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
|
þ
|
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
| For the fiscal year ended December 31, 2010 | ||
|
OR
|
||
|
o
|
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
| For the transition period from to | ||
Commission File Number
001-15149
LENNOX INTERNATIONAL
INC.
(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:
| Title of each class | Name of each exchange on which registered | |
|
Common Stock, $.01 par value per share
|
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
þ
No
o
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K is not contained
herein, and will not be contained, to the best of
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
the Exchange Act). Yes o No þ
As of June 30, 2010, the aggregate market value of the
common stock held by non-affiliates of the registrant was
approximately $2,219,266,287 based on the closing price of the
registrant’s common stock on the New York Stock Exchange on
such date. As of February 7, 2011, there were
53,720,904 shares of the registrant’s common stock
outstanding.
DOCUMENTS
INCORPORATED BY REFERENCE
Portions of the registrant’s Definitive Proxy Statement to
be filed with the Securities and Exchange Commission in
connection with the registrant’s 2011 Annual Meeting of
Stockholders to be held on May 12, 2011 are incorporated by
reference into Part III of this report.
LENNOX
INTERNATIONAL INC.
FORM 10-K
For the Fiscal Year Ended December 31, 2010
INDEX
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| 16 | ||||||||
| PART II | ||||||||
| 16 | ||||||||
| 19 | ||||||||
| 19 | ||||||||
| 37 | ||||||||
| 38 | ||||||||
| 105 | ||||||||
| 105 | ||||||||
| 105 | ||||||||
| PART III | ||||||||
| 105 | ||||||||
| 105 | ||||||||
| 106 | ||||||||
| 106 | ||||||||
| 106 | ||||||||
| PART IV | ||||||||
| 106 | ||||||||
| 107 | ||||||||
| 109 | ||||||||
| 110 | ||||||||
| EX-21.1 | ||||||||
| EX-23.1 | ||||||||
| EX-31.1 | ||||||||
| EX-31.2 | ||||||||
| EX-32.1 | ||||||||
| EX-101 INSTANCE DOCUMENT | ||||||||
| EX-101 SCHEMA DOCUMENT | ||||||||
| EX-101 CALCULATION LINKBASE DOCUMENT | ||||||||
| EX-101 LABELS LINKBASE DOCUMENT | ||||||||
| EX-101 PRESENTATION LINKBASE DOCUMENT | ||||||||
| EX-101 DEFINITION LINKBASE DOCUMENT | ||||||||
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 2010 net sales by
segment. Segment financial data for 2010, 2009 and 2008,
including financial information about foreign and domestic
operations, is included in Note 19 of the Notes to our
Consolidated Financial Statements in “Item 8.
Financial Statements and Supplementary Data” and is
incorporated herein by reference.
|
2010 Net Sales
|
||||||||
| Segment | 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 | $ | 1,417.4 | ||||
|
Commercial Heating & Cooling
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Unitary heating and air conditioning equipment, applied systems | Lennox, Allied Commercial | 620.0 | |||||
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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 | 590.3 | |||||
|
Refrigeration
|
Condensing units, unit coolers, fluid coolers, air cooled condensers, air handlers, process chillers, compressorized racks | Heatcraft Worldwide Refrigeration, Bohn, Larkin, Climate Control, Chandler Refrigeration, Friga-Bohn, HK Refrigeration, Hyfra, Kirby, Frigus-Bohn | 550.9 | |||||
|
Eliminations
|
(82.2 | ) | ||||||
| Total | $ | 3,096.4 | ||||||
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.
1
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. We are building a network of PartsPlus
stores across the United States that provide an easy access
solution for contractors and independent dealers to obtain
universal service and replacement parts, supplies, convenience
items, tools, Lennox equipment and OEM parts.
The “Lennox” and “Aire-Flo” brands are sold
directly to a network of approximately 7,000 independent
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 also sells evaporator
coils to our competitors for use in their heating and cooling
products.
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 our 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.
Our product offerings for these applications include rooftop
units ranging from 2 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 2 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
throughout 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 also have a growing Lennox
National Account Services business that focuses on providing
service and preventive maintenance to commercial national
account customers. We use a portfolio of management procedures
and best practices, including standards of excellence for
customer service, common
2
Table of Contents
information technology systems and financial controls, a
national accounting center 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 under the Heatcraft Worldwide Refrigeration
name. We sell these products 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.
In January 2011 we completed a transaction with The Manitowoc
Company, Inc. by which we acquired substantially all the assets
of its Kysor/Warren business. Kysor/Warren is a leading
manufacturer of refrigerated systems and display cases for
supermarkets throughout North America. This acquisition provides
us with a platform for additional business growth by extending
the value chain for us directly to food retail and supermarket
customers.
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 Germany, France, 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 joint venture product line is
complemented with imports from the U.S., which are sold through
the joint venture’s distribution network. We also own an 8%
common stock interest in a manufacturer in Thailand that
produces compressors for use in our products and for other HVACR
customers.
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 in 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, advertising and
merchandising.
3
Table of Contents
Geographic
Expansion
We are growing our international presence by continuing to
extend our successful domestic business model and product
knowledge into international markets.
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 independent 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. 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
4
Table of Contents
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 tools utilized by our 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 $49.5 million, $48.9 million and
$46.0 million on research and development during 2010, 2009
and 2008, 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.
Our markets are 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
tm
,
ALLIED
COMMERCIAL
tm
,
AIRE-FLO
®
,
CONCORD
®
,
ADP ADVANCED DISTRIBUTOR
PRODUCTS
®
,
MAGIC-PAK
®
,
HUMIDITROL
tm
,
PRODIGY
®
,
HEATCRAFT
®
WORLDWIDE REFRIGERATION,
BOHN
®
,
CHANDLER
REFRIGERATION
®
,
KIRBY
tm
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
5
Table of Contents
in each of our four business segments, 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 Standard); Paloma Co., Ltd. (Rheem, Ruud); Johnson Controls, Inc. (York, Weatherking); Daiken; 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, 2010, we employed approximately
11,800 employees, of whom approximately 4,800 were salaried
and 7,000 were hourly. The number of hourly workers we employ
may vary in order to match our labor needs during periods of
fluctuating demand. Approximately 2,400 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. We have complied with applicable rules and
regulations governing the use of HCFCs and HFCs. 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
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Table of Contents
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 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. For more information, see
Note 10 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 possible 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.
You can also read and copy any document that we file, including
this Annual Report on
Form 10-K,
at the Securities and Exchange Commission’s Public
Reference Room at 100 F Street, N.E.,
Washington, D.C. 20549. Call the Securities and Exchange
Commission at
1-800-SEC-0330
for information on the operation of the Public Reference Room.
In addition, the Securities and Exchange Commission maintains an
Internet site at www.sec.gov that contains reports, proxy and
information statements, and other information regarding issuers,
including Lennox International, that file electronically with
the Securities and Exchange Commission.
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
|
47 | Chief Executive Officer | ||||
|
Prakash Bedapudi
|
44 | 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
|
45 | Executive Vice President and President and Chief Operating Officer, Service Experts | ||||
|
James W. Borzi
|
48 | Vice President, Operations | ||||
|
Robert W. Hau
|
45 | Executive Vice President and Chief Financial Officer | ||||
|
David W. Moon
|
49 | Executive Vice President and President and Chief Operating Officer, LII Worldwide Refrigeration | ||||
|
Daniel M. Sessa
|
46 | Executive Vice President and Chief Human Resources Officer | ||||
|
John D. Torres
|
52 | Executive Vice President, Chief Legal Officer and Secretary | ||||
|
Douglas L. Young
|
48 | Executive Vice President and President and Chief Operating Officer, LII Residential Heating & Cooling | ||||
|
Roy A. Rumbough, Jr.
|
55 | 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
and President and Chief Operating Officer of LII’s Service
Experts segment in July 2010. He had previously served as
Executive Vice President, Operations since 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 an MS in
management and an MS in mechanical engineering, both from the
Massachusetts Institute of Technology.
James W. Borzi
was appointed Vice President, Operations
in June 2010. He had previously served as Senior Vice President,
Global Operations, for AEES, Inc., a Platinum Equity company
from 2009 to June 2010. From 2006 to 2009, Mr. Borzi served
as Senior Vice President, Operations, Americas for the
Electrical and Electronic Solutions division of Alcoa, Inc.
Prior to joining Alcoa, he spent 21 years at General Motors
Corporation and Delphi Corporation, holding senior leadership
positions in manufacturing, supply chain, logistics and general
management. He earned a BS in Mechanical Engineering from
Pennsylvania State University and an MS in Manufacturing
Management from Kettering University.
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
9
Table of Contents
before 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.
Global
General Business, Economic and Market Conditions Could Adversely
Affect Our Financial Performance and Limit our Access to the
Capital Markets
Future disruptions in U.S. or global financial and credit
markets might have an adverse impact on our business. The
tightening or unavailability of credit adversely affects the
ability of our customers to obtain financing for significant
purchases and operations and could result in a decrease in sales
of our products and services and may impact the ability of our
customers to make payments to us. Similarly, 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 may also be
adversely affected by future decreases in the general level of
economic activity, which may cause our customers to cancel,
decrease or delay their purchases of our products and services.
If financial markets were to deteriorate, or costs of capital
were to increase significantly due to a lowering of our credit
ratings, prevailing industry conditions, the volatility of the
capital markets or other factors, we may be unable to obtain new
financing on acceptable terms, or at all. A deterioration in our
financial performance could also limit our future ability to
access amounts currently available under our domestic revolving
credit facility. In addition, availability under our asset
securitization agreement may be adversely impacted by credit
quality and performance of our customer accounts receivable. The
availability under our asset securitization agreement is based
10
Table of Contents
on the amount of accounts receivable that meet the eligibility
criteria of the asset securitization agreement. If receivable
losses increase or credit quality deteriorates, the amount of
eligible receivables could decline and, in turn, lower the
availability under the asset securitization.
We cannot predict the likelihood of occurrence, 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.
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. 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 letters of credit as
collateral with our hedge counterparties, which would
temporarily reduce our borrowing capacity under our domestic
revolving credit facility.
Our
Ability to Meet Customer Demand may be Limited by Our
Single-Location Production Facilities, Reliance on Certain Key
Suppliers and Unanticipated Significant Shifts in Customer
Demand.
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
interruptions in production at one or more of our facilities, or
at a facility of one of our suppliers, could negatively impact
our ability to deliver our products to our customers. Further,
even with all of our facilities running at full production, we
could potentially be unable to fully meet demand during an
unanticipated period of exceptionally high demand.
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, 2010, approximately 20% 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, 2010, we had goodwill of
$271.8 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, 2011 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
|
369 |
Owned
|
||||||
|
Orangeburg, SC
|
Residential Heating & Cooling
|
Manufacturing & Distribution
|
771 |
Owned & Leased
|
||||||
|
Grenada, MS
|
Residential Heating & Cooling
|
Manufacturing & Distribution
|
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
|
||||||
|
Carrollton, TX
|
Residential & Commercial Heating & Cooling
|
Distribution
|
252 |
Leased
|
||||||
|
Ontario, CA
|
Residential & Commercial Heating & Cooling
|
Distribution
|
128 |
Leased
|
||||||
|
Des Moines, IA
|
Residential & Commercial Heating & Cooling
|
Distribution
|
352 |
Leased
|
||||||
|
Middleton , PA
|
Residential & Commercial Heating & Cooling
|
Distribution
|
129 |
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
|
Refrigeration
|
Manufacturing
|
599 |
Owned & Leased
|
||||||
|
Stone Mountain, GA
|
Refrigeration
|
Manufacturing &Business Unit Headquarters
|
145 |
Owned
|
||||||
|
Columbus, GA(1)
|
Refrigeration
|
Manufacturing, Warehousing & Offices
|
395 |
Owned & Leased
|
||||||
|
Midland, GA(1)
|
Refrigeration
|
Warehousing & Offices
|
138 |
Leased
|
||||||
|
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) | These properties were acquired on January 14, 2011, as part of the acquisition of Kysor/Warren. |
15
Table of Contents
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 16 to
the Consolidated Financial Statements for additional information
regarding restructuring activities.
The Residential & Commercial Heating &
Cooling distribution network is currently in the process of
being redesign for greater productivity, cost improvement, and
customer reach. Included in the table above are our large
warehouses that hold a significant inventory balance.
| Item 3. | Legal Proceedings |
On February 6, 2008, a class action lawsuit was filed
against us in the U.S. District Court for the Northern
District of California styled
Keilholtz v. Lennox Hearth
Products, Inc., Lennox Industries, Inc. and Lennox
International, Inc.
The lawsuit, which involves no personal
injury claims, alleges that certain of our single-pane,
glass-front, gas fireplaces are hazardous and that consumers
were not adequately warned, and seeks economic damages. On
February 16, 2010, the court issued an order certifying a
nationwide class of plaintiffs.
On August 23, 2010, the Company and the plaintiffs entered
into a binding Memorandum of Understanding (MOU) containing
tentative terms for settlement of the case. At the parties’
request, the court stayed the lawsuit shortly after the MOU was
signed. On January 11, 2011, the court granted preliminary
approval of the settlement. The court set June 2, 2011, as
the date for the final approval hearing.
We are involved in a number of other 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. | (Removed and Reserved) |
| 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 2010 and 2009 were as follows:
| Price Range Per Common Share | ||||||||||||||||
| 2010 | 2009 | |||||||||||||||
| High | Low | High | Low | |||||||||||||
|
First Quarter
|
$ | 45.50 | $ | 38.06 | $ | 34.97 | $ | 23.47 | ||||||||
|
Second Quarter
|
51.09 | 40.31 | 34.70 | 25.21 | ||||||||||||
|
Third Quarter
|
46.99 | 40.10 | 38.03 | 30.07 | ||||||||||||
|
Fourth Quarter
|
49.32 | 39.14 | 41.11 | 33.16 | ||||||||||||
16
Table of Contents
Dividends
During 2010 and 2009, we declared quarterly cash dividends as
set forth below:
|
Dividends per
|
||||||||
| Common Share | ||||||||
| 2010 | 2009 | |||||||
|
First Quarter
|
$ | 0.15 | $ | 0.14 | ||||
|
Second Quarter
|
0.15 | 0.14 | ||||||
|
Third Quarter
|
0.15 | 0.14 | ||||||
|
Fourth Quarter
|
0.15 | 0.14 | ||||||
|
Fiscal Year
|
$ | 0.60 | $ | 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 7, 2011, there were approximately 623
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, a broad
index of mid-size U.S. companies of which the Company is a
part, and a peer group of U.S. industrial manufacturing and
service companies in the heating, ventilation, air conditioning
and refrigeration businesses from December 31, 2005 through
December 31, 2010. The graph assumes that $100 was invested
on December 31, 2005, 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
Assumes Initial Investment of $100
December 2010
Assumes Initial Investment of $100
December 2010
This performance graph and other information furnished under
this Part II Item 5(a) of this
Form 10-K
shall not be deemed to be “soliciting material” or to
be “filed” with the Securities and Exchange Commission
or subject to Regulation 14A or 14C, or to the liabilities
of Section 18 of the Exchange Act of 1934.
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 2010, 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
|
1,243 | $ | 42.02 | — | $ | 141.0 | ||||||||||
|
November 1 through November 30
|
5,537 | $ | 42.04 | — | $ | 141.0 | ||||||||||
|
December 1 through December 31
|
67,856 | $ | 46.50 | — | $ | 141.0 | ||||||||||
|
Total
|
74,636 | $ | 46.10 | — | ||||||||||||
| (1) | Since there were no repurchases under the 2008 Share Repurchase Plan in the fourth quarter of 2010, this column reflects the surrender to LII of 74,636 shares of common stock to satisfy tax-withholding obligations in connection with the vesting of restricted stock units 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, 2010:
| For the Years Ended December 31, | ||||||||||||||||||||
| 2010 | 2009 | 2008 | 2007 | 2006 | ||||||||||||||||
| (In millions, except per share data) | ||||||||||||||||||||
|
Statements of Operations Data
|
||||||||||||||||||||
|
Net Sales
|
$ | 3,096.4 | $ | 2,847.5 | $ | 3,441.1 | $ | 3,691.7 | $ | 3,662.1 | ||||||||||
|
Operational Income From Continuing Operations
|
190.4 | 109.2 | 218.6 | 264.9 | 222.7 | |||||||||||||||
|
Income From Continuing Operations
|
117.1 | 61.8 | 123.8 | 165.7 | 167.1 | |||||||||||||||
|
Net Income
|
116.2 | 51.1 | 122.8 | 169.0 | 166.0 | |||||||||||||||
|
Diluted Earnings Per Share From Continuing Operations
|
2.10 | 1.09 | 2.12 | 2.39 | 2.27 | |||||||||||||||
|
Dividends Per Share
|
0.60 | 0.56 | 0.56 | 0.53 | 0.46 | |||||||||||||||
|
Other Data
|
||||||||||||||||||||
|
Capital Expenditures
|
$ | 45.8 | $ | 58.8 | $ | 62.1 | $ | 70.2 | $ | 74.8 | ||||||||||
|
Research and Development Expenses
|
49.5 | 48.9 | 46.0 | 43.6 | 42.2 | |||||||||||||||
|
Balance Sheet Data at Period End
|
||||||||||||||||||||
|
Total Assets
|
$ | 1,692.0 | $ | 1,543.9 | $ | 1,659.5 | $ | 1,814.6 | $ | 1,719.8 | ||||||||||
|
Total Debt
|
319.0 | 231.5 | 420.4 | 207.9 | 109.2 | |||||||||||||||
|
Stockholders’ Equity
|
589.7 | 604.4 | 458.6 | 808.5 | 804.4 | |||||||||||||||
| Item 7. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
The following discussions should be read in conjunction with the
other sections of this report, including the consolidated
financial statements and related notes contained in Item 8
of this Annual Report on
Form 10-K.
Overview
We operate in four reportable business segments of the heating,
ventilation, air conditioning and refrigeration,
(“HVACR”) industry. Our reportable segments are
Residential Heating & Cooling, Commercial
Heating & Cooling, Service Experts and Refrigeration.
For more detailed information regarding our reportable segments,
see Note 19 in the Notes to our Consolidated Financial
Statements.
Our products and services are sold through a combination of
distributors, independent and company-owned dealer service
centers, other installing contractors, wholesalers,
manufacturers’ representatives, 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. 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.
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, the volatility of
commodity prices and related components has impacted us and the
HVACR industry in general. We endeavor to mitigate the impact of
higher commodity prices through a combination of price
increases, commodity contracts, improved production
19
Table of Contents
efficiency and cost reduction initiatives. We also partially
mitigate volatility in the prices of these commodities by
entering into futures contracts and fixed forward contracts.
Company
Highlights
| • | Net sales for 2010 were $3,096.4 million, compared to $2,847.5 million in 2009 and were favorably impacted by higher volumes across all segments. | |
| • | Operational income from continuing operations for 2010 was $190.4 million compared to $109.2 million for 2009. The improvement to operational income was primarily due to higher sales volumes and productivity. | |
| • | Net income for 2010 was $116.2 million compared to $51.1 million in 2009. Diluted earnings per share from continuing operations was $2.10 per share in 2010 compared to $1.09 per share in 2009. | |
| • | We generated $185.8 million of cash flow from operating activities in 2010 compared to $225.5 million in 2009. | |
| • | During 2010, we returned $144.3 million to shareholders through share repurchases. |
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, | ||||||||||||||||||||||||
| 2010 | 2009 | 2008 | ||||||||||||||||||||||
| Dollars | Percent | Dollars | Percent | Dollars | Percent | |||||||||||||||||||
|
Net sales
|
$ | 3,096.4 | 100.0 | % | $ | 2,847.5 | 100.0 | % | $ | 3,441.1 | 100.0 | % | ||||||||||||
|
Cost of goods sold
|
2,204.6 | 71.2 | 2,059.4 | 72.3 | 2,506.6 | 72.8 | ||||||||||||||||||
|
Gross profit
|
891.8 | 28.8 | 788.1 | 27.7 | 934.5 | 27.2 | ||||||||||||||||||
|
Selling, general and administrative expenses
|
685.7 | 22.1 | 644.9 | 22.6 | 686.9 | 20.0 | ||||||||||||||||||
|
Losses (gains) and other expenses, net
|
10.2 | 0.3 | (6.6 | ) | (0.2 | ) | (1.9 | ) | (0.1 | ) | ||||||||||||||
|
Restructuring charges
|
15.6 | 0.5 | 41.5 | 1.5 | 30.4 | 0.9 | ||||||||||||||||||
|
Impairment of assets
|
— | — | 6.4 | 0.2 | 9.1 | 0.3 | ||||||||||||||||||
|
Income from equity method investments
|
(10.1 | ) | (0.3 | ) | (7.3 | ) | (0.2 | ) | (8.6 | ) | (0.3 | ) | ||||||||||||
|
Operational income from continuing operations
|
$ | 190.4 | 6.2 | % | $ | 109.2 | 3.8 | % | $ | 218.6 | 6.4 | % | ||||||||||||
|
Net income
|
$ | 116.2 | 3.8 | % | $ | 51.1 | 1.8 | % | $ | 122.8 | 3.6 | % | ||||||||||||
The following table sets forth net sales by geographic market
(dollars in millions):
| For the Years Ended December 31, | ||||||||||||||||||||||||
| 2010 | 2009 | 2008 | ||||||||||||||||||||||
| Dollars | Percent | Dollars | Percent | Dollars | Percent | |||||||||||||||||||
|
Geographic Market:
|
||||||||||||||||||||||||
|
U.S.
|
$ | 2,255.4 | 72.8 | % | $ | 2,033.1 | 71.4 | % | $ | 2,429.2 | 70.6 | % | ||||||||||||
|
Canada
|
336.6 | 10.9 | 327.0 | 11.5 | 363.9 | 10.6 | ||||||||||||||||||
|
International
|
504.4 | 16.3 | 487.4 | 17.1 | 648.0 | 18.8 | ||||||||||||||||||
|
Total net sales
|
$ | 3,096.4 | 100.0 | % | $ | 2,847.5 | 100.0 | % | $ | 3,441.1 | 100.0 | % | ||||||||||||
Year
Ended December 31, 2010 Compared to Year Ended
December 31, 2009 — Consolidated
Results
Net
Sales
Sales increased 8.7% for 2010 as compared to 2009 due to
increased sales volumes of 5% primarily driven by growth across
all four business segments. Volume improved in all four
reportable business segments, led by strength in Residential
Heating & Cooling and Service Experts. Price and mix
of approximately 2% also had a favorable impact on sales.
Changes in foreign currency exchange rates favorably impacted
net sales by 2%.
Gross
Profit
Gross profit margins improved approximately 110 basis
points to 28.8% for 2010, compared to gross profit margins of
27.7% in 2009. This improvement was primarily driven by lower
product costs from material savings and manufacturing
efficiencies of approximately 140 basis points. Gross
profit margin comparisons were also favorably impacted by
60 basis points for expenses related to a product quality
issue that were recorded in 2009 with no such expenses in 2010.
Partially offsetting these positive impacts to gross profit
margins were commodities headwinds of 50 basis points and
increased freight and distribution expenses that decreased gross
profit margins by approximately 50 basis points primarily
in the Residential Heating & Cooling segment.
21
Table of Contents
Selling,
General and Administrative Expenses
Selling, general and administrative (“SG&A”)
expenses increased by $40.8 million in 2010 as compared to
2009, and as a percentage of sales, SG&A expenses were down
50 basis points from 22.6% in 2009 to 22.1% in 2010.
SG&A expenses increased $16 million due to increased
variable incentive compensation driven by improved financial
performance and $35 million related to increased variable
selling, advertising, and promotion expenses in support of our
sales growth. These increases were partially offset by lower bad
debt expense and pension costs.
Losses
(Gains) and Other Expenses, Net
Losses (gains) and other expenses, net for 2010 and 2009
included the following (in millions):
|
For the Years Ended
|
||||||||
| December 31, | ||||||||
| 2010 | 2009 | |||||||
|
Realized (gains) losses on settled futures contracts
|
$ | (1.5 | ) | $ | 3.7 | |||
|
Unrealized gains on unsettled futures contracts
|
(0.6 | ) | (7.1 | ) | ||||
|
Gain on the disposal of a business, net
|
(0.1 | ) | (4.1 | ) | ||||
|
Special legal contingency charge
|
6.8 | — | ||||||
|
Acquisition expenses
|
4.8 | — | ||||||
|
Foreign currency exchange losses
|
0.4 | 0.7 | ||||||
|
Other items, net
|
0.4 | 0.2 | ||||||
|
Losses (gains) and other expenses, net
|
$ | 10.2 | $ | (6.6 | ) | |||
The change in gains and losses on settled futures contracts was
primarily due to increases in commodity prices relative to the
futures contract prices during 2010 as compared to 2009.
Conversely, the change in unrealized gains related to unsettled
futures contracts was primarily due to lower commodity prices
relative to the futures contract prices for those contracts. For
more information, see Note 8 in the Notes to the
Consolidated Financial Statements. For more information
regarding the special legal contingency charge, see Note 10
in the Notes to the Consolidated Financial Statements.
Acquisition expenses relate to an acquisition consummated
subsequent to year end. For more information, see Note 24
in the Notes to the Consolidated Financial Statements.
Restructuring
Charges
Restructuring charges were $15.6 million in 2010 compared
to $41.5 million in 2009. The lower restructuring charges
in 2010 were primarily due to a smaller number of large projects
in 2010. The restructuring charges in 2010 primarily consisted
of manufacturing rationalization projects in Australia in the
Refrigeration segment which totaled $8.6 million as well as
administrative reorganizations in our Service Experts segment
which totaled $2.1 million. The remaining restructuring
charges in 2010 were primarily related to projects announced
prior to 2010. Restructuring charges in 2009 primarily consisted
of three large manufacturing rationalization projects totaling
$25.2 million and $11.3 million in various corporate
and business unit administrative reorganizations. For a detailed
discussion regarding restructuring activities, see Note 16
in the Notes to the Consolidated Financial Statements.
Income
from Equity Method 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 increased
to $10.1 million in 2010 as compared to $7.3 million
in 2009 primarily due to the improved performance of our
U.S. joint venture in compressor manufacturing, which
experienced increased sales and profitability.
22
Table of Contents
Interest
Expense, net
Interest expense, net increased to $12.8 million in 2010 as
compared to $8.2 million in 2009. The increase in interest
expense was primarily attributable to higher debt levels, and
the issuance of $200 million of our senior unsecured notes
at 4.91% with a higher interest rate than our revolver.
Income
Taxes
The income tax provision was $59.5 million in 2010 as
compared to $39.1 million in 2009. The effective tax rate
was 33.7% for 2010 as compared to 38.8% for 2009. 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
During 2008 and 2009, we announced plans to sell twelve service
centers. We sold all of these service centers during 2009 and
2010.
The pre-tax operating loss from discontinued operations was
$1.1 million in 2010 as compared to $13.1 million in
2009. Included in the 2009 loss from discontinued operations was
an impairment charge of $2.7 million related to service
centers where the estimated selling price of the assets was
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.
Year
Ended December 31, 2010 Compared to Year Ended
December 31, 2009 — Results by
Segment
Residential
Heating & Cooling
The following table details our Residential Heating &
Cooling segment’s net sales and profit for 2010 and 2009
(dollars in millions):
|
Years Ended
|
||||||||||||||||
| December 31, | ||||||||||||||||
| 2010 | 2009 | Difference | % Change | |||||||||||||
|
Net sales
|
$ | 1,417.4 | $ | 1,293.5 | $ | 123.9 | 9.6 | % | ||||||||
|
Profit
|
132.3 | 111.7 | 20.6 | 18.4 | ||||||||||||
|
% of net sales
|
9.3 | % | 8.6 | % | ||||||||||||
The increase in sales was due to the recovery of the
U.S. residential end markets, primarily the replacement
market. Sales volumes increased net sales by 8% in 2010 as
compared to 2009, while price and mix were relatively flat at a
1% increase. The positive impact of changes in foreign currency
exchange rates also increased sales by 1%.
Segment profit increased $20.6 million, including
$25 million due to the increase in sales and
$14 million due to material savings and manufacturing
efficiencies partially offset by commodities headwinds of
$9 million. These were partially offset by higher SG&A
expenses of $14 million consisting primarily of increased
variable selling expenses and incentive compensation.
Commercial
Heating & Cooling
The following table details our Commercial Heating &
Cooling segment’s net sales and profit for 2010 and 2009
(dollars in millions):
|
Years Ended
|
||||||||||||||||
| December 31, | ||||||||||||||||
| 2010 | 2009 | Difference | % Change | |||||||||||||
|
Net sales
|
$ | 620.0 | $ | 594.6 | $ | 25.4 | 4.3 | % | ||||||||
|
Profit
|
69.3 | 49.3 | 20.0 | 40.6 | ||||||||||||
|
% of net sales
|
11.2 | % | 8.3 | % | ||||||||||||
23
Table of Contents
Our Commercial Heating & Cooling business experienced
increased sales volumes of nearly 3% during 2010 primarily due
to introductions of energy efficient products and an increase in
planned replacement business at national retail accounts as well
as strong growth in the schools market. Price and mix were
favorable by 2%. Foreign currency exchange rates decreased sales
by 1%.
Segment profit increased $20.0 million, including nearly
$19 million due to the increase in net sales and
$3 million due to material savings and manufacturing
efficiencies. These increases were partially offset by higher
SG&A expenses of $3 million consisting primarily of
increased variable selling expenses and incentive compensation.
Service
Experts
The following table details our Service Experts segment’s
net sales and profit for 2010 and 2009 (dollars in millions):
|
Years Ended
|
||||||||||||||||
| December 31, | ||||||||||||||||
| 2010 | 2009 | Difference | % Change | |||||||||||||
|
Net sales
|
$ | 590.3 | $ | 535.4 | $ | 54.9 | 10.3 | % | ||||||||
|
Profit
|
19.3 | 16.6 | 2.7 | 16.3 | ||||||||||||
|
% of net sales
|
3.3 | % | 3.1 | % | ||||||||||||
Net sales increased primarily due to the improvements in the
residential service and replacement end markets. In addition, we
have had significant growth in our commercial service business.
The sales increase was primarily due to an increase in sales
volumes of 5%. Price and mix increased sales by 3%. Foreign
currency exchange rates increased sales by 2%.
Segment profit increased $2.7 million, including nearly
$6 million due to the increase in sales. Higher selling
expenses of $3 million partially offset the favorable
effect of higher revenues.
Refrigeration
The following table details our Refrigeration segment’s net
sales and profit for 2010 and 2009 (dollars in millions):
|
Years Ended
|
||||||||||||||||
| December 31, | ||||||||||||||||
| 2010 | 2009 | Difference | % Change | |||||||||||||
|
Net sales
|
$ | 550.9 | $ | 512.7 | $ | 38.2 | 7.5 | % | ||||||||
|
Profit
|
61.4 | 48.9 | 12.5 | 25.6 | ||||||||||||
|
% of net sales
|
11.1 | % | 9.5 | % | ||||||||||||
Net sales increased due to higher sales volumes of about 1% and
the favorable impact of changes in foreign currency exchange
rates of 5%. Price and mix also increased sales by approximately
1%.
Segment profit increased $12.5 million, including
$10 million due to the increase in sales and almost
$3 million in improved material savings and manufacturing
efficiencies as those factors more than offset commodity price
pressures.
Corporate
and Other
Corporate and other expenses were $65.5 million in 2010, up
from $62.5 million in 2009. The increase was primarily
driven by increases in stock-based and incentive compensation
expenses of approximately $8 million, partially offset by
lower pension costs of approximately $4 million.
24
Table of Contents
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 50 basis points to 27.7% for
2009, compared to gross margins of 27.2% in 2008. Gross profit
margins improved by approximately 150 basis points due to
pricing actions. Lower product costs favorably impacted 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 in 2009.
Selling,
General and Administrative Expenses
Selling, general and administrative (“SG&A”)
expenses decreased by approximately $42.0 million in 2009
as compared to 2008 and as a percentage of total net sales,
SG&A expenses were 22.6% 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.
Losses
(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 | ||||||
|
Losses (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
25
Table of Contents
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 22 in the Notes to the Consolidated
Financial Statements.
Restructuring
Charges
Restructuring charges were $41.5 million in 2009 compared
to $30.4 million in 2008. In 2009, we announced three large
manufacturing rationalization projects which included
$9.7 million for the closure of the Blackville, South
Carolina facility, $7.8 million for the closure of our
Parets, Spain facility, and $7.7 million for the closure of
our Mions, France facility. In addition, we had
$11.3 million in restructuring charges in 2009 related to
various reorganizations of corporate and business unit
administrative functions. Restructuring charges in 2009 were
higher than 2008 due to the number of large restructuring
projects in 2009. We realized approximately $24 million
from restructuring savings in 2009. For a detailed discussion
regarding restructuring activities, see Note 16 in the
Notes to the Consolidated Financial Statements.
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.
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
We have reclassified a pre-tax loss of $13.1 million in
2009 as discontinued operations as compared to a pre-tax loss of
$1.8 million during 2008. Included in the 2009 loss from
discontinued operations was an impairment charge of
$2.7 million related to service centers where the estimated
selling price of the assets was 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 included 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.
26
Table of Contents
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, sales to the residential HVAC 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. 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.
27
Table of Contents
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.
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.
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 Losses (Gains) and Other
Expenses, net in the accompanying Consolidated Statements of
Operations. See Note 19 to our Consolidated Financial
Statements for more information and a reconciliation of segment
profit to net income.
28
Table of Contents
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 2010, 2009
and 2008 (in millions):
| 2010 | 2009 | 2008 | ||||||||||
| (In millions) | ||||||||||||
|
Net cash provided by operating activities
|
$ | 185.8 | $ | 225.5 | $ | 183.2 | ||||||
|
Net cash used in investing activities
|
(61.4 | ) | (14.0 | ) | (66.5 | ) | ||||||
|
Net cash used in financing activities
|
(93.5 | ) | (211.7 | ) | (132.0 | ) | ||||||
Net cash
provided by operating activities
During 2010, cash provided by operating activities was lower
than in 2009 primarily due to increased working capital needs in
support of our sales growth. An increase in accounts receivable
resulted in a cash use of $29.3 million and an increase in
inventories resulted in a cash use of $31.1 million. This
was partially offset by increased accounts payable of
$33.6 million. Increased net income of $116.2 million
in 2010 up from $51.1 million in 2009 partially offset
these unfavorable working capital impacts to operating cash
flows.
We contributed $5.6 million to our defined benefit pension
plans in 2010 as compared to $42.2 million in 2009. We made
no payments on our asset securitization program in 2010 as
compared to payments of $30.0 million in 2009. We received
cash of $37.9 million in 2009 from collateral previously
posted related to commodity hedge derivative loss positions in
2008, partially offsetting the positive impacts on operating
cash flows in 2010 compared to 2009. We paid $26.6 million
for restructuring activities in 2010 resulting in a negative
impact on operating cash flows of $11.0 million in 2010 as
compared to an $18.6 million source of cash in 2009.
Net cash
used in investing activities
Net cash used in investing activities in 2010 increased due to
the net purchase of businesses of $3.6 million and
restricted cash of $12.2 million. Investing activities in
2009 included net cash of $10.0 million from the sale of
businesses and the net positive cash flow impact of
$33.3 million for net short-term investments which
negatively impacted the comparison of 2010 investing cash flow
to those experienced in 2009. Capital expenditures were
$45.8 million, $58.8 million and $62.1 million in
2010, 2009 and 2008, respectively. In 2010 capital expenditures
were lower due to project timing and are anticipated to increase
in 2011 to similar levels as 2009 and 2008. On January 14,
2011, we paid $145.2 million, including a purchase price
working capital adjustment, to complete the Kysor/Warren
acquisition.
Net cash
used in financing activities
Net borrowings of long-term debt, short-term borrowings and
revolving long-term payments totaled approximately
$86.6 million in 2010 compared to net payments of
$189.3 million in 2009. During 2010, we used approximately
$144.3 million to repurchase approximately 3.3 million
shares of our common stock under our share repurchase plans.
Debt
Position and Financial Leverage
Our
debt-to-total
capital ratio increased to 35.1% as of December 31, 2010
from 27.7% as of December 31, 2009 due to higher
outstanding debt. For a detailed description regarding our debt
including our debt covenants, see Note 11 in the Notes to
the Consolidated Financial Statements.
As of December 31, 2010, we had outstanding long-term debt
obligations totaling $317.0 million, which increased from
$193.8 million as of December 31, 2009. The amount
outstanding as of December 31, 2010
29
Table of Contents
consisted primarily of outstanding borrowings of
$100.0 million under our domestic revolving credit
facility, which matures in 2012, and $200.0 million of
senior unsecured notes.
As of December 31, 2010, we had outstanding borrowings of
$100.0 million under our $650.0 million domestic
revolving credit facility and $69.5 million was committed
to standby letters of credit. The remaining $480.5 million
was available for future borrowings subject to covenant
limitations. The facility matures in October 2012. As of
December 31, 2010, we were in compliance with all covenant
requirements.
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 0.96% and 0.84% as of December 31, 2010 and 2009,
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, 2010 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 under our revolving credit facility 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 in the performance of, or compliance with any term of any other indebtedness or receivables securitization in an aggregate principal amount of at least $40.0 million, or any other condition exists which would give the holders the right to declare such indebtedness due and payable prior to its stated maturity. |
Each of our major debt agreements contains provisions by which a
default under one agreement causes a default in the others (a
cross default). If a cross default under the revolving credit
facility, our senior unsecured notes, or our revolving period
asset securitization program were 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).
On May 6, 2010, we issued $200.0 million of senior
unsecured notes due May 15, 2017 bearing fixed interest at
4.90% as a result of a public offering of securities. We
received proceeds of $199.8 million from the offering for a
yield of 4.91%. We also paid and capitalized $1.9 million
of debt issue costs related to the issuance. We pay interest on
the notes semiannually on May 15 and November 15.
The proceeds from the issuance were used to repay outstanding
indebtedness under our domestic revolving credit facility,
working capital and other general corporate purposes, including
repurchases of shares of our common stock pursuant to our
previously announced share repurchase plans.
Upon a change of control, holders of our notes will have the
right to require us to repurchase all or a portion of the senior
unsecured notes at a repurchase price equal to 101% of the
principal amount of the notes repurchased, plus accrued and
unpaid interest, if any. The notes are guaranteed, on a senior
unsecured basis, by each of our domestic subsidiaries that
guarantee payment by us of any indebtedness under our domestic
revolving credit
30
Table of Contents
facility. The indenture governing the notes contains covenants
that, among other things, limit our ability and the ability of
the subsidiary guarantors to: create or incur certain liens;
enter into certain sale and leaseback transactions; enter into
certain mergers, consolidations and transfers of substantially
all of our assets; and transfer certain properties. The
indenture also contains a cross default provision which is
triggered if we default on other debt of at least
$75 million in principal which is then accelerated, and
such acceleration is not rescinded within 30 days of the
notice date.
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 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 and beneficial interests sold were as follows (in
millions):
|
As of
|
As of
|
|||||||
|
December 31,
|
December 31,
|
|||||||
| 2010 | 2009 | |||||||
|
Eligible amount available under the ASA on qualified accounts
receivable
|
$ | 100.0 | $ | 72.5 | ||||
|
Beneficial interest sold
|
— | — | ||||||
|
Remaining amount available
|
$ | 100.0 | $ | 72.5 | ||||
As of December 31, 2010, $12.2 million of cash and
cash equivalents were restricted and held in a trust for our
captive insurance subsidiary.
We periodically review our capital structure, including our
primary bank facility, to ensure that it has adequate liquidity.
We believe that cash flows from operations, as well as available
borrowings under our revolving credit facility and other
existing sources of funding, will be sufficient to fund our
operations for the foreseeable future and share repurchases
under the terms of our 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, 2010 and 2009, we recorded both
a long-term asset and a corresponding long-term obligation of
$14.3 million 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. Rent expense for these leases was
$64.3 million, $64.4 million and $64.2 million in
2010, 2009 and 2008, respectively.
31
Table of Contents
Contractual
Obligations
Summarized below are our contractual obligations as of
December 31, 2010 (in millions):
| Payments Due by Period | ||||||||||||||||||||
|
1 Year
|
2-3
|
4-5
|
After
|
|||||||||||||||||
| Total | or Less | Years | Years | 5 Years | ||||||||||||||||
|
Total debt obligations
|
$ | 319.0 | $ | 2.0 | $ | 101.4 | $ | 1.2 | $ | 214.4 | ||||||||||
|
Operating leases
|
171.4 | 54.2 | 68.1 | 29.3 | 19.8 | |||||||||||||||
|
Purchase obligations
|
15.9 | 15.9 | — | — | — | |||||||||||||||
|
Estimated interest payments on long-term debt
|
100.5 | 19.4 | 30.8 | 24.4 | 25.9 | |||||||||||||||
|
Total contractual obligations
|
$ | 606.8 | $ | 91.5 | $ | 200.3 | $ | 54.9 | $ | 260.1 | ||||||||||
As of December 31, 2010, the liability for uncertain tax
positions, including interest and penalties, was
$1.1 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 be funded. For additional information regarding our
contractual obligations, see Note 10, Note 11 and
Note 12 of the Notes to the Consolidated Financial
Statements. Contractual obligations related to capital leases as
of December 31, 2010 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, 2010 and 2009, the measurement dates.
32
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.
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.
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)
|
21.3 | |||
|
Carrying amount and fair value of asset
|
$ | 20.2 | ||
|
Change in fair value from 10% change in forward prices
|
$ | 2.0 |
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.
33
Table of Contents
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 liability
|
$ | 2.0 | ||
|
Interest expense
|
$ | 1.3 |
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 2010, 2009 and 2008, net sales from outside the
U.S. represented 27.2%, 28.6% and 29.4%, 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, 2010, the impact to net
income of a 10% change in exchange rates is estimated to be
approximately $4.4 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. |
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
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.
34
Table of Contents
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 2010 and 2009. The average rate
used to discount the estimated cash flows for each reporting
unit was 10.1% in 2010 and 11.2% in 2009.
Below is a sensitivity analysis regarding the aggregate fair
value of our reporting units to changes in average discount
rates for 2010 (in millions):
|
Approximate decrease in fair value from a 100 basis point
increase in discount rate
|
$ | (400 | ) | |
|
Approximate increase in fair value from a 100 basis point
decrease in discount rate
|
$ | 600 |
We also monitor economic, legal, regulatory and other factors
for LII as a whole and for each reporting unit between annual
impairment tests to ensure that there are no indicators that
make it more likely than not that there has been a decline in
the fair value of the reporting unit below its carrying value.
Specifically, we monitor industry trends, our market
capitalization, recent and forecasted financial performance of
our reporting units, and the timing and nature of our
restructuring activities. While our recent financial performance
is below historical levels, we do not currently believe that
there are any indicators of impairment. If these estimates or
the related assumptions change, we may be required to record
non-cash impairment charges for these assets in the future.
Product
Warranties
The estimate of our liability for future warranty costs requires
us to make significant assumptions about the amount, timing and
nature of the costs we will incur in the future. As some of 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 10 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 5.47% for pension benefits
of our U.S. qualified pension plans and 5.30% for other
benefits were used to calculate the liability as of
35
Table of Contents
December 31, 2010. 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 2010, we have utilized 8.00% as the
assumed long-term rate of return on assets, which is
25 basis points lower than our 2009 estimate. These are
long-term estimates of equity values and are not dependent on
short-term variations of the equity markets. 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
accumulated other comprehensive income (“AOCI”) and
are amortized into net periodic benefit cost over the estimated
service period. For two of our pension plans, nearly all of the
participants were considered inactive because the plan benefits
were frozen by the company. As a result, we increased the
amortization term for these plans from the remaining service
lives of participants to their average life expectancy. The
change in amortization term had a favorable $3.4 million
impact to expense. The timing and amount of our contributions
also impact funding levels and the expected return on assets. In
2010, we contributed $5.6 million to our pension plans and
we contributed $42.2 million in 2009.
The assumed long-term rate of return on assets and the discount
rate have significant effects on the amounts reported for our
defined benefit plans. A 25 basis point decrease in the
long-term rate of return on assets or discount rate would have
the following effects (in millions):
|
25 Basis Point
|
||||||||
|
Decrease in Long-
|
25 Basis Point
|
|||||||
|
Term Rate of
|
Decrease in
|
|||||||
| Return | Discount Rate | |||||||
|
Effect on net periodic benefit cost
|
$ | 0.5 | $ | 0.6 | ||||
|
Effect on the postretirement benefit obligations
|
N/A | 9.9 | ||||||
Assumed healthcare cost trend rates have a significant effect on
the amounts reported for our healthcare plan. For 2010, our
assumed healthcare cost trend rate was 8.50%. In 2010, we
lengthened our assumption regarding the decline in healthcare
cost trend assumption to the ultimate trend rate of 5.0% from 8
to 10 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
|
$ | 0.2 | $ | (0.2 | ) | |||
|
Effect on the postretirement benefit obligation
|
1.6 | (1.4 | ) | |||||
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 12 in the Notes to our Consolidated Financial
Statements.
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.
36
Table of Contents
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 $61.3 million
as of December 31, 2010 and $60.4 million as of
December 31, 2009.
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. 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 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.
37
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, including our Chief Executive Officer and Chief
Financial Officer, has undertaken an assessment of the
effectiveness of the Company’s internal control over
financial reporting as of December 31, 2010, 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, 2010, 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, 2010, a copy of which is included herein.
38
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, 2010 and 2009, 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, 2010. 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, 2010,
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.
39
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, 2010 and 2009, and the results of their
operations and their cash flows for each of the years in the
three-year period ended December 31, 2010, 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, 2010, 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, 2011
40
Table of Contents
LENNOX
INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
As of December 31, 2010 and 2009
(In millions, except share and per share data)
CONSOLIDATED BALANCE SHEETS
As of December 31, 2010 and 2009
(In millions, except share and per share data)
| 2010 | 2009 | |||||||
|
ASSETS
|
||||||||
|
CURRENT ASSETS:
|
||||||||
|
Cash and cash equivalents
|
$ | 160.0 | $ | 124.3 | ||||
|
Restricted cash
|
12.2 | — | ||||||
|
Accounts and notes receivable, net of allowances of $12.8 and
$15.6 in 2010 and 2009, respectively
|
384.8 | 357.0 | ||||||
|
Inventories, net
|
286.2 | 250.2 | ||||||
|
Deferred income taxes
|
36.7 | 34.9 | ||||||
|
Other assets
|
67.0 | 67.5 | ||||||
|
Total current assets
|
946.9 | 833.9 | ||||||
|
PROPERTY, PLANT AND EQUIPMENT, net
|
324.3 | 329.6 | ||||||
|
GOODWILL
|
271.8 | 257.4 | ||||||
|
DEFERRED INCOME TAXES
|
87.2 | 74.6 | ||||||
|
OTHER ASSETS, net
|
61.8 | 48.4 | ||||||
|
TOTAL ASSETS
|
$ | 1,692.0 | $ | 1,543.9 | ||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
|
CURRENT LIABILITIES:
|
||||||||
|
Short-term debt
|
$ | 1.4 | $ | 2.2 | ||||
|
Current maturities of long-term debt
|
0.6 | 35.5 | ||||||
|
Accounts payable
|
273.8 | 238.2 | ||||||
|
Accrued expenses
|
334.5 | 317.9 | ||||||
|
Income taxes payable
|
5.3 | — | ||||||
|
Total current liabilities
|
615.6 | 593.8 | ||||||
|
LONG-TERM DEBT
|
317.0 | 193.8 | ||||||
|
POSTRETIREMENT BENEFITS, OTHER THAN PENSIONS
|
15.9 | 13.4 | ||||||
|
PENSIONS
|
88.1 | 66.7 | ||||||
|
OTHER LIABILITIES
|
65.7 | 71.8 | ||||||
|
Total liabilities
|
1,102.3 | 939.5 | ||||||
|
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, 86,480,816 shares and 85,567,485 shares issued
for 2010 and 2009, respectively
|
0.9 | 0.9 | ||||||
|
Additional paid-in capital
|
863.5 | 839.1 | ||||||
|
Retained earnings
|
642.2 | 558.6 | ||||||
|
Accumulated other comprehensive income (loss)
|
30.2 | (0.8 | ) | |||||
|
Treasury stock, at cost, 32,784,503 shares and
29,292,512 shares for 2010 and 2009, respectively
|
(947.1 | ) | (793.4 | ) | ||||
|
Total stockholders’ equity
|
589.7 | 604.4 | ||||||
|
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
|
$ | 1,692.0 | $ | 1,543.9 | ||||
The accompanying notes are an integral part of these
consolidated financial statements.
41
Table of Contents
LENNOX
INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended December 31, 2010, 2009 and 2008
(In millions, except per share data)
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended December 31, 2010, 2009 and 2008
(In millions, except per share data)
| 2010 | 2009 | 2008 | ||||||||||
|
NET SALES
|
$ | 3,096.4 | $ | 2,847.5 | $ | 3,441.1 | ||||||
|
COST OF GOODS SOLD
|
2,204.6 | 2,059.4 | 2,506.6 | |||||||||
|
Gross profit
|
891.8 | 788.1 | 934.5 | |||||||||
|
OPERATING EXPENSES:
|
||||||||||||
|
Selling, general and administrative expenses
|
685.7 | 644.9 | 686.9 | |||||||||
|
Losses (Gains) and Other Expenses, net
|
10.2 | (6.6 | ) | (1.9 | ) | |||||||
|
Restructuring charges
|
15.6 | 41.5 | 30.4 | |||||||||
|
Impairment of assets
|
— | 6.4 | 9.1 | |||||||||
|
Income from equity method investments
|
(10.1 | ) | (7.3 | ) | (8.6 | ) | ||||||
|
Operational income from continuing operations
|
190.4 | 109.2 | 218.6 | |||||||||
|
INTEREST EXPENSE, net
|
12.8 | 8.2 | 14.2 | |||||||||
|
OTHER EXPENSE, net
|
1.0 | 0.1 | 0.1 | |||||||||
|
Income from continuing operations before income taxes
|
176.6 | 100.9 | 204.3 | |||||||||
|
PROVISION FOR INCOME TAXES
|
59.5 | 39.1 | 80.5 | |||||||||
|
Income from continuing operations
|
117.1 | 61.8 | 123.8 | |||||||||
|
DISCONTINUED OPERATIONS:
|
||||||||||||
|
Loss from discontinued operations
|
1.1 | 13.1 | 1.8 | |||||||||
|
Income tax benefit
|
(0.2 | ) | (2.4 | ) | (0.8 | ) | ||||||
|
Loss from discontinued operations
|
0.9 | 10.7 | 1.0 | |||||||||
|
Net income
|
$ | 116.2 | $ | 51.1 | $ | 122.8 | ||||||
|
EARNINGS PER SHARE — BASIC:
|
||||||||||||
|
Income from continuing operations
|
$ | 2.14 | $ | 1.11 | $ | 2.18 | ||||||
|
Loss from discontinued operations
|
(0.01 | ) | (0.19 | ) | (0.01 | ) | ||||||
|
Net income
|
$ | 2.13 | $ | 0.92 | $ | 2.17 | ||||||
|
EARNINGS PER SHARE — DILUTED:
|
||||||||||||
|
Income from continuing operations
|
$ | 2.10 | $ | 1.09 | $ | 2.12 | ||||||
|
Loss from discontinued operations
|
(0.02 | ) | (0.19 | ) | (0.01 | ) | ||||||
|
Net income
|
$ | 2.08 | $ | 0.90 | $ | 2.11 | ||||||
|
AVERAGE SHARES OUTSTANDING:
|
||||||||||||
|
Basic
|
54.6 | 55.6 | 56.7 | |||||||||
|
Diluted
|
55.8 | 56.6 | 58.3 | |||||||||
|
CASH DIVIDENDS DECLARED PER SHARE
|
$ | 0.60 | $ | 0.56 | $ | 0.56 | ||||||
The accompanying notes are an integral part of these
consolidated financial statements.
42
Table of Contents
LENNOX
INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY AND COMPREHENSIVE (LOSS) INCOME
For the Years Ended December 31, 2010, 2009 and 2008
(In millions, except per share data)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY AND COMPREHENSIVE (LOSS) INCOME
For the Years Ended December 31, 2010, 2009 and 2008
(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 | (Loss) Income | |||||||||||||||||||||||||
|
ADJUSTED 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 | |||||||||||||||||
|
Net income
|
— | — | — | 116.2 | — | — | 116.2 | $ | 116.2 | |||||||||||||||||||||||
|
Dividends, $0.60 per share
|
— | — | — | (32.6 | ) | — | — | (32.6 | ) | — | ||||||||||||||||||||||
|
Foreign currency translation adjustments, net
|
— | — | — | — | 28.2 | — | 28.2 | 28.2 | ||||||||||||||||||||||||
|
Pension and postretirement liability changes, net of tax benefit
of $8.7
|
— | — | — | — | (13.3 | ) | — | (13.3 | ) | (13.3 | ) | |||||||||||||||||||||
|
Change in fair value of
available-for-sale
marketable equity securities changes
|
— | — | — | — | 12.5 | — | 12.5 | 12.5 | ||||||||||||||||||||||||
|
Stock-based compensation expense
|
— | — | 15.4 | — | — | — | 15.4 | — | ||||||||||||||||||||||||
|
Derivatives, net of tax provision of $2.1
|
— | — | — | — | 3.6 | — | 3.6 | 3.6 | ||||||||||||||||||||||||
|
Common stock issued
|
0.9 | — | 3.5 | — | — | — | 3.5 | — | ||||||||||||||||||||||||
|
Treasury stock purchases
|
— | — | — | — | — | (153.7 | ) | (153.7 | ) | — | ||||||||||||||||||||||
|
Tax benefits of stock-based compensation
|
— | — | 5.5 | — | — | — | 5.5 | — | ||||||||||||||||||||||||
|
Other tax related items
|
— | — | — | — | — | — | — | |||||||||||||||||||||||||
|
Comprehensive income
|
— | — | — | — | — | — | — | $ | 147.2 | |||||||||||||||||||||||
|
BALANCE AS OF DECEMBER 31, 2010
|
86.5 | $ | 0.9 | $ | 863.5 | $ | 642.2 | $ | 30.2 | $ | (947.1 | ) | $ | 589.7 | ||||||||||||||||||
The accompanying notes are an integral part of these
consolidated financial statement
43
Table of Contents
LENNOX
INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 2010, 2009 and 2008
(In millions)
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 2010, 2009 and 2008
(In millions)
| 2010 | 2009 | 2008 | ||||||||||
|
CASH FLOWS FROM OPERATING ACTIVITIES:
|
||||||||||||
|
Net income
|
$ | 116.2 | $ | 51.1 | $ | 122.8 | ||||||
|
Adjustments to reconcile net income to net cash provided by
operating activities:
|
||||||||||||
|
Income from equity method investments
|
(10.1 | ) | (7.3 | ) | (8.6 | ) | ||||||
|
Dividends from affiliates
|
12.3 | 11.3 | 14.3 | |||||||||
|
Restructuring expenses, net of cash paid
|
(11.0 | ) | 18.6 | 0.6 | ||||||||
|
Impairment of assets
|
— | 6.4 | 9.1 | |||||||||
|
Provision for bad debts
|
6.3 | 12.6 | 17.0 | |||||||||
|
Unrealized (gain) loss on derivative contracts
|
(0.7 | ) | (7.0 | ) | 5.1 | |||||||
|
Return (posting) of collateral for hedges
|
— | 37.9 | (37.9 | ) | ||||||||
|
Stock-based compensation expense
|
15.4 | 12.8 | 11.8 | |||||||||
|
Depreciation and amortization
|
53.5 | 52.9 | 50.6 | |||||||||
|
(Repayments) proceeds from sales of accounts receivable under
asset securitization
|
— | (30.0 | ) | 30.0 | ||||||||
|
Deferred income taxes
|
(9.5 | ) | 6.7 | 25.0 | ||||||||
|
Pension costs in excess of (less than) contributions
|
4.5 | (25.4 | ) | (19.5 | ) | |||||||
|
Other items, net
|
2.4 | 7.7 | (12.8 | ) | ||||||||
|
Changes in assets and liabilities, net of effects of
acquisitions and divestitures:
|
||||||||||||
|
Accounts and notes receivable
|
(29.3 | ) | 41.2 | 53.5 | ||||||||
|
Inventories
|
(31.1 | ) | 51.8 | 14.7 | ||||||||
|
Other current assets
|
(5.5 | ) | 10.8 | 0.7 | ||||||||
|
Accounts payable
|
33.6 | (5.4 | ) | (44.0 | ) | |||||||
|
Accrued expenses
|
31.8 | 3.8 | (41.5 | ) | ||||||||
|
Income taxes payable and receivable
|
18.8 | (7.0 | ) | (1.7 | ) | |||||||
|
Other
|
(11.8 | ) | (18.0 | ) | (6.0 | ) | ||||||
|
Net cash provided by operating activities
|
185.8 | 225.5 | 183.2 | |||||||||
|
CASH FLOWS FROM INVESTING ACTIVITIES:
|
||||||||||||
|
Proceeds from the disposal of property, plant and equipment
|
0.2 | 0.6 | 5.8 | |||||||||
|
Purchases of property, plant and equipment
|
(45.8 | ) | (58.8 | ) | (62.1 | ) | ||||||
|
Proceeds from sale of businesses
|
3.6 | 10.0 | — | |||||||||
|
Acquisition of business
|
(7.2 | ) | — | (4.7 | ) | |||||||
|
Return of investment
|
— | 0.9 | — | |||||||||
|
Restricted cash
|
(12.2 | ) | — | — | ||||||||
|
Purchases of short-term investments
|
— | (16.9 | ) | (64.2 | ) | |||||||
|
Proceeds from sales and maturities of short-term investments
|
— | 50.2 | 58.7 | |||||||||
|
Net cash used in investing activities
|
(61.4 | ) | (14.0 | ) | (66.5 | ) | ||||||
|
CASH FLOWS FROM FINANCING ACTIVITIES:
|
||||||||||||
|
Short-term (payments) borrowings, net
|
(0.8 | ) | (4.3 | ) | 1.4 | |||||||
|
Proceeds from capital lease
|
— | — | 15.3 | |||||||||
|
Long-term payments
|
(35.9 | ) | (1.7 | ) | (36.4 | ) | ||||||
|
Issuance of senior unsecured notes
|
199.8 | — | — | |||||||||
|
Revolver credit facility (payments) borrowings, net
|
(76.5 | ) | (183.3 | ) | 213.5 | |||||||
|
Additional investments in affiliates
|
(1.0 | ) | — | — | ||||||||
|
Proceeds from stock option exercises
|
3.5 | 9.4 | 19.7 | |||||||||
|
Payments of deferred financing costs
|
(1.8 | ) | — | (0.3 | ) | |||||||
|
Repurchases of common stock
|
(153.7 | ) | (5.6 | ) | (323.8 | ) | ||||||
|
Excess tax benefits related to share-based payments
|
5.3 | 4.9 | 11.0 | |||||||||
|
Cash dividends paid
|
(32.4 | ) | (31.1 | ) | (32.4 | ) | ||||||
|
Net cash used in financing activities
|
(93.5 | ) | (211.7 | ) | (132.0 | ) | ||||||
|
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
|
30.9 | (0.2 | ) | (15.3 | ) | |||||||
|
EFFECT OF EXCHANGE RATES ON CASH AND CASH EQUIVALENTS
|
4.8 | 2.4 | (8.1 | ) | ||||||||
|
CASH AND CASH EQUIVALENTS, beginning of year
|
124.3 | 122.1 | 145.5 | |||||||||
|
CASH AND CASH EQUIVALENTS, end of year
|
$ | 160.0 | $ | 124.3 | $ | 122.1 | ||||||
|
Supplementary disclosures of cash flow information:
|
||||||||||||
|
Cash paid during the year for:
|
||||||||||||
|
Interest
|
$ | 12.4 | $ | 8.4 | $ | 17.6 | ||||||
|
Income taxes (net of refunds)
|
$ | 45.5 | $ | 32.1 | $ | 41.9 | ||||||
The accompanying notes are an integral part of these
consolidated financial statements.
44
Table of Contents
LENNOX
INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 2010, 2009 and 2008
| 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, market and service 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 19 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 primarily of
bank deposits and US Treasury money market securities.
During the first quarter of 2010, our captive insurance
subsidiary entered into an agreement in which cash was placed
into a trust for the benefit of a third-party insurance
provider. The purpose of the trust is to pay workers
compensation claims for policy years 2003 — 2009 until
the liabilities are fully extinguished. These policies were
written by the third-party insurance provider, and then
reinsured by our captive insurance subsidiary. This transaction
was classified as restricted cash on the accompanying
Consolidated Balance Sheets. The balance at December 31,
2010 was $12.2 million.
Accounts
and Notes Receivable
Accounts and notes receivable are shown in the accompanying
Consolidated Balance Sheets, net of allowance for doubtful
accounts. 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 $123.8 million and
$100.8 million as of December 31, 2010 and 2009,
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
45
Table of Contents
LENNOX
INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
components,
work-in-process,
repair parts and finished goods. Starting in the late 1990s, we
began adopting the FIFO cost method for all new domestic
manufacturing operations (primarily acquisitions). Our operating
entities with a previous LIFO election continue to use the LIFO
cost method. We also use the FIFO cost method for all of our
foreign-based manufacturing facilities as well as our Service
Experts segment, whose inventory is limited to service parts and
finished goods.
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,
46
Table of Contents
LENNOX
INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
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.
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 LII 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, 2010, 2009 or 2008.
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 5.
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 heating, ventilation and air conditioning
(“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
47
Table of Contents
LENNOX
INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
rate, which is generally based on historical experience, to the
number of units that have been sold and are still under
warranty. The estimated units to be repaired under warranty are
multiplied by the average cost to repair or replace such
products to determine the estimated future warranty cost. We do
not discount product warranty liabilities as the amounts are not
fixed and the timing of future cash payments is neither fixed
nor reliably determinable. We also provide for specifically
identified warranty obligations. Estimated future warranty costs
are subject to adjustment from time to time depending on changes
in actual failure rate and cost experience. Subsequent costs
incurred for warranty claims serve to reduce the accrued product
warranty liability.
Pensions
and Postretirement Benefits
We provide pension and postretirement medical benefits to
eligible domestic and foreign employees and recognize pension
and postretirement benefit costs over the estimated service life
or average life expectancy of those employees. We also recognize
the funded status of our benefit plans, as measured at year-end
by the difference between plan assets at fair value and the
benefit obligation, in the Consolidated Balance Sheets. Changes
in the funded status are recognized in the year in which the
changes occur through accumulated other comprehensive income
(“AOCI”). Actuarial gains or losses are amortized into
net period benefit cost over the estimated service life of
covered employees or average life expectancy of participants
depending on the plan.
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 12.
Self-Insurance
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, 2010, self-insurance
and captive reserves represent the best estimate of the future
payments to be made on losses reported and unreported for 2010
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,
2010 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 10.
Derivatives
We use futures contracts and fixed forward contracts to mitigate
the exposure to volatility in commodity prices and foreign
exchange rates, 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 8.
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
48
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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.
For more information, see Note 9.
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, 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.
49
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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 AOCI in the accompanying Consolidated Balance
Sheets. Transaction gains and losses are included in Losses
(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. 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.
| 3. | Inventories: |
Components of inventories are as follows (in millions):
|
For the Years Ended
|
||||||||
| December 31, | ||||||||
| 2010 | 2009 | |||||||
|
Finished goods
|
$ | 213.7 | $ | 182.3 | ||||
|
Work in process
|
6.5 | 7.2 | ||||||
|
Raw materials and repair parts
|
137.0 | 132.7 | ||||||
| 357.2 | 322.2 | |||||||
|
Excess of current cost over
last-in,
first-out cost
|
(71.0 | ) | (72.0 | ) | ||||
|
Total inventories
|
$ | 286.2 | $ | 250.2 | ||||
Repair parts are primarily utilized in service operations and to
fulfill our warranty obligations.
The Company recorded income of $0.7 million and
$1.3 million from LIFO inventory liquidations during 2010
and 2009, respectively.
50
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LENNOX
INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
| 4. | Property, Plant and Equipment: |
Components of property, plant and equipment are as follows (in
millions):
|
For the Years Ended
|
||||||||
| December 31, | ||||||||
| 2010 | 2009 | |||||||
|
Land
|
$ | 39.3 | $ | 37.7 | ||||
|
Buildings and improvements
|
226.5 | 220.2 | ||||||
|
Machinery and equipment
|
625.4 | 583.0 | ||||||
|
Construction in progress and equipment not yet in service
|
17.8 | 39.7 | ||||||
|
Total
|
909.0 | 880.6 | ||||||
|
Less-accumulated depreciation
|
(584.7 | ) | (551.0 | ) | ||||
|
Property, plant and equipment, net
|
$ | 324.3 | $ | 329.6 | ||||
The balances above include capital lease assets composed of
buildings and improvements and machinery and equipment totaling
$17.1 million and $17.6 million, net of accumulated
depreciation of $5.6 million and $4.5 million for the
years ended December 31, 2010 and 2009, respectively.
During 2009, the Company recorded $6.0 million in
impairment charges related to the abandonment of information
technology assets that had not yet been placed in service. There
were no impairment charges during 2010.
| 5. | 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):
| Segment | ||||||||||||||||||||
|
Residential
|
Commercial
|
|||||||||||||||||||
|
Heating
|
Heating
|
Service
|
||||||||||||||||||
| & Cooling | & Cooling | Experts | Refrigeration | Total | ||||||||||||||||
|
Balance as of January 1, 2009:
|
||||||||||||||||||||
|
Goodwill
|
$ | 33.7 | $ | 31.2 | $ | 301.8 | $ | 73.6 | $ | 440.3 | ||||||||||
|
Accumulated impairment loss
|
— | — | (208.0 | ) | — | (208.0 | ) | |||||||||||||
| 33.7 | 31.2 | 93.8 | 73.6 | 232.3 | ||||||||||||||||
|
Changes(1)
|
— | 0.1 | 13.1 | 11.9 | 25.1 | |||||||||||||||
|
Balance as of December 31, 2009:
|
||||||||||||||||||||
|
Goodwill
|
$ | 33.7 | $ | 31.3 | $ | 314.9 | $ | 85.5 | $ | 465.4 | ||||||||||
|
Accumulated impairment loss
|
— | — | (208.0 | ) | — | (208.0 | ) | |||||||||||||
| 33.7 | 31.3 | 106.9 | 85.5 | 257.4 | ||||||||||||||||
|
Changes(2)
|
— | (1.3 | ) | 9.7 | 6.0 | 14.4 | ||||||||||||||
|
Balance as of December 31, 2010:
|
||||||||||||||||||||
|
Goodwill
|
33.7 | 30.0 | 324.6 | 91.5 | 479.8 | |||||||||||||||
|
Accumulated impairment loss
|
— | — | (208.0 | ) | — | (208.0 | ) | |||||||||||||
| $ | 33.7 | $ | 30.0 | $ | 116.6 | $ | 91.5 | $ | 271.8 | |||||||||||
51
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LENNOX
INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
| (1) | 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. | |
| (2) | During 2010, our Service Experts segment acquired a company which resulted in additional goodwill of $4.0 million. The other changes are related to fluctuations in foreign currency translation rates. |
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, | ||||||||||||||||||||||||
| 2010 | 2009 | |||||||||||||||||||||||
|
Gross
|
Accumulated
|
Net
|
Gross
|
Accumulated
|
Net
|
|||||||||||||||||||
| Amount | Amortization | Amount | Amount | Amortization | Amount | |||||||||||||||||||
|
Deferred financing costs
|
$ | 9.2 | $ | (6.3 | ) | $ | 2.9 | $ | 7.3 | $ | (5.5 | ) | $ | 1.8 | ||||||||||
|
Customer relationships
|
4.5 | (1.5 | ) | 3.0 | 3.3 | (1.1 | ) | 2.2 | ||||||||||||||||
|
Other
|
4.5 | (3.2 | ) | 1.3 | 3.4 | (2.3 | ) | 1.1 | ||||||||||||||||
|
Total
|
$ | 18.2 | $ | (11.0 | ) | $ | 7.2 | $ | 14.0 | $ | (8.9 | ) | $ | 5.1 | ||||||||||
Amortization of intangible assets was as follows (in millions):
| For the Years Ended December 31, | ||||||||||||
| 2010 | 2009 | 2008 | ||||||||||
|
Amortization expense
|
$ | 2.0 | $ | 1.6 | $ | 1.5 | ||||||
Estimated intangible amortization expense for the next five
years is as follows (in millions):
|
2011
|
$ | 1.9 | ||
|
2012
|
1.5 | |||
|
2013
|
0.9 | |||
|
2014
|
0.9 | |||
|
2015
|
0.9 | |||
|
Thereafter
|
1.1 |
As of December 31, 2010 and 2009, we had $4.9 million
and $4.8 million respectively of intangible assets
primarily consisting of trademarks, which are not subject to
amortization.
| 6. | 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.
52
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LENNOX
INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
The combined balance of equity method investments included in
Other Assets, net totaled (in millions):
| As of December 31, | ||||||||
| 2010 | 2009 | |||||||
|
Other Assets, net
|
$ | 28.2 | $ | 30.0 | ||||
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, | ||||||||||||
| 2010 | 2009 | 2008 | ||||||||||
|
Purchases of compressors
|
$ | 86.1 | $ | 95.0 | $ | 123.2 | ||||||
During 2008, the Company loaned $1.6 million 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. As of December 31, 2010 and 2009, the
outstanding loan balance was $0.9 million and
$1.6 million, respectively.
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.
Also, as a result of a 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
$18.0 million in 2010 and $5.4 million in 2009 was
accounted for as an
available-for-sale
marketable equity security. A net gain of $12.5 million in
2010 was recorded in AOCI. 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 20.
| 7. | Current Accrued Expenses: |
Significant components of current accrued expenses are presented
below (in millions):
|
For the Years Ended
|
||||||||
| December 31, | ||||||||
| 2010 | 2009 | |||||||
|
Accrued compensation and benefits
|
$ | 87.6 | $ | 66.4 | ||||
|
Self insurance reserves
|
61.3 | 60.4 | ||||||
|
Deferred income
|
34.9 | 32.7 | ||||||
|
Accrued warranties
|
31.2 | 31.5 | ||||||
|
Accrued product quality issue
|
16.0 | 21.6 | ||||||
|
Accrued rebates and promotions
|
38.2 | 36.7 | ||||||
|
Derivative contracts
|
2.2 | 2.0 | ||||||
|
Other
|
63.1 | 65.3 | ||||||
|
Total continuing operations accrued expenses
|
$ | 334.5 | $ | 316.6 | ||||
|
Discontinued operations accrued expenses
|
— | 1.3 | ||||||
|
Total current accrued expenses
|
$ | 334.5 | $ | 317.9 | ||||
53
Table of Contents
LENNOX
INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
| 8. | 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 20. 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 of
applicable taxes, in AOCI, 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 AOCI 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 AOCI
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 AOCI 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 Losses (Gains) and Other Expenses, net in the
accompanying Consolidated Statements of Operations.
54
Table of Contents
LENNOX
INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
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.
Interest Rate Risk
A portion 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.
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.
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 AOCI 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 18 months based on the prices of
the commodities at settlement date. Assuming that commodity
prices remain constant, $10.9 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,
2010 are scheduled to mature through May 2012.
The (gains) losses related to our interest rate swap are
expected to be reclassified into earnings within the next
22 months based on the term of the swap. Assuming that the
benchmark interest rate remains constant, $1.4 million of
derivative losses are expected to be reclassified into earnings
within the next 12 months.
55
Table of Contents
LENNOX
INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
We recorded the following amounts related to our cash flow
hedges (in millions):
| As of December 31, | ||||||||
| 2010 | 2009 | |||||||
|
Commodity Price Hedges:
|
||||||||
|
Gains included in AOCI, net of tax
|
$ | (11.7 | ) | $ | (7.2 | ) | ||
|
Provision for income taxes
|
6.7 | 4.1 | ||||||
|
Interest Rate Swap:
|
||||||||
|
Losses included in AOCI, net of tax
|
$ | 2.3 | $ | 1.4 | ||||
|
Benefit from income taxes
|
(1.3 | ) | (0.8 | ) | ||||
We had the following outstanding commodity futures contracts
designated as cash flow hedges (in millions):
| As of December 31, | ||||||||
| 2010 | 2009 | |||||||
| (Pounds) | (Pounds) | |||||||
|
Copper
|
18.5 | 12.6 | ||||||
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, | ||||||||
| 2010 | 2009 | |||||||
| (Pounds) | (Pounds) | |||||||
|
Copper
|
1.4 | 0.9 | ||||||
|
Aluminum
|
1.4 | 0.9 | ||||||
During 2010, we entered into foreign currency forward contracts
with notional amounts of $217.0 million and
£16.5 million, of which $35.0 million and
£2.0 million were outstanding at December 31,
2010. 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.
56
Table of Contents
LENNOX
INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Information
About the Location and Amounts of Derivative
Instruments
For information on the location and amounts of derivative fair
values in the Consolidated Balance Sheets and derivative gains
and losses in the Consolidated Statements of Operations, see the
tabular information presented below (in millions):
Fair
Values of Derivative Instruments
| As of December 31, | ||||||||||||
| 2010 | 2009 | |||||||||||
|
Balance Sheet
|
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) |
$ | 17.4 |
Other Assets
(Current) |
$ | 11.1 | ||||||
|
Commodity futures contracts
|
Other Assets
(Non-current) |
1.3 |
Other Assets
(Non-current) |
0.3 | ||||||||
| 18.7 | 11.4 | |||||||||||
|
Derivatives not designated as hedging instruments under FASB
ASC Topic 815
|
||||||||||||
|
Commodity futures contracts
|
Other Assets
(Current) |
1.4 |
Other Assets
(Current) |
1.1 | ||||||||
|
Commodity futures contracts
|
Other Assets
(Non-Current) |
0.1 |
Other Assets
(Non-Current) |
— | ||||||||
|
Foreign currency forward contracts
|
Other Assets (Current) | 0.2 | Other Assets (Current) | — | ||||||||
| 1.7 | 1.1 | |||||||||||
|
Total Asset for Derivatives
|
$ | 20.4 | $ | 12.5 | ||||||||
|
Liability Derivatives
|
||||||||||||
|
Derivatives designated as hedging instruments under FASB ASC
Topic 815
|
||||||||||||
|
Interest rate swap
|
Accrued Expenses | 2.2 | Accrued Expenses | 2.0 | ||||||||
|
Interest rate swap
|
Other Liabilities | 1.4 | Other Liabilities | 0.3 | ||||||||
|
Total Liability for Derivatives
|
$ | 3.6 | $ | 2.3 | ||||||||
57
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LENNOX
INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
|
Amount of Loss or (Gain) Reclassified
|
||||||||||||||
|
from AOCI into Income
|
||||||||||||||
|
Derivatives in FASB ASC
|
Location of Loss or (Gain)
|
(Effective Portion) | ||||||||||||
|
Topic 815 Cash Flow
|
Reclassified from AOCI into Income
|
For the Years Ended December 31, | ||||||||||||
| Hedging Relationships | (Effective Portion) | 2010 | 2009 | 2008 | ||||||||||
|
Commodity futures contracts
|
Cost of Goods Sold | $ | (11.2 | ) | $ | 19.6 | $ | (7.0 | ) | |||||
|
Interest rate swap
|
Interest Expense, net | 2.4 | 1.3 | — | ||||||||||
| $ | (8.8 | ) | $ | 20.9 | $ | (7.0 | ) | |||||||
|
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) | 2010 | 2009 | 2008 | ||||||||||
|
Commodity futures contracts
|
Losses (Gains) and Other Expenses, net | $ | (0.4 | ) | $ | (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 | 2010 | 2009 | 2008 | ||||||||||
|
Commodity futures contracts
|
Losses (Gains) and Other Expenses, net | $ | (1.7 | ) | $ | (3.4 | ) | $ | 5.7 | |||||
|
Foreign currency forward contracts
|
Losses (Gains) and Other Expenses, net | (0.2 | ) | 3.1 | — | |||||||||
| $ | (1.9 | ) | $ | (0.3 | ) | $ | 5.7 | |||||||
For more information on the valuation of these derivative
instruments, see Note 20.
58
Table of Contents
LENNOX
INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
| 9. | Income Taxes: |
Our income tax provision (benefits) from continuing operations
consisted of the following (in millions):
| For the Years Ended December 31, | ||||||||||||
| 2010 | 2009 | 2008 | ||||||||||
|
Current:
|
||||||||||||
|
Federal
|
$ | 54.7 | $ | 17.5 | $ | 32.4 | ||||||
|
State
|
6.0 | 5.0 | 5.8 | |||||||||
|
Foreign
|
7.3 | 8.1 | 11.0 | |||||||||
|
Total current
|
68.0 | 30.6 | 49.2 | |||||||||
|
Deferred:
|
||||||||||||
|
Federal
|
(6.9 | ) | 9.9 | 27.1 | ||||||||
|
State
|
(1.6 | ) | 3.0 | 4.2 | ||||||||
|
Foreign
|
— | (4.4 | ) | — | ||||||||
|
Total deferred
|
(8.5 | ) | 8.5 | 31.3 | ||||||||
|
Total income tax provision
|
$ | 59.5 | $ | 39.1 | $ | 80.5 | ||||||
Income from continuing operations before income taxes was
comprised of the following (in millions):
| For the Years Ended December 31, | ||||||||||||
| 2010 | 2009 | 2008 | ||||||||||
|
Domestic
|
$ | 157.2 | $ | 99.7 | $ | 186.9 | ||||||
|
Foreign
|
19.4 | 1.2 | 17.4 | |||||||||
|
Total
|
$ | 176.6 | $ | 100.9 | $ | 204.3 | ||||||
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, | ||||||||||||
| 2010 | 2009 | 2008 | ||||||||||
|
Provision at the U.S. statutory rate of 35%
|
$ | 61.8 | $ | 35.3 | $ | 71.5 | ||||||
|
Increase (reduction) in tax expense resulting from:
|
||||||||||||
|
State income tax, net of federal income tax benefit
|
2.5 | 3.8 | 7.7 | |||||||||
|
Other permanent items
|
(2.3 | ) | (2.8 | ) | (1.2 | ) | ||||||
|
Research tax credit
|
(0.5 | ) | (0.6 | ) | — | |||||||
|
Decrease in tax audit reserves
|
(0.2 | ) | (1.6 | ) | — | |||||||
|
Change in valuation allowance
|
(1.8 | ) | 4.5 | 1.1 | ||||||||
|
Foreign taxes at rates other than 35% and miscellaneous other
|
— | 0.5 | 1.4 | |||||||||
|
Total income tax provision
|
$ | 59.5 | $ | 39.1 | $ | 80.5 | ||||||
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.
59
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, | ||||||||
| 2010 | 2009 | |||||||
|
Gross deferred tax assets:
|
||||||||
|
Warranties
|
$ | 32.0 | $ | 36.0 | ||||
|
Net operating losses (foreign and U.S. state)
|
42.2 | 48.3 | ||||||
|
Postretirement and pension benefits
|
42.6 | 30.2 | ||||||
|
Inventory reserves
|
4.1 | 6.3 | ||||||
|
Receivables allowance
|
6.4 | 4.3 | ||||||
|
Compensation liabilities
|
17.3 | 20.3 | ||||||
|
Deferred income
|
7.8 | 8.0 | ||||||
|
Insurance liabilities
|
15.4 | 2.4 | ||||||
|
Other
|
10.6 | 10.5 | ||||||
|
Total deferred tax assets
|
178.4 | 166.3 | ||||||
|
Valuation allowance
|
(24.3 | ) | (30.9 | ) | ||||
|
Total deferred tax assets, net of valuation allowance
|
154.1 | 135.4 | ||||||
|
Gross deferred tax liabilities:
|
||||||||
|
Depreciation
|
(11.1 | ) | (14.6 | ) | ||||
|
Intangibles
|
(6.6 | ) | (4.1 | ) | ||||
|
Other
|
(12.5 | ) | (7.2 | ) | ||||
|
Total deferred tax liabilities
|
(30.2 | ) | (25.9 | ) | ||||
|
Net deferred tax assets
|
$ | 123.9 | $ | 109.5 | ||||
As of December 31, 2010 and 2009, we had $6.5 million
and $9.6 million in tax effected state net operating loss
carryforwards, respectively, and $35.8 million and
$38.7 million in tax effected foreign net operating loss
carryforwards, respectively. The state and foreign net operating
loss carryforwards begin expiring in 2011. 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 decrease in the valuation allowance
is primarily the result of foreign and state losses which were
not previously 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, 2010.
In order to realize the net deferred tax asset, we will need to
generate future foreign taxable income of approximately
$98.5 million during the periods in which those temporary
differences become deductible. We also will need to generate
U.S. federal income of approximately $46.8 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, 2010 and 2009 was $150.5 million and
$36.7 million, respectively.
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
60
Table of Contents
LENNOX
INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
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, 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 | ||
|
Decreases related to prior year tax positions
|
(0.4 | ) | ||
|
Settlements
|
(0.1 | ) | ||
|
Balance as of December 31, 2010
|
$ | 1.0 | ||
Included in the balance of unrecognized tax benefits as of
December 31, 2010 are potential benefits of
$0.7 million that, if recognized, would affect the
effective tax rate on income from continuing operations. As of
December 31, 2010, 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 2008, 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 2004.
During 2010, numerous states, including Colorado, Maine, Utah,
the District of Columbia, California and Connecticut,
enacted legislation effective for tax years beginning on or
after January 1, 2010, including requirements for combined
reporting, changes to apportionment methods and changes to nexus
requirements. We determined the impact of these changes to be
immaterial.
61
Table of Contents
LENNOX
INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
| 10. | Commitments and Contingencies: |
Leases
The approximate minimum commitments under all non-cancelable
leases outstanding as of December 31, 2010 are as follows
(in millions):
|
Operating
|
Capital
|
|||||||
| Leases | Leases | |||||||
|
2011
|
$ | 54.2 | $ | 1.1 | ||||
|
2012
|
40.4 | 1.0 | ||||||
|
2013
|
27.7 | 0.9 | ||||||
|
2014
|
17.4 | 0.7 | ||||||
|
2015
|
11.9 | 0.6 | ||||||
|
Thereafter
|
19.8 | 14.8 | ||||||
|
Total minimum lease payments
|
$ | 171.4 | 19.1 | |||||
|
Less amount representing interest
|
1.5 | |||||||
|
Present value of minimum payments
|
$ | 17.6 | ||||||
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, 2010. 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.
62
Table of Contents
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, | ||||||||
| 2010 | 2009 | |||||||
|
Discounted liabilities recorded in:
|
||||||||
|
Accrued Expenses
|
$ | 1.1 | $ | 1.3 | ||||
|
Other Long-Term Liabilities
|
3.3 | 3.0 | ||||||
| $ | 4.4 | $ | 4.3 | |||||
|
Undiscounted liabilities
|
$ | 4.8 | $ | 5.8 | ||||
|
Discount rate
|
1.3%-7.9 | % | 3.3%-9.9 | % | ||||
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, | ||||||||
| 2010 | 2009 | |||||||
|
Accrued Expenses
|
$ | 31.2 | $ | 31.5 | ||||
|
Other Liabilities
|
44.3 | 50.0 | ||||||
| $ | 75.5 | $ | 81.5 | |||||
The changes in the total warranty liabilities for the years
ended December 31, 2010 and 2009 were as follows (in
millions):
|
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 | ||
|
Payments made in 2010
|
(27.6 | ) | ||
|
Changes resulting from issuance of new warranties
|
27.6 | |||
|
Changes in estimates associated with pre-existing liabilities
|
(6.2 | ) | ||
|
Changes in foreign currency translation rates
|
0.2 | |||
|
Total warranty liability as of December 31, 2010
|
$ | 75.5 | ||
| As of December 31, | ||||||||
| 2010 | 2009 | |||||||
|
Accrued product quality issue (not covered under warranty)
|
$ | 16.0 | $ | 21.6 | ||||
63
Table of Contents
LENNOX
INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
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 HVAC warranty
liabilities. As a result of our annual evaluation, we recorded a
reduction in warranty liabilities in the second quarter of 2010
that is the principal amount contained within the changes in
estimates associated with pre-existing liabilities of
$6.2 million above.
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 that we believe
results from a vendor-supplied materials quality issue. We have
recorded an expense of $24.4 million in 2009 for the
portion of the issue that was probable and reasonably estimable.
There were no material charges recorded in 2010. As of
December 31, 2010 and 2009, $16.0 million and
$21.6 million, respectively, was accrued for this matter.
We may incur additional charges in the future as more
information becomes available. The expense for this product
quality issue, and the related liability, has not been included
in the tables related to our estimated warranty liabilities. The
expense related to this product quality issue was classified in
Cost of Goods Sold in the Consolidated Statements of Operations
and the related liability is included in Accrued Expenses in the
accompanying Consolidated Balance Sheets.
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.
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.
64
Table of Contents
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
$61.3 million and $60.4 million as of
December 31, 2010 and 2009, 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.
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 with 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. We are the defendant in a class action
lawsuit related to certain hearth products we produced and sold
that claims such products are hazardous and that consumers were
not adequately warned. On August 23, 2010, the Company and
the plaintiffs entered into a binding Memorandum of
Understanding (“MOU”) and have reached tentative terms
for settlement of the case. At the parties’ request, the
court stayed the lawsuit shortly after the MOU was signed. On
January 11, 2011, the court granted preliminary approval of
the settlement. The court set June 2, 2011 as the date for
the final approval hearing. Total charges related to this matter
recorded in 2010 were $9.3 million. These charges are
included in Selling, General and Administrative Expenses and
Losses (Gains) and Other Expenses, Net in the accompanying
Consolidated Statement of Operations.
| 11. | 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, 2010 | Short-Term Debt | Current Maturities | Long-Term Maturities | Total | ||||||||||||
|
Domestic revolving credit facility
|
$ | — | $ | — | $ | 100.0 | $ | 100.0 | ||||||||
|
Senior unsecured notes
|
— | — | 200.0 | 200.0 | ||||||||||||
|
Capital lease obligations
|
— | 0.6 | 17.0 | 17.6 | ||||||||||||
|
Other obligations
|
1.4 | — | — | 1.4 | ||||||||||||
|
Total debt
|
$ | 1.4 | $ | 0.6 | $ | 317.0 | $ | 319.0 | ||||||||
65
Table of Contents
LENNOX
INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
|
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 | ||||||||
| (1) | The domestic promissory notes matured on June 1, 2010 and were prepaid during the first quarter of 2010. |
As of December 31, 2010, the aggregate amounts of required
principal payments on long-term debt are as follows (in
millions):
|
2011
|
$ | 0.6 | ||
|
2012
|
100.7 | |||
|
2013
|
0.7 | |||
|
2014
|
0.6 | |||
|
2015
|
0.6 | |||
|
Thereafter
|
214.4 |
As of December 31, 2010, we had outstanding borrowings of
$100.0 million under our $650.0 million domestic
revolving credit facility and $69.5 million was committed
to standby letters of credit. The remaining $480.5 million
was available for future borrowings subject to covenant
limitations. The facility matures in October 2012. As of
December 31, 2010, we were in compliance with all covenant
requirements.
We have additional borrowing capacity through several of our
foreign subsidiaries used primarily to finance seasonal
borrowing needs. We had $1.4 million and $2.5 million
of obligations outstanding through our foreign subsidiaries as
of December 31, 2010 and 2009, respectively. Available
borrowing capacity at December 31, 2010 and 2009, under
foreign facilities was $10.1 million and
$12.6 million, respectively.
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 0.96% and 0.84% as of December 31, 2010 and 2009,
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, 2010 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
66
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LENNOX
INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
indebtedness or receivables securitizations (cross default), and
bankruptcy. A cross default under our revolving credit facility
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 in the performance of, or compliance with any term of any other indebtedness or receivables securitization in an aggregate principal amount of at least $40.0 million, or any other condition exists which would give the holders the right to declare such indebtedness due and payable prior to its stated maturity. |
Each of our major debt agreements contains provisions by which a
default under one agreement causes a default in the others (a
cross default). If a cross default under the revolving credit
facility, our senior unsecured notes, or our revolving period
asset securitization program were 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).
On May 6, 2010, we issued $200.0 million of senior
unsecured notes due May 15, 2017 bearing fixed interest at
4.90% as a result of a public offering of securities. We
received proceeds of $199.8 million from the offering for a
yield of 4.91%. We also paid and capitalized $1.9 million
of debt issue costs related to the issuance. We pay interest on
the notes semiannually on May 15 and November 15.
The notes are guaranteed, on a senior unsecured basis, by each
of our domestic subsidiaries that guarantee payment by us of any
indebtedness under our domestic revolving credit facility. The
indenture governing the notes contains covenants that, among
other things, limit our ability and the ability of the
subsidiary guarantors to: create or incur certain liens; enter
into certain sale and leaseback transactions; enter into certain
mergers, consolidations and transfers of substantially all of
our assets; and transfer certain properties. The indenture also
contains a cross default provision which is triggered if we
default on other debt of at least $75 million in principal
which is then accelerated, and such acceleration is not
rescinded within 30 days of the notice date.
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, 2010 and 2009, we recorded both
a capital lease asset and a corresponding long-term obligation
of $14.3 million related to these transactions.
Credit
Rating
At December 31, 2010, our senior credit rating was Baa3,
with a stable outlook, by Moody’s and BBB-, with a stable
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 18, 2011 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.
67
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LENNOX
INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
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, 2010, 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 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, | ||||||||
| 2010 | 2009 | |||||||
|
Eligible amount available under the ASA on qualified accounts
receivable
|
$ | 100.0 | $ | 72.5 | ||||
|
Beneficial interest sold
|
— | — | ||||||
|
Remaining amount available
|
$ | 100.0 | $ | 72.5 | ||||
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
0.75%. The rate as of December 31, 2010 and 2009 was 1.06%
and 1.38%, respectively. The unused fee is based on 102% of the
maximum available amount less the beneficial interest sold and
calculated at 0.375% 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, | ||||||||||||
| 2010 | 2009 | 2008 | ||||||||||
|
Discount fees
|
$ | 0.5 | $ | 0.7 | $ | 0.2 | ||||||
| 12. | 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 defined
contribution plans with employer contribution-matching
requirements. We recorded the following (in millions):
| For the Years Ended December 31, | ||||||||||||
| 2010 | 2009 | 2008 | ||||||||||
|
Provisions for profit sharing contributions
|
$ | — | $ | — | $ | 3.0 | ||||||
|
Contributions to defined contribution plans
|
$ | 12.1 | $ | 12.4 | $ | 1.6 | ||||||
68
Table of Contents
LENNOX
INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
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 defined
contribution 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.
The following tables set forth amounts recognized in our
financial statements and the plans’ funded status (dollars
in millions):
| Pension Benefits | Other Benefits | |||||||||||||||
| 2010 | 2009 | 2010 | 2009 | |||||||||||||
|
Accumulated benefit obligation
|
$ | 333.2 | $ | 296.1 | $ | N/A | $ | N/A | ||||||||
|
Changes in projected benefit obligation:
|
||||||||||||||||
|
Benefit obligation at beginning of year
|
$ | 299.4 | $ | 284.6 | $ | 14.4 | $ | 14.1 | ||||||||
|
Service cost
|
5.0 | 5.6 | 0.6 | 0.5 | ||||||||||||
|
Interest cost
|
17.6 | 17.5 | 0.8 | 0.8 | ||||||||||||
|
Plan participants’ contributions
|
— | — | 0.8 | 1.0 | ||||||||||||
|
Amendments
|
— | — | (0.1 | ) | — | |||||||||||
|
Actuarial loss
|
34.0 | 9.1 | 2.4 | 1.3 | ||||||||||||
|
Effect of exchange rates
|
0.4 | 3.9 | — | — | ||||||||||||
|
Settlements and curtailments
|
(2.6 | ) | (2.6 | ) | — | (0.9 | ) | |||||||||
|
Benefits paid
|
(17.5 | ) | (18.7 | ) | (1.9 | ) | (2.4 | ) | ||||||||
|
Benefit obligation at end of year
|
$ | 336.3 | $ | 299.4 | $ | 17.0 | $ | 14.4 | ||||||||
|
Changes in plan assets:
|
||||||||||||||||
|
Fair value of plan assets at beginning of year
|
$ | 231.1 | $ | 174.0 | $ | — | $ | — | ||||||||
|
Actual gain return on plan assets
|
27.6 | 33.0 | — | — | ||||||||||||
|
Employer contribution
|
5.6 | 42.2 | 1.1 | 1.4 | ||||||||||||
|
Plan participants’ contributions
|
— | — | 0.8 | 1.0 | ||||||||||||
|
Effect of exchange rates
|
0.4 | 3.0 | — | — | ||||||||||||
|
Plan settlements
|
(2.6 | ) | (2.4 | ) | — | — | ||||||||||
|
Benefits paid
|
(17.5 | ) | (18.7 | ) | (1.9 | ) | (2.4 | ) | ||||||||
|
Fair value of plan assets at end of year
|
244.6 | 231.1 | — | — | ||||||||||||
|
Funded status / net amount recognized
|
$ | (91.7 | ) | $ | (68.3 | ) | $ | (17.0 | ) | $ | (14.4 | ) | ||||
|
Net amount recognized consists of:
|
||||||||||||||||
|
Current liability
|
$ | (3.6 | ) | $ | (1.6 | ) | $ | (1.1 | ) | $ | (1.0 | ) | ||||
|
Non-current liability
|
(88.1 | ) | (66.7 | ) | (15.9 | ) | (13.4 | ) | ||||||||
|
Net amount recognized
|
$ | (91.7 | ) | $ | (68.3 | ) | $ | (17.0 | ) | $ | (14.4 | ) | ||||
69
Table of Contents
LENNOX
INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Included in the Non-Current Pension Liability on the
Consolidated Balance Sheets were plans with an over-funded
position of $0.1 million as of December 31, 2010 and
2009 (in millions).
|
For the Years Ended
|
||||||||
| December 31, | ||||||||
| 2010 | 2009 | |||||||
|
Pension plans with a benefit obligation in excess of plan
assets:
|
||||||||
|
Projected benefit obligation
|
$ | 335.6 | $ | 298.7 | ||||
|
Accumulated benefit obligation
|
332.5 | 295.4 | ||||||
|
Fair value of plan assets
|
243.8 | 230.3 | ||||||
Our
U.S.-based
pension plans comprised approximately 88.7% of the projected
benefit obligation and 88.9% of plan assets as of
December 31, 2010.
| Pension Benefits | Other Benefits | |||||||||||||||||||||||
| 2010 | 2009 | 2008 | 2010 | 2009 | 2008 | |||||||||||||||||||
|
Components of net periodic benefit cost as of December
31:
|
||||||||||||||||||||||||
|
Service cost
|
$ | 5.0 | $ | 5.6 | $ | 6.8 | $ | 0.6 | $ | 0.5 | $ | 0.8 | ||||||||||||
|
Interest cost
|
17.6 | 17.5 | 16.4 | 0.8 | 0.8 | 0.8 | ||||||||||||||||||
|
Expected return on plan assets
|
(19.5 | ) | (16.7 | ) | (17.6 | ) | — | — | — | |||||||||||||||
|
Amortization of prior service cost
|
0.5 | 0.5 | 0.6 | (1.9 | ) | (1.9 | ) | (1.9 | ) | |||||||||||||||
|
Recognized actuarial loss
|
5.1 | 8.9 | 4.6 | 1.2 | 1.2 | 1.1 | ||||||||||||||||||
|
Settlements and curtailments
|
1.4 | 1.0 | 3.1 | — | (0.6 | ) | — | |||||||||||||||||
|
Net periodic benefit cost
|
$ | 10.1 | $ | 16.8 | $ | 13.9 | $ | 0.7 | $ | — | $ | 0.8 | ||||||||||||
70
Table of Contents
LENNOX
INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
The following table sets forth amounts recognized in AOCI in our
financial statements for 2010 and 2009 (in millions):
| Pension Benefits | Other Benefits | |||||||||||||||
| 2010 | 2009 | 2010 | 2009 | |||||||||||||
|
Amounts recognized in other comprehensive income
(loss): |
||||||||||||||||
|
Prior service costs
|
$ | (3.5 | ) | $ | (4.0 | ) | $ | 14.7 | $ | 16.5 | ||||||
|
Actuarial loss
|
(176.2 | ) | (156.6 | ) | (19.8 | ) | (18.7 | ) | ||||||||
|
Subtotal
|
(179.7 | ) | (160.6 | ) | (5.1 | ) | (2.2 | ) | ||||||||
|
Deferred taxes
|
66.2 | 58.6 | 1.9 | 0.8 | ||||||||||||
|
Net amount recognized
|
$ | (113.5 | ) | $ | (102.0 | ) | $ | (3.2 | ) | $ | (1.4 | ) | ||||
|
Changes recognized in other comprehensive income
(loss): |
||||||||||||||||
|
Current year prior service costs
|
$ | — | $ | — | (0.1 | ) | $ | — | ||||||||
|
Current year actuarial loss (gain)
|
25.8 | (7.5 | ) | 2.4 | 0.5 | |||||||||||
|
Effect of exchange rates
|
0.3 | 1.5 | — | — | ||||||||||||
|
Amortization of prior service (costs) credits
|
(0.5 | ) | (0.5 | ) | 1.9 | 2.5 | ||||||||||
|
Amortization of actuarial loss
|
(6.5 | ) | (9.9 | ) | (1.3 | ) | (1.3 | ) | ||||||||
|
Total recognized in other comprehensive income
|
$ | 19.1 | $ | (16.4 | ) | $ | 2.9 | $ | 1.7 | |||||||
|
Total recognized in net periodic benefit cost and other
comprehensive income (loss)
|
$ | 29.2 | $ | 0.4 | $ | 3.6 | $ | 1.7 | ||||||||
The estimated prior service (costs) credits and actuarial gains
(losses) that will be amortized from AOCI in 2011 are
$(0.5) million and $(9.5) million, respectively, for
pension benefits and $1.9 million and $(1.2) million,
respectively, for other benefits.
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 2010 and 2009:
| Pension Benefits | Other Benefits | |||||||||||||||
| 2010 | 2009 | 2010 | 2009 | |||||||||||||
|
Weighted-average assumptions used to determine benefit
obligations as of December 31: |
||||||||||||||||
|
Discount rate
|
5.45 | % | 6.07 | % | 5.30 | % | 5.95 | % | ||||||||
|
Rate of compensation increase
|
4.23 | 4.23 | — | — | ||||||||||||
| Pension Benefits | Other Benefits | |||||||||||||||||||||||
| 2010 | 2009 | 2008 | 2010 | 2009 | 2008 | |||||||||||||||||||
|
Weighted-average assumptions used to determine
net periodic benefit cost for the years ended December 31: |
||||||||||||||||||||||||
|
Discount rate
|
6.07 | % | 6.27 | % | 6.48 | % | 5.95 | % | 6.42 | % | 6.36 | % | ||||||||||||
|
Expected long-term return on plan assets
|
8.00 | 8.25 | 8.25 | — | — | — | ||||||||||||||||||
|
Rate of compensation increase
|
4.23 | 4.19 | 4.34 | — | — | — | ||||||||||||||||||
71
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
non-U.S.-based
plans in 2010 and 2009:
| Pension Benefits | ||||||||
| 2010 | 2009 | |||||||
|
Weighted-average assumptions used to determine benefit
obligations as of December 31:
|
||||||||
|
Discount rate
|
5.43 | % | 5.98 | % | ||||
|
Rate of compensation increase
|
3.94 | 3.98 | ||||||
| Pension Benefits | ||||||||||||
| 2010 | 2009 | 2008 | ||||||||||
|
Weighted-average assumptions used to determine net periodic
benefit cost for the years ended December 31:
|
||||||||||||
|
Discount rate
|
5.98 | % | 6.57 | % | 5.60 | % | ||||||
|
Expected long-term return on plan assets
|
5.59 | 6.24 | 6.61 | |||||||||
|
Rate of compensation increase
|
3.98 | 3.90 | 4.22 | |||||||||
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 8.00%
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 5.47% discount rate assumption
for the U.S. qualified pension plans, 5.28% for the
U.S. non-qualified pension plans, and 5.30% for the other
benefits. A similar process was followed for the
non-U.S.-based
plans.
| 2010 | 2009 | |||||||
|
Assumed health care cost trend rates as of December 31:
|
||||||||
|
Health care cost trend rate assumed for next year
|
8.50 | % | 8.75 | % | ||||
|
Rate to which the cost rate is assumed to decline (the ultimate
trend rate)
|
5.00 | % | 5.00 | % | ||||
|
Year that the rate reaches the ultimate trend rate
|
2020 | 2017 | ||||||
Assumed health care cost trend rates have a significant effect
on the amounts reported for our healthcare plan. A one
percentage-point change in assumed healthcare cost trend rates
would have the following effects (in millions):
|
1-Percentage-
|
1-Percentage-
|
|||||||
| Point Increase | Point Decrease | |||||||
|
Effect on total of service and interest cost
|
$ | 0.2 | $ | (0.2 | ) | |||
|
Effect on the postretirement benefit obligation
|
1.6 | (1.4 | ) | |||||
72
Table of Contents
LENNOX
INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Expected future benefit payments are shown in the table below
(in millions):
| Years Ended December 31, | ||||||||||||||||||||||||
| 2011 | 2012 | 2013 | 2014 | 2015 | 2016- 2020 | |||||||||||||||||||
|
Pension benefits
|
$ | 18.4 | $ | 16.9 | $ | 18.7 | $ | 17.9 | $ | 19.0 | $ | 103.6 | ||||||||||||
|
Other benefits
|
1.1 | 1.1 | 1.1 | 1.2 | 1.2 | 7.1 | ||||||||||||||||||
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 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 United Kingdom (“U.K.”)
pension plan approximately 4% of the total fair value of our
plan assets as of December 31, 2010.
Our U.S. pension plans’ weighted-average asset
allocations as of December 31, 2010 and 2009, by asset
category, are as follows:
| Plan Assets as of December 31, | ||||||||
| Asset Category | 2010 | 2009 | ||||||
|
U.S. equity
|
33.1 | % | 33.2 | % | ||||
|
International equity
|
28.5 | 25.8 | ||||||
|
Fixed income
|
36.8 | 36.8 | ||||||
|
Money market/cash/guaranteed investment contracts
|
1.6 | 4.2 | ||||||
|
Total
|
100.0 | % | 100.0 | % | ||||
U.S. pension plan investments are invested within the
following range targets:
| Asset Category | Target | |||
|
U.S. equity
|
36.0 | % | ||
|
International equity
|
24.0 | % | ||
|
Fixed income
|
38.0 | % | ||
|
Money market/cash/guaranteed investment contracts
|
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
invested in a broad mix of assets consisting of U.K.,
U.S. and international equities, U.K. fixed income
securities, including corporate and government bonds, and bank
deposits.
73
Table of Contents
LENNOX
INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
The fair values of our pension plan assets, by asset category,
are as follows:
|
Fair Value Measurements as of
|
||||||||||||||||
| December 31, 2010 | ||||||||||||||||
|
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
|
$ | 3.9 | $ | — | $ | — | $ | 3.9 | ||||||||
|
Commingled pools / Collective Trusts
|
||||||||||||||||
|
U.S. equity(1)
|
— | 33.7 | — | 33.7 | ||||||||||||
|
International equity(2)
|
— | 53.8 | — | 53.8 | ||||||||||||
|
Fixed income(3)
|
— | 74.0 | — | 74.0 | ||||||||||||
|
Mutual funds
|
||||||||||||||||
|
U.S. equity(4)
|
38.2 | — | — | 38.2 | ||||||||||||
|
International equity(4)
|
6.5 | — | — | 6.5 | ||||||||||||
|
Fixed income(5)
|
6.2 | — | — | 6.2 | ||||||||||||
|
Balanced pension trust(6)
|
||||||||||||||||
|
U.S. equity
|
— | 2.1 | — | 2.1 | ||||||||||||
|
International equity
|
— | 7.4 | — | 7.4 | ||||||||||||
|
Bonds
|
— | 5.3 | — | 5.3 | ||||||||||||
|
Pension fund
|
||||||||||||||||
|
U.S. equity(7)
|
— | 1.1 | — | 1.1 | ||||||||||||
|
International equity(7)
|
— | 5.7 | — | 5.7 | ||||||||||||
|
Fixed income(8)
|
— | 4.1 | — | 4.1 | ||||||||||||
|
Money market instruments(9)
|
— | 0.8 | — | 0.8 | ||||||||||||
|
Guaranteed investment contracts
|
— | 1.8 | — | 1.8 | ||||||||||||
|
Total
|
$ | 54.8 | $ | 189.8 | $ | — | $ | 244.6 | ||||||||
74
Table of Contents
LENNOX
INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
|
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 | ||||||||
75
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, 2010 | ||||||||||
|
Redemption Frequency
|
Redemption Notice
|
|||||||||
| Fair Value | (if currently eligible) | Period | ||||||||
|
Assets Category:
|
||||||||||
|
Commingled pools / Collective Trusts
|
||||||||||
|
U.S. equity(1)
|
$ | 33.7 | n/a | n/a | ||||||
|
International equity(2)
|
53.8 | Monthly | 10 — 15 days | |||||||
|
Fixed income(3)
|
74.0 | Quarterly | 15 days | |||||||
|
Mutual funds
|
||||||||||
|
U.S. equity(4)
|
38.2 | n/a | n/a | |||||||
|
International equity(4)
|
6.5 | n/a | n/a | |||||||
|
Fixed income(5)
|
6.2 | n/a | n/a | |||||||
|
Balanced pension trust(6)
|
||||||||||
|
U.S. equity
|
2.1 | Daily | 5 days | |||||||
|
International equity
|
7.4 | Daily | 5 days | |||||||
|
Bonds
|
5.3 | Daily | 5 days | |||||||
|
Pension fund
|
||||||||||
|
U.S. equity(7)
|
1.1 | Daily | 7 days | |||||||
|
International equity(7)
|
5.7 | Daily | 7 days | |||||||
|
Fixed income(8)
|
4.1 | Daily | 7 days | |||||||
|
Money market instruments(9)
|
0.8 | Daily | 7 days | |||||||
|
Total
|
$ | 238.9 | ||||||||
| 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 | ||||||||||
76
Table of Contents
LENNOX
INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
| (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. | |
| (7) | This category includes investments in U.S. and Non-U.S. equity securities and aims to provide returns consistent with the markets in which it invests and provide broad exposure to countries around the world. | |
| (8) | This category includes investments in U.K. government index-linked securities (index-linked gilts) that have maturity periods of 5 years or longer and investment grade corporate bonds denominated in sterling. | |
| (9) | This fund invests in U.K. money market instruments and includes cash, bank deposits and short-term fixed interest investments. |
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 20 for information about our fair value
hierarchies and valuation techniques.
77
Table of Contents
LENNOX
INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
| 13. | Comprehensive Income (Loss): |
Our accumulated balances, shown net of tax for each
classification of comprehensive income (loss) are as follows (in
millions):
|
Foreign
|
Pension and
|
|||||||||||||||
|
Currency
|
Postretirement
|
Derivatives
|
||||||||||||||
| Translation Adjustment | Liability | and Other | Total | |||||||||||||
|
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 | ) | ||||||
|
Net change in currency translation and pension and
postretirement liability during 2010
|
28.2 | (13.3 | ) | 14.9 | ||||||||||||
|
Net change associated with 2010 derivative and other transactions
|
— | — | 27.5 | 27.5 | ||||||||||||
|
Reclassification of derivative gains into earnings
|
— | — | (11.4 | ) | (11.4 | ) | ||||||||||
|
Balance as of December 31, 2010
|
$ | 121.5 | $ | (116.7 | ) | $ | 25.4 | $ | 30.2 | |||||||
| 14. | Share Repurchases: |
During 2008, our Board of Directors approved a
$300.0 million share repurchase plan authorizing the
repurchase of 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”).
78
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, 2010, 2009 and 2008, 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 | Activity | |||||||||||||
|
2010 share repurchase activity:
|
||||||||||||||||
|
Number of shares
|
0.2 | 3.3 | — | 3.5 | ||||||||||||
|
Weighted average price per share
|
$ | 44.83 | $ | 43.97 | $ | — | $ | 44.02 | ||||||||
|
Amount Repurchased
|
$ | 9.4 | $ | 144.3 | $ | — | $ | 153.7 | ||||||||
|
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 | ||||||||
| 15. | 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, | ||||||||||||
| 2010 | 2009 | 2008 | ||||||||||
|
Compensation expense(1)
|
$ | 15.4 | $ | 12.8 | $ | 11.8 | ||||||
| (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, | ||||||||||||
| 2010 | 2009 | 2008 | ||||||||||
|
Excess tax benefits
|
$ | 5.3 | $ | 4.9 | $ | 11.0 | ||||||
Incentive
Plan
Under the Lennox International Inc. 2010 Incentive Plan, as
amended and restated (the “2010 Incentive Plan”), we
are authorized to issue awards for 24,254,706 shares of
common stock. As of December 31, 2010, awards for
20,478,607 shares of common stock had been granted, net of
cancellations and repurchases. Consequently, as of
December 31, 2010, there were 3,776,099 shares
available for future issuance.
The 2010 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.
79
Table of Contents
LENNOX
INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Performance
Share Units
Total compensation expense for performance share units was
$4.1 million, $1.8 million and $3.4 million for
the years ended December 31, 2010, 2009 and 2008,
respectively. The weighted-average fair value of performance
share units granted during the years ended December 31,
2010, 2009 and 2008 was $44.85, $35.26 and $26.83 per share,
respectively.
Under the 2010 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, 2010, 2009 and 2008 was 127.68%,
200% and 200%, respectively.
Performance share units under the 2010 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, 2010, and changes during the year
then ended, is presented below (in millions, except per share
data):
| Year Ended December 31, 2010 | ||||||||
|
Weighted-Average
|
||||||||
|
Grant Date
|
||||||||
| Shares | Fair Value per Share | |||||||
|
Undistributed performance share units:
|
||||||||
|
Undistributed as of December 31, 2009
|
1.0 | $ | 28.68 | |||||
|
Granted
|
0.2 | 44.85 | ||||||
|
Additional shares earned
|
— | 30.85 | ||||||
|
Distributed
|
(0.3 | ) | 27.07 | |||||
|
Forfeited
|
(0.1 | ) | 22.52 | |||||
|
Undistributed as of December 31, 2010(1)
|
0.8 | 33.90 | ||||||
| (1) | Undistributed performance share units as of December 31, 2010 include approximately 0.8 million units with a weighted-average grant date fair value of $33.90 per share that had not yet vested. |
As of December 31, 2010, we had $12.6 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 2.4 years. Our estimated
forfeiture rate for performance share units was 20.5% as of
December 31, 2010.
80
Table of Contents
LENNOX
INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
The total fair value of performance share units distributed and
the resulting tax deductions to realize tax benefits were as
follows (in millions):
|
For the Years Ended
|
||||||||||||
| December 31, | ||||||||||||
| 2010 | 2009 | 2008 | ||||||||||
|
Fair value of performance share units distributed
|
$ | 13.2 | $ | 9.6 | $ | 28.2 | ||||||
|
Realized tax benefits from tax deductions
|
5.0 | 3.7 | 10.7 | |||||||||
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, $6.6 million and $4.6 million for
the years ended December 31, 2010, 2009 and 2008,
respectively. The weighted-average fair value of restricted
stock units granted during the years ended December 31,
2010, 2009 and 2008 was $44.80, $35.09 and $27.48 per share,
respectively.
Under the 2010 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 2010 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, 2010 and changes during the year then
ended is presented below (in millions, except per share data):
| Year Ended December 31, 2010 | ||||||||
|
Weighted-Average
|
||||||||
|
Grant Date
|
||||||||
| Shares | Fair Value per Share | |||||||
|
Nonvested restricted stock units:
|
||||||||
|
Nonvested as of December 31, 2009
|
0.7 | $ | 31.14 | |||||
|
Granted
|
0.2 | 44.80 | ||||||
|
Vested
|
(0.2 | ) | 32.96 | |||||
|
Forfeited
|
(0.1 | ) | 30.90 | |||||
|
Nonvested as of December 31, 2010
|
0.6 | 34.44 | ||||||
As of December 31, 2010, we had $13.0 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 2.4 years. Our estimated
forfeiture rate for restricted stock units was 16.7% as of
December 31, 2010.
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, | ||||||||||||
| 2010 | 2009 | 2008 | ||||||||||
|
Fair value of restricted stock units vested
|
$ | 9.4 | $ | 8.3 | $ | 6.4 | ||||||
|
Realized tax benefits from tax deductions
|
3.6 | 3.2 | 2.4 | |||||||||
81
Table of Contents
LENNOX
INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
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
$4.7 million, $4.4 million and $3.8 million for
the years ended December 31, 2010, 2009 and 2008,
respectively. The weighted-average fair value of stock
appreciation rights granted during the years ended
December 31, 2010, 2009 and 2008 was $13.75, $10.96 and
$6.84 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 2010,
2009 and 2008 is estimated on the date of grant using the
following assumptions:
|
For the Years Ended
|
||||||||||||
| December 31, | ||||||||||||
| 2010 | 2009 | 2008 | ||||||||||
|
Expected dividend yield
|
1.46 | % | 1.57 | % | 2.05 | % | ||||||
|
Risk-free interest rate
|
1.46 | % | 1.78 | % | 1.40 | % | ||||||
|
Expected volatility
|
39.93 | % | 39.81 | % | 34.08 | % | ||||||
|
Expected life (in years)
|
4.04 | 4.12 | 4.18 | |||||||||
A summary of stock appreciation rights activity are as follows
(in millions, except per share data):
| Years Ended December 31, | ||||||||||||||||||||||||
| 2010 | 2009 | 2008 | ||||||||||||||||||||||
|
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
|
2.9 | $ | 31.06 | 2.7 | $ | 29.59 | 2.2 | $ | 29.14 | |||||||||||||||
|
Granted
|
0.5 | 46.78 | 0.6 | 36.94 | 1.0 | 28.36 | ||||||||||||||||||
|
Exercised
|
(0.7 | ) | 27.20 | (0.2 | ) | 28.31 | (0.3 | ) | 21.68 | |||||||||||||||
|
Forfeited
|
(0.2 | ) | 31.97 | (0.2 | ) | 30.59 | (0.2 | ) | 32.68 | |||||||||||||||
|
Outstanding at end of year
|
2.5 | $ | 34.89 | 2.9 | $ | 31.06 | 2.7 | $ | 29.59 | |||||||||||||||
|
Exercisable at end of year
|
1.5 | $ | 31.81 | 1.6 | $ | 29.58 | 1.1 | $ | 28.65 | |||||||||||||||
82
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LENNOX
INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
The following table summarizes information about stock
appreciation rights outstanding as of December 31, 2010 (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-$46.78
|
4 | 31.3 | 4 | 22.6 | ||||||||||||
As of December 31, 2010, we had $10.2 million of
unrecognized compensation cost related to nonvested stock
appreciation rights. Such cost is expected to be recognized over
a weighted-average period of 2.3 years. Our estimated
forfeiture rate for stock appreciation rights was 18% as of
December 31, 2010.
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, | ||||||||||||
| 2010 | 2009 | 2008 | ||||||||||
|
Intrinsic value of stock appreciation rights exercised
|
$ | 10.1 | $ | 1.5 | $ | 5.5 | ||||||
|
Realized tax benefits from tax deductions
|
3.9 | 0.6 | 2.1 | |||||||||
Our practice is to issue new shares of common stock to satisfy
the exercise of stock appreciation rights.
| 16. | 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 have also initiated a number of activities
that rationalize and reorganize various support and
administrative functions to reduce ongoing selling and
administrative expenses.
Information
on Total Restructuring Charges and Related
Reserves
Restructuring charges incurred include the following amounts (in
millions):
|
For the Years Ended
|
||||||||||||
| December 31, | ||||||||||||
| 2010 | 2009 | 2008(1) | ||||||||||
|
Manufacturing rationalizations
|
$ | 11.1 | $ | 30.1 | $ | 19.7 | ||||||
|
Reorganization of distribution network
|
0.1 | 0.1 | 2.9 | |||||||||
|
Reorganizations of corporate and business unit administrative
functions
|
4.4 | 11.3 | 7.8 | |||||||||
|
Total
|
$ | 15.6 | $ | 41.5 | $ | 30.4 | ||||||
| (1) | Restructuring charges for manufacturing rationalizations included pension curtailment charges of $0.9 million for 2008 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. |
The components of the $15.6 million of restructuring
charges recorded in 2010 are discussed in greater detail in
later sections of this footnote.
In 2009, restructuring charges for manufacturing
rationalizations included $9.7 million related to the
consolidation of Residential Heating & Cooling
manufacturing operations from Blackville, South Carolina into
our operations in Orangeburg, South Carolina and Saltillo,
Mexico. Manufacturing rationalizations recorded in
83
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LENNOX
INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
2009 also included $7.8 million of charges related to the
consolidation of certain Refrigeration manufacturing operations
located in Parets, Spain into our existing operations in Genas,
France. Restructuring charges for manufacturing rationalizations
recorded in 2009 also included $7.7 million related to the
consolidation of certain Commercial Heating & Cooling
manufacturing operations located in Mions, France into our
existing manufacturing operations in Longvic, France.
Restructuring charges for manufacturing rationalizations
recorded in 2009 also included $2.1 million related to the
closure of our Refrigeration operations in Danville, Illinois
and consolidate Danville manufacturing, support, and warehouse
functions into our Tifton, Georgia and Stone Mountain, Georgia
operations and $1.1 million related to the transition of
production of selected Refrigeration products currently
manufactured in Milperra, Australia to its sister facility in
Wuxi, China.
In 2009, restructuring charges related to reorganizations of
corporate and business unit selling and administrative functions
included $3.9 million related to reorganization of
Commercial Heating & Cooling’s selling and
administrative functions in Northern Europe through a series of
restructuring actions. Reorganizations of corporate and business
unit selling and administrative functions in 2009 also included
charges of $1.9 million related to 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. Restructuring charges in 2009 for corporate and
business unit selling and administrative functions also included
$1.9 million related to the reorganization of the
management structure of our Refrigeration administrative and
support functions across the globe. Restructuring charges
recorded in 2009 also included $1.8 million related to the
centralization of certain Service Experts administrative and
support functions and $1.1 million related to the
reorganization of our Commercial Heating & Cooling
selling and administrative organization in the United States and
Canada.
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.
84
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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, 2010 and 2009 (in millions):
|
Balance as of
|
Charged
|
Balance as of
|
||||||||||||||||||
|
December 31,
|
to
|
Cash
|
Non-Cash
|
December 31,
|
||||||||||||||||
| Description of Reserves | 2009 | Earnings | Utilization | Utilization and Other | 2010 | |||||||||||||||
|
Severance and related expense
|
$ | 21.1 | $ | 9.0 | $ | (22.5 | ) | $ | (1.4 | ) | $ | 6.2 | ||||||||
|
Asset write-offs and accelerated depreciation
|
— | 2.6 | — | (2.6 | ) | — | ||||||||||||||
|
Equipment moves
|
— | 0.8 | (0.8 | ) | — | — | ||||||||||||||
|
Lease termination
|
0.3 | 0.5 | (0.5 | ) | — | 0.3 | ||||||||||||||
|
Other(1)
|
0.8 | 2.7 | (2.8 | ) | — | 0.7 | ||||||||||||||
|
Total restructuring reserves
|
$ | 22.2 | $ | 15.6 | $ | (26.6 | ) | $ | (4.0 | ) | $ | 7.2 | ||||||||
| (1) | Charges classified as ‘Other’ include $1.0 million third-party services related to restructuring activities and $0.8 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 | 2008 | Earnings | Utilization | 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. |
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
|
||||||||||
| 2010 | Date | Incurred | ||||||||||
|
Severance and related expense
|
$ | 6.0 | $ | 31.2 | $ | 31.2 | ||||||
|
Asset write-offs and accelerated depreciation
|
2.1 | 10.5 | 10.5 | |||||||||
|
Equipment moves
|
0.6 | 2.7 | 3.6 | |||||||||
|
Other
|
2.4 | 6.2 | 8.4 | |||||||||
|
Total
|
$ | 11.1 | $ | 50.6 | $ | 53.7 | ||||||
Restructuring expense for significant manufacturing
rationalization activities related to the following:
| • | In the third quarter of 2010, we began to exit contract coil manufacturing in our Refrigeration operations in Milperra, Australia. Total restructuring charges related to this action recorded in 2010 were $3.3 million, |
85
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LENNOX
INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
| which was composed of severance of $2.8 million and other charges of $0.5 million. This action was primarily completed during 2010. |
| • | In the first quarter of 2010, we began to exit OEM coil manufacturing in our Refrigeration operations in Milperra, Australia. Total restructuring charges related to this action recorded in 2010 were $5.3 million, which was composed of severance of $4.0 million, asset write-offs of $1.1 million and other charges of $0.2 million. This action was completed during 2010. | |
| • | 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. During 2010 we recorded restructuring charges totaling $1.4 million, primarily composed of equipment move costs, severance and other plant closure costs. This action was completed during 2010. | |
| • | 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, Mexico. Total restructuring charges recorded related to this action in 2010 were $1.4 million, primarily composed of equipment move costs, accelerated depreciation, severance and other plant closure costs. The consolidation is expected to be completed during the fourth quarter of 2011. | |
| • | Additionally, during 2010, we reversed $0.8 million of restructuring severance charges related to the consolidation of certain Commercial Heating & Cooling manufacturing operations located in Mions, France into our existing manufacturing operations in Longvic, France to adjust estimated amounts to actual. |
Reorganization
of 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 $0.1 million of restructuring charges, which was
composed of severance, during 2010 related to this transition.
To date, we have incurred $3.2 million, which was composed
primarily of severance, and we expect the total cost to be
$3.6 million related to this restructuring activity. The
total cost of this restructuring activity will be composed of
severance of $2.6 million, equipment moving costs of
$0.3 million and other costs of $0.7 million. The
transition is expected to be completed in the fourth quarter of
2011.
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
|
||||||||||
| 2010 | Date | Incurred | ||||||||||
|
Severance and related expense
|
$ | 2.8 | $ | 23.4 | $ | 23.4 | ||||||
|
Asset write-offs and accelerated depreciation
|
0.6 | 1.4 | 1.4 | |||||||||
|
Lease termination
|
0.7 | 2.4 | 2.4 | |||||||||
|
Other
|
0.3 | 0.9 | 0.9 | |||||||||
|
Total
|
$ | 4.4 | $ | 28.1 | $ | 28.1 | ||||||
We incurred costs related to the following significant
restructuring actions in our support and administrative
activities:
| • | In the fourth quarter of 2010, we began to reorganize the management structure of our Service Experts business. Restructuring charges recorded in 2010 related to his action, totaled $1.1 million and was primarily composed of severance. Total anticipated restructuring charges related to this action are expected to total |
86
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LENNOX
INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
| $1.1 million and consist principally of severance. We anticipate that this action will be completed in the third quarter of 2011. |
| • | During the second quarter of 2010, we reorganized certain administrative operations of an acquired company within our Service Experts segment. Restructuring charges recorded in 2010 related to his action, totaled $1.0 million and was primarily composed of asset write-offs and lease termination costs. This action was completed during 2010. | |
| • | 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 $1.8 million during 2010, which primarily consisted of employee relocation and lease termination costs. Total restructuring charges related to this action totaled $3.8 million and consisted principally of severance, recruiting, relocation costs and lease termination costs. We completed this action during 2010. | |
| • | During 2009 and 2008, we reorganized various administrative functions in our Commercial Heating & Cooling and Refrigeration segments. As a result of these actions, we recorded restructuring severance charges of $0.4 million during 2010. These actions were completed during 2010. |
| 17. | Discontinued Operations: |
Service
Experts Discontinued Operations
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, | ||||||||||||
| 2010 | 2009 | 2008 | ||||||||||
|
Net trade sales
|
$ | 0.2 | $ | 26.1 | $ | 52.5 | ||||||
|
Pre-tax operating loss(1)
|
(1.1 | ) | (13.1 | ) | (1.8 | ) | ||||||
| (1) | Included in the pre-tax operating loss from discontinued operations are losses on the disposal of the assets and liabilities of the service centers sold of $0.2 million in 2010, and gains on disposal of the assets and liabilities of service centers sold of $2.3 million in 2009. Also, included in the 2009 pre-tax operating 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 and a write-off of $4.0 million of goodwill related to the sale of these service centers. The pre-tax operating loss from discontinued operations in 2008 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, | ||||||||
| 2010 | 2009 | |||||||
|
Assets of discontinued operations:
|
||||||||
|
Other assets
|
$ | — | $ | 3.6 | ||||
|
Liabilities of discontinued operations:
|
||||||||
|
Accrued expenses
|
$ | — | $ | 1.3 | ||||
87
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LENNOX
INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
| 18. | 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.
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, | ||||||||||||
| 2010 | 2009 | 2008 | ||||||||||
|
Net income
|
$ | 116.2 | $ | 51.1 | $ | 122.8 | ||||||
|
Add: Loss (income) from discontinued operations
|
0.9 | 10.7 | 1.0 | |||||||||
|
Income from continuing operations
|
$ | 117.1 | $ | 61.8 | $ | 123.8 | ||||||
|
Weighted-average shares outstanding — basic
|
54.6 | 55.6 | 56.7 | |||||||||
|
Effect of dilutive securities
|
1.2 | 1.0 | 1.6 | |||||||||
|
Weighted-average shares outstanding — diluted
|
55.8 | 56.6 | 58.3 | |||||||||
|
Earnings per share from continuing operations:
|
||||||||||||
|
Basic
|
$ | 2.14 | $ | 1.11 | $ | 2.18 | ||||||
|
Diluted
|
$ | 2.10 | $ | 1.09 | $ | 2.12 | ||||||
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, | ||||||||||||
| 2010 | 2009 | 2008 | ||||||||||
|
Options to purchase common stock (number of shares)
|
273,429 | — | 668,451 | |||||||||
|
Price ranges per share
|
$ | 46.78 | $ | N/A | $ | 34.52 to $37.11 | ||||||
88
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LENNOX
INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
| 19. | 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 Food Preservation and Non-Food/Industrial |
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 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.
89
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LENNOX
INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Net sales and segment profit (loss) by business segment, along
with a reconciliation of segment profit to Income from
Continuing Operations Before Income Taxes are shown below (in
millions):
| For the Years Ended December 31, | ||||||||||||
| 2010 | 2009 | 2008 | ||||||||||
|
Net Sales
|
||||||||||||
|
Residential Heating & Cooling
|
$ | 1,417.4 | $ | 1,293.5 | $ | 1,493.4 | ||||||
|
Commercial Heating & Cooling
|
620.0 | 594.6 | 835.3 | |||||||||
|
Service Experts
|
590.3 | 535.4 | 586.3 | |||||||||
|
Refrigeration
|
550.9 | 512.7 | 618.2 | |||||||||
|
Eliminations(1)
|
(82.2 | ) | (88.7 | ) | (92.1 | ) | ||||||
| $ | 3,096.4 | $ | 2,847.5 | $ | 3,441.1 | |||||||
|
Segment Profit (Loss)
(2)
|
||||||||||||
|
Residential Heating & Cooling
|
$ | 132.3 | $ | 111.7 | $ | 145.8 | ||||||
|
Commercial Heating & Cooling
|
69.3 | 49.3 | 93.3 | |||||||||
|
Service Experts
|
19.3 | 16.6 | 18.5 | |||||||||
|
Refrigeration
|
61.4 | 48.9 | 60.2 | |||||||||
|
Corporate and other
|
(65.5 | ) | (62.5 | ) | (53.8 | ) | ||||||
|
Eliminations(1)
|
0.2 | 0.5 | (0.7 | ) | ||||||||
|
Subtotal that includes segment profit and eliminations
|
217.0 | 164.5 | 263.3 | |||||||||
|
Reconciliation to income from continuing operations before
income taxes:
|
||||||||||||
|
Special product quality adjustments
|
(0.2 | ) | 18.3 | — | ||||||||
|
Items in losses (gains) and other expenses, net that are
excluded from segment profit(3)
|
11.2 | (10.9 | ) | 5.2 | ||||||||
|
Restructuring charges
|
15.6 | 41.5 | 30.4 | |||||||||
|
Impairment of assets
|
— | 6.4 | 9.1 | |||||||||
|
Interest expense, net
|
12.8 | 8.2 | 14.2 | |||||||||
|
Other expense, net
|
1.0 | 0.1 | 0.1 | |||||||||
|
Income from continuing operations before income taxes
|
$ | 176.6 | $ | 100.9 | $ | 204.3 | ||||||
| (1) | Eliminations consist of intercompany sales between business segments, such as products sold to Service Experts by the Residential Heating & Cooling segment. | |
| (2) | We define 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 Losses (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 Losses (Gains) and Other Expenses, net that are excluded from segment profit are net change in unrealized gains and/or losses on open future contracts, discount fee on accounts sold, realized gains and/or |
90
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LENNOX
INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
| losses on marketable securities, special legal contingency charge, and other items. For more information about Losses (Gains) and Other Expenses, net see Note 22. |
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 2010, 2009 and 2008.
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, | ||||||||
| 2010 | 2009 | |||||||
|
Total Assets
|
||||||||
|
Residential Heating & Cooling
|
$ | 519.8 | $ | 484.2 | ||||
|
Commercial Heating & Cooling
|
252.7 | 238.5 | ||||||
|
Service Experts
|
186.2 | 173.1 | ||||||
|
Refrigeration
|
389.7 | 357.5 | ||||||
|
Corporate and other
|
354.9 | 297.3 | ||||||
|
Eliminations(1)
|
(11.3 | ) | (10.3 | ) | ||||
|
Total assets
|
1,692.0 | 1,540.3 | ||||||
|
Discontinued operations (See Note 17)
|
— | 3.6 | ||||||
|
Total assets
|
$ | 1,692.0 | $ | 1,543.9 | ||||
| (1) | Eliminations consist of net intercompany receivables and intercompany profit included in inventory from products sold between business segments, such as products sold to Service Experts by the Residential Heating & Cooling segment. |
Total capital expenditures by business segment are shown below
(in millions):
|
For the Years Ended
|
||||||||||||
| December 31, | ||||||||||||
| 2010 | 2009 | 2008 | ||||||||||
|
Capital Expenditures
|
||||||||||||
|
Residential Heating & Cooling
|
$ | 19.4 | $ | 31.7 | $ | 33.2 | ||||||
|
Commercial Heating & Cooling
|
6.2 | 6.8 | 7.0 | |||||||||
|
Service Experts
|
0.8 | 0.7 | 0.3 | |||||||||
|
Refrigeration
|
6.9 | 7.4 | 7.6 | |||||||||
|
Corporate and other
|
12.5 | 12.2 | 14.0 | |||||||||
|
Total capital expenditures
|
$ | 45.8 | $ | 58.8 | $ | 62.1 | ||||||
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 2010 and 2009.
91
Table of Contents
LENNOX
INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
The depreciation and amortization expense by business segment
are shown below (in millions):
|
For the Years Ended
|
||||||||||||
| December 31, | ||||||||||||
| 2010 | 2009 | 2008 | ||||||||||
|
Depreciation and Amortization
|
||||||||||||
|
Residential Heating & Cooling
|
$ | 21.7 | $ | 22.2 | $ | 22.2 | ||||||
|
Commercial Heating & Cooling
|
8.0 | 8.0 | 8.2 | |||||||||
|
Service Experts
|
2.2 | 1.9 | 1.9 | |||||||||
|
Refrigeration
|
8.7 | 9.9 | 9.2 | |||||||||
|
Corporate and other
|
12.9 | 10.9 | 9.1 | |||||||||
|
Total depreciation and amortization
|
$ | 53.5 | $ | 52.9 | $ | 50.6 | ||||||
The equity method investees are shown below (in millions):
|
For the Years Ended
|
||||||||||||
| December 31, | ||||||||||||
| 2010 | 2009 | 2008 | ||||||||||
|
Income from Equity Method Investments
|
||||||||||||
|
Refrigeration
|
$ | 1.3 | $ | 0.5 | $ | 1.3 | ||||||
|
Corporate and other(1)
|
8.8 | 6.8 | 7.3 | |||||||||
| $ | 10.1 | $ | 7.3 | $ | 8.6 | |||||||
| (1) | A significant portion of income for equity method investments is allocated to our Residential Heating & Cooling and Commercial Heating & Cooling segments. We allocated $5.6 million, $5.9 million, and $4.5 million to those segments in 2010, 2009 and 2008, respectively. |
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, | ||||||||||||
| 2010 | 2009 | 2008 | ||||||||||
|
Net Sales to External Customers by Point of Shipment
|
||||||||||||
|
United States
|
$ | 2,255.4 | $ | 2,033.1 | $ | 2,429.2 | ||||||
|
Canada
|
336.6 | 327.0 | 363.9 | |||||||||
|
International
|
504.4 | 487.4 | 648.0 | |||||||||
|
Total net sales to external customers
|
$ | 3,096.4 | $ | 2,847.5 | $ | 3,441.1 | ||||||
| As of December 31, | ||||||||
| 2010 | 2009 | |||||||
|
Property, Plant and Equipment, net
|
||||||||
|
United States
|
$ | 225.5 | $ | 232.7 | ||||
|
Mexico
|
33.0 | 30.3 | ||||||
|
Canada
|
6.0 | 6.0 | ||||||
|
International
|
59.8 | 60.6 | ||||||
|
Total property, plant and equipment, net
|
$ | 324.3 | $ | 329.6 | ||||
92
Table of Contents
LENNOX
INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
| 20. | 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 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, 2010 and 2009, 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, 2010 | ||||||||||||||||
|
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)
|
$ | 18.0 | $ | — | $ | — | $ | 18.0 | ||||||||
|
Derivatives, net(2)
|
— | 16.8 | — | 16.8 | ||||||||||||
93
Table of Contents
LENNOX
INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
|
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 | ||||||||||||
| (1) | Investment in marketable equity securities is recorded in Other Long-Term Assets in the accompanying Consolidated Balance Sheets. See Note 6 for more information. | |
| (2) | For more information on the recording of derivatives in the accompanying Consolidated Balance Sheets, see Note 8. |
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.
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 our domestic revolving
credit facility, capital lease obligations, foreign obligations
and any related current maturities) was $114.6 million and
$242.5 million as of December 31, 2010 and 2009,
respectively. The estimated fair value of our senior unsecured
notes was $203.0 million as of December 31, 2010. 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.
| 21. | 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 | ||||||||||||||||||||||
| 2010(1) | 2009(2) | 2010(1) | 2009(2) | 2010(1) | 2009(2) | |||||||||||||||||||
|
First Quarter
|
$ | 644.1 | $ | 580.5 | $ | 174.3 | $ | 136.4 | $ | (1.6 | ) | $ | (18.1 | ) | ||||||||||
|
Second Quarter
|
872.1 | 784.0 | 264.7 | 226.2 | 48.3 | 31.7 | ||||||||||||||||||
|
Third Quarter
|
818.2 | 749.5 | 232.8 | 221.7 | 41.8 | 31.0 | ||||||||||||||||||
|
Fourth Quarter
|
762.0 | 733.5 | 220.0 | 203.8 | 27.7 | 6.5 | ||||||||||||||||||
94
Table of Contents
LENNOX
INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
|
Basic
|
Diluted
|
|||||||||||||||||||||||
|
(Loss) Earnings
|
(Loss) Earnings
|
|||||||||||||||||||||||
|
per Common
|
per
|
Dividends per
|
||||||||||||||||||||||
| Share | Common Share | Common Share | ||||||||||||||||||||||
| 2010 | 2009 | 2010 | 2009 | 2010 | 2009 | |||||||||||||||||||
|
First Quarter
|
$ | (0.02 | ) | $ | (0.33 | ) | $ | (0.02 | ) | $ | (0.33 | ) | $ | 0.15 | $ | 0.14 | ||||||||
|
Second Quarter
|
0.88 | 0.57 | 0.86 | 0.56 | 0.15 | 0.14 | ||||||||||||||||||
|
Third Quarter
|
0.78 | 0.56 | 0.76 | 0.54 | 0.15 | 0.14 | ||||||||||||||||||
|
Fourth Quarter
|
0.52 | 0.12 | 0.51 | 0.11 | 0.15 | 0.14 | ||||||||||||||||||
| (1) | The following unusual or infrequent pre-tax items were included in the 2010 quarterly results: | |
| We recorded an adjustment to pension cost in the fourth quarter resulted in a reduction of pension cost by $4.1 million as compared to the prior year and by $3.5 million as compared to the third quarter. | ||
| We recorded LIFO related adjustments in the fourth quarter that increased gross profit by $2.5 million | ||
| We recorded restructuring charges throughout 2010 as follows: first quarter — $7.2 million, second quarter — $3.2 million, third quarter — $4.7 million and fourth quarter — $0.5 million. | ||
| (2) | The following unusual or infrequent pre-tax items were included in the 2009 quarterly results: | |
| We recorded restructuring charges throughout 2009 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. |
| 22. | Losses (Gains) and Other Expenses, net: |
Losses (Gains) and Other Expenses, net were as follows (in
millions):
|
For the Years Ended
|
||||||||||||
| December 31, | ||||||||||||
| 2010 | 2009 | 2008 | ||||||||||
|
Realized losses (gains) on settled futures contracts
|
$ | (1.5 | ) | $ | 3.7 | $ | 0.9 | |||||
|
Net change in unrealized (gains) losses on unsettled futures
contracts
|
(0.6 | ) | (7.1 | ) | 5.1 | |||||||
|
Gain on disposal of a business, net
|
(0.1 | ) | (4.1 | ) | — | |||||||
|
Losses (gains) on disposals of fixed assets
|
0.1 | (0.1 | ) | (4.8 | ) | |||||||
|
Special legal contingency charge(1)
|
6.8 | — | — | |||||||||
|
Acquisition expenses(2)
|
4.8 | — | — | |||||||||
|
Foreign currency exchange losses (gains)
|
0.4 | 0.7 | (3.2 | ) | ||||||||
|
Other items, net
|
0.3 | 0.3 | 0.1 | |||||||||
|
Losses (Gains) and Other Expenses, net
|
$ | 10.2 | $ | (6.6 | ) | $ | (1.9 | ) | ||||
| (1) | For more information on the special legal contingency charge, see Note 10. | |
| (2) | Acquisition expenses relate to an acquisition consummated subsequent to year end. For more information, see Note 24. |
95
Table of Contents
LENNOX
INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
| 23. | Supplemental Information: |
Below is information about expenses included in our Statements
of Operations (in millions):
|
For the Years Ended
|
||||||||||||
| December 31, | ||||||||||||
| 2010 | 2009 | 2008 | ||||||||||
|
Research and development
|
$ | 49.5 | $ | 48.9 | $ | 46.0 | ||||||
|
Advertising, promotions and marketing
|
73.5 | 59.5 | 71.1 | |||||||||
|
Rent expense
|
64.3 | 64.4 | 64.2 | |||||||||
Interest
Expense, net
The components of Interest Expense, net were as follows (in
millions):
|
For the Years Ended
|
||||||||||||
| December 31, | ||||||||||||
| 2010 | 2009 | 2008 | ||||||||||
|
Interest expense, net of capitalized interest
|
$ | 13.7 | $ | 9.4 | $ | 18.0 | ||||||
|
Interest income
|
0.9 | 1.2 | 3.8 | |||||||||
| 24. | Subsequent Events (unaudited): |
On January 14, 2011, we completed a transaction with The
Manitowoc Company, Inc. by which we to acquired substantially
all the assets of its Kysor/Warren business. Kysor/Warren is a
leading manufacturer of refrigerated systems and display cases
for supermarkets throughout North America. Under the terms of
the agreement, the total consideration for the acquisition is
$138 million, subject to a post-closing purchase price
working capital adjustment.
| 25. | Condensed Consolidating Financial Statements |
The Company’s senior unsecured notes are unconditionally
guaranteed by certain of the Company’s subsidiaries (the
“Guarantor Subsidiaries”) while they are not by other
subsidiaries (the “Non-Guarantor Subsidiaries”). As
results of these guarantee arrangements, we are required to
present the following condensed consolidating financial
statements.
The condensed consolidating financial statements reflect the
investments in subsidiaries of the Company using the equity
method of accounting. Intercompany account balances have been
included in Accounts and Notes Receivable, Other (Current)
Assets, Other Assets, net, Short-Term Debt, Accounts Payable,
and Long-Term Debt line items of the Parent, Guarantor and
Non-Guarantor balance sheets. The principal elimination entries
eliminate investments in subsidiaries and intercompany balances
and transactions.
96
Table of Contents
LENNOX
INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Condensed consolidating financial statements of the Company, its
Guarantor Subsidiaries and Non-Guarantor Subsidiaries as of
December 31, 2010 and 2009 and for the for each of the
fiscal years of the three-year period ended December 31,
2010 are shown below:
As of December 31, 2010
(In millions)
|
Guarantor
|
Non-Guarantor
|
|||||||||||||||||||
| Parent | Subsidiaries | Subsidiaries | Eliminations | Consolidated | ||||||||||||||||
|
ASSETS
|
||||||||||||||||||||
|
CURRENT ASSETS:
|
||||||||||||||||||||
|
Cash and cash equivalents
|
$ | 81.1 | $ | 14.7 | $ | 64.2 | $ | — | $ | 160.0 | ||||||||||
|
Restricted cash
|
— | — | 12.2 | — | 12.2 | |||||||||||||||
|
Accounts and notes receivable, net
|
(1,169.7 | ) | 933.3 | 613.2 | 8.0 | 384.8 | ||||||||||||||
|
Inventories, net
|
— | 163.7 | 128.7 | (6.2 | ) | 286.2 | ||||||||||||||
|
Deferred income taxes
|
— | 27.6 | 12.1 | (3.0 | ) | 36.7 | ||||||||||||||
|
Other assets
|
19.3 | 21.0 | 121.2 | (94.5 | ) | 67.0 | ||||||||||||||
|
Total current assets
|
(1,069.3 | ) | 1,160.3 | 951.6 | (95.7 | ) | 946.9 | |||||||||||||
|
PROPERTY, PLANT AND EQUIPMENT, net
|
— | 202.8 | 121.6 | (0.1 | ) | 324.3 | ||||||||||||||
|
GOODWILL
|
— | 50.8 | 225.8 | (4.8 | ) | 271.8 | ||||||||||||||
|
DEFERRED INCOME TAXES
|
— | 77.3 | 22.6 | (12.7 | ) | 87.2 | ||||||||||||||
|
OTHER ASSETS, net
|
2,068.3 | 415.6 | 51.8 | (2,473.9 | ) | 61.8 | ||||||||||||||
|
TOTAL ASSETS
|
$ | 999.0 | $ | 1,906.8 | $ | 1,373.4 | $ | (2,587.2 | ) | $ | 1,692.0 | |||||||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||||||||||||||
|
CURRENT LIABILITIES:
|
||||||||||||||||||||
|
Short-term debt
|
$ | 31.1 | $ | — | $ | 1.8 | $ | (31.5 | ) | $ | 1.4 | |||||||||
|
Current maturities of long-term debt
|
— | 0.2 | 0.4 | — | 0.6 | |||||||||||||||
|
Accounts payable
|
8.1 | 133.1 | 131.0 | 1.6 | 273.8 | |||||||||||||||
|
Accrued expenses
|
6.6 | 262.0 | 115.5 | (49.6 | ) | 334.5 | ||||||||||||||
|
Income taxes payable
|
(36.1 | ) | 30.6 | 28.3 | (17.5 | ) | 5.3 | |||||||||||||
|
Total current liabilities
|
9.7 | 425.9 | 277.0 | (97.0 | ) | 615.6 | ||||||||||||||
|
LONG-TERM DEBT
|
300.0 | 5.4 | 139.6 | (128.0 | ) | 317.0 | ||||||||||||||
|
POSTRETIREMENT BENEFITS, OTHER THAN PENSIONS
|
— | 15.9 | — | — | 15.9 | |||||||||||||||
|
PENSIONS
|
— | 77.4 | 10.7 | — | 88.1 | |||||||||||||||
|
OTHER LIABILITIES
|
5.8 | 46.8 | 25.9 | (12.8 | ) | 65.7 | ||||||||||||||
|
Total liabilities
|
315.5 | 571.4 | 453.2 | (237.8 | ) | 1,102.3 | ||||||||||||||
|
COMMITMENTS AND CONTINGENCIES
|
||||||||||||||||||||
|
TOTAL STOCKHOLDERS’ EQUITY
|
683.5 | 1,335.4 | 920.2 | (2,349.4 | ) | 589.7 | ||||||||||||||
|
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
|
$ | 999.0 | $ | 1,906.8 | $ | 1,373.4 | $ | (2,587.2 | ) | $ | 1,692.0 | |||||||||
97
Table of Contents
LENNOX
INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Condensed
Consolidating Balance Sheets
As of December 31, 2009
(In millions)
As of December 31, 2009
(In millions)
|
Guarantor
|
Non-Guarantor
|
|||||||||||||||||||
| Parent | Subsidiaries | Subsidiaries | Eliminations | Consolidated | ||||||||||||||||
|
ASSETS
|
||||||||||||||||||||
|
CURRENT ASSETS:
|
||||||||||||||||||||
|
Cash and cash equivalents
|
$ | 0.8 | $ | 6.6 | $ | 116.9 | $ | — | $ | 124.3 | ||||||||||
|
Accounts and notes receivable, net
|
(975.0 | ) | 775.1 | 558.3 | (1.4 | ) | 357.0 | |||||||||||||
|
Inventories, net
|
— | 139.4 | 113.7 | (2.9 | ) | 250.2 | ||||||||||||||
|
Deferred income taxes
|
— | 25.4 | 15.8 | (6.3 | ) | 34.9 | ||||||||||||||
|
Other assets
|
12.2 | 19.1 | 93.0 | (56.8 | ) | 67.5 | ||||||||||||||
|
Total current assets
|
(962.0 | ) | 965.6 | 897.7 | (67.4 | ) | 833.9 | |||||||||||||
|
PROPERTY, PLANT AND EQUIPMENT, net
|
— | 207.8 | 121.8 | — | 329.6 | |||||||||||||||
|
GOODWILL
|
— | 46.7 | 215.4 | (4.7 | ) | 257.4 | ||||||||||||||
|
DEFERRED INCOME TAXES
|
— | 67.3 | 21.2 | (13.9 | ) | 74.6 | ||||||||||||||
|
OTHER ASSETS, net
|
1,905.1 | 371.4 | 41.5 | (2,269.6 | ) | 48.4 | ||||||||||||||
|
TOTAL ASSETS
|
$ | 943.1 | $ | 1,658.8 | $ | 1,297.6 | $ | (2,355.6 | ) | $ | 1,543.9 | |||||||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||||||||||||||
|
CURRENT LIABILITIES:
|
||||||||||||||||||||
|
Short-term debt
|
$ | 25.1 | $ | — | $ | 2.5 | $ | (25.4 | ) | $ | 2.2 | |||||||||
|
Current maturities of long-term debt
|
35.0 | — | 0.5 | — | 35.5 | |||||||||||||||
|
Accounts payable
|
7.9 | 115.4 | 122.7 | (7.8 | ) | 238.2 | ||||||||||||||
|
Accrued expenses
|
5.1 | 192.5 | 154.3 | (34.0 | ) | 317.9 | ||||||||||||||
|
Income taxes payable
|
(17.5 | ) | (21.6 | ) | 43.2 | (4.1 | ) | — | ||||||||||||
|
Total current liabilities
|
55.6 | 286.3 | 323.2 | (71.3 | ) | 593.8 | ||||||||||||||
|
LONG-TERM DEBT
|
176.5 | 98.8 | 117.4 | (198.9 | ) | 193.8 | ||||||||||||||
|
POSTRETIREMENT BENEFITS, OTHER THAN PENSIONS
|
— | 13.4 | — | — | 13.4 | |||||||||||||||
|
PENSIONS
|
— | 56.3 | 10.5 | (0.1 | ) | 66.7 | ||||||||||||||
|
OTHER LIABILITIES
|
2.6 | 50.9 | 32.9 | (14.6 | ) | 71.8 | ||||||||||||||
|
Total liabilities
|
234.7 | 505.7 | 484.0 | (284.9 | ) | 939.5 | ||||||||||||||
|
COMMITMENTS AND CONTINGENCIES
|
||||||||||||||||||||
|
TOTAL STOCKHOLDERS’ EQUITY
|
708.4 | 1,153.1 | 813.6 | (2,070.7 | ) | 604.4 | ||||||||||||||
|
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
|
$ | 943.1 | $ | 1,658.8 | $ | 1,297.6 | $ | (2,355.6 | ) | $ | 1,543.9 | |||||||||
98
Table of Contents
LENNOX
INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Condensed
Consolidating Statements of Operations
For the Year Ended December 31, 2010
(In millions)
For the Year Ended December 31, 2010
(In millions)
|
Non-
|
||||||||||||||||||||
|
Guarantor
|
Guarantor
|
|||||||||||||||||||
| Parent | Subsidiaries | Subsidiaries | Eliminations | Consolidated | ||||||||||||||||
|
NET SALES
|
$ | — | $ | 2,128.0 | $ | 1,220.8 | $ | (252.4 | ) | $ | 3,096.4 | |||||||||
|
COST OF GOODS SOLD
|
0.2 | 1,545.8 | 907.8 | (249.2 | ) | 2,204.6 | ||||||||||||||
|
Gross profit
|
(0.2 | ) | 582.2 | 313.0 | (3.2 | ) | 891.8 | |||||||||||||
|
OPERATING EXPENSES:
|
||||||||||||||||||||
|
Selling, general and administrative expenses
|
— | 480.3 | 205.4 | — | 685.7 | |||||||||||||||
|
(Gains) losses and other expenses, net
|
(0.6 | ) | 6.5 | 4.3 | — | 10.2 | ||||||||||||||
|
Restructuring charges
|
5.7 | 9.9 | — | 15.6 | ||||||||||||||||
|
(Income) loss from equity method investments
|
(138.8 | ) | (11.8 | ) | (10.1 | ) | 150.6 | (10.1 | ) | |||||||||||
|
Operational income from continuing operations
|
139.2 | 101.5 | 103.5 | (153.8 | ) | 190.4 | ||||||||||||||
|
INTEREST (INCOME) EXPENSE, net
|
12.4 | (3.0 | ) | 3.4 | — | 12.8 | ||||||||||||||
|
OTHER EXPENSE, net
|
— | — | 1.0 | — | 1.0 | |||||||||||||||
|
Income from continuing operations before income taxes
|
126.8 | 104.5 | 99.1 | (153.8 | ) | 176.6 | ||||||||||||||
|
(BENEFIT FROM) PROVISION FOR INCOME TAXES
|
(4.4 | ) | 34.3 | 29.6 | — | 59.5 | ||||||||||||||
|
Income from continuing operations
|
131.2 | 70.2 | 69.5 | (153.8 | ) | 117.1 | ||||||||||||||
|
Loss from discontinued operations
|
— | — | 0.9 | — | 0.9 | |||||||||||||||
|
Net income
|
$ | 131.2 | $ | 70.2 | $ | 68.6 | $ | (153.8 | ) | $ | 116.2 | |||||||||
99
Table of Contents
LENNOX
INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
CONDENSED
CONSOLIDATING STATEMENTS OF OPERATIONS
For the Year Ended December 31, 2009
(In millions)
For the Year Ended December 31, 2009
(In millions)
|
Non-
|
||||||||||||||||||||
|
Guarantor
|
Guarantor
|
|||||||||||||||||||
| Parent | Subsidiaries | Subsidiaries | Eliminations | Consolidated | ||||||||||||||||
|
NET SALES
|
$ | — | $ | 1,939.1 | $ | 1,147.1 | $ | (238.7 | ) | $ | 2,847.5 | |||||||||
|
COST OF GOODS SOLD
|
0.2 | 1,440.8 | 857.2 | (238.8 | ) | 2,059.4 | ||||||||||||||
|
Gross profit
|
(0.2 | ) | 498.3 | 289.9 | 0.1 | 788.1 | ||||||||||||||
|
OPERATING EXPENSES:
|
||||||||||||||||||||
|
Selling, general and administrative expenses
|
— | 453.0 | 191.8 | 0.1 | 644.9 | |||||||||||||||
|
(Gains) losses and other expenses, net
|
(6.7 | ) | (0.7 | ) | 0.8 | — | (6.6 | ) | ||||||||||||
|
Restructuring charges
|
— | 16.2 | 25.3 | — | 41.5 | |||||||||||||||
|
Impairment of assets
|
— | — | 6.4 | — | 6.4 | |||||||||||||||
|
(Income) loss from equity method investments
|
(39.1 | ) | 5.4 | (7.3 | ) | 33.7 | (7.3 | ) | ||||||||||||
|
Operational income from continuing operations
|
45.6 | 24.4 | 72.9 | (33.7 | ) | 109.2 | ||||||||||||||
|
INTEREST (INCOME) EXPENSE, net
|
(0.8 | ) | 7.2 | 1.9 | (0.1 | ) | 8.2 | |||||||||||||
|
OTHER EXPENSE, net
|
— | — | 0.1 | — | 0.1 | |||||||||||||||
|
Income from continuing operations before income taxes
|
46.4 | 17.2 | 70.9 | (33.6 | ) | 100.9 | ||||||||||||||
|
PROVISION FOR INCOME TAXES
|
0.2 | 6.3 | 32.2 | 0.4 | 39.1 | |||||||||||||||
|
Income from continuing operations
|
46.2 | 10.9 | 38.7 | (34.0 | ) | 61.8 | ||||||||||||||
|
Loss from discontinued operations
|
— | — | 10.7 | — | 10.7 | |||||||||||||||
|
Net income
|
$ | 46.2 | $ | 10.9 | $ | 28.0 | $ | (34.0 | ) | $ | 51.1 | |||||||||
100
Table of Contents
LENNOX
INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
CONDENSED
CONSOLIDATING STATEMENTS OF OPERATIONS
For the Year Ended December 31, 2008
(In millions)
For the Year Ended December 31, 2008
(In millions)
|
Guarantor
|
Non-Guarantor
|
|||||||||||||||||||
| Parent | Subsidiaries | Subsidiaries | Eliminations | Consolidated | ||||||||||||||||
|
NET SALES
|
$ | — | $ | 2,193.6 | $ | 1,396.9 | $ | (149.4 | ) | $ | 3,441.1 | |||||||||
|
COST OF GOODS SOLD
|
0.2 | 1,589.2 | 1,067.0 | (149.8 | ) | 2,506.6 | ||||||||||||||
|
Gross profit
|
(0.2 | ) | 604.4 | 329.9 | 0.4 | 934.5 | ||||||||||||||
|
OPERATING EXPENSES:
|
||||||||||||||||||||
|
Selling, general and administrative expenses
|
— | 477.0 | 209.9 | — | 686.9 | |||||||||||||||
|
Losses (gains) and other expenses, net
|
5.1 | (5.9 | ) | (1.0 | ) | (0.1 | ) | (1.9 | ) | |||||||||||
|
Restructuring charges
|
— | 10.7 | 19.7 | — | 30.4 | |||||||||||||||
|
Impairment of assets
|
— | — | 9.1 | — | 9.1 | |||||||||||||||
|
Income from equity method investments
|
(139.2 | ) | (6.6 | ) | (8.6 | ) | 145.8 | (8.6 | ) | |||||||||||
|
Operational income from continuing operations
|
133.9 | 129.2 | 100.8 | (145.3 | ) | 218.6 | ||||||||||||||
|
INTEREST EXPENSE, net
|
7.7 | 6.3 | 0.1 | 0.1 | 14.2 | |||||||||||||||
|
OTHER EXPENSE, net
|
— | — | 0.1 | — | 0.1 | |||||||||||||||
|
Income from continuing operations before income taxes
|
126.2 | 122.9 | 100.6 | (145.4 | ) | 204.3 | ||||||||||||||
|
(BENEFIT FROM) PROVISION FOR INCOME TAXES
|
(2.9 | ) | 43.6 | 39.6 | 0.2 | 80.5 | ||||||||||||||
|
Income from continuing operations
|
129.1 | 79.3 | 61.0 | (145.6 | ) | 123.8 | ||||||||||||||
|
Loss from discontinued operations
|
— | — | 1.0 | — | 1.0 | |||||||||||||||
|
Net income
|
$ | 129.1 | $ | 79.3 | $ | 60.0 | $ | (145.6 | ) | $ | 122.8 | |||||||||
101
Table of Contents
LENNOX
INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
CONDENSED
CONSOLIDATING STATEMENT OF CASH FLOWS
For the Year Ended December 31, 2010
(In millions)
For the Year Ended December 31, 2010
(In millions)
|
Guarantor
|
Non-Guarantor
|
|||||||||||||||||||
| Parent | Subsidiaries | Subsidiaries | Eliminations | Consolidated | ||||||||||||||||
|
CASH FLOWS FROM OPERATING ACTIVITIES:
|
$ | (115.4 | ) | 315.3 | $ | (14.1 | ) | $ | — | $ | 185.8 | |||||||||
|
CASH FLOWS FROM INVESTING ACTIVITIES:
|
||||||||||||||||||||
|
Proceeds from the disposal of property, plant and equipment
|
— | 0.1 | 0.1 | — | 0.2 | |||||||||||||||
|
Purchases of property, plant and equipment
|
— | (33.7 | ) | (12.1 | ) | — | (45.8 | ) | ||||||||||||
|
Proceeds from sale of businesses
|
— | 0.1 | 3.5 | — | 3.6 | |||||||||||||||
|
Acquisition of business
|
— | (7.2 | ) | — | — | (7.2 | ) | |||||||||||||
|
Restricted cash
|
— | — | (12.2 | ) | — | (12.2 | ) | |||||||||||||
|
Net cash used in investing activities
|
— | (40.7 | ) | (20.7 | ) | — | (61.4 | ) | ||||||||||||
|
CASH FLOWS FROM FINANCING ACTIVITIES:
|
||||||||||||||||||||
|
Short-term payments, net
|
— | — | (0.8 | ) | — | (0.8 | ) | |||||||||||||
|
Long-term payments
|
(35.0 | ) | (0.1 | ) | (0.8 | ) | — | (35.9 | ) | |||||||||||
|
Issuance of senior unsecured notes
|
199.8 | — | — | — | 199.8 | |||||||||||||||
|
Revolver long-term borrowings, net
|
(76.5 | ) | — | — | — | (76.5 | ) | |||||||||||||
|
Additional investment in affiliate
|
— | — | (1.0 | ) | — | (1.0 | ) | |||||||||||||
|
Proceeds from stock option exercises
|
3.5 | — | — | — | 3.5 | |||||||||||||||
|
Payments of deferred financing costs
|
(1.8 | ) | — | — | — | (1.8 | ) | |||||||||||||
|
Repurchases of common stock
|
(153.7 | ) | — | — | — | (153.7 | ) | |||||||||||||
|
Excess tax benefits related to share-based payments
|
5.3 | — | — | — | 5.3 | |||||||||||||||
|
Intercompany debt
|
90.8 | (107.8 | ) | 17.0 | — | — | ||||||||||||||
|
Intercompany financing activity
|
194.6 | (158.6 | ) | (36.0 | ) | — | — | |||||||||||||
|
Intercompany investments
|
(7.9 | ) | — | 7.9 | — | — | ||||||||||||||
|
Intercompany dividends
|
9.0 | — | (9.0 | ) | — | — | ||||||||||||||
|
Cash dividends paid
|
(32.4 | ) | — | — | — | (32.4 | ) | |||||||||||||
|
Net cash provided by (used in) financing activities
|
195.7 | (266.5 | ) | (22.7 | ) | — | (93.5 | ) | ||||||||||||
|
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
|
80.3 | 8.1 | (57.5 | ) | — | 30.9 | ||||||||||||||
|
EFFECT OF EXCHANGE RATES ON CASH AND CASH EQUIVALENTS
|
— | — | 4.8 | — | 4.8 | |||||||||||||||
|
CASH AND CASH EQUIVALENTS, beginning of period
|
0.8 | 6.6 | 116.9 | — | 124.3 | |||||||||||||||
|
CASH AND CASH EQUIVALENTS, end of period
|
$ | 81.1 | $ | 14.7 | $ | 64.2 | $ | — | $ | 160.0 | ||||||||||
102
Table of Contents
LENNOX
INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
CONDENSED
CONSOLIDATING STATEMENT OF CASH FLOWS
For the Year Ended December 31, 2009
(In millions)
For the Year Ended December 31, 2009
(In millions)
|
Guarantor
|
Non-Guarantor
|
|||||||||||||||||||
| Parent | Subsidiaries | Subsidiaries | Eliminations | Consolidated | ||||||||||||||||
|
CASH FLOWS FROM OPERATING ACTIVITIES:
|
$ | 54.0 | $ | 87.0 | $ | 84.5 | $ | — | $ | 225.5 | ||||||||||
|
CASH FLOWS FROM INVESTING ACTIVITIES:
|
||||||||||||||||||||
|
Proceeds from the disposal of property, plant and equipment
|
— | 0.2 | 0.4 | — | 0.6 | |||||||||||||||
|
Purchases of property, plant and equipment
|
— | (48.3 | ) | (10.5 | ) | — | (58.8 | ) | ||||||||||||
|
Proceeds from sale of businesses
|
— | 1.1 | 8.9 | — | 10.0 | |||||||||||||||
|
Return of investment
|
— | — | 0.9 | — | 0.9 | |||||||||||||||
|
Purchases of short-term investments
|
— | — | (16.9 | ) | — | (16.9 | ) | |||||||||||||
|
Proceeds from sales and maturities of short-term investments
|
— | — | 50.2 | — | 50.2 | |||||||||||||||
|
Net cash provided by (used in) investing activities
|
— | (47.0 | ) | 33.0 | — | (14.0 | ) | |||||||||||||
|
CASH FLOWS FROM FINANCING ACTIVITIES:
|
||||||||||||||||||||
|
Short-term payments, net
|
— | — | (4.3 | ) | — | (4.3 | ) | |||||||||||||
|
Long-term payments
|
— | — | (1.7 | ) | — | (1.7 | ) | |||||||||||||
|
Revolver long-term payments, net
|
(183.3 | ) | — | — | — | (183.3 | ) | |||||||||||||
|
Proceeds from stock option exercises
|
9.4 | — | — | — | 9.4 | |||||||||||||||
|
Repurchases of common stock
|
(5.6 | ) | — | — | — | (5.6 | ) | |||||||||||||
|
Excess tax benefits related to share-based payments
|
4.9 | — | — | — | 4.9 | |||||||||||||||
|
Intercompany debt
|
21.0 | (12.5 | ) | (8.5 | ) | — | — | |||||||||||||
|
Intercompany financing activity
|
126.5 | (24.0 | ) | (102.5 | ) | — | — | |||||||||||||
|
Intercompany dividends
|
5.0 | — | (5.0 | ) | — | — | ||||||||||||||
|
Cash dividends paid
|
(31.1 | ) | — | — | — | (31.1 | ) | |||||||||||||
|
Net cash used in financing activities
|
(53.2 | ) | (36.5 | ) | (122.0 | ) | — | (211.7 | ) | |||||||||||
|
DECREASE IN CASH AND CASH EQUIVALENTS
|
0.8 | 3.5 | (4.5 | ) | — | (0.2 | ) | |||||||||||||
|
EFFECT OF EXCHANGE RATES ON CASH AND CASH EQUIVALENTS
|
— | — | 2.4 | — | 2.4 | |||||||||||||||
|
CASH AND CASH EQUIVALENTS, beginning of period
|
— | 3.1 | 119.0 | — | 122.1 | |||||||||||||||
|
CASH AND CASH EQUIVALENTS, end of period
|
$ | 0.8 | $ | 6.6 | $ | 116.9 | $ | — | $ | 124.3 | ||||||||||
103
Table of Contents
LENNOX
INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
CONDENSED
CONSOLIDATING STATEMENT OF CASH FLOWS
For the Year Ended December 31, 2008
(In millions)
For the Year Ended December 31, 2008
(In millions)
|
Guarantor
|
Non-Guarantor
|
|||||||||||||||||||
| Parent | Subsidiaries | Subsidiaries | Eliminations | Consolidated | ||||||||||||||||
|
CASH FLOWS FROM OPERATING ACTIVITIES:
|
$ | 5.5 | $ | 136.4 | $ | 41.3 | $ | — | $ | 183.2 | ||||||||||
|
CASH FLOWS FROM INVESTING ACTIVITIES:
|
||||||||||||||||||||
|
Proceeds from the disposal of property, plant and equipment
|
— | 1.1 | 4.7 | — | 5.8 | |||||||||||||||
|
Purchases of property, plant and equipment
|
(1.2 | ) | (49.3 | ) | (11.6 | ) | — | (62.1 | ) | |||||||||||
|
Additional investments in affiliates
|
— | (3.1 | ) | (1.6 | ) | — | (4.7 | ) | ||||||||||||
|
Purchases of short-term investments
|
— | — | (64.2 | ) | — | (64.2 | ) | |||||||||||||
|
Proceeds from sales and maturities of short-term investments
|
— | — | 58.7 | — | 58.7 | |||||||||||||||
|
Net cash used in investing activities
|
(1.2 | ) | (51.3 | ) | (14.0 | ) | — | (66.5 | ) | |||||||||||
|
CASH FLOWS FROM FINANCING ACTIVITIES:
|
||||||||||||||||||||
|
Short-term borrowings, net
|
— | — | 1.4 | — | 1.4 | |||||||||||||||
|
Proceeds from capital lease
|
— | — | 15.3 | — | 15.3 | |||||||||||||||
|
Long-term payments
|
(36.3 | ) | — | (0.1 | ) | — | (36.4 | ) | ||||||||||||
|
Revolver long-term (payments) borrowings, net
|
213.5 | — | — | — | 213.5 | |||||||||||||||
|
Proceeds from stock option exercises
|
19.7 | — | — | — | 19.7 | |||||||||||||||
|
Payments of deferred financing costs
|
(0.3 | ) | — | — | — | (0.3 | ) | |||||||||||||
|
Repurchases of common stock
|
(323.8 | ) | — | — | — | (323.8 | ) | |||||||||||||
|
Excess tax benefits related to share-based payments
|
11.0 | — | — | — | 11.0 | |||||||||||||||
|
Intercompany debt
|
(5.8 | ) | 9.8 | (4.0 | ) | — | — | |||||||||||||
|
Intercompany activity
|
150.0 | (145.5 | ) | (4.5 | ) | — | — | |||||||||||||
|
Intercompany dividends
|
— | 41.5 | (41.5 | ) | — | — | ||||||||||||||
|
Cash dividends paid
|
(32.4 | ) | — | — | — | (32.4 | ) | |||||||||||||
|
Net cash used in financing activities
|
(4.4 | ) | (94.2 | ) | (33.4 | ) | — | (132.0 | ) | |||||||||||
|
DECREASE IN CASH AND CASH EQUIVALENTS
|
(0.1 | ) | (9.1 | ) | (6.1 | ) | — | (15.3 | ) | |||||||||||
|
EFFECT OF EXCHANGE RATES ON CASH AND CASH EQUIVALENTS
|
— | — | (8.1 | ) | — | (8.1 | ) | |||||||||||||
|
CASH AND CASH EQUIVALENTS, beginning of period
|
0.1 | 12.2 | 133.2 | — | 145.5 | |||||||||||||||
|
CASH AND CASH EQUIVALENTS, end of period
|
$ | — | $ | 3.1 | $ | 119.0 | $ | — | $ | 122.1 | ||||||||||
104
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, 2010, 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,
2010 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 information in the sections of our 2011 Proxy Statement
captioned “Proposal 1: Election of Directors,”
“Section 16(a) Beneficial Ownership Reporting
Compliance,” and “Corporate Governance” 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.
| Item 11. | Executive Compensation |
The sections of our 2011 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.
105
Table of Contents
| Item 12. | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters |
The sections of our 2011 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 2011 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 2011 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, 2010 and 2009 | |
| • | Consolidated Statements of Operations for the Years Ended December 31, 2010, 2009 and 2008 | |
| • | Consolidated Statements of Stockholders’ Equity for the Years Ended December 31, 2010, 2009 and 2008 | |
| • | Consolidated Statements of Cash Flows for the Years Ended December 31, 2010, 2009 and 2008 | |
| • | Notes to Consolidated Financial Statements for the Years Ended December 31, 2010, 2009 and 2008 |
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,
2010, 2009, and 2008 (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.
106
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, 2011
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, 2011 | ||||
|
/s/
Robert
W. Hau
|
Executive Vice President and
Chief Financial Officer (Principal Financial Officer) |
February 18, 2011 | ||||
|
/s/
Roy
A. Rumbough
|
Vice President, Controller and
Chief Accounting Officer (Principal Accounting Officer) |
February 18, 2011 | ||||
|
/s/
Richard
L. Thompson
|
Chairman of the Board of Directors | February 18, 2011 | ||||
|
/s/
James
J. Byrne
|
Director | February 18, 2011 | ||||
|
/s/
Janet
K. Cooper
|
Director | February 18, 2011 | ||||
|
/s/
C.L.
(Jerry) Henry
|
Director | February 18, 2011 | ||||
|
/s/
John
E. Major
|
Director | February 18, 2011 | ||||
|
/s/
John
W. Norris, III
|
Director | February 18, 2011 | ||||
|
/s/
Paul
W. Schmidt
|
Director | February 18, 2011 | ||||
107
Table of Contents
| Signature | Title | Date | ||||
|
/s/
Terry
D. Stinson
|
Director | February 18, 2011 | ||||
|
/s/
Jeffrey
D. Storey, MD
|
Director | February 18, 2011 | ||||
|
/s/
Gregory
T. Swienton
|
Director | February 18, 2011 | ||||
108
Table of Contents
LENNOX
INTERNATIONAL INC.
SCHEDULE II — VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
For the Years Ended December 31, 2010, 2009 and 2008
(In Millions)
SCHEDULE II — VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
For the Years Ended December 31, 2010, 2009 and 2008
(In Millions)
|
Additions
|
||||||||||||||||||||||||
|
Balance at
|
Charged
|
Balance
|
||||||||||||||||||||||
|
Beginning
|
to Cost and
|
at end
|
||||||||||||||||||||||
| of Year | Expenses | Write-offs | Recoveries | Other | of Year | |||||||||||||||||||
|
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 | |||||||||||
|
2010:
|
||||||||||||||||||||||||
|
Allowance for doubtful accounts
|
$ | 15.6 | $ | 6.3 | $ | (9.9 | ) | $ | 1.2 | $ | (0.4 | ) | $ | 12.8 | ||||||||||
109
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 March 15, 2010 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. | Indenture, dated as of May 3, 2010, between LII and U.S. Bank National Association, as trustee (filed as Exhibit 4.1 to LII’s Post-Effective Amendment No. 1 to Registration Statement on S-3 (Registration No. 333-155796) filed on May 3, 2010 and incorporated herein by reference). | ||
| 4 | .3. | Form of First Supplemental Indenture among LII, the guarantors party thereto and U.S. Bank National Association, as trustee (filed as Exhibit 4.2 to LII’s Post-Effective Amendment No. 1 to Registration Statement on S-3 (Registration No. 333-155796) filed on May 3, 2010 and incorporated herein by reference). | ||
| 4 | .4. | Form of 4.900% Notes due 2017 (filed as Exhibit 4.3 to LII’s Current Report on Form 8-K filed on May 6, 2010 and incorporated herein by reference). | ||
| 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 | Amendment No. 1 dated November 19, 2010, to the Receivables Purchase Agreement, dated as of November 25, 2009, with 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 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 November 19, 2010 and incorporated herein by reference). | ||
| 10 | .3 | 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 | .4 | First Amendment to Third Amended and Restated Revolving Credit Facility Agreement, dated February 22, 2010, by and among LII, Bank of America, N.A., as administrative agent, and the lenders named therein (filed as Exhibit 10.1 to LII’s Current Report on Form 8-K filed on February 22, 2010 and incorporated herein by reference). | ||
| 10 | .5 | 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 | .6 | 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 | .7 | 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 | .8 | 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). | ||
110
Table of Contents
|
Exhibit
|
||||
| Number | Exhibit Name | |||
| 10 | .9* | Lennox International Inc. 2010 Incentive Plan, as amended and restated (filed as Exhibit 10.1 to LII’s Current Report on Form 8-K filed on May 19, 2010 and incorporated herein by reference). | ||
| 10 | .10* | Form of Long-Term Incentive Award Agreement for U.S. Employees — Vice President and Above (for use under the 2010 Incentive Plan) (filed as Exhibit 10.2 to LII’s Current Report on Form 8-K filed on December 13, 2010 and incorporated herein by reference). | ||
| 10 | .11* | Form of Restricted Stock Unit Award Agreement for Non-Employee Directors (for use under the 2010 Incentive Plan) (filed as Exhibit 10.1 to LII’s Current Report on Form 8-K filed on December 13, 2010 and incorporated herein by reference). | ||
| 10 | .12* | 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 | .13* | 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). | ||
| 10 | .14* | 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 | .15* | 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 | .16* | Lennox International Inc. Supplemental 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 | .17* | 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 | .18* | 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 | .19* | 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 | .20* | 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 | .21* | 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 | .22* | Lennox International Inc. 2007 Long-Term Incentive Award Agreement, Non-Employee Directors, dated as of December 7, 2007 (filed as Exhibit 10.27 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). | ||
111
Table of Contents
|
Exhibit
|
||||
| Number | Exhibit Name | |||
|
Exhibit No. (101).INS** XBRL Instance Document
|
||||
|
Exhibit No. (101).SCH** XBRL Taxonomy Extension Schema
Document
|
||||
|
Exhibit No. (101).CAL** XBRL Taxonomy Extension Calculation
Linkbase Document
|
||||
|
Exhibit No. (101).LAB** XBRL Taxonomy Extension Label
Linkbase Document
|
||||
|
Exhibit No. (101).PRE** XBRL Taxonomy Extension
Presentation Linkbase Document
|
||||
|
Exhibit No. (101).DEF** XBRL Taxonomy Extension Definition
Linkbase Document
|
||||
| * | Management contract or compensatory plan or arrangement. |
| ** | In accordance with Regulation S-T, the XBRL-related information in Exhibit No. (101) to this Annual Report on Form 10-K shall be deemed “furnished” and not “filed.” |
112
TABLE OF CONTENTS
Part IItem 1. BusinessItem 1A. Risk FactorsItem 1B. Unresolved Staff CommentsItem 2. PropertiesItem 3. Legal ProceedingsItem 4. (removed and Reserved)Part 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