LENNOX INTERNATIONAL INC
10-Ks and 10-Qs
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Table of Contents
UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
Washington, D.C. 20549
Form 10-K
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þ
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 |
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| For the fiscal year ended December 31, 2009 | ||
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OR
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||
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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 |
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| For the transition period from to | ||
Commission File Number 001-15149
LENNOX INTERNATIONAL
INC.
(Exact name of Registrant as specified in its charter)
| Delaware | 42-0991521 | |
|
(State or other jurisdiction of
incorporation or organization) |
(I.R.S. Employer
Identification Number) |
2140 Lake Park Blvd.
Richardson, Texas 75080
(Address of principal executive
offices, including zip code)
(Registrant’s telephone number, including area code):
(972) 497-5000
Securities
Registered Pursuant to Section 12(b) of the Act:
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Title of each class
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Name of each exchange on which
registered
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Common Stock, $.01 par value per share
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New York Stock Exchange |
Securities
Registered Pursuant to Section 12(g) of the Act:
None
Indicate by checkmark if the registrant is a well-known seasoned
issuer, as defined in Rule 405 of the Securities
Act. Yes
þ
No
o
Indicate by checkmark if the registrant is not required to file
reports pursuant to Section 13 or 15(d) of the Exchange
Act. Yes
o
No
þ
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of
the Exchange Act during the preceding 12 months (or for
such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing
requirements for the last
90 days. Yes
þ
No
o
Indicate by check mark whether the registrant has submitted
electronically and posted on its corporate Web site, if any,
every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of
Regulation S-T(§232.405
of this chapter) during the preceding 12 months (or for
such shorter period that the registrant was required to submit
and post such
files). Yes
o
No
o
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of
Regulation S-K
is not contained herein, and will not be contained, to the best
of registrant’s knowledge, in definitive proxy or
information statements incorporated by reference in
Part III of this
Form 10-K
or any amendment to this
Form 10-K.
o
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company. See the definitions of
“large accelerated filer,” “accelerated
filer” and “smaller reporting company” in Rule
12b-2
of the
Exchange Act. (Check one):
| Large accelerated filer þ | Accelerated filer o | Non-accelerated filer o | Smaller reporting company o |
(Do not check if a smaller reporting company)
Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2
of the Exchange
Act). Yes
o
No
þ
As of June 30, 2009, the aggregate market value of the
common stock held by non-affiliates of the registrant was
approximately $1,345,591,000 based on the closing price of the
registrant’s common stock on the New York Stock Exchange on
such date. Common stock held by non-affiliates excludes common
stock held by the registrant’s executive officers,
directors and stockholders whose ownership exceeds 5% of the
common stock outstanding at June 30, 2009. As of
February 8, 2010, there were 56,300,383 shares of the
registrant’s common stock outstanding.
DOCUMENTS
INCORPORATED BY REFERENCE
Portions of the registrant’s Proxy Statement to be filed
with the Securities and Exchange Commission in connection with
the registrant’s 2010 Annual Meeting of Stockholders to be
held on May 13, 2010 are incorporated by reference into
Part III of this report.
LENNOX
INTERNATIONAL INC.
FORM 10-K
For the Fiscal Year Ended December 31, 2009
INDEX
FORM 10-K
For the Fiscal Year Ended December 31, 2009
INDEX
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| PART II | ||||||||
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| PART III | ||||||||
| 99 | ||||||||
| 100 | ||||||||
| 100 | ||||||||
| 100 | ||||||||
| 100 | ||||||||
| PART IV | ||||||||
| 100 | ||||||||
| EX-21.1 | ||||||||
| EX-23.1 | ||||||||
| EX-31.1 | ||||||||
| EX-31.2 | ||||||||
| EX-32.1 | ||||||||
i
Table of Contents
| Item 1. | Business |
References in this Annual Report on
Form 10-K
to “we,” “our,” “us,”
“LII” or the “Company” refer to Lennox
International Inc. and its subsidiaries, unless the context
requires otherwise.
The
Company
Through our subsidiaries, we are a leading global provider of
climate control solutions. We design, manufacture and market a
broad range of products for the heating, ventilation, air
conditioning and refrigeration (“HVACR”) markets. We
have leveraged our expertise to become an industry leader known
for innovation, quality and reliability. Our products and
services are sold through multiple distribution channels under
well-established brand names including “Lennox,”
“Armstrong Air,” “Ducane,” “Bohn,”
“Larkin,” “Advanced Distributor Products,”
“Service Experts” and others.
Shown below are our four business segments, the key products and
brand names within each segment and 2009 net sales by
segment. Segment financial data for 2009, 2008 and 2007,
including financial information about foreign and domestic
operations, is included in Note 21 of the Notes to our
Consolidated Financial Statements in “Item 8.
Financial Statements and Supplementary Data” and is
incorporated herein by reference.
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2009 Net Sales
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Segment
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Products/Services | Brand Names | (In millions) | |||||
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Residential Heating & Cooling
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Furnaces, air conditioners, heat pumps, packaged heating and cooling systems, indoor air quality equipment, pre-fabricated fireplaces, freestanding stoves | Lennox, Armstrong Air, Ducane, Aire-Flo, AirEase, Concord, Magic-Pak, Advanced Distributor Products, Superior, Country Stoves, Security Chimneys | $ | 1,293.5 | ||||
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Commercial Heating & Cooling
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Unitary heating and air conditioning equipment, applied systems | Lennox, Allied Commercial | 594.6 | |||||
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Service Experts
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Sales, installation and service of residential and light commercial heating and cooling equipment | Service Experts, various individual service center names | 535.4 | |||||
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Refrigeration
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Condensing units, unit coolers, fluid coolers, air cooled condensers, air handlers, process chillers | Heatcraft Worldwide Refrigeration, Bohn, Larkin, Climate Control, Chandler Refrigeration, Friga-Bohn, HK Refrigeration, Hyfra, Kirby, Frigus-Bohn | 512.7 | |||||
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Eliminations
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(88.7 | ) | ||||||
| Total | $ | 2,847.5 | ||||||
We were founded in 1895 in Marshalltown, Iowa when Dave Lennox,
the owner of a machine repair business for the railroads,
successfully developed and patented a riveted steel coal-fired
furnace, which was substantially more durable than the cast iron
furnaces used at that time. Manufacturing these furnaces grew
into a significant business and was diverting the Lennox Machine
Shop from its core focus. As a result, in 1904, a group of
investors headed by D.W. Norris bought the furnace business and
named it the Lennox Furnace Company. We reincorporated as a
Delaware corporation in 1991 and completed our initial public
offering in 1999.
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Table of Contents
Products
and Services
Residential
Heating & Cooling
Heating & Cooling Products.
We
manufacture and market a broad range of furnaces, air
conditioners, heat pumps, packaged heating and cooling systems,
accessories to improve indoor air quality, replacement parts and
related products for both the residential replacement and new
construction markets in North America. These products are
available in a variety of designs and efficiency levels and at a
range of price points, and are intended to provide a complete
line of home comfort systems. We believe that by maintaining a
broad product line marketed under multiple brand names, we can
address different market segments and penetrate multiple
distribution channels.
The “Lennox” and “Aire-Flo” brands are sold
directly to a network of approximately 7,000 installing dealers,
making us one of the largest wholesale distributors of
residential heating and air conditioning products in
North America. The “Armstrong Air,”
“Ducane,” “AirEase,” “Concord,”
“Magic-Pak” and “Advanced Distributor
Products” brands are sold through independent distributors.
Our Advanced Distributor Products operation builds evaporator
coils and air handlers under the “Advanced Distributor
Products” brand, as well as the “Lennox,”
“Armstrong Air,” “AirEase,”
“Concord” and “Ducane” brands. In addition
to supplying us with components for our heating and cooling
systems, Advanced Distributor Products produces evaporator coils
to be used in connection with competitors’ heating and
cooling products as an alternative to such competitors’
brand name components. We have achieved a significant share of
the market for evaporator coils through the application of
technological and manufacturing skills and customer service
capabilities.
Hearth Products.
Our hearth products include
factory-built gas, wood-burning and electric fireplaces; free
standing wood-burning, pellet and gas stoves; wood-burning,
pellet and gas fireplace inserts; gas logs, venting products and
accessories. Many of the fireplaces are built with a blower or
fan option and are efficient heat sources as well as attractive
amenities to the home. We currently market our hearth products
under the “Lennox,” “Superior,”
“Country Collection” and “Security Chimneys”
brand names.
Commercial
Heating & Cooling
North America.
In North America, we
manufacture and sell unitary heating and cooling equipment used
in light commercial applications, such as low-rise office
buildings, restaurants, retail centers, churches and schools, as
opposed to larger applied systems. Our product offerings for
these applications include rooftop units ranging from two to 50
tons of cooling capacity and split system/air handler
combinations, which range from 1.5 to 20 tons of cooling
capacity. These products are distributed primarily through
commercial contractors and directly to national account
customers. We believe the success of our products is
attributable to their efficiency, design flexibility, total cost
of ownership, low life-cycle cost, ease of service and advanced
control technology.
Europe.
In Europe, we manufacture and sell
unitary products, which range from two to 70 tons of cooling
capacity, and applied systems with up to 200 tons of cooling
capacity. Our European products consist of small package units,
rooftop units, chillers, air handlers and fan coils that serve
medium-rise commercial buildings, shopping malls, other retail
and entertainment buildings, institutional applications and
other field-engineered applications. We manufacture heating and
cooling products in several locations in Europe and market these
products through both direct and indirect distribution channels
in Europe, Russia, Turkey and the Middle East.
Service
Experts
Approximately 100 company-owned Service Experts dealer
service centers provide installation, preventive maintenance,
emergency repair and replacement of heating and cooling systems
directly to residential and light commercial customers in
metropolitan areas in the U.S. and Canada. In connection
with these services, we sell a wide range of our manufactured
equipment, parts and supplies, and third-party branded products.
We focus primarily on service and replacement opportunities,
which we believe are more stable and profitable than new
construction in our Service Experts segment. We use a portfolio
of management procedures and best practices, including standards
of excellence for customer service, a training program for new
general managers, common
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Table of Contents
information technology systems and financial controls, regional
accounting centers and an inventory management program designed
to enhance the quality, effectiveness and profitability of
operations.
Refrigeration
We manufacture and market equipment for the global commercial
refrigeration market through subsidiaries organized under the
Heatcraft Worldwide Refrigeration name. These products are sold
to distributors, installing contractors, engineering design
firms, original equipment manufacturers and end-users.
North America.
Our commercial refrigeration
products for the North American market include condensing units,
unit coolers, fluid coolers, air-cooled condensers, compressor
racks and air handlers. These products are sold for
refrigeration applications, primarily to preserve food and other
perishables, and are used by supermarkets, convenience stores,
restaurants, refrigerated warehouses and distribution centers.
As part of the sale of commercial refrigeration products, we
routinely provide application engineering for consulting
engineers, contractors and others. We also sell products for
non-food and various industry applications, such as
telecommunications, dehumidification and medical applications.
International.
In international markets, we
manufacture and market refrigeration products including
condensing units, unit coolers, air-cooled condensers, fluid
coolers, compressor racks and process chillers. We have
manufacturing locations in Europe, Australia, New Zealand,
Brazil and China. We also own a 50% common stock interest in a
joint venture in Mexico that produces unit coolers, air-cooled
condensers, condensing units and compressor racks of the same
design and quality as those manufactured by our
U.S. business. This venture product line is complemented
with imports from the U.S., which are sold through the joint
venture’s distribution network. We also own a 9% common
stock interest in a manufacturer in Thailand that produces
compressors for use in our products and for other HVACR
customers as well.
Business
Strategy
Our business strategy is to sustain and expand our premium
market position through organic growth and acquisitions while
maintaining our focus on cost reductions to drive margin
expansion and support growth into target business segments. This
strategy is supported by five strategic priorities that are
underlined by our values and our people. The five strategic
priorities are:
Innovative
Product and System Solutions
In all of our markets, we are continually building on our
heritage of innovation by developing residential, commercial,
and refrigeration products that give families and business
owners more precise control over more aspects of their indoor
environments, while significantly lowering their energy costs.
Manufacturing
and Sourcing Excellence
We maintain our commitment to manufacturing and sourcing
excellence by driving low-cost assembly through rationalization
of our facilities and product lines, maximizing factory
efficiencies, and leveraging our purchasing power and sourcing
initiatives to expand the use of lower-cost components that meet
our high-quality requirements.
Distribution
Excellence
By investing resources in expanding our distribution network, we
are making products available to our customers in a timely,
cost-efficient manner. Additionally, we provide enhanced dealer
support through the use of technology, training and advertising
and merchandising.
Geographic
Expansion
We are growing our international presence by extending our
successful domestic business model and product knowledge into
developing international markets.
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Expense
Reduction
Through our cost management initiatives, we are focused on areas
to reduce operating, manufacturing, and administrative costs.
Marketing
and Distribution
We utilize multiple channels of distribution and offer different
brands at various price points in order to better penetrate the
HVACR markets. Our products and services are sold through a
combination of distributors, independent and company-owned
dealer service centers, other installing contractors,
wholesalers, manufacturers’ representatives and original
equipment manufacturers and to national accounts. Dedicated
sales forces and manufacturers’ representatives are
deployed across our business segments and brands in a manner
designed to maximize our ability to service a particular
distribution channel. To optimize enterprise-wide effectiveness,
we have active cross-functional and cross-organizational teams
coordinating approaches to pricing, product design, distribution
and national account customers.
An example of the competitive strength of our marketing and
distribution strategy is in the North American residential
heating and cooling market. We use three distinctly different
distribution approaches in this market: the company-owned
distribution system, the independent distribution system and
sales made directly to end-users. We distribute our
“Lennox” and “Aire-Flo” brands in a
company-owned process directly to dealers that install these
heating and cooling products and, in some cases, we sell
“Lennox” commercial products directly to national
account customers. We distribute our “Armstrong Air,”
“Ducane,” “AirEase,” “Concord,”
“Magic-Pak” and “Advanced Distributor
Products” brands through the traditional independent
distribution process pursuant to which we sell our products to
distributors who, in turn, sell the products to installing
contractors. In addition, we provide heating and cooling
replacement products and services directly to consumers through
company-owned Service Experts dealer service centers.
Over the years, the “Lennox” brand has become
synonymous with “Dave Lennox,” a highly recognizable
advertising icon in the heating and cooling industry. We utilize
the “Dave Lennox” image in mass media advertising, as
well as in numerous locally produced dealer advertisements, open
houses and trade events.
Manufacturing
We operate manufacturing facilities in the U.S. and
international locations. We have embraced lean-manufacturing
principles, a manufacturing philosophy that reduces waste in
manufactured products by shortening the timeline between the
customer order and delivery, accompanied by initiatives designed
to achieve high product quality across our manufacturing
operations. In our facilities most impacted by seasonal demand,
we manufacture both heating and cooling products to balance
seasonal production demands and maintain a relatively stable
labor force. We are generally able to hire temporary employees
to meet changes in demand.
Strategic
Sourcing
We rely on various suppliers to furnish the raw materials and
components used in the manufacturing of our products. To
maximize our buying effectiveness in the marketplace, our
central strategic sourcing group consolidates required purchases
of materials, components and indirect items across business
segments. The goal of the strategic sourcing group is to develop
global strategies for a given component group, concentrate
purchases with three to five suppliers and develop long-term
relationships with these vendors. We have several alternative
suppliers for our key raw material and component needs. By
developing these strategies and relationships, we leverage our
material needs to reduce costs and improve financial and
operating performance. Compressors, motors and controls
constitute our most significant component purchases, while
steel, copper and aluminum account for the bulk of our raw
material purchases. We own equity interests in joint ventures
that manufacture compressors. These joint ventures provide us
with compressors for our residential, commercial and
refrigeration businesses.
Our centrally led supplier development group works with selected
suppliers to reduce their costs and improve their quality and
delivery performance. We seek to accomplish this by employing
the same business excellence
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Table of Contents
tools utilized by our four business segments to drive
improvements in the area of lean manufacturing and six sigma, a
disciplined, data-driven approach and methodology for improving
quality.
Research
and Development and Technology
An important part of our growth strategy is continued investment
in research and product development to both develop new products
and make improvements to existing product lines. As a result, we
spent an aggregate of $48.9 million, $46.0 million and
$43.6 million on research and development during 2009, 2008
and 2007, respectively. We operate a global engineering and
technology organization that focuses on new technology
invention, product development, and process improvements.
Intellectual property and innovative designs are leveraged
across our businesses. We leverage product development cycle
time improvement and product data management systems to
commercialize new products to market more rapidly. We use
advanced, commercially available computer-aided design,
computer-aided manufacturing, computational fluid dynamics and
other sophisticated design tools to streamline the design and
manufacturing processes. We use complex computer simulations and
analyses in the conceptual design phase before functional
prototypes are created.
We also operate a full line of prototype machine equipment and
advanced laboratories certified by applicable industry
associations.
Seasonal
Nature of Business
Our sales and related segment profit tend to be seasonally
higher in the second and third quarters of the year because
summer is the peak season for sales of air conditioning
equipment and services in the U.S. and Canada.
The North American heating, ventilation and air conditioning
(“HVAC”) market is driven by seasonal weather
patterns. HVAC products and services are sold year round, but
the volume and mix of product sales and service change
significantly by season. The industry ships roughly twice as
many units during June as it does in December. Overall, cooling
equipment represents a substantial portion of the annual HVAC
market. In between the heating season (roughly November through
February) and cooling season (roughly May through August) are
periods commonly referred to as shoulder seasons when the
distribution channel transitions its buying patterns from one
season to the next. These seasonal fluctuations in mix and
volume drive our sales and related segment profit, resulting in
somewhat higher sales in the second and third quarters due to
the larger cooling season relative to the heating season.
Patents
and Trademarks
We hold numerous patents that relate to the design and use of
our products. We consider these patents important, but no single
patent is material to the overall conduct of our business. We
proactively obtain patents to further our strategic intellectual
property objectives. We own or license several trademarks and
service marks we consider important in the marketing of our
products and services, including LENNOX, ARMSTRONG AIR, DUCANE,
ALLIED COMMERCIAL, AIRE-FLO, CONCORD, ADP ADVANCED DISTRIBUTOR
PRODUCTS, MAGIC-PAK, HUMIDITROL, PRODIGY, HEATCRAFT WORLDWIDE
REFRIGERATION, BOHN, CHANDLER REFRIGERATION, KIRBY AND LARKIN,
among others. We protect our marks through national
registrations and common law rights.
Competition
Substantially all markets in which we participate are highly
competitive. The most significant competitive factors we face
are product reliability, product performance, service and price,
with the relative importance of these factors varying among our
businesses. Listed below are some of the companies we view as
significant competitors in the three other segments we serve,
with relevant brand names, when different from the company name,
shown in parentheses.
| • | Residential Heating & Cooling — United Technologies Corp. (Carrier, Bryant, Tempstar, Comfortmaker, Heil, Arcoaire); Goodman Global, Inc. (Goodman, Amana); Ingersoll-Rand plc (Trane, American |
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| Standard); Paloma Co., Ltd. (Rheem, Ruud); Johnson Controls, Inc. (York, Weatherking); Nordyne (Maytag, Westinghouse, Frigidaire, Tappan, Philco, Kelvinator, Gibson); HNI Corporation (Heatilator, Heat-n-Glo); and Monessen Hearth Company (Majestic). |
| • | Commercial Heating & Cooling — United Technologies Corp. (Carrier); Ingersoll-Rand plc (Trane); Johnson Controls, Inc. (York); AAON, Inc.; and Daikin Industries, Ltd. (McQuay). | |
| • | Service Experts — Local independent dealers; dealers owned by utility companies, including, for example, Direct Energy; and national HVAC service providers such as Sears and American Residential Services. | |
| • | Refrigeration — United Technologies Corp. (Carrier); Ingersoll-Rand plc (Hussmann); Emerson Electric Co. (Copeland); GEA Group (Kuba, Searle, Goedhart); and Alfa Laval (Alfa Laval, Fincoil, Helpman). |
Employees
As of December 31, 2009, we employed approximately
11,600 employees, of whom approximately 4,800 were salaried
and 6,800 were hourly. The number of hourly workers we employ
may vary in order to match our labor needs during periods of
fluctuating demand. Approximately 2,600 employees are
represented by unions. We believe our relationships with our
employees and with the unions representing our employees are
good and currently we do not anticipate any material adverse
consequences resulting from negotiations to renew any collective
bargaining agreements.
Environmental
Regulation
Our operations are subject to evolving and often increasingly
stringent international, federal, state and local laws and
regulations concerning the environment. Environmental laws that
affect or could affect our domestic operations include, among
others, the National Appliance Energy Conservation Act of 1987,
as amended (“NAECA”), the Energy Policy Act, the Clean
Air Act, the Clean Water Act, the Resource Conservation and
Recovery Act, the Comprehensive Environmental Response,
Compensation and Liability Act, the National Environmental
Policy Act, the Toxic Substances Control Act, any regulations
promulgated under these acts and various other international,
federal, state and local laws and regulations governing
environmental matters. We believe we are in substantial
compliance with such existing environmental laws and regulations.
Energy Efficiency.
The U.S. Department of
Energy is conducting rule makings to evaluate the current
minimum efficiency standards for residential heating and cooling
products. On December 19, 2007, federal legislation was
enacted authorizing the U.S. Department of Energy to study
the establishment of regional efficiency standards for
residential furnaces, air conditioners and heat pumps. We
anticipate that the U.S. Department of Energy will
establish regional standards for furnaces and air conditioners
as part of the rulemakings. We have established a process that
we believe will allow us to offer new products that meet or
exceed these new standards in advance of implementation. Similar
new standards are being promulgated for commercial air
conditioning and refrigeration equipment. We are actively
involved in U.S. Department of Energy and Congressional
activities related to energy efficiency standards. We are
prepared to have compliant product in place in advance of the
implementation of all such regulations being considered by the
U.S. Department of Energy or Congress.
Refrigerants.
The use of
hydrochlorofluorocarbons, “HCFCs,” and
hydroflurocarbons “HFCs” as refrigerants for air
conditioning and refrigeration equipment is common practice in
the HVACR industry. Under the Montreal Protocol and implementing
regulations, the use of virgin HCFCs in new pre-charged
equipment within the U.S. was phased out January 1,
2010. We have complied with applicable rules and regulations
governing the HCFC phase out. The United States Congress,
Environmental Protection Agency and other international
regulatory bodies are considering steps to phase down the future
use of HFCs in HVACR products. We have been an active
participant in the ongoing international and domestic dialogue
on this subject and believe we are well positioned to react in a
timely manner to any changes in the regulatory landscape. In
addition, we are taking proactive steps to implement responsible
use principles and guidelines with respect to limiting
refrigerants from escaping into the atmosphere throughout the
life span of our HVACR equipment.
Remediation Activity.
In addition to affecting
our ongoing operations, applicable environmental laws can impose
obligations to remediate hazardous substances at our properties,
at properties formerly owned or operated
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by us and at facilities to which we have sent or send waste for
treatment or disposal. We are aware of contamination at some of
our facilities; however, based on facts presently known, we do
not believe that any future remediation costs at such facilities
will be material to our results of operations. We currently
believe that the release of the hazardous materials occurred
over an extended period of time, including a time when we did
not own the site. Extensive investigations have been performed,
we have completed remediation pilot-testing and are in the
process of implementing full-scale remediation
on-site.
For
more information, see Note 11 in the Notes to our
Consolidated Financial Statements.
In the past, we have received notices that we are a potentially
responsible party along with other potentially responsible
parties in Superfund proceedings under the Comprehensive
Environmental Response, Compensation and Liability Act for
cleanup of hazardous substances at certain sites to which the
potentially responsible parties are alleged to have sent waste.
Based on the facts presently known, we do not believe
environmental cleanup costs associated with any Superfund sites
where we have received notice that we are a potentially
responsible party will be material.
European WEEE and RoHS Compliance.
In the
European marketplace, electrical and electronic equipment is
required to comply with the Directive on Waste Electrical and
Electronic Equipment (“WEEE”) and the Directive on
Restriction of Use of Certain Hazardous Substances
(“RoHS”). WEEE aims to prevent waste by encouraging
reuse and recycling and RoHS restricts the use of six hazardous
substances in electrical and electronic products. All HVACR
products and certain components of such products “put on
the market” in the EU (whether or not manufactured in the
EU) are potentially subject to WEEE and RoHS. Because all HVACR
manufacturers selling within or from the EU are subject to the
standards promulgated under WEEE and RoHS, we believe that
neither WEEE nor RoHS uniquely impact us as compared to such
other manufacturers. Similar directives are being introduced in
other parts of the world, including the U.S. For example,
California, China and Japan have all adopted unique versions of
RoHS possessing similar intent. We are actively monitoring the
development of such directives and believe we are well
positioned to comply with such directives in the required time
frames.
Available
Information
Our web site address is
www.lennoxinternational.com.
We
make available, free of charge through our web site, our annual
reports on
Form 10-K,
quarterly reports on
Form 10-Q,
current reports on
Form 8-K
and amendments to those reports filed or furnished pursuant to
the Securities Exchange Act of 1934, as amended, as soon as
reasonably practicable after such material is electronically
filed with, or furnished to, the Securities and Exchange
Commission. The information on our web site is not a part of, or
incorporated by reference into, this annual report on
Form 10-K.
Certifications
We submitted the 2009 New York Stock Exchange (the
“NYSE”) Annual CEO Certification regarding our
compliance with the NYSE’s corporate governance listing
standards to the NYSE on June 12, 2009.
The certifications of our Chief Executive Officer and Chief
Financial Officer pursuant to Section 302 and
Section 906 of the Sarbanes-Oxley Act of 2002 are filed and
furnished, respectively, as exhibits to this Annual Report on
Form 10-K.
7
Table of Contents
Executive
Officers of the Company
Our executive officers, their present positions and their ages
are as follows:
|
Name
|
Age
|
Position
|
||||
|
Todd M. Bluedorn
|
46 | Chief Executive Officer | ||||
|
Prakash Bedapudi
|
43 | Executive Vice President and Chief Technology Officer | ||||
|
Harry J. Bizios
|
60 | Executive Vice President and President and Chief Operating Officer, LII Commercial Heating & Cooling | ||||
|
Michael J. Blatz
|
44 | Executive Vice President, Operations | ||||
|
Scott J. Boxer
|
59 | Executive Vice President and President and Chief Operating Officer, Service Experts | ||||
|
Robert W. Hau
|
44 | Executive Vice President and Chief Financial Officer | ||||
|
David W. Moon
|
48 | Executive Vice President and President and Chief Operating Officer, LII Worldwide Refrigeration | ||||
|
Daniel M. Sessa
|
45 | Executive Vice President and Chief Human Resources Officer | ||||
|
John D. Torres
|
51 | Executive Vice President, Chief Legal Officer and Secretary | ||||
|
Douglas L. Young
|
47 | Executive Vice President and President and Chief Operating Officer, LII Residential Heating & Cooling | ||||
|
Roy A. Rumbough, Jr.
|
54 | Vice President, Controller and Chief Accounting Officer | ||||
The following biographies describe the business experience of
our executive officers:
Todd M. Bluedorn
became Chief Executive Officer and was
elected to our Board of Directors in April 2007.
Mr. Bluedorn previously served in numerous senior
management positions for United Technologies since 1995,
including President, Americas — Otis Elevator Company
beginning in 2004; President, North America —
Commercial Heating, Ventilation and Air Conditioning for Carrier
Corporation beginning in 2001; and President, Hamilton
Sundstrand Industrial beginning in 2000. He began his
professional career with McKinsey & Company in 1992,
after receiving an MBA from Harvard University in 1992 and
serving in the United States Army as a combat engineer officer
and United States Army Ranger from 1985 to 1990. He also holds a
BS in Electrical Engineering from the United States Military
Academy at West Point. Mr. Bluedorn currently serves on the
board of directors of Eaton Corporation, a diversified
industrial manufacturer.
Prakash Bedapudi
became Executive Vice President and
Chief Technology Officer in July 2008. He had previously served
as vice president, global engineering and program management for
Trane Inc. Commercial Systems from 2006 through 2008, and as
vice president, engineering and technology for Trane’s
Residential Systems division from 2003 through 2006. Prior to
his career at Trane, Mr. Bedapudi served in senior
engineering leadership positions for GE Transportation Systems,
a division of General Electric Company, and for Cummins Engine
Company. He holds a BS in Mechanical/Automotive Engineering from
Karnataka University, India and an MS in Mechanical/Aeronautical
Engineering from the University of Cincinnati.
Harry J. Bizios
was appointed Executive Vice President
and President and Chief Operating Officer of LII’s
Commercial Heating & Cooling segment in October 2006.
Mr. Bizios had previously served as Vice President and
General Manager, LII Worldwide Commercial Systems since 2005 and
as Vice President and General Manager of Lennox North American
Commercial Products from 2003 to 2005. Mr. Bizios began his
career with LII in 1976 as an industrial engineer at LII’s
manufacturing facility in Marshalltown, Iowa, subsequently
serving in several senior leadership roles before being
appointed Vice President and General Manager of Lennox
Industries Commercial from 1998 to 2003. He holds a BS in
Engineering Operations from Iowa State University.
8
Table of Contents
Michael J. Blatz
was appointed Executive Vice President,
Operations in May 2009. Mr. Blatz joined LII in August 2007
as Vice President, Operations. Mr. Blatz was previously
Vice President and General Manager for Tyler Refrigeration, a
division of Carrier Corporation, a United Technologies company.
His career at Carrier Corporation began in 2003 and encompassed
senior leadership positions in supply chain, product management,
and manufacturing operations. He also served as Director of
Operations and Director of Worldwide Procurement at
Dell Computer Corporation and held engineering and product
development roles at Case Corporation before joining Carrier
Corporation. He holds a BS in mechanical engineering from the
United States Military Academy at West Point and a MS in
management and mechanical engineering, both from the
Massachusetts Institute of Technology.
Scott J. Boxer
was appointed President and Chief
Operating Officer of LII’s Service Experts segment in
July 2003. He served as President of Lennox Industries
Inc., an LII subsidiary, from 2000 to 2003. He joined LII in
1998 as Executive Vice President, Lennox Global Ltd. Prior to
joining LII, Mr. Boxer spent 26 years with York
International Corporation in various roles, including President,
Unitary Products Group Worldwide, where he directed residential
and light commercial heating and air conditioning operations.
Mr. Boxer previously served as an Executive Board Member of
the Air-Conditioning & Refrigeration Institute and
Chairman of the Board of Trustees of North American Technical
Excellence, Inc. He holds a BS in Industrial Engineering from
the University of Rhode Island.
Robert W. Hau
was appointed Executive Vice President and
Chief Financial Officer in October 2009. He had previously
served as Vice President and Chief Financial Officer for
Honeywell International’s Aerospace Business Group since
2006. Mr. Hau first joined Honeywell (initially
AlliedSignal) in 1987 and served in a variety of senior
financial leadership positions, including Vice President and
Chief Financial Officer for the company’s Aerospace
Electronic Systems Unit and for its Specialty Materials Business
Group. He holds a BSBA in Finance & Marketing from
Marquette University and an MBA in Finance from the University
of Southern California.
David W. Moon
was appointed Executive Vice President and
President and Chief Operating Officer of LII’s Worldwide
Refrigeration segment in August 2006. Mr. Moon had
previously served as Vice President and General Manager of
Worldwide Refrigeration, Americas Operations since 2002. Prior
to serving in that position, he served as Managing Director in
Australia beginning in 1999, where his responsibilities included
heat transfer manufacturing and distribution, refrigeration
wholesaling and manufacturing, and HVAC manufacturing and
distribution in Australia and New Zealand. Mr. Moon
originally joined LII in 1998 as Operations Director, Asia
Pacific. Prior to that time, Mr. Moon held various
management positions at Allied Signal, Inc., Case Corporation,
and Tenneco Inc. in the United States, Hong Kong, Taiwan and
Germany. He holds a BS in Civil Engineering and an MBA from
Texas A&M University.
Daniel M. Sessa
was appointed Executive Vice President
and Chief Human Resources Officer in June 2007. Mr. Sessa
previously served in numerous senior human resources and legal
leadership positions for United Technologies Corporation
since 1996, including Vice President, Human Resources for Otis
Elevator Company — Americas from 2005 to 2007,
Director, Employee Benefits and Human Resources Systems for
United Technologies Corporation from 2004 to 2005, and Director,
Human Resources for Pratt & Whitney from 2002 to 2004.
He holds a JD from the Hofstra University School of Law and a BA
in Law & Society from the State University of New York
at Binghamton.
John D. Torres
was appointed Executive Vice President and
Chief Legal Officer in December 2008. He had previously served
as Senior Vice President, General Counsel and Secretary for
Freescale Semiconductor, a semiconductor manufacturer that was
originally part of Motorola. He joined Motorola’s legal
department as Senior Counsel in 1996 and was appointed Vice
President, General Counsel of the company’s semiconductor
business in 2001. Prior to joining Motorola, Mr. Torres
served 13 years in private practice in Phoenix,
specializing in commercial law. He holds a BA from Notre Dame
and a JD from the University of Chicago.
Douglas L. Young
was appointed Executive Vice President
and President and Chief Operating Officer of LII’s
Residential Heating & Cooling segment in October 2006.
Mr. Young had previously served as Vice President and
General Manager of North American Residential Products since
2003 and as Vice President and General Manager of Lennox North
American Residential Sales, Marketing, and Distribution from
1999 to 2003. Prior to his career with LII, Mr. Young was
employed in the Appliances division of GE, where he held various
management positions before
9
Table of Contents
serving as General Manager of Marketing for GE Appliance
division’s retail group from 1997 to 1999 and as General
Manager of Strategic Initiatives in 1999. He holds a BSBA from
Creighton University and an MS in Management from Purdue
University.
Roy A. Rumbough, Jr.
was appointed Vice President,
Controller and Chief Accounting Officer in July 2006. He had
previously served as Vice President, Corporate Controller of
Maytag Corporation, a position he held since 2002. From 1998 to
2002, he served as Vice President, Controller of Blodgett
Corporation, a portfolio of food service equipment companies and
former affiliate of Maytag. Mr. Rumbough’s career at
Maytag spanned 17 years and included internal audit,
financial planning and analysis, and business unit controller
roles. Prior to his career at Maytag, he worked for Deloitte and
Touche, LLP. He holds a BA in Accounting from North Carolina
State University and an MBA from the Kellogg School of
Management, Northwestern University.
| Item 1A. | Risk Factors |
Forward-Looking
Statements
This Annual Report on
Form 10-K
contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as
amended, that are based on information currently available to
management as well as management’s assumptions and beliefs.
All statements, other than statements of historical fact,
included in this Annual Report on
Form 10-K
constitute forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995, including but
not limited to statements identified by the words
“may,” “will,” “should,”
“plan,” “predict,” “anticipate,”
“believe,” “intend,” “estimate”
and “expect” and similar expressions. Such statements
reflect our current views with respect to future events, based
on what we believe are reasonable assumptions; however, such
statements are subject to certain risks and uncertainties. In
addition to the specific uncertainties discussed elsewhere in
this Annual Report on
Form 10-K,
the risk factors set forth below may affect our performance and
results of operations. Should one or more of these risks or
uncertainties materialize, or should underlying assumptions
prove incorrect, actual results may differ materially from those
in the forward-looking statements. We disclaim any intention or
obligation to update or review any forward-looking statements or
information, whether as a result of new information, future
events or otherwise.
Risk
Factors
The following risk factors and other information included in
this Annual Report on
Form 10-K
should be carefully considered. We believe these are the
principal material risks currently facing our business; however,
additional risks and uncertainties not presently known to us or
that we presently deem less significant may also impair our
business operations. If any of the following risks actually
occur, our business, financial condition or results of
operations could be materially adversely affected.
Our
Operations are Subject to a Number of Economic Risks due to
Global General Business, Economic and Market
Conditions
Financial markets world-wide experienced extreme disruption in
2008 and 2009, including, among other things, extreme volatility
in security prices, severely diminished liquidity and credit
availability, rating downgrades of certain investments and
declining valuations of others. The tightening of credit in
financial markets adversely affects the ability of our customers
to obtain financing for significant purchases and operations and
could result in a decrease in or cancellation of orders for our
products and services as well as impact the ability of our
customers to make payments. Similarly, this tightening of credit
may adversely affect our supplier base and increase the
potential for one or more of our suppliers to experience
financial distress or bankruptcy. Our business is also adversely
affected by decreases in the general level of economic activity,
which may cause our customers to cancel, decrease or delay their
use of our products and services.
If these conditions continue or there is a further deterioration
in the financial markets, we may be unable to obtain new debt or
equity financing on acceptable terms or at all, or to access
amounts currently available under our domestic revolving credit
facility. Also, availability under our asset securitization
agreement may be adversely impacted by credit quality and
performance of our customer accounts receivable. The
availability under the asset securitization agreement is based
on the amount of accounts receivable that meet the eligibility
criteria of the asset
10
Table of Contents
securitization agreement. If receivable losses increase or
credit quality deteriorates, the amount of eligible receivables
could decline and, in turn, lower the availability under the
asset securitization.
We cannot predict the duration and severity of any future
disruption in financial markets or adverse economic conditions
in the U.S. and other countries.
Our
Financial Performance Is Dependent on the Conditions of the U.S.
Construction Industry.
Our business is affected by the performance of the
U.S. construction industry. Our sales in the residential
and commercial new construction market correlate to the number
of new homes and buildings that are built, which in turn is
influenced by cyclical factors such as interest rates,
inflation, availability of financing, consumer spending habits
and confidence, employment rates and other macroeconomic factors
over which we have no control. For the last several years the
U.S. housing industry has experienced a significant
downturn, resulting in a decline in the demand for the products
and services we sell into the residential new construction
market. These market challenges have affected, and will continue
to materially affect our business, financial condition and
results of operations.
Cooler
than Normal Summers and Warmer than Normal Winters May Depress
Our Sales.
Demand for our products and for our services is strongly
affected by the weather. Cooler than normal summers depress our
sales of replacement air conditioning and refrigeration products
and services, and warmer than normal winters have the same
effect on our heating products and services.
Price
Volatility for Commodities We Purchase or Significant Supply
Interruptions Could Have an Adverse Effect on Our Cash Flow or
Results of Operations.
In the manufacture of our products, we depend on raw materials,
such as steel, copper and aluminum, and components purchased
from third parties. We generally concentrate purchases for a
given raw material or component with a small number of
suppliers. Although we believe there are alternative suppliers
for all of our key raw material and component needs, if a
supplier is unable or unwilling to meet our supply requirements,
we could experience supply interruptions or cost increases,
either of which could have an adverse effect on our results of
operations. In addition, although we regularly pre-purchase a
portion of our raw materials at fixed prices each year to hedge
against price increases, an increase in raw materials prices not
covered by our fixed price arrangements could significantly
increase our cost of goods sold and negatively impact our
margins if we are unable to effectively pass such price
increases on to our customers. Alternatively, if we increase our
prices in response to increases in the prices or quantities of
raw materials or components we require or encounter significant
supply interruptions, our competitive position could be
adversely affected, which may result in depressed sales.
In addition, we use derivatives to hedge price risk associated
with forecasted purchases of certain raw materials. Our hedged
price could result in our paying higher or lower prices for
commodities as compared to the market prices for those
commodities when purchased. Decreases in spot prices below our
hedged prices can also require us to post cash collateral with
our hedge counterparties, which could impact our liquidity and
cash flows. At year-end 2008, we were required to post
$37.9 million of cash collateral on our hedges. During
2009, metal commodity prices remained relatively stable and as a
result our commodity contracts that were in loss positions at
December 31, 2008 have expired and we were no longer
required to post collateral as of December 31, 2009.
Our
Ability to Meet Customer Demands is Limited by Our
Single-Location Production Facilities and Reliance on Certain
Key Suppliers.
We manufacture many of our products at single-location
production facilities, and we rely on certain suppliers who also
may concentrate production in single locations. Any significant
problems at one or more of our production facilities, or at a
facility of one of our suppliers, could impact our ability to
deliver our products. Our inability to meet our customers’
demand for our products could have a material adverse impact on
our business, financial condition and results of operations.
11
Table of Contents
We
May Incur Substantial Costs as a Result of Warranty and Product
Liability Claims Which Could Have an Adverse Effect on Our
Results of Operations.
The development, manufacture, sale and use of our products
involve risks of warranty and product liability claims. In
addition, because we own installing heating and air conditioning
dealers in the U.S. and Canada, we incur the risk of
liability claims for the installation and service of heating and
air conditioning products. Our product liability insurance
policies have limits that, if exceeded, may result in
substantial costs that would have an adverse effect on our
results of operations. In addition, warranty claims are not
covered by our product liability insurance and certain product
liability claims may also not be covered by our product
liability insurance.
For some of our HVAC products, we provide warranty terms ranging
from one to 20 years to customers for certain components
such as compressors or heat exchangers. For select products, we
have provided lifetime warranties for heat exchangers.
Warranties of such extended lengths pose a risk to us as actual
future costs may exceed our current estimates of those costs.
Warranty expense is recorded on the date that revenue is
recognized and requires significant assumptions about what costs
will be incurred in the future. We may be required to record
material adjustments to accruals and expense in the future if
actual costs for these warranties are different from our
assumptions.
We May
Not be Able to Compete Favorably in the Highly Competitive HVACR
Business.
Substantially all of the markets in which we operate are highly
competitive. The most significant competitive factors we face
are product reliability, product performance, service and price,
with the relative importance of these factors varying among our
product lines. Other factors that affect competition in the
HVACR market include the development and application of new
technologies, an increasing emphasis on the development of more
efficient HVACR products and new product introductions. The
establishment of manufacturing in low-cost countries could also
provide cost advantages to existing and emerging competitors.
Our competitors may have greater financial resources than we
have, allowing them to invest in more extensive research and
development
and/or
marketing activity. In addition, our Service Experts segment
faces competition from independent dealers and dealers owned by
utility companies and other consumer service providers, some of
whom may be able to provide their products or services at lower
prices than we can. We may not be able to compete successfully
against current and future competitors and current and future
competitive pressures may cause us to reduce our prices or lose
market share, or could negatively affect our cash flow, all of
which could have an adverse effect on our results of operations.
There
Is No Guarantee That Our Efforts to Reduce Costs Will Be
Successful.
As part of our strategic priorities of manufacturing and
sourcing excellence and expense reduction, we are engaged in
various manufacturing rationalization actions designed to lower
our cost structure. We are reorganizing our North American
distribution network in order to better serve our
customers’ needs by deploying parts and equipment inventory
closer to them. We continue to rationalize and reorganize
various support and administrative functions in order to reduce
ongoing selling and administrative expenses. If we cannot
successfully implement such restructuring strategies or other
cost savings plans, we may not achieve our expected cost savings
in the time anticipated, or at all. In such case, our results of
operations and profitability may be negatively impaired, making
us less competitive and potentially causing us to lose market
share.
We May
Not be Able to Successfully Develop and Market New
Products.
Our future success depends on our continued investment in
research and new product development and our ability to
commercialize new technological advances in the HVACR industry.
If we are unable to continue to successfully develop and market
new products or to achieve technological advances on a pace
consistent with that of our competitors, our business and
results of operations could be adversely impacted.
We May
Not be Able to Successfully Integrate and Operate Businesses
that We May Acquire.
From time to time, we may seek to complement or expand our
business through strategic acquisitions. The success of these
transactions will depend, in part, on our ability to integrate
and operate the acquired businesses profitably. If we are unable
to successfully integrate acquisitions with our operations, we
may not realize the
12
Table of Contents
anticipated benefits associated with such transactions, which
could adversely affect our business and results of operations.
Because
a Significant Percentage of Our Workforce is Unionized, We Face
Risks of Work Stoppages and Other Labor Relations
Problems.
As of December 31, 2009, approximately 22% of our workforce
was unionized. The results of future negotiations with these
unions and the effects of any production interruptions or labor
stoppages could have an adverse effect on our results of
operations.
We
are Subject to Litigation and Environmental Regulations that
Could Have an Adverse Effect on Our Results of
Operations.
We are involved in various claims and lawsuits incidental to our
business, including those involving product liability, labor
relations and environmental matters, some of which claim
significant damages. Given the inherent uncertainty of
litigation, we cannot be certain that existing litigation or any
future adverse legal developments will not have a material
adverse impact on our financial condition. In addition, we are
subject to extensive and changing federal, state and local laws
and regulations designed to protect the environment. These laws
and regulations could impose liability for remediation costs and
civil or criminal penalties in cases of non-compliance.
Compliance with environmental laws increases our costs of doing
business. Because these laws are subject to frequent change, we
are unable to predict the future costs resulting from
environmental compliance.
Our
International Operations Subject Us to Risks Associated with
Foreign Currency Fluctuations and Changes in Local Government
Regulation.
We earn revenues, pay expenses, own assets and incur liabilities
in countries using currencies other than the U.S. dollar.
Because our consolidated financial statements are presented in
U.S. dollars, we must translate revenues, income and
expenses, as well as assets and liabilities, into
U.S. dollars at exchange rates in effect during or at the
end of each reporting period. Therefore, increases or decreases
in the value of the U.S. dollar against other major
currencies may affect our net operating revenues, operating
income and the value of balance sheet items denominated in
foreign currencies. Because of the geographic diversity of our
operations, weaknesses in some currencies might be offset by
strengths in others over time. However, we cannot assure that
fluctuations in foreign currency exchange rates, particularly
the strengthening of the U.S. dollar against major
currencies, would not materially affect our financial results.
In addition to the currency exchange risks inherent in operating
in foreign countries, our international sales and operations,
including our purchases of raw materials from international
suppliers, are subject to risks associated with changes in local
government laws, regulations and policies, including those
related to tariffs and trade barriers, investments, taxation,
exchange controls, and employment regulations. Our international
sales and operations are also sensitive to changes in foreign
national priorities, including government budgets, as well as to
political and economic instability. International transactions
may involve increased financial and legal risks due to differing
legal systems and customs in foreign countries. The ability to
manage these risks could be difficult and may limit our
operations and make the manufacture and sale of our products
internationally more difficult, which could negatively affect
our business and results of operations.
Any
Future Determination that a Significant Impairment of the Value
of Our Goodwill Intangible Asset has Occurred Could Have a
Material Adverse Effect on Our Results of
Operations.
As of December 31, 2009, we had goodwill of
$257.4 million on our Consolidated Balance Sheet. Any
future determination that an impairment of the value of goodwill
has occurred would require a write-down of the impaired portion
of goodwill to fair value, which would reduce our assets and
stockholders’ equity and could have a material adverse
effect on our results of operations.
13
Table of Contents
Declines
in Capital Markets Could Necessitate Increased Cash
Contributions by Us to Our Pension Plans to Maintain Required
Levels of Funding.
Volatility in the capital markets may have a significant impact
on the funding status of our defined benefit pension plans. If
the performance of the capital markets depresses the value of
our defined benefit pension plan assets, our plans may be
underfunded and we would have to make contributions to the
pension plans. The amount of contributions we may be required to
make to our pension plans in the future is uncertain and could
be significant, which may have a material impact on our results
of operations.
| Item 1B. | Unresolved Staff Comments |
None.
14
Table of Contents
| Item 2. | Properties |
The following chart lists our principal domestic and
international manufacturing, distribution and office facilities
as of February 1, 2010 and indicates the business segment
that uses such facilities, the approximate size of such
facilities and whether such facilities are owned or leased:
|
Type or Use
|
||||||||||
|
Location
|
Segment | of Facility | Approx. Sq. Ft. | Owned/Leased | ||||||
| (In thousands) | ||||||||||
|
Marshalltown, IA
|
Residential Heating & Cooling
|
Manufacturing & Distribution
|
1,300 |
Owned & Leased
|
||||||
|
Blackville, SC
|
Residential Heating & Cooling
|
Manufacturing
|
375 |
Owned
|
||||||
|
Orangeburg, SC
|
Residential Heating & Cooling
|
Manufacturing
|
559 |
Owned
|
||||||
|
Grenada, MS
|
Residential Heating & Cooling
|
Manufacturing & Business Unit Headquarters
|
300 |
Leased
|
||||||
|
Union City, TN
|
Residential Heating & Cooling
|
Manufacturing
|
295 |
Owned
|
||||||
|
Laval, Canada
|
Residential Heating & Cooling
|
Manufacturing
|
152 |
Owned
|
||||||
|
Saltillo, Mexico
|
Residential Heating & Cooling
|
Manufacturing
|
300 |
Owned
|
||||||
|
Columbus, OH
|
Residential Heating & Cooling
|
Distribution
|
144 |
Leased
|
||||||
|
McDonough, GA
|
Residential Heating & Cooling
|
Distribution
|
254 |
Leased
|
||||||
|
Atlanta, GA
|
Residential & Commercial Heating & Cooling
|
Distribution
|
119 |
Leased
|
||||||
|
Brampton, Canada
|
Residential & Commercial Heating & Cooling
|
Distribution
|
129 |
Leased
|
||||||
|
Calgary, Canada
|
Residential & Commercial Heating & Cooling
|
Distribution
|
110 |
Leased
|
||||||
|
Kansas City, KS
|
Residential & Commercial Heating & Cooling
|
Distribution
|
115 |
Leased
|
||||||
|
Dallas, TX
|
Residential & Commercial Heating & Cooling
|
Distribution
|
252 |
Leased
|
||||||
|
Ontario, CA
|
Residential & Commercial Heating & Cooling
|
Distribution
|
128 |
Leased
|
||||||
|
Des Moines, IA(1)
|
Residential & Commercial Heating & Cooling
|
Distribution
|
352 |
Leased
|
||||||
|
Stuttgart, AR
|
Commercial Heating & Cooling
|
Manufacturing
|
787 |
Owned
|
||||||
|
Longvic, France
|
Commercial Heating & Cooling
|
Manufacturing
|
133 |
Owned
|
||||||
|
Mions, France
|
Commercial Heating & Cooling
|
Manufacturing, Research & Development
|
129 |
Owned
|
||||||
|
Tifton, GA(2)
|
Refrigeration
|
Manufacturing
|
599 |
Owned & Leased
|
||||||
|
Stone Mountain, GA
|
Refrigeration
|
Manufacturing
|
145 |
Owned
|
||||||
|
Milperra, Australia
|
Refrigeration
|
Manufacturing & Business Unit Headquarters
|
830 |
Owned
|
||||||
|
Mt. Wellington, New Zealand
|
Refrigeration
|
Distribution & Offices
|
110 |
Owned
|
||||||
|
Genas, France
|
Refrigeration
|
Manufacturing, Distribution & Offices
|
175 |
Owned
|
||||||
|
San Jose dos Campos, Brazil
|
Refrigeration
|
Manufacturing, Warehousing & Offices
|
148 |
Owned
|
||||||
|
Carrollton, TX
|
Corporate and other
|
Research & Development
|
130 |
Owned
|
||||||
|
Richardson, TX
|
Corporate and other
|
Corporate Headquarters
|
311 |
Owned & Leased
|
||||||
| (1) | We began the gradual transitioning of all North American Parts Center activities performed at our Des Moines facility to other locations in 2008 and expect to complete this transition and the closing of the North American Parts Center in 2010. Our repair parts manufacturing moved to Marshalltown, IA in the second quarter of 2009, and other functions at the North American Parts Center are being relocated to the regional distribution centers as they have come on line. The Des Moines, IA sales office and local distribution activities remain in Des Moines. |
15
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| (2) | The expansion of our Refrigeration manufacturing facility in Tifton, GA has been completed and we have completed the closure of our Danville, IL facility with manufacturing being consolidated into Tifton, GA. |
In addition to the properties described above, we lease over 100
facilities in the U.S. for use as sales and service offices
and district warehouses and additional facilities worldwide for
use as sales and service offices and regional warehouses. The
majority of our Service Experts’ service center facilities
are leased. We routinely evaluate our production facilities to
ensure adequate capacity, effective cost structure, and
consistency with our business strategy. We believe that our
properties are in good condition, suitable and adequate for
their present requirements and that our principal plants are
generally adequate to meet our production needs. However,
certain production facilities are operating at less than full
capacity due to restructuring activities. See Note 18 to
the Consolidated Financial Statements for additional information
regarding restructuring activities.
The Residential & Commercial Heating &
Cooling distribution network is currently in the process of
moving from a decentralized to a centralized distribution
network. Included in the table above are our large warehouses
that hold a significant inventory balance.
| Item 3. | Legal Proceedings |
We are involved in a number of claims and lawsuits incident to
the operation of our businesses. Insurance coverages are
maintained and estimated costs are recorded for such claims and
lawsuits. It is management’s opinion that none of these
claims or lawsuits will have a material adverse effect on our
financial position, results of operations or cash flows. Costs
related to such matters were not material to the periods
presented.
| Item 4. | Submission of Matters to a Vote of Security Holders |
No matters were submitted to a vote of our stockholders during
the fourth quarter of fiscal 2009.
| Item 5. | Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities |
Market
Price for Common Stock
Our common stock is listed for trading on the New York Stock
Exchange under the symbol “LII.” The high and low
sales prices for our common stock for each quarterly period
during 2009 and 2008 were as follows:
| Price Range Per Common Share | ||||||||||||||||
| 2009 | 2008 | |||||||||||||||
| High | Low | High | Low | |||||||||||||
|
First Quarter
|
$ | 34.97 | $ | 23.47 | $ | 42.22 | $ | 26.51 | ||||||||
|
Second Quarter
|
34.70 | 25.21 | 38.48 | 25.17 | ||||||||||||
|
Third Quarter
|
38.03 | 30.07 | 41.62 | 27.86 | ||||||||||||
|
Fourth Quarter
|
41.11 | 33.16 | 34.12 | 19.72 | ||||||||||||
16
Table of Contents
Dividends
During 2009 and 2008, we declared quarterly cash dividends as
set forth below:
|
Dividends per
|
||||||||
| Common Share | ||||||||
| 2009 | 2008 | |||||||
|
First Quarter
|
$ | 0.14 | $ | 0.14 | ||||
|
Second Quarter
|
0.14 | 0.14 | ||||||
|
Third Quarter
|
0.14 | 0.14 | ||||||
|
Fourth Quarter
|
0.14 | 0.14 | ||||||
|
Fiscal Year
|
$ | 0.56 | $ | 0.56 | ||||
The amount and timing of dividend payments are determined by our
Board of Directors and subject to certain restrictions under our
credit facilities and promissory notes. As of the close of
business on February 8, 2010, there were approximately 679
holders of record of our common stock.
17
Table of Contents
Comparison
of Total Stockholder Return
The following performance graph compares our cumulative total
returns with the cumulative total returns of the
Standards & Poor’s Midcap 400 Index,
Standard & Poor’s Smallcap 600 Index, and a peer
group of U.S. industrial manufacturing and service
companies in the heating, ventilation, air conditioning and
refrigeration businesses from December 31, 2004 through
December 31, 2009. The graph assumes that $100 was invested
on December 31, 2004, with dividends reinvested. Peer group
returns are weighted by market capitalization. Our peer group
includes AAON, Inc., Ingersoll-Rand plc, Comfort Systems USA,
Inc., United Technologies Corporation, Johnson Controls Inc.,
and Watsco, Inc.
Comparison
of 5 Year Cumulative Total Return
Our
Purchase of LII Equity Securities
In June 2008 our Board of Directors approved a new share
repurchase plan for $300 million, pursuant to which we are
authorized to repurchase shares of our common stock through open
market purchases (the “2008 Share Repurchase
Plan”). The 2008 Share Repurchase Program has no
stated expiration date. In the fourth quarter of 2009, we
repurchased shares of our common stock as follows:
|
Approximate Dollar
|
||||||||||||||||
|
Total Number of
|
Value of Shares that
|
|||||||||||||||
|
Shares Purchased as
|
may yet be Purchased
|
|||||||||||||||
|
Total Number
|
Average Price
|
Part of Publicly
|
Under the Plans or
|
|||||||||||||
|
of Shares
|
Paid per Share
|
Announced Plans or
|
Programs
|
|||||||||||||
| Purchased (1) | (including fees) | Programs | (In millions) | |||||||||||||
|
October 1 through October 31
|
333 | $ | 35.99 | — | $ | 285.3 | ||||||||||
|
November 1 through November 30
|
3,440 | $ | 38.02 | — | $ | 285.3 | ||||||||||
|
December 1 through December 31
|
64,774 | $ | 36.85 | — | $ | 285.3 | ||||||||||
|
Total
|
68,547 | $ | 36.91 | — | ||||||||||||
| (1) | Since there were no repurchases under the 2008 Share Repurchase Plan in the fourth quarter of 2009, this column reflects the surrender to LII of 68,547 shares of common stock to satisfy tax-withholding obligations in connection with the vesting of restricted stock and performance share units. |
18
Table of Contents
| Item 6. | Selected Financial Data |
The table below shows selected financial data for the five years
ended December 31, 2009:
| For the Years Ended December 31, | ||||||||||||||||||||
| 2009 | 2008 | 2007 | 2006 | 2005 | ||||||||||||||||
| (In millions, except per share data) | ||||||||||||||||||||
|
Statements of Operations Data
|
||||||||||||||||||||
|
Net Sales
|
$ | 2,847.5 | $ | 3,441.1 | $ | 3,691.7 | $ | 3,662.1 | $ | 3,352.5 | ||||||||||
|
Operational Income From Continuing Operations
|
109.2 | 218.6 | 264.9 | 222.7 | 248.1 | |||||||||||||||
|
Income From Continuing Operations
|
61.8 | 123.8 | 165.7 | 167.1 | 151.7 | |||||||||||||||
|
Net Income
|
51.1 | 122.8 | 169.0 | 166.0 | 150.7 | |||||||||||||||
|
Diluted Earnings Per Share From Continuing Operations
|
1.09 | 2.12 | 2.39 | 2.27 | 2.12 | |||||||||||||||
|
Dividends Per Share
|
0.56 | 0.56 | 0.53 | 0.46 | 0.41 | |||||||||||||||
|
Other Data
|
||||||||||||||||||||
|
Capital Expenditures
|
$ | 58.8 | $ | 62.1 | $ | 70.2 | $ | 74.8 | $ | 63.3 | ||||||||||
|
Research and Development Expenses
|
48.9 | 46.0 | 43.6 | 42.2 | 40.3 | |||||||||||||||
|
Balance Sheet Data at Period End
|
||||||||||||||||||||
|
Total Assets
|
$ | 1,543.9 | $ | 1,659.5 | $ | 1,814.6 | $ | 1,719.8 | $ | 1,737.6 | ||||||||||
|
Total Debt
|
231.5 | 420.4 | 207.9 | 109.2 | 120.5 | |||||||||||||||
|
Stockholders’ Equity
|
604.4 | 458.6 | 808.5 | 804.4 | 794.4 | |||||||||||||||
| Item 7. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
Overview
We operate in four reportable business segments of the HVACR
industry. Our reportable segments include Residential
Heating & Cooling, Commercial Heating &
Cooling, Service Experts and Refrigeration. For more detailed
information regarding our reportable segments, see Note 21
in the Notes to our Consolidated Financial Statements.
Our products and services are sold through a combination of
distributors, independent and company-owned dealer service
centers, other installing contractors, wholesalers,
manufacturers’ representatives, original equipment
manufacturers and to national accounts. The demand for our
products and services is seasonal and dependent on the weather.
Warmer than normal summer temperatures generate strong demand
for replacement air conditioning and refrigeration products and
services and colder than normal winter temperatures have the
same effect on heating products and services. Conversely, cooler
than normal summers and warmer than normal winters depress HVACR
sales and services. In addition to weather, demand for our
products and services is influenced by national and regional
economic and demographic factors, such as interest rates, the
availability of financing, regional population and employment
trends, new construction, general economic conditions and
consumer spending habits and confidence.
The principal elements of cost of goods sold in our
manufacturing operations are components, raw materials, factory
overhead, labor and estimated costs of warranty expense. In our
Service Experts segment, the principal components of cost of
goods sold are equipment, parts and supplies and labor. The
principal raw materials used in our manufacturing processes are
steel, copper and aluminum. In recent years, increased prices
for these commodities and related components have challenged us
and the HVACR industry in general. We seek to mitigate the
impact of higher commodity prices through a combination of price
increases for our products and services, commodity contracts,
improved production efficiency and cost reduction initiatives.
We also seek to mitigate volatility in the prices of these
commodities by entering into futures contracts and fixed forward
contracts.
A substantial portion of the sales in each of our business
segments is attributable to replacement business, with the
balance comprised of new construction business. With the current
downturn in residential and commercial new
19
Table of Contents
construction activity and current overall economic conditions,
we have seen a decline in the demand for the products and
services we sell into these markets.
Impact of
Current Economic Environment on Our Business
During 2009, we continued to face challenging market conditions
as the global economic downturn continued to impact consumer and
business confidence. For the year, revenues declined across all
of our business units. However, the rate of decline in our
Residential Heating & Cooling business slowed during
the latter part of 2009 and that business showed
year-over-year
growth in the fourth quarter. For the year, the rate of decline
increased in our Commercial Heating & Cooling and
Refrigeration businesses. However, the rate of decline in these
business units slowed in the fourth quarter. We continue to
execute on our strategic priorities to win new business, capture
opportunities in the replacement market, and lower our cost
structure for the current market conditions.
We are continuing to adjust to lower demand levels in our end
markets with accelerated efforts to increase our operational
efficiency and reduce costs while we maintain focus on providing
our customers a high level of value and service. During 2009, we
recorded restructuring charges of $41.5 million. In
addition to the savings related to restructuring activities, we
believe that we will realize additional savings from lower
commodity prices on certain metals and from our global sourcing
initiatives. We are also executing on additional operating
efficiency and cost reduction initiatives that are designed to
substantially reduce our selling, general and administrative
expenses through salaried headcount reduction and other
measures. Our salaried headcount was down 13% for 2009.
We believe that when market conditions recover, we will be
well-positioned to drive increased earnings leverage.
Key
Financial Statistics
| • | Net sales for 2009 were $2,847.5 million and were adversely impacted on a year-over-year basis primarily by lower volumes across all segments as a result of the difficult economic environment. | |
| • | Operational income for 2009 was $109.2 million as compared to $218.6 million in 2008. As a percentage of net sales, operational income decreased to 3.8% in 2009 from 6.4% in 2008. The decline in operational income was primarily due to lower sales partially offset by lower material costs and savings from cost reductions and productivity initiatives. | |
| • | Net income for 2009 was $51.1 million as compared to $122.8 in 2008. Basic earnings per share from continuing operations were $1.11 in 2009 as compared to $2.18 in 2008. Diluted earnings per share from continuing operations were $1.09 per share in 2009, down from $2.12 per share in 2008. | |
| • | Cash provided by operating activities was $225.5 million for 2009 compared to $183.2 million in 2008. Cash provided by operating activities was higher primarily due to improved working capital management and the return of collateral posted related to commodity hedges. These increases were partially offset by lower net income and repayments related to our asset securitization program. | |
| • | In 2009, we returned to shareholders $31.1 million through cash dividends. |
20
Table of Contents
Results
of Operations
The following table provides a summary of our financial results,
including information presented as a percentage of net sales
(dollars in millions):
| For the Years Ended December 31, | ||||||||||||||||||||||||
| 2009 | 2008 | 2007 | ||||||||||||||||||||||
| Dollars | Percent | Dollars | Percent | Dollars | Percent | |||||||||||||||||||
|
Net sales
|
$ | 2,847.5 | 100.0 | % | $ | 3,441.1 | 100.0 | % | $ | 3,691.7 | 100.0 | % | ||||||||||||
|
Cost of goods sold
|
2,054.1 | 72.1 | 2,506.6 | 72.8 | 2,687.8 | 72.8 | ||||||||||||||||||
|
Gross profit
|
793.4 | 27.9 | 934.5 | 27.2 | 1,003.9 | 27.2 | ||||||||||||||||||
|
Selling, general and administrative expenses
|
650.2 | 22.8 | 686.9 | 20.0 | 731.1 | 19.8 | ||||||||||||||||||
|
Gains and other expenses, net
|
(6.6 | ) | (0.2 | ) | (1.9 | ) | (0.1 | ) | (6.7 | ) | (0.2 | ) | ||||||||||||
|
Restructuring charges
|
41.5 | 1.5 | 30.4 | 0.9 | 25.2 | 0.7 | ||||||||||||||||||
|
Impairment of assets
|
6.4 | 0.2 | 9.1 | 0.3 | — | — | ||||||||||||||||||
|
Income from equity method investments
|
(7.3 | ) | (0.2 | ) | (8.6 | ) | (0.3 | ) | (10.6 | ) | (0.3 | ) | ||||||||||||
|
Operational income from continuing operations
|
$ | 109.2 | 3.8 | % | $ | 218.6 | 6.4 | % | $ | 264.9 | 7.2 | % | ||||||||||||
|
Net income
|
$ | 51.1 | 1.8 | % | $ | 122.8 | 3.6 | % | $ | 169.0 | 4.6 | % | ||||||||||||
The following table sets forth net sales by geographic market
(dollars in millions):
| For the Years Ended December 31, | ||||||||||||||||||||||||
| 2009 | 2008 | 2007 | ||||||||||||||||||||||
| Dollars | Percent | Dollars | Percent | Dollars | Percent | |||||||||||||||||||
|
Geographic Market:
|
||||||||||||||||||||||||
|
U.S.
|
$ | 2,033.1 | 71.4 | % | $ | 2,429.2 | 70.6 | % | $ | 2,701.5 | 73.2 | % | ||||||||||||
|
Canada
|
327.0 | 11.5 | 363.9 | 10.6 | 353.6 | 9.6 | ||||||||||||||||||
|
International
|
487.4 | 17.1 | 648.0 | 18.8 | 636.6 | 17.2 | ||||||||||||||||||
|
Total net sales
|
$ | 2,847.5 | 100.0 | % | $ | 3,441.1 | 100.0 | % | $ | 3,691.7 | 100.0 | % | ||||||||||||
Year
Ended December 31, 2009 Compared to Year Ended
December 31, 2008 — Consolidated
Results
Net
Sales
Net sales decreased 17.3% for 2009 as compared to 2008. The
decrease in net sales was due to decreased sales volumes of
approximately 18% across all segments and was driven by declines
in the overall end markets we serve. For the year, we saw rates
of decline increase across all segments. However, our end
markets showed improvement late in the year and particularly in
the fourth quarter, with our residential HVAC end markets
showing growth in the fourth quarter. The commercial HVAC and
refrigeration markets were still down from a year ago, but the
rate of decline continued to slow in the fourth quarter. The
declines in unit volumes were partially offset by pricing gains
of approximately 1% and positive sales mix of almost 1%. Changes
in foreign currency exchange rates adversely impacted revenues
by 1%.
Gross
Profit
Gross profit margins improved 70 basis points to 27.9% for
2009, compared to gross margins of 27.2% in 2008. Pricing gains
increased gross profit margins by approximately 150 basis
points. Lower product costs slightly improved our gross profit
margins as material savings were offset by increases in other
product costs, including under-absorbed overhead on lower volume
and distribution costs. A charge for a product quality issue
lowered gross profit margins by 80 basis points.
21
Table of Contents
Selling,
General and Administrative Expenses
Selling, general and administrative (“SG&A”)
expenses decreased by approximately $36.7 million in 2009
as compared to 2008 and as a percentage of total net sales,
SG&A expenses were 22.8% for 2009 and 20.0% for 2008.
Expenses decreased generally due to cost reductions, including
headcount savings, totaling $35 million, and the impact of
changes in foreign exchange rates of $12 million. In the
comparison of 2009 to 2008, the positive impact in 2008 of a
$10 million one-time change in our vacation policy
partially offset these reductions to SG&A expenses.
Research and development expenses increased slightly as we
continued to invest in future product offerings.
Gains and
Other Expenses, Net
Gains and other expenses, net for 2009 and 2008 included the
following (in millions):
|
For the Years
|
||||||||
|
Ended
|
||||||||
| December 31, | ||||||||
| 2009 | 2008 | |||||||
|
Realized losses on settled futures contracts
|
$ | 3.7 | $ | 0.9 | ||||
|
Net change in unrealized (gains) losses on unsettled futures
contracts
|
(7.1 | ) | 5.1 | |||||
|
Gain on sale of business, net
|
(4.1 | ) | — | |||||
|
Gains on disposals of fixed assets
|
(0.1 | ) | (4.8 | ) | ||||
|
Foreign currency exchange losses (gains)
|
0.7 | (3.2 | ) | |||||
|
Other items, net
|
0.3 | 0.1 | ||||||
|
Gains and other expenses, net
|
$ | (6.6 | ) | $ | (1.9 | ) | ||
The change in gains and losses on futures contracts was
primarily due to decreases in commodity prices relative to the
futures contract prices during 2009 as compared to 2008 for the
contracts that settled during the period. Conversely, the change
in unrealized (gains) losses related to unsettled futures
contracts not designated as cash flow hedges was primarily due
to higher commodity prices relative to the futures contract
prices for those contracts. Gains and Other Expenses, net for
2009 includes a net gain on the sale of a European business in
our Commercial Heating & Cooling segment. We sold
assets totaling $5.9 million and recorded a net loss of
$2.7 million, after related transaction costs. Upon
liquidation of this business, we recorded previously deferred
currency gains of $6.8 million. Gains on disposal of fixed
assets in 2008 included gains recorded on the sale-leaseback of
two properties located in North America in 2008. No such
transactions occurred in 2009. The change in foreign currency
losses (gains) was primarily due to a favorable
catch-up
adjustment of $4.5 million related to foreign currency
fluctuations on intercompany loans recorded in 2008. For more
information, see Note 24 in the Notes to the Consolidated
Financial Statements.
Restructuring
Charges
As part of our strategic priorities of manufacturing and
sourcing excellence and expense reduction, we have initiated
various manufacturing rationalization actions designed to lower
our cost structure. We also continue to reorganize our North
American distribution network in order to better serve our
customers’ needs by deploying parts and equipment inventory
closer to them. We also have initiated a number of activities
that rationalize and reorganize various support and
administrative functions to reduce ongoing selling and
administrative expenses.
22
Table of Contents
In 2009 and 2008, we incurred restructuring charges consisting
of:
|
For the Years Ended
|
||||||||
| December 31, | ||||||||
| 2009 | 2008 | |||||||
|
Manufacturing rationalizations
|
$ | 30.1 | $ | 19.7 | ||||
|
Reorganization of distribution network
|
0.1 | 2.9 | ||||||
|
Reorganizations of corporate and business unit selling and
administrative functions
|
11.3 | 7.8 | ||||||
|
Total
|
$ | 41.5 | $ | 30.4 | ||||
For further detail regarding restructuring reserves and
individual restructuring actions, see Note 18 in the Notes
to our Consolidated Financial Statements.
Manufacturing Rationalizations
The restructuring charges incurred in 2009 for manufacturing
rationalizations included $17.8 million of severance,
$7.5 million of asset write-offs and accelerated
depreciation, $1.2 million of equipment move costs and
$3.6 million of other costs.
The restructuring charges for manufacturing rationalizations
incurred in 2009 primarily related to the consolidation of
Residential Heating & Cooling manufacturing operations
from Blackville, South Carolina into our operations in
Orangeburg, South Carolina and Saltillo, Mexico. Total
restructuring charges recorded in 2009 related to this action
were $9.7 million. Restructuring charges for manufacturing
rationalizations also included the consolidation of certain
Refrigeration manufacturing operations located in Parets, Spain
into our existing operations in Genas, France and we recorded
restructuring charges totaling $7.8 million related to this
action. We also incurred restructuring charges related to the
consolidation of certain Commercial Heating & Cooling
manufacturing operations located in Mions, France into our
existing manufacturing operations in Longvic, France. As a
result of significant headcount reductions for this action, we
recorded restructuring charges of $7.9 million during 2009.
We also incurred restructuring charges related to restructuring
activities started in prior years. These restructuring projects
included the closure of our Refrigeration operations in
Danville, Illinois and consolidation of our Danville
manufacturing, support, and warehouse functions into our Tifton,
Georgia and Stone Mountain, Georgia operations. The operations
at Danville ceased as of the end of the first quarter of 2009,
and the transition was completed in the second quarter of 2009.
Total restructuring charges recorded in 2009 related to this
action were $2.1 million. Restructuring activities started
in prior years also included the transition of production of
selected Refrigeration products currently manufactured in
Milperra, Australia to its sister facility in Wuxi, China. Total
restructuring charges recorded in 2009 related to this action
were $1.1 million.
To date and in total, we have incurred $60.5 million of
restructuring charges related to manufacturing rationalizations
that were in process during 2009. Of that amount,
$29.7 million was severance costs, $12.5 million was
asset write-offs and accelerated depreciation, $4.8 million
was equipment move costs, and the remaining $13.5 million
was for other charges which are primarily composed of
manufacturing inefficiencies, facilities
clean-up
and
demolition costs, and inventory move costs.
In the future, we expect to incur additional charges of
$4.4 million related to the manufacturing rationalization
projects that were in process during 2009. Of these additional
expected charges, $0.5 million will be accelerated
depreciation or asset impairment charges and, therefore,
non-cash. We also expect to incur $1.9 million in equipment
move costs and $2.0 million of other costs, which are
primarily composed of facility demolition and site
clean-up.
Reorganization of North American Distribution Network
During 2009, we recorded restructuring expenses for severance of
$0.8 million offset by reductions to expense of
$0.7 million due to changes in previous severance estimates
related to the transition of activities currently
23
Table of Contents
performed at our North American Parts Center in Des Moines, Iowa
to other locations, including our North American Distribution
Center in Marshalltown, Iowa.
In the future, we expect to incur additional charges of
$0.5 million related to this project, consisting primarily
of $0.1 million in severance and $0.4 million in other
costs, consisting of relocation, pension curtailment and
facility cleanup costs. The current restructuring project is
expected to be completed within one year. We anticipate that we
will initiate additional restructuring activities in this area
as we seek to further enhance our North American distribution
network.
Reorganizations of Corporate, Business Unit Selling and
Administrative Functions
The restructuring charges incurred in 2009 related primarily to
the reorganization of selling and administrative functions and
included $10.2 million of severance and related charges,
$0.6 million of lease termination costs, and
$0.5 million of other costs.
Restructuring charges related to reorganizations of selling and
administrative functions included charges for the reorganization
of our Commercial Heating & Cooling business selling
and administrative functions in Northern Europe through a series
of restructuring actions. Total restructuring charges recorded
in 2009 related to this action were $3.9 million and
consist principally of severance. The restructuring charges
impacting administrative functions in 2009 also included the
relocation of Residential Heating & Cooling
factory-built fireplace headquarters from Orange, California to
Nashville, Tennessee and the consolidation of customer and
technical service departments into our existing hearth products
plant in Union City, Tennessee. As a result of this action, we
recorded severance charges of $1.9 million during 2009.
During the first quarter of 2009, we began to reorganize the
management structure of our Refrigeration administrative and
support functions across the globe. Restructuring charges
recorded in 2009 related to these actions were
$1.9 million. During the first quarter of 2009, Service
Experts began to centralize certain of its administrative and
support functions through a series of restructuring actions. As
a result of these actions, we recorded restructuring charges of
$1.8 million during 2009. During the first half of 2009, we
reorganized our Commercial Heating & Cooling selling
and administrative organization in the United States and Canada.
As a result of this action, we recorded severance charges of
$1.1 million during 2009.
To date and in total, we have incurred $17.2 million of
restructuring charges related to reorganizations of selling and
administrative functions for projects that were in process
during 2009. Of that amount, $14.4 million was severance
costs, $0.9 million was asset write-offs and accelerated
depreciation, $0.9 million was lease termination costs, and
the remaining $1.0 million was other charges.
In the future, we expect to incur additional charges of
$3.0 million related to these projects, consisting of
$0.4 million of severance, $0.3 million of lease
termination costs, and $2.3 million of other costs, which
will consist primarily of building demolition and site
clean-up
costs. All of these future charges except the accelerated
depreciation will require the use of cash.
Future Charges and Expense Savings
We anticipate incurring approximately $7.9 million of
future restructuring charges relating to projects that were in
process during 2009. Of that amount, about $0.6 million are
anticipated to be non-cash charges for accelerated depreciation
and asset impairments. Future cash outlays for restructuring
activities that are currently in process are estimated to be
$30.5 million. These restructuring charges and cash outlays
are expected to be incurred generally within the next year.
We realized approximately $24 million of incremental
restructuring savings in 2009.
Impairment
of Assets
In 2009, we recorded $6.0 million in impairment charges
related to the abandonment of information technology assets that
had not yet been placed in service due to our significant
restructuring activities and our exiting of a business in the
European region.
24
Table of Contents
In 2008, we recorded $9.1 million of impairment charges
related to our investment in a joint venture in Thailand. The
carrying value of this investment at year-end 2008 was
$1.8 million and, due to a loss of significant influence
over the venture, it was no longer accounted for under the
equity method in 2009.
Results
from Equity Method and Other Equity Investments
Investments over 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 $7.3 million in 2009, compared to $8.6 million in
2008, primarily due to a decrease in the performance of our
Mexican joint venture and our U.S. joint venture in
compressor manufacturing due to lower sales volumes.
Interest
Expense, Net
Interest expense, net, decreased to $8.2 million in 2009
from $14.2 million in 2008. The decrease in interest
expense was primarily attributable to a decrease in the average
amounts borrowed in 2009 as compared to 2008, and the remainder
of the decrease is due to a lower interest rate paid on variable
rate debt.
Provision
for Income Taxes
The income tax provision was $39.1 million in 2009,
compared to $80.5 million in 2008. The effective tax rate
was 38.8% for 2009 as compared to 39.4% for 2008. 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%.
Discontinued
Operations
Near the end of 2008, we announced plans to sell seven
unprofitable service centers. We entered into agreements to sell
all of these service centers during the first quarter of 2009.
Also, during the third quarter of 2009, we announced plans to
sell an additional five service centers.
We have reclassified a pre-tax loss of $13.1 million
related to these service centers in 2009 as discontinued
operations as compared to a pre-tax loss of $1.8 million
during 2008. Included in the loss from discontinued operations
is an impairment charge of $2.7 million related to service
centers where the estimated selling price of the assets is below
the net book value of those assets, gains on disposal of assets
and liabilities of $2.3 million, and a write-off of
$4.0 million of goodwill related to the sale of these
service centers. The loss from discontinued operations in 2008
also includes a provision of $4.4 million for an
unfavorable judgment in litigation related to the sale of a
service center in 2004 that was included in discontinued
operations. This contingency was settled in 2009 for
$6.1 million.
Year
Ended December 31, 2009 Compared to Year Ended
December 31, 2008 — Results by
Segment
Residential
Heating & Cooling
The following table summarizes our Residential
Heating & Cooling segment’s net sales and profit
for 2009 and 2008 (dollars in millions):
|
Years Ended
|
||||||||||||||||
| December 31, | ||||||||||||||||
| 2009 | 2008 | Difference | % Change | |||||||||||||
|
Net sales
|
$ | 1,293.5 | $ | 1,493.4 | $ | (199.9 | ) | (13.4 | )% | |||||||
|
Profit
|
111.7 | 145.8 | (34.1 | ) | (23.4 | ) | ||||||||||
|
% of net sales
|
8.6 | % | 9.8 | % | ||||||||||||
The decrease in net sales was due to continuing weakness early
in 2009 in the U.S. residential new construction market and
softer replacement business as consumers remained cautious due
to the economic environment. Sales from the Hearth business
within Residential Heating & Cooling continued to be
down significantly. However, sale to the residential HVAC end
markets end markets showed improvement late in the year and
particularly in the fourth
25
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quarter, with our residential HVAC end markets showing growth in
the fourth quarter. Reduced sales volumes decreased net sales by
nearly 15% in 2009 as compared to 2008. The unfavorable impact
of changes in foreign currency exchange rates also decreased net
sales by almost 1%. The decrease in net sales was partially
offset by pricing gains of almost 2% related to increases that
were enacted in the later quarters of 2008. Our sales mix was
flat.
Segment profit declined $30 million due to a decrease in
net sales. The decrease in 2009 was also partially due to the
positive impact in 2008 of a $7 million one-time change in
our vacation policy and gains related to the sale-leaseback of
two properties of $4 million. The decline in segment profit
was partially offset by lower product costs of $4 million
resulting from material savings partially offset by increases in
other product costs, including under-absorbed manufacturing
overhead, and SG&A cost reductions, including headcount
savings, of $7 million.
In 2009, a $24.4 million charge related to a
vendor-supplied materials quality issue was not included in our
Residential Heating & Cooling segment’s profit as
it is considered an unusual and nonrecurring item.
Commercial
Heating & Cooling
The following table summarizes our Commercial
Heating & Cooling segment’s net sales and profit
for 2009 and 2008 (dollars in millions):
|
Years Ended
|
||||||||||||||||
| December 31, | ||||||||||||||||
| 2009 | 2008 | Difference | % Change | |||||||||||||
|
Net sales
|
$ | 594.6 | $ | 835.3 | $ | (240.7 | ) | (28.8 | )% | |||||||
|
Profit
|
49.3 | 93.3 | (44.0 | ) | (47.2 | ) | ||||||||||
|
% of net sales
|
8.3 | % | 11.2 | % | ||||||||||||
Our Commercial Heating & Cooling business experienced
lower sales volumes of 31%, primarily due to weak new
construction in North America and overall weakness in European
business. The unfavorable impact of changes in foreign currency
exchange rates on net sales was 2%. As an offset to these
negative impacts, sales mix was positive at 4%. Pricing was flat
for 2009.
Segment profit declined $59 million due to a decrease in
net sales. The unfavorable comparison of 2009 to 2008 was also
partially due to the positive impact in 2008 of a
$4 million one-time change in our vacation policy. These
declines were partially offset by lower product costs of
$5 million resulting from material savings partially offset
by increases in other product costs, including under-absorbed
manufacturing overhead. SG&A cost reductions, including
headcount savings, of over $15 million partially also
offset the decline in segment profit.
Service
Experts
The following table summarizes our Service Experts
segment’s net sales and profit from continuing operations
for 2009 and 2008 (dollars in millions):
|
Years Ended
|
||||||||||||||||
| December 31, | ||||||||||||||||
| 2009 | 2008 | Difference | % Change | |||||||||||||
|
Net sales
|
$ | 535.4 | $ | 586.3 | $ | (50.9 | ) | (8.7 | )% | |||||||
|
Profit
|
16.6 | 18.5 | (1.9 | ) | (10.3 | ) | ||||||||||
|
% of net sales
|
3.1 | % | 3.2 | % | ||||||||||||
The decrease in net sales was primarily due to the decline in
the residential new construction and residential service and
replacement end markets resulting from the weakness of the
U.S. economy. The sales decrease was primarily due to a
decrease in sales volumes of 7% as both price and sales mix were
flat. The unfavorable impact of changes in foreign currency
exchange rates decreased net sales by 1%.
Segment profit declined $9 million due to a decrease in net
sales. Reduced costs of sales of $2 million due to lower
fuel costs and increased technician productivity and SG&A
cost reductions, including headcount savings, of almost
$5 million partially offset this decline.
26
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Refrigeration
The following table summarizes our Refrigeration segment’s
net sales and profit for 2009 and 2008 (dollars in millions):
|
Years Ended
|
||||||||||||||||
| December 31, | ||||||||||||||||
| 2009 | 2008 | Difference | % Change | |||||||||||||
|
Net sales
|
$ | 512.7 | $ | 618.2 | $ | (105.5 | ) | (17.1 | )% | |||||||
|
Profit
|
48.9 | 60.2 | (11.3 | ) | (18.8 | ) | ||||||||||
|
% of net sales
|
9.5 | % | 9.7 | % | ||||||||||||
Net sales decreased due to lower sales volumes of 16% and the
unfavorable impact of changes in foreign currency exchange rates
of 3%. Pricing gains of approximately 2% partially offset these
negative impacts.
Segment profit declined $21 million due to a decrease in
net sales and increased product costs of $1 million, as
other product costs, including under-absorbed manufacturing
overhead, more than offset materials savings in 2009. Offsetting
these unfavorable impacts were SG&A cost reductions,
including headcount savings, of $10 million.
Corporate
and Other
Corporate and other expenses increased to $62.5 million in
2009, up from $53.8 million in 2008. Comparisons to the
prior year were affected by a favorable adjustment for foreign
currency exchange rates of approximately $4.5 million that
was recorded in the second quarter of 2008.
Year
Ended December 31, 2008 Compared to Year Ended
December 31, 2007 — Consolidated
Results
Net
Sales
Net sales decreased 6.8% for 2008 as compared to 2007. The
decrease in net sales was due to a decrease in sales volumes of
approximately 11% across all segments, but was primarily caused
by lower volumes related to U.S. residential and commercial
new construction. Our Residential Heating & Cooling
and Service Experts segments experienced decreases in sales
primarily due to the weakened U.S. residential new
construction market. Our Commercial Heating & Cooling
segment experienced a smaller decrease in unit volumes than our
Residential Heating & Cooling segment as the decline
in the commercial market trailed the residential new
construction market. The decline in net sales was partially
offset by moderate price increases of almost 2% and a positive
sales mix of almost 2%. The favorable impact of changes in
foreign currency exchange rates increased net sales by
approximately 1%.
Gross
Profit
Gross profit margin remained flat at 27.2% for 2008 and 2007.
Gross profit margins were negatively impacted by the decreased
sales volumes and increased commodity costs experienced for much
of 2008. Also, 2007 gross margins contained a one-time
favorable warranty program adjustment of $16.9 million.
Sales mix partially offset these negative impacts as Residential
Heating & Cooling customers purchased a higher
percentage of our premium product offerings. We also were
successful in increasing the price of our products to
incorporate increases in costs related to commodities and fuel.
The changes in foreign currency exchange rates did not have a
material impact on our gross margins. Also favorably impacting
gross margins was a $4.6 million reduction in salaries and
wages expense related to a change in our vacation policy.
While we realized savings from previously announced and
implemented restructurings and cost reduction programs, the full
effect on gross margins was mitigated by manufacturing
inefficiencies that were incurred related to those activities.
These inefficiencies were related to the move of certain
manufacturing operations to Saltillo, Mexico and other
manufacturing rationalization activities.
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Table of Contents
Selling,
General and Administrative Expenses
SG&A expenses for the year decreased by over
$44.2 million in 2008 as compared to 2007. As a percentage
of total net sales, SG&A expenses were 20.0% for 2008 and
19.8% for 2007. SG&A expenses decreased due to cost
measures and the operation of incentive compensation plans,
including an adjustment in our vacation policy of
$10 million.
These decreases in SG&A expenses were partially offset by
an increase in bad debt expense as a result of increased
economic pressure on our customers, the impact of foreign
currency exchange rates as the dollar weakened against
currencies in some of the foreign countries where we operate,
and increased research and development spending.
Gains and
Other Expenses, Net
Gains and other expenses, net for 2008 and 2007 included the
following (in millions):
|
For the Years
|
||||||||
|
Ended
|
||||||||
| December 31, | ||||||||
| 2008 | 2007 | |||||||
|
Realized losses (gains) on settled futures contracts
|
$ | 0.9 | $ | (3.9 | ) | |||
|
Unrealized losses on unsettled futures contracts
|
5.1 | 3.4 | ||||||
|
Gains on disposals of fixed assets
|
(4.8 | ) | (0.3 | ) | ||||
|
Foreign currency exchange gains
|
(3.2 | ) | (6.2 | ) | ||||
|
Other items, net
|
0.1 | 0.3 | ||||||
|
Gains and other expenses, net
|
$ | (1.9 | ) | $ | (6.7 | ) | ||
The changes in gains and losses on futures contracts were
primarily due to decreases in commodity prices relative to the
futures contract prices during 2008 as compared to 2007. For
more information, see Note 24 in the Notes to the
Consolidated Financial Statements. Gains on disposals of fixed
assets included gains recorded on the sale-leaseback of two
properties located in North America.
Restructuring
Charges
In 2008 and 2007, we incurred restructuring charges consisting
of:
|
For the Years
|
||||||||
|
Ended
|
||||||||
| December 31, | ||||||||
| 2008 | 2007 | |||||||
|
Manufacturing rationalizations
|
$ | 19.7 | $ | 15.8 | ||||
|
Reorganization of distribution network
|
2.9 | — | ||||||
|
Reorganizations of corporate and business unit administrative
functions
|
7.8 | 10.0 | ||||||
|
Other
|
— | (0.6 | ) | |||||
|
Total
|
$ | 30.4 | $ | 25.2 | ||||
For further detail regarding restructuring reserves and
individual restructuring actions, see Note 18 in the Notes
to our Consolidated Financial Statements.
Manufacturing Rationalizations
The restructuring charges incurred in 2008 related to
manufacturing rationalizations included $6.4 million of
severance and related charges, $4.0 million of asset
write-offs and accelerated depreciation, $3.0 million of
equipment move charges and $6.3 million of other costs.
These other costs were primarily manufacturing inefficiencies
caused by decreased volumes at affected facilities and inventory
move costs. Restructuring charges incurred related to
manufacturing rationalizations during 2007 related primarily to
the closures of the Danville,
28
Table of Contents
Lynwood, and Bellevue, Ohio operations. We incurred
$31.0 million of restructuring charges related to
manufacturing rationalizations for projects that were in process
during 2008. Of that amount, $12.0 million was severance
costs, $5.2 million was asset write-offs and accelerated
depreciation, $3.7 million of equipment move charges,
$2.7 million of pension curtailments, other personnel
related charges of $0.6 million, and other charges,
including manufacturing inefficiencies and inventory move costs
of $6.8 million.
Reorganization of North American Distribution Network
In the fourth quarter of 2008, we commenced the transition of
activities currently performed at our North American Parts
Center in Des Moines, Iowa to other locations, including our
North American Distribution Center in Marshalltown, Iowa. We
incurred $2.9 million of restructuring charges related to
the reorganization of our North American distribution network.
Of that amount $2.8 million was severance costs and
$0.1 million was a pension curtailment.
Reorganizations of Support and Administrative Functions
The restructuring charges incurred in 2008 related to the
reorganization of support and administrative functions included
$5.8 million of severance and related charges,
$0.8 million of asset write-offs and accelerated
depreciation, $0.3 million of lease termination costs and
$0.9 million of other costs. Restructuring charges in 2007
primarily related to the elimination of the position of chief
administrative officer. In connection with this action, we
recorded an $8.0 million liability to settle the terms of
his employment agreement, of which $6.6 million, net of
$1.4 million of previously recorded stock-based
compensation expense, was recorded in the second quarter of
2007. The final settlement of this matter occurred and an amount
equal to the liability recorded was paid during the second
quarter of 2008.
We incurred $18.2 million of restructuring charges related
to reorganizations of support and administrative functions for
projects that were in process during 2008. Of that amount,
$15.4 million was severance costs, $0.8 million was
asset write-offs and accelerated depreciation, $1.1 million
lease termination costs, and the remainder of $0.9 million
was other charges.
Cash Used in Restructuring Activities, Future Charges and
Expense Savings
Total cash paid for restructuring activities during 2008 was
$29.8 million, a significant increase over the 2007 amount
of $10.6 million. A significant portion of this amount
related to increased restructuring activities and was primarily
composed of severance payments related to the elimination of the
position of chief administrative officer and severance related
to manufacturing rationalizations and administrative
reorganizations. We use operating cash as the funding source for
restructuring activities.
In 2008, we realized approximately $7.3 million of
incremental expense savings from our restructuring activities.
Results
from Equity Method and Other Equity Investments
Investments where we do not exercise control but have
significant influence are accounted for using the equity method
of accounting. Income from equity method investments decreased
to $8.6 million in 2008 when compared to $10.6 million
in 2007 primarily due to the lowered performance of our
U.S. joint venture in compressor manufacturing due to a
reduction in our volume of purchases from such joint venture.
In 2008, we also recorded $9.1 million of impairment
charges related to our investment in a joint venture in
Thailand. The carrying value of this investment at year-end was
$1.8 million and, due to a loss of significant influence
over the venture, it was no longer accounted for under the
equity method.
Interest
Expense, Net
Interest expense, net, increased to $14.2 million in 2008
from $6.8 million in 2007. The increase in interest expense
was primarily attributable to higher debt balances as the result
of increased borrowing related to our share repurchases during
the first two quarters of 2008 of $296.7 million.
Offsetting the increase in the average amounts borrowed was a
decrease in the average interest rate paid on variable rate debt.
29
Table of Contents
Provision
for Income Taxes
The provision for income taxes was $80.5 million in 2008
compared to $91.7 million in 2007. The effective tax rate
was 39.4% for 2008 as compared to 35.6% for 2007. Our effective
rates differ from the statutory federal rate of 35% for certain
items, such as state and local taxes, non-deductible expenses,
foreign operating losses for which no tax benefits have been
recognized and foreign taxes at rates other than 35%. Our
effective rate was also impacted in 2008 by a non-deductible
impairment charge and foreign operating losses for which no tax
benefits have been recognized. These two items combined add
approximately 3.2 percentage points to our effective tax
rate.
Year
Ended December 31, 2008 Compared to Year Ended
December 31, 2007 — Results by
Segment
Residential
Heating & Cooling
The following table summarizes our Residential
Heating & Cooling segment’s net sales and profit
for 2008 and 2007 (dollars in millions):
|
Years Ended
|
||||||||||||||||
| December 31, | ||||||||||||||||
| 2008 | 2007 | Difference | % Change | |||||||||||||
|
Net sales
|
$ | 1,493.4 | $ | 1,669.6 | $ | (176.2 | ) | (10.6 | )% | |||||||
|
Profit
|
145.8 | 174.4 | (28.6 | ) | (16.4 | ) | ||||||||||
|
% of net sales
|
9.8 | % | 10.4 | % | ||||||||||||
The decrease in net sales was due to continuing weakness in the
U.S. residential new construction market and softer
replacement business as consumers remain cautious due to the
economic environment. Unit volumes were lower across the
industry. An additional impact on volume for our value product
offerings is that a higher number of consumers in difficult
market conditions are electing to repair versus replace their
HVAC equipment. As a result, unit volumes were down nearly 16%
in 2008 as compared to 2007. The decrease related to sales
volumes was partially offset by favorable product mix shift of
approximately 4% towards our premium products and approximately
2% price increases. We believe that customers with disposable
income are moving towards higher efficiency premium systems.
Segment profit declined $23 million due to a decrease in
net sales and increased product costs of $16 million. These
unfavorable impacts to segment profit were partially offset by
SG&A cost reductions and programs that resulted in lower
personnel-related and incentive compensation expenses totaling
$7 million.
In 2007, a favorable warranty program adjustment of
$16.9 million was not included in our Residential
Heating & Cooling segment’s profit as it is
considered an unusual and nonrecurring item.
While the Residential Heating & Cooling segment
realized savings from previously announced and implemented
restructurings and cost reduction programs, the full effect on
gross margins was mitigated by some manufacturing inefficiencies
related to those activities.
Commercial
Heating & Cooling
The following table summarizes our Commercial
Heating & Cooling segment’s net sales and profit
for 2008 and 2007 (dollars in millions):
|
Years Ended
|
||||||||||||||||
| December 31, | ||||||||||||||||
| 2008 | 2007 | Difference | % Change | |||||||||||||
|
Net sales
|
$ | 835.3 | $ | 875.0 | $ | (39.7 | ) | (4.5 | )% | |||||||
|
Profit
|
93.3 | 101.0 | (7.7 | ) | (7.6 | ) | ||||||||||
|
% of net sales
|
11.2 | % | 11.5 | % | ||||||||||||
Our domestic operations experienced lower sales volumes of
approximately 9% on a
year-over-year
basis primarily due to the softening in our retail national
account business as customers extended times between scheduled
unit replacements and deferred new store openings. These
reductions were partially offset by price increases of
30
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approximately 3%. Sales mix was slightly unfavorable of
approximately 1%. Sales mix was positive for the first three
quarters due to the relatively high levels of newly introduced
premium product during the early part of the year. The favorable
impact of changes in foreign currency exchange rates increased
net sales by approximately 2%.
The reduced segment profit was due primarily to increased
product costs of $11 million partially offset by
improvements to segment profit due to increased net sales of
approximately $4 million.
Service
Experts
The following table summarizes our Service Experts
segment’s net sales and profit from continuing operations
for 2008 and 2007 (dollars in millions):
|
Years Ended
|
||||||||||||||||
| December 31, | ||||||||||||||||
| 2008 | 2007 | Difference | % Change | |||||||||||||
|
Net sales
|
$ | 586.3 | $ | 623.5 | $ | (37.2 | ) | (6.0 | )% | |||||||
|
Profit
|
18.5 | 24.4 | (5.9 | ) | (24.2 | ) | ||||||||||
|
% of net sales
|
3.2 | % | 3.9 | % | ||||||||||||
The decrease in net sales was primarily due to the decline in
the residential new construction and residential service and
replacement markets resulting from the weakness of the
U.S. economy. This was primarily due to a volume decline of
approximately 6% as both price and sales mix were relatively
flat.
Segment profit declined $16 million due to the decrease in
net sales partially offset by SG&A cost reductions, and
programs that resulted in lower personnel-related and incentive
compensation expenses of approximately $9 million.
During 2009 and 2008, we announced plans to exit twelve service
centers. As a result, we have reclassified losses incurred
related to these service centers in 2008 of $1.8 million to
discontinued operations. This compares with income in 2007 of
$0.8 million. Also, included in discontinued operations was
a $1.7 million charge for litigation related to the sale of
a service center in 2004 that was included in discontinued
operations. These amounts have been excluded from Service
Experts segment profit.
Refrigeration
The following table summarizes our Refrigeration segment’s
net sales and profit for 2008 and 2007 (dollars in millions):
|
Years Ended
|
||||||||||||||||
| December 31, | ||||||||||||||||
| 2008 | 2007 | Difference | % Change | |||||||||||||
|
Net sales
|
$ | 618.2 | $ | 607.7 | $ | 10.5 | 1.7 | % | ||||||||
|
Profit
|
60.2 | 61.5 | (1.3 | ) | (2.1 | ) | ||||||||||
|
% of net sales
|
9.7 | % | 10.1 | % | ||||||||||||
Net sales increased due to the favorable impact of changes in
foreign currency exchange rates of approximately 2% and moderate
price increases of approximately 2% implemented primarily in our
domestic and Australian operations as a result of higher
commodity and component costs. These favorable items were
partially offset by moderate decreases in unit volumes of
approximately 3% in all of the geographic areas where the
Refrigeration segment operates.
The decrease in segment profit was primarily due to increased
product costs of $9 million offset by a $6 million
improvement to segment profit due to increased net sales and
SG&A cost reductions and programs that resulted in lower
personnel-related and incentive compensation expenses of
approximately $3 million.
While the Refrigeration segment realized savings from previously
announced and implemented restructurings and cost reduction
programs, the full effect on our gross margins was not apparent
due to manufacturing inefficiencies that were incurred related
to those activities.
31
Table of Contents
Corporate
and Other
Corporate and other expenses decreased to $53.8 million in
2008 from $85.0 million in 2007. The decrease was primarily
driven by a reduction in both short-term and long-term incentive
compensation due to decreased financial performance, expense
reduction in professional fees related to compliance activities,
changes in employee benefits, foreign currency gains and overall
tight budgetary controls. The decrease in long-term stock-based
compensation expense of $9 million was primarily due to an
increase in forfeiture rates and a decrease in the estimated
pay-out percentage on outstanding performance share units in
2008 as compared to 2007. A portion of the decrease in Corporate
and Other expenses was composed of the favorable
$4.5 million
catch-up
adjustment related to foreign currency in the second quarter of
2008.
Accounting
for Futures Contracts
Realized gains and losses on settled futures contracts are a
component of segment profit (loss). Unrealized gains and losses
on open futures contracts are excluded from segment profit
(loss) as they are subject to changes in fair value until their
settlement date. Both realized and unrealized gains and losses
on futures contracts are a component of Gains and Other
Expenses, net in the accompanying Consolidated Statements of
Operations. See Note 21 to our Consolidated Financial
Statements for more information and a reconciliation of segment
profit to net income.
Liquidity
and Capital Resources
Our working capital and capital expenditure requirements are
generally met through internally generated funds, bank lines of
credit and a revolving period asset securitization arrangement.
Working capital needs are generally greater in the first and
second quarters due to the seasonal nature of our business cycle.
Statement
of Cash Flows
The following table summarizes our cash activity for 2009, 2008
and 2007 (in millions):
| 2009 | 2008 | 2007 | ||||||||||
| (In millions) | ||||||||||||
|
Net cash provided by operating activities
|
$ | 225.5 | $ | 183.2 | $ | 239.9 | ||||||
|
Net cash used in investing activities
|
(14.0 | ) | (66.5 | ) | (97.6 | ) | ||||||
|
Net cash used in financing activities
|
(211.7 | ) | (132.0 | ) | (152.7 | ) | ||||||
Net cash
provided by operating activities
During 2009, cash provided by operating activities was
$225.5 million compared to $183.2 million in 2008 and
$239.9 million in 2007. This was higher primarily due to
improved working capital management and the return of collateral
posted related to commodity hedges. These were partially offset
by lower net income, $51.1 million in 2009 from
$122.8 million in 2008, and repayments related to our asset
securitization program.
We contributed $42.2 million to our defined benefit pension
plans in 2009. We made payments on our asset securitization
program of $30.0 million in 2009 compared to proceeds
received of $30.0 million in 2008. Partially offsetting
these uses of cash, we received cash of $37.9 million from
collateral previously posted related to commodity hedge
derivative loss positions in 2008. With continued focus on
manufacturing rationalization, sourcing excellence and expense
reduction, restructuring expenses, net of cash paid, increased
in 2009 to $18.6 million.
Improvements in working capital had a positive impact on cash
flow from operations. The cash flow impact of $37.1 million
from reductions to inventory levels contributed to the increase
in operating cash flows for 2009. The cash flow impact from
accounts payable improved in 2009, by $38.6 million, as
accounts payable remained relatively flat.
32
Table of Contents
Net cash
used in investing activities
Net cash used in investing activities was $14.0 million in
2009 compared to $66.5 million and $97.6 million in
2008 and 2007, respectively. Capital expenditures of
$58.8 million, $62.1 million and $70.2 million in
2009, 2008 and 2007, respectively, resulted primarily from
(i) purchases of production equipment in our Residential
Heating & Cooling and Commercial Heating &
Cooling segments, (ii) expenditures for plant
consolidations and (iii) spending for our Saltillo, Mexico
facility. Net cash used in investing activities in 2009 was
reduced by proceeds from sale of businesses of
$10.0 million and the net positive cash flow impact of
$33.3 million for net short-term investments. Investing
activities for 2008 also included the proceeds from the
sale-leaseback from two properties that are part of our North
American operations of $5.5 million.
Net cash
used in financing activities
Net cash used in financing activities was $211.7 million in
2009 compared to $132.0 million and $152.7 million in
2008 and 2007, respectively. We paid a total of
$31.1 million in dividends on our common stock in 2009 as
compared to $32.4 million and $35.0 million in 2008
and 2007, respectively. Net payments of long-term debt,
short-term borrowings and revolving long-term payments totaled
approximately $189.3 million in 2009 as compared to net
borrowings of $178.5 million in 2008. During 2008, we used
approximately $311.3 million to repurchase approximately
8,907,650 shares of our common stock under our share
repurchase plans. We also purchased approximately
356,731 shares of our common stock to satisfy tax
withholding obligations in connection with the exercise of stock
appreciation rights, the payout of shares of our common stock
pursuant to vested performance share awards and the vesting of
restricted stock awards.
Debt
Position and Financial Leverage
Our
debt-to-total
capital ratio decreased to 28% as of December 31, 2009 from
48% as of December 31, 2008 due to lower outstanding debt
and increased equity.
Our stockholders’ equity also increased during 2009,
primarily due to changes in Accumulated Other Comprehensive Loss
(“AOCL”). We incurred comprehensive gains related to
foreign currency translation adjustments, net of
$59.5 million as the U.S. Dollar weakened against the
currencies in the areas of the world where we operate. We also
recorded $7.2 million comprehensive gains, net of tax,
related to our derivatives.
The following tables summarize our outstanding debt obligations
and the classification in the accompanying Consolidated Balance
Sheets as of December 31, 2009 and 2008 (in millions):
|
Description of Obligation
|
Short-Term
|
Current
|
Long-Term
|
|||||||||||||
|
As of December 31, 2009
|
Debt | Maturities | Maturities | Total | ||||||||||||
|
Domestic promissory notes(1)
|
$ | — | $ | 35.0 | $ | — | $ | 35.0 | ||||||||
|
Domestic revolving credit facility
|
— | — | 176.5 | 176.5 | ||||||||||||
|
Capital lease obligations
|
— | 0.4 | 17.1 | 17.5 | ||||||||||||
|
Other obligations
|
2.2 | 0.1 | 0.2 | 2.5 | ||||||||||||
|
Total Debt
|
$ | 2.2 | $ | 35.5 | $ | 193.8 | $ | 231.5 | ||||||||
|
Description of Obligation
|
Short-Term
|
Current
|
Long-Term
|
|||||||||||||
|
As of December 31, 2008
|
Debt | Maturities | Maturities | Total | ||||||||||||
|
Domestic promissory notes(1)
|
$ | — | $ | — | $ | 35.0 | $ | 35.0 | ||||||||
|
Domestic revolving credit facility
|
— | — | 359.8 | 359.8 | ||||||||||||
|
Capital lease obligations
|
— | 0.3 | 18.6 | 18.9 | ||||||||||||
|
Other obligations
|
6.1 | 0.3 | 0.3 | 6.7 | ||||||||||||
|
Total Debt
|
$ | 6.1 | $ | 0.6 | $ | 413.7 | $ | 420.4 | ||||||||
| (1) | Domestic promissory notes bear interest at 8.00% and mature in 2010. |
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Table of Contents
As of December 31, 2009, we had outstanding long-term debt
obligations totaling $229.3 million, which decreased from
$414.3 million as of December 31, 2008. The amount
outstanding as of December 31, 2009 consisted primarily of
outstanding borrowings of $176.5 million under our domestic
revolving credit facility, which matures in 2012, and a
promissory note with an aggregate principal amount outstanding
of $35.0 million.
As of December 31, 2009, we had outstanding borrowings of
$176.5 million under the $650.0 million domestic
revolving credit facility and $93.5 million was committed
to standby letters of credit. All of the remaining
$380.0 million was available for future borrowings after
consideration of covenant limitations. The facility matures in
October 2012.
Our domestic revolving credit facility includes a subfacility
for swingline loans of up to $50.0 million and provides for
the issuance of letters of credit for the full amount available
under our domestic revolving credit facility. Our weighted
average borrowing rate on our domestic revolving credit facility
was 0.84% and 2.26% as of December 31, 2009 and 2008,
respectively.
Our domestic revolving credit facility contains financial
covenants relating to leverage and interest coverage. Other
covenants contained in the domestic revolving credit facility
restrict, among other things, mergers, asset dispositions,
guarantees, debt, liens, acquisitions, investments, affiliate
transactions and our ability to make restricted payments. The
financial covenants require us to maintain defined levels of
Consolidated Indebtedness to Adjusted EBITDA Ratio and a Cash
Flow (defined as EBITDA minus capital expenditures) to Net
Interest Expense Ratio. The required ratios under our domestic
revolving credit facility as of December 31, 2009 are
detailed below:
|
Consolidated Indebtedness to Adjusted EBITDA Ratio no greater
than
|
3.5 : 1.0 | |||
|
Cash Flow to Net Interest Expense Ratio no less than
|
3.0 : 1.0 |
Our domestic revolving credit facility contains customary events
of default. These events of default include nonpayment of
principal or interest, breach of covenants or other restrictions
or requirements, default on any other indebtedness or
receivables securitizations (cross default), and bankruptcy. A
cross default could occur if:
| • | we fail to pay any principal or interest when due on any other indebtedness or receivables securitization of at least $40.0 million; or | |
| • | we are in default on any other indebtedness or receivables securitization in an aggregate principal amount of at least $40.0 million, which would give the holders the right to declare such indebtedness due and payable prior to its stated maturity. |
If a cross default was to occur, it could have a wider impact on
our liquidity than might otherwise occur from a default of a
single debt instrument or lease commitment.
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 our
domestic revolving credit facility and accelerate amounts due
under our domestic revolving credit facility (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).
The domestic promissory notes contain similar financial covenant
restrictions as our domestic revolving credit facility described
above. As of December 31, 2009, we were in compliance with
all covenant requirements. Our domestic revolving credit
facility and promissory notes are guaranteed by our material
subsidiaries.
We have additional borrowing capacity through several foreign
facilities governed by agreements between us and various banks.
These borrowings are used primarily to finance seasonal
borrowing needs of our foreign subsidiaries. We had
$2.5 million and $6.7 million of obligations
outstanding through our foreign subsidiaries as of
December 31, 2009 and 2008, respectively. Available
borrowing capacity at December 31, 2009 and 2008, on
foreign facilities was $12.6 million and
$11.1 million, respectively.
Under a revolving period asset securitization arrangement
(“ASA”), we are eligible to transfer beneficial
interests in a portion of our trade accounts receivable to third
parties in exchange for cash. Our continued involvement in the
transferred assets includes servicing, collection and
administration of the transferred beneficial
34
Table of Contents
interests. The sale of the beneficial interests in our trade
accounts receivable are reflected as secured borrowings. The
fair values assigned to the retained and transferred interests
are based primarily on the receivables’ carrying value
given the short term to maturity and low credit risk. The ASA
provides for a maximum securitization amount of
$100 million or 100% of the net pool balance as defined by
the ASA. However, eligibility for securitization is limited
based on the amount and quality of the qualifying accounts
receivable and is calculated monthly. The beneficial interest
sold cannot exceed the maximum amount even if our qualifying
accounts receivable is greater than the maximum amount at any
point in time. The eligible amounts available were as follows
(in millions):
|
For the Years Ended
|
||||||||
| December 31, | ||||||||
| 2009 | 2008 | |||||||
|
Eligible amount available under the ASA on qualified accounts
receivable
|
$ | 72.5 | $ | 91.0 | ||||
|
Beneficial interest sold
|
— | (30.0 | ) | |||||
|
Remaining amount available
|
$ | 72.5 | $ | 61.0 | ||||
As of December 31, 2009 and 2008, $2.6 million of cash
and cash equivalents were restricted primarily due to routine
lockbox collections and letters of credit issued with respect to
the operations of our captive insurance subsidiary, which expire
on December 31, 2010, and will be renewed upon expiration.
These letters of credit restrictions can be transferred to our
revolving lines of credit as needed.
In June 2008 our Board of Directors approved a new share
repurchase plan, pursuant to which we are authorized to
repurchase up to $300 million of shares of our common stock
through open market purchases (the “2008 Share
Repurchase Plan”).
We periodically review our capital structure, including our
primary bank facility, to ensure that it has adequate liquidity.
We believe that cash flows from operations, as well as available
borrowings under our revolving credit facility and other
existing sources of funding, will be sufficient to fund our
operations for the foreseeable future and the share repurchases
under 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 financial
covenants consistent with our domestic revolving credit
agreement and we are in compliance with these financial
covenants. The lease will continue to be accounted for as an
operating lease.
During 2008, we expanded our Tifton, Georgia manufacturing
facility using the proceeds from Industrial Development Bonds
(“IDBs”). We entered into a lease agreement with the
owner of the property and the issuer of the IDBs, and through
our lease payments fund the interest payments to investors in
the IDBs. We also guaranteed the repayment of the IDBs and
entered into letters of credit totaling $15.5 million to
fund a potential repurchase of the IDBs in the event that
investors exercised their right to tender the IDBs to the
Trustee. As of December 31, 2008 and 2009, we recorded both
a long-term asset and a corresponding long-term obligation of
$14.3 and $15.3 million, respectively, related to these
transactions.
Off
Balance Sheet Arrangements
In addition to the credit facilities and promissory notes
described above, we also lease real estate and machinery and
equipment pursuant to operating leases that are not capitalized
on the balance sheet, including high-turnover equipment such as
autos and service vehicles and short-lived equipment such as
personal computers. These leases generated rent expense of
approximately $64.4 million, $64.2 million and
$64.4 million in 2009, 2008 and 2007, respectively.
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Table of Contents
Contractual
Obligations
Summarized below are our contractual obligations as of
December 31, 2009 (in millions):
| Payments Due by Period | ||||||||||||||||||||
|
1 Year
|
2-3
|
4-5
|
After
|
|||||||||||||||||
| Total | or Less | Years | Years | 5 Years | ||||||||||||||||
|
Total debt obligations
|
$ | 231.5 | $ | 37.7 | $ | 177.7 | $ | 1.1 | $ | 15.0 | ||||||||||
|
Operating leases
|
172.5 | 55.0 | 69.7 | 28.8 | 19.0 | |||||||||||||||
|
Purchase obligations
|
9.2 | 9.2 | — | — | — | |||||||||||||||
|
Estimated interest payments on long-term debt
|
36.8 | 10.1 | 19.5 | 1.0 | 6.2 | |||||||||||||||
|
Total contractual obligations
|
$ | 450.0 | $ | 112.0 | $ | 266.9 | $ | 30.9 | $ | 40.2 | ||||||||||
As of December 31, 2009, the liability for uncertain tax
positions, including interest and penalties, was
$1.6 million. Due to the uncertainty regarding the timing
of payments associated with these liabilities, we are unable to
make a reasonable estimate of the amount and period in which
these liabilities might be paid.
Purchase obligations consist of aluminum commitments. The above
table does not include retirement, postretirement and warranty
liabilities because it is not certain when these liabilities
will become due. Due to $42.2 million in contributions in
2009 and favorable return on assets, our required pension
contributions in 2010 are expected to be minimal. For additional
information regarding our contractual obligations, see
Note 11, Note 12 and Note 13 of the Notes to the
Consolidated Financial Statements. Contractual obligations
related to capital leases as of December 31, 2009 were
included as part of long-term debt in the table above.
Fair
Value Measurements
Fair
Value Hierarchy
The three-level fair value hierarchy for disclosure of fair
value measurements are defined 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 entity’s own assumptions about the assumptions market participants would use in pricing the asset or liability developed based on the best information available in the circumstances. |
Fair
Value Techniques
General
Our valuation techniques are applied to all of the assets and
liabilities carried at fair value. 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 party’s creditworthiness and ability to pay. Where
appropriate, these amounts were incorporated into our valuations
as of December 31, 2009 and 2008, the measurement dates.
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Table of Contents
Derivatives
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
counterparty’s 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.
Short-Term Investments
During the third quarter of 2009, we liquidated all of the
short-term investments reported on our Consolidated Balance
Sheets as of December 31, 2008. The majority of our
short-term investments were managed by professional investment
advisors. The net asset values were furnished in statements
received from the investment advisor and reflect valuations
based upon the respective pricing policies utilized by the
investment advisor. We 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 were based on several observable
inputs including, but not limited to, benchmark yields, reported
trades, broker/dealer quotes, issuer spreads and benchmark
securities. These investments consisted of U.S. government
and government agency securities, corporate bonds, asset-backed
securities, collateralized mortgage obligations and various
securitized debt instruments. The majority of these investments
were of high quality, with 85% having AAA ratings. The
application of our valuation techniques resulted in no net
changes to the valuations for these securities as of
December 31, 2008.
Pension Plan Assets
The majority of our commingled pool/collective trust, mutual
funds and balanced pension trusts are managed by professional
investment advisors. The net asset values (“NAV”) per
share are furnished in monthly
and/or
quarterly statements received from the investment advisors and
reflect valuations based upon their pricing policies. We have
assessed the classification of the inputs used to value these
investments at Level 1 for mutual funds and Level 2
for commingled pool/collective trusts and balance pension trusts
through examination of their pricing policies and the related
controls and procedures. The fair values we report are based on
the pool or trust’s NAV per share. The NAV’s per share
are calculated periodically (daily or no less than one time per
month) as the aggregate value of each pool or trust’s
underlying assets divided by the number of units owned.
Market
Risk
Commodity
Price Risk
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.
Fluctuations in metal commodity prices impact the value of the
derivative instruments that we hold. When metal commodity prices
rise, the fair value of our futures contracts increases and
conversely, when commodity prices fall, the fair value of our
futures contracts decreases. During 2008, metal commodity prices
decreased considerably in a short time period, which resulted in
significant derivative loss positions. As a result of these loss
positions, we were required to post collateral of
$37.9 million as of December 31, 2008. During 2009,
metal commodity prices remained relatively stable and as a
result, our commodity contracts that were in loss positions at
December 31, 2008 have expired and we were no longer
required to post collateral as of December 31, 2009. The
collateral posted was treated as a prepaid expense and recorded
in Other Assets in the accompanying Consolidated Balance Sheets.
We also recorded derivative losses, net of tax, of
$21.3 million in AOCL as of December 31, 2008. During
2009, our commodity contracts that were in loss positions at
December 31, 2008 have expired and we recorded derivative
gains, net of tax, of $7.2 million in AOCL as of
December 31, 2009. We believe that this decline in metal
prices was an extraordinary event because of its size and its
occurrence over a relatively short timeframe.
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Table of Contents
Information about our exposure to market risks related to metal
commodity prices and a sensitivity analysis related to our metal
commodity hedges is presented below (in millions):
|
Notional amount (pounds)
|
14.4 | |||
|
Carrying amount and fair value of asset
|
$ | 12.5 | ||
|
Change in fair value from 10% change in forward prices
|
$ | 4.6 |
Interest
Rate Risk
Our results of operations can be affected by changes in interest
rates due to variable rates of interest on our revolving credit
facilities, cash, cash equivalents and short-term investments.
In order to partially mitigate interest rate risk, we use a
hedging strategy to eliminate the variability of cash flows in
the interest payments for the first $100 million of the
total variable-rate debt outstanding under the domestic
revolving credit facility that is solely due to changes in the
benchmark interest rate. This strategy allows us to fix a
portion of our interest payments while also taking advantage of
historically low interest rates.
On June 12, 2009, we entered into a $100 million
pay-fixed, receive-variable interest rate swap with a large
financial institution at a fixed interest rate of 2.66%. The
variable portion of the interest rate swap is tied to
1-Month
LIBOR (the benchmark interest rate). The interest rates under
both the interest rate swap and the underlying debt are reset,
the swap is settled with the counterparty, and interest is paid,
on a monthly basis. The interest rate swap expires
October 12, 2012. We account for the interest rate swap as
a cash flow hedge.
Information about our exposure to interest rate risk and a
sensitivity analysis related to our interest rate swap is
presented below (in millions):
|
Notional amount
|
$ | 100.0 | ||
|
Impact of a 100 basis point change in the benchmark
interest rate:
|
||||
|
Carrying amount and fair value of asset
|
$ | 0.4 | ||
|
Interest expense
|
$ | 1.1 |
Foreign
Currency Exchange Rate Risk
Our results of operations can be affected by changes in exchange
rates. Net sales and expenses in foreign currencies are
translated into U.S. dollars for financial reporting
purposes based on the average exchange rate for the period.
During 2009, 2008 and 2007, net sales from outside the
U.S. represented 28.6%, 29.4% and 26.8%, respectively, of
our total net sales. Historically, foreign currency transaction
gains (losses) have not had a material effect on our overall
operations. As of December 31, 2009, the impact to net
income of a 10% change in exchange rates is estimated to be
approximately $3.6 million.
Critical
Accounting Policies
The preparation of financial statements requires the use of
judgments and estimates. The critical accounting policies are
described below to provide a better understanding of how we
develop our judgments about future events and related
estimations and how such policies can impact our financial
statements. A critical accounting policy is one that requires
difficult, subjective or complex estimates and assessments and
is fundamental to the results of operations. We consider our
most critical accounting policies to be:
| • | goodwill and other intangible assets; | |
| • | product warranties; | |
| • | pension and postretirement benefits; | |
| • | self-insurance expense; | |
| • | derivative accounting; and | |
| • | income taxes. |
38
Table of Contents
This discussion and analysis should be read in conjunction with
our Consolidated Financial Statements and related Notes in
“Item 8. Financial Statements and Supplementary
Data.”
Goodwill
and Other Intangible Assets
We assign goodwill to the reporting units that benefit from the
synergies of our acquisitions, which are the reporting units
that report the results of such acquisitions. If we reorganize
our management structure, the related goodwill is allocated to
the affected reporting units based upon the relative fair values
of those reporting units. Assets and liabilities, including
deferred income taxes, are generally directly assigned to the
reporting units through our segment reporting system as part of
our financial closing process. However, certain assets and
liabilities, including information technology assets and
pension, self-insurance, and environmental liabilities, are
commonly managed and are not allocated to the segments in the
normal course of our financial reporting process and therefore
must be assigned to the reporting units based upon appropriate
methods. We test goodwill for impairment by reporting unit at
least annually in the first quarter of each fiscal year.
Reporting units that we test are generally equivalent to our
business segments, or in some cases, one level below. We review
our reporting unit structure each year as part of our annual
goodwill impairment testing and reporting units are determined
based upon a review of the periodic financial information
supplied to and reviewed by our Chief Executive Officer (the
chief operating decision maker). We aggregate operating units
reviewed into reporting units when those operating units share
similar economic characteristics.
We estimate reporting unit fair values using standard business
valuation techniques such as discounted cash flows and reference
to comparable business transactions. The discounted cash flow
approach is the principal technique we use. We use comparable
business transactions as a reasonableness test of our principal
technique as we believe that the discounted cash flow approach
provides greater detail and opportunity to reflect specific
facts, circumstances and economic conditions for each reporting
unit. Comparable business transactions are often limited in
number, the information can be dated, and may require
significant adjustments due to differences in the size of the
business, markets served, product offered, and other factors. We
therefore believe that in our circumstances, this makes
comparisons to business transactions less reliable than the
discounted cash flows method.
The discounted cash flows used to estimate fair value are based
on assumptions regarding each reporting unit’s estimated
projected future cash flows and the estimated weighted-average
cost of capital that a market participant would use in
evaluating the reporting unit in a purchase transaction. The
estimated weighted-average cost of capital is based on the
risk-free interest rate and other factors such as equity risk
premiums and the ratio of total debt to equity capital. In
performing these impairment tests, we take steps to ensure that
appropriate and reasonable cash flow projections and assumptions
are used. We reconcile our estimated enterprise value to our
market capitalization and determine the reasonableness of the
cost of capital used by comparing to market data. We also
perform sensitivity analyses on the key assumptions used, such
as the weighted-average cost of capital and terminal growth
rates.
In the aggregate, there has been an excess of fair value over
the carrying value of the net assets of our reporting units of
over $1.0 billion in both 2009 and 2008. The average rate
used to discount the estimated cash flows for each reporting
unit was 11.2% in 2009 and 10.6% in 2008.
Below is a sensitivity analysis regarding the aggregate fair
value of our reporting units to changes in average discount
rates for 2009 (in millions):
|
Approximate decrease in fair value from a 100 basis point
increase in discount rate
|
$ | (300 | ) | |
|
Approximate increase in fair value from a 100 basis point
decrease in discount rate
|
$ | 400 |
We also monitor economic, legal, regulatory and other factors
for Lennox as a whole and for each reporting unit between annual
impairment tests to ensure that there are no indicators that
make it more likely than not that there has been a decline in
the fair value of the reporting unit below its carrying value.
Specifically, we monitor industry trends, our market
capitalization, recent and forecasted financial performance of
our reporting units, and the timing and nature of our
restructuring activities. While our recent financial performance
is below historical levels, we do not currently believe that
there are any indicators of impairment. If these estimates or
the related assumptions change, we may be required to record
non-cash impairment charges for these assets in the future.
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Table of Contents
Product
Warranties
The estimate of our liability for future warranty costs requires
us to make significant assumptions about the amount, timing and
nature of the costs we will incur in the future. Because the
warranties we issue extend 10 years or more in duration, a
relatively small adjustment to an assumption may have a
significant impact on our overall liability. We review the
assumptions used to determine the liability periodically and we
adjust our assumptions based upon factors such as actual failure
rates and cost experience. Numerous factors could affect actual
failure rates and cost experience, including the amount and
timing of new product introductions, changes in manufacturing
techniques or locations, components or suppliers used. Should
actual warranty costs differ from our estimates, we may be
required to record adjustments to accruals and expense in the
future. For more information see Note 11 in the Notes to
the Consolidated Financial Statements.
Pensions
and Postretirement Benefits
We have domestic and foreign pension plans covering essentially
all employees and we also maintain an unfunded postretirement
benefit plan, which provides certain medical and life insurance
benefits to eligible employees. In order to calculate the
liability and the expense for the plans, we have to make several
assumptions including the discount rate and expected return on
assets. The assumed discount rates of 6.07% for pension benefits
and 5.95% for other benefits were used to calculate the
liability as of December 31, 2009. Our assumed discount
rates are selected using the yield curve for high-quality
corporate bonds, which is dependent upon risk-free interest
rates and current credit market conditions. In 2009, we selected
8.25% as the assumed long-term rate of return on assets, which
is consistent with our 2008 estimate. These are long-term
estimates of equity values and are not dependent on short-term
variations of the equity markets. Due to the significant recent
declines in security market values in 2008, we experienced
negative returns on assets of $59.3 million. In 2009, the
securities markets partially recovered and we recorded returns
on asset values of $33.0 million. Differences between
actual experience and our assumptions are quantified as
actuarial gains and losses. These actuarial gains and losses do
not immediately impact our earnings as they are deferred in AOCL
and are amortized into net periodic benefit cost over the
estimated service period. The estimated service life of covered
employees in 2009 is 13.0 years. However, these gains and
losses are recognized as an immediate increase to our benefit
obligations. The timing and amount of our contributions also
impact funding levels and the expected return on assets. In
2009, we contributed $42.2 million to our pension plans and
we contributed $33.4 million in 2008.
The assumed long-term rate of return on assets and the discount
rate have significant effects on the amounts reported for our
defined benefit plans. A 25 basis point decrease in the
long-term rate of return on assets or discount rate would have
the following effects (in millions):
|
25 Basis Point
|
||||||||
|
Decrease in Long-
|
25 Basis Point
|
|||||||
|
Term Rate of
|
Decrease in
|
|||||||
| Return | Discount Rate | |||||||
|
Effect on net periodic benefit cost
|
$ | 0.6 | $ | 0.6 | ||||
|
Effect on the postretirement benefit obligations
|
N/A | 7.9 | ||||||
Assumed healthcare cost trend rates have a significant effect on
the amounts reported for our healthcare plan. For 2009, our
assumed healthcare cost trend rate was 8.50%. In 2009, we
lengthened our assumption regarding the decline in healthcare
cost trend assumption to the ultimate trend rate of 5.0% from 7
to 8 years A one percentage-point change in assumed
healthcare cost trend rates would have the following effects (in
millions):
|
1-Percentage-Point
|
1-Percentage-Point
|
|||||||
| Increase | Decrease | |||||||
|
Effect on total of service and interest cost
|
$ | 0.1 | $ | (0.1 | ) | |||
|
Effect on the postretirement benefit obligation
|
1.5 | (1.3 | ) | |||||
Should actual results differ from our estimates and assumptions,
revisions to the benefit plan liabilities and the related
expenses would be required. For more information, see
Note 13 in the Notes to our Consolidated Financial
Statements.
40
Table of Contents
Self-Insurance
Expense
We use a combination of third-party insurance and self-insurance
plans (large deductible or captive) to provide protection
against claims relating to workers’
compensation/employers’ liability, general liability,
product liability, auto liability, auto physical damage and
other exposures. Prior to the third quarter of 2009, these
policies were written by a third-party insurance provider, which
was then reinsured by our captive insurance subsidiary. Starting
with the third quarter of 2009, we use large deductible
insurance plans for workers’ compensation/employers’
liability, general liability, product liability, and auto
liability. These policies are written through third-party
insurance providers. We also carry umbrella or excess liability
insurance for all third-party and self-insurance plans, except
for directors’ and officers’ liability, property
damage and various other insurance programs. We believe the
limit within our excess policy is adequate for companies of our
size in our industry. We believe that the deductibles and
liability limits retained by LII and the captive are customary
for companies of our size in our industry and are appropriate
for our business.
In addition, we use third-party insurance plans for property
damage, aviation liability, directors’ and officers’
liability, and other exposures. Each of these policies may
include per occurrence and annual aggregate limits. However, we
believe these limits are customary for companies of our size in
our industry and are appropriate for our business.
The self-insurance expense and liabilities are primarily
determined based on our historical claims information, as well
as industry factors and trends. We maintain safety and
manufacturing programs that are designed to improve the safety
and effectiveness of our business processes and, as a result,
reduce the level and severity of our various self-insurance
risks. In recent years, our actual claims experience has been
trending favorably and therefore, both self-insurance expense
and the related liability have decreased. To the extent
actuarial assumptions change and claims experience rates differ
from historical rates, our liability may change. The
self-insurance liabilities recorded in Accrued Expenses in the
accompanying Consolidated Balance Sheets were $60.4 as of
December 31, 2009 and $63.2 million as of
December 31, 2008.
Derivative
Accounting
We use futures contracts and fixed forward contracts to mitigate
our exposure to volatility in commodity prices in the ordinary
course of business. Fluctuations in metal commodity prices
impact the value of the derivative instruments that we hold.
When metal commodity prices rise, the fair value of our futures
contracts increases and conversely, when commodity prices fall,
the fair value of our futures contracts decreases. Late in 2008,
metal prices fell significantly and as a result, we recorded
derivative losses of $21.3 million in AOCL. During 2009,
our commodity contracts that were in loss positions at
December 31, 2008 have expired and we recorded derivative
gains, net of tax, of $7.2 million in AOCL as of
December 31, 2009. Historically, hedge ineffectiveness has
not been significant. We are required to prepare and maintain
contemporaneous documentation for futures contracts to be
formally designated as cash flow hedges. Our failure to comply
with the strict documentation requirements could result in the
de-designation of cash flow hedges, which may significantly
impact our consolidated financial statements.
Income
Taxes
In determining income for financial statement purposes, we must
make certain estimates and judgments in the calculation of tax
provisions and the resultant tax liabilities and in the
recoverability of deferred tax assets that arise from temporary
differences between the tax and financial statement recognition
of revenue and expense. In the ordinary course of global
business, there may be many transactions and calculations where
the ultimate tax outcome is uncertain. The calculation of tax
liabilities involves dealing with uncertainties in the
application of complex tax laws. We recognize potential
liabilities for anticipated tax audit issues in the
U.S. and other tax jurisdictions based on an estimate of
the ultimate resolution of whether, and the extent to which,
additional taxes will be due. Although we believe the estimates
are reasonable, no assurance can be given that the final outcome
of these matters will not be different than what is reflected in
the historical income tax provisions and accruals.
As part of our financial reporting process, we must assess the
likelihood that our deferred tax assets can be recovered. If
recovery is not likely, the provision for taxes must be
increased by recording a reserve in the form of a
41
Table of Contents
valuation allowance for the deferred tax assets that are
estimated not to be ultimately recoverable. In this process,
certain relevant criteria are evaluated, including the existence
of deferred tax liabilities that can be used to absorb deferred
tax assets, the taxable income in prior carryback years that can
be used to absorb net operating losses and credit carrybacks and
taxable income in future years. Our judgment regarding future
taxable income may change due to future market conditions,
changes in U.S. or international tax laws and other
factors. These changes, if any, may require material adjustments
to these deferred tax assets and an accompanying reduction or
increase in net income in the period when such determinations
are made. In addition to the risks to the effective tax rate
described above, the effective tax rate reflected in
forward-looking statements is based on current tax law. Any
significant changes in the tax laws could affect these estimates.
| Item 7A. | Quantitative and Qualitative Disclosures About Market Risk |
The information required by this item is included under the
caption “Market Risk” in Item 7 above.
42
Table of Contents
| Item 8. | Financial Statements and Supplementary Data |
MANAGEMENT’S
REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Our management is responsible for establishing and maintaining
adequate internal control over financial reporting. As defined
by the Securities and Exchange Commission, internal control over
financial reporting is a process designed to provide reasonable
assurance regarding the reliability of financial reporting and
the preparation of the consolidated financial statements in
accordance with U.S. generally accepted accounting
principles.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
Management has undertaken an assessment of the effectiveness of
the Company’s internal control over financial reporting as
of December 31, 2009, based on criteria established in
Internal Control — Integrated Framework
issued
by the Committee of Sponsoring Organizations of the Treadway
Commission. Management’s assessment included an evaluation
of the design of the Company’s internal control over
financial reporting and testing of the operational effectiveness
of those controls.
Based on this assessment, management concluded that as of
December 31, 2009, the Company’s internal control over
financial reporting was effective.
KPMG LLP, the independent registered public accounting firm that
audited the Company’s consolidated financial statements,
has issued an audit report including an opinion on the
effectiveness of our internal control over financial reporting
as of December 31, 2009, a copy of which is included herein.
43
Table of Contents
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders
Lennox International Inc.:
We have audited the accompanying consolidated balance sheets of
Lennox International Inc. and subsidiaries (the Company) as of
December 31, 2009 and 2008, and the related consolidated
statements of operations, stockholders’ equity and
comprehensive income (loss), and cash flows for each of the
years in the three-year period ended December 31, 2009. In
connection with our audits of the consolidated financial
statements, we also have audited the financial statement
schedule. We also have audited the Company’s internal
control over financial reporting as of December 31, 2009,
based on criteria established in
Internal Control —
Integrated Framework
issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO). Lennox
International Inc.’s management is responsible for these
consolidated financial statements, the financial statement
schedule, for maintaining effective internal control over
financial reporting, and for its assessment of the effectiveness
of internal control over financial reporting, included in the
accompanying Management’s Report on Internal Control Over
Financial Reporting. Our responsibility is to express an opinion
on these consolidated financial statements, the financial
statement schedule and the effectiveness of the Company’s
internal control over financial reporting based on our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are
free of material misstatement and whether effective internal
control over financial reporting was maintained in all material
respects. Our audits of the consolidated financial statements
included examining, on a test basis, evidence supporting the
amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement
presentation. Our audit of internal control over financial
reporting included obtaining an understanding of internal
control over financial reporting, assessing the risk that a
material weakness exists, and testing and evaluating the design
and operating effectiveness of internal control based on the
assessed risk. Our audits also included performing such other
procedures as we considered necessary in the circumstances. We
believe that our audits provide a reasonable basis for our
opinions.
A company’s internal control over financial reporting is a
process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
generally accepted accounting principles. A company’s
internal control over financial reporting includes those
policies and procedures that (1) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the
company; (2) provide reasonable assurance that transactions
are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of
management and directors of the company; and (3) provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the
company’s assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
44
Table of Contents
In our opinion, the consolidated financial statements referred
to above present fairly, in all material respects, the financial
position of Lennox International Inc. and subsidiaries as of
December 31, 2009 and 2008, and the results of their
operations and their cash flows for each of the years in the
three-year period ended December 31, 2009, in conformity
with U.S. generally accepted accounting principles. Also in
our opinion, the related financial statement schedule, when
considered in relation to the basic consolidated financial
statements taken as a whole, present fairly, in all material
respects, the information set forth therein. Also in our
opinion, Lennox International Inc. maintained, in all material
respects, effective internal control over financial reporting as
of December 31, 2009, based on criteria established in
Internal Control — Integrated Framework
issued
by the Committee of Sponsoring Organizations of the Treadway
Commission.
/s/
KPMG
LLP
Dallas, Texas
February 18, 2010
45
Table of Contents
LENNOX
INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
As of December 31, 2009 and 2008
(In millions, except share and per share data)
CONSOLIDATED BALANCE SHEETS
As of December 31, 2009 and 2008
(In millions, except share and per share data)
| 2009 | 2008 | |||||||
|
ASSETS
|
||||||||
|
CURRENT ASSETS:
|
||||||||
|
Cash and cash equivalents
|
$ | 124.3 | $ | 122.1 | ||||
|
Short-term investments
|
— | 33.4 | ||||||
|
Accounts and notes receivable, net of allowances of $15.6 and
$17.9 in 2009 and 2008, respectively
|
357.0 | 363.4 | ||||||
|
Inventories, net
|
250.2 | 297.3 | ||||||
|
Deferred income taxes
|
34.9 | 24.2 | ||||||
|
Other assets
|
67.5 | 94.8 | ||||||
|
Total current assets
|
833.9 | 935.2 | ||||||
|
PROPERTY, PLANT AND EQUIPMENT, net
|
329.6 | 329.4 | ||||||
|
GOODWILL
|
257.4 | 232.3 | ||||||
|
DEFERRED INCOME TAXES
|
74.6 | 113.5 | ||||||
|
OTHER ASSETS, net
|
48.4 | 49.1 | ||||||
|
TOTAL ASSETS
|
$ | 1,543.9 | $ | 1,659.5 | ||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
|
CURRENT LIABILITIES:
|
||||||||
|
Short-term debt
|
$ | 2.2 | $ | 6.1 | ||||
|
Current maturities of long-term debt
|
35.5 | 0.6 | ||||||
|
Accounts payable
|
238.2 | 234.1 | ||||||
|
Accrued expenses
|
317.9 | 331.5 | ||||||
|
Income taxes payable
|
— | 3.7 | ||||||
|
Total current liabilities
|
593.8 | 576.0 | ||||||
|
LONG-TERM DEBT
|
193.8 | 413.7 | ||||||
|
POSTRETIREMENT BENEFITS, OTHER THAN PENSIONS
|
13.4 | 12.5 | ||||||
|
PENSIONS
|
66.7 | 107.7 | ||||||
|
OTHER LIABILITIES
|
71.8 | 91.0 | ||||||
|
Total liabilities
|
939.5 | 1,200.9 | ||||||
|
COMMITMENTS AND CONTINGENCIES
|
||||||||
|
STOCKHOLDERS’ EQUITY:
|
||||||||
|
Preferred stock, $.01 par value, 25,000,000 shares
authorized, no shares issued or outstanding
|
— | — | ||||||
|
Common stock, $.01 par value, 200,000,000 shares
authorized, 85,567,485 shares and 84,215,904 shares
issued for 2009 and 2008, respectively
|
0.9 | 0.8 | ||||||
|
Additional paid-in capital
|
839.1 | 805.6 | ||||||
|
Retained earnings
|
558.6 | 538.8 | ||||||
|
Accumulated other comprehensive loss
|
(0.8 | ) | (98.8 | ) | ||||
|
Treasury stock, at cost, 29,292,512 shares and
29,109,058 shares for 2009 and 2008, respectively
|
(793.4 | ) | (787.8 | ) | ||||
|
Total stockholders’ equity
|
604.4 | 458.6 | ||||||
|
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
|
$ | 1,543.9 | $ | 1,659.5 | ||||
The accompanying notes are an integral part of these
consolidated financial statements.
46
Table of Contents
LENNOX
INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended December 31, 2009, 2008 and 2007
(In millions, except per share data)
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended December 31, 2009, 2008 and 2007
(In millions, except per share data)
| 2009 | 2008 | 2007 | ||||||||||
|
NET SALES
|
$ | 2,847.5 | $ | 3,441.1 | $ | 3,691.7 | ||||||
|
COST OF GOODS SOLD
|
2,054.1 | 2,506.6 | 2,687.8 | |||||||||
|
Gross profit
|
793.4 | 934.5 | 1,003.9 | |||||||||
|
OPERATING EXPENSES:
|
||||||||||||
|
Selling, general and administrative expenses
|
650.2 | 686.9 | 731.1 | |||||||||
|
Gains and other expenses, net
|
(6.6 | ) | (1.9 | ) | (6.7 | ) | ||||||
|
Restructuring charges
|
41.5 | 30.4 | 25.2 | |||||||||
|
Impairment of assets
|
6.4 | 9.1 | — | |||||||||
|
Income from equity method investments
|
(7.3 | ) | (8.6 | ) | (10.6 | ) | ||||||
|
Operational income from continuing operations
|
109.2 | 218.6 | 264.9 | |||||||||
|
INTEREST EXPENSE, net
|
8.2 | 14.2 | 6.8 | |||||||||
|
OTHER EXPENSE, net
|
0.1 | 0.1 | 0.7 | |||||||||
|
Income from continuing operations before income taxes
|
100.9 | 204.3 | 257.4 | |||||||||
|
PROVISION FOR INCOME TAXES
|
39.1 | 80.5 | 91.7 | |||||||||
|
Income from continuing operations
|
61.8 | 123.8 | 165.7 | |||||||||
|
DISCONTINUED OPERATIONS:
|
||||||||||||
|
Loss (income) from discontinued operations
|
13.1 | 1.8 | (0.8 | ) | ||||||||
|
Income tax benefit
|
(2.4 | ) | (0.8 | ) | (2.5 | ) | ||||||
|
Loss (income) from discontinued operations
|
10.7 | 1.0 | (3.3 | ) | ||||||||
|
Net income
|
$ | 51.1 | $ | 122.8 | $ | 169.0 | ||||||
|
EARNINGS PER SHARE — BASIC:
|
||||||||||||
|
Income from continuing operations
|
$ | 1.11 | $ | 2.18 | $ | 2.50 | ||||||
|
(Loss) income from discontinued operations
|
(0.19 | ) | (0.01 | ) | 0.05 | |||||||
|
Net income
|
$ | 0.92 | $ | 2.17 | $ | 2.55 | ||||||
|
EARNINGS PER SHARE — DILUTED:
|
||||||||||||
|
Income from continuing operations
|
$ | 1.09 | $ | 2.12 | $ | 2.39 | ||||||
|
(Loss) income from discontinued operations
|
(0.19 | ) | (0.01 | ) | 0.04 | |||||||
|
Net income
|
$ | 0.90 | $ | 2.11 | $ | 2.43 | ||||||
|
AVERAGE SHARES OUTSTANDING:
|
||||||||||||
|
Basic
|
55.6 | 56.7 | 66.4 | |||||||||
|
Diluted
|
56.6 | 58.3 | 69.4 | |||||||||
|
CASH DIVIDENDS DECLARED PER SHARE
|
$ | 0.56 | $ | 0.56 | $ | 0.53 | ||||||
The accompanying notes are an integral part of these
consolidated financial statements.
47
Table of Contents
LENNOX
INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY AND COMPREHENSIVE INCOME (LOSS)
For the Years Ended December 31, 2009, 2008 and 2007
(In millions, except per share data)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY AND COMPREHENSIVE INCOME (LOSS)
For the Years Ended December 31, 2009, 2008 and 2007
(In millions, except per share data)
|
Accumulated
|
||||||||||||||||||||||||||||||||
|
Common Stock
|
Additional
|
Other
|
Treasury
|
Total
|
||||||||||||||||||||||||||||
| Issued |
Paid-In
|
Retained
|
Comprehensive
|
Stock
|
Stockholders’
|
Comprehensive
|
||||||||||||||||||||||||||
| Shares | Amount | Capital | Earnings | Income (Loss) | at Cost | Equity | Income (Loss) | |||||||||||||||||||||||||
|
BALANCE AS OF DECEMBER 31, 2006
|
77.0 | $ | 0.8 | $ | 706.6 | $ | 312.5 | $ | (5.1 | ) | $ | (210.4 | ) | $ | 804.4 | — | ||||||||||||||||
|
Impact of adoption of ASC Topic 740
|
— | — | — | 0.9 | — | — | 0.9 | — | ||||||||||||||||||||||||
|
ADJUSTED BALANCE AS OF JANUARY 1, 2007
|
77.0 | $ | 0.8 | $ | 706.6 | $ | 313.4 | $ | (5.1 | ) | $ | (210.4 | ) | $ | 805.3 | — | ||||||||||||||||
|
Net income
|
— | — | — | 169.0 | — | — | 169.0 | $ | 169.0 | |||||||||||||||||||||||
|
Dividends, $0.53 per share
|
— | — | — | (35.0 | ) | — | — | (35.0 | ) | — | ||||||||||||||||||||||
|
Foreign currency translation adjustments, net
|
— | — | — | — | 62.9 | — | 62.9 | 62.9 | ||||||||||||||||||||||||
|
Pension and postretirement liability changes, net of tax benefit
of $0.0
|
— | — | — | — | 3.2 | — | 3.2 | 3.2 | ||||||||||||||||||||||||
|
Stock-based compensation expense
|
— | — | 21.0 | — | — | — | 21.0 | — | ||||||||||||||||||||||||
|
Reversal of previously recorded stock-based compensation expense
related to share-based awards canceled in restructuring
|
— | — | (2.1 | ) | — | — | — | (2.1 | ) | — | ||||||||||||||||||||||
|
Derivatives, net of tax provision of $1.3
|
— | — | — | — | 2.6 | — | 2.6 | 2.6 | ||||||||||||||||||||||||
|
Common stock issued
|
4.9 | — | 21.5 | — | — | — | 21.5 | — | ||||||||||||||||||||||||
|
Treasury stock purchases
|
— | — | — | — | — | (253.6 | ) | (253.6 | ) | — | ||||||||||||||||||||||
|
Tax benefits of stock-based compensation
|
— | — | 20.1 | — | — | — | 20.1 | — | ||||||||||||||||||||||||
|
Other tax-related items
|
— | — | (6.4 | ) | — | — | — | (6.4 | ) | — | ||||||||||||||||||||||
|
Comprehensive income
|
— | — | — | — | — | — | — | $ | 237.7 | |||||||||||||||||||||||
|
BALANCE AS OF DECEMBER 31, 2007
|
81.9 | $ | 0.8 | $ | 760.7 | $ | 447.4 | $ | 63.6 | $ | (464.0 | ) | $ | 808.5 | ||||||||||||||||||
|
Net income
|
— | — | — | 122.8 | — | — | 122.8 | $ | 122.8 | |||||||||||||||||||||||
|
Dividends, $0.56 per share
|
— | — | — | (31.4 | ) | — | — | (31.4 | ) | — | ||||||||||||||||||||||
|
Foreign currency translation adjustments, net
|
— | — | — | — | (84.9 | ) | — | (84.9 | ) | (84.9 | ) | |||||||||||||||||||||
|
Pension and postretirement liability changes, net of tax benefit
of $35.1
|
— | — | — | — | (55.9 | ) | — | (55.9 | ) | (55.9 | ) | |||||||||||||||||||||
|
Stock-based compensation expense
|
— | — | 11.8 | — | — | — | 11.8 | — | ||||||||||||||||||||||||
|
Derivatives and other, net of tax benefit of $12.3
|
— | — | — | — | (21.6 | ) | — | (21.6 | ) | (21.6 | ) | |||||||||||||||||||||
|
Common stock issued
|
2.3 | — | 19.7 | — | — | — | 19.7 | — | ||||||||||||||||||||||||
|
Treasury stock purchases
|
— | — | — | — | — | (323.8 | ) | (323.8 | ) | — | ||||||||||||||||||||||
|
Tax benefits of stock-based compensation
|
— | — | 13.4 | — | — | — | 13.4 | — | ||||||||||||||||||||||||
|
Comprehensive loss
|
— | — | — | — | — | — | — | $ | (39.6 | ) | ||||||||||||||||||||||
|
BALANCE AS OF DECEMBER 31, 2008
|
84.2 | $ | 0.8 | $ | 805.6 | $ | 538.8 | $ | (98.8 | ) | $ | (787.8 | ) | $ | 458.6 | |||||||||||||||||
|
Net income
|
— | — | — | 51.1 | — | — | 51.1 | $ | 51.1 | |||||||||||||||||||||||
|
Dividends, $0.56 per share
|
— | — | — | (31.3 | ) | — | — | (31.3 | ) | — | ||||||||||||||||||||||
|
Foreign currency translation adjustments, net
|
— | — | — | — | 59.5 | — | 59.5 | 59.5 | ||||||||||||||||||||||||
|
Pension and postretirement liability changes, net of tax
provision of $6.4
|
— | — | — | — | 8.1 | — | 8.1 | 8.1 | ||||||||||||||||||||||||
|
Stock-based compensation expense
|
— | — | 12.8 | — | — | — | 12.8 | — | ||||||||||||||||||||||||
|
Derivatives and other, net of tax provision of $15.4
|
— | — | — | — | 30.4 | — | 30.4 | 30.4 | ||||||||||||||||||||||||
|
Common stock issued
|
1.4 | 0.1 | 9.3 | — | — | — | 9.4 | — | ||||||||||||||||||||||||
|
Treasury stock purchases
|
— | — | — | — | — | (5.6 | ) | (5.6 | ) | — | ||||||||||||||||||||||
|
Tax benefits of stock-based compensation
|
— | — | 6.0 | — | — | — | 6.0 | — | ||||||||||||||||||||||||
|
Other tax related items
|
— | — | 5.4 | — | — | — | 5.4 | — | ||||||||||||||||||||||||
|
Comprehensive income
|
— | — | — | — | — | — | — | $ | 149.1 | |||||||||||||||||||||||
|
BALANCE AS OF DECEMBER 31, 2009
|
85.6 | $ | 0.9 | $ | 839.1 | $ | 558.6 | $ | (0.8 | ) | $ | (793.4 | ) | $ | 604.4 | |||||||||||||||||
The accompanying notes are an integral part of these
consolidated financial statements.
48
Table of Contents
LENNOX
INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 2009, 2008 and 2007
(In millions)
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 2009, 2008 and 2007
(In millions)
| 2009 | 2008 | 2007 | ||||||||||
|
CASH FLOWS FROM OPERATING ACTIVITIES:
|
||||||||||||
|
Net income
|
$ | 51.1 | $ | 122.8 | $ | 169.0 | ||||||
|
Adjustments to reconcile net income to net cash provided by
operating activities:
|
||||||||||||
|
Income from equity method investments
|
(7.3 | ) | (8.6 | ) | (10.6 | ) | ||||||
|
Dividends from affiliates
|
11.3 | 14.3 | 12.3 | |||||||||
|
Restructuring expenses, net of cash paid
|
18.6 | 0.6 | 14.8 | |||||||||
|
Impairment of assets
|
6.4 | 9.1 | — | |||||||||
|
Provision for bad debts
|
12.6 | 17.0 | 10.0 | |||||||||
|
Unrealized (gain) loss on derivative contracts
|
(7.0 | ) | 5.1 | 3.3 | ||||||||
|
Return (posting) of collateral for hedges
|
37.9 | (37.9 | ) | — | ||||||||
|
Stock-based compensation expense
|
12.8 | 11.8 | 21.0 | |||||||||
|
Depreciation and amortization
|
52.9 | 50.6 | 48.7 | |||||||||
|
(Repayments) proceeds from sales of accounts receivable under
asset securitization
|
(30.0 | ) | 30.0 | — | ||||||||
|
Deferred income taxes
|
6.7 | 25.0 | 5.7 | |||||||||
|
Pension contributions, net of expense
|
(25.4 | ) | (19.5 | ) | (6.6 | ) | ||||||
|
Other items, net
|
7.7 | (12.8 | ) | (0.9 | ) | |||||||
|
Changes in assets and liabilities, net of effects of
acquisitions and divestitures:
|
||||||||||||
|
Accounts and notes receivable
|
41.2 | 53.5 | 31.1 | |||||||||
|
Inventories
|
51.8 | 14.7 | (5.3 | ) | ||||||||
|
Other current assets
|
10.8 | 0.7 | (12.7 | ) | ||||||||
|
Accounts payable
|
(5.4 | ) | (44.0 | ) | (0.9 | ) | ||||||
|
Accrued expenses
|
3.8 | (41.5 | ) | 1.4 | ||||||||
|
Income taxes payable and receivable
|
(7.0 | ) | (1.7 | ) | (25.5 | ) | ||||||
|
Other
|
(18.0 | ) | (6.0 | ) | (14.9 | ) | ||||||
|
Net cash provided by operating activities
|
225.5 | 183.2 | 239.9 | |||||||||
|
CASH FLOWS FROM INVESTING ACTIVITIES:
|
||||||||||||
|
Proceeds from the disposal of property, plant and equipment
|
0.6 | 5.8 | 0.8 | |||||||||
|
Purchases of property, plant and equipment
|
(58.8 | ) | (62.1 | ) | (70.2 | ) | ||||||
|
Proceeds from sale of businesses
|
10.0 | — | — | |||||||||
|
Additional investments in affiliates
|
— | (4.7 | ) | (0.8 | ) | |||||||
|
Return of investment
|
0.9 | — | — | |||||||||
|
Purchases of short-term investments
|
(16.9 | ) | (64.2 | ) | (42.5 | ) | ||||||
|
Proceeds from sales and maturities of short-term investments
|
50.2 | 58.7 | 15.1 | |||||||||
|
Net cash used in investing activities
|
(14.0 | ) | (66.5 | ) | (97.6 | ) | ||||||
|
CASH FLOWS FROM FINANCING ACTIVITIES:
|
||||||||||||
|
Short-term (payments) borrowings, net
|
(4.3 | ) | 1.4 | 3.4 | ||||||||
|
Proceeds from capital lease
|
— | 15.3 | — | |||||||||
|
Long-term payments
|
(1.7 | ) | (36.4 | ) | (36.1 | ) | ||||||
|
Revolver long-term (payments) borrowings, net
|
(183.3 | ) | 213.5 | 131.0 | ||||||||
|
Proceeds from stock option exercises
|
9.4 | 19.7 | 21.5 | |||||||||
|
Payments of deferred financing costs
|
— | (0.3 | ) | (1.8 | ) | |||||||
|
Repurchases of common stock
|
(5.6 | ) | (323.8 | ) | (253.6 | ) | ||||||
|
Excess tax benefits related to share-based payments
|
4.9 | 11.0 | 17.9 | |||||||||
|
Cash dividends paid
|
(31.1 | ) | (32.4 | ) | (35.0 | ) | ||||||
|
Net cash used in financing activities
|
(211.7 | ) | (132.0 | ) | (152.7 | ) | ||||||
|
DECREASE IN CASH AND CASH EQUIVALENTS
|
(0.2 | ) | (15.3 | ) | (10.4 | ) | ||||||
|
EFFECT OF EXCHANGE RATES ON CASH AND CASH EQUIVALENTS
|
2.4 | (8.1 | ) | 11.6 | ||||||||
|
CASH AND CASH EQUIVALENTS, beginning of year
|
122.1 | 145.5 | 144.3 | |||||||||
|
CASH AND CASH EQUIVALENTS, end of year
|
$ | 124.3 | $ | 122.1 | $ | 145.5 | ||||||
|
Supplementary disclosures of cash flow information:
|
||||||||||||
|
Cash paid during the year for:
|
||||||||||||
|
Interest
|
$ | 8.4 | $ | 17.6 | $ | 11.4 | ||||||
|
Income taxes (net of refunds)
|
$ | 32.1 | $ | 41.9 | $ | 91.3 | ||||||
|
Non-cash items:
|
||||||||||||
|
Impact of adoption of ASC Topic 740
|
$ | — | $ | — | $ | 0.9 | ||||||
The accompanying notes are an integral part of these
consolidated financial statements.
49
Table of Contents
LENNOX
INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
For the
Years Ended December 31, 2009, 2008 and 2007
| 1. | Nature of Operations: |
Lennox International Inc., a Delaware corporation, through its
subsidiaries (referred to herein as “we,”
“our,” “us,” “LII” or the
“Company”), is a leading global provider of climate
control solutions. We design, manufacture and market a broad
range of products for the heating, ventilation, air conditioning
and refrigeration (“HVACR”) markets. We operate in
four reportable business segments of the HVACR industry:
Residential Heating & Cooling, Commercial
Heating & Cooling, Service Experts, and Refrigeration.
See Note 21 for financial information regarding our
reportable segments.
We sell our products and services through a combination of
distributors, independent and company-owned dealer service
centers, other installing contractors, wholesalers,
manufacturers’ representatives, original equipment
manufacturers and to national accounts.
| 2. | Summary of Significant Accounting Policies: |
Principles
of Consolidation
The consolidated financial statements include the accounts of
Lennox International Inc. and the accounts of our majority-owned
subsidiaries. All intercompany transactions, profits and
balances have been eliminated.
Cash
and Cash Equivalents
We consider all highly liquid temporary investments with
original maturity dates of three months or less to be cash
equivalents. Cash and cash equivalents consisted of cash,
overnight repurchase agreements and investment grade securities
and are stated at cost, which approximates fair value.
As of December 31, 2009 and 2008, $2.6 million of cash
and cash equivalents were restricted due to letters of credit
issued with respect to the operations of our captive insurance
subsidiary (the “Captive”), which expire on
December 31, 2010. These letters of credit restrictions can
be transferred to our revolving credit facility as needed.
Accounts
and Notes Receivable
Accounts and notes receivable are shown in the accompanying
Consolidated Balance Sheets, net of allowance for doubtful
accounts and, in 2008, net of accounts receivable sold under our
asset securitization arrangement. The allowance for doubtful
accounts is generally established during the period in which
receivables are recognized and is maintained at a level deemed
appropriate based on historical and other factors that affect
collectability. Such factors include the historical trends of
write-offs and recovery of previously written-off accounts, the
financial strength of the customer and projected economic and
market conditions. We determine the delinquency status of
receivables predominantly based on contractual terms and write
off uncollectible receivables after management’s review of
factors that affect collectability as noted above, among other
considerations. We have no significant concentrations of credit
risk within our accounts and notes receivable.
Inventories
Inventory costs include material, labor, depreciation and plant
overhead. Inventories of $100.8 million and
$129.0 million as of December 31, 2009 and 2008,
respectively, were valued at the lower of cost or market using
the
last-in,
first-out (“LIFO”) cost method. The remaining portion
of the inventory is valued at the lower of cost or market with
cost being determined either on the
first-in,
first-out (“FIFO”) basis or average cost. We elected
to use the LIFO cost method for our domestic manufacturing
companies in 1974 and continued to elect the LIFO cost method
for new operations through the late 1980s. The types of
inventory include raw materials, purchased components,
work-in-process,
repair parts and finished goods. Starting in the late 1990s, we
began adopting the FIFO cost method for all new domestic
manufacturing operations (primarily acquisitions). Our operating
entities
50
Table of Contents
LENNOX
INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
with a previous LIFO election continue to use the LIFO cost
method. We also use the FIFO cost method for all of our
foreign-based manufacturing facilities as well as our Service
Experts segment, whose inventory is limited to service parts and
finished goods.
Property,
Plant and Equipment
Property, plant and equipment is stated at cost, net of
accumulated depreciation. Expenditures that increase the utility
or extend the useful lives of fixed assets are capitalized and
expenditures for maintenance and repairs are charged to expense
as incurred. Depreciation is computed using the straight-line
method over the following estimated useful lives:
|
Buildings and improvements
|
2 to 40 years | |||
|
Machinery and equipment
|
1 to 15 years |
We periodically review long-lived assets for impairment as
events or changes in circumstances indicate that the carrying
amount of such assets might not be recoverable. In order to
assess recoverability, we compare the estimated expected future
undiscounted cash flows identified with each long-lived asset or
related asset group to the carrying amount of such assets. If
the expected future cash flows do not exceed the carrying value
of the asset or assets being reviewed, an impairment loss is
recognized based on the excess of the carrying amount of the
impaired assets over their fair value.
Goodwill
Goodwill represents the excess of cost over fair value of assets
of acquired businesses. Goodwill and intangible assets
determined to have an indefinite useful life are not amortized,
but are instead tested for impairment at least annually. We
complete our annual goodwill impairment tests in the first
quarter of each fiscal year and continuously monitor our
operations for indicators of goodwill impairment based on
current market conditions.
We assign goodwill to the reporting units that benefit from the
synergies of our acquisitions, which are the reporting units
that report the results of such acquisitions. If we reorganize
our management structure, the related goodwill is allocated to
the affected reporting units based upon the relative fair values
of those reporting units. Assets and liabilities, including
deferred income taxes, are generally directly assigned to the
reporting units through our segment reporting system as part of
our financial closing process. However, certain assets and
liabilities, including information technology assets and
pension, self-insurance, and environmental liabilities, are
commonly managed and are not allocated to the segments in the
normal course of our financial reporting process and therefore
must be assigned to the reporting units based upon appropriate
methods.
Reporting units that we test are generally equivalent to our
business segments, or in some cases, one level below. We review
our reporting unit structure each year as part of our annual
goodwill impairment testing and reporting units are determined
based upon a review of the periodic financial information
supplied to and reviewed by our Chief Executive Officer (the
chief operating decision maker). We aggregate operating units
reviewed into reporting units when those operating units share
similar economic characteristics.
We estimate reporting unit fair values using standard business
valuation techniques such as discounted cash flows and reference
to comparable business transactions and observable fair values
of comparable entities. The discounted cash flow approach is the
principal technique we use. We use comparable business
transactions and observable fair values of comparable entities
as a reasonableness test of our principal technique as we
believe that the discounted cash flow approach provides greater
detail and opportunity to reflect specific facts, circumstances
and economic conditions for each reporting unit. Comparable
business transactions are often limited in number, the
information can be dated, and may require significant
adjustments due to differences in the size of the business,
markets served, product offered, and other factors. We therefore
believe that in our circumstances, this makes comparisons to
comparable business transactions less reliable than the
discounted cash flows method.
51
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LENNOX
INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
The discounted cash flows used to estimate fair value are based
on assumptions regarding each reporting unit’s estimated
projected future cash flows and the estimated weighted-average
cost of capital that a market participant would use in
evaluating the reporting unit in a purchase transaction. The
estimated weighted-average cost of capital is based on the
risk-free interest rate and other factors such as equity risk
premiums and the ratio of total debt to equity capital. In
performing these impairment tests, we take steps to ensure that
appropriate and reasonable cash flow projections and assumptions
are used. We reconcile our estimated enterprise value to our
market capitalization and determine the reasonableness of the
cost of capital used by comparing to market data. We also
perform sensitivity analyses on the key assumptions used, such
as the weighted-average cost of capital and terminal growth
rates.
We also monitor economic, legal, regulatory and other factors
for Lennox as a whole and for each reporting unit between annual
impairment tests to ensure that there are no indicators that
make it more likely than not that there has been a decline in
the fair value of any reporting unit below its carrying value.
Specifically, we monitor industry trends, our market
capitalization, recent and forecasted financial performance of
our reporting units, and the timing and nature of our
restructuring activities. While our recent financial performance
is below historical levels, we determined that no impairment of
our goodwill existed as of December 31, 2009, 2008 or 2007.
If these estimates or the related assumptions change, we may be
required to record non-cash impairment charges for these assets
in the future. For additional disclosures on goodwill, see
Note 6.
Intangible
and Other Assets
We amortize intangible assets with finite lives over their
respective estimated useful lives to their estimated residual
values.
Identifiable intangible and other assets that have finite lives
are amortized over their estimated useful lives as follows:
|
Asset
|
Useful Life
|
|
|
Deferred financing costs
|
Effective interest method | |
|
Customer relationships
|
Straight-line method up to 10 years |
We periodically review intangible assets with estimable useful
lives for impairment as events or changes in circumstances
indicate that the carrying amount of such assets might not be
recoverable. In order to assess recoverability, we compare the
estimated expected undiscounted future cash flows identified
with each intangible asset or related asset group to the
carrying amount of such assets. If the expected future cash
flows do not exceed the carrying value of the asset or assets
being reviewed, an impairment loss is recognized based on the
excess of the carrying amount of the impaired assets over their
fair value.
In assessing the fair value of our other intangibles, we must
make assumptions that a market participant would make regarding
estimated future cash flows and other factors to determine the
fair value of the respective assets. If these estimates or the
related assumptions change, we may be required to record
impairment charges for these assets in the future.
Product
Warranties
For some of our HVAC products, we provide warranty terms ranging
from one to 20 years to customers for certain components
such as compressors or heat exchangers. For select products, we
also provide lifetime warranties for heat exchangers. A
liability for estimated warranty expense is recorded on the date
that revenue is recognized. Our estimates of future warranty
costs are determined for each product line. The number of units
that we expect to repair or replace is determined by applying
the estimated failure rate, which is generally based on
historical experience, to the number of units that have been
sold and are still under warranty. The estimated units to be
repaired under warranty are multiplied by the average cost to
repair or replace such products to determine the estimated
future warranty cost. We do not discount product warranty
liabilities as the amounts are not fixed and the
52
Table of Contents
LENNOX
INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
timing of future cash payments is neither fixed nor reliably
determinable. We also provide for specifically identified
warranty obligations. Estimated future warranty costs are
subject to adjustment from time to time depending on changes in
actual failure rate and cost experience. Subsequent costs
incurred for warranty claims serve to reduce the accrued product
warranty liability.
Pensions
and Postretirement Benefits
We provide pension and postretirement medical benefits to
eligible domestic and foreign employees and recognize pension
and postretirement benefit costs over the estimated service life
of those employees. We also recognize the funded status of our
benefit plans, as measured at year-end by the difference between
plan assets at fair value and the benefit obligation, in the
Consolidated Balance Sheets. Changes in the funded status are
recognized in the year in which the changes occur through
accumulated other comprehensive loss (“AOCL”).
Actuarial gains or losses are amortized into net period benefit
cost over the estimated service life of covered employees.
The benefit plan assets and liabilities reflect assumptions
about the long-range performance of our benefit plans. Should
actual results differ from management’s estimates,
revisions to the benefit plan assets and liabilities would be
required. For additional disclosures on pension and
postretirement medical benefits, including how we determine the
assumptions used, see Note 13.
Self-Insurance
We use a combination of third-party insurance and self-insurance
plans (large deductible or captive) to provide protection
against claims relating to workers’ compensation, general
liability, product liability, property damage, aviation
liability, directors’ and officers’ liability, auto
liability, auto physical damage and other exposures.
Self-insurance expense and liabilities, calculated on an
undiscounted basis, are actuarially determined based primarily
on our historical claims information, as well as industry
factors and trends. As of December 31, 2009, self-insurance
and captive reserves represent the best estimate of the future
payments to be made on losses reported and unreported for 2009
and prior years. The majority of our self-insured risks
(excluding auto liability and physical damage) will be paid over
an extended period of time.
Actual payments for claims reserved as of December 31,
2009 may vary depending on various factors, including the
development and ultimate settlement of reported and unreported
claims. To the extent actuarial assumptions change and claims
experience rates differ from historical rates, our liability may
change. For additional disclosures on self-insured risks and
reserves, see Note 11.
Derivatives
We use futures contracts and fixed forward contracts to mitigate
the exposure to volatility in commodity prices and we use an
interest rate swap to hedge changes in the benchmark interest
rate related to our revolving credit facility. We hedge only
exposures in the ordinary course of business and do not hold or
trade derivatives for profit. All derivatives are recognized in
the Consolidated Balance Sheets at fair value. Classification of
each hedging instrument is based upon whether the maturity of
the instrument is less than or greater than 12 months. For
more information, see Note 9.
Income
Taxes
Income taxes are accounted for under the asset and liability
method. Deferred tax assets and liabilities are recognized for
the future tax consequences attributable to differences between
the financial statement carrying amounts of existing assets and
liabilities and their respective tax bases and operating loss
and tax credit carry forwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to
apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect
of a
53
Table of Contents
LENNOX
INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
change in tax rates on deferred tax assets and liabilities is
recognized in income in the period that includes the enactment
date.
Unrecognized tax benefits are accounted for as required by the
Financial Accounting Standards Board (“FASB”)
Accounting Standards Codification (“ASC”) Topic 740.
Revenue
Recognition
Our Residential Heating & Cooling, Commercial
Heating & Cooling and Refrigeration segments’
revenue recognition practices depend upon the shipping terms for
each transaction. Shipping terms are primarily FOB Shipping
Point and, therefore, revenues are recognized for these
transactions when products are shipped to customers and title
passes. However, certain customers in our smaller operations,
primarily outside of North America, have shipping terms where
title and risk of ownership do not transfer until the product is
delivered to the customer. For these transactions, revenues are
recognized on the date that the product is received and accepted
by such customers. We have experienced returns for miscellaneous
reasons and we record a reserve for these returns based on
historical experience at the time we recognize revenue. Our
historical rate of returns are insignificant as a percentage of
sales.
Our Service Experts segment recognizes sales, installation,
maintenance and repair revenues at the time the services are
completed. The Service Experts segment also provides HVAC system
design and installation services under fixed-price contracts,
which may extend up to one year. Revenue for these services is
recognized using the
percentage-of-completion
method, based on the percentage of incurred contract
costs-to-date
in relation to total estimated contract costs, after giving
effect to the most recent estimates of total cost. The effect of
changes to total estimated contract revenue or cost is
recognized in the period such changes are determined. Provisions
for estimated losses on individual contracts are made in the
first period in which the loss becomes probable.
We engage in cooperative advertising, customer rebate, cash
discount and other miscellaneous programs that result in
payments or credits being issued to our customers. Our policy is
to record the discounts and incentives as a reduction of sales
when the sales are recorded, with the exception of certain
cooperative advertising expenditures that are charged to
Selling, General and Administrative (“SG&A”)
Expenses. Under these cooperative advertising programs, we
receive, or will receive, an identifiable benefit (goods or
services) in exchange for the consideration given.
Cost
of Goods Sold
The principal components of cost of goods sold in our
manufacturing operations are component costs, raw materials,
factory overhead, labor estimated costs of warranty expense and
freight and distribution costs. In our Service Experts segment,
the principal components of cost of goods sold are equipment,
vehicle costs, parts and supplies and labor.
Selling,
General and Administrative Expenses
SG&A expenses include all other payroll and benefit costs,
advertising, commissions, research and development, information
technology costs and other selling, general and administrative
related costs such as insurance, travel, and non-production
depreciation and rent.
Stock-Based
Compensation
We recognize compensation expense for stock-based arrangements
over the required employee service periods. We base stock-based
compensation costs on the estimated grant-date fair value of the
stock-based awards that are expected to ultimately vest and
adjust expected vesting rates to actual rates as additional
information becomes known. We also adjust performance
achievement rates based on our best estimates of those rates at
the end of the performance period.
54
Table of Contents
LENNOX
INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Translation
of Foreign Currencies
All assets and liabilities of foreign subsidiaries and joint
ventures are translated into U.S. dollars using rates of
exchange in effect at the balance sheet date. Revenues and
expenses are translated at weighted average exchange rates
during the year. The unrealized translation gains and losses are
included in AOCL in the accompanying Consolidated Balance
Sheets. Transaction gains and losses are included in Gains and
Other Expenses, net in the accompanying Consolidated Statements
of Operations.
Use of
Estimates
The preparation of financial statements requires us to make
estimates and assumptions about future events. These estimates
and the underlying assumptions affect the amounts of assets and
liabilities reported, disclosures about contingent assets and
liabilities, and reported amounts of revenues and expenses. Such
estimates include the valuation of accounts receivable,
inventories, goodwill, intangible assets, and other long-lived
assets, contingencies, guarantee obligations, indemnifications,
and assumptions used in the calculation of income taxes, pension
and postretirement medical benefits, among others. These
estimates and assumptions are based on our best estimates and
judgment.
We evaluate our estimates and assumptions on an ongoing basis
using historical experience and other factors, including the
current economic environment. We believe these estimates and
assumptions to be reasonable under the circumstances and adjust
such estimates and assumptions when facts and circumstances
dictate. Declines in our end markets and other consumer
spending, volatile equity, foreign currency, and commodity
markets, have combined to increase the uncertainty inherent in
such estimates and assumptions. As future events and their
effects cannot be determined with precision, actual results
could differ significantly from these estimates. Changes in
those estimates resulting from continuing changes in the
economic environment will be reflected in the financial
statements in future periods.
Reclassifications
Certain amounts have been reclassified from the prior year
presentation to conform to the current year presentation.
Recently
Adopted Accounting Pronouncements
In September 2009, the FASB issued Accounting Standards Update
(“ASU”)
No. 2009-12,
Fair Value Measurements and Disclosures (Topic
820) — Investments in Certain Entities That Calculate
Net Asset Value per Share (or Its Equivalent).
This ASU
amends ASC Topic 820
,
allowing a reporting entity to
measure the fair value of certain investments on the basis of
the net asset value per share of the investment (or its
equivalent). This ASU also requires new disclosures, by major
category of investments, about the attributes includes for
investments within the scope of this amendment to the ASC. The
guidance is effective for interim and annual periods ending
after December 15, 2009 and we have adopted this standard
as of December 31, 2009. See Note 13 for the
disclosures as described in ASU
No. 2009-12.
Newly
Issued Accounting Pronouncements
In June 2009, the FASB issued revisions to ASC Topic 860 and
will require more information about transfers of financial
assets, including securitization transactions, and where
entities have continuing exposure to the risks related to
transferred financial assets. It eliminates the concept of a
“qualifying special-purpose entity,” provides for more
restrictive requirements for derecognizing financial assets, and
requires additional disclosures. The changes will be effective
January 1, 2010. Early application is not permitted.
Adoption of this standard will not have a material effect on our
consolidated financial statements.
55
Table of Contents
LENNOX
INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
| 3. | Short-term Investments |
During the third quarter of 2009, our captive insurance company
liquidated all of the short-term investments reported on our
Consolidated Balance Sheets as of December 31, 2008. As of
December 31, 2009, these funds were reinvested in a
U.S. Treasury money market mutual fund and are included in
cash and cash equivalents in the accompanying Consolidated
Balance Sheets. Unrealized losses included in AOCL in the
accompanying Consolidated Balance Sheet as of December 31,
2008 were not material. Realized gains and losses from the sale
of securities were also not material for 2009 and 2008.
| 4. | Inventories: |
Components of inventories are as follows (in millions):
|
For the Years Ended
|
||||||||
| December 31, | ||||||||
| 2009 | 2008 | |||||||
|
Finished goods
|
$ | 182.3 | $ | 232.5 | ||||
|
Work in process
|
7.2 | 8.4 | ||||||
|
Raw materials and repair parts
|
132.7 | 132.2 | ||||||
| 322.2 | 373.1 | |||||||
|
Excess of current cost over
last-in,
first-out cost
|
(72.0 | ) | (75.8 | ) | ||||
|
Total inventories
|
$ | 250.2 | $ | 297.3 | ||||
Repair parts are primarily utilized in service operations and to
fulfill our warranty obligations.
The Company recorded income of $1.3 million from LIFO
inventory liquidations during 2009.
| 5. | Property, Plant and Equipment: |
Components of property, plant and equipment are as follows (in
millions):
|
For the Years Ended
|
||||||||
| December 31, | ||||||||
| 2009 | 2008 | |||||||
|
Land
|
$ | 37.7 | $ | 35.6 | ||||
|
Buildings and improvements
|
220.2 | 237.7 | ||||||
|
Machinery and equipment
|
583.0 | 560.8 | ||||||
|
Construction in progress and equipment not yet in service
|
39.7 | 38.8 | ||||||
|
Total
|
880.6 | 872.9 | ||||||
|
Less-accumulated depreciation
|
(551.0 | ) | (543. 5 | ) | ||||
|
Property, plant and equipment, net
|
$ | 329.6 | $ | 329.4 | ||||
The balances above include capital lease assets composed of
buildings and improvements and machinery and equipment totaling
$17.6 million and $18.6 million, net of accumulated
depreciation of $4.5 million and $3.4 million for the
years ended December 31, 2009 and 2008, respectively.
In 2009, we recorded $6.0 million in impairment charges
related to the abandonment of information technology assets that
had not yet been placed in service.
56
Table of Contents
LENNOX
INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
| 6. | Goodwill, Intangible and Other Assets: |
Goodwill
The changes in the carrying amount of goodwill related to
continuing operations, by segment, are as follows (in millions):
|
Balance as of
|
Balance as of
|
Balance as of
|
||||||||||||||||||
|
December 31,
|
December 31,
|
December 31,
|
||||||||||||||||||
| 2007 | Changes(1) | 2008 | Changes(2) | 2009 | ||||||||||||||||
|
Residential Heating & Cooling
|
$ | 33.7 | $ | — | $ | 33.7 | $ | — | $ | 33.7 | ||||||||||
|
Commercial Heating & Cooling
|
32.1 | (0.9 | ) | 31.2 | 0.1 | 31.3 | ||||||||||||||
|
Service Experts
|
112.5 | (18.7 | ) | 93.8 | 13.1 | 106.9 | ||||||||||||||
|
Refrigeration
|
84.5 | (10.9 | ) | 73.6 | 11.9 | 85.5 | ||||||||||||||
|
Total
|
$ | 262.8 | $ | (30.5 | ) | $ | 232.3 | $ | 25.1 | $ | 257.4 | |||||||||
| (1) | Changes in 2008 primarily relate to changes in foreign currency translation rates. Changes in 2008 also include an increase in goodwill of $2.6 million related to an acquisition and a decrease related to an adjustment of income tax contingencies related to a previous acquisition. Both of these goodwill adjustments were recorded in our Service Experts segment. | |
| (2) | Changes in 2009 primarily relate to changes in foreign currency translation rates, offset by the write-off of $4.4 million of goodwill related to the sale of businesses, primarily in the Service Experts segment. |
Intangible
and Other Assets
Identifiable intangible and other assets subject to amortization
are recorded in Other Assets in the accompanying Consolidated
Balance Sheets and were comprised of the following (in millions):
| For the Years Ended December 31, | ||||||||||||||||||||||||
| 2009 | 2008 | |||||||||||||||||||||||
|
Gross
|
Accumulated
|
Net
|
Gross
|
Accumulated
|
Net
|
|||||||||||||||||||
| Amount | Amortization | Amount | Amount | Amortization | Amount | |||||||||||||||||||
|
Deferred financing costs
|
$ | 7.3 | $ | (5.5 | ) | $ | 1.8 | $ | 7.2 | $ | (4.8 | ) | $ | 2.4 | ||||||||||
|
Customer relationships
|
3.3 | (1.1 | ) | 2.2 | 3.3 | (0.7 | ) | 2.6 | ||||||||||||||||
|
Other
|
3.4 | (2.3 | ) | 1.1 | 5.1 | (3.8 | ) | 1.3 | ||||||||||||||||
|
Total
|
$ | 14.0 | $ | (8.9 | ) | $ | 5.1 | $ | 15.6 | $ | (9.3 | ) | $ | 6.3 | ||||||||||
Amortization of intangible assets was as follows (in millions):
| For the Years Ended December 31, | ||||||||||||
| 2009 | 2008 | 2007 | ||||||||||
|
Amortization expense
|
$ | 1.6 | $ | 1.5 | $ | 1.4 | ||||||
Estimated intangible amortization expense for the next five
years is as follows (in millions):
|
2010
|
$ | 1.6 | ||
|
2011
|
1.2 | |||
|
2012
|
0.8 | |||
|
2013
|
0.4 | |||
|
2014
|
0.4 |
57
Table of Contents
LENNOX
INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
As of December 31, 2009 and 2008, we had $4.8 million
of intangible assets primarily consisting of trademarks, which
are not subject to amortization.
| 7. | Joint Ventures and Other Equity Investment: |
Joint
Ventures
We participate in two joint ventures; the largest is located in
the U.S. and the other in Mexico. These joint ventures are
engaged in the manufacture and sale of compressors, unit coolers
and condensing units. Because we exert significant influence
over these affiliates based upon our respective 25% and 50%
ownership, but do not control them due to venture partner
participation, they have been accounted for under the equity
method and their financial position and results of operations
are not consolidated. We purchase compressors from our
U.S. joint venture for use in certain of our products.
The combined balance of equity method investments included in
Other Assets, net totaled (in millions):
| As of December 31, | ||||||||
| 2009 | 2008 | |||||||
|
Other Assets, net
|
$ | 30.0 | $ | 32.0 | ||||
Purchases of compressors from our U.S. joint venture that
were included in Cost of Goods Sold in the Consolidated
Statements of Operations were approximately (in millions):
| For the Years Ended December 31, | ||||||||||||
| 2009 | 2008 | 2007 | ||||||||||
|
Purchases of compressors
|
$ | 95.0 | $ | 123.2 | $ | 164.9 | ||||||
During 2009 and 2008, the Company loaned $1.6 million on a
short-term basis to its joint venture in Mexico due to that
entity’s cash needs related to margin calls on forward
commodity contracts and operating cash requirements. The joint
venture partner loaned equal amounts under identical terms to
the joint venture; and therefore, the investment continues to be
recorded under the equity method.
Other
Investment
LII also has an investment in a compressor manufacturer located
in Thailand. During 2008, under the equity method we recorded
investment losses of $0.3 million and dividends of
$1.1 million as reductions to the investment balance. We
also recorded $9.1 million of impairment charges related to
this investment in 2008.
The investee’s financial results were adversely impacted by
increases in commodity costs, unfavorable currency exchange
fluctuations, and difficulties integrating past acquisitions.
Furthermore, the investee began a strategy of expansion during
the fourth quarter of 2008 and executed a rights offering to
existing shareholders to fund its plans. We did not agree with
the plans for expansion, were unable to influence the investee
not to pursue this strategy and therefore did not participate in
the rights offering. These economic factors, the unsuccessful
attempt to influence the investee’s business strategy,
together with a change in management intent regarding holding
its investment until recovery prompted the
other-than-temporary
impairment charges.
Also, as a result of the rights offering in 2008, our percentage
of equity ownership declined from 13% to 9%. While formerly
accounted for under the equity method, the investment of
$5.4 million in 2009 and $1.8 million in 2008 was
accounted for as an
available-for-sale
marketable equity security. The net gain of $3.6 million in
2009 was recorded in AOCL. The fair value of the investment was
measured based upon the quoted market price of the
investee’s common stock as listed on the Stock Exchange of
Thailand, multiplied by the number of shares owned. For more
information on the valuation of this investment, see
Note 22.
58
Table of Contents
LENNOX
INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
| 8. | Current Accrued Expenses: |
Significant components of current accrued expenses are presented
below (in millions):
|
For the Years Ended
|
||||||||
| December 31, | ||||||||
| 2009 | 2008 | |||||||
|
Accrued compensation and benefits
|
$ | 66.4 | $ | 66.3 | ||||
|
Insurance reserves
|
70.1 | 72.3 | ||||||
|
Deferred income
|
32.7 | 32.5 | ||||||
|
Accrued warranties
|
31.5 | 29.8 | ||||||
|
Accrued product quality issue
|
21.6 | — | ||||||
|
Accrued rebates and promotions
|
36.7 | 30.9 | ||||||
|
Derivative contracts
|
2.0 | 36.5 | ||||||
|
Other
|
55.6 | 57.8 | ||||||
|
Total continuing operations accrued expenses
|
316.6 | 326.1 | ||||||
|
Discontinued operations accrued expenses
|
1.3 | 5.4 | ||||||
|
Total current accrued expenses
|
$ | 317.9 | $ | 331.5 | ||||
| 9. | Derivatives: |
General
Our earnings and cash flows are subject to fluctuations due to
changes in commodity prices, interest rates, and foreign
currency exchange rates, and we seek to mitigate a portion of
these risks by entering into derivative contracts. The
derivatives we use are commodity futures contracts, interest
rate swaps, and currency forward contracts. We do not use
derivatives for speculative purposes.
The derivatives we enter into may be, but are not always,
accounted for as hedges. To qualify for hedge accounting, the
derivatives must be highly effective in reducing the risk
exposure that they are designed to hedge, and it must be
probable that the underlying transaction will occur. For
instruments designated as cash flow hedges, we must formally
document, at inception, the relationship between the derivative
and the hedged item, the risk management objective, the hedging
strategy for use of the hedged instrument, and how hedge
effectiveness is, and will be, assessed. This documentation also
includes linking the derivatives that are designated as cash
flow hedges to forecasted transactions. We assess hedge
effectiveness at inception and at least quarterly throughout the
hedge designation period.
We recognize all derivatives as either assets or liabilities at
fair value in the Consolidated Balance Sheets, regardless of
whether or not hedge accounting is applied. For more information
on the fair value of these derivative instruments, see
Note 22. We report cash flows arising from our hedging
instruments consistent with the classification of cash flows
from the underlying hedged items. Accordingly, cash flows
associated with our derivative programs are classified as
operating activities in the accompanying Consolidated Statements
of Cash Flows.
We monitor our derivative positions and credit ratings of our
counterparties and do not anticipate losses due to counterparty
non-performance.
Hedge
Accounting
The derivatives that we use as hedges of commodity prices and
movements in interest rates are accounted for as cash flow
hedges. The effective portion of the gain or loss on the
derivatives accounted for as hedges is recorded, net
59
Table of Contents
LENNOX
INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
of applicable taxes, in AOCL, a component of Stockholders’
Equity in the accompanying Consolidated Balance Sheets. When
earnings are affected by the variability of the underlying cash
flow, the applicable offsetting amount of the gain or loss from
the derivatives that is deferred in AOCL is reclassified into
earnings in the same financial statement line item that the
hedged item is recorded in. Ineffectiveness, if any, is recorded
in earnings each period. If the hedging relationship ceases to
be highly effective, the net gain or loss shall remain in AOCL
and will be reclassified into earnings when earnings are
affected by the variability of the underlying cash flow. If it
becomes probable that the forecasted transaction will not occur
by the end of the originally specified period or within two
months thereafter, the net gain or loss remaining in AOCL will
be reclassified to earnings immediately.
Accounting
for Derivatives When Hedge Accounting is Not
Applied
We may also enter into derivatives that economically hedge
certain of our risks, even though hedge accounting does not
apply or we elect not to apply hedge accounting to these
instruments. The changes in fair value of the derivatives act as
an economic offset to changes in the fair value of the
underlying items. Changes in the fair value of instruments not
designated as cash flow hedges are recorded in earnings
throughout the term of the derivative instrument and are
reported in Gains and Other Expenses, net in the accompanying
Consolidated Statements of Operations.
Objectives
and Strategies for Using Derivative Instruments
Commodity
Price Risk
We utilize a cash flow hedging program to mitigate our exposure
to volatility in the prices of metal commodities we use in our
production processes. The hedging program includes the use of
futures contracts, and we enter into these contracts based on
our hedging strategy. We use a dollar cost averaging strategy
for our hedge program. As part of this strategy, a higher
percentage of commodity price exposures are hedged near term
with lower percentages hedged at future dates. This strategy
provides us with protection against near-term price volatility
caused by market speculators and market forces, such as supply
variation, while allowing us to adjust to market price movements
over time. Upon entering into futures contracts, we lock in
prices and are subject to derivative losses should the metal
commodity prices decrease and gains should the prices increase.
During 2008, metal commodity prices decreased considerably in a
short time period, which resulted in significant derivative loss
positions. As a result of these loss positions, we were required
to post collateral of $37.9 million as of December 31,
2008. The collateral posted was treated as a prepaid expense and
recorded in Other Assets in the accompanying Consolidated
Balance Sheets. The unrealized derivative losses were recorded
in AOCL. During 2009, metal commodity prices remained relatively
stable and as a result, our commodity contracts that were in
loss positions at December 31, 2008 expired and we were no
longer required to post collateral as of December 31, 2009.
Interest
Rate Risk
The majority of our debt bears interest at variable interest
rates and therefore, we are subject to variability in the cash
paid for interest expense. In order to mitigate a portion of
this risk, we use a hedging strategy to eliminate the
variability of cash flows in the interest payments associated
with the first $100 million of the total variable-rate debt
outstanding under our revolving credit facility that is solely
due to changes in the benchmark interest rate. This strategy
allows us to fix a portion of our interest payments while also
taking advantage of historically low interest rates.
On June 12, 2009, we entered into a $100 million
pay-fixed, receive-variable interest rate swap with a large
financial institution at a fixed interest rate of 2.66%. The
variable portion of the interest rate swap is tied to the
1-Month
LIBOR (the benchmark interest rate). The interest rates under
both the interest rate swap and the underlying debt are reset,
the swap is settled with the counterparty, and interest is paid,
on a monthly basis. The interest rate swap expires
October 12, 2012. We account for the interest rate swap as
a cash flow hedge.
60
Table of Contents
LENNOX
INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Foreign
Currency Risk
Foreign currency exchange rate movements create a degree of risk
by affecting the U.S. dollar value of assets and
liabilities arising in foreign currencies. Our objective for
entering into foreign currency forward contracts is to mitigate
the impact of short-term currency exchange rate movements on
certain short-term intercompany transactions. In order to meet
that objective, we periodically enter into foreign currency
forward contracts that act as economic hedges against changes in
foreign currency exchange rates. These forward contracts are not
designated as hedges and generally expire during the quarter
that we entered into them.
Cash
Flow Hedges
We include (gains) losses in AOCL in connection with our
commodity cash flow hedges. The (gains) losses related to
commodity price hedges are expected to be reclassified into
earnings within the next 16 months based on the prices of
the commodities at settlement date. Assuming that commodity
prices remain constant, $11.1 million of derivative gains
are expected to be reclassified into earnings within the next
12 months. Commodity futures contracts that are designated
as cash flow hedges and are in place as of December 31,
2009 are scheduled to mature through March 2011.
The (gains) losses related to our interest rate swap are
expected to be reclassified into earnings within the next
34 months based on the term of the swap. Assuming that the
benchmark interest rate remains constant, $2.1 million of
derivative losses are expected to be reclassified into earnings
within the next 12 months.
We recorded the following amounts related to our cash flow
hedges (in millions):
| As of December 31, | ||||||||
| 2009 | 2008 | |||||||
|
Commodity Price Hedges:
|
||||||||
|
(Gains) Losses included in AOCL, net of tax
|
$ | (7.2 | ) | $ | 21.3 | |||
|
Tax expense (benefit)
|
4.1 | (11.9 | ) | |||||
|
Interest Rate Swap:
|
||||||||
|
Losses included in AOCL, net of tax
|
$ | 1.4 | $ | — | ||||
|
Tax benefit
|
(0.8 | ) | — | |||||
We had the following outstanding commodity futures contracts
designated as cash flow hedges (in millions):
| As of December 31, | ||||||||
| 2009 | 2008 | |||||||
| (Pounds) | (Pounds) | |||||||
|
Copper
|
12.6 | 23.1 | ||||||
Derivatives
not Designated as Cash Flow Hedges
For commodity derivatives not designated as cash flow hedges, we
follow the same hedging strategy as for derivatives designated
as cash flow hedges. We elect not to designate these derivatives
as cash flow hedges at inception of the arrangement. We had the
following outstanding commodity futures contracts not designated
as cash flow hedges (in millions):
| As of December 31, | ||||||||
| 2009 | 2008 | |||||||
| (Pounds) | (Pounds) | |||||||
|
Copper
|
0.9 | 2.9 | ||||||
|
Aluminum
|
0.9 | 3.2 | ||||||
61
Table of Contents
LENNOX
INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
During 2009, we entered into foreign currency forward contracts
with notional amounts of $123.6 million, of which
$12.2 million were outstanding at December 31, 2009.
Information
About the Location and Amounts of Derivative
Instruments
For information on the location and amounts of derivative fair
values in the Consolidated Balance Sheets and derivative gains
and losses in the Consolidated Statements of Operations, see the
tabular information presented below (in millions):
Fair
Values of Derivative Instruments
| As of December 31, | ||||||||||||
| 2009 | 2008 | |||||||||||
|
|
Balance Sheet
|
|||||||||||
|
Asset Derivatives
|
Location | Fair Value | Location | Fair Value | ||||||||
|
Derivatives designated as hedging instruments under FASB ASC
Topic 815
|
||||||||||||
|
Commodity futures contracts
|
Other Assets
(Current) |
$ | 11.1 |
Other Assets
(Current) |
$ | — | ||||||
|
Commodity futures contracts
|
Other Assets
(Non-current) |
0.3 |
Other Assets
(Non-current) |
— | ||||||||
| 11.4 | — | |||||||||||
|
Derivatives not designated as hedging instruments under FASB
ASC Topic 815
|
||||||||||||
|
Commodity futures contracts
|
Other Assets
(Current) |
1.1 |
Other Assets
(Current) |
— | ||||||||
|
Total Asset for Derivatives
|
$ | 12.5 | $ | — | ||||||||
|
Liability Derivatives
|
||||||||||||
|
Derivatives designated as hedging instruments under FASB ASC
Topic 815
|
||||||||||||
|
Commodity futures contracts
|
Accrued Expenses | $ | — | Accrued Expenses | $ | 31.0 | ||||||
|
Interest rate swap
|
Accrued Expenses | 2.0 | Accrued Expenses | — | ||||||||
|
Interest rate swap
|
Other Liabilities | 0.3 | Other Liabilities | — | ||||||||
|
Commodity futures contracts
|
Other Liabilities | — | Other Liabilities | 2.6 | ||||||||
| 2.3 | 33.6 | |||||||||||
|
Derivatives not designated as hedging instruments under FASB
ASC Topic 815
|
||||||||||||
|
Commodity futures contracts
|
Accrued Expenses | — | Accrued Expenses | 5.5 | ||||||||
|
Commodity futures contracts
|
Other Liabilities | — | Other Liabilities | 0.3 | ||||||||
| — | 5.8 | |||||||||||
|
Total Liability for Derivatives
|
$ | 2.3 | $ | 39.4 | ||||||||
62
Table of Contents
LENNOX
INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
|
Amount of Loss or (Gain) Reclassified
|
||||||||||||||||
|
from AOCL into Income
|
||||||||||||||||
|
Derivatives in FASB ASC
|
Location of Loss or (Gain)
|
(Effective Portion) | ||||||||||||||
|
Topic 815 Cash Flow
|
Reclassified from AOCL into Income
|
For the Years Ended December 31, | ||||||||||||||
|
Hedging Relationships
|
(Effective Portion) | 2009 | 2008 | 2007 | ||||||||||||
|
Commodity futures contracts
|
Cost of Goods Sold | $ | 19.6 | $ | (7.0 | ) | $ | (6.2 | ) | |||||||
|
Interest rate swap
|
Interest Expense, net | 1.3 | — | — | ||||||||||||
| $ | 20.9 | $ | (7.0 | ) | $ | (6.2 | ) | |||||||||
|
Amount of Loss or (Gain) Recognized
|
||||||||||||||||
|
Location of Loss or (Gain)
|
in Income on Derivatives
|
|||||||||||||||
|
Derivatives in FASB ASC
|
Recognized in Income on
|
(Ineffective Portion) | ||||||||||||||
|
Topic 815 Cash Flow
|
Derivatives
|
For the Years Ended December 31, | ||||||||||||||
|
Hedging Relationships
|
(Ineffective Portion) | 2009 | 2008 | 2007 | ||||||||||||
|
Commodity futures contracts
|
Gains and Other Expenses, net | $ | (0.1 | ) | $ | 0.3 | $ | — | ||||||||
|
Amount of Loss or (Gain)
|
||||||||||||||||
|
Recognized in Income on
|
||||||||||||||||
|
Derivatives Not Designated
|
Location of (Gain) or Loss
|
Derivatives | ||||||||||||||
|
as Hedging Instruments under
|
Recognized in Income on
|
For the Years Ended December 31, | ||||||||||||||
|
FASB ASC Topic 815
|
Derivatives | 2009 | 2008 | 2007 | ||||||||||||
|
Commodity futures contracts
|
Gains and Other Expenses, net | $ | (3.4 | ) | $ | 5.7 | $ | (0.7 | ) | |||||||
|
Foreign currency forward contracts
|
Gains and Other Expenses, net | 3.1 | — | — | ||||||||||||
| $ | (0.3 | ) | $ | 5.7 | $ | (0.7 | ) | |||||||||
For more information on the valuation of these derivative
instruments, see Note 22.
63
Table of Contents
LENNOX
INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
| 10. | Income Taxes: |
Our income tax provision (benefits) from continuing operations
consisted of the following (in millions):
| For the Years Ended December 31, | ||||||||||||
| 2009 | 2008 | 2007 | ||||||||||
|
Current:
|
||||||||||||
|
Federal
|
$ | 17.5 | $ | 32.4 | $ | 58.8 | ||||||
|
State
|
5.0 | 5.8 | 6.7 | |||||||||
|
Foreign
|
8.1 | 11.0 | 18.5 | |||||||||
|
Total current
|
30.6 | 49.2 | 84.0 | |||||||||
|
Deferred:
|
||||||||||||
|
Federal
|
9.9 | 27.1 | (1.7 | ) | ||||||||
|
State
|
3.0 | 4.2 | 1.2 | |||||||||
|
Foreign
|
(4.4 | ) | — | 8.2 | ||||||||
|
Total deferred
|
8.5 | 31.3 | 7.7 | |||||||||
|
Total income tax provision
|
$ | 39.1 | $ | 80.5 | $ | 91.7 | ||||||
Income from continuing operations before income taxes was
comprised of the following (in millions):
| For the Years Ended December 31, | ||||||||||||
| 2009 | 2008 | 2007 | ||||||||||
|
Domestic
|
$ | 99.7 | $ | 186.9 | $ | 192.7 | ||||||
|
Foreign
|
1.2 | 17.4 | 64.7 | |||||||||
|
Total
|
$ | 100.9 | $ | 204.3 | $ | 257.4 | ||||||
The difference between the income tax provision from continuing
operations computed at the statutory federal income tax rate and
the financial statement provision for taxes is summarized as
follows (in millions):
| For the Years Ended December 31, | ||||||||||||
| 2009 | 2008 | 2007 | ||||||||||
|
Provision at the U.S. statutory rate of 35%
|
$ | 35.3 | $ | 71.5 | $ | 90.1 | ||||||
|
Increase (reduction) in tax expense resulting from:
|
||||||||||||
|
State income tax, net of federal income tax benefit
|
3.8 | 7.7 | 5.2 | |||||||||
|
Other permanent items
|
(2.8 | ) | (1.2 | ) | (4.0 | ) | ||||||
|
Research tax credit
|
(0.6 | ) | — | (0.3 | ) | |||||||
|
Decrease in tax audit reserves
|
(1.6 | ) | — | — | ||||||||
|
Change in valuation allowance
|
4.5 | 1.1 | (1.0 | ) | ||||||||
|
Foreign taxes at rates other than 35% and miscellaneous other
|
0.5 | 1.4 | 1.7 | |||||||||
|
Total income tax provision
|
$ | 39.1 | $ | 80.5 | $ | 91.7 | ||||||
Deferred income taxes reflect the tax consequences on future
years of temporary differences between the tax basis of assets
and liabilities and their financial reporting basis and are
reflected as current or non-current depending on the
classification of the asset or liability generating the deferred
tax. The deferred tax provision for the periods shown represents
the effect of changes in the amounts of temporary differences
during those periods.
64
Table of Contents
LENNOX
INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Deferred tax assets (liabilities) were comprised of the
following (in millions):
|
For the Years Ended
|
||||||||
| December 31, | ||||||||
| 2009 | 2008 | |||||||
|
Gross deferred tax assets:
|
||||||||
|
Warranties
|
$ | 36.0 | $ | 33.0 | ||||
|
Net operating losses (foreign and U.S. state)
|
48.3 | 41.6 | ||||||
|
Postretirement and pension benefits
|
30.2 | 45.0 | ||||||
|
Inventory reserves
|
6.3 | 1.4 | ||||||
|
Receivables allowance
|
4.3 | 5.0 | ||||||
|
Compensation liabilities
|
20.3 | 23.9 | ||||||
|
Deferred income
|
8.0 | 8.3 | ||||||
|
Insurance liabilities
|
2.4 | — | ||||||
|
Intangibles
|
— | 0.4 | ||||||
|
Other
|
10.5 | 32.4 | ||||||
|
Total deferred tax assets
|
166.3 | 191.0 | ||||||
|
Valuation allowance
|
(30.9 | ) | (28.7 | ) | ||||
|
Total deferred tax assets, net of valuation allowance
|
135.4 | 162.3 | ||||||
|
Gross deferred tax liabilities:
|
||||||||
|
Depreciation
|
(14.6 | ) | (14.6 | ) | ||||
|
Insurance liabilities
|
— | (2.8 | ) | |||||
|
Intangibles
|
(4.1 | ) | — | |||||
|
Other
|
(7.2 | ) | (7.7 | ) | ||||
|
Total deferred tax liabilities
|
(25.9 | ) | (25.1 | ) | ||||
|
Net deferred tax assets
|
$ | 109.5 | $ | 137.2 | ||||
As of December 31, 2009 and 2008, we had $9.6 million
and $10.9 million in tax effected state net operating loss
carryforwards, respectively, and $38.7 million and
$30.7 million in tax effected foreign net operating loss
carryforwards, respectively. The state and foreign net operating
loss carryforwards begin expiring in 2010. The deferred tax
asset valuation allowance relates primarily to the operating
loss carryforwards in various states in the U.S., European and
Asian tax jurisdictions. The increase in the valuation allowance
is primarily the result of foreign and state losses which are
not benefited and currency fluctuation.
In assessing the realizability of deferred tax assets, we
consider whether it is more likely than not that some portion or
all of the deferred tax assets will not be realized. We consider
the reversal of existing taxable temporary differences,
projected future taxable income, and tax planning strategies in
making this assessment. Based upon the level of historical
taxable income and projections for future taxable income over
the periods in which the deferred tax assets are deductible, we
believe it is more likely than not that we will realize the
benefits of these deductible differences, net of the existing
valuation allowances, as of December 31, 2009.
In order to realize the net deferred tax asset, we will need to
generate future foreign taxable income of approximately
$90.5 million during the periods in which those temporary
differences become deductible. We also will need to generate
U.S. federal income of approximately $104.4 million in
addition to our carryback capacity to fully realize the federal
deferred tax asset. U.S. taxable income for the years ended
December 31, 2009 and 2008 was $38.6 million and
$54.5 million, respectively.
65
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LENNOX
INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
A limited provision has been made for income taxes which may
become payable upon distribution of our foreign
subsidiaries’ earnings related to the Czech Republic. It is
not practicable to estimate the amount of tax that might be
payable with regard to any other distribution of foreign
subsidiary earnings because our intent is to permanently
reinvest these earnings or to repatriate earnings when it is tax
effective to do so.
A reconciliation of the beginning and ending amount of
unrecognized tax benefits is as follows (in millions):
|
Balance as of December 31, 2007
|
$ | 23.9 | ||
|
Increases related to prior year tax positions
|
0.2 | |||
|
Decreases related to prior year tax positions
|
(0.1 | ) | ||
|
Increases related to current year tax positions
|
0.4 | |||
|
Settlements
|
(9.5 | ) | ||
|
Balance as of December 31, 2008
|
$ | 14.9 | ||
|
Increases related to prior year tax positions
|
0.1 | |||
|
Decreases related to prior year tax positions
|
(7.2 | ) | ||
|
Increases related to current year tax positions
|
0.1 | |||
|
Settlements
|
(6.4 | ) | ||
|
Balance as of December 31, 2009
|
$ | 1.5 | ||
Included in the balance of unrecognized tax benefits as of
December 31, 2009 are potential benefits of
$1.0 million that, if recognized, would affect the
effective tax rate on income from continuing operations. As of
December 31, 2009, we had recognized $0.1 million (net
of federal tax benefits) in interest and penalties in income tax
expense.
The Internal Revenue Service (“IRS”) completed its
examination of our consolidated tax returns for the years
1999 — 2003 and issued a Revenue Agent’s Report
(“RAR”) on April 6, 2006. We reached a settlement
with the IRS in December 2008 that resulted in an immaterial
impact to the Consolidated Statements of Operations.
The IRS completed its examination of our consolidated tax
returns for the years
2004-2005
and issued an RAR on July 31, 2008. We reached a settlement
with the IRS in the fourth quarter of 2009 that resulted in an
immaterial impact to the Consolidated Statements of Operations.
The IRS completed its examination of our consolidated tax
returns for the years
2006-2007
and issued an RAR on June 1, 2009. We reached a settlement
with the IRS in the third quarter of 2009 that resulted in an
immaterial impact to the Consolidated Statements of Operations.
We are currently under examination for our U.S. federal
income taxes for 2009 and 2010. We are subject to examination by
numerous other taxing authorities in jurisdictions such as
Australia, Belgium, France, Canada, and Germany. We are
generally no longer subject to U.S. federal, state and
local, or
non-U.S. income
tax examinations by taxing authorities for years before 2002.
During 2009, numerous states, including Wisconsin, California,
Virginia, North Dakota, Oregon and Pennsylvania enacted
legislation effective for tax years beginning on or after
January 1, 2009, including requirements for combined
reporting, changes to apportionment methods and surtaxes. We
determined the impact of these changes to be immaterial.
66
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LENNOX
INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
| 11. | Commitments and Contingencies: |
Leases
The approximate minimum commitments under all non-cancelable
leases outstanding as of December 31, 2009 are as follows
(in millions):
|
Operating
|
Capital
|
|||||||
| Leases | Leases | |||||||
|
2010
|
$ | 55.0 | $ | 1.3 | ||||
|
2011
|
41.5 | 1.3 | ||||||
|
2012
|
28.2 | 1.2 | ||||||
|
2013
|
17.6 | 1.1 | ||||||
|
2014
|
11.2 | 1.1 | ||||||
|
Thereafter
|
19.0 | 21.0 | ||||||
|
Total minimum lease payments
|
$ | 172.5 | 27.0 | |||||
|
Less amount representing interest
|
9.5 | |||||||
|
Present value of minimum payments
|
$ | 17.5 | ||||||
On June 22, 2006, we entered into an agreement with a
financial institution to lease our corporate headquarters in
Richardson, Texas for a term of seven years (the “Lake Park
Lease”). The leased property consists of an office building
of approximately 192,000 square feet, land and related
improvements. During the term, the Lake Park Lease requires us
to pay base rent in quarterly installments, payable in arrears.
At the end of the term, we must do one of the following:
(i) purchase the property for approximately
$41.2 million; (ii) make a final payment under the
lease equal to approximately 82% of the Lease Balance and return
the property to the financial institution in good condition;
(iii) arrange for the sale of the leased property to a
third party; or (iv) renew the lease under mutually
agreeable terms. If we elect to sell the property to a third
party and the sales proceeds are less than the Lease Balance, we
must pay any such deficit to the financial institution. Any such
payment cannot exceed 82% of the Lease Balance.
Our obligations under the Lake Park Lease are secured by a
pledge of our interest in the leased property and are also
guaranteed by us and certain of our subsidiaries. The Lake Park
Lease, as amended, contains restrictive covenants that are
consistent with those of our revolving credit facility. We were
in compliance with these financial covenants as of
December 31, 2009. The Lake Park Lease is accounted for as
an operating lease.
Environmental
Applicable environmental laws can potentially impose obligations
to remediate hazardous substances at our properties, at
properties formerly owned or operated by us and at facilities to
which we have sent or send waste for treatment or disposal. We
are aware of contamination at some facilities; however, we do
not presently believe that any future remediation costs at such
facilities will be material to our results of operations.
The amount and timing of cash payments are reliably determinable
and, therefore, we have recorded environmental reserves at their
present values.
67
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LENNOX
INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
The following information relates to our environmental reserve
(in millions except percentages):
|
For the Years Ended
|
||||||||
| December 31, | ||||||||
| 2009 | 2008 | |||||||
|
Discounted liabilities recorded in:
|
||||||||
|
Accrued Expenses
|
$ | 1.3 | $ | 1.4 | ||||
|
Other Long-Term Liabilities
|
3.0 | 2.7 | ||||||
| $ | 4.3 | $ | 4.1 | |||||
|
Undiscounted liabilities
|
$ | 5.8 | $ | 5.7 | ||||
|
Discount rate
|
3.3%-9.9 | % | 7.5%-11.1 | % | ||||
Estimates of future costs are subject to change due to changing
environmental remediation regulations
and/or
site-specific requirements.
Product
Warranties
Total liabilities for estimated warranty are included in the
following captions on the accompanying Consolidated Balance
Sheets (in millions):
|
For the Years Ended
|
||||||||
| December 31, | ||||||||
| 2009 | 2008 | |||||||
|
Accrued Expenses
|
$ | 31.5 | $ | 29.8 | ||||
|
Other Liabilities
|
50.0 | 64.3 | ||||||
| $ | 81.5 | $ | 94.1 | |||||
The changes in the total warranty liabilities for the years
ended December 31, 2009 and 2008 were as follows (in
millions):
|
Total warranty liability as of December 31, 2007
|
$ | 98.1 | ||
|
Payments made in 2008
|
(26.8 | ) | ||
|
Changes resulting from issuance of new warranties
|
32.1 | |||
|
Changes in estimates associated with pre-existing liabilities
|
(6.4 | ) | ||
|
Changes in foreign currency translation rates
|
(2.9 | ) | ||
|
Total warranty liability as of December 31, 2008
|
$ | 94.1 | ||
|
Payments made in 2009
|
(27.3 | ) | ||
|
Changes resulting from issuance of new warranties
|
25.7 | |||
|
Changes in estimates associated with pre-existing liabilities
|
(12.7 | ) | ||
|
Changes in foreign currency translation rates
|
1.7 | |||
|
Total warranty liability as of December 31, 2009
|
$ | 81.5 | ||
|
Accrued product quality issue (not covered under warranty)
|
$ | 21.6 | ||
At the end of each accounting period, we evaluate our warranty
liabilities and during the second quarter of each year, we
perform a complete reevaluation of our warranty liabilities. As
a result of our annual evaluation, we recorded a reduction in
warranty liabilities in the second quarter of 2009 that is the
principal amount contained within the changes in estimates
associated with pre-existing liabilities of $12.7 million
above. The reduction to our
68
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LENNOX
INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
warranty liabilities was principally caused by lower than
expected failure rates, reductions to future cost estimates, and
new experience data.
We incur the risk of liability claims for the installation and
service of heating and air conditioning products, and we
maintain liabilities for those claims that we self-insure. We
are involved in various claims and lawsuits related to our
products. Our product liability insurance policies have limits
that, if exceeded, may result in substantial costs that could
have an adverse effect on our results of operations. In
addition, warranty claims are not covered by our product
liability insurance and certain product liability claims may
also not be covered by our product liability insurance. There
have been no material changes in the circumstances since our
latest fiscal year-end.
We also may incur costs related to our products that may not be
covered under our warranties and are not covered by insurance,
and we may, from time to time, repair or replace installed
products experiencing quality issues in order to satisfy our
customers and to protect our brand. These product quality issues
may be caused by vendor-supplied components that fail to meet
required specifications.
We have identified a product quality issue in a heating and
cooling product line produced in 2006 and 2007 period that we
believe results from a vendor-supplied materials quality issue.
For the year ended December 31, 2009, we have recorded an
expense of $24.4 million for the portion of the issue that
is probable and can be reasonably estimated based upon the
current data available and $21.6 million remained accrued
as of December 31, 2009. We may incur additional charges in
the future as more information becomes available. The expense
for this product quality issue, and the related liability, is
not included in the tables related to our estimated warranty
liabilities. The expense related to this product quality issue
has been classified in Cost of Goods Sold in the Consolidated
Statements of Operations and the related liability is included
in Accrued Expenses on the Consolidated Balance Sheet.
Self
Insurance
We use a combination of third-party insurance and self-insurance
plans (large deductible or captive) to provide protection
against claims relating to workers’
compensation/employers’ liability, general liability,
product liability, auto liability, auto physical damage and
other exposures. Prior to the third quarter of 2009, these
policies were written by a third-party insurance provider, which
was then reinsured by our captive insurance subsidiary. Starting
with the third quarter of 2009, we use large deductible
insurance plans for workers’ compensation/employers’
liability, general liability, product liability, and auto
liability. These policies are written through third-party
insurance providers. We also carry umbrella or excess liability
insurance for all third-party and self-insurance plans, except
for directors’ and officers’ liability, property
damage and various other insurance programs. We believe the
limit within our excess policy is adequate for companies of our
size in our industry. We believe that the deductibles and
liability limits retained by LII and the captive are customary
for companies of our size in our industry and are appropriate
for our business.
In addition, we use third-party insurance plans for property
damage, aviation liability, directors’ and officers’
liability, and other exposures. Each of these policies may
include per occurrence and annual aggregate limits. However, we
believe these limits are customary for companies of our size in
our industry and are appropriate for our business.
The self-insurance expense and liabilities, calculated on an
undiscounted basis, are actuarially determined based primarily
on our historical claims information, as well as industry
factors and trends, and represent the best estimate of the
future payments to be made on both reported and unreported
losses for 2009 and prior years. We maintain safety and
manufacturing programs that are designed to improve the safety
and effectiveness of our business processes and, as a result,
reduce the level and severity of our various self-insurance
risks. In recent years, our actual claims experience has been
trending favorably and therefore, both self-insurance expense
and the related liability have decreased.
69
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LENNOX
INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Since we have a captive insurance company, we are required to
maintain specified levels of liquid assets from which we must
pay claims. The majority of our self-insured risks (excluding
auto liability and physical damage) will be paid over an
extended period of time. To the extent actuarial assumptions
change and claims experience rates differ from historical rates,
our liability may change.
The self-insurance liabilities recorded in Accrued Expenses in
the accompanying Consolidated Balance Sheets were
$60.4 million and $63.2 million as of
December 31, 2009 and 2008, respectively.
Litigation
We are involved in a number of claims and lawsuits incident to
the operation of our businesses. Insurance coverages are
maintained and estimated costs are recorded for such claims and
lawsuits. It is management’s opinion that none of these
claims or lawsuits will have a material adverse effect on our
financial position, results of operations or cash flows. Costs
related to such matters were not material to the periods
presented.
We estimate the costs to settle pending litigation based on
experience involving similar claims and specific facts known. We
do not believe that any current or pending or threatened
litigation will have a material adverse effect on our financial
position. Litigation and arbitration, however, involve
uncertainties and it is possible that the eventual outcome of
litigation could adversely affect our results of operations for
a particular period.
| 12. | Long-Term Debt, Lines of Credit and Asset Securitization: |
The following tables summarize our outstanding debt obligations
and the classification in the accompanying Consolidated Balance
Sheet (in millions):
|
Description of Obligation
|
||||||||||||||||
|
As of December 31, 2009
|
Short-Term Debt | Current Maturities | Long-Term Maturities | Total | ||||||||||||
|
Domestic promissory notes(1)
|
$ | — | $ | 35.0 | $ | — | $ | 35.0 | ||||||||
|
Domestic revolving credit facility
|
— | — | 176.5 | 176.5 | ||||||||||||
|
Capital lease obligations
|
— | 0.4 | 17.1 | 17.5 | ||||||||||||
|
Other obligations
|
2.2 | 0.1 | 0.2 | 2.5 | ||||||||||||
|
Total debt
|
$ | 2.2 | $ | 35.5 | $ | 193.8 | $ | 231.5 | ||||||||
|
Description of Obligation
|
||||||||||||||||
|
As of December 31, 2008
|
Short-Term Debt | Current Maturities | Long-Term Maturities | Total | ||||||||||||
|
Domestic promissory notes(1)
|
$ | — | $ | — | $ | 35.0 | $ | 35.0 | ||||||||
|
Domestic revolving credit facility
|
— | — | 359.8 | 359.8 | ||||||||||||
|
Capital lease obligations
|
— | 0.3 | 18.6 | 18.9 | ||||||||||||
|
Other obligations
|
6.1 | 0.3 | 0.3 | 6.7 | ||||||||||||
|
Total debt
|
$ | 6.1 | $ | 0.6 | $ | 413.7 | $ | 420.4 | ||||||||
| (1) | Domestic promissory notes bear interest at 8.00% and mature in 2010. |
70
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LENNOX
INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
As of December 31, 2009, the aggregate amounts of required
principal payments on long-term debt are as follows (in
millions):
|
2010
|
$ | 35.5 | ||
|
2011
|
0.6 | |||
|
2012
|
177.1 | |||
|
2013
|
0.5 | |||
|
2014
|
0.6 | |||
|
Thereafter
|
15.0 |
As of December 31, 2009, we had outstanding borrowings of
$176.5 million under our $650.0 million domestic
revolving credit facility and $93.5 million was committed
to standby letters of credit. The remaining $380.0 million
was available for future borrowings subject to covenant
limitations. The facility matures in October 2012.
Our domestic revolving credit facility includes a subfacility
for swingline loans of up to $50.0 million and provides for
the issuance of letters of credit for the full amount available
under the domestic revolving credit facility. Our weighted
average borrowing rate on the domestic revolving credit facility
was 0.84% and 2.26% as of December 31, 2009 and 2008,
respectively.
Our domestic revolving credit facility contains financial
covenants relating to leverage and interest coverage. Other
covenants contained in our domestic revolving credit facility
restrict, among other things, mergers, asset dispositions,
guarantees, debt, liens, acquisitions, investments, affiliate
transactions and our ability to make restricted payments. The
financial covenants require us to maintain defined levels of
Consolidated Indebtedness to Adjusted EBITDA Ratio and a Cash
Flow (defined as EBITDA minus capital expenditures) to Net
Interest Expense Ratio. The required ratios as of
December 31, 2009 are detailed below:
|
Consolidated Indebtedness to Adjusted EBITDA Ratio not greater
than
|
3.5 : 1.0 | |||
|
Cash Flow to Net Interest Expense Ratio no less than
|
3.0 : 1.0 |
Our domestic revolving credit facility contains customary events
of default. These events of default include nonpayment of
principal or interest, breach of covenants or other restrictions
or requirements, default on any other indebtedness or
receivables securitizations (cross default), and bankruptcy. A
cross default could occur if:
| • | we fail to pay any principal or interest when due on any other indebtedness or receivables securitization of at least $40.0 million; or, | |
| • | we are in default on any other indebtedness or receivables securitization in an aggregate principal amount of at least $40.0 million, which would give the holders the right to declare such indebtedness due and payable prior to its stated maturity. |
If a cross default was to occur, it could have a wider impact on
our liquidity than might otherwise occur from a default of a
single debt instrument or lease commitment.
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 our
domestic revolving credit facility and accelerate amounts due
under our domestic revolving credit facility (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).
The domestic promissory notes contain the same financial
covenant restrictions as the domestic revolving credit facility
listed above. As of December 31, 2009, we were in
compliance with all covenant requirements. Our domestic
revolving credit facility and promissory notes are guaranteed by
our material subsidiaries.
We have additional borrowing capacity through several of our
foreign subsidiaries used primarily to finance seasonal
borrowing needs. We had $2.5 million and $6.7 million
of obligations outstanding through our foreign
71
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LENNOX
INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
subsidiaries as of December 31, 2009 and 2008,
respectively. Available borrowing capacity at December 31,
2009 and 2008, under foreign facilities was $12.6 million
and $11.1 million, respectively.
During 2008, we expanded our Tifton, Georgia manufacturing
facility using the proceeds from Industrial Development Bonds
(“IDBs”). We entered into a lease agreement with the
owner of the property and the issuer of the IDBs, and through
our lease payments fund the interest payments to investors in
the IDBs. We also guaranteed the repayment of the IDBs and
entered into letters of credit totaling $15.5 million to
fund a potential repurchase of the IDBs in the event that
investors exercised their right to tender the IDBs to the
Trustee. At December 31, 2009 and 2008, we recorded both a
capital lease asset and a corresponding long-term obligation of
$14.3 million and $15.3 million related to these
transactions, respectively.
Credit
Rating
At December 31, 2009, our senior credit rating was Ba1,
with a stable outlook, by Moody’s and BB+, with a positive
outlook, by Standard & Poor’s Rating Group
(“S&P”).
Asset
Securitization
Under a revolving period asset securitization arrangement
(“ASA”), we are eligible to sell beneficial interests
in a portion of our trade accounts receivable to participating
financial institutions for cash. The current arrangement expires
November 24, 2010 and is subject to renewal and contains a
provision whereby we retain the right to repurchase all of the
outstanding beneficial interests transferred. Our continued
involvement in the transferred assets includes servicing,
collection and administration of the transferred beneficial
interests. The sale of the beneficial interests in our trade
accounts receivable are reflected as secured borrowings in the
accompanying Consolidated Balance Sheets and the proceeds
received are included in cash flows from financing activities in
the accompanying Consolidated Statements of Cash Flows.
Transactions under the former ASA that expired November 24,
2009, and did not contain the provision noted above, were
accounted for as sales and were therefore not included in the
accompanying 2008 Consolidated Balance Sheet. Proceeds received
or amounts repaid under the former ASA were included in cash
flows from operating activities in the accompanying Consolidated
Statements of Cash Flows.
The accounts receivable sold under the ASA are high quality
domestic customer accounts that have not aged significantly and
the program takes into account an allowance for uncollectable
accounts. The receivables represented by the retained interest
that we service are exposed to the risk of loss for any
uncollectible amounts in the pool of receivables sold under the
ASA. The fair values assigned to the retained and transferred
interests are based on the sold accounts receivable carrying
value given the short term to maturity and low credit risk.
The ASA contains certain restrictive covenants relating to the
quality of our accounts receivable and cross-default provisions
with our Credit Agreement. The administrative agent under the
ASA is also a participant in our Credit Agreement. The
participating financial institution has an investment grade
credit rating. We continue to evaluate its credit rating and
have no reason to believe it will not perform under the ASA. As
of December 31, 2009, we were in compliance with all
covenant requirements.
The ASA provides for a maximum securitization amount of
$100.0 million or 100% of the net pool balance as defined
by the ASA. However, eligibility for securitization is limited
based on the amount and quality of the qualifying accounts
receivable and is calculated monthly. The beneficial interest
sold cannot exceed the maximum
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LENNOX
INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
amount even if our qualifying accounts receivable is greater
than the maximum amount at any point in time. The eligible
amounts available were as follows (in millions):
| For the Years Ended December 31, | ||||||||
| 2009 | 2008 | |||||||
|
Eligible amount available under the ASA on qualified accounts
receivable
|
$ | 72.5 | $ | 91.0 | ||||
|
Beneficial interest sold
|
— | (30.0 | ) | |||||
|
Remaining amount available
|
$ | 72.5 | $ | 61.0 | ||||
Under the ASA, we pay certain discount fees to use the program
and have the facility available to us. These fees relate to both
the used and unused portions of the securitization. The used fee
is based on the beneficial interest sold and calculated on the
average floating commercial paper rate determined by the
purchaser of the beneficial interest, plus a program fee of
1.15%. The rate as of December 31, 2009 was 1.38%. The
unused fee is based on 102% of the maximum available amount less
the beneficial interest sold and calculated at 0.5% fixed rate
throughout the term of the agreement. We recorded these fees in
Selling, General and Administrative Expenses in the accompanying
Consolidated Statements of Operations. The amounts recorded were
as follows (in millions):
| For the Years Ended December 31, | ||||||||||||
| 2009 | 2008 | 2007 | ||||||||||
|
Discount fees
|
$ | 0.7 | $ | 0.2 | $ | 0.2 | ||||||
| 13. | Employee Benefit Plans: |
Defined
Contribution Plans
We maintain noncontributory profit sharing plans for our
eligible domestic and Canadian salaried employees. These plans
are discretionary, as our contributions are determined annually
by the Board of Directors. We also sponsor several 401(k) plans
with employer contribution-matching requirements. We recorded
the following (in millions):
| For the Years Ended December 31, | ||||||||||||
| 2009 | 2008 | 2007 | ||||||||||
|
Provisions for profit sharing contributions
|
$ | — | $ | 3.0 | $ | 8.0 | ||||||
|
Contributions to 401(k) plans
|
$ | 12.4 | $ | 1.6 | $ | 1.7 | ||||||
Pension
and Postretirement Benefit Plans
We provide pension and postretirement medical benefits to
eligible domestic and foreign employees. In the third quarter of
2008, we announced that we were freezing our defined benefit
pension and profit sharing plans for our domestic and Canadian
salaried employees and moving to an enhanced 401(k) plan in 2009
for our domestic salaried employees and 2010 for our Canadian
salaried employees. We also maintain an unfunded postretirement
benefit plan, which provides certain medical and life insurance
benefits to eligible employees. In 2006, we amended the
postretirement benefit plan to (i) eliminate post-65
coverage for current and future nonunion retirees and
(ii) gradually shift the pre-65 medical coverage cost from
us to participants starting in 2007 such that by 2010, pre-65
retirees would be paying 100% of the cost. As a result of this
amendment, the postretirement plan will still exist in 2010 and
eligible nonunion participants will still be able to receive
group coverage rates. However, we will no longer be paying any
portion of the participants’ premiums.
73
Table of Contents
LENNOX
INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
The following tables set forth amounts recognized in our
financial statements and the plans’ funded status (dollars
in millions):
| Pension Benefits | Other Benefits | |||||||||||||||
| 2009 | 2008 | 2009 | 2008 | |||||||||||||
|
Accumulated benefit obligation
|
$ | 296.1 | $ | 280.1 | $ | N/A | $ | N/A | ||||||||
|
Changes in projected benefit obligation:
|
||||||||||||||||
|
Benefit obligation at beginning of year
|
$ | 284.6 | $ | 261.1 | $ | 14.1 | $ | 17.7 | ||||||||
|
Service cost
|
5.6 | 6.8 | 0.5 | 0.7 | ||||||||||||
|
Interest cost
|
17.5 | 16.4 | 0.8 | 0.8 | ||||||||||||
|
Plan participants’ contributions
|
— | 0.1 | 1.0 | 0.9 | ||||||||||||
|
Amendments
|
— | — | — | (2.5 | ) | |||||||||||
|
Actuarial loss (gain)
|
9.1 | 32.1 | 1.3 | (0.4 | ) | |||||||||||
|
Effect of exchange rates
|
3.9 | (8.3 | ) | — | — | |||||||||||
|
Settlements and curtailments
|
(2.6 | ) | (7.1 | ) | (0.9 | ) | — | |||||||||
|
Benefits paid
|
(18.7 | ) | (16.5 | ) | (2.4 | ) | (3.1 | ) | ||||||||
|
Benefit obligation at end of year
|
$ | 299.4 | $ | 284.6 | $ | 14.4 | $ | 14.1 | ||||||||
|
Changes in plan assets:
|
||||||||||||||||
|
Fair value of plan assets at beginning of year
|
$ | 174.0 | $ | 224.6 | $ | — | $ | — | ||||||||
|
Actual gain (loss) return on plan assets
|
33.0 | (59.3 | ) | — | — | |||||||||||
|
Employer contribution
|
42.2 | 33.4 | 1.4 | 2.2 | ||||||||||||
|
Plan participants’ contributions
|
— | 0.1 | 1.0 | 0.9 | ||||||||||||
|
Effect of exchange rates
|
3.0 | (6.0 | ) | — | — | |||||||||||
|
Plan settlements
|
(2.4 | ) | (2.3 | ) | — | — | ||||||||||
|
Benefits paid
|
(18.7 | ) | (16.5 | ) | (2.4 | ) | (3.1 | ) | ||||||||
|
Fair value of plan assets at end of year
|
231.1 | 174.0 | — | — | ||||||||||||
|
Funded status / net amount recognized
|
$ | (68.3 | ) | $ | (110.6 | ) | $ | (14.4 | ) | $ | (14.1 | ) | ||||
|
Net amount recognized consists of:
|
||||||||||||||||
|
Current liability
|
$ | (1.6 | ) | $ | (2.9 | ) | $ | (1.0 | ) | $ | (1.6 | ) | ||||
|
Non-current liability
|
(66.7 | ) | (107.7 | ) | (13.4 | ) | (12.5 | ) | ||||||||
|
Net amount recognized
|
$ | (68.3 | ) | $ | (110.6 | ) | $ | (14.4 | ) | $ | (14.1 | ) | ||||
Included in the Non-Current Pension Liability on the
Consolidated Balance Sheets were plans with an over-funded
position of $0.1 million and $0.2 million as of
December 31, 2009 and 2008, respectively (in millions).
|
For the Years Ended
|
||||||||
| December 31, | ||||||||
| 2009 | 2008 | |||||||
|
Pension plans with a benefit obligation in excess of plan
assets:
|
||||||||
|
Projected benefit obligation
|
$ | 298.7 | $ | 284.0 | ||||
|
Accumulated benefit obligation
|
295.4 | 279.5 | ||||||
|
Fair value of plan assets
|
230.3 | 173.3 | ||||||
Our
U.S.-based
pension plans comprised approximately 88.3% of the projected
benefit obligation and 89.4% of plan assets as of
December 31, 2009.
74
Table of Contents
LENNOX
INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
| Pension Benefits | Other Benefits | |||||||||||||||||||||||
| 2009 | 2008 | 2007 | 2009 | 2008 | 2007 | |||||||||||||||||||
|
Components of net periodic benefit cost as of December 31:
|
||||||||||||||||||||||||
|
Service cost
|
$ | 5.6 | $ | 6.8 | $ | 6.9 | $ | 0.5 | $ | 0.8 | $ | 0.6 | ||||||||||||
|
Interest cost
|
17.5 | 16.4 | 14.9 | 0.8 | 0.8 | 0.8 | ||||||||||||||||||
|
Expected return on plan assets
|
(16.7 | ) | (17.6 | ) | (17.2 | ) | — | — | — | |||||||||||||||
|
Amortization of prior service cost
|
0.5 | 0.6 | 0.9 | (1.9 | ) | (1.9 | ) | (1.7 | ) | |||||||||||||||
|
Recognized actuarial loss
|
8.9 | 4.6 | 4.8 | 1.2 | 1.1 | 1.0 | ||||||||||||||||||
|
Settlements and curtailments
|
1.0 | 3.1 | 8.7 | (0.6 | ) | — | — | |||||||||||||||||
|
Net periodic benefit cost
|
$ | 16.8 | $ | 13.9 | $ | 19.0 | $ | — | $ | 0.8 | $ | 0.7 | ||||||||||||
The following table sets forth amounts recognized in AOCL in our
financial statements for 2009 and 2008 (in millions):
| Pension Benefits | Other Benefits | |||||||||||||||
| 2009 | 2008 | 2009 | 2008 | |||||||||||||
|
Amounts recognized in other comprehensive income (loss):
|
||||||||||||||||
|
Prior service costs
|
$ | (4.0 | ) | $ | (4.5 | ) | $ | 16.5 | $ | 19.0 | ||||||
|
Actuarial loss
|
(156.6 | ) | (172.5 | ) | (18.7 | ) | (19.5 | ) | ||||||||
|
Subtotal
|
(160.6 | ) | (177.0 | ) | (2.2 | ) | (0.5 | ) | ||||||||
|
Deferred taxes
|
58.6 | 65.8 | 0.8 | 0.2 | ||||||||||||
|
Net amount recognized
|
$ | (102.0 | ) | $ | (111.2 | ) | $ | (1.4 | ) | $ | (0.3 | ) | ||||
|
Changes recognized in other comprehensive income (loss):
|
||||||||||||||||
|
Current year prior service costs
|
$ | — | $ | 0.1 | — | $ | (2.6 | ) | ||||||||
|
Current year actuarial loss (gain)
|
(7.5 | ) | 104.3 | 0.5 | (0.4 | ) | ||||||||||
|
Effect of exchange rates
|
1.5 | (2.9 | ) | — | — | |||||||||||
|
Amortization of prior service credits (costs)
|
(0.5 | ) | (1.8 | ) | 2.5 | 2.0 | ||||||||||
|
Amortization of actuarial loss
|
(9.9 | ) | (6.6 | ) | (1.3 | ) | (1.1 | ) | ||||||||
|
Total recognized in other comprehensive income
|
$ | (16.4 | ) | $ | 93.1 | $ | 1.7 | $ | (2.1 | ) | ||||||
|
Total recognized in net periodic benefit cost and other
comprehensive income (loss)
|
$ | 0.4 | $ | 107.0 | $ | 1.7 | $ | (1.3 | ) | |||||||
The estimated prior service (costs) credits and actuarial gains
(losses) that will be amortized from AOCL in 2010 are
$(0.5) million and $(8.6) million, respectively, for
pension benefits and $1.9 million and $(1.2) million,
respectively, for other benefits.
75
Table of Contents
LENNOX
INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
The following tables set forth the weighted-average assumptions
used to determine Benefit Obligations and Net Periodic Benefit
Cost for the
U.S.-based
plans in 2009 and 2008:
| Pension Benefits | Other Benefits | |||||||||||||||
| 2009 | 2008 | 2009 | 2008 | |||||||||||||
|
Weighted-average assumptions used to determine benefit
obligations as of December 31:
|
||||||||||||||||
|
Discount rate
|
6.07 | % | 6.27 | % | 5.95 | % | 6.42 | % | ||||||||
|
Rate of compensation increase
|
4.23 | 4.19 | — | — | ||||||||||||
| Pension Benefits | Other Benefits | |||||||||||||||||||||||
| 2009 | 2008 | 2007 | 2009 | 2008 | 2007 | |||||||||||||||||||
|
Weighted-average assumptions used to determine net periodic
benefit cost for the years ended December 31:
|
||||||||||||||||||||||||
|
Discount rate
|
6.27 | % | 6.48 | % | 5.89 | % | 6.42 | % | 6.36 | % | 5.82 | % | ||||||||||||
|
Expected long-term return on plan assets
|
8.25 | 8.25 | 8.25 | — | — | — | ||||||||||||||||||
|
Rate of compensation increase
|
4.19 | 4.34 | 4.30 | — | — | — | ||||||||||||||||||
The following tables set forth the weighted-average assumptions
used to determine Benefit Obligations and Net Periodic Benefit
Cost for the
non-U.S.-based
plans in 2009 and 2008:
| Pension Benefits | ||||||||
| 2009 | 2008 | |||||||
|
Weighted-average assumptions used to determine benefit
obligations as of December 31:
|
||||||||
|
Discount rate
|
5.98 | % | 6.57 | % | ||||
|
Rate of compensation increase
|
3.98 | 3.90 | ||||||
| Pension Benefits | ||||||||||||
| 2009 | 2008 | 2007 | ||||||||||
|
Weighted-average assumptions used to determine net periodic
benefit cost for the years ended December 31:
|
||||||||||||
|
Discount rate
|
6.57 | % | 5.60 | % | 5.14 | % | ||||||
|
Expected long-term return on plan assets
|
6.24 | 6.61 | 6.69 | |||||||||
|
Rate of compensation increase
|
3.90 | 4.22 | 4.00 | |||||||||
To develop the expected long-term rate of return on assets
assumption for the U.S. plans, we considered the historical
returns and the future expectations for returns for each asset
category, as well as the target asset allocation of the pension
portfolio and the effect of periodic rebalancing. These results
were adjusted for the payment of reasonable expenses of the plan
from plan assets. This resulted in the selection of the 8.25%
long-term rate of return on assets assumption. A similar process
was followed for the
non-U.S.-based
plans.
To select a discount rate for the purpose of valuing the plan
obligations for the U.S. plans, we performed an analysis in
which the duration of projected cash flows from defined benefit
and retiree healthcare plans were matched with a yield curve
based on the appropriate universe of high-quality corporate
bonds that were available. We used the results of the yield
curve analysis to select the discount rate that matched the
duration and payment stream of the benefits in each plan. This
resulted in the selection of the 6.07% discount rate assumption
for the pension benefits and 5.95% for the other benefits. A
similar process was followed for the
non-U.S.-based
plans.
76
Table of Contents
LENNOX
INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
| 2009 | 2008 | |||||||
|
Assumed health care cost trend rates as of December 31:
|
||||||||
|
Health care cost trend rate assumed for next year
|
8.75 | % | 8.5 | % | ||||
|
Rate to which the cost rate is assumed to decline (the ultimate
trend rate)
|
5.0 | % | 5.0 | % | ||||
|
Year that the rate reaches the ultimate trend rate
|
2017 | 2015 | ||||||
Assumed health care cost trend rates have a significant effect
on the amounts reported for our healthcare plan. A one
percentage-point change in assumed healthcare cost trend rates
would have the following effects (in millions):
|
1-Percentage-
|
1-Percentage-
|
|||||||
| Point Increase | Point Decrease | |||||||
|
Effect on total of service and interest cost
|
$ | 0.1 | $ | (0.1 | ) | |||
|
Effect on the postretirement benefit obligation
|
1.5 | (1.3 | ) | |||||
Expected future benefit payments are shown in the table below
(in millions):
| Years Ended December 31, | ||||||||||||||||||||||||
| 2010 | 2011 | 2012 | 2013 | 2014 | 2015- 2019 | |||||||||||||||||||
|
Pension benefits
|
$ | 16.1 | $ | 16.6 | $ | 21.8 | $ | 19.6 | $ | 18.4 | $ | 103.3 | ||||||||||||
|
Other benefits
|
1.0 | 1.0 | 1.0 | 1.0 | 1.1 | 6.8 | ||||||||||||||||||
We utilize professional investment advisors to assist us in
determining the appropriate investment structure for our
U.S. pension plan assets. We believe that by adequately
diversifying the plan assets, asset returns can be optimized at
an acceptable level of risk. Since equity securities have
historically generated higher returns than fixed income
securities and the plan is not fully funded, we believe it is
appropriate to allocate more assets to equities than fixed
income securities. In the fourth quarter of 2009, in order to
increase diversification, we changed the targeted allocations
for our plan assets. The target allocations for fixed income,
money market, cash and guaranteed investment contracts
investments increased from 32% to 40% while targeted equity
investment allocations declined from 68% to 60%. At the same
time, we increased our exposure to International equity from 15%
to 24% of total assets while reducing our exposure to domestic
equity from 53% to 36%. In addition, these categories are
further diversified among various asset classes including high
yield and emerging markets debt, and international and emerging
markets equities in order to avoid significant concentrations of
risk. Our U.S. pension plan represents approximately 90%,
our Canadian pension plan approximately 6%, and our U.K. pension
plan approximately 4% of the total fair value of our plan assets
as of December 31, 2009.
Our U.S. pension plans’ weighted-average asset
allocations as of December 31, 2009 and 2008, by asset
category, are as follows:
| Plan Assets as of December 31, | ||||||||
|
Asset Category
|
2009 | 2008 | ||||||
|
U.S. equity
|
33.2 | % | 44.7 | % | ||||
|
International equity
|
25.8 | 12.7 | ||||||
|
Fixed income
|
36.8 | 26.3 | ||||||
|
Money market/cash/guaranteed investment contracts
|
4.2 | 16.3 | ||||||
|
Total
|
100.0 | % | 100.0 | % | ||||
77
Table of Contents
LENNOX
INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
U.S. pension plan investments are invested within the
following range targets:
|
Asset Category
|
Target | + / - | ||||||
|
U.S. equity
|
36.0 | % | + / −2.5% | |||||
|
International equity
|
24.0 | % | + / −2.5% | |||||
|
Fixed income
|
38.0 | % | + / −2.0% | |||||
|
Money market/cash/guaranteed investment contracts
|
2.0 | % | + 3.0% / −2.0% | |||||
Our Canadian pension plan is invested in only one asset, which
is a balanced fund that maintains diversification among various
asset classes, including Canadian common stocks, bonds and money
market securities, U.S. equities, other international
equities and fixed income investments. Our U.K. pension plan was
primarily invested in a guaranteed insurance contract as well as
a U.K. money market fund.
The fair values of our pension plan assets, by asset category,
are as follows:
|
Fair Value Measurements as of
|
||||||||||||||||
| December 31, 2009 | ||||||||||||||||
|
Significant
|
||||||||||||||||
|
Quoted Prices in
|
Other
|
Significant
|
||||||||||||||
|
Active Markets for
|
Observable
|
Unobservable
|
||||||||||||||
|
Identical Assets
|
Inputs
|
Inputs
|
||||||||||||||
| (Level 1) | (Level 2) | (Level 3) | Total | |||||||||||||
|
Assets Category:
|
||||||||||||||||
|
Cash and cash equivalents
|
$ | 8.9 | $ | — | $ | — | $ | 8.9 | ||||||||
|
Commingled pools / Collective Trusts
|
||||||||||||||||
|
U.S. equity(1)
|
— | 45.5 | — | 45.5 | ||||||||||||
|
International equity(2)
|
— | 47.2 | — | 47.2 | ||||||||||||
|
Fixed income(3)
|
— | 69.7 | — | 69.7 | ||||||||||||
|
Mutual funds
|
||||||||||||||||
|
U.S. equity(4)
|
23.0 | — | — | 23.0 | ||||||||||||
|
International equity(4)
|
6.0 | — | — | 6.0 | ||||||||||||
|
Fixed income(5)
|
6.0 | — | — | 6.0 | ||||||||||||
|
Balanced pension trust(6)
|
||||||||||||||||
|
U.S. equity
|
— | 2.0 | — | 2.0 | ||||||||||||
|
International equity
|
— | 7.0 | — | 7.0 | ||||||||||||
|
Bonds
|
— | 5.1 | — | 5.1 | ||||||||||||
|
Guaranteed investment contracts
|
— | 10.7 | — | 10.7 | ||||||||||||
|
Total
|
$ | 43.9 | $ | 187.2 | $ | — | $ | 231.1 | ||||||||
78
Table of Contents
LENNOX
INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Additional information about assets measured at Net Asset Value
(“NAV”) per share (in millions):
| As of December 31, 2009 | ||||||||||||
|
Redemption Frequency
|
Redemption Notice
|
|||||||||||
| Fair Value | (if currently eligible) | Period | ||||||||||
|
Assets Category:
|
||||||||||||
|
Commingled pools / Collective Trusts
|
||||||||||||
|
U.S. equity(1)
|
$ | 45.5 | Daily | 4 days | ||||||||
|
International equity(2)
|
47.2 | Daily, Monthly | 4 — 15 days | |||||||||
|
Fixed income(3)
|
69.7 | Quarterly | 15 days | |||||||||
|
Mutual funds
|
||||||||||||
|
U.S. equity(4)
|
23.0 | n/a | n/a | |||||||||
|
International equity(4)
|
6.0 | n/a | n/a | |||||||||
|
Fixed income(5)
|
6.0 | n/a | n/a | |||||||||
|
Balanced pension trust(6)
|
||||||||||||
|
U.S. equity
|
2.0 | Daily | 5 days | |||||||||
|
International equity
|
7.0 | Daily | 5 days | |||||||||
|
Bonds
|
5.1 | Daily | 5 days | |||||||||
|
Total
|
$ | 211.5 | ||||||||||
| (1) | This category includes investments primarily in U.S. equity securities that include large, mid and small capitalization companies. | |
| (2) | This category includes investments primarily in non-U.S. equity securities that include large, mid and small capitalization companies in large developed markets as well as emerging markets equities. | |
| (3) | This category includes investments in U.S. investment grade and high yield fixed income securities, non-U.S. fixed income securities and emerging markets fixed income securities. | |
| (4) | These funds seek capital appreciation and generally invest in common stocks of U.S. and Non-U.S. issuers. They may invest in growth stocks or value stocks. | |
| (5) | This fund seeks to provide inflation protection. It currently invests at least 80% of its assets in inflation-indexed bonds issued by the U.S. government. It may invest in bonds of any maturity, though the fund typically maintains a dollar-weighted average maturity of 7 to 20 years. | |
| (6) | The investment objectives of the fund are to provide long-term capital growth and income by investing primarily in a well-diversified, balanced portfolio of Canadian common stocks, bonds and money market securities. The fund also holds a portion of its assets in U.S. and non-U.S. equities. |
The majority of our commingled pool /collective trust, mutual
funds and balanced pension trusts are managed by professional
investment advisors. The NAVs per share are furnished in monthly
and/or
quarterly statements received from the investment advisors and
reflect valuations based upon their pricing policies. We have
assessed the classification of the inputs used to value these
investments at Level 1 for mutual funds and Level 2
for commingled pool / collective trusts and balance
pension trusts through examination of their pricing policies and
the related controls and procedures. The fair values we report
are based on the pool or trust’s NAV per share. The
NAV’s per share are calculated periodically (daily or no
less than one time per month) as the aggregate value of each
pool or trust’s underlying assets divided by the number of
units owned.
See Note 22 for information about our fair value
hierarchies and valuation techniques.
79
Table of Contents
LENNOX
INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
| 14. | Comprehensive Income (Loss): |
Our accumulated balances, shown net of tax for each
classification of comprehensive income (loss) are as follows (in
millions):
|
Foreign
|
||||||||||||||||
|
Currency
|
Pension and
|
|||||||||||||||
|
Translation
|
Postretirement
|
Derivatives
|
||||||||||||||
| Adjustment | Liability | and Other | Total | |||||||||||||
|
Balance as of December 31, 2006
|
$ | 55.8 | $ | (58.8 | ) | $ | (2.1 | ) | $ | (5.1 | ) | |||||
|
Net change in currency translation and pension and
postretirement liability during 2007
|
62.9 | 3.2 | — | 66.1 | ||||||||||||
|
Net change associated with 2007 derivative and other transactions
|
— | — | 9.0 | 9.0 | ||||||||||||
|
Reclassification of derivative gains into earnings
|
— | — | (6.4 | ) | (6.4 | ) | ||||||||||
|
Balance as of December 31, 2007
|
118.7 | (55.6 | ) | 0.5 | 63.6 | |||||||||||
|
Net change in currency translation and pension and
postretirement liability during 2008
|
(84.9 | ) | (55.9 | ) | — | (140.8 | ) | |||||||||
|
Net change associated with 2008 derivative and other transactions
|
— | — | (14.9 | ) | (14.9 | ) | ||||||||||
|
Reclassification of derivative gains into earnings
|
— | — | (6.7 | ) | (6.7 | ) | ||||||||||
|
Balance as of December 31, 2008
|
$ | 33.8 | $ | (111.5 | ) | $ | (21.1 | ) | $ | (98.8 | ) | |||||
|
Net change in currency translation and pension and
postretirement liability during 2009
|
59.5 | 8.1 | — | 67.6 | ||||||||||||
|
Net change associated with 2009 derivative and other transactions
|
— | — | 10.7 | 10.7 | ||||||||||||
|
Reclassification of derivative gains into earnings
|
— | — | 19.7 | 19.7 | ||||||||||||
|
Balance as of December 31, 2009
|
$ | 93.3 | $ | (103.4 | ) | $ | 9.3 | $ | (0.8 | ) | ||||||
| 15. | Share Repurchases: |
During 2008, our Board of Directors approved a
$300.0 million share repurchase plan authorizing the
repurchase shares of our common stock through open market
purchases (the “2008 Plan”). Also, during 2007, our
Board of Directors approved a $500.0 million share
repurchase plan authorizing the repurchase of shares of our
common stock through open market purchases (the “2007
Plan”).
80
Table of Contents
LENNOX
INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
The following table summarizes the share repurchase activity for
years ended December 31, 2009, 2008 and 2007, by share
repurchase plan and those related to share-based payments (in
millions, except per share data):
|
Related to
|
Total Share
|
|||||||||||||||||||
|
Share-Based
|
Repurchase
|
|||||||||||||||||||
| Payments | 2008 Plan | 2007 Plan | 2005 Plan | Activity | ||||||||||||||||
|
2009 share repurchase activity:
|
||||||||||||||||||||
|
Number of shares
|
0.2 | — | — | — | 0.2 | |||||||||||||||
|
Weighted average price per share
|
$ | 30.55 | $ | — | $ | — | $ | — | $ | 30.55 | ||||||||||
|
Amount Repurchased
|
$ | 5.6 | $ | — | $ | — | $ | — | $ | 5.6 | ||||||||||
|
2008 share repurchase activity:
|
||||||||||||||||||||
|
Number of shares
|
0.4 | 0.6 | 8.3 | — | 9.3 | |||||||||||||||
|
Weighted average price per share
|
$ | 35.10 | $ | 24.32 | $ | 35.72 | $ | — | $ | 34.95 | ||||||||||
|
Amount repurchased
|
$ | 12.5 | $ | 14.7 | $ | 296.6 | $ | — | $ | 323.8 | ||||||||||
|
2007 share repurchase activity:
|
||||||||||||||||||||
|
Number of shares
|
0.2 | — | 5.9 | 1.3 | 7.4 | |||||||||||||||
|
Weighted average price per share
|
$ | 35.19 | $ | — | $ | 34.59 | $ | 34.46 | $ | 34.62 | ||||||||||
|
Amount repurchased
|
$ | 6.8 | $ | — | $ | 203.4 | $ | 43.4 | $ | 253.6 | ||||||||||
| 16. | Stock Rights: |
On July 27, 2000, our Board of Directors declared a
dividend of one right (“Right”) for each outstanding
share of our common stock to stockholders of record at the close
of business on August 7, 2000. Each Right entitles the
registered holder to purchase a unit consisting of one
one-hundredth of a share (a “Fractional Share”) of
Series A Junior Participating Preferred Stock, par value
$.01 per share, at a purchase price of $75.00 per Fractional
Share, subject to adjustment. The Rights will separate from the
common stock and a distribution date will occur, with certain
exceptions, upon the earlier of ten days following a public
announcement that a person or group has acquired 15% or more of
the outstanding shares of our common stock, or the commencement
of a tender offer or exchange offer that would result in a
person or group acquiring 15% or more of the outstanding shares
of our common stock. The rights are not exercisable until the
distribution date and will expire at the close of business on
July 27, 2010, unless earlier redeemed or exchanged by us.
| 17. | Stock-Based Compensation Plans: |
Stock-Based Compensation expense is included in SG&A
Expenses in the accompanying Consolidated Statements of
Operations as follows (in millions):
| For the Years Ended December 31, | ||||||||||||
| 2009 | 2008 | 2007 | ||||||||||
|
Compensation expense(1)
|
$ | 12.8 | $ | 11.8 | $ | 21.0 | ||||||
| (1) | Stock-Based Compensation expense is recorded in our Corporate and other business segment. |
Excess tax benefits classified as a financing cash inflow in the
accompanying Consolidated Statements of Cash Flows were as
follows (in millions):
| For the Years Ended December 31, | ||||||||||||
| 2009 | 2008 | 2007 | ||||||||||
|
Excess tax benefits
|
$ | 4.9 | $ | 11.0 | $ | 17.9 | ||||||
81
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LENNOX
INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Incentive
Plan
Under the Amended and Restated 1998 Incentive Plan (the
“1998 Incentive Plan”), we are authorized to issue
awards for 24,254,706 shares of common stock. As of
December 31, 2009, awards for 20,440,687 shares of
common stock had been granted, net of cancellations and
repurchases. Consequently, as of December 31, 2009, there
were 3,814,019 shares available for future issuance.
The 1998 Incentive Plan provides for various long-term incentive
awards, which include stock options, performance share units,
restricted stock units and stock appreciation rights. A
description of these long-term incentive awards and related
activity within each award category is provided below.
Performance
Share Units
Total compensation expense for performance share units was
$1.8 million, $3.4 million and $11.5 million for
the years ended December 31, 2009, 2008 and 2007,
respectively. The weighted-average fair value of performance
share units granted during the years ended December 31,
2009, 2008 and 2007 was $35.26, $26.83 and $33.35 per share,
respectively.
Under the 1998 Incentive Plan, performance share units are
granted to certain employees at the discretion of the Board of
Directors with a three-year performance period beginning
January 1st of each year. Upon meeting the performance
and vesting criteria, performance share units are converted to
an equal number of shares of our common stock. Outstanding
awards granted prior to 2003 vest after ten years of service at
the target amount.
Performance share units vest if, at the end of the three-year
performance period, at least the threshold performance level has
been attained. To the extent that the payout level attained is
less than 100%, the difference between 100% and the units earned
and distributed will be forfeited. Eligible participants may
also earn additional units of our common stock, which would
increase the potential payout from 101% to 200% of the units
granted, depending on LII’s performance over the three-year
performance period. The payout level for shares paid during
years ended December 31, 2009, 2008 and 2007 was 200%, 200%
and 200%, respectively.
Performance share units under the 1998 Incentive Plan are
classified as equity awards, with the fair value of each unit
equal to the average of the high and low market price of the
stock on the date of grant for units granted prior to December
2007. The fair value of units granted after December 2007 is the
average of the high and low market price of the stock on the
date of grant discounted by the expected dividend rate over the
service period. Units are amortized to expense ratably over the
service period. The compensation expense for any additional
units which may be earned is estimated each reporting period
based on the fair value of the stock at the date of grant. The
number of units expected to be earned will be adjusted, as
necessary, to reflect the actual number of units awarded.
A summary of the status of our undistributed performance share
units as of December 31, 2009, and changes during the year
then ended, is presented below (in millions, except per share
data):
| Year Ended December 31, 2009 | ||||||||
|
Weighted-Average
|
||||||||
|
Grant Date
|
||||||||
| Shares | Fair Value per Share | |||||||
|
Undistributed performance share units:
|
||||||||
|
Undistributed as of December 31, 2008
|
1.0 | $ | 26.83 | |||||
|
Granted
|
0.2 | 35.26 | ||||||
|
Additional shares earned
|
0.2 | 29.36 | ||||||
|
Distributed
|
(0.4 | ) | 27.84 | |||||
|
Forfeited
|
— | 29.77 | ||||||
|
Undistributed as of December 31, 2009(1)
|
1.0 | 28.68 | ||||||
82
Table of Contents
LENNOX
INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
| (1) | Undistributed performance share units as of December 31, 2009 include approximately 0.8 million units with a weighted-average grant date fair value of $27.87 per share that had not yet vested. |
As of December 31, 2009, we had approximately
$10.6 million of total unrecognized compensation cost
related to nonvested performance share units. Such cost is
expected to be recognized over a weighted-average period of
2.6 years. Our estimated forfeiture rate for performance
share units was 25% as of December 31, 2009.
The total fair value of performance share units distributed and
the resulting tax deductions to realize tax benefits were as
follows (in millions):
| For the Years Ended December 31, | ||||||||||||
| 2009 | 2008 | 2007 | ||||||||||
|
Fair value of performance share units distributed
|
$ | 9.6 | $ | 28.2 | $ | 13.1 | ||||||
|
Realized tax benefits from tax deductions
|
3.7 | 10.7 | 5.0 | |||||||||
Our practice is to issue new shares of common stock to satisfy
performance share unit distributions.
Restricted
Stock Units
Total compensation expense for restricted stock units was
$6.6 million, $4.6 million and $6.3 million for
the years ended December 31, 2009, 2008 and 2007,
respectively. The weighted-average fair value of restricted
stock units granted during the years ended December 31,
2009, 2008 and 2007 was $35.09, $27.48 and $33.52 per share,
respectively.
Under the 1998 Incentive Plan, restricted stock units are issued
to attract and retain key employees. Generally, at the end of a
three-year retention period, the units will vest and be
distributed in shares of our common stock to the participant.
Restricted stock units under the 1998 Incentive Plan are
classified as equity awards, with the fair value of each unit
equal to the average of the high and low market price of the
stock on the date of grant for units granted prior to December
2007. The fair value of units granted after December 2007 is the
average of the high and low market price of the stock on the
date of grant discounted by the expected dividend rate over the
service period. Units are amortized to compensation expense
ratably over the service period.
A summary of the status of our nonvested restricted stock units
as of December 31, 2009 and changes during the year then
ended is presented below (in millions, except per share data):
| Year Ended December 31, 2009 | ||||||||
|
Weighted-Average
|
||||||||
|
Grant Date
|
||||||||
| Shares | Fair Value per Share | |||||||
|
Nonvested restricted stock units:
|
||||||||
|
Nonvested as of December 31, 2008
|
0.8 | $ | 30.18 | |||||
|
Granted
|
0.2 | 35.09 | ||||||
|
Vested
|
(0.2 | ) | 32.35 | |||||
|
Forfeited
|
(0.1 | ) | 29.66 | |||||
|
Nonvested as of December 31, 2009
|
0.7 | 31.14 | ||||||
As of December 31, 2009, we had approximately
$13.2 million of total unrecognized compensation cost
related to nonvested restricted stock units. Such cost is
expected to be recognized over a weighted-average period of
2.3 years. Our estimated forfeiture rate for restricted
stock units was 16% as of December 31, 2009.
83
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LENNOX
INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
The total fair value of restricted stock units vested and the
resulting tax deductions to realize tax benefits were as follows
(in millions):
| For the Years Ended December 31, | ||||||||||||
| 2009 | 2008 | 2007 | ||||||||||
|
Fair value of restricted stock units vested
|
$ | 8.3 | $ | 6.4 | $ | 12.8 | ||||||
|
Realized tax benefits from tax deductions
|
3.2 | 2.4 | 4.8 | |||||||||
Our practice is to issue new shares of common stock to satisfy
restricted stock unit vestings.
Stock
Appreciation Rights
Total compensation expense for stock appreciation rights was
$4.4 million, $3.8 million and $2.5 million for
the years ended December 31, 2009, 2008 and 2007,
respectively. The weighted-average fair value of stock
appreciation rights granted during the years ended
December 31, 2009, 2008 and 2007 was $10.96, $6.84 and
$8.43 per share, respectively.
In 2003, we began awarding stock appreciation rights. Each
recipient is given the “right” to receive a value
equal to the future appreciation of our common stock price. The
value is paid in shares of our common stock. Stock appreciation
rights generally vest in one-third increments beginning on the
first anniversary date after the grant date, and expire after
seven years.
Compensation expense for stock appreciation rights granted is
based on the fair value on the date of grant and is recognized
over the service period. The fair value for these awards is
estimated using the Black-Scholes-Merton valuation model. We use
historical stock price data and other pertinent information to
estimate the expected volatility and the outstanding period of
the award for separate groups of employees that have similar
historical exercise behavior to estimate expected life. The
risk-free interest rate was based on zero-coupon
U.S. Treasury instruments with a remaining term equal to
the expected life of the stock appreciation right at the time of
grant.
The fair value of each stock appreciation right granted in 2009,
2008 and 2007 is estimated on the date of grant using the
following assumptions:
| For the Years Ended December 31, | ||||||||||||
| 2009 | 2008 | 2007 | ||||||||||
|
Expected dividend yield
|
1.57 | % | 2.05 | % | 1.69 | % | ||||||
|
Risk-free interest rate
|
1.78 | % | 1.40 | % | 3.27 | % | ||||||
|
Expected volatility
|
39.81 | % | 34.08 | % | 28.42 | % | ||||||
|
Expected life (in years)
|
4.12 | 4.18 | 4.35 | |||||||||
84
Table of Contents
LENNOX
INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
A summary of stock appreciation rights activity are as follows
(in millions, except per share data):
| Years Ended December 31, | ||||||||||||||||||||||||
| 2009 | 2008 | 2007 | ||||||||||||||||||||||
|
Weighted-
|
Weighted-
|
Weighted-
|
||||||||||||||||||||||
|
Average
|
Average
|
Average
|
||||||||||||||||||||||
|
Exercise
|
Exercise
|
Exercise
|
||||||||||||||||||||||
|
Price per
|
Price per
|
Price per
|
||||||||||||||||||||||
| Shares | Share | Shares | Share | Shares | Share | |||||||||||||||||||
|
Outstanding at beginning of year
|
2.7 | $ | 29.59 | 2.2 | $ | 29.14 | 1.9 | $ | 25.20 | |||||||||||||||
|
Granted
|
0.6 | 36.94 | 1.0 | 28.36 | 0.7 | 34.60 | ||||||||||||||||||
|
Exercised
|
(0.2 | ) | 28.31 | (0.3 | ) | 21.68 | (0.3 | ) | 18.57 | |||||||||||||||
|
Forfeited
|
(0.2 | ) | 30.59 | (0.2 | ) | 32.68 | (0.1 | ) | 30.47 | |||||||||||||||
|
Outstanding at end of year
|
2.9 | $ | 31.06 | 2.7 | $ | 29.59 | 2.2 | $ | 29.14 | |||||||||||||||
|
Exercisable at end of year
|
1.6 | $ | 29.58 | 1.1 | $ | 28.65 | 1.0 | $ | 24.40 | |||||||||||||||
The following table summarizes information about stock
appreciation rights outstanding as of December 31, 2009 (in
millions, except per share data and years):
| Stock Appreciation Rights Outstanding | Stock Appreciation Rights Exercisable | |||||||||||||||
|
Weighted-Average
|
Weighted-Average
|
|||||||||||||||
|
Remaining
|
Remaining
|
|||||||||||||||
|
Range of Exercise
|
Contractual Term
|
Aggregate Intrinsic
|
Contractual Life
|
Aggregate Intrinsic
|
||||||||||||
|
Prices per Share
|
(in years) | Value | (in years) | Value | ||||||||||||
|
16.76-37.11
|
5.0 | 23.0 | 4.0 | 14.8 | ||||||||||||
As of December 31, 2009, we had approximately
$10.0 million of unrecognized compensation cost related to
nonvested stock appreciation rights. Such cost is expected to be
recognized over a weighted-average period of 2.4 years. Our
estimated forfeiture rate for stock appreciation rights was 18%
as of December 31, 2009.
The total intrinsic value of stock appreciation rights exercised
and the resulting tax deductions to realize tax benefits were as
follows (in millions):
| For the Years Ended December 31, | ||||||||||||
| 2009 | 2008 | 2007 | ||||||||||
|
Intrinsic value of stock appreciation rights exercised
|
$ | 1.5 | $ | 5.5 | $ | 5.6 | ||||||
|
Realized tax benefits from tax deductions
|
0.6 | 2.1 | 2.1 | |||||||||
Our practice is to issue new shares of common stock to satisfy
the exercise of stock appreciation rights.
| 18. | Restructuring Charges: |
As part of our strategic priorities of manufacturing and
sourcing excellence and expense reduction, we have initiated
various manufacturing rationalization actions designed to lower
our cost structure. We also continue to reorganize our North
American distribution network in order to better serve our
customers’ needs by deploying parts and equipment inventory
closer to them. We also have initiated a number of activities
that rationalize and reorganize various support and
administrative functions to reduce ongoing selling and
administrative expenses.
85
Table of Contents
LENNOX
INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Information
on Total Restructuring Charges and Related
Reserves
Restructuring charges incurred as a result of the actions
include the following amounts (in millions):
| For the Years Ended December 31, | ||||||||||||
| 2009 | 2008(1) | 2007(1) | ||||||||||
|
Manufacturing rationalizations
|
$ | 30.1 | $ | 19.7 | $ | 15.8 | ||||||
|
Reorganization of distribution network
|
0.1 | 2.9 | — | |||||||||
|
Reorganizations of corporate and business unit administrative
functions
|
11.3 | 7.8 | 10.0 | |||||||||
|
Other
|
— | — | (0.6 | ) | ||||||||
|
Total
|
$ | 41.5 | $ | 30.4 | $ | 25.2 | ||||||
| (1) | Restructuring charges for manufacturing rationalizations included pension curtailment charges of $0.9 million for 2008 and $2.0 million in 2007 that have not been reflected in restructuring reserves as these items relate to our pension obligation. These amounts also include pension settlement charges of $0.2 million in 2008 and $0.7 million in 2007. |
In 2009, we incurred restructuring charges of $30.1 million
for manufacturing rationalizations, $0.1 million for the
reorganization of our distribution network in North America and
$11.3 million related to reorganizations of corporate and
business unit administrative functions. The components of these
2009 restructuring charges are discussed in greater detail in
later sections of this footnote.
In 2008, restructuring charges for manufacturing
rationalizations included $9.8 million related to the
closure of our Refrigeration operations in Danville, Illinois
and consolidation of manufacturing, support and warehouse
functions in our Tifton, Georgia and Stone Mountain, Georgia
operations. Manufacturing rationalizations also included charges
of $3.4 million related to the transition of production of
certain Residential Heating & Cooling products from
our Marshalltown, Iowa manufacturing facility to our new
manufacturing operations in Saltillo, Mexico and
$3.1 million related to the transition of production of
selected Refrigeration products manufactured in Milperra,
Australia to its sister facility in Wuxi, China. We also
recorded $1.6 million in restructuring charges related to
the closure of Lennox Hearth Products Inc.’s operations in
Lynwood, California, part of our Residential Heating &
Cooling operations, and the consolidation of our
U.S. factory-built fireplace manufacturing operations into
our facility in Union City, Tennessee.
In 2008, restructuring charges for reorganizations of corporate
and business unit administrative functions included
$4.1 million related to the reorganization of the Northern
European sales support and administrative functions of the
Commercial business unit and $1.1 million in charges
related to the rationalization of our corporate administrative
functions, primarily in the human resources and information
technology areas.
In 2007, restructuring charges for manufacturing
rationalizations included $7.6 million related to the
Danville, Illinois closure and $3.3 million related to the
Lynwood, California plant closure. We also recorded
$3.2 million in restructuring charges related to the
consolidation of the manufacturing, distribution,
research & development, and administrative operations
of Allied Air Enterprises Inc., the Company’s two-step
Residential Heating & Cooling operations, in South
Carolina, and closure of our operations in Bellevue, Ohio.
In 2007, we reorganized our corporate administrative function
and eliminated the position of chief administrative officer. In
connection with this action, we recorded an $8.0 million
liability to settle the terms of his employment agreement, of
which $6.6 million, net of $1.4 million of previously
recorded stock-based compensation expense, was recorded in the
second quarter of 2007. The final settlement of this matter
occurred and an amount equal to the liability recorded was paid
during the second quarter of 2008.
86
Table of Contents
LENNOX
INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Restructuring reserves are included in Accrued Expenses in the
accompanying Consolidated Balance Sheets. The table below
details activity within the restructuring reserves for the years
ended December 31, 2009 and 2008 (in millions):
|
Balance as of
|
Charged
|
Balance as of
|
||||||||||||||||||
|
December 31,
|
to
|
Cash
|
Non-Cash
|
December 31,
|
||||||||||||||||
|
Description of Reserves
|
2008 | Earnings | Utilization | Utilization and Other | 2009 | |||||||||||||||
|
Severance and related expense
|
$ | 9.3 | $ | 27.8 | $ | (16.0 | ) | $ | — | $ | 21.1 | |||||||||
|
Asset write-offs and accelerated depreciation
|
— | 7.7 | — | (7.7 | ) | — | ||||||||||||||
|
Equipment moves
|
— | 1.5 | (1.4 | ) | (0.1 | ) | — | |||||||||||||
|
Lease termination
|
0.6 | 0.8 | (1.1 | ) | — | 0.3 | ||||||||||||||
|
Other(1)
|
1.0 | 3.7 | (4.4 | ) | 0.5 | 0.8 | ||||||||||||||
|
Total restructuring reserves
|
$ | 10.9 | $ | 41.5 | $ | (22.9 | ) | $ | (7.3 | ) | $ | 22.2 | ||||||||
| (1) | Charges classified as ‘Other’ include $1.7 million of manufacturing inefficiencies, $0.8 million third-party services related to restructuring activities and $0.7 million of facilities clean-up and demolition costs. |
|
Balance as of
|
Charged
|
Non-Cash
|
Balance as of
|
|||||||||||||||||
|
December 31,
|
to
|
Cash
|
Utilization and
|
December 31,
|
||||||||||||||||
|
Description of Reserves
|
2007 | Earnings | Utilization | Other | 2008 | |||||||||||||||
|
Severance and related expense
|
$ | 15.2 | $ | 15.0 | $ | (20.9 | ) | $ | — | $ | 9.3 | |||||||||
|
Asset write-offs and accelerated depreciation
|
— | 4.8 | — | (4.8 | ) | — | ||||||||||||||
|
Equipment moves
|
— | 3.0 | (3.0 | ) | — | — | ||||||||||||||
|
Lease termination
|
1.5 | 0.3 | (1.2 | ) | — | 0.6 | ||||||||||||||
|
Other(1)
|
— | 7.3 | (4.7 | ) | (1.6 | ) | 1.0 | |||||||||||||
|
Total restructuring reserves
|
$ | 16.7 | $ | 30.4 | $ | (29.8 | ) | $ | (6.4 | ) | $ | 10.9 | ||||||||
| (1) | Charges classified as ‘Other’ include $2.3 million of manufacturing inefficiencies, $1.6 million third-party services related to restructuring activities and $0.8 million of costs for moving inventories. |
Manufacturing
Rationalization Activities
Information regarding the restructuring charges related to
manufacturing rationalizations is as follows (in millions):
|
Charges
|
Charges
|
Total Charges
|
||||||||||
|
Incurred in
|
Incurred to
|
Expected to be
|
||||||||||
| 2009 | Date | Incurred | ||||||||||
|
Severance and related expense
|
$ | 17.8 | $ | 29.7 | $ | 29.7 | ||||||
|
Asset write-offs and accelerated depreciation
|
7.6 | 12.5 | 13.0 | |||||||||
|
Equipment moves
|
1.2 | 4.8 | 6.7 | |||||||||
|
Other
|
3.5 | 13.5 | 15.5 | |||||||||
|
Total
|
$ | 30.1 | $ | 60.5 | $ | 64.9 | ||||||
Restructuring expense for significant manufacturing
rationalization activities related to the following:
| • | In the first quarter of 2009, we began the consolidation of Residential Heating & Cooling manufacturing operations from Blackville, South Carolina into our operations in Orangeburg, South Carolina and Saltillo, |
87
Table of Contents
LENNOX
INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
| Mexico. Total restructuring charges recorded in 2009 related to this action were $9.7 million. These charges were primarily composed of accelerated depreciation of $5.7 million, severance and employee related costs of $2.5 million and manufacturing inefficiencies of $1.3 million. Total anticipated restructuring charges related to this action are $13.3 million and consist principally of severance, accelerated depreciation, equipment move costs and manufacturing inefficiencies. All of these charges except the accelerated depreciation charges require future cash expenditures, and we intend to fund these with operating cash of $5.0 million. We expect to complete this action during the first half of 2011. |
| • | In the fourth quarter of 2009, we began the consolidation of certain Refrigeration manufacturing operations located in Parets, Spain into our existing operations in Genas, France and we recorded restructuring charges totaling $7.8 million related to this action. As a result of headcount reductions for this action, we recorded severance charges of $6.6 million. We also incurred impairment charges of $1.1 million related to manufacturing equipment that will cease to be used after the consolidation is completed. Total anticipated restructuring charges related to this action are $8.7 million and consist principally of severance, impairment charges and recruiting costs. All of these charges except the impairment charges require future cash expenditures, and we intend to fund these with operating cash of $7.5 million. We expect to complete this action during the first half of 2010. | |
| • | In the third quarter of 2009, we initiated the consolidation of certain Commercial Heating & Cooling manufacturing operations located in Mions, France into our existing manufacturing operations in Longvic, France. As a result of significant headcount reductions for this action, we recorded severance charges of $7.7 million during 2009. Total anticipated restructuring charges related to this action are $7.9 million and consist principally of severance and lease termination costs. All of these charges require future cash expenditures, and we intend to fund these with operating cash of $6.8 million. We expect to complete this action during the third quarter of 2010. | |
| • | In the fourth quarter of 2007, we announced plans to close our Refrigeration operations in Danville, Illinois and consolidate Danville manufacturing, support, and warehouse functions into our Tifton, Georgia and Stone Mountain, Georgia operations. The operations at Danville ceased as of the end of the first quarter of 2009, and the transition was completed in the second quarter of 2009. Total restructuring charges recorded in 2009 related to this action were $2.1 million. These charges were primarily composed of facility clean-up costs, equipment moving costs, and manufacturing inefficiencies incurred prior to the plant closure. Total charges recorded as a result of this action were $19.5 million. This action was completed during 2009. | |
| • | In the second quarter of 2008, we announced the transition of production of selected Refrigeration products currently manufactured in Milperra, Australia to its sister facility in Wuxi, China. Total restructuring charges recorded in 2009 related to this action were $1.1 million and were primarily composed of asset impairments of $0.6 million and severance of $0.4 million. All future charges require cash expenditures, and we intend to fund these with operating cash of $0.6 million. The transition is expected to be complete by the first quarter of 2010. |
Reorganization
of Distribution Network
In the fourth quarter of 2008, we commenced the transition of
activities then performed at our North American Parts Center in
Des Moines, Iowa to other locations, including our North
American Distribution Center in Marshalltown, Iowa. We recorded
restructuring charges of $0.1 million during 2009 related
to this transition. To date, we have incurred $3.1 million
of costs to this transition, which was composed primarily of
severance. We expect the total cost to be $3.6 million
related to this restructuring activity, consisting of severance
of $2.6 million, equipment moving costs of
$0.3 million and other costs of $0.7 million. All
future charges require cash expenditures, and we intend to fund
these with operating cash of $2.2 million. This transition
is expected to be completed in the first quarter of 2010.
88
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LENNOX
INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Reorganizations
of Corporate and Business Unit Administrative
Functions
Information regarding the restructuring charges related to the
reorganization of the support and administrative functions is as
follows (in millions):
|
Charges
|
Charges
|
Total Charges
|
||||||||||
|
Incurred in
|
Incurred to
|
Expected to be
|
||||||||||
| 2009 | Date | Incurred | ||||||||||
|
Severance and related expense
|
$ | 10.2 | $ | 14.4 | $ | 14.8 | ||||||
|
Asset write-offs and accelerated depreciation
|
0.1 | 0.9 | 0.9 | |||||||||
|
Lease termination
|
0.6 | 0.9 | 1.2 | |||||||||
|
Other
|
0.4 | 1.0 | 3.3 | |||||||||
|
Total
|
$ | 11.3 | $ | 17.2 | $ | 20.2 | ||||||
We incurred costs related to the following significant
restructuring actions in our support and administrative
activities:
| • | In the third quarter of 2008, our Commercial Heating & Cooling business unit began to reorganize its selling and administrative functions in Northern Europe through a series of restructuring actions. Restructuring charges recorded in 2009 related to this action were $3.9 million and consist principally of severance. Total restructuring charges related to this action were $7.9 million and consisted principally of severance, impairment charges and lease termination costs. Of these charges, $1.8 million will require future cash expenditures and we intend to fund these with operating cash. These actions were completed by the fourth quarter of 2009. | |
| • | In the third quarter of 2009, we initiated the relocation of Residential Heating & Cooling factory-built fireplace headquarters from Orange, California to Nashville, Tennessee and the consolidation of customer and technical service departments into our existing hearth products plant in Union City, Tennessee. As a result of this action, we recorded restructuring charges of $1.9 million during 2009. Total anticipated restructuring charges related to this action are $4.6 million and consist principally of severance, recruiting, relocation costs and lease termination costs. Of these charges, $3.9 million will require future cash expenditures and we intend to fund these with operating cash. We expect to complete this action during the first half of 2010. | |
| • | During the first quarter of 2009, we began to reorganize the management structure of our Refrigeration administrative and support functions across the globe. Restructuring charges recorded in 2009 related to these actions were $1.9 million. Total expected restructuring charges related to these actions are $2.9 million and consist principally of severance. Of these charges, $0.3 million will require future cash expenditures and we intend to fund these with operating cash. These actions were substantially completed during the third quarter of 2009. | |
| • | During the first quarter of 2009, Service Experts began to centralize certain of its administrative and support functions through a series of restructuring actions. As a result of these actions, we recorded restructuring charges of $1.8 million during 2009. Total expected restructuring charges related to these actions are $2.5 million and consist principally of severance and lease termination costs. Of these charges, $0.5 million will require future cash expenditures and we intend to fund these with operating cash. These actions are expected to be completed during the first quarter of 2010. | |
| • | During the first half of 2009, we reorganized our Commercial Heating & Cooling selling and administrative organization in the United States and Canada. As a result of this action, we recorded severance charges of $1.1 million during 2009. The action was completed during the second quarter of 2009. |
89
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LENNOX
INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
| 19. | Discontinued Operations: |
Service
Experts Discontinued Operations
Management approved the following discontinued operations within
our Service Experts business segment:
| • | During the third quarter of 2009, we finalized plans to sell five service centers that did not fit our current business strategy. We sold four of these service centers during 2009 and the remaining service center was sold subsequent to year-end. | |
| • | In the fourth quarter of 2008, we announced plans to discontinue operations of seven service centers. We decided to sell these seven centers due to their history of operating losses. By the end of the first quarter of 2009, we had disposed of all seven service centers. |
A summary of net trade sales and pre-tax operating losses
classified as Discontinued Operations in the accompanying
Consolidated Statements of Operations are detailed below (in
millions):
| For the Years Ended December 31, | ||||||||||||
| 2009 | 2008 | 2007 | ||||||||||
|
Net trade sales
|
$ | 26.1 | $ | 52.5 | $ | 58.0 | ||||||
|
Pre-tax operating (loss) income(1)
|
(13.1 | ) | (1.8 | ) | 0.8 | |||||||
| (1) | Included in the pre-tax operating (loss) income from discontinued operations are gains on disposal of the assets and liabilities of service centers sold of $2.3 million, an impairment charge of $2.7 million related to service centers where the estimated selling price of the assets is below the net book value of those assets, and a write-off of $4.0 million of goodwill related to the sale of these service centers. The loss from discontinued operations in 2008 also includes a provision of $4.4 million for an unfavorable judgment related to the sale of a service center in 2004 that was included in discontinued operations. This contingency was settled in 2009 for $6.1 million. |
The assets and liabilities of the discontinued operations are
presented as follows in the accompanying Consolidated Balance
Sheets (in millions):
|
For the Years
|
||||||||
|
Ended
|
||||||||
| December 31, | ||||||||
| 2009 | 2008 | |||||||
|
Assets of discontinued operations:
|
||||||||
|
Other assets
|
$ | 3.6 | $ | 8.8 | ||||
|
Liabilities of discontinued operations:
|
||||||||
|
Accrued expenses
|
$ | 1.3 | $ | 5.4 | ||||
| 20. | Earnings Per Share: |
Basic earnings per share are computed by dividing net income by
the weighted-average number of common shares outstanding during
the period. Diluted earnings per share are computed by dividing
net income by the sum of the weighted-average number of shares
and the number of equivalent shares assumed outstanding, if
dilutive, under our stock-based compensation plans.
90
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LENNOX
INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
The computations of basic and diluted earnings per share for
Income from Continuing Operations were as follows (in millions,
except per share data):
| For the Years Ended December 31, | ||||||||||||
| 2009 | 2008 | 2007 | ||||||||||
|
Net income
|
$ | 51.1 | $ | 122.8 | $ | 169.0 | ||||||
|
Add: Loss (income) from discontinued operations
|
10.7 | 1.0 | (3.3 | ) | ||||||||
|
Income from continuing operations
|
$ | 61.8 | $ | 123.8 | $ | 165.7 | ||||||
|
Weighted-average shares outstanding — basic
|
55.6 | 56.7 | 66.4 | |||||||||
|
Effect of dilutive securities
|
1.0 | 1.6 | 3.0 | |||||||||
|
Weighted-average shares outstanding — diluted
|
56.6 | 58.3 | 69.4 | |||||||||
|
Earnings per share from continuing operations:
|
||||||||||||
|
Basic
|
$ | 1.11 | $ | 2.18 | $ | 2.50 | ||||||
|
Diluted
|
$ | 1.09 | $ | 2.12 | $ | 2.39 | ||||||
Stock appreciation rights were outstanding, but not included in
the diluted earnings per share calculation because the assumed
exercise of such rights would have been anti-dilutive. The
details are as follows:
| For the Years Ended December 31, | ||||||||||||
| 2009 | 2008 | 2007 | ||||||||||
|
Options to purchase common stock (number of shares)
|
— | 668,451 | 125,852 | |||||||||
|
Price ranges per share
|
$ | N/A | $ | 34.52 to $37.11 | $ | 34.52 to $49.63 | ||||||
| 21. | Reportable Business Segments: |
We operate in four reportable business segments of the HVACR
industry. Our segments are organized primarily by the nature of
the products and services provided. The table below details the
nature of the operations of each reportable segment:
|
Segment
|
Product or Services
|
Markets Served
|
Geographic Areas
|
|||
|
Residential Heating & Cooling
|
Heating
Air Conditioning Hearth Products |
Residential Replacement Residential New Construction |
United States
Canada |
|||
|
Commercial Heating & Cooling
|
Rooftop Products
Chillers Air Handlers |
Light Commercial |
United States
Canada Europe |
|||
|
Service Experts
|
Equipment Sales Installation Maintenance Repair | Residential Light Commercial |
United States
Canada |
|||
|
Refrigeration
|
Unit Coolers Condensing Units Other Commercial Refrigeration Products | Light Commercial |
United States
Canada Europe Asia Pacific South America |
Transactions between segments, such as products sold to Service
Experts by the Residential Heating & Cooling segment,
are recorded on an arm’s-length basis using the market
price for these products. The eliminations
91
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LENNOX
INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
of these intercompany sales and any associated profit are noted
in the reconciliation of segment results to the income from
continuing operations before income taxes below.
We use segment profit or loss as the primary measure of
profitability to evaluate operating performance and to allocate
capital resources. We define segment profit or loss as a
segment’s income or loss from continuing operations before
income taxes included in the accompanying Consolidated
Statements of Operations excluding certain items. See the
reconciliation of segment profit to Income from Continuing
Operations Before Income Taxes below for more detail on the
items excluded from segment profit.
Our corporate costs include those costs related to corporate
functions such as legal, internal audit, treasury, human
resources, tax compliance and senior executive staff. Corporate
costs also include the long-term share-based incentive awards
provided to employees throughout LII. We recorded these
share-based awards as Corporate costs as they are determined at
the discretion of the Board of Directors and based on the
historical practice of doing so for internal reporting purposes.
Net sales and segment profit (loss) by business segment, along
with a reconciliation of segment profit to Income from
Continuing Operations Before Income Taxes are shown below (in
millions):
| For the Years Ended December 31, | ||||||||||||
| 2009 | 2008 | 2007 | ||||||||||
|
Net Sales
|
||||||||||||
|
Residential Heating & Cooling
|
$ | 1,293.5 | $ | 1,493.4 | $ | 1,669.6 | ||||||
|
Commercial Heating & Cooling
|
594.6 | 835.3 | 875.0 | |||||||||
|
Service Experts
|
535.4 | 586.3 | 623.5 | |||||||||
|
Refrigeration
|
512.7 | 618.2 | 607.7 | |||||||||
|
Eliminations(1)
|
(88.7 | ) | (92.1 | ) | (84.1 | ) | ||||||
| $ | 2,847.5 | $ | 3,441.1 | $ | 3,691.7 | |||||||
|
Segment Profit (Loss)
(2)
|
||||||||||||
|
Residential Heating & Cooling
|
$ | 111.7 | $ | 145.8 | $ | 174.4 | ||||||
|
Commercial Heating & Cooling
|
49.3 | 93.3 | 101.0 | |||||||||
|
Service Experts
|
16.6 | 18.5 | 24.4 | |||||||||
|
Refrigeration
|
48.9 | 60.2 | 61.5 | |||||||||
|
Corporate and other
|
(62.5 | ) | (53.8 | ) | (85.0 | ) | ||||||
|
Eliminations(1)
|
0.5 | (0.7 | ) | 0.6 | ||||||||
|
Subtotal that includes segment profit and eliminations
|
164.5 | 263.3 | 276.9 | |||||||||
|
Reconciliation to income from continuing operations before
income taxes:
|
||||||||||||
|
Special product quality adjustments
|
18.3 | — | (16.9 | ) | ||||||||
|
Items in (gains) losses and other expenses, net that are
excluded from segment profit(3)
|
(10.9 | ) | 5.2 | 3.7 | ||||||||
|
Restructuring charges
|
41.5 | 30.4 | 25.2 | |||||||||
|
Impairment of assets
|
6.4 | 9.1 | — | |||||||||
|
Interest expense, net
|
8.2 | 14.2 | 6.8 | |||||||||
|
Other expense, net
|
0.1 | 0.1 | 0.7 | |||||||||
|
Income from continuing operations before income taxes
|
$ | 100.9 | $ | 204.3 | $ | 257.4 | ||||||
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LENNOX
INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
| (1) | Eliminations consist of intercompany sales between business segments, such as products sold to Service Experts by the Residential Heating & Cooling segment. | |
| (2) | The Company defines segment profit and loss as a segment’s income or loss from continuing operations before income taxes included in the accompanying Consolidated Statements of Operations: Excluding: | |
| • | Special product quality adjustments. | |
| • | Items within Gains and Other Expenses, net that are noted in (3). | |
| • | Restructuring charges. | |
| • | Goodwill and equity method investment impairments. | |
| • | Interest expense, net. | |
| • | Other expense, net. | |
| (3) | Items in Gains and Other Expenses, net that are excluded from segment profit are net change in unrealized gains on open future contracts, discount fee on accounts sold, realized gain on marketable securities, and other items. For more information about Gains and Other Expenses, net see Note 24. |
Included in our Residential Heating & Cooling business
segment profit for 2008 is a gain on the sale of fixed assets of
$4.1 million. The gains or losses in our other business
segments were immaterial for 2009, 2008 and 2007.
On a consolidated basis, no revenues from transactions with a
single customer were 10% or greater of our consolidated net
sales for any of the periods presented.
Total assets by business segment are shown below (in millions).
The assets in the Corporate and other segment are primarily
comprised of cash, short-term investments and deferred tax
assets. Assets recorded in the operating segments represent
those assets directly associated with those segments.
|
For the Years Ended
|
||||||||
| December 31, | ||||||||
| 2009 | 2008 | |||||||
|
Total Assets
|
||||||||
|
Residential Heating & Cooling
|
$ | 484.2 | $ | 492.1 | ||||
|
Commercial Heating & Cooling
|
238.5 | 319.0 | ||||||
|
Service Experts
|
173.1 | 162.6 | ||||||
|
Refrigeration
|
357.5 | 340.4 | ||||||
|
Corporate and other
|
297.3 | 345.3 | ||||||
|
Eliminations(1)
|
(10.3 | ) | (8.7 | ) | ||||
|
Total assets
|
1,540.3 | 1,650.7 | ||||||
|
Discontinued operations (See Note 19)
|
3.6 | 8.8 | ||||||
|
Total assets
|
$ | 1,543.9 | $ | 1,659.5 | ||||
| (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. |
93
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LENNOX
INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Total capital expenditures by business segment are shown below
(in millions):
| For the Years Ended December 31, | ||||||||||||
| 2009 | 2008 | 2007 | ||||||||||
|
Capital Expenditures
|
||||||||||||
|
Residential Heating & Cooling
|
$ | 31.7 | $ | 33.2 | $ | 21.8 | ||||||
|
Commercial Heating & Cooling
|
6.8 | 7.0 | 24.1 | |||||||||
|
Service Experts
|
0.7 | 0.3 | 1.8 | |||||||||
|
Refrigeration
|
7.4 | 7.6 | 9.7 | |||||||||
|
Corporate and other
|
12.2 | 14.0 | 12.8 | |||||||||
|
Total capital expenditures
|
$ | 58.8 | $ | 62.1 | $ | 70.2 | ||||||
Excluded from capital expenditures for 2008 are capital leases
of $7.4 million relating to our Residential
Heating & Cooling and $14.6 million relating to
our Refrigeration business segment. There were no capital leases
in 2009 and 2007.
The depreciation and amortization expense by business segment
are shown below (in millions):
| For the Years Ended December 31, | ||||||||||||
| 2009 | 2008 | 2007 | ||||||||||
|
Depreciation and Amortization
|
||||||||||||
|
Residential Heating & Cooling
|
$ | 22.2 | $ | 22.2 | $ | 22.1 | ||||||
|
Commercial Heating & Cooling
|
8.0 | 8.2 | 7.4 | |||||||||
|
Service Experts
|
1.9 | 1.9 | 2.0 | |||||||||
|
Refrigeration
|
9.9 | 9.2 | 8.7 | |||||||||
|
Corporate and other
|
10.9 | 9.1 | 8.5 | |||||||||
|
Total depreciation and amortization
|
$ | 52.9 | $ | 50.6 | $ | 48.7 | ||||||
The equity method investees are shown below (in millions):
| For the Years Ended December 31, | ||||||||||||
| 2009 | 2008 | 2007 | ||||||||||
|
Income from Equity Method Investments
|
||||||||||||
|
Refrigeration
|
$ | 0.5 | $ | 1.3 | $ | 1.5 | ||||||
|
Corporate and other(1)
|
6.8 | 7.3 | 9.1 | |||||||||
| $ | 7.3 | $ | 8.6 | $ | 10.6 | |||||||
| (1) | A significant portion of income for equity method investments is allocated to our Residential Heating & Cooling and Commercial Heating & Cooling segments. We allocated $5.9 million, $4.5 million, and $4.2 million to those segments in 2009, 2008 and 2007, respectively. |
94
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LENNOX
INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
The following table sets forth certain financial information
relating to our operations by geographic area based on the
domicile of our operations (in millions):
| For the Years Ended December 31, | ||||||||||||
| 2009 | 2008 | 2007 | ||||||||||
|
Net Sales to External Customers by Point of Shipment
|
||||||||||||
|
United States
|
$ | 2,033.1 | $ | 2,429.2 | $ | 2,701.5 | ||||||
|
Canada
|
327.0 | 363.9 | 353.6 | |||||||||
|
International
|
487.4 | 648.0 | 636.6 | |||||||||
|
Total net sales to external customers
|
$ | 2,847.5 | $ | 3,441.1 | $ | 3,691.7 | ||||||
| As of December 31, | ||||||||
| 2009 | 2008 | |||||||
|
Property, Plant and Equipment, net
|
||||||||
|
United States
|
$ | 232.7 | $ | 233.3 | ||||
|
Mexico
|
30.3 | 24.5 | ||||||
|
Canada
|
6.0 | 6.6 | ||||||
|
International
|
60.6 | 65.0 | ||||||
|
Total property, plant and equipment, net
|
$ | 329.6 | $ | 329.4 | ||||
| 22. | Fair Value Measurements: |
Fair value is 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. Our
framework for measuring fair value is established on a
three-level hierarchy for fair value measurements based upon the
transparency of inputs to the valuation of an asset or liability
as of the measurement date and requires consideration of our
creditworthiness when valuing certain liabilities.
Fair
Value Hierarchy
The three-level fair value hierarchies for disclosure of fair
value measurements are defined 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 entity’s own assumptions about the
assumptions market participants would use in pricing the asset
or liability developed based on the best information available
in the circumstances.
Fair
Value Techniques
Our fair value valuation techniques are applied to all of the
assets and liabilities carried at fair value. 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
95
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LENNOX
INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
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 party’s
creditworthiness and ability to pay. Where appropriate, these
amounts were incorporated into our valuations as of
December 31, 2009 and 2008, the measurement dates.
Assets
and Liabilities Measured at Fair Value on a Recurring
Basis
The following table presents the fair value hierarchy for those
assets and liabilities measured at fair value on a recurring
basis (in millions):
|
Fair Value Measurements on a Recurring Basis as of
|
||||||||||||||||
| December 31, 2009 | ||||||||||||||||
|
Quoted Prices in
|
Significant
|
|||||||||||||||
|
Active Markets
|
Other
|
Significant
|
||||||||||||||
|
for
|
Observable
|
Unobservable
|
||||||||||||||
|
Identical Assets
|
Inputs
|
Inputs
|
||||||||||||||
| (Level 1) | (Level 2) | (Level 3) | Total | |||||||||||||
|
Assets:
|
||||||||||||||||
|
Investment in marketable equity securities(1)
|
$ | 5.4 | $ | — | $ | — | $ | 5.4 | ||||||||
|
Derivatives, net(2)
|
— | 10.2 | — | 10.2 | ||||||||||||
|
Fair Value Measurements on a Recurring Basis as of
|
||||||||||||||||
| December 31, 2008 | ||||||||||||||||
|
Quoted Prices in
|
Significant
|
|||||||||||||||
|
Active Markets
|
Other
|
Significant
|
||||||||||||||
|
for
|
Observable
|
Unobservable
|
||||||||||||||
|
Identical Assets
|
Inputs
|
Inputs
|
||||||||||||||
| (Level 1) | (Level 2) | (Level 3) | Total | |||||||||||||
|
Assets:
|
||||||||||||||||
|
Short-term investments
|
$ | — | $ | 33.4 | $ | — | $ | 33.4 | ||||||||
|
Investment in marketableequity securities(1)
|
1.8 | — | — | 1.8 | ||||||||||||
|
Liabilities:
|
||||||||||||||||
|
Derivatives, net(2)
|
$ | — | $ | 39.4 | $ | — | $ | 39.4 | ||||||||
| (1) | Investment in marketable equity securities is recorded in Other Long-Term Assets in the accompanying Consolidated Balance Sheets. See Note 7 for more information. | |
| (2) | For more information on the recording of derivatives in the accompanying Consolidated Balance Sheets, see Note 9. |
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
counterparty’s creditworthiness, or our own
creditworthiness, as appropriate.
During the third quarter of 2009, we liquidated all of the
short-term investments reported on our Consolidated Balance
Sheets as of December 31, 2008. These funds were reinvested
in a U.S. Treasury money market mutual fund and are
included in cash and cash equivalents in the accompanying
Consolidated Balance Sheets as of December 31, 2009. During
2008, the majority of our short-term investments were managed by
professional investment advisors. The net asset values were
furnished in statements received from the investment advisor and
reflected valuations based upon the respective pricing policies
utilized by the investment advisor. We 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
96
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LENNOX
INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
were based on several observable inputs including, but not
limited to, benchmark yields, reported trades, broker/dealer
quotes, issuer spreads and benchmark securities. These
investments consisted of U.S. government and government
agency securities, corporate bonds, asset-backed securities,
collateralized mortgage obligations and various securitized debt
instruments. The majority of these investments were of high
quality, with 85% having AAA ratings. The application of our
valuation techniques resulted in no net changes to the
valuations for these securities as of December 31, 2008.
Other
Fair Value Measurements
The carrying amounts of cash and cash equivalents, accounts and
notes receivable, net, accounts payable and other current
liabilities approximate fair value due to the short maturities
of these instruments. The fair values of each of our long-term
debt instruments are based on the quoted market prices for the
same issues or on the amount of future cash flows associated
with each instrument using current market rates for debt
instruments of similar maturities and credit risk. The estimated
fair value of long-term debt (including current maturities) was
$242.5 million and $460.3 million as of
December 31, 2009 and 2008, respectively. The fair values
presented are estimates and are not necessarily indicative of
amounts for which we could settle such instruments currently or
indicative of our intent or ability to dispose of or liquidate
them.
23. Quarterly
Financial Information
(unaudited)
:
Financial
results
The following tables provide information on net sales, gross
profit, net income, earnings per share and dividends per share
by quarter (in millions, except per share data):
| Net Sales | Gross Profit | Net (Loss) Income | ||||||||||||||||||||||
| 2009(1) | 2008(2) | 2009(1) | 2008(2) | 2009(1) | 2008(2) | |||||||||||||||||||
|
First Quarter
|
$ | 580.5 | $ | 754.5 | $ | 137.8 | $ | 190.8 | $ | (18.1 | ) | $ | 6.3 | |||||||||||
|
Second Quarter
|
784.0 | 988.4 | 227.5 | 275.1 | 31.7 | 51.2 | ||||||||||||||||||
|
Third Quarter
|
749.5 | 959.9 | 223.0 | 269.2 | 31.0 | 54.9 | ||||||||||||||||||
|
Fourth Quarter
|
733.5 | 738.3 | 205.1 | 199.4 | 6.5 | 10.4 | ||||||||||||||||||
|
Diluted
|
||||||||||||||||||||||||
|
Basic
|
Earnings (Loss) per
|
Dividends per
|
||||||||||||||||||||||
| Earnings (Loss) per Common Share | Common Share | Common Share | ||||||||||||||||||||||
| 2009 | 2008 | 2009 | 2008 | 2009 | 2008 | |||||||||||||||||||
|
First Quarter
|
$ | (0.33 | ) | $ | 0.10 | $ | (0.33 | ) | $ | 0.10 | $ | 0.14 | $ | 0.14 | ||||||||||
|
Second Quarter
|
0.57 | 0.91 | 0.56 | 0.88 | 0.14 | 0.14 | ||||||||||||||||||
|
Third Quarter
|
0.56 | 0.99 | 0.54 | 0.96 | 0.14 | 0.14 | ||||||||||||||||||
|
Fourth Quarter
|
0.12 | 0.19 | 0.11 | 0.18 | 0.14 | 0.14 | ||||||||||||||||||
| (1) | The following unusual or infrequent pre-tax items were included in the 2009 quarterly results: | |
| We recorded restructuring charges throughout 2008 as follows: first quarter — $11.2 million, second quarter — $4.7 million, third quarter — $11.5 million and fourth quarter — $14.1 million. | ||
| We recorded a $6.0 million impairment charge related to the abandonment of information technology assets in the fourth quarter. | ||
| We recorded expenses related to a specific product quality issue as follows: first quarter — $ -, second quarter — $4.2 million, third quarter — $0.9 million, and fourth quarter — $19.3 million. | ||
| We recorded a net gain of $3.8 million related to the sale and liquidation of a foreign business in the fourth quarter. | ||
| (2) | The following unusual or infrequent pre-tax items were included in the 2008 quarterly results: | |
| We recorded restructuring charges throughout 2008 as follows: first quarter — $2.8 million, second quarter — $7.7 million, third quarter — $8.4 million and fourth quarter — $11.5 million. |
97
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LENNOX
INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
| We recorded impairment charges related to an equity method investment of $2.2 million in the second quarter and $6.9 million in the fourth quarter of 2008. | ||
| We recorded a reduction to operating expenses during the fourth quarter of 2008 of $14.5 million related to a change in our vacation policy whereby employees now earn vacation throughout the year the vacation is taken. |
| 24. | Gains and Other Expenses, net: |
Gains and other expenses, net were as follows (in millions):
| For the Years Ended December 31, | ||||||||||||
| 2009 | 2008 | 2007 | ||||||||||
|
Realized losses (gains) on settled futures contracts
|
$ | 3.7 | $ | 0.9 | $ | (3.9 | ) | |||||
|
Net change in unrealized (gains) losses
|
(7.1 | ) | 5.1 | 3.4 | ||||||||
|
on unsettled futures contracts
|
||||||||||||
|
Gain on disposal of a business, net
|
(4.1 | ) | — | — | ||||||||
|
Gains on disposals of fixed assets
|
(0.1 | ) | (4.8 | ) | (0.3 | ) | ||||||
|
Foreign currency exchange losses (gains)
|
0.7 | (3.2 | ) | (6.2 | ) | |||||||
|
Other items, net
|
0.3 | 0.1 | 0.3 | |||||||||
|
Gains and other expenses, net
|
$ | (6.6 | ) | $ | (1.9 | ) | $ | (6.7 | ) | |||
Gains and Other Expenses, net includes a net gain on the sale of
a European business in our Commercial Heating &
Cooling segment. We sold assets totaling $5.9 million and
recorded a net loss of $2.7 million, after related
transaction costs. Upon liquidation of this business, we
recorded $6.8 million of Cumulative Translation Adjustment
in earnings as a gain.
| 25. | Supplemental Information: |
Below is information about expenses included in our Statements
of Operations (in millions):
| For the Years Ended December 31, | ||||||||||||
| 2009 | 2008 | 2007 | ||||||||||
|
Research and development
|
$ | 48.9 | $ | 46.0 | $ | 43.6 | ||||||
|
Advertising, promotions and marketing
|
59.5 | 71.1 | 71.6 | |||||||||
|
Rent expense
|
64.4 | 64.2 | 64.4 | |||||||||
Interest
Expense, net
The components of Interest Expense, net were as follows (in
millions):
| For the Years Ended December 31, | ||||||||||||
| 2009 | 2008 | 2007 | ||||||||||
|
Interest expense, net of capitalized interest
|
$ | 9.4 | $ | 18.0 | $ | 10.7 | ||||||
|
Interest income
|
1.2 | 3.8 | 3.9 | |||||||||
| 26. | Subsequent Events (unaudited): |
We have evaluated subsequent events through February 18,
2010, which was the date the financial statements were issued.
98
Table of Contents
| Item 9. | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure |
None.
| Item 9A. | Controls and Procedures |
Disclosure
Controls and Procedures
As required by
Rule 13a-15
under the Securities Exchange Act of 1934, we carried out an
evaluation, under the supervision and with the participation of
our current management, including our Chief Executive Officer
and Chief Financial Officer, of the effectiveness of our
disclosure controls and procedures as of the end of the period
covered by this report. There are inherent limitations to the
effectiveness of any system of disclosure controls and
procedures, including the possibility of human error and
circumvention or overriding of the controls and procedures.
Accordingly, even effective disclosure controls and procedures
can only provide reasonable assurance of achieving their control
objectives. Based on that evaluation, the Chief Executive
Officer and Chief Financial Officer have concluded that, as of
December 31, 2009, our disclosure controls and procedures
were effective to provide reasonable assurance that information
required to be disclosed by us in the reports we file or submit
under the Securities Exchange Act of 1934 is recorded,
processed, summarized and reported, within the time periods
specified in the applicable rules and forms, and that such
information is accumulated and communicated to management,
including our Chief Executive Officer and Chief Financial
Officer, to allow timely decisions regarding required disclosure.
Management’s
Annual Report on Internal Control Over Financial
Reporting
See “Management’s Report on Internal Control Over
Financial Reporting” included in Item 8
“Financial Statements and Supplementary Data.”
Attestation
Report of the Independent Registered Public Accounting
Firm
See “Report of Independent Registered Public Accounting
Firm” included in Item 8 “Financial Statements
and Supplementary Data.”
Changes
in Internal Control Over Financial Reporting
There were no changes during the quarter ended December 31,
2008 in our internal control over financial reporting that have
materially affected, or are reasonably likely to materially
affect, our internal control over financial reporting.
| Item 9B. | Other Information |
None.
| Item 10. | Directors, Executive Officers and Corporate Governance |
The section of our 2010 Proxy Statement captioned
“Proposal 1: Election of Directors” identifies
members of our Board of Directors and nominees for election to
the Board of Directors at our 2010 Annual Meeting, and is
incorporated in this Item 10 by reference.
Part I, Item 1 “Business — Executive
Officers of the Company” of this Annual Report on
Form 10-K
identifies our executive officers and is incorporated in this
Item 10 by reference.
The section of our 2010 Proxy Statement captioned
“Section 16(a) Beneficial Ownership Reporting
Compliance” is incorporated in this Item 10 by
reference.
99
Table of Contents
The section of our 2010 Proxy Statement captioned
“Corporate Governance — Board of Directors and
Board Committees — Audit Committee” and
“Audit Committee Report” identifies members of the
Audit Committee of our Board of Directors and our audit
committee financial expert, and is incorporated in this
Item 10 by reference.
The section of our 2010 Proxy Statement captioned
“Corporate Governance — Other Corporate
Governance Policies — Code of Conduct and Code of
Ethical Conduct” includes information regarding our Code of
Conduct and Code of Ethical Conduct and is incorporated in this
Item 10 by reference.
| Item 11. | Executive Compensation |
The sections of our 2010 Proxy Statement captioned
“Executive Compensation,” “Director
Compensation” and “Certain Relationships and Related
Party Transactions — Compensation Committee Interlocks
and Insider Participation” are incorporated in this
Item 11 by reference.
| Item 12. | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters |
The sections of our 2010 Proxy Statement captioned “Equity
Compensation Plan Information” and “Ownership of
Common Stock” are incorporated in this Item 12 by
reference.
| Item 13. | Certain Relationships and Related Transactions, and Director Independence |
The sections of our 2010 Proxy Statement captioned
“Corporate Governance — Director
Independence” and “Certain Relationships and Related
Party Transactions” are incorporated in this Item 13
by reference.
| Item 14. | Principal Accounting Fees and Services |
The section of our 2010 Proxy Statement captioned
“Independent Registered Public Accountants” is
incorporated in this Item 14 by reference.
| Item 15. | Exhibits, Financial Statement Schedules |
Financial
Statements
The following financial statements are included in Part II,
Item 8 of this Annual Report on
Form 10-K:
| • | Report of Independent Registered Public Accounting Firm | |
| • | Consolidated Balance Sheets as of December 31, 2009 and 2008 | |
| • | Consolidated Statements of Operations for the Years Ended December 31, 2009, 2008 and 2007 | |
| • | Consolidated Statements of Stockholders’ Equity for the Years Ended December 31, 2009, 2008 and 2007 | |
| • | Consolidated Statements of Cash Flows for the Years Ended December 31, 2009, 2008 and 2007 | |
| • | Notes to Consolidated Financial Statements for the Years Ended December 31, 2009, 2008 and 2007 |
100
Table of Contents
Financial
Statement Schedules
The financial statement schedule included in this Annual Report
on
Form 10-K
is Schedule II — Valuation and Qualifying
Accounts and Reserves for the Years Ended December 31,
2009, 2008, and 2007 (see Schedule II immediately following
the signature page of this Annual Report on
Form 10-K).
Financial statement schedules not included in this Annual Report
on
Form 10-K
have been omitted because they are not applicable or the
required information is shown in the Consolidated Financial
Statements or Notes thereto.
Exhibits
A list of the exhibits required to be filed or furnished as part
of this Annual Report on
Form 10-K
is set forth in the Index to Exhibits, which immediately
precedes such exhibits, and is incorporated herein by reference.
101
Table of Contents
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
LENNOX INTERNATIONAL INC.
| By: |
/s/
Todd
M. Bluedorn
|
Todd M. Bluedorn
Chief Executive Officer
February 18, 2010
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons
on behalf of the registrant in the capacities and on the dates
indicated.
|
Signature
|
Title
|
Date
|
||||
|
/s/
Todd
M. Bluedorn
|
Chief Executive Officer and Director
(Principal Executive Officer) |
February 18, 2010 | ||||
|
/s/
Robert
W. Hau
|
Executive Vice President and
Chief Financial Officer (Principal Financial Officer) |
February 18, 2010 | ||||
|
/s/
Roy
A. Rumbough
|
Vice President, Controller and
Chief Accounting Officer (Principal Accounting Officer) |
February 18, 2010 | ||||
|
/s/
Richard
L. Thompson
|
Chairman of the Board of Directors | February 18, 2010 | ||||
|
/s/
Linda
G. Alvarado
|
Director | February 18, 2010 | ||||
|
/s/
Steven
R. Booth
|
Director | February 18, 2010 | ||||
|
/s/
James
J. Byrne
|
Director | February 18, 2010 | ||||
|
/s/
Janet
K. Cooper
|
Director | February 18, 2010 | ||||
|
/s/
C.L.
(Jerry) Henry
|
Director | February 18, 2010 | ||||
|
/s/
John
E. Major
|
Director | February 18, 2010 | ||||
102
Table of Contents
|
Signature
|
Title
|
Date
|
||||
|
/s/
John
W. Norris, III
|
Director | February 18, 2010 | ||||
|
/s/
Paul
W. Schmidt
|
Director | February 18, 2010 | ||||
|
/s/
Terry
D. Stinson
|
Director | February 18, 2010 | ||||
|
/s/
Jeffrey
D. Storey, MD
|
Director | February 18, 2010 | ||||
103
Table of Contents
LENNOX
INTERNATIONAL INC.
SCHEDULE II — VALUATION AND QUALIFYING
ACCOUNTS AND RESERVES
For the Years Ended December 31, 2009, 2008 and 2007
(In Millions)
|
Additions
|
||||||||||||||||||||||||
|
Balance at
|
Charged
|
Balance
|
||||||||||||||||||||||
|
Beginning
|
to Cost and
|
at end
|
||||||||||||||||||||||
| of Year | Expenses | Write-offs | Recoveries | Other | of Year | |||||||||||||||||||
|
2007:
|
||||||||||||||||||||||||
|
Allowance for doubtful accounts
|
$ | 16.7 | $ | 10.0 | $ | (10.4 | ) | $ | 0.6 | $ | (0.4 | ) | $ | 16.5 | ||||||||||
|
2008:
|
||||||||||||||||||||||||
|
Allowance for doubtful accounts
|
$ | 16.5 | $ | 17.0 | $ | (15.2 | ) | $ | 0.6 | $ | (1.0 | ) | $ | 17.9 | ||||||||||
|
2009:
|
||||||||||||||||||||||||
|
Allowance for doubtful accounts
|
$ | 17.9 | $ | 12.6 | $ | (17.8 | ) | $ | 1.4 | $ | 1.5 | $ | 15.6 | |||||||||||
104
Table of Contents
INDEX TO
EXHIBITS
|
Exhibit
|
||||
|
Number
|
Exhibit Name
|
|||
| 3 | .1 | Restated Certificate of Incorporation of Lennox International Inc. (“LII”) (filed as Exhibit 3.1 to LII’s Registration Statement on Form S-1 (Registration No. 333-75725) filed on April 6, 1999 and incorporated herein by reference). | ||
| 3 | .2 | Amended and Restated Bylaws of LII (filed as Exhibit 3.1 to LII’s 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 LII’s 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 LII’s Current Report on Form 8-K (File No. 001-15149) filed on July 28, 2000 and incorporated herein by reference). | ||
| LII is a party to a debt instrument under which the total amount of securities authorized under such instrument does not exceed 10% of the total assets of LII and its subsidiaries on a consolidated basis. Pursuant to paragraph 4(iii)(A) of Item 601(b) of Regulation S-K, LII agrees to furnish a copy of such instrument to the Securities and Exchange Commission upon request. | ||||
| 10 | .1 | Receivables Purchase Agreement dated as of November 25, 2009, by and among Lennox Industries Inc., LPAC Corp., Victory Receivables Corporation, as a Purchaser, The Bank of Tokyo-Mitsubishi UFJ, LTD, New York Branch, as a Liquidity Bank, and The Bank of Toyko-Mitsubishi UFJ, LTD, New York Branch, as Administrative Agent and the BTMU Purchaser Agent (filed as Exhibit 10.1 to LII’s Current Report on Form 8-K filed on December 2, 2009 and incorporated herein by reference). | ||
| 10 | .2 | Third Amended and Restated Credit Agreement, dated October 12, 2007, among LII, Bank of America, N.A., as administrative agent, swingline lender and issuing bank, JPMorgan Chase Bank, N.A. and Wachovia Bank, National Association, as co-syndication agents, and the Lenders party thereto (filed as Exhibit 10.1 to LII’s Current Report on Form 8-K filed on October 15, 2007 and as Exhibit 10.1 to LII’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2009 and incorporated herein by reference). | ||
| 10 | .3 | Lease Agreement, dated as of June 22, 2006, by and between BTMU Capital Corporation, as lessor, and Lennox Procurement Company Inc., as lessee (filed as Exhibit 10.1 to LII’s Current Report on Form 8-K filed on June 28, 2006 and incorporated herein by reference). | ||
| 10 | .4 | Memorandum of Lease, Deed of Trust, Assignment of Leases and Rents, Security Agreement and Fixture Filing, dated as of June 22, 2006, by and among Lennox Procurement Company Inc., BTMU Capital Corporation and Jeffrey L. Bell, as Deed of Trust Trustee, for the benefit of BTMU Capital Corporation (filed as Exhibit 10.3 to LII’s Current Report on Form 8-K filed on June 28, 2006 and incorporated herein by reference). | ||
| 10 | .5 | First Omnibus Amendment to Operative Documents, dated as of September 22, 2008, among LII, Lennox Procurement Company Inc., Lennox Industries Inc., Allied Air Enterprises Inc., Service Experts LLC, Lennox Global Ltd., BTMU Capital Corporation and Compass Bank (filed as Exhibit 10.1 to LII’s Current Report on Form 8-K filed on September 25, 2008 and incorporated herein by reference). | ||
| 10 | .6 | Subsidiary Guaranty, dated as of September 22, 2008, made by LII, Allied Air Enterprises Inc., Service Experts LLC. and Lennox Global Ltd., as guarantors, in favor of BTMU Capital Corporation and the other parties specified therein (filed as Exhibit 10.2 to LII’s Current Report on Form 8-K filed on September 25, 2008 and incorporated herein by reference). | ||
| 10 | .7 | Receivables Purchase Agreement, dated as of November 25, 2009, by and among I Industries Inc., LPAC Corp., Victory Receivables Corporation, as a Purchaser, The Bank of Tokyo-Mitsubishi UFJ, LTD, New York Branch, as a Liquidity Bank, and The Bank of Tokyo-Mitsubishi UI LTD, New York Branch, as Administrative Agent and the BTMU Purchaser Agent (filed as Exhibit 10.1 to LII’s Current Report on Form 8-K filed on November 25, 2009 and incorporated herein by reference). | ||
| 10 | .8* | Amended and Restated 1998 Incentive Plan of Lennox International Inc. (filed as Exhibit 10.1 to LII’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2005 and incorporated herein by reference). | ||
| 10 | .9* | Form of 2009 Long-Term Incentive Award Agreement for U.S. Employees of LII under the 1998 Incentive Plan of LII (filed as Exhibit 10.4 to LII’s Current Report on Form 8-K filed on December 17, 2008 and incorporated herein by reference). | ||
105
Table of Contents
|
Exhibit
|
||||
|
Number
|
Exhibit Name
|
|||
| 10 | .10* | Form of 2009 Long-Term Incentive Award Agreement Non-Employee Director under the 1998 Incentive Plan of LII (filed as Exhibit 10.9 to LII’s Annual Report on Form 10-K for the year ended December 31, 2008 and incorporated by reference). | ||
| 10 | .11* | Lennox International Inc. Profit Sharing Restoration Plan, as amended and restated effective January 1, 2009 (filed as Exhibit 10.3 to LII’s Current Report on Form 8-K filed on December 17, 2008 and incorporated herein by reference). | ||
| 10 | .12* | Lennox International Inc. Supplemental Executive Retirement Plan, as amended and restated effective January 1, 2009 (filed as Exhibit 10.2 to LII’s Current Report on Form 8-K filed on December 17, 2008 and incorporated herein by reference). | ||
| 10 | .13* | Form of Indemnification Agreement entered into between LII and certain executive officers and directors of LII (filed as Exhibit 10.15 to LII’s Registration Statement on Form S-1 (Registration No. 333-75725) filed on April 6, 1999 and incorporated herein by reference). | ||
| 10 | .14* | Form of Employment Agreement entered into between LII and certain executive officers of LII (filed as Exhibit 10.30 to LII’s Annual Report on Form 10-K for the year ended December 31, 2006 and incorporated herein by reference). | ||
| 10 | .15* | Form of Amendment to Employment Agreement entered into between LII and certain executive officers of LII (filed as Exhibit 10.2 to LII’s Current Report on Form 8-K filed on December 12, 2007 and incorporated herein by reference). | ||
| 10 | .16* | Form of Change of Control Employment Agreement entered into between LII and certain executive officers of LII (filed as Exhibit 10.1 to LII’s Current Report on Form 8-K filed on December 17, 2008 and incorporated herein by reference). | ||
| 10 | .17* | Summary of Fiscal 2010 Target Short-Term Incentive Percentages for the Named Executive Officers of LII (filed in LII’s Current Report on Form 8-K filed on December 16, 2009 and incorporated herein by reference). | ||
| 10 | .18* | Lennox International Inc. Directors’ Retirement Plan (as Amended and Restated as of January 1, 2010) (filed as Exhibit 10.1 to LII’s Current Report on Form 8-K filed on December 16, 2009 and incorporated herein by reference). | ||
| 10 | .19* | Lennox International Inc. 2007 Long-Term Incentive Award Agreement, Non-Employee Directors, dated as of December 7, 2007 (filed as Exhibit 10.42 to LII’s Annual Report on Form 10-K for the year ended December 31, 2007 and incorporated herein by reference). | ||
| 21 | .1 | Subsidiaries of LII (filed herewith). | ||
| 23 | .1 | Consent of KPMG LLP (filed herewith). | ||
| 31 | .1 | Certification of the principal executive officer (filed herewith). | ||
| 31 | .2 | Certification of the principal financial officer (filed herewith). | ||
| 32 | .1 | Certification of the principal executive officer and the principal financial officer of LII pursuant to 18 U.S.C. Section 1350 (filed herewith). | ||
| * | Management contract or compensatory plan or arrangement. |
106
TABLE OF CONTENTS
Part IItem 1. BusinessItem 1A. Risk FactorsItem 1B. Unresolved Staff CommentsItem 2. PropertiesItem 3. Legal ProceedingsItem 4. Submission Of Matters To A Vote Of Security HoldersPart IIItem 5. Market For Registrant S Common Equity, Related Stockholder Matters and Issuer Purchases Of Equity SecuritiesItem 6. Selected Financial DataItem 7. Management S Discussion and Analysis Of Financial Condition and Results Of OperationsItem 7A. Quantitative and Qualitative Disclosures About Market RiskItem 8. Financial Statements and Supplementary DataItem 9. Changes in and Disagreements with Accountants on Accounting and Financial DisclosureItem 9A. Controls and ProceduresItem 9B. Other InformationPart IIIItem 10. Directors, Executive Officers and Corporate GovernanceItem 11. Executive CompensationItem 12. Security Ownership Of Certain Beneficial Owners and Management and Related Stockholder MattersItem 13. Certain Relationships and Related Transactions, and Director IndependenceItem 14. Principal Accounting Fees and ServicesPart IVItem 15. Exhibits, Financial Statement Schedules