1 0 0 2 t r o p e r l a u n n a integrity: buzzword or just good business? At Lennox International, integrity means achieving success by following a code of business principles we share and believe. When Dave Lennox built the first riveted steel furnace in 1895, he focused on a few simple but timeless principles. The need for innovative, high-quality products that make people’s lives easier. The importance of building a bond of trust between a company and its custom- ers. The commitment to take advantage of growth opportunities, meet the challenges they present, and perform at the highest level possible. Over a century later, we have grown from Dave Lennox’ blacksmith shop into a worldwide leader in climate control—but we still run our company by the solid principles he stood for. To us, that’s integrity. And whether we’re reflecting on our past achievements, facing the exciting challenges of today, or planning for our successes to come, that’s just good business. global climate control solutions Lennox International is a leading provider of climate control solutions for the heating, air conditioning, and refrigeration markets in over 70 countries. Our business has been built on a heritage of integrity and innovation dating back to 1895. The 21,000 employees who make up Lennox International are dedicated to providing trusted brands, innovative products, unsurpassed quality, and responsive service. business segments 2001 Net Sales of $3.1 Billion North American Residential 35% Retail 32% Commercial Air Conditioning 15% Commercial Refrigeration 11% Heat Transfer 7% Lennox International operates in five key business segments: North American residential. We manufacture and market the heating and cooling equipment that makes your home more comfortable: furnaces, heat pumps, air conditioners, hearth products, and a variety of indoor air quality equipment, including humidifiers and electronic air cleaners. Retail. We are Service Experts, the company to trust for home heating and cooling needs. With approximately 200 North American service centers representing $1 billion in sales, we are a leading provider of retail heating, ventilation, and air condi- tioning (HVAC) equipment sales and services. Commercial refrigeration. Our refrigeration products are sold under well-established brand names, pri- marily for cold storage applications in supermarkets, convenience stores, restaurants, warehouses, and distribution centers. We are a leading provider of commercial refrigeration products in North America and a growing presence internationally. Commercial air conditioning. We make working, learning, and shopping more comfortable. Our unitary commercial air conditioning products are used in thousands of low-rise office buildings, restaurants, retail and supermarket centers, churches, and schools. Heat transfer. Heat transfer surfaces are a key component of any heating, ventilation, air condition- ing, or refrigeration (HVACR) system. We combine the engineering expertise of our sales force with flexible manufacturing processes to create distinct competitive advantages in the design and applica- tion of these products. financial highlights (In millions, except per share data) 2001(1) For the year ending December 31, 1999 2000(2) 1998 1997(3) Statement of Operations Data Net Sales Income (Loss) from Operations Net Income (Loss) Diluted Earnings (Loss) Per Share Dividends Per Share Other Data Capital Expenditures Research and Development Expenses Balance Sheet Data Working Capital Total Assets Total Debt Stockholders’ Equity $3,119.7 (0.7) (42.4) (0.75) 0.380 $3,247.4 158.6 59.1 1.05 0.380 $2,361.7 155.9 73.2 1.81 0.350 $1,821.8 106.6 52.5 1.47 0.325 $1,444.4 (35.2) (33.6) (0.99) 0.275 17.4 37.3 58.3 36.5 76.7 39.1 52.4 33.3 158.8 1,794.0 517.8 654.6 311.3 2,055.0 690.5 743.1 424.6 1,683.7 577.0 597.9 263.3 1,151.6 317.4 375.6 34.6 25.4 335.9 970.4 198.5 325.2 Note (1): Includes pretax restructuring charges of $73.2 million. Excluding these charges, Income From Operations is $72.5 million, Net Income is $14.2 million, and Diluted EPS is $0.25. Note (2): Includes pretax restructuring charge of $5.1 million. Excluding this charge, Income From Operations is $163.7 million, Net Income is $61.9 million, and Diluted EPS is $1.10. Note (3): Includes product inspection charge of $140 million. Excluding this charge, Income From Operations is $104.8 million, Net Income is $51.7 million, and Diluted EPS is $1.53. A N N U A L R E P O R T 2 0 0 1 0 1 message to our s t o c k h o l d e r s At Lennox International Inc. (LII) we define integrity as a firm commitment to a code of values. It’s how we define our way of doing business. But what impact has our integrity had on our history, our current performance, or the vision we want to share with you for LII’s future? Before discussing how our traditions are still driving us today and how they will positively affect our performance in the years ahead, let’s review our 2001 performance. 2001 Performance LII faced soft global economic conditions while we worked to integrate and consolidate our retail operations. These challenges were clearly reflected in our results for 2001. Total corporate sales were $3.1 billion, down 4% from 2000. Our operating margin before restructuring charges associated with consolidating some of our operations was 2.3%, down from 5.0% in 2000. Net income, before restruc- turing charges, was $14 million, compared with $62 million the previous year. Earnings per share were $0.25 versus $1.10 last year. On a GAAP basis, after accounting for total pre-tax restructuring charges of $73 million, our reported net loss per share for the year was $0.75, compared with earn- ings per share of $1.05 in 2000. While we are certainly not satisfied with these results, we did achieve some significant progress in several important areas during 2001: • Despite strong competition and a weak econ- omy, our domestic air conditioning, heating, and refrigeration businesses—which represent almost half of our revenues—gained measurable market share and position us favorably for the next eco- nomic cycle. John W. Norris, Jr. Chairman of the Board Robert E. Schjerven Chief Executive Officer 0 2 A N N U A L R E P O R T 2 0 0 1 • Our emphasis on managing free cash flow LII has substantial strengths, including market throughout the organization enabled us to signifi- leadership, strong brands, an experienced man- cantly improve performance on this key measure- agement team, clear strategies focused on growth ment. We generated $184 million in free cash in and operating improvement, and an emphasis on 2001—well ahead of our mid-year 2001 guidance generating cash and paying down debt. We are of $80 to 90 million. We strengthened our balance confident that by sticking to our strategies and sheet by using the additional cash primarily to continuing our aggressive efforts to improve our reduce debt. As a result, we decreased our total performance, we will see every segment of our debt to $518 million as of December 31, 2001 business move toward its full earnings potential. from $690 million the year before, reducing our Our 21,000 employees worldwide are more debt-to-total-capital ratio to 44% from 48% over than capable of meeting our challenges with the same period. integrity, improving our performance, and increas- • We appointed a new leader of our retail ing our value to our shareholders. Their continued operations, Dennis Smith, who has a proven hard work and resilient attitude in difficult times record of turning around similar businesses. He are proof of that. Our 107-year history—notable has made adjustments to right-size the organiza- for success and growth through an economic tion, reducing the total head count at Service depression and two world wars—is proof of that Experts by 15% from 12 months ago. We remain as well. confident our retail operations offer significant earnings potential, and we are determined to A model for over a century of success begin realizing that potential in the near term. Dave Lennox started the Lennox business • We announced restructuring initiatives model in what one observer described as “an designed to improve utilization of our manufac- overgrown blacksmith shop” in Marshalltown, Iowa, turing and distribution assets. While these will in 1895. He made an innovative and popular involve one-time charges, we project an annual product: the first riveted steel furnace, far more pre-tax benefit of $7 million in 2002, beginning in efficient and durable than the cast-iron furnaces the second quarter, and $11 million annually common at the time. beginning in 2003. But innovation was only part of Lennox’ way • We are expanding our served market for of doing business. He also built a quality product, heat transfer surfaces through de-integration of one that could deliver safe, economical comfort heat transfer component production by OEMs. year after year. He sold his products directly to We have entered into a key alliance with Ingersoll- installing contractors, helping to build a personal Rand’s Climate Control division that marks a bond of communication and trust with his cus- significant success for LII in this area. The new tomers. When things went wrong, he listened, agreement is expected to bring $11 million in took responsibility, and corrected them. incremental revenues to Lennox in 2002 and up When D.W. Norris bought the business from to $25 million annually thereafter. Dave Lennox and became president in 1904, he • We are serious about reducing our over- built on what Lennox had begun, following his head. In the fourth quarter of last year we froze own simple but highly effective philosophy: both salaries and hiring in our North American operations. Over the past 12 months, as cost reduction programs have been executed through- out the company, our total workforce has been reduced by over 10%. “Build me the best product, and get me the best salesman. The best salesman will get me the best dealer, and the best dealer will get me the most business.” A N N U A L R E P O R T 2 0 0 1 0 3 “We continue our unwavering commitment to innovation and per- formance, treat our customers like true business partners, and learn from our past as we build for the future.” We have since expanded our business strat- • Products and services: Our century-old egy around the world to encompass multiple commitment to quality products and services distribution channels. But Dave Lennox and continues as we implement sophisticated lean D.W. Norris defined the basic values that helped manufacturing processes at many of our facilities, Lennox grow to become a global leader in the resulting in better products for our customers, climate control industry. Building on tradition built faster. We are developing highly sophisticated e-commerce systems that make it easier and faster for customers to communicate and do busi- Even in today’s far more complex business ness with us. We are constantly exploring new environment, we still find success and growth ways to enhance our products and services by opportunities in following and expanding on our listening to our customers, refining our processes earliest values. For over a century, we have main- to improve quality and efficiency, and evaluating tained our integrity through: emerging technologies. • Innovation: Dave Lennox’ emphasis on practical innovation lives on in our commitment to expanding our fast-growing e-commerce systems with input from our customers. It is also evident in our recent development of web-based controls for residential and commercial comfort systems. This year we are also introducing our Dave Lennox Signature(cid:2) Collection of top-of-the-line home comfort equipment, utilizing our own SilentComfort(cid:2) technology that allows us to produce the quietest air conditioners and furnaces on the market today. • Performance: After growing in the midst of • Brands: Originally led by the trusted face of “Dave Lennox,” we have carefully expanded our brand family to cover the entire depth and breadth of our industry. At the same time, we have ensured each name represents the tradi- tional Lennox standards of reliability and trust. Our brands—including Lennox, Armstrong, Ducane, Bohn, Kirby, Larkin, Heatcraft, and Service Experts—are well known and respected in the air conditioning and heating, refrigeration, heat transfer, and commercial refrigeration indus- tries around the world. many difficult domestic and global challenges We further demonstrated our commitment to over more than a century, we are firmly committed innovation and stronger financial performance to maximizing our performance in the public sec- at the highest levels of our operations by making tor. While our stock traded below its IPO price three key senior management appointments in 2001, our return to shareholders for the year during the year: was strong at over 30%. This performance far exceeded the broader markets, which had nega- tive returns in 2001. • We announced Rick Smith’s appointment to chief financial officer in our letter to you last year. Rick joined us on January 15, 2001 and, as we 0 4 A N N U A L R E P O R T 2 0 0 1 predicted, has proven to be an excellent fit with control technology. A key element in the new logo our company. His emphasis on enhancing the is “LII,” which stands for Lennox International Inc., basics of our balance sheet has resulted in sig- reflecting our new identity. The logo’s simple and nificant improvement in many important areas of direct visual style is suggestive of our focus on our financial operations. business basics and the underlying integrity that • We appointed Linda Goodspeed to chief has been part of our culture since 1895. technology officer. Linda was president and chief We continue our unwavering commitment to operating officer for Partminer, Inc., a leading innovation and performance, treat our customers global supplier of electronic components and like true business partners, and learn from our past component information and a provider of inventory as we build for the future. As we have grown around management services and enterprise solutions. the world, we have remained faithful to these core Before coming to Partminer, Linda was product values, through good times and challenging general manager of General Electric Appliances, ones—and have always emerged successful. responsible for $1.2 billion in cooking products While we expect our revenues will be flat to sales and maintaining the company’s number one modestly down for 2002, we are confident the share position in that market. Her expertise in initiatives we took during 2001 will enable us to technology, product management, quality systems, improve earnings, which will be reflected in the and manufacturing best practices is helping quality of our free cash flow. We look forward to accelerate improvement in these key areas. progress in 2002 in realizing our earnings poten- • As we mentioned earlier, we appointed tial, and expect improvements will accelerate in Dennis Smith to president of Service Experts Inc., the second half of the year. our retail operation. Dennis was formerly chief For all of us at LII, “integrity” just means good operating officer for Simplex Time Recorder, a business. Our integrity—the firm commitment we $900 million fire alarm and security systems busi- have to our code of values—will be key to meet- ness with 170 company-operated locations. Given ing our challenges in the year ahead and the Dennis’ impressive track record of helping compa- years to come. nies reach their fullest potential, we expect to see accelerated improvements in performance for our retail operations. We are also proud to introduce our new cor- porate logo, which you can see on the cover of this annual report. The previous LII logo is associ- ated with our Lennox brand of heating and cooling products and dates from the 1950s, when LII did not even exist. Introducing a distinctive corporate logo repre- sents our new role as a strong public company and our growth from a small-town furnace manu- facturer into a global leader in all aspects of climate Robert E. Schjerven Chief Executive Officer John W. Norris, Jr. Chairman of the Board A N N U A L R E P O R T 2 0 0 1 0 5 integrity for o v e r 1 0 0 y e a r s 1895 Dave Lennox develops a major innovation in 1994 LII’s Lennox Industries subsidiary introduces home comfort: the first riveted steel furnace. a complete combination high-efficiency residential 1935 Lennox develops and markets the first forced- air furnaces and enameled furnace cabinets. 1960 Lennox establishes an international division with facilities in England, Holland, and Germany. 1964 Lennox develops the Duracurve heat exchanger, reducing noise problems in gas furnaces. 1965 Lennox introduces packaged multi-zone units for commercial heating and cooling. 1973 Lennox increases air conditioning efficiency with the development of the two-speed hermetic compressor. 1982 Lennox develops and manufactures the industry’s first high-efficiency gas furnaces. 1984 Lennox International Inc. (LII) is established as the parent company for Lennox Industries Inc. and future acquisitions. space/water heating system, and enters the growing hearth products market. 1996 LII’s Heatcraft subsidiary develops the Beacon control system, improving the accuracy and reliability of refrigeration system information and easing installation. 1997 LII enters into joint venture agreements in Europe and Latin America, and makes acquisi- tions in Australia. 1998 LII establishes a retail distribution network offering full sales and service functions and in 2000 expands operations with the acquisition of Service Experts, Inc. 1999 A Lennox Industries dealer places the first online order through the DaveNet(cid:2) e-commerce system. 1999 LII expands its reach into the price-sensitive segment of the market by acquiring the air con- ditioning and heating division of the Ducane 1986 LII expands into the commercial refrigera- Company. tion and heat transfer markets with the establish- ment of Heatcraft Inc. 1988 LII expands into two-step distribution of resi- dential heating and cooling products with the acquisition of Armstrong Air Conditioning Inc. 2002 Lennox Industries announces the industry’s quietest air conditioner and gas furnace, and PureAir(cid:2), the industry’s most effective air purifi- cation system. 0 6 A N N U A L R E P O R T 2 0 0 1 integrity in o u r c o m m i t m e n t t o p e r f o r m a n c e In the 20th century, Lennox successfully met challenges posed by the Great Depression and two world wars—not only surviving, but growing stronger. In 2001, we continued that commitment to performance, aggressively tackling key perform- ance issues in the midst of a challenging worldwide economic environment. Our domestic air conditioning, heating, and refrigeration businesses performed strongly in diffi- cult markets, with measurably improved market shares. Responding to softening demand in 2001 and working to increase our production efficiency, we implemented significant cost control measures— including reducing our worldwide workforce by over 10%, amounting to over 2,600 jobs. A corporate-wide focus on free cash flow in 2001 increased free cash flow to $184 million, more than tripling the previous year’s figure of $57 million. Our major focus for improvement is on Service Experts, our retail business segment. We aggres- sively addressed the chronic under-performers in our retail business by rationalizing our network of service centers from 224 to less than 200 by sell- ing, closing, or merging centers. During the year, we established operations accountability at the center level and replaced approximately 70 service center general managers with new leadership com- mitted to improved performance. We aggressively pursued expanding the mar- ket for our heat transfer business. Lennox will serve as a major provider of coil products to Ingersoll- Rand for the U.S., Mexico, and Canada. These coils, previously integrated into Ingersoll-Rand’s manufacturing operations, will be produced at a new facility in Mexico beginning in the second quarter of this year, with the plant projected to be fully operational by mid-2003. A N N U A L R E P O R T 2 0 0 1 0 7 integrity in p r o d u c t i n n o v a t i o n Dave Lennox revolutionized home comfort when he built the first riveted steel furnace in 1895. That tradition of product innovation continues today in the Dave Lennox Signature(cid:2) Collection, a top-of-the- line series of residential home comfort equipment introduced in early 2002 featuring the quietest gas furnaces and air conditioners on the market today. Growing awareness and concern over the quality of indoor air led us to develop the PureAir(cid:2) air purification system, which installs easily into new or existing air conditioning systems. Using a combination of ultraviolet light and photo-catalytic oxidation technology, PureAir proved in independent testing to be the industry’s most effective air puri- fication system. Dave would also be proud to know his spirit of creativity and innovation lives on in other important markets. Smaller commercial refrigeration systems weren’t providing what the restaurant industry told us they really needed, so we developed the popular 3 Pro packaged refrigeration system—requiring mini- mal installation space and freeing up use of more refrigerated space inside the cooler or freezer. Meeting the widely varying needs of our many commercial customers, the new Lennox L Connec- tion Network(cid:2) is a flexible and comprehensive building controls management system that includes remote monitoring, demand control ventilation, and advanced diagnostics—making identification of comfort system problems as easy as pushing a button. 0 8 A N N U A L R E P O R T 2 0 0 1 integrity in o u r b r a n d s “Attaboy, Dave.” Long after the original Dave Lennox died in the late 1940s, his name and famil- iar cap and overalls continue to be a symbol of quality and trust to new generations of homeowners looking for the finest in home comfort. Today, Dave shares his legacy of trust with a growing family of Lennox International brand names respected around the world. We have expanded the depth and breadth of the Lennox North American residential brand family to include a wide range of products at all major price points. Our Lennox brand continues to repre- sent the highest level of home comfort innovation and is now being aggressively promoted in the growing hearth products market, via hearth spe- cialty shops. The Armstrong brand continues to grow and represents our strong commitment to the middle- tier residential market, while the Aire-Flo and Ducane brands are popular products in more price-sensitive market segments. To many consumers, service is as important as the equipment they buy—and last year our retail segment began to establish Service Experts as the most trusted name in residential heating and air conditioning service. Building on our branding success in North America, we are consolidating our European air conditioning products under the Lennox name as part of our Pan-European marketing strategy. And, the products of our worldwide heat transfer and refrigeration business segments carry some of the most recognizable and trusted brand names in their industry—including Heatcraft, Bohn, Larkin, Kirby, Chandler, and Climate Control. Continuing in the tradition of quality and trust inspired by the original Lennox name, the members of the growing Lennox International brand family represent some of the most respected names in our industry. A N N U A L R E P O R T 2 0 0 1 0 9 integrity in s e r v i c e 1 0 A N N U A L R E P O R T 2 0 0 1 D.W. Norris, Lennox’ first president, believed in establishing a relationship of mutual trust with his salespeople and his customers. That century-old drive to find the best customers and provide them with the best customer service is still integral to LII’s business strategy around the world. Our Advanced Distributor Products division announced a 5-day delivery on evaporator coils, the fastest delivery time in the industry. We also reduced the lead time on our popular configure-to- order commercial HVAC products from as much as seven weeks to three—cutting customer wait times by more than half. Customer service also made innovative strides via emerging technologies: using Access2Answers(cid:2), Heatcraft customers can now check current inven- tory and track the status of their orders in real time through a new website service for order and product information. Another web-based tool, DaveNet(cid:2)— Lennox’ e-commerce system—welcomed 1,900 new users during the year as many impressive new features were added to help dealers grow their business, including the ability to access fresh sales leads daily. More than 3800 of our customers, rep- resenting over 80% of our Lennox residential HVAC business, now subscribe to DaveNet. Linking the Internet with lean principles, our Armstrong subsidiary introduced Velocit-e(cid:2), an Internet-based system connecting Armstrong, the customer, and suppliers to increase efficiency, reduce waste, and provide quicker response. When we entered the retail marketplace in 1998, the homeowner became our customer for the first time—and we’re expanding our century-old commitment to superior service to them as well. In 2001 Service Experts, our retail operation, announced a 100% customer satisfaction guarantee on the sales and service of home comfort equipment. board of directors Linda G. Alvarado President Alvarado Construction Inc. David H. Anderson Attorney-at-Law Richard W. Booth Retired Executive Vice President Administration and Secretary Lennox International Inc. Thomas W. Booth Vice President Advanced Heat Transfer Lennox International Inc. David V. Brown Owner/Director Plantation Farm Camp James J. Byrne Chairman Byrne Technology Partners Ltd. Janet K. Cooper Chief Financial Officer McDATA Corporation C. L. (Jerry) Henry Chairman, President and CEO Johns Manville Corporation John E. Major CEO Novatel Wireless, Inc. John W. Norris, Jr. Chairman of the Board Lennox International Inc. John W. (Bo) Norris III Director of Annual Funding Maine Chapter The Nature Conservancy William G. Roth Retired Chairman of the Board Dravo Corporation Robert E. Schjerven CEO Lennox International Inc. Terry D. Stinson Former Chairman and CEO Bell Helicopter Textron Inc. Richard L. Thompson Group President Caterpillar Inc. executive staff Robert E. Schjerven Chief Executive Officer Richard A. Smith Chief Financial Officer Harry J. Ashenhurst Chief Administrative Officer Scott J. Boxer President, Lennox Industries Inc. Carl E. Edwards Jr. Chief Legal Officer Linda A. Goodspeed Chief Technology Officer Robert J. McDonough President, Worldwide Refrigeration, Heat Transfer, and International Operations Michael G. Schwartz President, North American Distributed Products Dennis H. Smith President, Service Experts David L. Inman Vice President, Controller and Chief Accounting Officer A N N U A L R E P O R T 2 0 0 1 1 1 corporate information Corporate Headquarters Lennox International Inc. 2140 Lake Park Blvd. Richardson, TX 75080 972-497-5000 For more information on Lennox International and our subsidiaries, visit our website at www.lennoxinternational.com. Annual Meeting Our annual shareholders meeting will be held on May 17, 2002 at 9 a.m. local time. Any shareholder with proper identification may attend. The meeting will be held at: University of Texas at Dallas Conference Center Rutford Avenue and Drive A Richardson, TX 75083 Investor Inquiries Investors and financial analysts interesting in obtaining informa- tion about Lennox International should contact: Bill Moltner Vice President, Investor Relations Phone: 972-497-6670 e-mail: investor@lennoxintl.com Stock Exchange Lennox International’s trading symbol is LII. The common stock of LII has traded on the New York Stock Exchange since July 29, 1999. There were approximately 12,000 beneficial holders of the company’s common stock as of March 25, 2002. Form 10-K A copy of the Lennox International Inc. Annual Report filed with the Securities and Exchange Commis- sion for 2001 (Form 10-K) is avail- able through our corporate website or will be furnished, without charge, on written request to: Lennox International Investor Relations P.O. Box 799900 Dallas, TX 75379-9900 Transfer Agent and Registrar Mellon Investor Services is Lennox International’s Transfer Agent. All inquiries should be directed to: Lennox International Inc. c/o Mellon Investor Services P. O. Box 3315 South Hackensack, NJ 07606-1915 LII stockholders can access their account for automated information 24 hours a day, 7 days a week by dialing 1-800-797-5603. Independent Auditors Arthur Andersen LLP Dallas, TX Dividend Information In recent years, Lennox International has declared dividends four times a year. The amount and timing of dividend payments are determined by our board of directors. Forward-Looking Statements This annual report contains forward- looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements are subject to numerous risks and uncertainties that could cause actual results to differ materially from such state- ments. For information concerning these risks and uncertainties, see Lennox International’s publicly available filings with the Securities and Exchange Commission. Lennox disclaims any intention or obligation to update or revise any forward- looking statements, whether as a result of new information, future events or otherwise. 1 2 A N N U A L R E P O R T 2 0 0 1 m o c . s r o n n o c - n a r r u c . w w w / . c n I , s r o n n o C & n a r r u C y b d e n g s e D i LENNOX INTERNATIONAL INC. 2140 LAKE PARK BLVD. RICHARDSON, TX 75080 WWW.LENNOXINTERNATIONAL.COM 2140 LAKE PARK BLVD. RICHARDSON, TX 75080 WWW.LENNOXINTERNATIONAL.COM