entered into letters of credit totaling $16.3 million to fund a potential repurchase of the
IDBs in the event that investors exercised their right to tender the IDBs to the Trustee. On
September 25, 2008, the investors tendered the IDBs to the Trustee. At September 30, 2008, we
recorded both a long-term asset and a corresponding long-term obligation of $16.3 million related to these transactions. The
Remarketing Agent has the obligation to remarket the IDBs to third-party investors and will
continue to do so on a best efforts basis.
As a result of the recent declines in the securities markets as a whole, the fair value of
pension plan assets has also declined. A sustained decline in fair value of pension plan assets
could result in increased pension contributions.
34
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:
|
|
|
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 September 30, 2008
and December 31, 2007, respectively, we had not sold any such accounts receivable. |
|
|
|
We also lease real estate and machinery and equipment pursuant to leases that, in
accordance with generally accepted accounting principles, are not capitalized on the
balance sheet, including high-turnover equipment such as autos and service vehicles
and short-lived equipment such as personal computers. |
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:
|
|
|
Level 1
|
|
Quoted prices for identical instruments in active markets at the measurement date. |
|
|
|
Level 2
|
|
Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in
markets that are not active; and model-derived valuations in which all significant inputs and significant value
drivers are observable in active markets at the measurement date and for the anticipated term of the instrument. |
|
|
|
Level 3
|
|
Valuations derived from valuation techniques in which one or more significant inputs or
significant value drivers are unobservable inputs that reflect the reporting entitys own
assumptions about the assumptions market participants would use in pricing the asset or
liability developed based on the best information available in the circumstances. |
Fair Value Techniques
Our valuation techniques are applied to all of the assets and liabilities carried at fair
value as of January 1, 2008, upon adoption of SFAS No. 157. Where available, the fair values are
based upon quoted prices in active markets. However, if quoted prices are not available, then the
fair values are based upon quoted prices for similar assets or liabilities or independently sourced
market parameters, such as credit default swap spreads, yield curves, reported trades,
broker/dealer quotes, interest rates and benchmark securities. For assets and liabilities with a
lack of observable market activity, if any, the fair values are based upon discounted cash flow
methodologies incorporating assumptions that, in our judgment, reflect the assumptions a
marketplace participant would use. To ensure that financial assets and liabilities are recorded at
fair value, valuation adjustments may be required to reflect either partys creditworthiness and
ability to pay. Where appropriate, these amounts were incorporated into our valuations as of
September 30, 2008, the measurement date.
Our adoption of SFAS No. 157 has resulted in changes to the valuation techniques used when
determining the fair value of our derivative instruments. These derivatives are primarily valued
using estimated future cash flows that are based directly on observed prices from exchange-traded
derivatives and therefore have been classified as Level 2. We also take into account the
counterpartys creditworthiness, or our own creditworthiness, as appropriate. An adjustment
has been recorded in order to reflect the risk of credit default, but
these adjustments have been insignificant to the overall value of the derivatives. The effect of
adopting these changes to the valuation techniques was not material.
35
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.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
Our results of operations can be affected by changes in exchange rates. Net sales and
expenses in foreign currencies are translated into U.S. dollars for financial reporting purposes
based on the average exchange rate for the period. Net sales from outside the United States
represented 29.3% and 26.4% and 29.4% and 25.6% of total net sales for the three and nine months
ended September 30, 2008 and 2007, respectively. Historically, foreign currency translation gains
or losses have not had a material effect on our overall operations. As of September 30, 2008, the
impact to net income of a 10% change in exchange rates is estimated to be approximately $5.2
million on a year-to-date 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
September 30, 2008, we had metal futures contracts maturing at various dates through January 2010
with a fair value of a liability of $6.3 million. The impact of a 10% change in commodity prices
would not have a significant impact on our results from operations on an annual basis, absent any
other contravening actions.
Our results of operations can be affected by changes in interest rates due to variable rates
of interest on our revolving credit facilities. A 100 basis point change in interest rates would
impact our results of operations by approximately $2.6 million.
Item 4. Controls and Procedures.
Disclosure Controls and Procedures
We carried out an evaluation, under the supervision and with the participation of our
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 September 30, 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 September 30, 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.
36
PART II OTHER INFORMATION
Item 1. 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.
Item 1A. Risk Factors.
In addition to the other information set forth in this Quarterly Report on Form 10-Q, you
should carefully consider the risk factors discussed in Part I, Item 1A. Risk Factors in our
Annual Report on Form 10-K for the year ended December 31, 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.
Item 2. 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 third quarter of 2008 is incorporated in this Item 2 by reference.
Item 6. Exhibits.
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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 23, 2008 and incorporated herein by reference). |
|
|
|
|
|
|
|
|
4.1 |
|
|
|
|
Specimen Stock Certificate for the Common Stock, par value $.01 per share, of LII
(filed as Exhibit 4.1 to LIIs Amendment to Registration Statement on Form S-1/A
(Registration No. 333-75725) filed on June 16, 1999 and incorporated herein by reference). |
|
|
|
|
|
|
|
|
4.2 |
|
|
|
|
Rights Agreement, dated as of July 27, 2000, between LII and ChaseMellon Shareholder
Services, L.L.C., as Rights Agent, which includes as Exhibit A the form of Certificate of
Designations of Series A Junior Participating Preferred Stock setting forth the terms of the
Preferred Stock, as Exhibit B the form of Rights Certificate and as Exhibit C the Summary of
Rights to Purchase Preferred Stock (filed as Exhibit 4.1 to LIIs Current Report on Form 8-K
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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|
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|
31.2 |
|
|
|
|
Certification of the principal financial officer (filed herewith). |
|
|
|
|
|
|
|
|
32.1 |
|
|
|
|
Certification of the principal executive officer and the principal financial officer pursuant to 18 U.S.C.
Section 1350 (filed herewith). |
37
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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|
|
Date: October 30, 2008 |
LENNOX INTERNATIONAL INC.
|
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|
|
/s/ Susan K. Carter
|
|
|
Susan K. Carter |
|
|
Chief Financial Officer
(on behalf of registrant and as principal
financial officer) |
|
38
EXHIBIT INDEX
|
|
|
|
|
|
|
|
31.1 |
|
|
|
|
Certification of the principal executive officer (filed herewith). |
|
|
|
|
|
|
|
|
31.2 |
|
|
|
|
Certification of the principal financial officer (filed herewith). |
|
|
|
|
|
|
|
|
32.1 |
|
|
|
|
Certification of the principal executive officer and the principal financial officer pursuant to 18 U.S.C.
Section 1350 (filed herewith). |
39