Lennox International Annual Report 2003

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FY2003 Annual Report · Lennox International

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2140 Lake Park Blvd.
Richardson, TX 75080
www.lennoxinternational.com

2003 Annual Report

Who We Are

Company Proﬁle: Lennox International, through our subsidiaries, is a leading

provider of climate control solutions for the heating, air conditioning, and refrigeration

markets around the world. We have built our business on a heritage of integrity and

innovation dating back to 1895. The 16,000 employees who make up our company are

dedicated to providing trusted brands, innovative products, unsurpassed quality, and

responsive service.

Our Businesses

Heating & Cooling: We are a leading provider of heating and cooling equipment

that improves indoor comfort. Our product lines include air conditioners, furnaces, heat

pumps, commercial heating and cooling systems, hearth products, and a variety of indoor

air quality equipment, including humidiﬁers and electronic air cleaners.

Service Experts: We are the company that consumers trust for their heating, cooling,

and indoor air quality needs. We operate dealer service centers in the United States and

Canada that sell, install, maintain and service heating and cooling equipment for resi-

dential and light commercial applications.

Refrigeration: We are a leading provider of commercial refrigeration systems in markets

around the world. Sold under widely respected brand names, our products are used for

cold storage applications, primarily to preserve food and other perishables, in supermarkets,

convenience stores, restaurants, warehouses, and distribution centers.

Highlights

Financial Summary

FOR THE YEAR ENDING DECEMBER 31,
(In millions, except per share data)

Statement of Operations Data
Net sales
Income (loss) from operations
Income (loss) before cumulative effect of
accounting change
Diluted earnings (loss) per share before
cumulative effect of accounting change
Dividends per share

Other Data
Capital expenditures
Research and development expenses

2003

2002

2001

2000

1999

$3,085.1
155.7

$3,024.6
108.1

$3,113.6
(0.7)

$3,242.2
158.6

$2,357.5
155.9

84.4

42.9

(42.4)

59.1

1.40
0.38

41.2
38.0

0.73
0.38

(0.75)
0.38

23.1
38.2

17.4
37.3

1.05
0.38

58.3
36.5

73.2

1.81
0.35

76.7
39.1

Balance Sheet Data
Working capital
Total assets
Total debt
Stockholders’ equity

230.2
1,726.6
362.3
584.2

121.5
1,507.6
379.9
430.3

158.8
1,791.7
517.8
652.3

311.3
2,051.2
690.5
739.3

424.6
1,682.0
577.0
596.2

2003 Sales (In millions of dollars)

2003 Segment Profit (In millions of dollars)

-300

300

600

900

1200

1500

-100

-50

100

150

200

Heating & Cooling

Residential
Commercial

Service Experts
Refrigeration
Eliminations

Heating & Cooling

Residential
Commercial

Service Experts
Refrigeration
Corporate & Other
Eliminations

-300

300

600

900

1,200

1,500

-100

-50

100

150

200

A Message

To Our Shareholders

2003 was a successful year for Lennox International. We strengthened our balance sheet and sharpened

our focus on our three core business segments. We delivered the ﬁnancial results we had projected—

and more. We created outstanding value for our shareholders, with a total return in 2003 of more than

36%, the third straight year the return on LII stock has exceeded 30%. Just as important, the initiatives that

helped us post a solid performance for the year ﬁrmly position LII for further growth.

We achieved these results by staying true to the approach we outlined in last year’s annual report:

“For LII…integrity will mean what it has always meant: sticking to the core values that have brought us

success for over a century, exploring opportunities for proﬁtable growth, and remaining committed to

increasing value for our shareholders.”

We demonstrated this integrity when, shortly after reporting preliminary ﬁnancial results for 2003, LII announced

that the audit committee of our board of directors was conducting an independent investigation into

the accounting practices at our Service Experts operations in Canada. The investigation resulted in a

downward adjustment of $7 million to cumulative earnings for the years 1999 through 2003, and delayed

the ﬁling of our annual report on Form 10-K with the Securities and Exchange Commission. The adjustments

increased 2003 net income by $8 million from the $77 million previously announced. We restated earnings

for 2002, reducing net income by $15 million. In addition to a downward adjustment to earnings in 2002

of $9 million, this restatement reﬂects $6 million in additional expense attributed to prior years. While the

investigation consumed a great deal of time and resources, we take the integrity of our ﬁnancial statements

very seriously and this was absolutely the correct course of action.

The improvement in our numbers for 2003 is noteworthy. Our total corporate sales grew to $3.1 billion, up

7% when adjusted for heat transfer revenue included in the prior year’s sales—essentially all of which is

now part of our joint venture with Outokumpu and no longer reported by LII. Operating income grew

44% to $155 million. Net income, before the cumulative effect of an accounting change, nearly doubled

to $84 million, and diluted earnings per share rose from $0.73 to $1.40 on the same basis. We generated

cash from operations of $57 million and invested $41 million in capital expenditures, while reducing the

balance in our asset securitization program by $99 million—giving us a strong free cash ﬂow of $115

million. In the past three years, we have cut our total debt by $328 million. This new strength in our balance

sheet gives us increased ﬂexibility to pursue growth opportunities.

But the story behind the numbers is even more exciting. Our focus on our core businesses and unwavering

commitment to our principles of integrity and innovation were demonstrated in many signiﬁcant ways

throughout our organization in 2003. We appointed Bob McDonough, Scott Boxer, and Mike Schwartz to

head our Heating & Cooling, Service Experts, and Refrigeration segments, respectively—placing skilled,

experienced leaders in charge of each of our three businesses. Our respected brand names, reputation

for quality products and services, and well-established

aggressively moving to refocus this business on its

multi-channel distribution networks give us conﬁdence

original strategy of pursuing proﬁtable service,

in continued improvement and success in these

repair, and replacement opportunities in metropol-

related markets.

Our manufacturing businesses—Heating & Cooling

and Refrigeration—had a terriﬁc year, generating a

combined 9.9% segment operating income margin.

Contributing to this strong performance were the

introduction of innovative new products, initiatives

to develop new customers and strengthen existing

relationships, a reduction in excess manufacturing

capacity, and a tight rein on costs to offset softness

in end-market demand. We integrated and coordi-

nated many key operations across our business

segments, helping us realize targeted cost savings

of almost $40 million. We moved aggressively to

reduce waste and cut costs by extending Six Sigma

into our design processes. We also continued to

drive down costs by combining our procurement

itan markets. We have identiﬁed 130 dealer service

centers that ﬁt this strategy and will comprise the

ongoing Service Experts business segment, and

have also begun to divest the remaining 47 centers.

In our commitment to realize this business’ enormous

potential, we are addressing its performance issues

at every level. As a result of the investigation into

the accounting practices at Service Experts’

Canadian centers, the company has accelerated

the implementation of a common IT system in its

remaining Canadian centers, eliminated Service

Experts’ Canadian head ofﬁce, consolidated

Canadian operations with U.S. operations, and

enhanced implementation of its procedures for

reporting and addressing concerns or complaints

that involve accounting issues.

activities across our operations.

Our 16,000 employees worldwide responded to the

Innovation has been a core value at LII for more

than 100 years, and we remain committed to

developing new products and services to meet our

customers’ needs. Approximately one-third of last

year’s revenue in our manufacturing businesses

came from products launched in the past three

years—several with important industry leadership

claims. We created a world-class heat transfer

research and development organization through

a joint venture with Outokumpu, creating a new

source of ideas for innovative products in all markets

we serve. We also expanded process improvement

and resource-sharing programs across our business

segments, enhancing the effectiveness of our

product development and speed to market for

new ideas.

Service Experts, our direct-to-consumer service

business, was only marginally proﬁtable in 2003,

clearly an unacceptable performance. We are

challenges of last year just as we knew they would:

with creativity, a positive attitude, and the continuing

commitment to make every area of our organization

perform at its highest possible level. But what excites

us—and drives us on—is knowing that, even with

our great success and growth for more than 100

years, we have yet to reach our full potential. We

intend to continue striving for just that in the years

to come.

Robert E. Schjerven
Chief Executive Officer

John W. Norris, Jr.
Chairman of the Board

SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

Form 10-K

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

For the Ñscal year ended December 31, 2003

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from

Commission File Number 001-15149

Lennox International Inc.
(Exact name of Registrant as speciÑed in its charter)

Delaware
(State or other jurisdiction of
incorporation or organization)

42-0991521
(I.R.S. Employer
IdentiÑcation Number)

2140 Lake Park Blvd.
Richardson, Texas 75080
(Address of principal executive oÇces, 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 check mark whether the registrant (1) has Ñled all reports required to be Ñled by Section 13
or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period
that the registrant was required to Ñle such reports), and (2) has been subject to such Ñling requirements for
the last 90 days. Yes n No ¥

Indicate by check mark if disclosure of delinquent Ñlers 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 deÑnitive proxy or
information statements incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. n

Indicate by check mark whether the registrant is accelerated Ñler (as deÑned in Rule 12b-2 of the Act.)

Yes ¥ No n

As of June 30, 2004, there were 60,130,582 shares of the registrant's Common Stock outstanding, and the
aggregate market value of the Common Stock held by non-aÇliates of the registrant was $737,987,789 based
on the closing price of the Common Stock on the New York Stock Exchange Composite Transactions on such
date.*

* Excludes the Common Stock held by the registrant's executive oÇcers, directors and stockholders whose
ownership exceeds 5% of the Common Stock outstanding at June 30, 2004. Exclusion of such shares should
not be construed to indicate that any such person possesses the power, direct or indirect, to direct or cause
the direction of the management or policies of the registrant or that such person is controlled by or under
common control with the registrant.

LENNOX INTERNATIONAL INC.

INTRODUCTORY NOTE

Lennox International Inc. (""LII'' or the ""Company'') is Ñling this Annual Report on Form 10-K to
reÖect the audited consolidated Ñnancial statements for the years ended December 31, 2003 and 2001, and the
audited restatement of its consolidated Ñnancial statements for the year ended December 31, 2002. The
Company identiÑed adjustments through the current date that were required to be recorded, which reduced
previously reported after-tax income by a total of $7.0 million, cumulative for the years 1999 through 2003. Of
this amount, $7.6 million was additional income in 2003. The impact on net income for the years ended
December 31, 2002 and 2001 was $9.0 million and $1.0 million of additional expense, respectively. In addition,
approximately $4.6 million of adjustments were identiÑed for years prior to 2001. As the Consolidated
Financial Statements for 2001 and prior years were not materially aÅected by the adjustments, no adjustments
have been made to the Company's Ñscal 2001 Consolidated Financial Statements. The impact for 2001 and
prior years is included as an adjustment to March 31, 2002 net income.

The following discussion details the public disclosures LII has made during this period regarding the

restatement and the subsequent delay in Ñling this Annual Report on Form 10-K:

‚ On February 5, 2004, LII furnished a Current Report on Form 8-K that included a press release

issuing preliminary unaudited Ñnancial results for the fourth quarter and full-year of 2003.

‚ On March 11, 2004, LII furnished a Current Report on Form 8-K that included a press release
announcing that its previously announced unaudited earnings for 2003 would be revised pending
completion of an internal inquiry being conducted by the Audit Committee of LII's Board of Directors
due to accounting irregularities at certain Canadian service centers within the Company's Service
Experts business segment.

‚ On March 15, 2004, LII Ñled a notiÑcation of late Ñling on Form 12b-25, disclosing that LII was
delaying the Ñling of its Annual Report on Form 10-K and the issuance of audited consolidated
Ñnancial statements for the year ended December 31, 2003, pending the resolution of the internal
inquiry.

‚ On May 11, 2004, LII Ñled a notiÑcation of late Ñling on Form 12b-25, disclosing that LII was
delaying the Ñling of its Quarterly Report on Form 10-Q for the quarter ended March 31, 2004,
pending the resolution of the internal inquiry.

‚ On July 8, 2004, LII furnished a Current Report on Form 8-K that included a press release announcing
the Ñndings of the independent review by the Audit Committee of LII's Board of Directors and
identiÑed downward adjustments of approximately $7 million to LII's previously reported cumulative
earnings for the years 1999 through 2003.

‚ On August 9, 2004, LII Ñled notiÑcation of late Ñling on Form 12b-25, disclosing that LII was delaying
the Ñling of its Quarterly Report on Form 10-Q for the quarter ended June 30, 2004, pending review
and Ñnalization of the appropriate treatment of the accounting adjustments with its external auditors.

‚ On August 18, 2004, LII reported Ñrst and second quarter 2004 earnings results and held a publicly
accessible teleconference call to discuss the quarterly results. During the teleconference, LII indicated
the investigation was complete and that it would Ñle its Annual Report on Form 10-K for 2003 and its
Quarterly Reports on Form 10-Q for the Ñrst and second quarters of 2004 with the SEC as soon as
possible.

The Consolidated Financial Statements and Ñnancial information contained in LII's Annual Report on
Form 10-K for 2002 and its Quarterly Reports on Form 10-Q for the years 2002 and 2003 have been revised in
this 10-K Ñling to reÖect the restatement adjustments described in Note 3, ""Restatement of 2002 Financial
Statements and Additional Information for 2003'' of the accompanying Consolidated Financial Statements.
LII does not intend to amend its Annual Reports on Form 10-K or Quarterly Reports on Form 10-Q for the
periods aÅected by the restatement that ended prior to December 31, 2003. As a result, the Ñnancial
statements and related information contained in such reports should no longer be relied upon.

LENNOX INTERNATIONAL INC.

FORM 10-K
For the Fiscal Year Ended December 31, 2003

INDEX

Introductory Note ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

Page

PART I

ITEM 1.
ITEM 2.
ITEM 3.
ITEM 4.

PART II

Business ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Properties ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Legal Proceedings ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Submission of Matters to a Vote of Security Holders ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

ITEM 5. Market for Registrant's Common Stock, Related Stockholder Matters and Issuer

Purchases of Equity Securities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Selected Financial Data ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

ITEM 6.
ITEM 7. Management's Discussion and Analysis of Financial Condition and Results of

Operations ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
ITEM 7A. Quantitative and Qualitative Disclosures About Market RiskÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Financial Statements and Supplementary DataÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
ITEM 8.
Changes in and Disagreements with Accountants on Accounting and Financial
ITEM 9.
Disclosure ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
ITEM 9A. Controls and Procedures ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

PART III

ITEM 10. Directors and Executive OÇcers of the RegistrantÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
ITEM 11. Executive Compensation ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
ITEM 12.
Security Ownership of Certain BeneÑcial Owners and Management ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
ITEM 13. Certain Relationships and Related Transactions ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Principal Accounting Fees and ServicesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
ITEM 14.

1
11
12
12

13
13

14
32
33

77
77

79
80
80
81
81

PART IV

ITEM 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-KÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

Item 1. Business

The Company

PART I

Lennox International Inc. and its subsidiaries is a leading global provider of climate control solutions. The
Company designs, manufactures and markets a broad range of products for the heating, ventilation, air
conditioning and refrigeration (""HVACR'') markets. LII has leveraged its expertise to become an industry
leader known for product innovation, quality and reliability. The Company's 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 the Company's four business segments, the key products and brand names within each
segment and 2003 net sales by segment. Segment Ñnancial data for the years 2001 through 2003, including
Ñnancial information about foreign and domestic operations, is included in Note 4 of the Notes to
Consolidated Financial Statements on pages 51 through 54 herein.

Segment

Products/Services

Brand Names

Residential Heating & Furnaces, air conditioners, heat

Cooling

pumps, packaged heating and
cooling systems, indoor air
quality equipment; pre-
fabricated Ñreplaces and free
standing stoves

Commercial Heating & Unitary heating and air

Cooling

conditioning equipment and
applied systems

Total Heating & Cooling

Sales, installation and service of
residential and light commercial
heating and cooling equipment
Chillers, condensing units, unit
coolers, Öuid coolers, air cooled
condensers and air handlers

Service Experts

Refrigeration

Eliminations

Lennox, Armstrong Air,
Ducane, Aire-Flo, Concord,
Magic-Pak, Advanced
Distributor Products (ADP),
Superior, WhitÑeld, Security
Chimneys
Lennox

Service Experts, various
individual service center names

Bohn, Larkin, Climate Control,
Chandler Refrigeration,
Friga-Bohn, HK Refrigeration,
Kirby, Heatcraft Worldwide
Refrigeration, Lovelocks,
Frigus-Bohn

Total

2003 Net Sales
(In Millions)
$1,358.7

508.4

1,867.1
937.1

387.2

(106.3)

$3,085.1

The Company was 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-Ñred furnace, which
was substantially more durable than the cast iron furnaces used at the time. The manufacturing of these
furnaces had grown into a signiÑcant business and was diverting the Lennox Machine Shop from its core
business. 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. Over the years, D.W. Norris ensured that ownership of the Company
was distributed to succeeding generations of his family. In 1991, the Company reincorporated as a Delaware
corporation. On August 3, 1999, the Company completed the initial public oÅering of its common stock. The
Company believes that a signiÑcant portion of the Company's ownership currently is broadly distributed
among approximately 100 descendants of, or persons otherwise related to, D.W. Norris.

Forward-Looking Statements

Various sections of this Annual Report on Form 10-K (""Form 10-K''), including Business and
Management's Discussion and Analysis of Financial Condition and Results of Operations, contain 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 upon management's beliefs,
as well as assumptions made by and information currently available to management. All statements other than
statements of historical fact included in this 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
identiÑed by the words ""may,'' ""will,'' ""should,'' ""plan,'' ""predict,'' ""anticipate,'' ""believe,'' ""intend,''
""estimate'' and ""expect'' and similar expressions. Such statements reÖect the current views of LII with respect
to future events, based on what it believes are reasonable assumptions; however, such statements are subject to
certain risks, uncertainties and assumptions. In addition to the speciÑc uncertainties discussed elsewhere in
this Form 10-K, the following risks and uncertainties may aÅect the Company's performance and results of
operations:

‚ the Company's business is aÅected by a number of economic factors including the level of economic
activity in the markets in which the Company operates, and a decline in economic activity typically
results in a decline in new construction and replacement purchases, which could result in a decrease in
LII's sales and proÑtability;

‚ the demand for the Company's products and services is strongly aÅected by the weather, and cooler
than normal summers depress the Company's sales of replacement air conditioning and refrigeration
products and warmer than normal winters have the same eÅect on the Company's heating products;

‚ increases in the prices of raw materials or components, or problems in their availability, could increase

the costs of its products and/or depress the Company's sales;

‚ the development, manufacture, sale and use of the Company's products involve a risk of warranty and
product liability claims, and such claims could be material and have an adverse eÅect on its future
proÑtability;

‚ the Company incurs the risk of liability claims for the installation and service of heating and cooling
products with its Company-owned dealer service centers, and if these claims exceed the limits of the
Company's product liability insurance policies it may result in material costs that could have an
adverse eÅect on future proÑtability;

‚ the success of the Company will depend in part on its ability to integrate and operate acquired
businesses proÑtably and to identify and implement opportunities for cost savings; any future
determination that a signiÑcant impairment of the value of the Company's intangible assets has
occurred could have a material adverse eÅect on its results of operations;

‚ as of December 31, 2003 the Company had $362.3 million of consolidated indebtedness outstanding,
and the Company's level of indebtedness may have important consequences for its operations,
including that it may have to use a large portion of its consolidated cash Öow to pay principal and
interest on its indebtedness and that it may have diÇculty borrowing money in the future for working
capital, capital expenditures, acquisitions or other purposes;

‚ the Company operates in very competitive markets, and competitive factors could cause the Company

to reduce its prices or lose market share and could negatively aÅect its cash Öow;

‚ the Company's future success will depend upon its continued investment in research and new product
development and its ability to commercialize new technological advances in the HVACR industry;

‚ the Company faces a risk of work stoppage and other labor relations matters because a signiÑcant
percentage of its workforce is unionized, and the results of future negotiations with the unions,
including the eÅect of any production interruptions or labor stoppages, could have an adverse eÅect on
the Company's future Ñnancial results; and

‚ the Company is subject to extensive and changing federal, state and local laws and regulations designed
to protect the environment, and these laws and regulations could impose liability for remediation costs
and civil or criminal penalties for non-compliance.

Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove
incorrect, actual results may diÅer materially from those in the forward-looking statements. The Company
disclaims 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.

Business Strategy

The Company's business strategy is designed to capitalize on its competitive strengths in order to expand

its market share and proÑtability in the HVACR markets. The key elements of this strategy include:

Improve ProÑtability of Service Experts

The acquisition of heating and air conditioning contractors, or dealer service centers, in the United States
and Canada has enabled the Company to extend its distribution directly to the end consumer, thereby
permitting it to participate in the revenues and margins available at the retail level while strengthening and
protecting its brand equity. The Company has assembled an experienced management team to manage the
dealer operations and has developed a portfolio of management procedures and best practices, training
programs, and goods and services that it believes will enhance the quality, eÅectiveness and proÑtability of
dealer operations. In April 2004, the Company announced a plan to focus Service Experts primarily on service
and replacement opportunities in the residential and light commercial markets in major metropolitan areas. As
a result, 47 dealer service centers that did not Ñt this strategy were identiÑed for divestiture. Additional
information on the turnaround plan is provided in ""Item 7 Ì Management's Discussion and Analysis of
Financial Condition and Results of Operations Ì Subsequent Events'' on page 31. The Company is focused
on establishing best practices and processes and improving the proÑtability of the approximately 130 dealer
service centers that comprise Service Expert's ongoing operations. While the Company believes the retail sales
and service market represents a signiÑcant growth opportunity because this market is large and highly
fragmented, comprised of approximately 40,000 contractors, no further signiÑcant acquisitions are currently
planned.

Exploit Global Refrigeration Opportunities

The Company believes that increasing international demand for commercial refrigeration products
presents substantial opportunities. For example, there is an increasing need for equipment to preserve
perishable food products. Refrigeration products generally have similar design and applications globally, and
LII believes it can use its domestic product knowledge and business model to grow internationally. To take
advantage of international opportunities, the Company has made investments in manufacturing facilities in
Europe, Latin America, South America and the Asia PaciÑc region through acquisitions and joint ventures.

Increase Heating & Cooling Market Share in North America

The Company intends to increase its share of the residential and light commercial HVAC market in

North America by:

‚ selectively expanding its ""Lennox'' independent dealer network;

‚ introducing innovative new products and expanding the oÅering of Indoor Air Quality (IAQ) related

products;

‚ promoting sales of its ""Aire-Flo'' and other residential heating and cooling brands to its existing

network of ""Lennox'' dealers as a second line; and

‚ expanding the geographic market for the ""Armstrong Air'' and ""Ducane'' brands of residential heating

and cooling products.

Technology, Product Innovation and Manufacturing EÇciency

An important part of LII's growth strategy is to continue to invest in research and new product
development. The Company has designated a number of its facilities as ""centers for excellence'' that are
responsible for the research and development of core competencies vital to its success, such as advanced heat
transfer, indoor air quality and materials. Technological advances are disseminated from these ""centers for
excellence'' to all of LII's operating divisions. In addition, LII has embraced Lean-manufacturing principles
across its manufacturing operations, accompanied by initiatives to achieve high sigma quality.

Products and Services

Residential Heating & Cooling

Heating & Cooling Products. The Company manufactures and markets a broad range of furnaces, air
conditioners, heat pumps, packaged heating and cooling systems, replacement parts and related products for
both the residential replacement and new construction markets in the United States and Canada. These
products are available in a variety of product designs and eÇciency levels at a range of price points intended to
provide a complete line of home comfort systems. The Company markets these products under multiple brand
names and believes that by maintaining a broad product line with multiple brand names, it can address
diÅerent market segments and penetrate multiple distribution channels.

The Company sells its ""Lennox'' brand of residential heating and air conditioning products directly to a
network of installing dealers, which currently numbers approximately 7,000, making it one of the largest
wholesale distributors of these products in North America. The Company's ""Armstrong Air'' and ""Ducane''
brands are sold through third party distributors.

The Company's Advanced Distributor Products division builds evaporator coils, unit heaters and air
handlers under the ""Advanced Distributor Products'' brand as well as the ""Lennox,'' ""Armstrong Air'' and
""Ducane'' brands. This division supplies the Company with components for its heating and cooling products,
and produces evaporator coils to be used in connection with competitors' heating and cooling products and as
an alternative to such competitors' brand name components. The Company has been able to achieve a
signiÑcant share of the market for evaporator coils through the application of its technological and
manufacturing skills, and customer service capabilities.

Hearth Products. The Company's Hearth Products include prefabricated gas, wood burning and electric
Ñreplaces; free standing pellet and gas stoves, Ñreplace inserts, gas logs and accessories. Many of the Ñreplaces
are built with a blower or fan option and are eÇcient heat sources as well as attractive amenities to the home.
The Company currently markets its Hearth Products under the ""Lennox,'' ""Superior,'' ""WhitÑeld,'' ""Earth
Stove'' and ""Security Chimneys'' brand names.

Commercial Heating & Cooling

North America.

In North America the Company's heating and cooling equipment is used in light
commercial applications such as low-rise oÇce buildings, restaurants, retail centers, churches and schools.
The Company's product oÅerings for these applications include rooftop units which range from two to 40 tons
of cooling capacity and split system/air handler combinations, which range from 1.5 to 20 tons. The Company
believes the success of its products is attributable to eÇciency, design Öexibility, low life cycle cost, ease of
service and advanced control technology. In North America, the Company sells unitary equipment as opposed
to larger applied systems.

Europe. The Company manufactures and sells unitary products, which range from two to 30 tons and
applied systems in varying size ranges. LII's European products consist of rooftop units, chillers, air handlers,
fan coils and small packaged units, and serve medium-rise commercial buildings, shopping malls, other retail
and entertainment buildings, institutional applications and other Ñeld-engineered applications. LII markets
these products through both direct and indirect distribution channels in Europe, Russia and the Middle East.

Service Experts

In September 1998, the Company initiated a program to acquire dealer service centers in metropolitan
areas in the United States and Canada to provide heating and cooling products and services directly to end
consumers. The Company greatly expanded this program with the acquisition of Service Experts Inc., a
consolidator of heating and cooling contractors, in January 2000.

Through approximately 130 Company-owned dealer service centers in its Service Experts operation, the
Company provides installation, preventive maintenance, emergency repair services, and the replacement of
heating and cooling systems directly to both residential and light commercial customers. In connection with
these services, the Company sells a wide range of mechanical and electrical equipment, parts and supplies
under both Lennox International brands as well as other brand names.

Refrigeration

The Company manufactures and markets equipment for the global commercial refrigeration market

through subsidiaries organized under the Heatcraft Worldwide Refrigeration name.

North America. The Company is a leading manufacturer of commercial refrigeration products in North
America. The Company's refrigeration products include condensing units, unit coolers, Öuid coolers, air cooled
condensers and air handlers. These products are sold for cold storage applications, primarily to preserve food
and other perishables, and are used by supermarkets, convenience stores, restaurants, warehouses and
distribution centers. As part of its sale of commercial refrigeration products, the Company routinely provides
application engineering for consulting engineers, contractors and others.

International. LII manufactures and markets refrigeration products including small chillers, unit
coolers, air-cooled condensers, Öuid coolers and refrigeration racks. These products are sold to distributors,
installing contractors and original equipment manufacturers. The Company has manufacturing locations in
Europe, Australia, Brazil and China. The Company also owns 50% of a joint venture in Mexico that produces
unit coolers and condensing units of the same design and quality as those manufactured by the Company in
the United States. Since this venture produces a smaller range of products, the product line is complemented
with imports from the United States, which are sold through the joint venture's distribution network. Sales in
Mexico are to wholesalers, installing contractors and original equipment manufacturers. As production
volumes increase, there exists the potential to export some products from the joint venture into the United
States, Canada and other parts of Latin America.

Marketing and Distribution

The Company manages multiple channels of distribution and oÅers diÅerent brands at various price
points in order to better penetrate the HVACR markets. Generally, the Company's products and services are
sold through a combination of distributors, independent and Company-owned dealer service centers,
wholesalers, manufacturers' representatives, original equipment manufacturers and national accounts. Dedi-
cated sales forces are deployed across all the Company's business segments and brands in a manner designed
to maximize their ability to service a particular distribution channel. To maximize enterprise-wide eÅective-
ness, the Company has active cross-functional and cross-organizational teams coordinating approaches to
pricing, product design and national account customers.

An example of the competitive strength of the Company's marketing and distribution strategy is in the
North American residential heating and cooling market in which it uses three distinctly diÅerent distribution
approaches Ì the one-step distribution system, the two-step distribution system and sales made directly to
consumers through Company-owned dealers. The Company markets and distributes its ""Lennox'' and ""Aire-
Flo'' brands directly to independent dealers that install these heating and cooling products. The Company
distributes its ""Armstrong Air,'' ""Ducane,'' ""Advanced Distributor Products'' and ""Magic-Pak'' brands
through the traditional two-step distribution process whereby it sells its products to distributors who, in turn,
sell the products to an installing contractor. In addition, the Company provides heating and cooling products
and services directly to consumers through Company-owned dealer service centers.

Over the years, the ""Lennox'' brand has become synonymous with the ""Dave Lennox'' image, which is
utilized in television and print advertising as well as in numerous locally produced dealer ads, open houses and
trade events. ""Dave Lennox'' is a highly recognizable advertising icon in the heating and cooling industry.

Manufacturing

The Company operates manufacturing facilities in the United States and other parts of the world. In its
facilities most impacted by seasonal demand, the Company manufactures both heating and cooling products
to smooth seasonal production demands and maintain a relatively stable labor force. The Company is generally
able to hire temporary employees to meet changes in demand.

Purchasing

The Company relies on various suppliers to furnish the raw materials and components used in the
manufacture of its products. To maximize its buying eÅectiveness in the marketplace, the Company utilizes
purchasing councils that consolidate required purchases of materials and components across domestic business
segments. The purchasing councils generally concentrate purchases for a given material or component with
one or two suppliers, although the Company believes there are alternative suppliers for all of its key raw
material and component needs. Compressors, motors and controls constitute the Company's most signiÑcant
component purchases, while steel, copper and aluminum account for the bulk of the Company's raw material
purchases. The Company owns a 24.5% interest in a joint venture that manufactures compressors in the one
and one-half to six and one-half horsepower range. This joint venture provides the Company with the majority
of its domestic compressor requirements for its unitary residential and commercial cooling equipment.

Technology and Research and Development

The Company supports an extensive research and development program focusing on the development of
new products and improvements to its existing product lines. The Company spent an aggregate of
$38.0 million, $38.2 million and $37.3 million on research and development during 2003, 2002 and 2001,
respectively. The Company uses advanced, commercially available computer-aided design, computer-aided
manufacturing, computational Öuid dynamics and other sophisticated software not only to streamline the
design and manufacturing processes, but also to run complex computer simulations on a product design before
a working prototype is created. The Company operates a full line of metalworking equipment and advanced
laboratories certiÑed by applicable industry associations.

Patents and Trademarks

The Company holds numerous patents that relate to the design and use of its products. The Company
considers these patents important, but no single patent is material to the overall conduct of its business. The
Company's policy is to obtain and protect patents whenever such action would be beneÑcial. The Company
owns or licenses several trademarks it considers important in the marketing of its products, including Lennox»,
Armstrong AirTM, DucaneTM, Advanced Distributor ProductsTM, Aire-FloTM, CompleteHeat», Concord»,
Superior», WhitÑeld», Security ChimneysTM, Service Experts», Bohn», LarkinTM, Climate ControlTM, Chan-
dler Refrigeration», KirbyTM, Heatcraft Worldwide RefrigerationTM, LovelocksTM, HK RefrigerationTM, Frigus-
BohnTM and Friga-BohnTM. These trademarks have no Ñxed expiration dates and the Company believes its
rights in these trademarks are adequately protected.

Competition

Essentially all markets in which the Company participates are highly competitive. The most signiÑcant
competitive factors facing the Company are product reliability, product performance, service and price, with
the relative importance of these factors varying among its product lines. In its Service Experts segment, the
Company faces competition from independent dealers and dealers owned by consolidators, utility companies
and other consumer services providers. The Company's competitors may have greater Ñnancial and marketing

resources. Listed below are some of the companies LII views as main competitors in each segment it serves,
with relevant brand names, when diÅerent than the company name, shown in parentheses.

‚ Residential Heating & Cooling Ì United Technologies Corp. (Carrier, Bryant); Goodman Manufac-
turing Company (Janitrol, Amana); American Standard Companies Inc. (Trane, American Stan-
dard); York International Corporation; HNI Corporation (Heatilator); CFM Corporation (Majestic).

‚ Commercial Heating & Cooling Ì United Technologies Corp. (Carrier); American Standard Compa-
nies Inc. (Trane); York International Corporation; AAON, Inc.; Daikin Industries, Ltd.; McQuay
International.

‚ Service Experts Ì The ServiceMaster Company (ARS, AMS).

‚ Refrigeration Ì United Technologies Corp. (Carrier); Ingersoll-Rand Company Limited (Huss-

mann); Tecumseh Products Company; Emerson Electric Co. (Copeland).

Employees

As of January 1, 2004, the Company employed approximately 18,000 employees, approximately 4,100 of
which were represented by unions. The number of hourly workers the Company employs may vary in order to
match its labor needs during periods of Öuctuating demand. The Company believes that its relationships with
its employees and with the unions representing some of its employees are generally good and does not
anticipate any material adverse consequences resulting from negotiations to renew any collective bargaining
agreements.

Regulation

The Company's operations are subject to evolving and often increasingly stringent international, federal,
state, and local laws and regulations concerning the environment. Environmental laws that aÅect or could
aÅect the Company's domestic operations include, among others, the Clean Air Act, the Clean Water Act, the
Resource Conservation and Recovery Act, the Comprehensive Environmental Response, Compensation and
Liability Act, the Occupational Safety and Health Act, the National Environmental Policy Act, the Toxic
Substances Control Act, any regulations promulgated under these acts and various other federal, state and
local laws and regulations governing environmental matters. The Company believes it is in substantial
compliance with such existing environmental laws and regulations. The Company's non-United States
operations are also subject to various environmental statutes and regulations. Generally, these statutes and
regulations impose operational requirements similar to those imposed in the United States. The Company
believes it is in substantial compliance with applicable non-United States environmental statutes and
regulations.

Refrigerants.

In the past there has been regulatory and political pressure to phase out the use of certain
ozone depleting substances, including hydrochloroÖuorocarbons, which are sometimes referred to as
""HCFCs.'' This development is of particular importance to the Company and its competitors because of the
common usage of HCFCs as refrigerants for air conditioning and refrigeration equipment. This will not occur
prior to 2010 and the Company is prepared to introduce new product oÅerings that will replace HCFCs as the
refrigerant Öuid with an approved alternative. As discussed below, the Company does not believe implementa-
tion of the phase-out schedule for HCFCs contained in the current regulations will have a material adverse
eÅect on its Ñnancial position or results of operations. The Company does believe, however, there will likely be
continued pressure by the international environmental community for the United States and other countries to
accelerate the phase-out schedule. The Company has been an active participant in the ongoing international
dialogue on these issues and believes that it is well positioned to react to any changes in the regulatory
landscape.

In 1987, the United States became a signatory to an international agreement titled the Montreal Protocol
on Substances that Deplete the Ozone Layer. The Montreal Protocol requires its signatories to phase out
HCFCs on a predictable and orderly basis. All countries in the developed world have become signatories to
the Montreal Protocol. The manner in which these countries implement the Montreal Protocol and regulate

HCFCs diÅers widely. The 1990 U.S. Clean Air Act amendments implement the Montreal Protocol by
establishing a program to limit the production, importation and use of speciÑed ozone depleting substances,
including HCFCs currently used as refrigerants by the Company and its competitors. Under the Clean Air Act
and implementing regulations, all HCFCs must be phased out between 2010 and 2030. The Company believes
these regulations, as currently in eÅect, will not have a material adverse eÅect on its operations.

The Company, together with major chemical manufacturers, is reviewing and addressing the potential
impact of refrigerant regulations on its products. The Company believes the combination of products that
presently utilize HCFCs and new products utilizing alternative refrigerants being phased in will allow it to
oÅer a complete line of commercial and industrial products. Therefore, the Company does not foresee any
material adverse impact on its business or competitive position as a result of the Montreal Protocol, the 1990
Clean Air Act amendments or their implementing regulations. However, the Company believes the
implementation of severe restrictions on the production, importation or use of refrigerants the Company
employs in larger quantities or acceleration of the current phase-out schedule could have such an impact on
the Company and its competitors.

The Company is subject to appliance eÇciency regulations promulgated under the National Appliance
Energy Conservation Act of 1987, as amended, and various state regulations concerning the energy eÇciency
of its products. The Company has developed, and will continue to develop, products which comply with new
National Appliance Energy Conservation Act regulations and does not believe that such regulations will have
a material adverse eÅect on its business. In 1998, the United States Department of Energy began its review of
national standards for comfort products covered under the National Appliance Energy Conservation Act. The
National Appliance Energy Conservation Act regulations requiring manufacturers to phase in new higher
eÇciency products becomes eÅective in January 2006. The Company believes it is well positioned to comply
with the new standards promulgated by the Department of Energy and does not foresee any adverse material
impact from a National Appliance Energy Conservation Act standard change.

Remediation Activity.

In addition to aÅecting the Company's ongoing operations, applicable environ-
mental laws can impose obligations to remediate hazardous substances at its properties, at properties formerly
owned or operated by the Company and at facilities to which it has sent or sends waste for treatment or
disposal. The Company's former Grenada facility, now part of a joint venture, is subject to an administrative
order issued by the Mississippi Department of Environmental Quality under which the Company is
conducting groundwater remediation. The expenditures from this groundwater remediation are not expected to
materially aÅect the Company's Ñnancial condition or results of operations. The Company is aware of
contamination at some of its other facilities; however, the Company does not presently believe that any future
remediation costs at such facilities will be material.

The Company has received notices in the past that it is 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, the Company does not
believe environmental cleanup costs associated with any Superfund sites where the Company has received
notice that it is a potentially responsible party will be material.

Service Center Operations. The heating and cooling dealer service centers acquired in the United States

and Canada are subject to various federal, state and local laws and regulations, including:

‚ permitting and licensing requirements applicable to service technicians in their respective trades;

‚ building, heating, ventilation, air conditioning, plumbing and electrical codes and zoning ordinances;

‚ laws and regulations relating to consumer protection, including laws and regulations governing service

contracts for residential services; and

‚ laws and regulations relating to worker safety and protection of the environment.

A large number of state and local regulations governing the residential and commercial maintenance
services trades require various permits and licenses to be held by individuals. In some cases, a required permit

or license held by a single individual may be suÇcient to authorize speciÑed activities for all of the Company's
service technicians who work in the geographic area covered by the permit or license.

Available Information

LII's Internet address is www.lennoxinternational.com. The company makes available, free of charge
through this web site, its annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on
Form 8-K and amendments to those reports Ñled or furnished pursuant to Section 13(a) of the Securities
Exchange Act of 1934, as amended, as soon as reasonably practicable after such material is electronically Ñled
with, or furnished to, the Securities and Exchange Commission.

Executive OÇcers of the Company (Ages as of 9/1)

The executive oÇcers of the Company, their present positions and their ages are as follows:

Name

John W. Norris, Jr. ÏÏÏÏÏÏÏÏÏ

Robert E. SchjervenÏÏÏÏÏÏÏÏÏ

Harry J. Ashenhurst, Ph.D ÏÏÏ

Age

Position

Chairman of the Board

Chief Executive OÇcer

Executive Vice President and Chief Administrative

OÇcer

Scott J. Boxer ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

Executive Vice President and President and Chief

Operating OÇcer, Service Experts

Susan K. Carter ÏÏÏÏÏÏÏÏÏÏÏÏ

Executive Vice President, Chief Financial OÇcer and

Linda A. Goodspeed ÏÏÏÏÏÏÏÏ

Robert J. McDonough ÏÏÏÏÏÏÏ

Michael G. Schwartz ÏÏÏÏÏÏÏÏ

Treasurer (as of August 2004)

Executive Vice President and Chief Technology OÇcer

Executive Vice President and President and Chief

Operating OÇcer, Worldwide Heating & Cooling

Executive Vice President and President and Chief
Operating OÇcer, Worldwide Refrigeration

William F. Stoll, Jr. ÏÏÏÏÏÏÏÏ

Executive Vice President, Chief Legal OÇcer and

Secretary (as of March 2004)

David L. Inman ÏÏÏÏÏÏÏÏÏÏÏÏ

Vice President, Controller and Chief Accounting OÇcer

The following biographies describe the business experience of the Company's executive oÇcers:

John W. Norris, Jr., 68, was elected Chairman of the Board of Directors of the Company in 1991. He has
served as a Director of the Company since 1966. After joining the Company in 1960, Mr. Norris held a variety
of key positions including Vice President of Marketing, President of Lennox Industries (Canada) Ltd., a
subsidiary of the Company, and Corporate Senior Vice President. He became President of the Company in
1977 and was appointed President and Chief Executive OÇcer of the Company in 1980 and served through
2001. Mr. Norris is on the Board of Directors of the Air-Conditioning & Refrigeration Institute, of which he
was Chairman in 1986. He is also an active Board member of the Gas Appliance Manufacturers Association,
where he was Chairman from 1980 to 1981. He is a past Chairman of The Nature Conservancy of Texas
Board of Trustees. He also serves as a Director of AmerUs Group Co., a life insurance and annuity company.

Robert E. Schjerven, 61, was named Chief Executive OÇcer of the Company in 2001 and has served on
the Board of Directors since that time. Prior to his election as Chief Executive OÇcer of the Company, he
served as Chief Operating OÇcer of the Company in 2000 and as President and Chief Operating OÇcer of
Lennox Industries Inc., a subsidiary of the Company, from 1995 to 2000. He joined the Company in 1986 as
Vice President of Marketing and Engineering for Heatcraft Inc., a subsidiary of the Company. From 1988 to
1991, he held the position of Vice President and General Manager of Heatcraft. From 1991 to 1995, he served
as President and Chief Operating OÇcer of Armstrong Air Conditioning Inc., also a subsidiary of the

Company. Mr. Schjerven spent the Ñrst 20 years of his career with The Trane Company, an international
manufacturer and marketer of HVAC systems, and McQuay-Perfex Inc.

Harry J. Ashenhurst, 56, was appointed Chief Administrative OÇcer in 2000. Dr. Ashenhurst joined the
Company in 1989 as Vice President of Human Resources, was named Executive Vice President, Human
Resources for the Company in 1990 and in 1994 became Executive Vice President, Human Resources and
Administration and assumed responsibility for the public relations and communications and aviation
departments. Currently, Dr. Ashenhurst also has responsibilities for risk management, corporate safety,
facilities, government aÅairs and investor relations. Prior to joining the Company, he worked as an
independent management consultant with the consulting Ñrm of Roher, Hibler and Replogle.

Scott J. Boxer, 54, joined the Company in 1998 as Executive Vice President, Lennox Global Ltd. and
President, European Operations. He was appointed President, Lennox Industries Inc. in 2000, and was named
President and Chief Operating OÇcer of Service Experts in July 2003. Prior to joining the Company,
Mr. Boxer spent 26 years with York International Corporation, a HVACR manufacturer, in various roles,
most recently as President, Unitary Products Group Worldwide, where he reported directly to the Chairman of
that company and was responsible for directing residential and light commercial heating and air conditioning
operations worldwide. Mr. Boxer is an Executive Board Member of the Air-Conditioning & Refrigeration
Institute and an OÇcer on the Board of Trustees of North American Technician Excellence, Inc.

Susan K. Carter, 45, was appointed Executive Vice President, Chief Financial OÇcer and Treasurer in
August 2004. Prior to joining the Company, Ms. Carter was Vice President of Finance and Chief Accounting
OÇcer of Cummins, Inc., a global power leader and manufacturer of engines, electric power generation
systems, and engine-related products. Prior to her career at Cummins, Ms. Carter had been Vice President
and Chief Financial OÇcer of Transportation & Power Systems and held other senior Ñnancial management
positions for Honeywell, Inc., formerly AlliedSignal, Inc. from 1996 to 2002. She had also previously served in
senior Ñnancial management positions at Crane Co., and DeKalb Corporation.

Linda A. Goodspeed, 42, was appointed Chief Technology OÇcer eÅective September 2001. Prior to
joining the Company, Ms. Goodspeed was President and Chief Operating OÇcer for Partminer, Inc., a
privately held electronics B2B supply chain parts and service company. Before going to Partminer, Ms.
Goodspeed had served since 1999 as Product General Manager of General Electric (GE) Appliances. She
also became General Manager in 1999 for Six Sigma, managing a team of 160 GE quality leaders spanning
operations across the company. Beginning her career in engineering with Ford Motor Company in 1984,
Ms. Goodspeed moved to Nissan research and development in 1989 and joined GE in 1996. She became GE's
Range Product Development Manager in 1997 and was promoted to Product General Manager in 1999.

Robert J. McDonough, 45, was named President and Chief Operating OÇcer, Worldwide Heating &
Cooling in July 2003. Previously he had been President, Worldwide Refrigeration and International
Operations since 2001. Mr. McDonough joined Heatcraft, Inc. in 1990, when the Company acquired Larkin
Coils, as a Division Sales Manager. He was named Director of Sales in 1992 and became Vice President and
General Manager of the Refrigeration Products Division in 1995. In 2000, he was appointed President,
Worldwide Commercial Refrigeration. Previously he held a number of sales positions at Larkin Coils before
becoming National Sales Manager in 1987.

Michael G. Schwartz, 46, became President and Chief Operating OÇcer, Worldwide Refrigeration in
July 2003. Prior to his current appointment, he had served as President, North American Distributed Products
since 2000, and President and Chief Operating OÇcer of Armstrong Air Conditioning Inc. since 1997.
Mr. Schwartz joined Heatcraft in 1990 when the Company acquired Bohn Heat Transfer Inc. and served as
Director of Sales and Marketing, Original Equipment Manufacturer Products and Vice President of
Commercial Products for Heatcraft Inc. where his responsibilities included the development of Heatcraft's
position in the A-Coil market. Mr. Schwartz began his career with Bohn Heat Transfer Inc. in 1981.

William F. Stoll, Jr., 56, became Executive Vice President and Chief Legal OÇcer for Lennox
International in March 2004. Most recently, Mr. Stoll was Executive Vice President and Chief Legal OÇcer

for Borden, Inc. from 1996 to 2003. Prior to his career with Borden Inc., he worked for 21 years with
Westinghouse Electric Corporation, becoming Vice President and Deputy General Counsel in 1993.

David L. Inman, 49, was named Vice President, Controller and Chief Accounting OÇcer for the
Company in 2001. Previously, he served as Vice President and Group Controller of North American
Distributed Products from 2000 to 2001. Mr. Inman has held multiple positions in accounting, internal audit
and Ñnancial systems within the Company including Controller of Armstrong Air Conditioning Inc., a
subsidiary of the Company.

Item 2. Properties

Real Property and Leases

The following chart lists the Company's major domestic and international manufacturing, distribution

and oÇce facilities and whether such facilities are owned or leased:

Location

Segment

Richardson, TX

Marshalltown, IA

Bellevue, OH

Blackville, SC

Orangeburg, SC

Grenada, MS

Union City, TN

Lynwood, CA

Burlington, WA

Orange, CA

Laval, Canada

Des Moines, IA

Headquarters

Residential Heating & Cooling

Residential & Commercial
Heating & Cooling

Stuttgart, AR

Commercial Heating & Cooling

Prague, Czech Republic

Commercial Heating & Cooling

Longvic, France

Mions, France

Burgos, Spain

Danville, IL

Tifton, GA

Stone Mountain, GA

Milperra, Australia

Genas, France

San Jose dos Campos, Brazil

Auckland, New Zealand

Barcelona, Spain

Krunkel, Germany

Wuzi, China

Carrollton, TX

Commercial Heating & Cooling

Refrigeration

Research & Development facility

Approx. Sq. Ft.
(in thousands)

Owned/Leased

311

1,300

Owned & Leased

613

375

329

300

295

200

120

152

352

500

161

133

129

322

232

145

412

172

160

130

Owned

Leased

Owned

Leased

Owned

Leased

Owned

Leased

Owned

Leased

Owned

Leased

Owned

In addition to the properties described above and excluding dealer facilities, the Company leases over
55 facilities in the United States for use as sales oÇces and district warehouses and additional facilities
worldwide for use as sales and service oÇces and regional warehouses. The vast majority of Company-owned
service center facilities are leased and the remainders are owned. The Company believes that its properties are
in good condition and adequate for its present requirements. The Company also believes that its principal
plants are generally adequate to meet its production needs.

Item 3. Legal Proceedings

The Company is involved in various claims and lawsuits incidental to its business. In addition, the
Company and its subsidiary Heatcraft Inc. have been named in four lawsuits in connection with its former
heat transfer operations. The lawsuits allege personal injury resulting from alleged emissions of trichloroethyl-
ene, dichloroethylene, and vinyl chloride and other unspeciÑed emissions from the South Plant in Grenada,
Mississippi, previously owned by Heatcraft Inc. It is not possible to predict with certainty the outcome of these
matters or an estimate of any potential loss; however, based on present knowledge, management believes that
it is unlikely that resolution of these matters will result in a material liability for the Company. As of
December 31, 2003, no accrual has been made for these matters.

As more fully described under ""Item 9A Ì Controls and Procedures,'' in March 2004 the Company
announced that the Audit Committee of the Company's Board of Directors was initiating an independent
inquiry into certain accounting matters related to the Company's Canadian service centers in its Service
Experts operations. Immediately prior to such announcement, the Company contacted the Fort Worth oÇce
of the Securities and Exchange Commission (""SEC'') to inform the SEC of the existence and details of such
allegations and the related independent inquiry. Independent counsel for the Audit Committee has communi-
cated the results of the independent inquiry to the SEC, and the Company has produced documents in
response to requests from the SEC. The Company will continue to cooperate with the SEC staÅ in its
continuing informal inquiry, but the Company is unable to predict the ultimate outcome of this matter.

Item 4. Submission of Matters to a Vote of Security Holders

There were no matters submitted to a vote of security holders during the fourth quarter of Ñscal year

2003.

PART II

Item 5. Market for Registrant's Common Stock, Related Stockholder Matters and Issuer Purchases of

Equity Securities

The Company's common stock is listed for trading on the New York Stock Exchange under the symbol
""LII.'' The high and low sales prices for the Company's common stock for each quarterly period during 2003
and 2002 are set forth in Note 16 of the Notes to Consolidated Financial Statements on page 71 herein.
During 2003 and 2002, the Company declared quarterly cash dividends as set forth in Note 16 of the Notes to
Consolidated Financial Statements on page 71 herein. The quarterly dividend declared in December 2003 was
paid on January 2, 2004. The amount and timing of dividend payments are determined by the Company's
Board of Directors and subject to certain restrictions under the Company's credit agreements. As of
October 15, 2004, there were approximately 11,000 beneÑcial holders of the Company's common stock.

Equity Compensation Plans Information

Information contained under the caption ""Equity Compensation Plans Information'' is discussed in

Item 12 herein on page 80.

Item 6. Selected Financial Data

The table below shows the selected Ñnancial data of the Company for the Ñve years ended December 31,

2003:

Statements of Operations Data
Net Sales(2) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Income (Loss) From Operations ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Net Income (Loss) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Diluted Earnings (Loss) Per Share ÏÏÏÏÏÏÏÏÏÏÏÏ
Dividends Per Share ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

Other Data
Capital Expenditures ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Research & Development ExpensesÏÏÏÏÏÏÏÏÏÏÏÏ

Balance Sheet Data
Working CapitalÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total Assets(3) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total Debt ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Stockholders' Equity(3) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

Note:

2003

For the Year Ending December 31,

Restated
2002(1)
2000
2001
(in millions, except per share data)

1999

$3,085.1
155.7
84.4
1.40
0.38

$3,024.6
108.1
(205.0)
(3.48)
0.38

$3,113.6

(0.7)
(42.4)
(0.75)
0.38

$3,242.2
158.6
59.1
1.05
0.38

$2,357.5
155.9
73.2
1.81
0.35

41.2
38.0

23.1
38.2

17.4
37.3

58.3
36.5

76.7
39.1

$ 230.2
1,726.6
362.3
584.2

$ 121.5
1,507.6
379.9
430.3

$ 158.8
1,791.7
517.8
652.3

$ 311.3
2,051.2
690.5
739.3

$ 424.6
1,682.0
577.0
596.2

(1) Includes adjustments associated with the years 1999-2001 that were not material to the aÅected years.

See Note 3 of the consolidated Ñnancial statements.

(2) As a result of adopting Emerging Issues Tax Force (""EITF'') 01-9 in 2002, the Company restated prior
years Net Sales. EITF 01-9 addressed various issues related to the income statement classiÑcation of
certain promotional payments. The adoption of EITF 01-9 reduced 2001, 2000 and 1999 Net Sales by
$6.0 million, $5.1 million and $4.2 million, respectively.

(3) In December 2003, the Company reclassiÑed the deferred income tax portion of deferred compensation
from long-term deferred income tax assets to deferred compensation within shareholders' equity. Such
reclassiÑcation reduced shareholders' equity by $(1.7) million in 1999, $(3.8) million in 2000,
$(2.3) million in 2001 and $(8.2) million in 2002. This reclassiÑcation was not related to the restatement
discussed in Note 3 of the Company's consolidated Ñnancial statements.

Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations

Restatement of Previously-Issued Financial Statements

The Management's Discussion and Analysis of Financial Condition and Results of Operations
(""MD&A'') has been revised to reÖect the restatement of the Company's Consolidated Financial Statements
for the year ended December 31, 2002 and certain events occurring subsequent to the original due date for
Ñling this 2003 Annual Report on Form 10-K.

On March 11, 2004, LII announced that its unaudited earnings for 2003 previously reported on Form 8-K
would be revised, and previously issued Ñnancial statements restated, subject to the completion of an inquiry
being conducted by the Audit Committee of the Board of Directors related to the Canadian service centers in
its Service Experts business segment. The cumulative Ñnancial impact of this inquiry totaled $7.0 million
comprising an increase of $7.6 million over previously reported unaudited net income for 2003, and a reduction
of $14.6 million in previously reported net income for Ñscal 2002 and prior. The revision and restatement are
described below. Additionally, the Company's unaudited 2003 and 2002 quarterly Ñnancial information has
been restated to reÖect adjustments to the Company's previously reported Ñnancial information on Form 10-Q
for the quarters ended March 31, 2003; June 30, 2003; and September 30, 2003.

The Company identiÑed adjustments that were required to be recorded, which reduced previously
reported after-tax income by a total of $14.6 million, cumulative for the years 1999 through 2002. In addition,
adjustments of $7.6 million increased previously released unaudited after-tax income in 2003. The impact on
net income for the years ended December 31, 2002 and 2001 was $9.0 million and $1.0 million of additional
expense, respectively. In addition, approximately $4.6 million of adjustments were identiÑed for years prior to
2001. As the Consolidated Financial Statements for 2001 and prior years were not materially aÅected by these
errors, no adjustments have been made to the Company's Ñscal 2001 or prior Consolidated Financial
Statements. The impact for 2001 and prior years is included as an adjustment in the quarter ended March 31,
2002.

The Company has segregated the adjustments discussed above into the following categories:

‚ Service Experts Ì these adjustments arose from the internal inquiry by its Audit Committee into
accounting irregularities within its Canadian service centers within its Service Experts business
segment. The adjustments increased (reduced) income as follows:

‚ Corrected treatment of purchase accounting items related to non-compete agreements, adjustments
to purchase price, and other balances at the time of purchase of $(1.1) million and $(0.2) million in
2003 and 2002, respectively. The majority of these items impacted selling, general and administra-
tive expense.

‚ Recording items in the proper period related to revenue recognition, bad debts, accrued expenses,
cash and inter-company reconciliations and other related period adjustments of $6.1 million and
$(9.3) million in 2003 and 2002, respectively. Of the $6.1 million, $2.2 million reduced net sales and
$8.3 million primarily reduced selling, general and administrative expense. Of the $9.3 million,
$1.2 million reduced net sales and $8.1 primarily increased selling, general and administrative
expense.

‚ Revaluations of the key judgment accounts related to warranty reserve and inventory allowances of
$3.9 million and $(4.6) million in 2003 and 2002, respectively. The majority of these items impacted
cost of goods sold.

‚ Tax entries related to the above adjustments of $0.2 million and $(0.2) million in 2003 and 2002,

respectively.

‚ The total impact on previously reported unaudited 2003 after-tax income for the Service Experts
business segment is an increase of $9.1 million. The total cumulative impact on previously reported
2002 after-tax income for the Service Experts business segment is a reduction of $14.3 million, net of
a favorable $1.3 million adjustment of Cumulative EÅect of Accounting Change.

‚ Non-Service Experts Ì these adjustments were identiÑed during the review of the Ñnancial statements
performed by the Company, and include revisions primarily to selling, general and administrative
expense that relate to signiÑcant estimates, uncertainties and judgments, net of related tax eÅects. The
total cumulative impact on previously reported after-tax income for the Non-Service Experts business
segment is a reduction of $1.5 million and $0.3 million in 2003 and 2002, respectively.

The eÅect of restatement on LII's previously issued Ñnancial statements is presented in more detail in
Note 3 titled ""Restatement of 2002 Financial Statements and Additional Information for 2003'' in the Notes
to Consolidated Financial Statements. A discussion of the Company's detailed remedial actions is included in
Item 9A ""Controls and Procedures.''

Overview

The Company participates in four reportable business segments of the heating, ventilation, air condition-
ing and refrigeration (""HVACR'') industry. The Ñrst reportable segment is Residential Heating & Cooling, in
which LII manufactures and markets a full line of heating, air conditioning and Hearth Products for the
residential replacement and new construction markets in the United States and Canada. The second
reportable segment is Commercial Heating & Cooling, in which LII manufactures and sells primarily rooftop
products and related equipment for light commercial applications. Combined, the Residential Heating &
Cooling and Commercial Heating & Cooling segments form LII's heating and cooling business. The third
reportable segment is Service Experts, which, includes sales and installation of, and maintenance and repair
services for, HVAC equipment. On December 31, 2003, there were approximately 180 LII-owned service
centers in the United States and Canada. The fourth reportable segment is Refrigeration, in which LII
manufactures and sells unit coolers, condensing units and other commercial refrigeration products.

On July 8, 2003, LII announced organizational changes and assignments in an eÅort to streamline the
reporting of the Company's four business segments. First, Scott J. Boxer was named President and Chief
Operating OÇcer (""COO'') of Service Experts Inc. (""SEI''), the Company's retail sales and service business.
Mr. Boxer was formerly President of Lennox Industries Inc. and had also been serving as interim President of
SEI since March 24, 2003. Second, Robert J. McDonough was named President and COO, Worldwide
Heating & Cooling, encompassing the Company's Lennox Industries Inc., North American Distributed
Products (""NADP'') and European HVAC businesses. Mr. McDonough was formerly President, Worldwide
Refrigeration. Third, Michael G. Schwartz was named President and COO, Worldwide Refrigeration,
replacing Mr. McDonough. Mr. Schwartz was formerly President, NADP.

During 2003, LII's Residential Heating & Cooling and Commercial Heating & Cooling business
segments signiÑcantly improved upon segment performance compared to prior year primarily due to higher
volumes, a favorable mix of higher margin premium products and increased factory productivity. Segment
performance in LII's Refrigeration business segment was slightly below prior year due in large part to lower
demand worldwide. However, in LII's Service Experts business segment, performance fell short of manage-
ment's expectations. Much of the shortfall was due to unfavorable inventory valuations, increased costs on
commercial construction contracts, bad debt expenses and severance in Service Experts Canadian operations,
as well as overall labor ineÇciencies and segment proÑt margin erosion driven by price competition.

Improving the performance of the Service Experts business segment is a top priority of LII's
management and a key challenge in 2004. In addition to the organization changes described above, the Service
Experts business segment continues the rollout of a program focused on the sharing of best practices across all
residential service and replacement service centers. This rollout began mid-year in 2003 and was completed at

most of the service centers in the third quarter of 2004. The deployment of an information technologies
(""IT'') system in Service Experts Canadian service centers was completed in the third quarter of 2004. This
IT system is currently used by most of the Service Experts U.S. service centers and facilitates the
consolidation of service center accounting functions as well as the tracking of key performance indicators used
in the best practices program described above. In April 2004, the Company announced the speciÑcs of a
turnaround plan designed to realign Service Experts' dealer service centers to focus on service and
replacement opportunities in the residential and light commercial markets. For more detail on this turnaround
plan, see ""Subsequent Events'' located at the end of MD&A. Item 9A ""Controls and Procedures'' also
contains a listing of actions that are being implemented in the Service Experts business segment.

During August 2002, LII formed joint ventures with Outokumpu Oyj of Finland (""Outokumpu'').
Outokumpu purchased a 55% interest in the Company's former Heat Transfer business segment in the U.S.
and Europe for $55 million in cash and notes, with LII retaining 45% ownership. The net after-tax gain on the
sale and the related expenses and charges was $6.4 million. LII accounts for its remaining 45% ownership
interest using the equity method of accounting. The Company currently reports the historical results of
operations of its former Heat Transfer business segment in the ""Corporate and other'' business segment.

LII's customers include distributors, installing dealers, property owners, national accounts and original
equipment manufacturers. LII recognizes sales revenue when products are shipped or when services are
rendered. The demand for LII's products and services is inÖuenced by national and regional economic and
demographic factors, such as interest rates, the availability of Ñnancing, regional population and employment
trends, new construction, general economic conditions and consumer conÑdence. In addition to economic
cycles, demand for LII's products and services is seasonal and dependent on the weather. Hotter than normal
summers generate strong demand for replacement air conditioning, refrigeration products and services; and
colder than normal winters have the same eÅect on heating products and services. Conversely, cooler than
normal summers and warmer than normal winters depress HVACR sales and services.

The principal components of cost of goods sold in LII's manufacturing operations are component costs,
raw materials, factory overhead, labor and estimated costs of warranty expense. In LII's Service Experts
segment, the principal components of cost of goods sold are equipment, parts and supplies and labor. The
principal raw materials used in LII's manufacturing processes are steel, copper and aluminum. In instances
where LII is unable to pass on to its customers increases in the costs of copper and aluminum, LII may enter
into forward contracts for the purchase of those materials. Warranty expense is estimated based on historical
trends and other factors.

On January 1, 2002, LII adopted Statement of Financial Accounting Standards No. 142 ""Goodwill and
Other Intangible Assets'' (""SFAS No. 142''), and recorded a $283.7 million impairment of goodwill
($247.9 million, net of taxes). The impairment charge related primarily to the 1998 to 2000 acquisitions of
LII's Service Experts and Hearth Products operations, where lower than expected operating results occurred.

LII's Ñscal year ends on December 31 of each year and its interim Ñscal quarters are each comprised of
13 weeks. For convenience, throughout this Management's Discussion and Analysis of Financial Condition
and Results of Operations, the 13-week periods comprising each Ñscal quarter are denoted by the last day of
the calendar quarter.

Results of Operations

The following table sets forth, as a percentage of net sales, LII's statement of income data for the years
ended December 31, 2003, 2002 and 2001. LII's statement of income data has been reconciled for the year

ended December 31, 2001 to reÖect the discontinuation of goodwill and trademark amortization under SFAS
No. 142:

Year Ended December 31,

2003

Restated
2002

2001

Net Sales ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Cost of goods sold ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

100.0%
67.0

Gross ProÑtÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Selling, general and administrative expense ÏÏÏÏÏÏÏÏ
Restructurings ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
(Gains) Losses and other expenses ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

Income from operations ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Interest expense, net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Other expense (income) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

Income (loss) before income taxes and

cumulative eÅect of accounting change ÏÏÏÏÏÏÏ
Provision for income taxes ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

Income (loss) before cumulative eÅect of

accounting change ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Cumulative eÅect of accounting change ÏÏÏÏÏÏÏÏÏÏÏ

33.0
27.9
Ì
0.1

5.0
0.9
(0.1)

4.2
1.5

2.7
Ì

100.0% 100.0%

68.7

31.3
27.7
0.3
(0.3)

3.6
1.1
Ì

2.5
1.1

1.4
8.2

70.6

29.4
27.3
2.1
Ì

Ì
1.4
Ì

(1.4)
Ì

SFAS
No. 142
2001 Adj.

Ì
Ì

Ì
(0.6)
Ì
Ì

0.6
Ì
Ì

0.6
Ì

2001
Adj.

100.0%
70.6

29.4
26.7
2.1
Ì

0.6
1.4
Ì

(0.8)
Ì

Net income (loss) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

2.7%

(6.8)% (1.4)%

0.6%

(0.8)%

The following table sets forth net sales by business segment and geographic market (dollars in millions):

2003

Years Ended December 31,
Restated
2002

2001

Amount

Business Segment:
Residential ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Commercial ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

$1,358.7
508.4

44.0% $1,249.1
442.4
16.5

41.3% $1,195.1
470.0
14.6

Heating & Cooling ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Service Experts ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Refrigeration ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Corporate and other ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
EliminationsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

1,867.1
937.1
387.2
Ì
(106.3)

60.5
30.4
12.5
Ì
(3.4)

1,691.5
942.6
363.8
129.3
(102.6)

55.9
31.2
12.0
4.3
(3.4)

1,665.1
1,002.6
348.1
200.5
(102.7)

38.4%
15.1

53.5
32.2
11.2
6.4
(3.3)

Total net sales ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

$3,085.1

100.0% $3,024.6

100.0% $3,113.6

100.0%

Geographic Market:
U.S. ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
International ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

$2,344.6
740.5

76.0% $2,357.6
667.0
24.0

77.9% $2,448.5
665.1
22.1

78.6%
21.4

Total net sales ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

$3,085.1

100.0% $3,024.6

100.0% $3,113.6

100.0%

Year Ended December 31, 2003 Compared to Year Ended December 31, 2002

Previously-Issued Financial Statements'' located at the beginning of the MD&A as well as Note 3 titled
""Restatement of 2002 Financial Statements and Additional Information for 2003'' in the Notes to Consoli-
dated Financial Statements.

Net Sales

Net sales increased $60.5 million, or 2.0%, to $3,085.1 million for the year ended December 31, 2003
from $3,024.6 million for the comparable period in 2002. Adjusted for the favorable impact of foreign currency
translation, net sales declined 1.3% compared to the same period last year. Higher net sales in the Residential
Heating & Cooling and Commercial Heating & Cooling segments and in the Refrigeration segment were
partially oÅset by lower net sales in the Service Experts business segment, the absence of net sales from the
Company's former Heat Transfer business segment, 55% of which was sold to Outokumpu during the third
quarter of 2002, and the wind-down of the Company's engineered machine tool business. The Company
currently reports the historical results of operations of its former Heat Transfer business segment in the
""Corporate and other'' business segment. Adjusting for the loss of $129.3 million of net sales from the
Company's former Heat Transfer business segment and $100.2 million favorable impact of foreign currency
translation, net sales increased $89.6 million, or 3.1%, for the year ended December 31, 2003 compared to the
year ended December 31, 2002 as shown in the following table (dollars in millions):

Net sales, as reported ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Net sales from former Heat Transfer

business segment ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Impact of foreign currency translation ÏÏÏÏÏÏÏÏÏÏÏÏ

Year Ended
December 31,

2003

Restated
2002

$ Change

% Change

$3,085.1

$3,024.6

60.5

2.0%

Ì
(100.2)

(129.3)
Ì

129.3
(100.2)

Net sales, as adjusted ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

$2,984.9

$2,895.3

89.6

3.1%

Net sales in the Residential Heating & Cooling business segment increased $109.6 million, or 8.8%, to
$1,358.7 million for the year ended December 31, 2003 from $1,249.1 million in 2002. Adjusted for the impact
of foreign currency translation, net sales increased 7.2%, or $90.0 million, compared to the year ended
December 31, 2002. Net sales increases were achieved by the Company's Lennox and Ducane brands of home
comfort equipment and Hearth Products business, all of which experienced sales increases ranging from 10%
to 20% for the year ended December 31, 2003 compared to the same period in the prior year.

Higher net sales of the Company's Lennox brand of home comfort equipment were due primarily to
customer acceptance of new products and strength in the residential new construction market driven primarily
by lower interest rates. According to the National Association of Home Builders, single and multi-family
housing starts of 1.85 million units in 2003 were 8.1% higher than in 2002. Higher net sales of the Company's
Ducane brand of home comfort equipment were due primarily to expanded distribution. Higher net sales in
the Company's Hearth Products business were due primarily to higher sales to new and existing customers and
strength in the residential new construction market. Overall, the Company's Residential Heating & Cooling
business segment outperformed the market. For example, according to the Air-Conditioning and Refrigeration
Institute, U.S. factory shipments of unitary air conditioners and heat pumps were up only 1% January through
December 2003 compared to the same period in 2002.

Net sales in the Commercial Heating & Cooling business segment increased $66.0 million, or 14.9%, to
$508.4 million for the year ended December 31, 2003 compared to the year ended December 31, 2002. After
adjusting for the impact of foreign currency translation, net sales increased $39.7 million, or 9.0%, compared to
the year ended December 31, 2002. The higher net sales were driven primarily by increased domestic sales to
new and existing national accounts, as well as higher sales to commercial mechanical contractors. Net sales in
the Company's European operations for the year ended December 31, 2003 were up modestly compared to the
same period last year, when adjusted for foreign currency translation.

Net sales in the Service Experts business segment declined $5.5 million, or 0.6%, to $937.1 million from
$942.6 million for the year ended December 31, 2003 compared to the year ended December 31, 2002. Net
sales declined $28.2 million, or 3.0%, after adjusting for the impact of foreign currency translation. The sales
decline was entirely in the commercial new construction business due in part to price competition and sluggish
commercial construction starts. Compared to the year ended December 31, 2002, net sales were higher in the
service and replacement businesses and the residential new construction business.

Refrigeration business segment net sales increased $23.4 million, or 6.4%, to $387.2 million for the year
ended December 31, 2003 compared to the year ended December 31, 2002. However, after adjusting for the
impact of foreign currency translation, net sales decreased $11.7 million, or 3.2%, for the year ended
December 31, 2003 compared to 2002. The sales decline, after adjusting for the impact of foreign currency
translation, was due primarily to continued depressed domestic and international market demand from retail
customers.

Gross ProÑt

Gross proÑt was $1,017.2 million for the year ended December 31, 2003 compared to $947.0 million for
the year ended December 31, 2002, an increase of $70.2 million. Gross proÑt margin improved 1.7% to 33.0%
for the year ended December 31, 2003 from 31.3% for the comparable period in the prior year. Gross proÑt
margin improved in the Company's Residential Heating & Cooling, Commercial Heating & Cooling and
Refrigeration business segments.

In the Company's Residential Heating & Cooling business segment, gross proÑt margins improved 1.4%
for the year ended December 31, 2003 compared to the same period last year due primarily to higher volumes,
a favorable mix of higher-margin premium products and improved Hearth Products performance. Gross proÑt
margins improved 2.3% in the Company's Commercial Heating & Cooling business segment over the same
period due to higher volumes, increased factory productivity and the beneÑts of reducing excess international
manufacturing capacity. In the Company's Service Experts business segment, gross proÑt margin declined
0.9% over the same period due primarily to unfavorable inventory valuations and increased costs on
commercial construction contracts mostly in the Canadian service centers as well as labor ineÇciencies and
margin erosion driven by price competition necessary to maintain net sales. In the Company's Refrigeration
business segment, gross proÑt margin improved 1.0% over the same period due primarily to purchasing savings
in the Company's domestic and Asia PaciÑc operations. The absence of lower-margin business from the
Company's former Heat Transfer business segment also contributed to the gross proÑt margin improvement
for the year ended December 31, 2003 compared to the same period last year. LIFO (last in, Ñrst out)
inventory liquidations did not have a material impact on gross proÑt margins.

Selling, General and Administrative Expense

Selling, general and administrative (""SG&A'') expenses were $859.6 million for the year ended
December 31, 2003, an increase of $20.6 million, or 2.5%, from $839.0 million for the year ended
December 31, 2002. The increase in SG&A expenses was driven by $27.0 million of unfavorable foreign
currency translation and higher freight, distribution and marketing expenses due primarily to higher sales
volumes. Partially oÅsetting these items were lower SG&A of $9.9 million (excluding unfavorable foreign
currency translation) in the Company's Service Experts business segment and the absence of SG&A from the
former Heat Transfer business segment. For the year ended December 31, 2002, Service Experts' SG&A
included a cumulative unfavorable adjustment of $5.9 million for years prior to 2002 in connection with the
internal inquiry discussed above (see ""Restatement of PreviouslyÓIssued Financial Statements'' located at the
beginning of MD&A). As a percentage of total net sales, SG&A expenses were 27.9% for the year ended
December 31, 2003, slightly higher compared to the year ended December 31, 2002. The Company has no
signiÑcant concentration of credit risk among its diversiÑed customer base.

(Gains) Losses and Other Expenses

(Gains) losses and other expenses were a net pre-tax expense of $1.9 million for the year ended
December 31, 2003 which included $3.4 million of pre-tax expenses related to the Heat Transfer joint venture
agreement the Company entered into with Outokumpu during the third quarter of 2002, pre-tax expenses
totaling $2.6 million from the loss on the sale of a HVAC distributor in the Company's Residential Heating &
Cooling business segment and other expenses partially oÅset by a $2.4 million pre-tax gain on the sale of the
Company's Electrical Products Division and a $1.7 million pre-tax gain on the sale of a manufacturing facility
in Europe in the Company's Refrigeration business segment. For the year ended December 31, 2002,
(gains) losses and other expenses totaled a net pre-tax gain of $7.9 million which included an $11.5 million net
pre-tax gain on the sale of a 55% interest in the Company's former Heat Transfer business segment to
Outokumpu partially oÅset by a $3.6 million pre-tax loss on the sale of the Company's 50% ownership interest
in its Fairco S.A. joint venture in Argentina to the joint venture partner.

Restructurings

Pre-tax restructuring charges for the year ended December 31, 2002 were $7.8 million. Of these charges,
$1.3 million related to the manufacturing and distribution restructuring program which was initiated in the
fourth quarter of 2001 and principally included personnel termination charges in the Company's Residential
Heating & Cooling segment, the relocation of production lines, net gains upon disposal of certain impaired
assets and restructuring income associated with the subleasing of vacated corporate oÇce lease space. The
remaining $6.5 million of these charges related to the Company's engineered machine tool business
restructuring program, which was initiated in the third quarter of 2002, and included personnel termination
charges and other exit costs in the Company's former Heat Transfer business segment. (For a more detailed
discussion of the Company's 2002 restructuring programs, see ""Results of Operations Ì Year Ended
December 31, 2002 Compared to Year Ended December 31, 2001 Ì Restructurings.'')

Interest Expense, Net

Interest expense, net, for the year ended December 31, 2003 decreased $3.3 million, or 10.4%, from
$31.8 million for the year ended December 31, 2002. The lower interest expense resulted from lower average
debt levels partially oÅset by marginally higher average interest rates due to a higher proportion of Ñxed rate
debt. The average interest rates on the Company's Ñxed rate debt are higher than the average interest rates on
the Company's variable rate debt. As of December 31, 2003, total debt of $362.3 million was $17.6 million
lower than total debt as of December 31, 2002.

Other Expense (Income)

Other expense (income) was income of $2.5 million for the year ended December 31, 2003 compared to
income of $0.8 million last year. Other expense (income) includes foreign currency exchange gains, which
relate principally to the Company's operations in Canada, Australia and Europe, and expenses related to
minority interest holders.

Provision for Income Taxes

The provision for income taxes was $45.3 million for the year ended December 31, 2003 compared to
$34.2 million for the year ended December 31, 2002. The eÅective tax rate was 34.9% for the year ended
December 31, 2003 compared to 44.4% for the year ended December 31, 2002. This eÅective rate diÅers from
the statutory federal rate of 35% principally due to state and local taxes, non-deductible expenses, foreign
operating losses for which no tax beneÑts have been recognized and foreign taxes at rates other than 35%.

Cumulative EÅect of Accounting Change

with an indeÑnite useful life no longer be amortized as expenses of operations, but rather be tested for
impairment upon adoption and, at least annually, by applying a fair-value-based test. During the Ñrst quarter
of 2002, LII conducted such fair-value-based tests and recorded a pre-tax goodwill impairment charge of
$283.7 million. The charge primarily relates to the Company's Service Experts and Residential Heating &
Cooling business segments. The tax beneÑt of this charge was $35.8 million. During the Ñrst quarter of 2003,
LII performed its annual goodwill impairment test and determined that no further goodwill impairment
charge was necessary.

Year Ended December 31, 2002 Compared to Year Ended December 31, 2001

The Results of Operations have been revised to reÖect the restatement of the Company's Consolidated
Financial Statements for the year ended December 31, 2002. For more information, see ""Restatement of
Previously-Issued Financial Statements'' located at the beginning of the MD&A as well as Note 3 titled
""Restatement of 2002 Financial Statements and Additional Information for 2003'' in the Notes to Consoli-
dated Financial Statements.

The Company adopted Emerging Issues Task Force (""EITF'') Issue 01-9, ""Accounting for Considera-
tion Given by a Vendor to a Customer or a Reseller of the Vendor's Products'' (""EITF 01-9''), issued by the
EITF in November 2001. EITF 01-9 addressed various issues related to the income statement classiÑcation of
certain promotional payments, including consideration from a vendor to a reseller or another party that
purchases the vendor's products. As a result of adopting EITF 01-9 in 2002, the Company restated prior year
net sales, cost of goods sold and selling, general and administrative (""SG&A'') expense. The adoption of
EITF 01-9 decreased net sales by $6.0 million; increased cost of goods sold by $1.4 million and decreased
SG&A expenses by $7.4 million for the year ended December 31, 2001.

Net Sales

Net sales decreased $89.0 million, or 2.9%, to $3,024.6 million for the year ended December 31, 2002
from $3,113.6 million for the comparable period in 2001. Adjusted for the favorable impact of foreign currency
translation, net sales declined 3.2% compared to the same period in 2001. The sales decline was attributable to
lower sales in the Company's Service Experts and Commercial Heating & Cooling segments, the wind-down
of the Company's engineering business (see ""Restructurings'') and the absence of sales (September 2002
through December 2002) from the Company's former Heat Transfer business segment, 55% of which was sold
to Outokumpu during the third quarter of 2002. The Company currently reports the historical results of
operations of its former Heat Transfer business segment in the ""Corporate and other'' business segment.

Net sales in the Residential Heating & Cooling segment increased $54.0 million, or 4.5%, to
$1,249.1 million for the year ended December 31, 2002 from $1,195.1 million for the year ended Decem-
ber 31, 2001. Adjusted for the impact of foreign currency translation, net sales increased 4.7%, or
$55.9 million, compared to 2001. The North American market for residential air conditioners, heat pumps and
gas furnaces increased industry-wide through December 2002 as compared to the prior year, due primarily to
favorable weather during the cooling season. Net sales of the Company's Lennox- and Ducane-branded
products, as well as evaporator coils from its Advanced Distributor Products unit, were particularly strong for
the twelve months ended December 31, 2002.

Net sales in the Commercial Heating & Cooling segment decreased $27.6 million, or 5.9%, to
$442.4 million for the year ended December 31, 2002 compared to the prior year. The sales decrease was 7.4%
after adjusting for the impact of foreign currency exchange. The decline was due primarily to lower demand
levels for commercial air conditioning equipment in North America as well as the absence of sales from the
Company's Australian commercial air conditioning operations, which were exited during the second quarter of
2002. North American industry shipments of unitary commercial HVAC equipment were down in 2002 as
compared to 2001. Lower demand in Europe also contributed to the sales decline.

Net sales in the Service Experts segment were $942.6 million for the year ended December 31, 2002, a
decrease of $60.0 million, or 6.0%, from $1,002.6 million for the year ended December 31, 2001. The sales
decline was 5.7% after adjusting for the impact of foreign currency exchange. On a same-store basis, after

adjusting for sold or closed service centers in connection with a restructuring program announced in 2001, net
sales in the Service Experts segment declined 3.6% in 2002 compared to 2001. As a result of this restructuring
program, the primary operating focus of this segment in 2002 was improving operating eÇciency through cost
reduction programs, expense control initiatives and reductions in personnel.

Refrigeration segment net sales increased $15.7 million, or 4.5%, to $363.8 million for the year ended
December 31, 2002 compared to the prior year. After adjusting for the impact of foreign currency exchange,
the sales increase was 2.4%. A sustained strengthening order rate for commercial refrigeration equipment in
the Company's domestic and Asia PaciÑc operations resulted in higher net sales in 2002. In the U.S., LII
improved market share in this segment in part due to the successful launch of the Pro3 package refrigeration
units. Eleven new product platforms were introduced in 2002, with approximately one-third of net sales
derived from products introduced in the past three years.

Corporate and other segment revenues declined $71.2 million, or 35.6%, to $129.3 million for the year
ended December 31, 2002 compared to the year ended December 31, 2001. The ""Corporate and other''
segment net sales primarily consists of the historical results of the Company's former Heat Transfer segment,
55% of which was sold to Outokumpu in August 2002. As a result, the sales decline was primarily attributable
to the absence of sales from this segment during the last four months of 2002.

Gross ProÑt

Gross proÑt was $947.0 million for the year ended December 31, 2002 compared to $914.4 million for the
year ended December 31, 2001, an increase of $32.6 million. Gross proÑt margin improved 1.9% to 31.3% for
the year ended December 31, 2002 from 29.4% for the comparable period in the prior year. Gross proÑt
margin in the Company's Service Experts segment improved 2.1% in 2002 compared to 2001 due primarily to
direct labor personnel reductions and increased productivity of existing direct labor personnel. Service Experts
direct labor personnel reductions were made in connection with a restructuring program announced in 2001 as
well as eÅorts to staÅ individual service centers to match market demand. The gross proÑt margin
improvement was also due to factory eÇciencies, particularly in the areas of labor utilization, purchasing
savings and lower overhead. LIFO (last in, Ñrst out) inventory liquidations did not have a material impact on
gross margins.

Selling, General and Administrative Expense

SG&A expenses were $839.0 million for the year ended December 31, 2002, a decrease of $10.7 million,
or 1.3%, from $849.7 million for the year ended December 31, 2001. As a percentage of total revenues, SG&A
expenses increased to 27.7% for the year ended December 31, 2002 from 27.3% for the year ended
December 31, 2001. SG&A expenses for 2001 included $18.6 million of goodwill and trademark amortization,
which has been discontinued with the adoption of SFAS No. 142 on January 1, 2002. Bad debt expense, which
is driven largely by overall economic conditions, totaled $9.8 million and $15.8 million for the twelve-month
periods ended December 31, 2002 and 2001, respectively. The bad debt expense was higher in 2001 as it
included speciÑc reserves for two customers totaling $4.2 million. The Company has no signiÑcant concentra-
tion of credit risk among its diversiÑed customer base. Partially oÅsetting the favorable bad debt expense
variance and absence of goodwill and trademark amortization in 2002 were the inclusion of a cumulative
unfavorable adjustment of $5.9 million for years prior to 2002 in connection with the internal inquiry within
the Company's Service Experts business segment as discussed previously (see ""Restatement of Previ-
ouslyÓIssued Financial Statements'' located at the beginning of MD&A); higher proÑt sharing and incentive
programs expenses, driven primarily by improved Ñnancial performance; and higher insurance costs.

Restructurings

additional restructuring initiative of its non-core Heat Transfer engineering business. The three initiatives are
as follows:

1. Retail Restructuring Program

In the second quarter of 2001, the Company recorded a pre-tax restructuring charge of $38.0 million
($25.6 million, net of tax), which covered the selling, closing or merging of 38 company-owned dealer
service centers in the Company's Service Experts segment. The $38.0 million pre-tax restructuring
charge included inventory impairments of $3.4 million in cost of goods sold. These centers were either
under-performing Ñnancially, located in geographical areas requiring disproportionate management eÅort
or focused on non-HVAC activities. The major actions of the plan consisted of employee terminations,
closure, sale or merger of dealer service centers and completion of in-process commercial construction
jobs, all of which have been completed, with long-term lease and other exit cost payments continuing into
2003. The revenue and net operating loss of the service centers sold, closed or merged as part of the Retail
Restructuring Program were $24.5 million and $3.9 million, respectively, for the year ended Decem-
ber 31, 2001.

The $38.0 million pre-tax charge for the Retail Restructuring Program consisted of $4.8 million of
severance and beneÑt charges, $12.3 million of other exit costs and $20.9 million of asset impairments.
The asset impairments in the restructuring charge included $6.6 million for long-lived assets, principally
property, plant and equipment used in the operations of the closed service centers, $5.7 million in
goodwill, $3.4 million for inventory write-downs and $5.2 million in accounts receivable. The accounts
receivable and inventory write-downs were recorded in conjunction with the restructuring since the
decisions to close the operations directly impacted the net realizable value of the related assets. The
inventory write-downs totaling $3.4 million were included in cost of goods sold.

Through December 2002, the Company made cash payments of $15.4 million under this program.
These payments included $2.9 million for severance and beneÑt payments and $12.5 million for other exit
costs payments. The Company made cash expenditures of $3.6 million for other exit costs in 2003. The
improvement in net operating income due to the elimination of net operating losses of service centers
sold, closed or merged under this restructuring program was $3.9 million for the year ended December 31,
2002.

2. Manufacturing and Distribution Restructuring Program

In the fourth quarter of 2001, the Company recorded pre-tax restructuring charges totaling
$35.2 million ($31.0 million, net of tax) for severance and other exit costs that resulted from the
Company's decision to sell or abandon certain manufacturing and distribution operations. The $35.2 mil-
lion pre-tax restructuring charge included inventory impairments of $4.4 million in cost of goods sold.
The major actions included in the plan were the closing of a domestic distribution facility, the Company's
Mexico sales oÇce, manufacturing plants in Canada, Australia and Europe, and the disposal of other
non-core Heat Transfer businesses. The revenue and net operating loss of separately identiÑable
operations were $36.3 million and $2.3 million, respectively, for the year ended December 31, 2001.

The $35.2 million pre-tax charge for the Manufacturing and Distribution Restructuring Program
consisted of $6.0 million of severance and beneÑt charges, $3.4 million of other exit costs and
$25.8 million of asset impairments. The asset impairments in the restructuring charge included
$3.7 million for property, plant and equipment written down to the cash expected to be received upon sale
or abandonment, if any, $10.9 million in goodwill, $4.4 million for inventory write-downs and $6.8 million
in accounts receivable. The accounts receivable and inventory write-downs were recorded in conjunction
with the restructuring since the decisions to close the operations directly impacted the net realizable value
of the related assets. The inventory write-downs of $4.4 million were included in cost of goods sold.

Through December 2002, the Company made cash payments of $10.0 million under this program.
These payments included $7.7 million for severance and beneÑt payments and $2.3 million for other exit
cost payments. During 2003, the Company made cash payments of $2.1 million under this program.

These payments included $1.3 million for severance and beneÑt payments and $0.8 million for other exit
cost payments. The improvements in net operating income were approximately $6.0 million for the year
ended December 31, 2002.

3. Engineering Business Restructuring Program

In the third quarter of 2002, the Company recorded a pre-tax restructuring charge of $7.5 million
($5.2 million, net of tax) for inventory impairments, severance and other exit costs that resulted from the
Company's decision to abandon a residual portion of the Heat Transfer business that does not Ñt with the
Company's strategic focus and was not included in the joint ventures with Outokumpu formed during the
third quarter of 2002. The $7.5 million charge included $1.0 million related to inventory write-downs,
which has been included in cost of goods sold.

The $7.5 million pre-tax charge for the Engineering Business Restructuring Program consisted of
$3.7 million of severance and beneÑt charges, $2.8 million for other exit costs and $1.0 million of
inventory impairment. Actual operating losses in 2002 from this business totaled $6.9 million. The
Company completed the wind-down period of this business and recorded an additional operating loss of
$1.8 million in 2003. Operating losses from this business are reported in the ""Corporate and other''
business segment.

In summary, pre-tax restructuring charges for the year ended December 31, 2002 were $7.8 million. Of
these charges, $1.3 million stemmed from the Manufacturing and Distribution Restructuring Program and
principally included personnel termination charges in the Company's Residential Heating & Cooling segment,
the relocation of production lines, net gains upon disposal of certain impaired assets and restructuring income
associated with the subleasing of vacated corporate oÇce lease space. The remaining $6.5 million of these
charges stemmed from the Engineering Business Restructuring Program and included personnel termination
charges and other exit costs in the Company's former Heat Transfer business segment. Pre-tax restructuring
charges for the year ended December 31, 2001 were $73.2 million, of which $7.8 million was included in cost
of goods sold. Of these charges, $38.0 million stemmed from the Retail Restructuring Program ($3.4 million
in cost of goods sold) and $35.2 million stemmed from the Manufacturing and Distribution Restructuring
Program ($4.4 million in cost of goods sold).

(Gains) Losses and Other Expenses

During 2002, LII recognized two events aggregating in a net pre-tax gain of $7.9 million. These events

were related to narrowing LII's strategic focus on its core businesses. These events are detailed as follows:

1. Sale of Heat Transfer Business

In August 2002, LII formed joint ventures with Outokumpu. Outokumpu purchased a 55% interest
in the Company's former Heat Transfer business segment in the U.S. and Europe for $55 million in cash
and notes, with LII retaining 45% ownership. LII recognized a pre-tax gain on the sale of $23.1 million,
subject to post-closing balance sheet audit adjustments. In conjunction with the sale, LII incurred
$11.6 million of other charges and expenses. Included in this amount are asset impairments that reduced
to zero the carrying value of non-core Heat Transfer assets not included in the sale and that were
identiÑed for abandonment in the third quarter of 2002. Additionally, this amount included a pension
curtailment in connection with U.S.-based Heat Transfer employees, indemniÑcation of Öood losses that
occurred at a Heat Transfer manufacturing facility in Prague, Czech Republic in August 2002 and other
related transaction expenses. The net after-tax gain on the sale was $6.4 million. LII accounts for its
remaining 45% ownership using the equity method of accounting.

2. Exit from Commercial HVAC Operations in Argentina

In August 2002, LII sold its 50% ownership interest in its Argentine joint venture. Operationally,
this joint venture was under performing, in large part due to volatile economic conditions in Argentina.
The Company recognized a pre-tax loss on the sale of $3.6 million. The tax beneÑt recognized on the loss

on sale was $2.4 million resulting in a net after-tax loss of $1.2 million. The proceeds from the sale were
immaterial.

Interest Expense, Net

Interest expense, net, for the year ended December 31, 2002 decreased $11.3 million, or 26.2%, from
$43.1 million for the year ended December 31, 2001. The lower interest expense resulted from lower debt
levels. Strong cash Öow generation in 2002 allowed continued signiÑcant progress in paying down debt. At the
end of December 2002, total debt of $379.9 million was $137.9 million lower than total debt at December
2001.

Other Expense (Income)

Other expense (income) was $(0.8) million for the year ended December 31, 2002 and $0.6 million for
the year ended December 31, 2001. Other expense (income) is primarily comprised of foreign currency
exchange gains or losses, which relate principally to the Company's operations in Canada, Australia and
Europe. Appreciation of Australia's and Europe's currencies was primarily responsible for the overall change
versus last year. Other expense (income) also includes expenses related to minority interest holders.

Provision for Income Taxes

The provision for income taxes was $34.2 million for the year ended December 31, 2002 compared to a
beneÑt from income taxes of $2.0 million for the year ended December 31, 2001. Excluding the tax beneÑt
resulting from restructuring recognized in 2002 and in 2001, and (gains) losses and other expenses in 2002,
the eÅective tax rate was 47.0% and 50.6% for the years ended December 31, 2002 and December 31, 2001.
This rate diÅers from the statutory federal rate of 35.0% principally due to state and local taxes, non-
deductible expenses, foreign operating losses for which no tax beneÑts have been recognized and foreign taxes
at rates other than 35.0%, partially oÅset by favorable resolution of tax contingencies.

Cumulative EÅect of Accounting Change

The cumulative eÅect of accounting change represents an after-tax, non-cash, goodwill impairment
charge of $247.9 million for the year ended December 31, 2002. This charge resulted from the adoption of
SFAS No. 142 which became eÅective January 1, 2002 and requires that goodwill and other intangible assets
with an indeÑnite useful life no longer be amortized as expenses of operations, but rather be tested for
impairment upon adoption and, at least annually, by applying a fair-value-based test. During the Ñrst quarter
of 2002, LII conducted such fair-value-based tests and recorded a pre-tax goodwill impairment charge of
$283.7 million. The charge primarily relates to the Company's Service Experts and Residential Heating &
Cooling business segments. The tax beneÑt of this charge was $35.8 million.

Liquidity, Capital Resources and OÅ-Balance Sheet Arrangements

Lennox's 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 more extensive in the Ñrst and second quarter due to the seasonal nature of the Company's business
cycle.

During 2003, LII generated $56.7 million of cash from operations compared to $168.0 million in 2002
and $212.0 million in 2001. Cash from operations during 2003 was negatively impacted by approximately
$99.0 million due to reduced utilization of the asset securitization arrangement as of December 31, 2003.
Additionally, cash from operations was approximately $20.0 million less in 2003 compared to 2002 due to prior
years' initiatives to reduce overall working capital. Net cash provided by investing activities in 2002 includes
$55 million from the Outokumpu JV sales, acquiring a partner's remaining 14% interest in Heatcraft do
Brasil S.A., and proceeds from the sale of the net assets of a distributor in the Residential Heating & Cooling
segment. Cash used to fund acquisitions in 2001 amounted to $21.3 million and this consisted primarily of
contingent payment considerations on prior Retail acquisitions and similar contingent consideration for the

Kirby company acquisition. Cash used in Ñnancing activities in 2002 reÖects the Company's issuance of
$143.8 million of 6.25% convertible subordinated notes due 2009 oÅset by the use of these net proceeds, the
cash from the Outokumpu transaction and cash from operations to reduce its indebtedness under its revolving
credit facility.

As of December 31, 2003, $28.6 million of cash and cash equivalents were restricted due to outstanding

letters of credit.

Capital expenditures of $41.2 million and $23.1 million in 2003 and 2002, respectively, were primarily for
production equipment in the manufacturing plants in the Residential Heating & Cooling and Commercial
Heating & Cooling business segments. The Company estimates that capital expenditures in 2004 will
approximate its annual depreciation expense.

As of December 31, 2003, the Company had outstanding long-term debt obligations totaling $358.7 mil-
lion, which was down from $370.6 million at December 31, 2002. The amount outstanding as of December 31,
2003 consisted primarily of seven issues of notes with an aggregate principal outstanding of $354.3 million,
with interest rates ranging from 6.25% to 8.0% and with maturities ranging from 2004 to 2010. The Company
has bank lines of credit aggregating $275.5 million, of which $6.7 million was borrowed and outstanding, and
$65.1 million was committed to standby letters of credit as of December 31, 2003. The remaining
$203.7 million was available for future borrowings, subject to covenant limitations. Included in the lines of
credit are several regional facilities and a multi-currency facility in the amount of $225 million governed by
agreements between the Company and a syndicate of banks. In September 2003, the Company amended its
former domestic facility to, among other things, base covenants on the Ñnancials of domestic and foreign
subsidiaries, extend the facility maturity date to September 2006 and reduce capacity from $270 million to
$205 million. In October 2003, the facility capacity was increased to $225 million. The facility bears interest,
at the Company's option, at a rate equal to either (a) the greater of the bank's prime rate or the federal fund's
rate plus 0.5% or (b) the London Interbank OÅered Rate plus a margin equal to 1.0% to 2.5%, depending
upon the ratio of total funded debt-to-earnings before interest, taxes, depreciation and amortization
(""EBITDA'') as deÑned in the facility. The Company pays a facility fee, depending upon the ratio of total
funded debt to EBITDA, equal to 0.25% to 0.50% of the capacity. The facility includes restrictive covenants
that limit the Company's ability to incur additional indebtedness, encumber its assets, sell its assets, or pay
dividends. There are no required payments prior to the expiration of the facility. The Company's facility and
promissory notes are secured by the stock of the Company's major subsidiaries. The facility requires that LII
annually and quarterly deliver Ñnancial statements, as well as compliance certiÑcates, to the banks within a
speciÑed period of time. As a result of the delay in Ñling of LII's Annual Report on Form 10-K for the year
ended December 31, 2003 and Quarterly Reports on Forms 10-Q for the quarters ended March 31, 2004 and
June 30, 2004, LII requested and received waivers from its banks through December 31, 2004, of any breach
due to a delay in the delivery of its annual and quarterly Ñnancial statements, as well as compliance
certiÑcates. Upon Ñling this Annual Report on Form 10-K and LII's Quarterly Reports on Form 10-Q for the
quarters ended March 31, 2004, and June 30, 2004 with the SEC and by delivering a copy of these Ñlings to
the Administrative Agent under the facility, LII will comply with the terms of the facility.

eÅective and usable for the oÅer and sale of the Notes. The delay in Ñling of LII's Annual Report on
Form 10-K caused a default on April 29, 2004 under the Registration Rights Agreements (the ""Default
Date'') since the registration statement ceased to be eÅective through May 8, 2004 (a ""Registration
Default''). Upon a Registration Default, LII became contractually obligated to pay an additional 0.25% per
annum interest (""Liquidated Damages'') from the Default Date until the second anniversary of the issuance
of the Notes. As of May 8, 2004, LII was no longer in default with no further Liquidated Damages required.
LII paid approximately $32,000 in Liquidated Damages on June 1, 2004.

Summarized below are LII's long-term payment obligations (amounts shown in million):

Long-term debt and capital leases ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Operating leases ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Purchase obligations ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

Total

$358.7
170.7
20.1

Total contractual obligationsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

$549.5

$21.4
43.7
20.1

$85.2

Payments Due by Period
2-3
4-5
Years
Years

1 Year
or Less

$ 85.6
50.2
Ì

$72.6
23.7
Ì

After
5 Years

$179.1
53.1
Ì

$135.8

$96.3

$232.2

Purchase obligations consist of copper and aluminum commitments. The above table does not include
retirement and postretirement liabilities because it is not certain when these liabilities will become due. See
Note 12 of the Notes to the Company's Consolidated Financial Statements for additional information.

LII, in addition to the revolving and term loans described above, utilizes two other types of Ñnancing in

the course of funding its operations:

Trade accounts receivable are sold on a non-recourse basis to third parties. The sales are reported as
a reduction of the asset ""Accounts and notes receivable, net'' in the Consolidated Balance Sheets. As of
December 31, 2003 and December 31, 2002, LII had sold zero and $99.0 million, respectively, of such
accounts receivable. The receivables are sold at a discount from face value, and this discount aggregated
$2.9 million in 2003 and $4.3 million in 2002. The discount expense is shown as a component of selling,
general and administrative expense in the Consolidated Statements of Operations.

LII also leases real estate and machinery and equipment pursuant to leases, that properly are not
capitalized on the balance sheet under Generally Accepted Accounting Principles (""GAAP''), including
high-turnover equipment such as autos and service vehicles and short-lived equipment such as personal
computers. These operating leases generated rent expense of approximately $59.7 million, $71.4 million
and $69.9 million in the years 2003, 2002 and 2001, respectively.

LII's domestic revolving and term loans contain certain Ñnancial covenant restrictions. As of Decem-
ber 31, 2003, LII was in compliance with all covenant requirements and LII believes that cash Öow from
operations, as well as available borrowings under its revolving credit facility and other sources of funding will
be suÇcient to fund its operations for the foreseeable future. LII is currently reviewing its capital structure,
and this review may include modifying current sources of capital or obtaining alternative sources of capital
with a goal of providing additional Ñnancial Öexibility to LII.

Market Risk

LII's results of operations can be aÅected by changes in exchange rates. Net sales and expenses in
currencies other than the United States dollar are translated into United States dollars for Ñnancial reporting
purposes based on the average exchange rate for the period. During 2003, 2002 and 2001, net sales from
outside the United States represented 24.0%, 22.1% and 21.4%, respectively, of total net sales. Historically,
foreign currency transaction gains (losses) have not had a material eÅect on LII's overall operations. The
impact of a 10% change in exchange rates on income from operations is estimated to be approximately
$3.0 million.

The Company's results of operations can be aÅected by changes in interest rates due to variable rates of
interest on the revolving credit facilities. A 10% change in interest rates would not be material to the
Company's results of operations.

The Company enters into commodity futures contracts to stabilize prices expected to be paid for raw
materials and parts containing high copper and aluminum content. These contracts are for quantities equal to,
or less than, quantities expected to be consumed in future production. As of December 31, 2003, LII was
committed for 13.4 million pounds of aluminum and 12.0 million pounds of copper under such arrangements.
The net fair value of these contracts was an asset of $2.3 million as of December 31, 2003. Accordingly, the
Company has recorded an unrealized gain of $1.4 million, net of tax provision of $0.9 million, in the
Accumulated Other Comprehensive Loss component of stockholders' equity. The impact of a 10% change in
commodity prices on the Company results from operations is estimated to be approximately $16.0 million,
absent any other contravening actions.

InÖation

Historically, inÖation has not had a material eÅect on LII's results of operations.

Critical Accounting Policies

The preparation of Ñnancial statements requires the use of judgments and estimates. The critical
accounting policies are described below to provide a better understanding of how the Company develops its
judgments about future events and related estimations and how they can impact the Ñnancial statements. A
critical accounting policy is one that requires the most diÇcult, subjective or complex estimates and
assessments and is fundamental to the results of operations. The Company identiÑed the most critical
accounting policies to be:

‚ Estimation of warranty liabilities;

‚ Valuation of goodwill and intangible assets;

‚ Adequacy of allowance for doubtful accounts;

‚ Pension and Postretirement beneÑt projections; and

‚ Estimates of self-insured risks.

This discussion and analysis should be read in conjunction with the consolidated Ñnancial statements and

related notes beginning on page 33.

Product Warranties

A liability for estimated warranty expense is established by a charge against operations at the time the
products are sold. The subsequent costs incurred for warranty claims serve to reduce the product warranty
liability. The Company recorded warranty expense of $25.4 million, $25.9 million and $27.2 million for the
years ended December 31, 2003, 2002 and 2001, respectively.

The Company's estimate of future warranty costs is determined for each product line. The number of
units that are expected to be repaired or replaced is determined by applying the estimated failure rate, which is
generally based on historical experience, to the number of units that have been sold and are still under
warranty. The estimated units to be repaired under warranty are multiplied by the average cost (undis-
counted) to repair or replace such products to determine the Company's estimated future warranty cost. The
Company's estimated future warranty cost is subject to adjustment from time to time depending on changes in
actual failure rate and cost experience.

Total liabilities for estimated warranty expense are $67.3 million and $63.6 million as of December 31,
2003 and 2002, respectively, and are included in the following captions on the accompanying Consolidated
Balance Sheets (in millions):

Accrued expenses ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Other liabilities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

December 31,

2003

$28.1
39.2

$67.3

Restated
2002

$25.9
37.7

$63.6

The changes in the carrying amount of the Company's total warranty liabilities for the years ended

December 31, 2003 and 2002 are as follows (in millions):

Total warranty liability at December 31, 2001 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Payments made in 2002 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Changes resulting from issuance of new warranties (restated) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

Total warranty liability at December 31, 2002 (restated) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Payments made in 2003 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Changes resulting from issuance of new warranties ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

$ 61.9

(24.2)
25.9

$ 63.6
(21.7)
25.4

Total warranty liability at December 31, 2003 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

$ 67.3

The change in warranty liability that resulted from changes in estimates of warranties issued is not

signiÑcant.

Goodwill and Other Intangible Assets

Goodwill and intangible assets acquired in a purchase business combination and determined to have an
indeÑnite useful life are not amortized, but instead tested for impairment at least annually in accordance with
the provisions of SFAS No. 142 as of January 1, 2002. SFAS No. 142 also requires that intangible assets with
estimable useful lives be amortized over their respective estimated useful lives to their estimated residual
values, and reviewed for impairment in accordance with Statement of Financial Accounting Standards
No. 144, ""Accounting for Impairment or Disposal of Long-Lived Assets.''

In connection with SFAS No. 142's transitional goodwill impairment evaluation, the statement required
the Company to perform an assessment of whether there was an indication that goodwill was impaired as of
the date of adoption. To accomplish this, the Company was required to identify its reporting units and
determine the carrying value of each reporting unit by assigning the assets and liabilities, including the existing
goodwill and intangible assets, to those reporting units as of January 1, 2002. To the extent the carrying
amount of a reporting unit exceeded the fair value of the reporting unit, the Company would be required to
perform the second step of the transitional impairment test, as this is an indication that the reporting unit
goodwill may be impaired. The second step was required for certain reporting units within the Residential
Heating & Cooling, Service Experts and Heat Transfer reporting segments where the results of various
business operations acquired during 1998 to 2000 were lower than expected. In the second step, the Company
compared the implied fair value of the reporting units goodwill with the carrying amount of the reporting unit
goodwill, both of which were measured as of the date of adoption. The implied fair value of goodwill was
determined by allocating the fair value of the reporting unit to all of the assets (recognized and unrecognized)
and liabilities of the reporting unit in a manner similar to a purchase price allocation, in accordance with
Statement of Financial Accounting Standards No. 141, ""Business Combinations.'' The residual fair value after
this allocation was the implied fair value of the reporting units' goodwill and was less than the carrying amount
of these reporting units' goodwill by $283.7 million. Accordingly, the Company recorded a $283.7 million
($247.9 million, net of tax) impairment charge upon adoption.

The goodwill impairment evaluation described above requires management to make long-range forecasts,
determine the weighted average cost of capital and estimate the fair value of assets (both recognized and
unrecognized) for the various reporting units. These forecasts and related factors are subject to various risks
and uncertainties described within this document. To the extent these forecasts do not materialize and are
adjusted downward in later periods, additional impairments may be required.

During the Ñrst quarter of 2003, the Company performed its annual goodwill impairment test and

determined that no further goodwill impairment charge was necessary.

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 by management based on historical and other
factors that aÅect collectibility. Such factors include the historical trends of write-oÅs and recovery of
previously written-oÅ accounts, the Ñnancial strength of the customer and projected economic and market
conditions. The evaluation of these factors involves complex, subjective judgments. Thus, changes in these
factors or changes in economic circumstances may signiÑcantly impact the consolidated Ñnancial statements.

Pensions and Postretirement BeneÑts

The Company has domestic and foreign pension plans covering essentially all employees. The Company
also maintains an unfunded postretirement beneÑt plan, which provides certain medical and life insurance
beneÑts to eligible employees. The pension plans are accounted for under provisions of SFAS No. 87,
""Employers' Accounting for Pensions.'' The postretirement beneÑt plan is accounted for under the provisions
of SFAS No. 106, ""Employers' Accounting for Postretirement BeneÑts Other than Pensions.'' In December
2003, the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (""the Act'') was signed
into law. The Act introduces a prescription drug beneÑt under Medicare (Medicare Part D) as well as a
federal subsidy to sponsors of retiree health care beneÑt plans that provide a beneÑt that is at least actuarially
equivalent to Medicare Part D. In January 2004, Financial Accounting Standards Board StaÅ Position
No. FAS 106-1, ""Accounting and Disclosure Requirements Related to the Medicare Prescription Drug,
Improvement and Modernization Act of 2003,'' was issued and it permits a sponsor of a postretirement health
care plan that provides a prescription drug beneÑt to make a one-time election to defer accounting for the
eÅects of the Act. The Company has elected to make this deferral, as the speciÑc authoritative guidance on
the accounting for the federal subsidy is pending. Therefore, the accumulated postretirement beneÑt obligation
and net postretirement beneÑt costs in the Ñnancial statements and footnote do not reÖect the eÅects of the
Act on the plan.

The beneÑt plan assets and liabilities included in the Company's Ñnancial statements and associated notes
reÖect management's assessment as to the long-range performance of its beneÑt plans. These assumptions are
listed below:

Pension BeneÑts
2002
2003

Other BeneÑts

2003

2002

Weighted-average assumptions as of December 31:

Discount rate ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Expected return on plan assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

6.00%
8.75

6.75%
9.50

6.00%
Ì

6.75%
Ì

To develop the expected long-term rate of return on assets assumption, the Company considered the
historical returns and the future expectations for returns for each asset class, as well as the target asset
allocation of the pension portfolio and the eÅect 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 8.75% long-
term rate of return on assets assumption.

Self-Insurance Expense

The Company self-insures for Worker's Compensation, Product Liability, General Liability, Auto
Liability and Physical Damage. On January 1, 2002, a captive insurance company was formed for all the above
risks subsequent to that date.

The Company utilizes the services of a third party actuary to assist in the determination of its self-
insurance expense and liabilities. The expense and liabilities were determined based on historical company
claims information, as well as industry factors and trends in the level of such claims and payments.

The Company's self-insurance reserves, calculated on an undiscounted basis, as of December 31, 2003,
represent the best estimate of the future payments to be made on losses reported and unreported for 2003 and
prior years. The majority of the Company's self-insured risks (excluding Auto and Physical Liability) have
relatively long payout patterns. The Company's accounting policy is not to discount its self-insurance reserves.
The Company maintains safety and manufacturing programs that are designed to improve the safety and
eÅectiveness of its business processes, and as a result reduce the level and severity of its various self-insurance
risks.

The Company's reserves for self-insurance risks total $51.8 million and $48.2 million at December 31,
2003 and 2002, respectively. Actual payments for claims reserved at December 31, 2003 may vary depending
on various factors including the development and ultimate settlement of reported and unreported claims.

Recent Accounting Pronouncement

EITF Issue 04-8, ""The EÅect of Contingently Convertible Debt on Diluted Earnings per Share,''
(""EITF 04-8'') was Ñnalized at the end of September 2004 and becomes eÅective for the Company for all
periods ending after December 15, 2004. EITF 04-8 will be applied by retrospectively restating previously
reported earnings per share (""EPS''). EITF 04-8 will require that contingently convertible debt securities with
a market price trigger should be included in diluted EPS, regardless of whether the market price trigger has
been met. Contingently convertible debt securities are generally convertible into common shares of the issuer
after the price of the common stock has exceeded a predetermined threshold for a speciÑc time period.

On May 8, 2002, the Company issued $143.8 million of 6.25% convertible subordinated notes (""Notes'').
Each $1,000 Note is convertible into 55.29 shares of common stock. Redemption can occur at the Company's
option beginning in June 2005 if the market price of the Company's Common Stock has exceeded $23.52
during speciÑed periods and at the option of the Note holders if the market price of the Company's Common
Stock has exceeded $19.90 during speciÑed periods or if the market price of the Notes is less than 95% of the
market price of the stock multiplied by 55.29. Upon adoption of EITF 04-8, the Company will include
7.9 million shares of common stock and exclude the corresponding interest expense and amortization of
deferred Ñnancing costs associated with the Notes in its diluted EPS computations.

The following table compares the diluted EPS computations before and after the adoption of EITF 04-8

(in millions, except per share data):

2003 Before
Adoption

Years Ended December 31,
2002 Before
2003 After
Adoption
Adoption

2002 After
Adoption

$84.4

$(205.0)

Net income (loss) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Add: after-tax interest expense and amortization
of deferred Ñnancing costs on Notes ÏÏÏÏÏÏÏÏ

Net income (loss) as adjusted ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

$84.4

Weighted average shares outstandingÏÏÏÏÏÏÏÏÏÏ
EÅect of diluted securities attributable to stock
options, performance share awards and Notes

58.4

2.0

Weighted average shares outstanding, as

adjusted ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

60.4

Diluted earnings (loss) per share ÏÏÏÏÏÏÏÏÏÏÏÏÏ

$1.40

6.3

$90.7

58.4

9.9

68.3

$1.33

4.1

$(205.0)

$(200.9)

57.3

1.6

58.9

57.3

6.8

64.1

$ (3.48)

$ (3.14)

EITF 04-8 will have no impact on the years presented prior to 2002 as the Notes were issued on May 8, 2002.

Subsequent Events

Service Experts Turnaround Plan

In April 2004, the Company announced the speciÑcs of a turnaround plan designed to improve the
performance of its Service Experts business segment. The plan realigns Service Experts' dealer service centers
to focus on service and replacement opportunities in the residential and light commercial markets.

The Company identiÑed 130 dealer service centers, whose primary business is residential and light
commercial service and replacement, which comprise the ongoing Service Experts business segment. LII
intends to divest the remaining 47 centers, in addition to the previously announced closure of four centers. The
47 centers that are no longer a part of Service Experts are organized under a new entity and will be classiÑed
as a discontinued business and managed separately.

As of September 30, 2004, 28 of the 47 centers identiÑed for divestiture have been sold and the Company
anticipates the remaining centers will be divested by the end of 2004. Cash proceeds from the sale of these
centers and related tax eÅects are expected to more than oÅset the cash expenses of divestiture.

Service Experts Goodwill Impairment

Pursuant to Statement of Financial Accounting Standards No. 142, ""Goodwill and Other Intangible
Assets,'' LII is required, at least annually, to review the carrying value of goodwill on its books, which at
December 31, 2003 amounted to $447.3 million. LII completed this review in the Ñrst quarter of 2004 and
took a goodwill impairment charge of $221.6 million ($196.9 million, net of tax) associated with its Service
Experts unit. Fair value of the reporting unit was determined consistent with the method described in Note 2.
This impairment will be recorded in operating expenses on the consolidated statement of operations in 2004.

Pre-payment of Long-term Debt

In June 2004, LII made a pre-payment on its long-term debt of $35 million. The long-term debt was
scheduled to have been repaid in the third quarter of 2005. The pre-payment make-whole amount associated
with the debt was $1.9 million.

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

The information required by this item is included under Item 7 above.

Item 8. Financial Statements and Supplementary Data

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Stockholders and Board of Directors of

Lennox International Inc.:

We have audited the consolidated balance sheets of Lennox International Inc. and subsidiaries as of
December 31, 2003 and 2002, and the related consolidated statements of operations, stockholders' equity and
cash Öows for the years then ended. These consolidated Ñnancial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these Ñnancial statements based on our
audits. The consolidated Ñnancial statements of Lennox International Inc., for the year ended December 31,
2001, were audited by other auditors who have ceased operations. Those auditors expressed an unqualiÑed
opinion on those Ñnancial statements and Ñnancial statement schedule, before the revision described in Note 2
(under the heading ""Goodwill and Other Intangible Assets'') to the consolidated Ñnancial statements, in their
report dated February 6, 2002.

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 audit to obtain reasonable
assurance about whether the Ñnancial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in the Ñnancial statements. An
audit also includes assessing the accounting principles used and signiÑcant estimates made by management, as
well as evaluating the overall Ñnancial statement presentation. We believe that our audits provide a reasonable
basis for our opinion.

In our opinion, the consolidated Ñnancial statements referred to above present fairly, in all material
respects, the Ñnancial position of Lennox International Inc. and subsidiaries as of December 31, 2003 and
2002, and the results of its operations and its cash Öows for the years then ended in conformity with accounting
principles generally accepted in the United States of America. Also in our opinion, Schedule II Ì Valuation
and Qualifying Accounts and Reserves for the years ended December 31, 2003 and 2002, when considered in
relation to the basic Ñnancial statements taken as a whole, presents fairly, in all material respects, the
information set forth.

As discussed in Note 3 to the consolidated Ñnancial statements, Lennox International Inc. and
subsidiaries has restated its consolidated balance sheet as of December 31, 2002, and the related consolidated
statements of operations, stockholders' equity, and cash Öows for the year then ended.

As discussed in Note 2 (under the heading ""Goodwill and Other Intangible Assets'') to the consolidated
Ñnancial statements, the Company changed its method of accounting for goodwill and other intangible assets
in 2002 to conform to Statement of Financial Accounting Standard (SFAS) No. 142, Goodwill and Other
Intangible Assets.

As discussed above, the consolidated Ñnancial statements and Ñnancial statement schedule of Lennox
International Inc. for the year ended December 31, 2001 were audited by other auditors who have ceased
operations. As described in Note 2, these Ñnancial statements have been revised to include the transitional
disclosures required by SFAS No. 142, Goodwill and Other Intangible Assets, which were adopted by the
Company as of January 1, 2002. In our opinion, the disclosures for 2001 in Note 2 are appropriate. However,
we were not engaged to audit, review, or apply any procedures to the 2001 consolidated Ñnancial statements of
Lennox International Inc. other than with respect to such disclosures and, accordingly, we do not express an
opinion or any other form of assurance on the 2001 consolidated Ñnancial statements taken as a whole.

Dallas, Texas
October 5, 2004

KPMG LLP

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To the Stockholders and Board of Directors of

Lennox International Inc.:

We have audited the accompanying Consolidated Balance Sheets of Lennox International Inc. (a
Delaware corporation) and Subsidiaries as of December 31, 2001 and 2000 and the related consolidated
statements of income, stockholders' equity and cash Öows for each of the three years in the period ended
December 31, 2001. These Ñnancial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these Ñnancial statements based on our audits.

We conducted our audits in accordance with auditing standards generally accepted in the United States.
Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the
Ñnancial statements are free of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the Ñnancial statements. An audit also includes assessing the
accounting principles used and signiÑcant estimates made by management, as well as evaluating the overall
Ñnancial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the Ñnancial statements referred to above present fairly, in all material respects, the
Ñnancial position of Lennox International Inc. and Subsidiaries as of December 31, 2001 and 2000 and the
results of their operations and their cash Öows for each of the three years in the period ended December 31,
2001, in conformity with accounting principles generally accepted in the United States.

Dallas, Texas,
February 6, 2002

ARTHUR ANDERSEN LLP(1)

(1) This report is a copy of the previously issued report covering Ñscal years 2001 and 2000. The predecessor
auditors have not reissued their report. The consolidated Ñnancial statements as of December 31, 2001 and
for each of the years in the two-year period then ended have been revised to include the transitional
disclosures required by Statement of Financial Accounting Standard No. 142, Goodwill and Other
Intangible Assets (see Note 2 under the heading ""Goodwill and Other Intangible Assets''). The report of
Arthur Andersen LLP presented above does not extend to these changes.

LENNOX INTERNATIONAL INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
As of December 31, 2003 and 2002
(In millions, except share data)

ASSETS

CURRENT ASSETS:

Cash and cash equivalents ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Accounts and notes receivable, net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Inventories ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Deferred income taxesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Other assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

Total current assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
PROPERTY, PLANT AND EQUIPMENT, netÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
GOODWILL, net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
DEFERRED INCOME TAXES ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
OTHER ASSETS ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

As of December 31,

2003

Restated
2002

76.1
463.4
226.6
33.4
46.0

845.5
234.6
447.3
59.8
139.4

74.4
304.6
214.6
34.0
37.5

665.1
231.4
420.7
74.5
115.9

TOTAL ASSETS ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

$1,726.6

$1,507.6

CURRENT LIABILITIES:

LIABILITIES AND STOCKHOLDERS' EQUITY

Short-term debt ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Current maturities of long-term debtÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Accounts payable ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Accrued expensesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Income taxes payable ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

Total current liabilities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
LONG-TERM DEBTÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
POSTRETIREMENT BENEFITS, OTHER THAN PENSIONSÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
PENSIONS ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
OTHER LIABILITIES ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

3.6
21.4
262.9
292.1
35.3

615.3
337.3
13.8
94.1
81.9

9.3
13.9
250.7
257.1
12.6

543.6
356.7
13.5
85.4
78.1

Total liabilities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

1,142.4

1,077.3

COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:

Preferred stock, $.01 par value, 25,000,000 shares authorized, no shares

issued or outstanding ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

Common stock, $.01 par value, 200,000,000 shares authorized,

64,247,203 shares and 62,922,308 (restated) shares issued for 2003 and 2002,
respectively ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Additional paid-in capital ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Retained earningsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Accumulated other comprehensive lossÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Deferred compensation ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Treasury stock, at cost, 3,043,916 shares and 3,009,656 shares for 2003 and 2002

respectively ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

Total stockholders' equity ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

0.6
420.4
218.9

(6.4)
(18.2)

(31.1)

584.2

0.6
403.4
156.7
(78.5)
(21.2)

(30.7)

430.3

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITYÏÏÏÏÏÏÏÏÏÏÏ

$1,726.6

$1,507.6

The accompanying notes are an integral part of these consolidated Ñnancial statements.

LENNOX INTERNATIONAL INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended December 31, 2003, 2002 and 2001
(In millions, except per share data)

For the Years Ended December 31,
Restated
2002

2003

2001

NET SALES ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
COST OF GOODS SOLD ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

$3,085.1
2,067.9

$3,024.6
2,077.6

$3,113.6
2,199.2

Gross proÑt ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

1,017.2

947.0

914.4

OPERATING EXPENSES:

Selling, general and administrative expense ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
RestructuringsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
(Gains) Losses and other expenses ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

Income (loss) from operations ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
INTEREST EXPENSE, net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
OTHER (INCOME) EXPENSE ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

Income (loss) before income taxes and cumulative eÅect of

accounting change ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
PROVISION FOR (BENEFIT FROM) INCOME TAXES ÏÏÏÏÏÏÏÏÏ

Income (loss) before cumulative eÅect of accounting change ÏÏÏÏÏÏÏÏ

CUMULATIVE EFFECT OF ACCOUNTING CHANGE ÏÏÏÏÏÏÏÏÏÏ

859.6
Ì
1.9

155.7
28.5
(2.5)

129.7
45.3

84.4

839.0
7.8
(7.9)

108.1
31.8
(0.8)

77.1
34.2

42.9

247.9

849.7
65.4
Ì

(0.7)
43.1
0.6

(44.4)
(2.0)

(42.4)

Net income (loss) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

84.4

$ (205.0)

$ (42.4)

INCOME (LOSS) PER SHARE BEFORE CUMULATIVE

EFFECT OF ACCOUNTING CHANGE:
Basic ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Diluted ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

CUMULATIVE EFFECT OF ACCOUNTING CHANGE

PER SHARE:
Basic ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Diluted ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

NET INCOME (LOSS) PER SHARE:

$
$

1.45
1.40

$
$

0.75
0.73

$ (0.75)
$ (0.75)

$
Ì $ (4.33)
$ Ì $ (4.21)

$
$

Ì
Ì

Basic ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Diluted ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

$
$

1.45
1.40

$ (3.58)
$ (3.48)

$ (0.75)
$ (0.75)

The accompanying notes are an integral part of these consolidated Ñnancial statements.

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LENNOX INTERNATIONAL INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 2003, 2002 and 2001
(In millions)

For the Years Ended December 31,
Restated
2002

2003

2001

CASH FLOWS FROM OPERATING ACTIVITIES:

Net income (loss) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

84.4

$(205.0)

$ (42.4)

Adjustments to reconcile net income (loss) to net cash used in

operating activities:
Minority interest and equity in unconsolidated aÇliates ÏÏÏÏÏÏÏÏÏÏ
Non-cash cumulative eÅect of accounting change ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Depreciation and amortizationÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Non-cash restructuring charges ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Deferred income taxes ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Other (gains) losses and expenses ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

Changes in assets and liabilities, net of eÅects of acquisitions and

divestitures Ì

(3.2)
Ì
48.7
Ì
5.0
12.9

Accounts and notes receivableÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Inventories ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Other current assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Accounts payable ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Accrued expenses ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Income taxes payable and receivable ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Long-term warranty, deferred income and other liabilities ÏÏÏÏÏÏÏÏ
Net cash provided by operating activitiesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

(141.8)
0.9
(5.7)
(5.0)
21.7
23.8
15.0
56.7

CASH FLOWS FROM INVESTING ACTIVITIES:

Proceeds from the disposal of property, plant and equipment ÏÏÏÏÏÏÏÏÏÏ
Purchases of property, plant and equipment ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Proceeds from disposal of businesses and investments ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Acquisitions, net of cash acquiredÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Net cash (used in) provided by investing activities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

CASH FLOWS FROM FINANCING ACTIVITIES:

Repayments of short-term borrowings ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Repayments of long-term debt ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Revolving long-term borrowings ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Proceeds from issuance of long-term debt ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Sales of common stockÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Repurchases of common stock ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Payments of deferred Ñnance costs ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Cash dividends paid ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Net cash used in Ñnancing activities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
EFFECT OF EXCHANGE RATES ON CASH AND CASH

EQUIVALENTS ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
CASH AND CASH EQUIVALENTS, beginning of yearÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
CASH AND CASH EQUIVALENTS, end of year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

10.6
(41.2)
8.9
(0.7)
(22.4)

(6.8)
(15.4)
3.0
Ì
12.5
(0.4)
(2.7)
(22.1)
(31.9)
2.4

(0.7)
74.4
76.1

Supplementary disclosures of cash Öow information:

Cash paid during the year for:

Interest ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

$ 30.1

Income taxes (net of refunds) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

9.1

(2.7)

247.9
56.7
1.5
(9.8)
(3.5)

(41.4)
52.1
24.9
22.6
10.9
5.6
8.2
168.0

4.2
(23.1)
55.8
(4.7)
32.2

0.1
Ì
82.5
7.8
(7.7)
(0.6)

87.8
62.2
(16.3)
(13.0)
56.2
(7.0)
2.4
212.0

5.8
(17.4)
Ì
(21.3)
(32.9)

(16.3)
(57.0)
(212.7)
143.8
10.0
(0.3)
(5.9)
(21.7)
(160.1)
40.1

(6.1)
(28.5)
(132.6)
Ì
3.9
(0.2)
Ì
(21.3)
(184.8)
(5.7)

(0.1)
34.4
74.4

(0.5)
40.6
$ 34.4

32.1

17.3

$ 48.7

11.4

The accompanying notes are an integral part of these consolidated Ñnancial statements.

LENNOX INTERNATIONAL INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 2003, 2002 and 2001

1. Nature of Operations:

Lennox International Inc., a Delaware corporation, and subsidiaries (the ""Company'' or ""LII''), is a
global designer, manufacturer and marketer of a broad range of products for the heating, ventilation, air
conditioning and refrigeration (""HVACR'') markets. The Company participates in four reportable business
segments of the HVACR industry. The Ñrst reportable segment is Residential Heating & Cooling, in which
LII manufactures and markets a full line of heating, air conditioning and Hearth Products for the residential
replacement and new construction markets in the United States and Canada. The second reportable segment
is Commercial Heating & Cooling, in which LII manufactures and sells rooftop products and related
equipment for commercial applications. Combined, the Residential Heating & Cooling and Commercial
Heating & Cooling reportable business segments form LII's heating and cooling business. The third reportable
segment is Service Experts, which includes sales and installation of, and maintenance and repair services for
HVAC equipment by LII-owned service centers in the United States and Canada. The fourth reportable
segment is Refrigeration, which consists of the manufacture and sale of unit coolers, condensing units and
other commercial refrigeration products. Prior to August 2002, the Company operated a Heat Transfer
segment that manufactured and sold evaporator and condenser coils, copper tubing and related manufacturing
equipment to original equipment manufacturers and other specialty purchasers on a global basis. In August
2002, the Company formed joint ventures with Outokumpu Oyj (""Outokumpu'') of Finland by selling to
Outokumpu a 55% interest in the Company's heat transfer businesses for approximately $55 million in cash
and notes. The Company accounts for its remaining 45% interest using the equity method of accounting and
includes such amounts in the ""Corporate and other "" segment. See Note 4 for Ñnancial information regarding
the Company's reportable segments.

The Company sells its products and services to numerous types of customers, including distributors,

installing dealers, homeowners, national accounts and original equipment manufacturers.

2. Summary of SigniÑcant Accounting Policies:

Principles of Consolidation

The consolidated Ñnancial statements include the accounts of Lennox International Inc. and its majority-

owned subsidiaries. All intercompany transactions and balances have been eliminated.

Cash and Cash Equivalents

The Company considers all highly liquid temporary investments with original maturity dates of three
months or less to be cash equivalents. Cash and cash equivalents of $76.1 million and $74.4 million at
December 31, 2003 and 2002, respectively, consisted of cash and overnight repurchase agreements and of
investment grade securities and are stated at cost, which approximates fair value. The Company earned
interest income of $3.5 million, $2.0 million and $1.9 million for the years ended December 31, 2003, 2002 and
2001, respectively, which is included in interest expense, net in the accompanying Consolidated Statements of
Operations.

As of December 31, 2003 and 2002, $28.6 million and $27.6 million, respectively, of cash and cash

equivalents were restricted due to outstanding letters of credit.

Accounts and Notes Receivable

Accounts and notes receivable have been shown net of an allowance for doubtful accounts of
$19.2 million and $23.8 million, and net of accounts receivable sold under an ongoing asset securitization
arrangement of zero and $99.0 million as of December 31, 2003 and 2002, respectively. In addition,
approximately $224.4 million and $106.2 million of accounts receivable as reported in the accompanying

LENNOX INTERNATIONAL INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)

Consolidated Balance Sheets at December 31, 2003 and 2002, respectively, represent retained interests in
securitized receivables that have restricted disposition rights per the terms of the asset securitization
agreement and would not be available to satisfy obligations to creditors in the event of bankruptcy or
receivership of LII or its subsidiaries. The Company has no signiÑcant credit risk concentration among its
diversiÑed customer base. The reduction in doubtful accounts from December 31, 2002 is primarily due to
speciÑc customer receivables of $4.1 million that were reserved at December 31, 2002 and were written oÅ in
2003.

Inventories

Inventory costs include material, labor, depreciation and plant overhead. Inventories of $93.3 million and
$91.8 million in 2003 and 2002, respectively, are valued at the lower of cost or market using the last-in, Ñrst-
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 Ñrst-in, Ñrst-out (FIFO) basis or average cost.

Property, Plant and Equipment

Property, plant and equipment are stated at cost, net of accumulated depreciation. Expenditures for
renewals and betterments 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 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Machinery and equipment ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

10 to 39 years
3 to 10 years

Investments in AÇliates

Investments in aÇliates in which the Company does not exercise control and has a 20% or more voting
interest are accounted for using the equity method of accounting. The Company's marketable equity security
investment is classiÑed as available-for-sale and is carried at fair value as a component of non-current assets
with unrealized gains and losses, net of the related tax eÅect, reported as accumulated other comprehensive
income.

Investments in aÇliated companies accounted for under the equity method consist of 45% common stock
ownership interest in Outokumpu Heatcraft, a joint venture engaged in the manufacture and sale of heat
transfer components, primarily coils; a 24.5% common stock ownership interest in Alliance, a joint venture
engaged in the manufacture and sale of compressors; and a 50% common stock ownership in Frigus-Bohn, a
Mexican joint venture that produces unit coolers and condensing units. The Company also owns an 18%
interest in the marketable equity securities of Kulthorn Kirby Public Company Limited, a Thailand company
engaged in the manufacture of compressors for refrigeration applications. On December 31, 2003, the
Company had $12.2 million of net unrealized gain associated with its investment in Kulthorn Kirby Public
Company Limited as part of accumulated other comprehensive income. The Company has recorded
$4.8 million, $3.0 million and zero of equity in the earnings (losses) of these aÇliates for the years ended
December 31, 2003, 2002 and 2001, respectively, and has included these amounts in SG&A in the
accompanying Consolidated Statements of Operations. The carrying amount of investments in aÇliates,
including Kulthorn Kirby Public Company Limited, as of December 31, 2003 and 2002 is $64.4 million and
$39.8 million, respectively.

Goodwill and Other Intangible Assets

Goodwill represents the excess of cost over fair value of assets of businesses acquired. The Company
adopted the provisions of Statement of Financial Accounting Standards No. 142, ""Goodwill and Other
Intangible Assets,'' (""SFAS No. 142'') as of January 1, 2002. Goodwill and intangible assets acquired in a

LENNOX INTERNATIONAL INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)

purchase business combination and determined to have an indeÑnite useful life are not amortized, but instead
tested for impairment at least annually in accordance with the provisions of SFAS No. 142. SFAS No. 142
also requires that intangible assets with estimable useful lives be amortized over their respective estimated
useful lives to their estimated residual values, and reviewed for impairment in accordance with Statement of
Financial Accounting Standards No. 144, ""Accounting for Impairment or Disposal of Long-Lived Assets.''

In connection with SFAS No. 142's transitional goodwill impairment evaluation, the Statement required
the Company to perform an assessment of whether there was an indication that goodwill is impaired as of the
date of adoption. To accomplish this, the Company was required to identify its reporting units and determine
the carrying value of each reporting unit by assigning the assets and liabilities, including the existing goodwill
and intangible assets, to those reporting units as of January 1, 2002. To the extent the carrying amount of a
reporting unit exceeded the fair value of the reporting unit, the Company would be required to perform the
second step of the transitional impairment test, as this is an indication that the reporting unit goodwill may be
impaired. The second step was required for certain reporting units within the Residential Heating & Cooling,
Service Experts and Heat Transfer reporting segments where the results of various business operations
acquired during 1998 to 2000 were lower than expected. In the second step, the Company compared the
implied fair value of the reporting units' goodwill with the carrying amount of the reporting units' goodwill,
both of which were measured as of the date of adoption. The implied fair value of goodwill was determined by
allocating the fair value of the reporting unit to all of the assets (recognized and unrecognized) and liabilities
of the reporting unit in a manner similar to a purchase price allocation, in accordance with Statement of
Financial Accounting Standards No. 141, ""Business Combinations.'' The residual fair value after this
allocation was the implied fair value of the reporting units' goodwill and was less than the carrying amount of
these reporting units' goodwill by $283.7 million. Accordingly, the Company recorded a $283.7 million
($247.9 million, net of tax) impairment charge upon adoption. During the Ñrst quarter of 2003, the Company
performed its annual goodwill impairment test and determined that no goodwill impairment charge was
necessary.

The Company estimates reporting unit fair values using standard business valuation techniques such as
discounted cash Öows and reference to comparable business transactions. The discounted cash Öows fair value
estimates were based on management's projected future cash Öows and the estimated weighted average cost of
capital. The weighted average cost of capital was based on the risk-free interest rate and other factors such as
equity risk premiums and the ratio of total debt and equity capital.

The following reÖects the Company's income (loss) before the cumulative eÅect of accounting change
and income (loss) adjusted to exclude goodwill amortization for all periods presented (in millions, except per
share data):

For the Years Ended December 31,
Restated
2002

2001

2003

Income (loss) before cumulative eÅect of accounting change ÏÏÏ
Add back: goodwill amortization, net of income taxÏÏÏÏÏÏÏÏÏÏ

$84.4
Ì

42.9
Ì

$(42.4)
16.5

Adjusted income (loss) before cumulative eÅect of accounting
change ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

$84.4

42.9

$(25.9)

Basic earnings (loss) per share:

Income (loss) before cumulative eÅect of accounting change
Add back: goodwill amortization, net of income taxÏÏÏÏÏÏÏÏÏÏ

$1.45
Ì

0.75
Ì

$(0.75)
0.29

Adjusted income (loss) before cumulative eÅect of accounting
change ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

$1.45

0.75

$(0.46)

LENNOX INTERNATIONAL INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)

For the Years Ended December 31,
Restated
2002

2003

2001

Diluted earnings (loss) per share:

Income (loss) before cumulative eÅect of accounting change
Add back: goodwill amortization, net of income taxÏÏÏÏÏÏÏÏÏÏ

$1.40
Ì

0.73
Ì

$(0.75)
0.29

Adjusted income (loss) before cumulative eÅect of accounting
change ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

$1.40

0.73

$(0.46)

Reported net income (loss) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Add back: goodwill amortization, net of income taxÏÏÏÏÏÏÏÏÏÏ

$84.4
Ì

$(205.0)

$(42.4)
16.5

Adjusted net income (loss) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

$84.4

$(205.0)

$(25.9)

Basic earnings (loss) per share:

Reported net income (loss) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Add back: goodwill amortizationÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

$1.45
Ì

$ (3.58)

$(0.75)
0.29

Adjusted net income (loss) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

$1.45

$ (3.58)

$(0.46)

Diluted earnings (loss) per share:

Reported net income (loss) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Add back: goodwill amortizationÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

$1.40
Ì

$ (3.48)

$(0.75)
0.29

Adjusted net income (loss) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

$1.40

$ (3.48)

$(0.46)

Prior to the adoption of SFAS No. 142, goodwill was being amortized on a straight-line basis over periods
generally ranging from thirty to forty years and as of December 31, 2001, the accumulated amortization was
$83.3 million. In addition, the Company periodically reviewed long-lived assets and identiÑable intangibles for
impairment as events or changes in circumstances indicated that the carrying amount of such assets might not
be recoverable. In order to assess recoverability, the Company compared the estimated expected future cash
Öows (undiscounted and without interest charges) identiÑed with each long-lived asset or related asset
grouping to the carrying amount of such assets. For purposes of such comparisons, portions of goodwill were
attributed to related long-lived assets and identiÑable intangible assets based upon relative fair values of such
assets at acquisition. If the expected future cash Öows did not exceed the carrying value of the asset or assets
being reviewed, an impairment loss was recognized based on the excess of the carrying amount of the impaired
assets over their fair value. As a result of these periodic reviews, certain assets, including goodwill, of an
Australian subsidiary were adjusted in 2001.

Shipping and Handling

Shipping and handling costs are included as part of Selling, General and Administrative Expense in the

accompanying Consolidated Statements of Operations in the following amounts (in millions):

For the Years Ended December 31,
Restated
2002

2001

2003

$127.3

$122.0

$123.2

Product Warranties

A liability for estimated warranty expense is established by a charge against operations at the time
products are sold. The subsequent costs incurred for warranty claims serve to reduce the product warranty

LENNOX INTERNATIONAL INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)

liability. The Company recorded warranty expense of $25.4 million, $25.9 million and $27.2 million for the
years ended December 31, 2003, 2002 and 2001, respectively.

Accrued expenses ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Other Liabilities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

December 31,

2003

$28.1
39.2

$67.3

Restated
2002

$25.9
37.7

$63.6

The changes in the carrying amount of the Company's total warranty liabilities for the years ended

December 31, 2003 and 2002 are as follows (in millions):

$ 61.9

(24.2)
25.9

$ 63.6
(21.7)
25.4

Total warranty liability at December 31, 2003 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

$ 67.3

The change in warranty liability that results from changes in estimates of warranties issued prior to 2003

is not signiÑcant.

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 diÅerences between the Ñnancial 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 diÅerences are expected to be recovered or settled.
The eÅect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period
that includes the enactment date.

Revenue Recognition

The Company's Residential Heating & Cooling, Commercial Heating & Cooling and Refrigeration
segments recognize revenue when products are shipped to customers. The Company's Service Experts
segment recognizes sales, installation, maintenance and repair revenues at the time the services are completed.

LENNOX INTERNATIONAL INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)

The Service Experts segment also provides HVAC system design and installation services under Ñxed-price
contracts, which may extend up to one year. Revenue for these services is recognized on the percentage-of-
completion method, based on the percentage of incurred contract costs-to-date in relation to total estimated
contract costs, after giving eÅect to the most recent estimates of total cost. The eÅect 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 period in which the loss Ñrst becomes apparent. The
adoption of Emerging Issues Task Force Issues No. 00-21, ""Revenue Arrangements with Multiple Deliver-
ables,'' in June 2003 did not have a material impact on the Company's Ñnancial statements.

Stock-Based Compensation

The Company accounts for its stock-based compensation under the recognition and measurement
principles of Accounting Principles Board ""APB'' Opinion No. 25, ""Accounting for Stock Issued to
Employees,'' and related interpretations (""APB 25'') and has adopted the disclosure-only provisions of
Statement of Financial Accounting Standards No. 123 (""SFAS No. 123''), ""Accounting for Stock-Based
Compensation,'' as amended. Under APB 25, no stock-based compensation cost is reÖected in net income for
grants of stock options to employees because the Company grants stock options with an exercise price equal to
the market value of the stock on the date of grant.

The following table illustrates the pro-forma eÅect on net income and earnings per share as if the
Company had used the fair-value-based accounting method for stock compensation expense described by
SFAS No. 123 (in millions, except per share data):

For the Year Ending December 31,
Restated
2002

2003

2001

Net income (loss), as reported ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Add: Reported stock-based compensation expense, net of taxes ÏÏ
Deduct: Fair-value-based compensation expense, net of taxesÏÏÏÏ

$84.4
4.0
(9.1)

$ (205.0)

1.3
(2.9)

$(42.4)
1.1
(2.6)

Net income (loss), pro-forma ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

$79.3

$ (206.6)

$(43.9)

Earnings per share:
Basic, as reported ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Basic, pro-forma ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Diluted, as reportedÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Diluted, pro-formaÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

$1.45
$1.36
$1.40
$1.31

$ (3.58)
$ (3.60)
$ (3.48)
$ (3.51)

$(0.75)
$(0.78)
$(0.75)
$(0.78)

Research and Development

Research and development costs are expensed as incurred. The Company expended approximately
$38.0 million, $38.2 million and $37.3 million for the years ended December 31, 2003, 2002 and 2001,
respectively, for research and product development activities. Research and development costs are included in
Selling, General and Administrative Expense on the accompanying Consolidated Statements of Operations.

Advertising

The costs of advertising, promotion and marketing programs are charged to operations in the period
incurred. Expense relating to advertising, promotions and marketing programs was $76.7 million, $72.8 million
and $78.4 million for the years ended December 31, 2003, 2002 and 2001, respectively.

LENNOX INTERNATIONAL INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)

Translation of Foreign Currencies

All assets and liabilities of foreign subsidiaries and joint ventures are translated into United States dollars
using rates of exchange in eÅect at the balance sheet date. Revenues and expenses are translated at average
exchange rates during the respective years. The unrealized translation gains and losses are included in
accumulated other comprehensive income. Transaction gains (losses) included in Other (Income) Expense in
the accompanying Consolidated Statements of Operations were $4.2 million, $1.2 million and $(0.4) million
for the years ended December 31, 2003, 2002 and 2001, respectively.

Derivatives

Derivative Ñnancial instruments are recognized as either assets or liabilities in the balance sheet and are
carried at fair value. Changes in fair value of these instruments are recognized periodically in earnings or
stockholders' equity depending on the intended use of the instrument. Gains or losses arising from the changes
in the fair value of derivatives designated as fair value hedges are recognized in earnings. Gains or losses
arising from the changes in the fair value of derivatives designated as cash Öow hedges are initially reported as
a component of other comprehensive income and later classiÑed into cost of goods sold in the period in which
the hedged item also aÅects earnings. The Company hedges its exposure to the Öuctuation on the prices paid
for copper and aluminum metals by purchasing futures contracts on these metals. Gains or losses recognized
on the closing of these contracts adjust the cost of the physical deliveries of these metals. Quantities covered
by these commodity futures contracts are for less than actual quantities expected to be purchased. As of
December 31, 2003, the Company had metals futures contracts maturing at various dates to December 31,
2004, for which the fair value was an asset of $2.3 million. These are hedges of forecasted transactions, and are
considered cash Öow hedges. Accordingly, the Company has recorded an unrealized gain of $1.4 million, net
of tax provision of $0.9 million, in the Accumulated Other Comprehensive Loss component of stockholders'
equity. This deferred gain will be reclassiÑed into the cost of inventory as the commodity futures contracts
settle, all of which will happen within the next twelve months. Hedge ineÅectiveness was immaterial for 2003
and 2002.

Use of Estimates

The preparation of Ñnancial statements in conformity with generally accepted accounting principles
requires management to make estimates and assumptions that aÅect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of the Ñnancial statements and the
reported amounts of revenues and expenses during the reporting period. Actual results could diÅer from those
estimates.

ReclassiÑcations

Certain amounts have been reclassiÑed from the prior year presentation to conform to the current year

presentation.

3. Restatement of 2002 Financial Statements and Additional Information for 2003:

LENNOX INTERNATIONAL INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)

been restated to reÖect adjustments to the Company's previously reported Ñnancial information on Form 10-Q
for the quarters ended March 31, 2003; June 30, 2003; and September 30, 2003.

The Company has segregated the adjustments discussed above into the following categories:

‚ Tax entries related to the above adjustments of $0.2 million and $(0.2) million in 2003 and 2002,

respectively.

LENNOX INTERNATIONAL INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)

A discussion of the Company's detailed remedial actions is included in Item 9A ""Controls and
Procedures.'' The eÅect of restatement on LII's previously issued Ñnancial statements is presented in the table
below:

Net income (loss) as originally released/reported
Adjustments (pre-tax):

2003

$76.8

Adjustments included in 2002
2002
Pre-2001
2002
(In millions, except per share)
$(190.4)

2001

(14.1)
(1.5)

(15.6)
1.0

$(8.0)
(0.5)

$(1.1)
(0.2)

(8.5)
(0.5)

(1.3)
0.3

$(5.0)
(0.8)

(5.8)
1.2

(14.6)

$(9.0)

$(1.0)

$(4.6)

6.0
1.6

7.6

Service Experts ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Non-Service Experts ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

8.9
(2.9)

Total adjustments (pre-tax) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Tax eÅect of restatement adjustments ÏÏÏÏÏÏÏÏ

Total net adjustments ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

Net income (loss) as Ñled/restatedÏÏÏÏÏÏÏÏÏÏÏÏÏ
Per Share of Common Stock:
Net income (loss) Ì Basic as originally

released/reported ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
EÅect of net adjustments ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

Net income (loss) Ì Basic as Ñled/restated ÏÏÏÏÏ
Net income (loss) Ì Diluted as originally

released/reported ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
EÅect of net adjustments ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

$84.4

$(205.0)

$1.32
0.13

$ (3.32)
(0.26)

$1.45

$ (3.58)

$1.28
0.12

$ (3.23)
(0.25)

Net income (loss) Ì Diluted as Ñled/restated ÏÏÏ

$1.40

$ (3.48)

LENNOX INTERNATIONAL INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)

The following table sets forth the eÅects of the restatement adjustments discussed above on the

Consolidated Statement of Operations for the years ended December 31, 2003 and 2002.

2003

As Previously
Released
(Unaudited)

2002

As Filed

As Previously
Reported

As
Restated

(In millions, except share data)

NET SALES ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
COST OF GOODS SOLDÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

$3,087.3
2,064.9

$3,085.1
2,067.9

$3,025.8
2,074.1

$3,024.6
2,077.6

Gross proÑt ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

1,022.4

1,017.2

951.7

947.0

OPERATING EXPENSES:

Selling, general and administrative expenseÏÏÏÏÏÏÏÏÏ
Restructurings ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
(Gains) Losses and other expenses ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

Income from operations ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
INTEREST EXPENSE, net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
OTHER INCOME ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

Income before income taxes and cumulative eÅect
of accounting change ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
PROVISION FOR INCOME TAXES ÏÏÏÏÏÏÏÏÏÏÏÏÏ

Income before cumulative eÅect of accounting

change ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

CUMULATIVE EFFECT OF ACCOUNTING

CHANGE ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

Net income (loss) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

NET INCOME (LOSS) PER SHARE:

BasicÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Diluted ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

870.6
Ì
1.9

149.9
28.7
(2.5)

123.7
46.9

859.6
Ì
1.9

155.7
28.5
(2.5)

129.7
45.3

76.8

1.32
1.28

$
$

84.4

1.45
1.40

$
$

826.2
7.8
(7.9)

125.6
31.8
(0.9)

94.7
35.9

58.8

839.0
7.8
(7.9)

108.1
31.8
(0.8)

77.1
34.2

42.9

249.2

247.9

$ (190.4)

$ (205.0)

$ (3.32)
$ (3.23)

$ (3.58)
$ (3.48)

LENNOX INTERNATIONAL INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)

The following table sets forth the eÅects of the restatement adjustments discussed above on the

Consolidated Balance Sheets at December 31, 2003 and 2002.

2003

As Previously
Released
(Unaudited)

2002

As Filed

As Previously
Reported

As
Restated

(In millions, except share data)

ASSETS

CURRENT ASSETS:

Cash and cash equivalents ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Accounts and notes receivable, netÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Inventories ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Deferred income taxes ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Other assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

Total current assetsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
PROPERTY, PLANT AND EQUIPMENT, net ÏÏÏÏÏ
GOODWILL, netÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
DEFERRED INCOME TAXESÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
OTHER ASSETS ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

76.9
465.7
230.4
33.7
43.7

850.4
234.4
449.4
59.5
139.4

76.1
463.4
226.6
33.4
46.0

845.5
234.6
447.3
59.8
139.4

76.4
307.3
219.7
33.3
38.4

675.1
231.0
420.8
74.4
112.1

74.4
304.6
214.6
34.0
37.5

665.1
231.4
420.7
74.5
115.9

TOTAL ASSETSÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

$1,733.1

$1,726.6

$1,513.4

$1,507.6

LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES:

Short-term debt ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Current maturities of long-term debt ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Accounts payable ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Accrued expenses ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Income taxes payable ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

Total current liabilities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
LONG-TERM DEBT ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
POSTRETIREMENT BENEFITS, OTHER THAN

PENSIONS ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
PENSIONS ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
OTHER LIABILITIES ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

3.7
21.4
260.6
289.0
38.0

612.7
337.3

13.8
94.1
79.4

3.6
21.4
262.9
292.1
35.3

615.3
337.3

13.8
94.1
81.9

9.3
13.9
247.6
253.9
12.8

537.5
356.7

13.5
85.4
75.8

9.3
13.9
250.7
257.1
12.6

543.6
356.7

13.5
85.4
78.1

Total liabilities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

1,137.3

1,142.4

1,068.9

1,077.3

LENNOX INTERNATIONAL INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)

2003

As Previously
Released
(Unaudited)

2002

As Filed

As Previously
Reported

As
Restated

(In millions, except share data)

COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:

Preferred stock, $.01 par value, 25,000,000 shares

authorized, no shares issued or outstanding ÏÏÏÏÏÏÏ

Common stock, $.01 par value, 200,000,000 shares
authorized, 64,247,203 shares and 62,922,308
(restated) shares issued for 2003 and 2002,
respectively ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Additional paid-in capital ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Retained earnings ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Accumulated other comprehensive loss ÏÏÏÏÏÏÏÏÏÏÏÏ
Deferred compensationÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Treasury stock, at cost, 3,043,916 and

3,009,656 shares for 2003 and 2002, respectively ÏÏ

Total stockholders' equity ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

TOTAL LIABILITIES AND

0.6
421.8
225.9
(2.7)
(18.7)

(31.1)

595.8

0.6
420.4
218.9
(6.4)
(18.2)

(31.1)

584.2

0.6
404.7
171.3
(79.6)
(21.8)

(30.7)

444.5

0.6
403.4
156.7
(78.5)
(21.2)

(30.7)

430.3

STOCKHOLDERS' EQUITYÏÏÏÏÏÏÏÏÏÏÏ

$1,733.1

$1,726.6

$1,513.4

$1,507.6

As a result of the internal inquiry conducted by the Audit Committee of the Board of Directors, the
Company delayed the Ñling of this Annual Report on Form 10-K for the year ended December 31, 2003, and
its Quarterly Reports on Form 10-Q for the quarters ended March 31, 2004 and June 30, 2004 with the
Securities and Exchange Commission (""SEC''). The delay in Ñling resulted in the Company's inability to
meet certain requirements under the Company's debt obligations, the most signiÑcant of which are discussed
below.

The Company's long-term public debt is governed by an Indenture, dated as of May 8, 2002 between LII
and Bank of New York, as Trustee, relating to LII's 6.25% Convertible Subordinated Notes due June 1, 2009
(the ""Convertible Notes''), and a Registration Rights Agreement, dated as of May 8, 2002 (the ""Registration
Rights Agreement''), between LII, UBS Warburg LLC and the other initial purchasers relating to LII's
Convertible Notes. Under the Registration Rights Agreement, LII agreed that during the two-year period
from the date of issuance (May 8, 2002), LII would Ñle with the SEC a registration statement on the
Convertible Notes and cause the registration statement to be declared eÅective and usable for the oÅer and
sale of the Convertible Notes. The delay in Ñling the Annual Report on Form 10-K caused a default on
April 29, 2004 under the Registration Rights Agreement (the ""Default Date'') since the registration
statement ceased to be eÅective through May 8, 2004 (a ""Registration Default''). Upon a Registration
Default, LII became contractually obligated to pay an additional 0.25% per annum interest (""Liquidated
Damages'') from the Default Date until the second anniversary of the issuance of the Convertible Notes. As
of May 8, 2004, LII was no longer in default with no further Liquidated Damages required. LII paid
approximately $32,000 in Liquidated Damages on June 1, 2004.

In September 2003, the Company entered into a credit facility agreement that provides for aggregate
borrowings of up to $225 million and is available on a revolving basis for a period of three years. At the same
time, LII amended its private placement notes that are pari passu with the credit facility. These agreements
require that LII annually and quarterly deliver Ñnancial statements, as well as compliance certiÑcates, to the

LENNOX INTERNATIONAL INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)

lenders within a speciÑed period of time. As a result of the delays mentioned above, LII requested and
received waivers from its lenders through December 31, 2004, of any breach due to a delay in the delivery of
its annual and quarterly Ñnancial statements, as well as compliance certiÑcates. As of December 31, 2003,
there was $3 million outstanding under the credit facility and $210 million outstanding under the private
placement notes.

By Ñling this Annual Report on Form 10-K and our Quarterly Reports on Form 10-Q for the quarters
ended March 31, 2004 and June 30, 2004 with the SEC and by delivering a copy of these Ñlings to the
Administrative Agent under the credit facility and the lenders under the private placement notes, the
Company will comply with the terms of those agreements.

4. Reportable Business Segments:

The Company's basis of organization and the diÅerences in the nature of products or services (as more
fully described in Note 1), were the factors used in determining the Company's reportable segments. Financial
information about the Company's reportable business segments are as follows (in millions):

For the Years Ended December 31,
Restated
2002

2001(b)

2003

Net Sales

Residential ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Commercial ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

$1,358.7
508.4

$1,249.1
442.4

$1,195.1
470.0

Heating & CoolingÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Service ExpertsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Refrigeration ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Corporate and other(a)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Eliminations ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

1,867.1
937.1
387.2
Ì

(106.3)

1,691.5
942.6
363.8
129.3
(102.6)

1,665.1
1,002.6
348.1
200.5
(102.7)

$3,085.1

$3,024.6

$3,113.6

LENNOX INTERNATIONAL INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)

For the Years Ended December 31,
Restated
2002

2001(b)

2003

Segment ProÑt (Loss)

Residential ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Commercial ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

$ 152.1
38.0

$ 110.4
20.8

84.8
23.3

190.1
1.1
34.2
(69.2)
1.4

Segment ProÑt ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

157.6

Reconciliation to Income (loss) before income taxes and

cumulative eÅect of accounting change:
Goodwill and trademark amortization ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
RestructuringsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
(Gains) losses and other expensesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Interest Expense, net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Other (Income) Expense ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

Ì
Ì
1.9
28.5
(2.5)

131.2
8.0
34.6
(64.5)
(1.3)

108.0

Ì
7.8
(7.9)
31.8
(0.8)

108.1
(1.9)
26.1
(48.9)
(0.1)

83.3

18.6
65.4
Ì
43.1
0.6

$ 129.7

77.1

$ (44.4)

As of December 31,

2003

Restated
2002

Total Assets

Residential ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Commercial ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

$ 461.4
212.4

$ 372.7
167.4

Heating & CoolingÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Service ExpertsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Refrigeration ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Corporate and other(a)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Eliminations ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

673.8
487.5
318.4
261.8
(14.9)

540.1
479.7
234.8
268.8
(15.8)

$1,726.6

$1,507.6

LENNOX INTERNATIONAL INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)

For the Years Ended
December 31,
Restated
2002

2001

2003

Capital Expenditures

Residential ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Commercial ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

$19.8
8.5

Heating & CoolingÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Service ExpertsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Refrigeration ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Corporate and other(a) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

28.3
4.0
6.6
2.3

$ 8.6
3.0

11.6
0.7
4.6
6.2

$ 7.3
1.3

8.6
1.6
2.1
5.1

$41.2

$23.1

$17.4

For the Years Ended
December 31,
2002

2001

2003

Depreciation and Amortization

Residential ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Commercial ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

$16.8
4.9

$17.2
5.0

$22.4
6.5

Heating & Cooling ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Service Experts ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Refrigeration ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Corporate and other(a) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

21.7
8.3
8.4
10.3

22.2
9.4
9.0
16.1

28.9
24.7
11.3
17.6

$48.7

$56.7

$82.5

(a) In the third quarter of 2002, the Company formed joint ventures with Outokumpu by selling to
Outokumpu a 55% interest in the Company's Heat Transfer business segment for approximately
$55 million in cash and notes. The Company accounts for its remaining 45% interest using the equity
method of accounting and includes such amounts in the ""Corporate and other'' segment. The historical
net sales, results of operations and total assets of the ""Corporate and other'' segment have been restated
to include the portions of the Heat Transfer business segment that was sold to Outokumpu. The results of
operations of the Heat Transfer business segment now presented in the ""Corporate and other'' segment
was $(2.2) million for the year ended December 31, 2003. The historical net sales and results of
operations of the Heat Transfer business segment now presented in the ""Corporate and other'' segment
were $129.3 million and $(3.7) million for the year ended December 31, 2002 and $200.5 million and
$(1.5) million for the year ended December 31, 2001, respectively.

(b) To facilitate comparisons, the reported segment proÑt amounts for the year ended December 31, 2001 has
been adjusted to reÖect the discontinuation of goodwill and trademark amortization under Statement of
Financial Accounting Standards No. 142, ""Goodwill and Other Intangible Assets.''

LENNOX INTERNATIONAL INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)

The following table sets forth certain Ñnancial information relating to the Company's operations by

geographic area based on the domicile of the Company's operations (in millions):

For the Years Ended December 31,
Restated
2002

2001

2003

Net Sales to External Customers

United States ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Canada ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
International ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

$2,344.6
345.9
394.6

$2,357.6
303.1
363.9

$2,448.5
278.3
386.8

Total net sales to external customersÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

$3,085.1

$3,024.6

$3,113.6

Long-Lived Assets

United States ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Canada ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
InternationalÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

$636.8
93.7
150.6

$648.4
78.1
116.0

Total long-lived assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

$881.1

$842.5

As of December 31,
Restated
2002

2003

Inventories:

Components of inventories are as follows (in millions):

As of December 31,
Restated
2002

2003

Finished goods ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Repair parts ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Work in processÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Raw materials ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

$152.2
34.9
8.8
78.3

$143.1
37.2
8.7
72.7

Excess of current cost over last-in, Ñrst-out costÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

274.2
(47.6)

261.7
(47.1)

$226.6

$214.6

LENNOX INTERNATIONAL INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)

6. Property, Plant and Equipment:

Components of property, plant and equipment are as follows (in millions):

Land ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Buildings and improvements ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Machinery and equipment ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

As of December 31,

2003

29.7
171.4
490.0

Restated
2002

27.8
167.5
461.2

Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Less Ì accumulated depreciation ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

691.1
(456.5)

656.5
(425.1)

Property, plant and equipment, net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

$ 234.6

$ 231.4

7. Acquisitions and Divestitures:

Outokumpu Joint Ventures

During August 2002, the Company completed the formation of joint ventures with Outokumpu.
Outokumpu purchased a 55% interest in the Company's former Heat Transfer business segment in the U.S.
and Europe for $55 million in cash and notes, with the Company retaining 45% ownership. A pre-tax gain of
approximately $23.1 million was recognized in 2002 in conjunction with the sale and is included in the
(Gains) losses and other expenses line item in the accompanying Consolidated Statements of Operations. In
conjunction with the sale, the Company incurred $11.6 million of other charges and expenses. Included in this
amount are asset impairments that reduced to zero the carrying value of non-core Heat Transfer assets not
included in the sale and that were identiÑed for abandonment in the third quarter of 2002. Additionally, this
amount includes transaction costs, a pension curtailment in connection with U.S. based Heat Transfer
employees and indemniÑcation of Öood losses that occurred at a Heat Transfer manufacturing facility in
Europe in August 2002. After deducting these expenses, the Company recognized a net pre-tax gain of
$11.5 million ($6.4 million net of tax) in 2002. The Company is accounting for its remaining 45% ownership
in the joint ventures using the equity method of accounting. The Company recorded expenses of $3.4 million
in 2003 related to the Heat Transfer joint venture agreement in (Gains) losses and other expenses.

Fairco, S.A.

In August 2002, the Company sold its 50% ownership interest in an Argentine joint venture. The
Company recognized a pre-tax loss on the sale of $3.6 million ($1.2 million net of tax). The proceeds from the
sale were immaterial. The Company's equity in earnings of Fairco S.A. was immaterial for all prior periods.

Heatcraft do Brasil S.A.

In June 2002, the Company's Lennox Global Ltd. subsidiary purchased the remaining 14% interest in
Heatcraft do Brasil S.A., a Brazilian company that manufactures primarily commercial refrigeration
equipment, for approximately $2.4 million.

HVAC Distributors

In June 2002, the Company sold the net assets of a heating, ventilation and air conditioning (""HVAC'')
distributor, included in the Residential Heating & Cooling segment, for $4.2 million in cash and notes. The
sale resulted in a pre-tax loss of approximately $0.2 million that is included in (Gains) losses and other
expenses. The revenues and results of operations of the distributor were immaterial for all prior periods.

LENNOX INTERNATIONAL INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)

In March 2003, the Company sold the net assets of a HVAC distributor included in the Residential
Heating & Cooling segment for $4.6 million in cash and notes. The sale resulted in a pre-tax loss of
approximately $0.8 million that is included in (Gains) losses and other expenses. The revenues and results of
operations of the distributor were immaterial for all prior periods.

Electrical Products Division

In August 2003, the Company sold the assets of its Electrical Products Division business for $4.5 million
in cash. The sale resulted in a pre-tax gain of approximately $2.4 million that is included in (Gains) losses and
other expenses. The revenues and results of operations of the business were immaterial for all prior periods.

8. Restructuring Charges

During 2001, the Company undertook separate restructuring initiatives of its Service Experts operations
and certain of its manufacturing and distribution operations. During 2002, the Company undertook an
additional restructuring initiative of its non-core Heat Transfer engineering business.

Retail Restructuring Program.

In the second quarter of 2001, the Company recorded a pre-tax
restructuring charge of $38.0 million ($25.6 million, net of tax), of which $3.4 million was included in cost of
goods sold, for the selling, closing or merging of 38 company-owned dealer service centers. These centers were
either under-performing Ñnancially, located in geographical areas requiring disproportionate management
eÅort or focused on non-HVAC activities. The major actions of the plan consisted of employee terminations,
closure, sale or merger of dealer service centers and completion of in-process commercial construction jobs, all
of which have been completed. The revenue and net operating loss of the service centers sold, merged or
closed as a part of the Retail Restructuring Program were $24.5 million and $3.9 million, respectively, for the
year ended December 31, 2001.

The $38.0 million restructuring charge consisted of asset impairments and estimates of future cash

expenditures. Charges based on estimated cash expenditures are as follows (in millions):

Original
Charge

New
Charges

Cash
Payments

Other
Changes

Balance
December 31,
2002

Severance and beneÑtsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Other exit costs ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

$ 4.8
12.3

Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

$17.1

$0.2
0.8

$1.0

$ (2.9)
(12.5)

$(2.1)
3.1

$(15.4)

$ 1.0

$ Ì
3.7

$3.7

Balance
December 31,
2002

New
Charges

Cash
Payments

Other
Changes

Balance
December 31,
2003

Other exit costs ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

$3.7

$ Ì

$(3.6)

$ Ì

$0.1

The original severance charge of $4.8 million included the termination of 605 employees. All employee
termination actions have been completed. The original ""Other exit costs'' charged included $4.7 million to
complete in-process commercial construction jobs at the exit date, $4.7 million for non-cancelable operating
lease commitments on closed service center facilities and $2.9 million of other closure-related costs.

In the third and fourth quarter of 2001, the Company identiÑed an additional 15 centers for closure. The
$1.0 million of new charges in the above table, of which $0.4 million was recognized in 2001 and $0.6 million
in 2002, reÖects the Company's estimate of costs related to closure of these centers.

The other changes of $(2.1) million in severance and beneÑts included in the above table were revisions
to the original number of employees to be terminated as a result of the Company Ñnding buyers for service

LENNOX INTERNATIONAL INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)

centers that had previously been identiÑed for closure. Approximately $(1.9) million was recognized in 2001
with the remaining $(0.2) million being recognized in 2002. The other changes in ""Other exit costs'' included
in the above table relate to higher-than-expected costs to complete the in-process commercial jobs at closed
centers. Approximately $3.3 million was recognized in 2001 with the remaining $(0.2) million being
recognized in 2002.

Asset impairments included in the restructuring charge consisted of the following:

The restructuring charge included impairments of $6.6 million for long-lived assets, principally property,
plant and equipment used in the operations of the closed service centers, $5.7 million in goodwill, $3.4 million
for inventory write-downs (included as a component of cost of goods sold) and $5.2 million in accounts
receivable. All asset impairment charges were related to assets included in the Service Experts reportable
segment.

The impairment charges for the long-lived assets reduced the carrying amount of the assets to
management's estimate of fair value that was based primarily on the estimated proceeds, if any, to be
generated from the sale or disposal of the assets. The property, plant and equipment carrying value after
consideration of the impairment charge was immaterial. The goodwill impairment charge reduced to zero any
goodwill that had been recorded in conjunction with acquisitions of speciÑc service centers that were
completely idled and for which expected future cash Öows were not suÇcient to cover the related property,
plant and equipment. For the year ended December 31, 2002, the Company recognized as a component of the
Restructurings line item in the accompanying Consolidated Statements of Operations $0.2 million in net gains
that represent diÅerences between the original estimate of fair value and actual proceeds received.

The inventory and accounts receivable impairment charges recorded in conjunction with the restructuring
reduced the carrying value of service center inventories and accounts receivables to net realizable value. These
revisions to net realizable value resulted directly from the Company's decision to close the related service
center operations. For the year ended December 31, 2002, the Company has recognized as a component of the
Restructurings line item in the accompanying Consolidated Statements of Operations, $0.3 million in net
gains that represent diÅerences between the original estimate of net realizable value and actual proceeds
received.

Manufacturing and Distribution Restructuring Program.

In the fourth quarter of 2001, the Company
recorded pre-tax restructuring charges totaling $35.2 million ($31.0 million, net of tax) for severance and
other exit costs that resulted from the Company's decision to sell or abandon certain manufacturing and
distribution operations. Inventory impairments of $4.4 million were included in cost of goods sold. The major
actions included in the plan were the closing of a domestic distribution facility, the Company's Mexico sales
oÇce, manufacturing plants in Canada, Australia and Europe and the disposal of other non-core Heat
Transfer businesses, which have been completed. The revenue and net operating loss of separately identiÑable
operations were $36.3 million and $2.3 million, respectively, for the year ended December 31, 2001.

LENNOX INTERNATIONAL INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)

A summary of the asset impairments by action and the operating segment impacted are included in the

following table (in millions):

Major Action and Operating Segment Impacted:

PP & E

Residential segment:

Canadian manufacturing facility ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Domestic distribution facilityÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

Residential segment ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

Commercial segment:

Australian manufacturing facility ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Closure of Mexico sales oÇceÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

Commercial segment ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

Refrigeration segment:

European manufacturing facility ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Heat Transfer segment Ì engineering businessÏÏÏÏÏÏÏÏ

$1.0
0.5

1.5

0.3
Ì

0.3

Ì
1.9

Asset Impairments and Write-Downs
Accounts
Receivable

Goodwill

Inventory

$ Ì
Ì

1.5
Ì

1.5

Ì
9.4

$ Ì
Ì

Ì
1.0

1.0

Ì
5.8

$ Ì
1.0

1.0

1.2
Ì

1.2

1.4
0.8

Total

$ 1.0
1.5

2.5

3.0
1.0

4.0

1.4
17.9

Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

$3.7

$10.9

$6.8

$4.4

$25.8

The property, plant and equipment impairment consisted primarily of manufacturing equipment written
down to the cash expected to be received upon sale or abandonment, if any. The goodwill impairment charges
reduced the goodwill associated with the closed operation to zero. The accounts receivable and inventory
write-downs were recorded in conjunction with the restructuring since the decisions to close the operations
directly impacted the net realizable value of the related assets. Included in restructurings in the accompanying
Consolidated Statements of Operations for the year ended December 31, 2002 are $2.0 million of net gains
upon disposal of these impaired assets that resulted from diÅerences between original estimates of fair and net
realizable value and amounts realized upon disposal.

A summary of the severance and other exit costs associated with the Manufacturing and Distribution

Restructuring Program are included in the following table (in millions):

Original
Charge

New
Charges

Cash
Payments

Other
Changes

Balance
December 31,
2002

Severance and beneÑtsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Other exit costs ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

$6.0
3.4

$9.4

$3.4
1.1

$4.5

$ (7.7)
(2.3)

$ 0.3
(0.9)

$(10.0)

$(0.6)

$2.0
1.3

$3.3

Balance
December 31,
2002

New
Charges

Cash
Payments

Other
Changes

Balance
December 31,
2003

Severance and beneÑts ÏÏÏÏÏÏÏÏÏÏÏÏÏ
Other exit costs ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

$2.0
1.3

$3.3

$0.3
Ì

$0.3

$(1.3)
(0.8)

$(0.3)
Ì

$(2.1)

$(0.3)

$0.7
0.5

$1.2

The original severance and beneÑts charge of $6.0 million primarily related to the termination of
250 hourly and 46 salaried employees in Canada. The $3.4 million of new charges represents the 2002
termination of 64 European Refrigeration, 49 Heat Transfer and other Australian personnel. The ""Other exit

LENNOX INTERNATIONAL INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)

costs'' consist of $2.5 million for contractual lease obligations associated with the vacated corporate oÇce lease
space and the closed Australian manufacturing facility. Included in Restructurings in the accompanying
Consolidated Statements of Operations for the year ended December 31, 2002 are $0.7 million of restructuring
income associated with the subleasing of the vacated corporate oÇce lease space. The cash obligations
associated with these exit costs continue through 2004.

Engineering Business Restructuring Program.

In the third quarter of 2002, the Company recorded a
pre-tax restructuring charge totaling $7.5 million ($5.2 million, net of tax) consisting of $1.0 million of
inventory impairments included in cost of goods sold, severance and other exit costs that resulted from the
Company's decision to abandon the residual portion of the Heat Transfer business that does not Ñt with the
Company's strategic focus and was not included in the joint venture with Outokumpu. The revenue and net
operating loss associated with the engineering business was $9.8 million and $6.9 million, respectively, for the
year ended December 31, 2002. The Company completed the wind-down period of this business and recorded
an additional operating loss of $1.8 million in 2003. Operating losses from this business are reported in the
""Corporate and other'' business segment.

A summary of the severance and other exit costs, recorded in the quarter ended September 30, 2002,
associated with the Engineering Business Restructuring Program are included in the following table (in
millions):

Original
Charge

New
Charges

Cash
Payments

Other
Changes

Balance
December 31,
2002

Severance and beneÑtsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Other exit costs ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

$3.7
2.8

$6.5

$ Ì
Ì

$ Ì

$(3.1)
(0.9)

$(4.0)

$0.3
0.2

$0.5

$0.9
2.1

$3.0

Balance
December 31,
2002

New
Charges

Cash
Payments

Other
Changes

Balance
December 31,
2003

Severance and beneÑts ÏÏÏÏÏÏÏÏÏÏÏÏÏ
Other exit costs ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

$0.9
2.1

$3.0

$ Ì
Ì

$ Ì

$(0.9)
(1.8)

$(2.7)

$ Ì
Ì

$ Ì

$ Ì
0.3

$0.3

The severance and beneÑts charge primarily related to the termination of 147 personnel. All employee

termination actions have been completed.

The ""Other exit costs'' consist of contractual lease and contract takeover obligations. The cash
obligations associated with these exit costs will continue through November 2005. Included in Restructurings
in the accompanying Consolidated Statements of Operations for the year ended December 31, 2002 are
$0.5 million of net gains upon disposal of these impaired assets that resulted from diÅerences between original
estimates of fair and net realizable value and amounts realized upon disposal.

LENNOX INTERNATIONAL INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)

9. Long-Term Debt and Lines of Credit:

Long-term debt at December 31 consists of the following (in millions):

2003

2002

Floating rate revolving loans payable ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
6.25% convertible subordinate notes, payable in 2009 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
6.73% promissory notes, payable $11.1 annually, 2004 through 2008 ÏÏÏÏÏÏÏÏÏ
7.06% promissory note, payable $10.0 annually in 2004 and 2005 ÏÏÏÏÏÏÏÏÏÏÏÏ
6.56% promissory notes, payable in 2005 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
6.75% promissory notes, payable in 2008 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
8.00% promissory note, payable in 2010 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
7.75% promissory note, payable in 2005 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Capitalized lease obligations and other ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

3.0
$
143.8
55.5
20.0
25.0
50.0
35.0
25.0
1.4

$ Ì
143.8
66.6
20.0
25.0
50.0
35.0
25.0
5.2

Less current maturities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

358.7
(21.4)

370.6
(13.9)

$337.3

$356.7

At December 31, 2003, the aggregate amounts of required principal payments on long-term debt are as

follows (in millions):

2004 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
2005 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
2006 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
2007 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
2008 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Thereafter ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

$ 21.4
71.3
14.3
11.3
61.3
179.1

$358.7

The Company has bank lines of credit aggregating $275.5 million, of which $6.7 million was borrowed
and outstanding, and $65.1 million was committed to standby letters of credit at December 31, 2003. The
remaining $203.7 million was available for future borrowings, subject to Ñnancial covenant limitations.
Included in the lines of credit are several regional facilities and a multi-currency facility in the amount of
$225 million governed by agreements between the Company and a syndicate of banks. In September 2003, the
Company amended its former domestic facility to, among other things, base covenants on the Ñnancials of
domestic and foreign subsidiaries, extend the facility maturity date to September 2006 and reduce capacity
from $270 million to $205 million. In October 2003, the facility capacity was increased to $225 million. The
facility bears interest, at the Company's option, at a rate equal to either (a) the greater of the bank's prime
rate or the federal funds rate plus 0.5% or (b) the London Interbank OÅered Rate plus a margin equal to 1.0%
to 2.5%, depending upon the ratio of total funded debt-to-earnings before interest, taxes, depreciation and
amortization (""EBITDA'') as deÑned in the facility. The Company pays a facility fee, depending upon the
ratio of total funded debt to EBITDA, equal to 0.25% to 0.50% of the capacity. The facility includes restrictive
covenants that limit the Company's ability to incur additional indebtedness, encumber its assets, sell its assets,
or pay dividends. There are no required payments prior to the expiration of the facility. The Company's facility
and promissory notes are secured by the stock of the Company's major subsidiaries. The facility requires that
LII annually and quarterly deliver Ñnancial statements, as well as compliance certiÑcates, to the banks within
a speciÑed period of time. As a result of the delay in Ñling of LII's Annual Report on Form 10-K for the year

LENNOX INTERNATIONAL INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)

ended December 31, 2003 and Quarterly Reports on Forms 10-Q for the quarters ended March 31, 2004 and
June 30, 2004, LII requested and received waivers from its banks through December 31, 2004, of any breach
due to a delay in the delivery of its annual and quarterly Ñnancial statements, as well as compliance
certiÑcates. Upon Ñling this Annual Report on Form 10-K and LII's Quarterly Reports on Form 10-Q for the
quarters ended March 31, 2004 and June 30, 2004 with the SEC and by delivering a copy of these Ñlings to the
Administrative Agent under the facility, LII will comply with the terms of the facility.

On May 8, 2002, the Company issued $143.8 million of 6.25% convertible subordinated notes (""Notes''),
maturing June 1, 2009, and received proceeds totaling approximately $139 million after debt issuance costs.
Interest is payable semi-annually on June 1 and December 1 of each year. Each $1,000 Note is convertible
into 55.29 shares of common stock. Redemption can occur at the Company's option beginning in June 2005 if
the market price of the Company's Common Stock has exceeded $23.52 during speciÑed periods and at the
option of the Note holders if the market price of the Company's Common Stock has exceeded $19.90 during
speciÑed periods or if the market price of the Notes is less than 95% of the market price of the stock multiplied
by 55.29. The Notes are junior in right of payment to all of our existing and future senior indebtedness, and are
structurally subordinated to all liabilities of our subsidiaries, including trade payables, lease commitments and
money borrowed. Under the Registration Rights Agreement, dated as of May 8, 2002 (the ""Registration
Rights Agreement''), between LII, UBS Warburg LLC and the other initial purchasers relating to the Notes,
LII agreed that during the two-year period from the date of issuance of the Notes (May 8, 2002), LII would
Ñle with the SEC a registration statement on the Notes and cause the registration statement to be declared
eÅective and usable for the oÅer and sale of the Notes. The delay in Ñling of LII's Annual Report on
Form 10-K caused a default on April 29, 2004 under the Registration Rights Agreements (the ""Default
Date'') since the registration statement ceased to be eÅective through May 8, 2004 (a ""Registration
Default''). Upon a Registration Default, LII became contractually obligated to pay an additional 0.25% per
annum interest (""Liquidated Damages'') from the Default Date until the second anniversary of the issuance
of the Notes. As of May 8, 2004, LII was no longer in default with no further Liquidated Damages required.
LII paid approximately $32,000 in Liquidated Damages on June 1, 2004.

Under a revolving period asset securitization arrangement, the Company transfers beneÑcial interests in a
portion of its trade accounts receivable to a third party in exchange for cash. The Company's continued
involvement in the transferred assets is limited to servicing. These transfers are accounted for as sales rather
than secured borrowing. The fair values assigned to the retained and transferred interests are based primarily
on the receivables carrying value given the short term to maturity and low credit risk. As of December 31,
2003 and 2002, the Company had sold zero and $99.0 million, respectively, of beneÑcial interests in accounts
receivable. The discount incurred in the sale of such receivables of $2.9 million and $4.3 million for the years
ended December 31, 2003 and 2002, respectively, is included as part of Selling, General and Administrative
Expense in the accompanying Consolidated Statements of Operations.

LENNOX INTERNATIONAL INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)

10.

Income Taxes:

The income tax provision (beneÑt) consisted of the following (in millions):

For the Years Ended December 31,
Restated
2002

2003

2001

Current:

FederalÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
State ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Foreign ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

$33.0

(1.8)
0.2

Total current ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

31.4

Deferred:

6.5
5.3
2.1

Total deferred ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

13.9

$13.3

$ 6.2

(1.5)
6.6

18.4

15.0
5.1
(4.3)

15.8

(3.7)
4.2

6.7

(4.6)
(0.6)
(3.5)

(8.7)

Total income tax provision (beneÑt) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

$45.3

$34.2

$(2.0)

Income (loss) before income taxes and cumulative eÅect of accounting change was comprised of
$112.6 million domestic and $17.1 million foreign for the year ended December 31, 2003 and $98.4 million
domestic and $(21.3) million foreign for the year ended December 31, 2002.

The diÅerence between the income tax provision computed at the statutory federal income tax rate and

the Ñnancial statement provision for taxes is summarized as follows (in millions):

Provision (beneÑt) at the U.S. statutory rate of 35% ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Increase (reduction) in tax expense resulting from:

2003

Restated
2002

2001

$45.4

$27.0

$(15.5)

State income tax, net of federal income tax beneÑtÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Foreign losses not providing a current beneÑtÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Goodwill and other permanent itemsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Foreign taxes at rates other than 35% and miscellaneous other ÏÏÏÏÏÏÏÏÏÏÏÏ

(0.5)
3.8
(1.2)
(2.2)

2.3
8.6
(2.9)
(0.8)

(2.8)
Ì
9.6
6.7

Total income tax provision (beneÑt) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

$45.3

$34.2

$ (2.0)

Deferred income taxes reÖect the tax consequences on future years of temporary diÅerences between the
tax basis of assets and liabilities and their Ñnancial reporting basis and are reÖected as current or non-current
depending on the timing of the expected realization. The deferred tax provision (beneÑt) for the periods
shown represents the eÅect of changes in the amounts of temporary diÅerences during those periods.

LENNOX INTERNATIONAL INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)

Deferred tax assets (liabilities), as determined under the provisions of SFAS No. 109, ""Accounting for

Income Taxes,'' were comprised of the following at December 31 (in millions):

2003

Restated
2002

Gross deferred tax assets:

Warranties ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
NOLs (foreign and U.S. state)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Postretirement and pension beneÑts ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Inventory reserves ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Receivable allowance ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Compensation liabilities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Deferred income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Intangibles ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Other ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

$ 23.7
54.9
18.0
6.7
4.3
26.9
11.3
15.0
7.9

$ 26.6
45.9
18.5
10.4
5.2
24.7
9.4
20.9
14.0

Total deferred tax assetsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Valuation allowance ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

168.7
(39.4)

175.6
(29.7)

Total deferred tax assets, net of valuation allowance ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

129.3

145.9

Gross deferred tax liabilities:

DepreciationÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Insurance liabilities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Other ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

(14.7)
(2.8)
(18.6)

(20.3)
(4.7)
(12.4)

Total deferred tax liabilities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

(36.1)

(37.4)

Net deferred tax assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

$ 93.2

$108.5

The Company has net operating loss carry forwards that expire at various dates in the future. The
deferred tax asset valuation allowance relates primarily to the operating loss carryforwards in various U.S.
states, European and Canadian tax jurisdictions. The increase in valuation allowance is primarily the result of
foreign losses not beneÑted.

In assessing the realizability of deferred tax assets, management considers whether it is more likely than
not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred
tax assets is dependent upon the generation of future federal and foreign taxable income of approximately
$253.5 million and future state taxable income, a subset of federal income, of approximately $176.0 million
during the periods in which those temporary diÅerences become deductible. Management considers the
scheduled reversal of deferred tax liabilities, 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, management believes it is more likely
than not that the Company will realize the beneÑts of these deductible diÅerences, net of the existing
valuation allowances at December 31, 2003.

No provision has been made for income taxes which may become payable upon distribution of the foreign
subsidiaries' earnings since management considers essentially all of these earnings permanently invested. As of
December 31, 2003, the unrecorded deferred tax liability related to the undistributed earnings of the
Company's foreign subsidiaries was insigniÑcant.

LENNOX INTERNATIONAL INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)

11. Current Accrued Expenses:

SigniÑcant components of current accrued expenses are as follows (in millions):

Accrued wagesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Casualty insurance reserves ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Deferred income on service contracts ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Accrued warranties ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Accrued promotions ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Other ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

December 31,

2003

$ 86.3
51.8
30.5
28.1
23.4
72.0

Restated
2002

$ 85.9
48.2
27.4
25.9
16.4
53.3

Total current accrued expenses ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

$292.1

$257.1

12. Employee BeneÑt Plans:

ProÑt Sharing Plans

The Company maintains noncontributory proÑt sharing plans for its eligible domestic salaried employees.
These plans are discretionary as the Company's contributions are determined annually by the Board of
Directors. Provisions for contributions to the plans amounted to $8.5 million, $7.0 million and $5.0 million in
2003, 2002 and 2001, respectively. The Company also sponsors several 401(k) plans with employer
contribution-matching requirements. The Company contributed $2.5 million to these 401(k) plans in 2003
and in 2002.

Employee BeneÑts Trust

The Company also has an Employee BeneÑts Trust (the ""Trust'') to provide eligible employees of the
Company, as deÑned, with certain medical beneÑts. Trust contributions are made by the Company as deÑned
by the Trust agreement.

Employee Stock Purchase Plan

The Company's employee stock purchase plan, which was terminated as of December 31, 2003, had
2,575,000 shares of Common Stock reserved. The shares were oÅered for sale to employees only, through
payroll deductions, at prices equal to 85% of the lesser of the fair market value of the Company's Common
Stock on the Ñrst day of the oÅering period or the last day of the oÅering period. Under the plan, participating
employees purchased 508,380, 516,580 and 676,660 shares in 2003, 2002 and 2001, respectively.

Pension and Postretirement BeneÑt Plans

The Company has domestic and foreign pension plans covering essentially all employees. The Company
also maintains an unfunded postretirement beneÑt plan that provides certain medical and life insurance
beneÑts to eligible employees. The pension plans are accounted for under provisions of SFAS No. 87,
""Employers' Accounting for Pensions.'' The postretirement beneÑt plan is accounted for under the provisions
of SFAS No. 106, ""Employers' Accounting for Postretirement BeneÑts Other than Pensions.'' In December
2003, the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (""the Act'') was signed
into law. The Act introduces a prescription drug beneÑt under Medicare (Medicare Part D) as well as a
federal subsidy to sponsors of retiree health care beneÑt plans that provide a beneÑt that is at least actuarially
equivalent to Medicare Part D. In January 2004, Financial Accounting Standards Board StaÅ Position No.

LENNOX INTERNATIONAL INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)

FAS 106-1, ""Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improve-
ment and Modernization Act of 2003'' was issued and it permits a sponsor of a postretirement health care plan
that provides a prescription drug beneÑt to make a one-time election to defer accounting for the eÅects of the
Act. The Company has elected to make this deferral as the speciÑc authoritative guidance on the accounting
for the federal subsidy is pending. Therefore, the accumulated postretirement beneÑt obligation and net
postretirement beneÑt costs in the Ñnancial statements and footnote do not reÖect the eÅects of the Act on the
plan.

The following table sets forth amounts recognized in the Company's Ñnancial statements and the plans'

funded status (in millions):

Accumulated beneÑt obligation ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Changes in projected beneÑt obligation:

Pension BeneÑts
2002
2003

Other BeneÑts

2003

2002

$214.9

$185.2

$ N/A $ N/A

BeneÑt obligation at beginning of year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Service costÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Interest cost ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Plan participants' contributions ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
AmendmentsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Actuarial loss ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
BeneÑts paid ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

191.5
5.3
12.7
0.1
1.7
19.5
(10.6)

163.3
5.0
11.8
0.1
3.1
19.0
(10.8)

BeneÑt obligation at end of year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

220.2

191.5

Changes in plan assets:

Fair value of plan assets at beginning of yearÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Actual return on plan assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Employer contribution ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Plan participants' contributions ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Foreign currency changes ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
BeneÑts paid ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

133.3
23.2
9.0
0.1
2.7
(9.1)

143.4
(14.0)
11.9
0.1
0.9
(9.0)

Fair value of plan assets at end of yearÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

159.2

133.3

23.4
0.9
1.6
1.8
(7.2)
8.2
(4.4)

24.3

Ì
Ì
2.6
1.8
Ì
(4.4)

20.6
0.6
1.4
1.8
Ì
3.6
(4.6)

23.4

Ì
Ì
2.8
1.8
Ì
(4.6)

Funded status ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Unrecognized actuarial loss ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Unamortized prior service cost ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Unrecognized net obligation ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

(61.0)
76.2
11.8
0.1

(58.2)
68.5
11.0
0.2

(24.3)
16.8
(7.7)
Ì

(23.4)
9.4
(0.9)
Ì

Net amount recognized ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

$ 27.1

$ 21.5

$(15.2)

$(14.9)

Amounts recognized in the consolidated balance sheets consist of:

Prepaid beneÑt cost ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Accrued beneÑt liability ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Intangible assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Accumulated other comprehensive lossÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

$ 44.4
(94.1)
11.6
65.2

$ 35.7
(85.4)
12.0
59.2

$ Ì $ Ì
(14.9)
(15.2)
Ì
Ì
Ì
Ì

Net amount recognized ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

$ 27.1

$ 21.5

$(15.2)

$(14.9)

LENNOX INTERNATIONAL INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)

Pension plans with an accumulated beneÑt obligation in excess of

plan assets:
Projected beneÑt obligationÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Accumulated beneÑt obligation ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Fair value of plan assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

$208.7
203.4
147.4

$186.6
181.5
128.2

December 31,

2003

2002

Pension BeneÑts
2002

2003

2001

Other BeneÑts
2002

2001

2003

Components of net periodic beneÑt cost:

Service costÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Interest cost ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Expected return on plan assets ÏÏÏÏÏÏÏÏÏÏÏ
Amortization of prior service cost ÏÏÏÏÏÏÏÏ
Recognized actuarial (gain)/loss ÏÏÏÏÏÏÏÏÏ
Recognized transition obligationÏÏÏÏÏÏÏÏÏÏ
CurtailmentÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

5.3
12.7
(14.6)
0.9
1.1
0.1
Ì

5.0
11.8
(15.3)
0.7
0.3
0.1
1.2

5.1
11.0

$0.9
1.6
(14.9) Ì

0.7
(0.1)
0.1
0.7

(0.3)
0.7
Ì
Ì

$0.6
1.4
Ì
(0.1)
0.6
Ì
Ì

$0.5
1.3
Ì
0.1
(0.4)
Ì
Ì

Net periodic beneÑt cost ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

5.5

3.8

2.6

$2.9

$2.5

$1.5

Pension
BeneÑts

2003

2002

Other BeneÑts
2002
2003

Weighted-average assumptions used to determine beneÑt

obligations at December 31:

Discount rate ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Rate of compensation increase ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

Weighted-average assumptions used to determine net periodic

beneÑt cost for years ended December 31:

Discount rate ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Expected long-term return on plan assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Rate of compensation increase ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

6.00% 6.75% 6.00% 6.75%
4.00

4.00

Pension
BeneÑts

2003

2002

Other BeneÑts
2002
2003

6.75% 7.50% 6.75% 7.50%
8.75
4.00

9.50
4.00

Ì
Ì

To develop the expected long-term rate of return on assets assumption, the Company 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 eÅect 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 8.75% long-
term rate of return on assets assumption.

2003

2002

Assumed health care cost trend rates at December 31:
Health care cost trend rate assumed for next year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Rate to which the cost rate is assumed to decline (the ultimate trend rate) ÏÏÏÏÏÏ
Year that the rate reaches the ultimate trend rate ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

10.0%
5.0
2009

9.0%
5.0
2008

LENNOX INTERNATIONAL INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)

Assumed health care cost trend rates have a signiÑcant eÅect on the amounts reported for the health care
plan. A one percentage-point change in assumed health care cost trend rates would have the following eÅects
(in millions):

1-Percentage-
Point Increase

1-Percentage-
Point Decrease

EÅect on total of service and interest cost ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
EÅect on the post-retirement beneÑt obligationÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

$0.3
2.8

$(0.3)
(2.5)

The Company's U.S.-based pension plan weighted-average asset allocations at December 31, 2003 and

2002, by asset category are as follows:

Asset Category

Plan Assets
at December 31,
2002
2003

Domestic equity ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
International equity ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Investment Grade BondsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Money Market/Cash ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

57.4%
11.4%
28.0%
3.2%

49.4%
9.2%
28.5%
12.9%

Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

100%

Plan investments are invested within the following range targets:
Domestic equity ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
International equityÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Investment grade bonds ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Money market/cash ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

55%
10%
30%
5%

°/¿3%
°/¿3%
°/¿3%
°1%/¿4%

Target

°/¿

The plan's investment advisors have discretion within the above ranges. Investments are rebalanced based
upon guidelines developed by the Company with input from their consultants and investment advisers.
Additional contributions are invested under the same guidelines and may be used to rebalance the portfolio.
The investment allocation and individual investments are chosen with regard to the duration of the obligations
under the plan. The Company estimates its 2004 minimum required contribution will be $0.5 million to its
pension plans. The Company will evaluate additional voluntary pension contributions throughout 2004. The
Company estimates its 2004 contribution to its postretirement beneÑt plan to be approximately $3.0 million.
Included in total plan assets above is approximately $20.0 million of assets related to foreign plans with a
weighted-average expected rate of return is 7.5%.

13. Stock-Based Compensation Plans:

Incentive Plan

The Company has an Incentive Plan, which was amended in September 1998 (the ""1998 Incentive
Plan'') and it provides for various long-term incentive and retentive vehicles. These vehicles include stock
options, performance shares, restricted stock awards and stock appreciation rights.

Under the 1998 Incentive Plan, the Company is authorized to issue options for 18,254,706 shares of
common stock. As of December 31, 2003, 17,670,597 shares of common stock have been granted and
2,574,528 shares have been cancelled or repurchased. Consequently, as of December 31, 2003, there are
3,158,637 shares available for grant. Under the 1998 Incentive Plan, the exercise price equals the stock's fair
value on the date of grant. The 1998 Incentive Plan options granted prior to 1998 vest on the date of grant.

LENNOX INTERNATIONAL INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)

Beginning in 1998, the 1998 Incentive Plan options vest over three years. The 1998 Incentive Plan options
issued prior to December 2000 expire after ten years. The options issued beginning in December 2000 expire
after seven years.

The Company, in connection with the acquisition of Service Experts Inc., assumed 254,355 outstanding

stock options which are outstanding and fully vested.

A summary of stock option activity follows (in millions, except per share data):

Outstanding at beginning of yearÏÏÏÏÏÏÏÏÏÏÏÏÏ
Granted ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Exercised ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Forfeited ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

Outstanding at end of yearÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

Exercisable at end of year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

Fair value of options granted ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

2003

Weighted
Average
Exercise
Price

$13.03
17.00
10.70
19.07

$13.09

$12.74

$ 6.33

9.7
0.2
(0.6)
(0.3)

9.0

7.2

Years Ended December 31,
2002

7.3
3.2
(0.6)
(0.2)

9.7

6.3

Weighted
Average
Exercise
Price

$12.08
14.71
9.30
15.01

$13.03

$12.99

$ 5.51

2001

Weighted
Average
Exercise
Price

$11.97
9.83
7.44
11.53

$12.08

$13.24

$ 3.96

8.1
0.1
(0.1)
(0.8)

7.3

5.3

The following table summarizes information about stock options outstanding at December 31, 2003 (in

millions, except per share data and years):

Range of Exercise Prices

$7.28 - $7.88ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$8.19 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$8.75 - $11.22ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$13.21 - $13.31ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$13.38 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$13.90 - $15.59ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$16.21 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$16.37 - $19.40ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$24.91 - $49.63ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

Options Outstanding
Weighted-
Average
Remaining
Contractual
Life (Years)

Number
Outstanding

Weighted-
Average
Exercise
Price per
Share

0.9
1.5
1.3
0.5
1.6
0.5
1.3
1.3
0.1

9.0

2
4
6
3
6
4
5
5
4

$ 7.55
8.19
11.05
13.31
13.38
14.00
16.21
18.31
37.85

$13.09

Options Exercisable

Weighted-
Average
Exercise
Price per
Share

$ 7.55
8.19
11.05
13.31
13.38
14.00
16.21
18.62
37.85

$12.74

Number
Exercisable

0.9
1.5
1.3
0.5
0.5
0.5
0.9
1.0
0.1

7.2

LENNOX INTERNATIONAL INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)

The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-

pricing model with the following weighted-average assumptions:

December 31,
2002

2003

2001

Expected dividend yield ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Risk-free interest rate ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Expected volatilityÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Expected life (in years) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

2.24% 3.0% 4.0%
3.75% 4.29% 4.88%
40.0% 50.0% 40.0%
7

Performance Shares

Under the Incentive Plan, performance shares are awarded (""The Fixed Performance Awards'') to
certain employees at the discretion of the Board of Directors as of the beginning of each Ñscal year. Awards
granted prior to 2003 were vested after ten years of employment (the ""Vesting Period''). Fixed Performance
Awards are converted to an equal number of shares of the Company's Common Stock. If pre-deÑned
performance measures are met by the Company over a three-year period, the Vesting Period is accelerated
from ten years to three years for 25% to 100% of the Fixed Performance Awards, depending on the Company's
performance. Compensation expense is measured based on the market price of the stock at date of grant and is
recognized on a straight-line basis over the performance period. The participants may also earn additional
shares of the Company's Common Stock. The number of additional shares can range from 0% to 100% of the
awards granted, depending on the Company's performance over a three-year period. Compensation expense on
the additional shares is measured by applying the market price of the Company's stock at the end of the period
to the number of additional shares that are expected to be earned. Such expense is recognized over the
performance period. As of December 31, 2003, no additional shares were expected to be earned in future
periods. The weighted-average grant-date fair values for awards granted in 2002 were $15.32. No awards were
granted in 2001. Beginning in 2003, the Company changed the vesting of Fixed Performance Awards such that
the awards vest if, at the end of the performance period, at least the minimum performance level has been
attained. To the extent that the award payout level attained is less than 100%, the diÅerence between 100%
and the award distributed, if any, shall be forfeited. Compensation expense is measured by applying the
market price of the Company's stock at the end of the period to the number of awards expected to be earned.
In 2003, the Company awarded 258,166 shares at a weighted-average grant-date fair value of $16.76. The
64,247,203 shares of Common Stock issued as of December 31, 2003 include 1,272,036 shares which represent
Fixed Performance Awards that have not yet vested, and 200,975 shares which represent Fixed Performance
Awards which have vested but have not been converted to shares of the Company's Common Stock.

Restricted Stock Awards

Under the Incentive Plan, Restricted Stock Awards are used to attract and retain key Company
executives. The 64,247,203 shares of Common Stock issued as of December 31, 2003 include 654,936
unvested shares awarded to key executives. At the end of the three-year retention period, the award will vest
and be distributed to the participant provided that the participant has been an employee of the Company or
one of its wholly owned subsidiaries continuously throughout the retention period. Compensation expense is
measured based on the market price of the stock at date of grant and is recognized on a straight-line basis over
the performance period. The weighted-average grant-date fair values for awards granted in 2003 and 2002,
were $15.81 and $16.25, respectively.

Stock Appreciation Rights

In 2003, the Company began the awarding of stock appreciation rights. Each awardee is given the ""right''
to receive a value equal to the future appreciation of the Company's stock price. The value is paid in the

LENNOX INTERNATIONAL INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)

Company's stock. The award vests in one-third increments beginning with the Ñrst anniversary date after the
grant date. Compensation expense is measured by applying the increase in the market price of the Company's
stock at the end of the period to the number of awards. In 2003, the Company awarded 1,048,881 shares at a
weighted-average grant-date fair value of $16.76. As the closing stock price on December 31, 2003 was less
than the grant-date fair value, no expense was recognized in 2003.

14. Commitments and Contingencies:

Operating Leases

The Company has various leases relating principally to the use of operating facilities. Rent expense for

2003, 2002 and 2001 was approximately $59.7 million, $71.4 million and $69.9 million, respectively.

The approximate minimum commitments under all non-cancelable leases at December 31, 2003, are as

follows (in millions):

$ 43.7
29.8
20.4
13.5
10.2
53.1

$170.7

Litigation

The Company is involved in various claims and lawsuits incidental to its business. In addition, the
Company and its subsidiary Heatcraft Inc. have been named in four lawsuits in connection with its former
Heat Transfer operations. The lawsuits allege personal injury resulting from alleged emissions of trichloroeth-
ylene, dichloroethylene, and vinyl chloride and other unspeciÑed emissions from the South Plant in Grenada,
Mississippi, previously owned by Heatcraft Inc. It is not possible to predict with certainty the outcome of these
matters or an estimate of any potential loss; however, based on present knowledge, management believes that
it is unlikely that resolution of these matters will result in a material liability for the Company. As of
December 31, 2003, no accrual has been made for these matters.

Guarantees

The Company has issued guarantees to third parties in conjunction with the sale of Company assets and
divestiture of businesses. These guarantees indemnify the respective buyers against certain liabilities that may
arise in connection with the sales transactions and business activities prior to the closing of the sale. These
indemniÑcation obligations typically pertain to breach of representations and warranties and environmental
and tax liabilities. Liabilities recognized at December 31, 2003 related to these guarantees are approximately
$3.5 million. The maximum obligation under these guaranties is not determinable. No assets are held as
collateral and no speciÑc recourse provisions exist.

15. 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 the Company's stock-based compensation plans. As of December 31, 2003, the

LENNOX INTERNATIONAL INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)

Company had 62,119,256 shares outstanding of which 3,043,916 were held as treasury shares. Diluted earnings
per share are computed as follows (in millions, except per share data):

Years Ended December 31,
Restated
2002

2001

2003

Net income (loss) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

$84.4

$(205.0)

$(42.4)

Weighted average shares outstanding ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
EÅect of diluted securities attributable to stock options and

58.4

57.3

56.2

performance share awards ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

2.0

Weighted average shares outstanding, as adjusted ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

60.4

1.6

58.9

56.2

Diluted earnings (loss) per share ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

$1.40

$ (3.48)

$(0.75)

Options to purchase 2,699,089 shares of Common Stock at prices ranging from $15.59 to $49.63 per
share, options to purchase 5,542,241 shares of Common Stock at prices ranging from $13.21 to $49.63 per
share and 4,528,180 shares of Common Stock at prices ranging from $10.31 to $49.63 per share were
outstanding for the years ended December 31, 2003, 2002 and 2001, respectively, but were not included in the
diluted earnings per share calculation because the assumed exercise of such options would have been anti-
dilutive. The Company's convertible notes were not considered in the diluted earnings per share calculation
because the conversion of such notes is contingent upon certain conversion criteria having been met (see
Note 9). The Notes are convertible into approximately 8.0 million shares.

16. Restated Quarterly Financial Information (unaudited):

The selected quarterly Ñnancial data presented below have been restated from the information previously

presented in our Form 10-Qs for the applicable periods to reÖect the adjustments described in Note 3.

Net sales ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Gross proÑt ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Net income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Per common share:
Basic earningsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Diluted earnings ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Dividends ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Stock price per share:

First
Quarter

$648.7
210.4
2.3

.04
.04
.095

Second
Quarter

Fourth
Quarter

2003 Ì As restated (a)
Third
Quarter
(in millions, except per share amounts)
$838.4
276.1
32.2

$817.5
274.4
30.3

$780.5
256.3
19.6

Total

$3,085.1
1,017.2
84.4

.52
.50
.095

.55
.53
.095

.33
.32
.095

1.45
1.40
.38

High ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Low ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

$15.00
$11.90

$15.24
$12.56

$16.54
$12.47

$17.60
$14.51

LENNOX INTERNATIONAL INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)

Net sales ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Gross proÑt ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Net income (loss) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Per common share:
Basic earningsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Diluted earnings ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Dividends ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Stock price per share:

First
Quarter

$ 674.3
203.9
(252.0)

Fourth
Quarter

Second
Quarter

2002 Ì As restated (b)
Third
Quarter
(in millions, except per share amounts)
$818.8
256.1
23.8

$703.4
219.0
(0.3)

$828.1
268.0
23.5

Total

$3,024.6
947.0
(205.0)

$ (4.44)
(4.44)
.095

.41
.40
.095

$ Ì $ (3.58)
(3.48)
.38

Ì
.095

High ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Low ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

$ 13.05
9.42
$

$17.96
$12.89

$18.17
$12.33

$14.89
$11.71

(a) The information presented in the table below reconciles our restated net income for the Ñrst three
quarters of 2003 from the net income previously presented in our Form 10-Qs for the applicable periods.
The information for the fourth quarter of 2003 has been reconciled from the unaudited net income
amount previously provided in our Form 8-K dated February 4, 2004. See Note 3 for a description of the
adjustments:

Net income as originally reported ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Adjustments (pre-tax):

$ 2.5

First
Quarter

Second
Quarter

2003
Third
Quarter
(in millions, except per share amounts)
$27.7

Fourth
Quarter

$16.2

$30.4

Service Experts ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Non-Service ExpertsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

Total adjustments (pre-tax) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Tax eÅect of restatement adjustments ÏÏÏÏÏÏÏÏÏ

Total net adjustments ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

0.7
(1.2)

(0.5)
0.3

(0.2)

(1.8)
(1.5)

(3.3)
3.2

(0.1)

5.6
(1.4)

4.2
0.3

4.5

4.4
1.2

5.6
(2.2)

3.4

Total

$76.8

8.9
(2.9)

6.0
1.6

7.6

Net income as restated ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

$ 2.3

$30.3

$32.2

$19.6

$84.4

Per Share of Common Stock:
Net income Ì Basic as originally reported ÏÏÏÏÏÏÏ
EÅect of net adjustments ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

Net loss Ì Basic as restated ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Net income-Diluted as originally reportedÏÏÏÏÏÏÏÏ
EÅect of net adjustments ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

$ .04
Ì

$ .04
$ .04
Ì

$ .52
Ì

$ .52
$ .51

(.01)

Net income Ì Diluted as restated ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

$ .04

$ .50

$ .47
.08

$ .55
$ .46
.07

$ .53

$ .28
.05

$ .33
$ .27
.05

$ .32

$1.32
.13

$1.45
$1.28
.12

$1.40

(b) The information presented in the table below reconciles our restated net income for the Ñrst three
quarters of 2002 from the net income previously presented in our Form 10-Qs for the applicable periods.
The information for the fourth quarter of 2002 has been reconciled from the net income amount
previously reported in our 2002 Form 10-K. See Note 3 for a description of the adjustments.

LENNOX INTERNATIONAL INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)

Net (loss) income as originally reported ÏÏÏÏÏÏ
Adjustments (pre-tax):

Service Experts ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Non-Service Experts ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

Total adjustments (pre-tax) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Tax eÅect of restatement adjustments ÏÏÏÏÏÏ

Total net adjustments ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

First
Quarter

$(248.6)

Second
Quarter

2002
Third
Quarter
(in millions, except per share amounts)
$27.6

Fourth
Quarter

$ 5.0

$25.6

(4.6)
(1.3)

(5.9)
2.5

(3.4)

(1.4)
(0.1)

(1.5)
(0.6)

(2.1)

(1.4)
Ì

(1.4)
(2.4)

(3.8)

(6.7)
(0.1)

(6.8)
1.5

(5.3)

Total

$(190.4)

(14.1)
(1.5)

(15.6)
1.0

(14.6)

Net (loss) income as restatedÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

$(252.0)

$23.5

$23.8

$(0.3)

$(205.0)

Per Share of Common Stock:
Net (loss) income Ì Basic as originally

reported ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
EÅect of net adjustmentsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

$ (4.38)
(.06)

$ .45

$ .48

$ .09

(.04)

(.07)

(.09)

$ (3.32)
(.26)

Net (loss) income Ì Basic as restatedÏÏÏÏÏÏÏ
Net (loss) income Ì Diluted as originally

reported ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
EÅect of net adjustmentsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

$ (4.44)

$ .41

$ Ì $ (3.58)

$ (4.38)
(.06)

$ .43

$ .46

$ .08

(.03)

(.06)

(.08)

$ (3.23)
(.25)

Net (loss) income Ì Diluted as restated ÏÏÏÏÏ

$ (4.44)

$ .40

$ Ì $ (3.48)

17. Treasury Stock:

On November 1, 1999, the Company's Board of Directors authorized the purchase of up to 5,000,000
shares of the issued and outstanding Common Stock. As of December 31, 2003 the Company had purchased
3,587,300 of such shares at a total cost of $37.7 million. There were no outstanding commitments as of
December 31, 2003 to repurchase the remaining 1,412,700 shares. When treasury shares are reissued, any
diÅerence between the average acquisition cost of the shares and the proceeds from re-issuance is charged or
credited to additional paid-in capital.

18. Comprehensive Income:

The accumulated balances for each classiÑcation of comprehensive income are as follows (in millions):

For. Currency
Translation Adj.

Minimum
Pension Liab.

Cash Flow
Hedges

Unrealized Gains
on Securities

Total

$(57.4)

$ (7.8)

$(3.1)

$ Ì

$(68.3)

16.9

(29.4)

2.3

(10.2)

December 31, 2003ÏÏÏÏÏÏÏ

$ 22.8

$(42.4)

$ 1.0

(40.5)
63.3

(37.2)
(5.2)

(0.8)
1.8

Ì
12.2

$12.2

(78.5)
72.1

$ (6.4)

The net change in cash Öow hedges during 2003 consisted of $4.3 million, net of tax of $(1.5) million, in
reclassiÑcations to earnings and $(1.6) million, net of tax of $0.6 million, in changes in the fair value of

December 31, 2001ÏÏÏÏÏÏÏ
Net change during 2002

(restated)ÏÏÏÏÏÏÏÏÏÏÏÏÏ

December 31, 2002

(restated)ÏÏÏÏÏÏÏÏÏÏÏÏÏ
Net change during 2003ÏÏÏ

LENNOX INTERNATIONAL INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)

derivative contracts and during 2002 was $3.1 million, net of tax of $(1.3) million, in reclassiÑcations to
earnings and $(0.8) million, net of tax of $0.3 million, in changes in the fair value of derivative contracts.

19. Goodwill and Other Intangible Assets

On January 1, 2002, the Company adopted Statement of Financial Accounting Standards No. 142,
""Goodwill and Other Intangible Assets,'' and recorded a $283.4 million impairment of goodwill ($247.6 mil-
lion, net of tax). During the Ñrst quarter of 2003, the Company performed its annual goodwill impairment test
and determined that no goodwill impairment existed. The changes in the carrying amount of goodwill for the
years ended December 31, 2003 and 2002, in total and by segment, are as follows (in millions):

Segment

Balance
December 31,
2001

Goodwill
Impairment

Foreign Currency
Translation & Other

Balance
December 31,
2002

ResidentialÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Commercial ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

Heating & Cooling ÏÏÏÏÏÏÏÏÏÏÏÏÏ
Service Experts (restated)ÏÏÏÏÏÏÏÏÏ
Refrigeration ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Heat Transfer ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

$104.1
22.7

126.8
510.8
57.2
9.9

$ (77.1)
Ì

(77.1)
(198.5)
Ì
(8.1)

$ 0.1
3.2

3.3
(4.9)
3.1
(1.8)

$ 27.1
25.9

53.0
307.4
60.3
Ì

Total (restated) ÏÏÏÏÏÏÏÏÏÏÏÏÏ

$704.7

$(283.7)

$(0.3)

$420.7

Segment

Balance
December 31,
2002

Goodwill
Impairment

Foreign Currency
Translation & Other

Balance
December 31,
2003

ResidentialÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Commercial ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

Heating & Cooling ÏÏÏÏÏÏÏÏÏÏÏÏÏ
Service Experts ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Refrigeration ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

$ 27.1
25.9

53.0
307.4
60.3

$ Ì
Ì

Ì
Ì
Ì

TotalÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

$420.7

$ Ì

$(1.0)
3.2

2.2
14.1
10.3

$26.6

$ 26.1
29.1

55.2
321.5
70.6

$447.3

The change in the Residential Heating & Cooling segment includes $(0.8) million allocated to the

divestiture of the HVAC distributor discussed in Note 7.

IdentiÑable intangible assets, subject to amortization, as of December 31, 2003 are recorded in Other
Assets in the accompanying Consolidated Balance Sheets and are comprised of the following (in millions):

2003

Restated 2002

Gross
Amount

Accumulated
Amortization

Gross
Amount

Accumulated
Amortization

Deferred Ñnancing costs ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Non-compete agreements and other ÏÏÏÏÏÏÏÏÏÏÏÏ

$ 8.6
9.3

Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

$17.9

$ (1.9)
(6.3)

$ (8.2)

$10.9
9.4

$20.3

$ (4.5)
(4.4)

$ (8.9)

Amortization of intangible assets for the years ended December 31, 2003 and December 31, 2002 was
approximately $4.6 million and $5.4 million, respectively. Amortization expense for 2004 to 2008 is estimated
to be approximately $3.1 million in 2004, $1.9 million in 2005, $1.6 million in 2006, $1.0 million in 2007 and
$0.9 million in 2008. As of December 31, 2003, the Company had $16.0 million of intangible assets, consisting

LENNOX INTERNATIONAL INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)

of $11.6 million of pension intangible assets and $4.4 million of trademarks and others, which are not subject
to amortization.

20. Related Party Transactions:

John W. Norris, Jr., LII's Chairman of the Board, Thomas W. Booth, Stephen R. Booth, David V.
Brown and John W. Norris III, each a director of Lennox, as well as other LII stockholders who may be
immediate family members of the foregoing persons are, individually or through trust arrangements, members
of AOC Land Investment, L.L.C. AOC Land Investment L.L.C. owns 70% of AOC Development II, L.L.C.,
which owns essentially all of One Lake Park, L.L.C. LII is leasing part of an oÇce building owned by One
Lake Park, L.L.C. for use as the LII corporate headquarters. The lease, initiated in 1999, has a term of
25 years and the lease payments for 2003, 2002 and 2001 were approximately $2.9 million, $2.9 million and
$2.7 million, respectively. LII also leased a portion of Lennox Center, a retail complex owned by AOC
Development, L.L.C., for use as oÇces. The lease, initiated in 2000, terminated in March 2003 and the lease
payments for 2003, 2002 and 2001 were $20,430, $122,580 and $122,580, respectively. AOC Land Investment,
L.L.C. also owns 70% of AOC Development, L.L.C. LII believes that the terms of its leases with One Lake
Park, L.L.C. and AOC Development, L.L.C. are comparable to terms that could be obtained from unaÇliated
third parties.

21. Stock Rights:

On July 27, 2000, the Board of Directors of the Company declared a dividend of one right (""Right'') for
each outstanding share of its Common Stock to stockholders of record at the close of business on August 7,
2000. Each Right entitles the registered holder to purchase from the Company a unit consisting of one one-
hundredth of a share (a ""Fractional Share'') of Series A Junior Participating Preferred Stock, par value $.01
per share, at a purchase price of $75.00 per Fractional Share, subject to adjustment.

22. Fair Value of Financial Instruments:

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
carrying amount of long-term debt approximates fair value due to interest rates that approximate current
market rates for instruments of similar size and duration.

23. Subsequent Events:

Service Experts Turnaround Plan

LENNOX INTERNATIONAL INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)

Service Experts Goodwill Impairment

Pre-payment of Long-term Debt

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

As discussed in the Company's Current Report on Form 8-K dated May 20, 2002, eÅective May 20,
2002, the Board of Directors of the Company (as recommended by the Company's Audit Committee)
approved the dismissal of Arthur Andersen LLP as the Company's independent auditors and the appointment
of KPMG LLP to serve as the Company's independent auditors for the years ending December 31, 2003 and
2002.

Item 9A. Controls and Procedures

Overview

In March 2004 the Audit Committee of the Company's Board of Directors, with the assistance of its own
independent legal counsel and forensic accountants, initiated an independent inquiry of certain accounting
matters related to the Company's Canadian service centers in its Service Experts operations after the
Company received allegations of accounting and other improprieties at one of its Canadian service centers.
Although these allegations were made prior to the Company's public announcement of its results of operations
for 2003, the Company's internal control system failed to ensure that these allegations were communicated in
a timely manner to the Company's senior management and the Audit Committee so that such allegations
could be investigated prior to the public release of 2003 results. The independent inquiry was completed in
July 2004. The independent inquiry identiÑed certain weaknesses in the internal controls with respect to the
Canadian service centers, including the following:

‚ Canadian operations were autonomous from the other Service Experts operations;

‚ Canadian accounting personnel reported directly to operational personnel;

‚ Canadian operations lacked adequate accounting resources;

‚ There were not consistent accounting systems across all Canadian service centers; and

‚ Canadian management failed to provide adequate oversight to the Canadian Ñnancial and accounting

functions.

While the Audit Committee's independent inquiry identiÑed certain accounting adjustments as a result of
its examination of Service Experts' U.S. operations, which are reÖected in the adjustments discussed below, it
did not Ñnd deÑciencies of the nature or type of those found in Canada. The Company's independent auditors,
KPMG LLP, have reviewed these matters and advised the Audit Committee that these control weaknesses
constitute material weaknesses as deÑned in Statement of Auditing Standards No. 60. Certain of these control
weaknesses may also constitute deÑciencies in our disclosure controls.

The Audit Committee's independent inquiry identiÑed downward adjustments of $7.0 million to
previously reported cumulative earnings for the years 1999 through 2003. As a result, the Company restated
certain of our historical Ñnancial results as more fully discussed under ""Item 6 Ì Selected Financial Data''
and in Note 3 to our Ñnancial statements under ""Item 8 Ì Financial Statements and Supplementary Data.''
In addition, the Company's results of operations for 2003 as set forth in this report diÅer from the unaudited
Ñnancial results initially reported by the Company.

Remedial Actions

As a result of the independent inquiry discussed above and an internal review conducted by the Company
in the third and fourth quarters of 2003, the Company's management implemented and continues to
implement actions that are designed to improve the eÅectiveness of internal controls with respect to its
Canadian service centers. SpeciÑcally, the Company has identiÑed remedial actions to (1) address control
issues in the Canadian operations of the Company's Service Experts operations, (2) enhance the Company's
procedures for monitoring management's remediation of internal audit Ñndings and (3) enhance the
Company's policies and procedures for the handling of whistleblower claims. As noted below, implementation
of many of these actions began in December 2003 and has already been completed.

‚ Reorganize the accounting function of the Canadian operations from a stand alone entity to an
integrated operation within the Service Experts structure. The Company is moving the majority of the
accounting functions for its Canadian service centers into its two U.S. regional accounting centers,
leaving bookkeeping and data entry as the only accounting functions performed at the Canadian center
level. The Company anticipates that all Canadian centers will be moved to a regional accounting center
by the end of 2004. In addition, all accounting duties formerly performed by the Service Experts
Canadian headquarters have been moved to the Company's headquarters in Richardson, Texas.

‚ Reorganize the reporting and management structure of the Canadian operations. The chief executive
oÇcer and chief Ñnancial oÇcer positions in the Service Experts Canadian operations have been
eliminated and all Canadian accounting personnel report directly to Ñnancial and accounting personnel
within the Service Experts organization.

‚ Implement the STARS accounting system in the Canadian centers. The Company is accelerating the
implementation of the STARS accounting system in the Canadian centers and expects all centers to
have implemented it by the end of the third quarter of 2004. STARS (""System Training Action
Resource Success'') is an operations and Ñnancial computer system that has been customized to meet
the needs of the Company's centers. The STARS system has been functioning at U.S. centers and the
Company believes it is a good system for management and control of the Service Experts business.

‚ Adopt consistent accounting policies in all Canadian centers and establish a training program for
accounting personnel in Canadian centers. The Company's accounting policies and procedures
manual has been adopted and implemented in the Canadian centers. In addition, concurrently with the
implementation of STARS at a center, the bookkeeping and data entry personnel receive training on
the system and will continue to receive training as required to ensure their understanding of the system
and accounting policies, procedures and controls.

‚ Establish a process of increased oversight and monitoring of the Canadian centers. Through the
Company's Sarbanes-Oxley 404 process, the Company is reviewing the design and functionality of its
internal controls, including those of the Canadian centers. The eÅorts of the Company's internal audit
department include, and will continue to include the Canadian centers in their annual risk assessment
and audit plan to ensure that control compliance is functioning and that recommended remedial
actions are implemented.

‚ Enhance the procedures for monitoring management's remediation of internal audit Ñndings. The
Company is developing monitoring procedures to include Business Unit reporting and oversight by
Senior management to ensure prompt and appropriate resolution of all Ñndings.

‚ Strengthen the policies and procedures for the handling of whistleblower claims. The Company has
adopted an enhanced whistleblower policy and established procedures to ensure that all complaints are
reported to the Company's chief legal oÇcer and director of internal audit and, depending on the
nature of the claim, the Audit Committee. In addition, the Company is implementing compliance and
ethics training to provide appropriate training to all levels of employees, including the Company's
executive staÅ.

‚ Reinforce the accounting controls and procedures for the Canadian service centers scheduled for
disposition. The Company has announced a turnaround plan designed to improve the performance of
the Service Experts operations. The Company has identiÑed 130 service centers in the U.S. and
Canada which will comprise the ongoing Service Experts operations, and the remaining centers have
been or are in the process of being disposed of. The Company has strengthened the accounting controls
and procedures for the Canadian centers scheduled for disposition, including increasing the oversight of
such centers and reviewing a weekly cash basis tracking report for such centers.

‚ Take corrective action with respect to certain Company personnel. The Company has terminated or is
in the process of terminating the duties of all Canadian personnel alleged to have engaged in
improprieties.

Disclosure Controls and Procedures

The Company carried out an evaluation, under the supervision and with the participation of the
Company's current management, including its Chief Executive OÇcer and Chief Financial OÇcer (the
Company's principal executive oÇcer and principal Ñnancial oÇcer, respectively) of the eÅectiveness of its
disclosure controls and procedures as of the end of the period covered by this report. Based on that evaluation,
the Chief Executive OÇcer and Chief Financial OÇcer have concluded that, to the extent and for the reasons
described above, the Company's disclosure controls and procedures were not eÅective as of December 31,
2003 to provide reasonable assurance that information required to be disclosed by the Company in the reports
Ñled or submitted by the Company under the Securities Exchange Act of 1934 is recorded, processed,
summarized and reported within the time periods speciÑed in the Securities and Exchange Commission's rules
and forms.

Changes in Internal Control Over Financial Reporting

Except as identiÑed above, during the quarter ended December 31, 2003, there were no changes in the
Company's internal controls over Ñnancial reporting that have materially aÅected, or are reasonably likely to
materially aÅect, the Company's internal controls over Ñnancial reporting.

Item 10. Directors and Executive OÇcers of the Registrant

PART III

Information regarding the Company's directors responsive to Item 401 of Regulation S-K is set forth in
Exhibit 99.1, which is attached hereto. For information regarding the Company's executive oÇcers, reference
is made to Part I, at pages 9 through 11 inclusive, of this Annual Report.

Audit Committee

The Company has a separately designated standing Audit Committee established in accordance with
Section 3(a)(58)(A) of the Exchange Act. The members of the Audit Committee are Janet K. Cooper
(Chair), C.L. (Jerry) Henry, John E. Major and Terry D. Stinson.

Audit Committee Financial Expert

The Board of Directors of the Company has determined that Janet K. Cooper, Chair of the Audit
Committee, is an audit committee Ñnancial expert as deÑned by Item 401(h) of Regulation S-K of the
Securities Exchange Act of 1934, as amended (the ""Exchange Act'') and is independent within the meaning
of Item 7(d)(3)(iv) of Schedule 14A of the Exchange Act.

Code of Conduct and Code of Ethical Conduct

The Company has adopted a Code of Conduct that applies to all the Company's Directors, executive
oÇcers and employees. The Code of Conduct is available on the Company's website at
http://www.lennoxinternational.com/governance/code.html. Shareholders may request a free copy of these
documents from:

Lennox International Inc.
Attention: Investor Relations
2140 Lake Park Blvd.
Richardson, TX 75080
(972) 497-5000

The Company Code of Ethical Conduct for Senior Financial and Principal Executive OÇcers (""Code of
Ethical Conduct'') is also posted on the Company's website. Amendments to and waivers from the Code of
Conduct and Code of Ethical Conduct will be disclosed on the Company's website.

Corporate Governance Guidelines Ì Certain Committee Charters

The Company had adopted Corporate Governance Guidelines as well as charters for each of its Audit,
Compensation and Board Governance Committees. These documents are available on the Company's website
at http://www//lennoxinternational.com/governance/committee.html. Shareholders may request a free copy
of any of these documents from the address and phone numbers set forth above under ""Code of Conduct and
Code of Ethical Conduct.''

Section 16(a) BeneÑcial Ownership Reporting Compliance

Section 16(a) of the Securities Exchange Act of 1934 requires LII's Directors and executive oÇcers and
persons who beneÑcially own more than 10% of LII common stock to Ñle with the Securities and Exchange
Commission and the New York Stock Exchange, initial reports of ownership and reports of changes in their
ownership of LII common stock. Directors, executive oÇcers and greater than 10% beneÑcial owners are
required by the Securities and Exchange Commission regulations to furnish LII with copies of these reports.
Based solely upon a review of such reports and related information furnished to LII, LII believes that during
the 2003 Ñscal year, all LII Directors, executive oÇcers and greater than 10% beneÑcial owners were in
compliance with the section 16(a) Ñling requirements, other than Thomas W. Booth, who inadvertently Ñled
one Form 4 Statement of Change in BeneÑcial Ownership, reporting three transactions, on December 17,
2003, two days late.

Item 11. Executive Compensation

Information responsive to Item 402 of Regulation S-K is set forth in Exhibit 99.2, which is attached

hereto.

Item 12. Security Ownership of Certain BeneÑcial Owners and Management

(a) In accordance with Item 201(d) of Regulation S-K, set forth in the table below is certain
information regarding the number of shares of our common stock that were subject to outstanding stock
options or other compensation plan grants and awards at December 31, 2003.

EQUITY COMPENSATION PLANS INFORMATION

Plan Category

Equity compensation approved by

security holders ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

Equity compensation plans not approved by

security holders ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

Number of Securities Weighted-average
Exercise Price(b)

to be Issued(a)

Number of Securities
Remaining(c)

11,874,855(1)

$13.09(2)

3,600,580(3)

TotalÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

11,874,855

$13.09

3,600,580

(a) Number of securities to be issued upon exercise of outstanding options, warrants and rights.

(b) Weighted-average exercise price of outstanding options, warrants and rights.

securities reÖected in column (a).

(1) Includes the following:

‚ 8,698,027 shares of common stock to be issued upon exercise of outstanding stock options granted

under the 1998 Plan and the Non-employee Directors' Compensation and Deferral Plan;

‚ Stock appreciation rights based on 1,048,881 shares of common stock granted under the 1998 Plan and
the Non-employee Directors' Compensation and Deferral Plan. Upon exercise, the stock appreciation
rights will be settled in cash; and

‚ 2,127,947 shares of common stock to be issued upon the vesting of restricted stock units outstanding

under the 1998 Plan.

Excludes 254,355 shares of common stock to be issued upon exercise of outstanding options originally
granted under the Ñve equity compensation plans adopted by Service Experts, Inc. The options have a
weighted average exercise price of $27.78. The options were assumed by the Company in connection with
the acquisition of Service Experts in 2000. No additional options will be granted under such plans.

(2) Upon vesting, restricted stock units are settled for shares of common stock on a one-for-one basis.
Accordingly, the restricted stock units have been excluded for purposes of computing the weighted-
average exercise price.

(3) Includes 3,158,637 shares of common stock available for issuance under the 1998 Plan, 382,441 shares of
common stock reserved for issuance under the Non-employee Directors' Compensation and Deferral
Plan and 59,502 shares of common stock reserved for issuance under the Employee Stock Purchase Plan.

(b) Information regarding security ownership of certain beneÑcial owners, directors and executive

oÇcers is set forth in Exhibit 99.3, which information is incorporated herein by reference.

Item 13. Certain Relationships and Related Transactions

Information regarding certain relationships and related transactions is set forth in Exhibit 99.2, which is

attached hereto.

Item 14. Principal Accounting Fees and Services

Information regarding principal accountant fees and services is set forth in Exhibit 99.4, which is attached

hereto.

Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K

(a) Financial Statements, Financial Statement Schedules and Exhibits

PART IV

(1) The following Ñnancial statements of Lennox International Inc. and subsidiaries are included in

Part II, Item 8 of this Form 10-K:

Report of Independent Public Accountants
Consolidated Balance Sheets as of December 31, 2003 and 2002
Consolidated Statements of Operations for the Years Ended December 31, 2003, 2002 and 2001
Consolidated Statements of Stockholders' Equity for the Years Ended December 31, 2003, 2002 and
2001
Consolidated Statements of Cash Flows for the Years Ended December 31, 2003, 2002 and 2001
Notes to Consolidated Financial Statements for the Years Ended December 31, 2003, 2002 and
2001

(2) The following Ñnancial statement schedule for Lennox International Inc. and subsidiaries is

included herein:

Report of Independent Public Accountants on Financial Statement Schedule (pages 33 and 85 of
Form 10-K)
Schedule II Ì Valuation and Qualifying Accounts and Reserves (page 86 of Form 10-K)

(3) Exhibits:

The exhibits listed in the accompanying Index to Exhibits on pages 87 through 90 of this

Form 10-K are Ñled or incorporated by reference as part of this Form 10-K.

(b) Reports on Form 8-K:

During the three-month period ending December 31, 2003, the Company Ñled or furnished one
Current Report on Form 8-K dated October 21, 2003 reporting under Item 12 Ì Results of Operations
and Financial Condition a press release reporting the Company's Ñnancial results for the quarter ended
September 30, 2003.

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.

SIGNATURES

LENNOX INTERNATIONAL INC.

By:

/s/ ROBERT E. SCHJERVEN

Robert E. Schjerven
Chief Executive OÇcer

October 18, 2004

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/ ROBERT E. SCHJERVEN

Chief Executive OÇcer and

October 18, 2004

Robert E. Schjerven

Director (Principal Executive
OÇcer)

/s/ SUSAN K. CARTER

Susan K. Carter

/s/ DAVID L. INMAN

David L. Inman

Executive Vice President, Chief
Financial OÇce and Treasurer
(Principal Financial OÇcer)

October 18, 2004

Vice President, Controller and
Chief Accounting OÇcer
(Principal Accounting OÇcer)

October 18, 2004

/s/

JOHN W. NORRIS, JR.
John W. Norris, Jr.

Chairman of the Board of

October 18, 2004

Directors

/s/ LINDA G. ALVARADO

Director

October 18, 2004

Linda G. Alvarado

/s/ STEVEN R. BOOTH

Director

October 18, 2004

Steven R. Booth

/s/ THOMAS W. BOOTH

Director

October 18, 2004

Thomas W. Booth

David V. Brown

Director

Signature

Title

Date

/s/

JAMES J. BYRNE
James J. Byrne

/s/

JANET K. COOPER
Janet K. Cooper

Director

October 18, 2004

/s/ C.L. (JERRY) HENRY

Director

October 18, 2004

C.L. (Jerry) Henry

/s/

JOHN E. MAJOR
John E. Major

/s/

JOHN W. NORRIS III
John W. Norris III

Director

October 18, 2004

/s/ WALDEN W. O'DELL

Director

October 18, 2004

Walden W. O'Dell

/s/ TERRY D. STINSON

Director

October 18, 2004

Terry D. Stinson

/s/ RICHARD L. THOMPSON

Director

October 18, 2004

Richard L. Thompson

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
ON FINANCIAL STATEMENT SCHEDULE

To the Stockholders and Board of Directors of

Lennox International Inc.:

We have audited in accordance with auditing standards generally accepted in the United States the
consolidated Ñnancial statements of Lennox International Inc. and Subsidiaries included in this Annual
Report on Form 10-K and have issued our report thereon dated February 6, 2002. Our audits were made for
the purpose of forming an opinion on the basic consolidated Ñnancial statements taken as a whole.
Schedule II, Valuation and Qualifying Accounts and Reserves, is the responsibility of the Company's
management and is presented for purposes of complying with the Securities and Exchange Commission's rules
and is not part of the basic consolidated Ñnancial statements. This schedule has been subjected to the auditing
procedures applied in the audits of the basic consolidated Ñnancial statements and, in our opinion, fairly states
in all material respects the Ñnancial data required to be set forth therein in relation to the basic consolidated
statements taken as a whole.

Dallas, Texas
February 6, 2002

ARTHUR ANDERSEN LLP(1)

LENNOX INTERNATIONAL INC.

SCHEDULE II Ì VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
For the Years Ended December 31, 2003, 2002 and 2001

Balance at
beginning
of year

Additions
charged to
cost and
expenses

Deductions(1)

Balance
at end
of year

(In Millions)

2001:

Allowance for doubtful accounts ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

$23.8

$15.8

$(11.2)

$28.4

2002:

Allowance for doubtful accounts ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

$28.4

$ 9.8

$(14.4)

$23.8

2003:

Allowance for doubtful accounts ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ

$23.8

$13.3

$(17.9)

$19.2

(1) Uncollectible accounts charged oÅ, net of recoveries. Also includes $0.9 million transferred as part of the

formation of Outokumpu Heatcraft joint ventures in 2002.

Exhibit Number

Exhibit Name

INDEX TO EXHIBITS

3.1

3.2

4.1

4.2

4.3

4.4

10.1

10.2

10.3

10.4

Ì Restated CertiÑcate of Incorporation of Lennox International Inc. (""LII'') (Ñled as
Exhibit 3.1 to LII's Registration Statement on Form S-1 (Registration
No. 333-75725) and incorporated herein by reference).

Ì Amended and Restated Bylaws of LII (Ñled as Exhibit 3.2 to LII's Registration
Statement on Form S-1 (Registration No. 333-75725) and incorporated herein by
reference).

Ì Specimen Stock CertiÑcate for the Common Stock, par value $.01 per share, of LII
(Ñled as Exhibit 4.1 to LII's Registration Statement on Form S-1 (Registration
No. 333-75725) and incorporated herein by reference).

Ì Rights Agreement, dated as of July 27, 2000, between LII and ChaseMellon
Shareholder Services, L.L.C., as Rights Agent, which includes as Exhibit A the
form of CertiÑcate of Designations of Series A Junior Participating Preferred Stock
setting forth the terms of the Preferred Stock, as Exhibit B the form of Rights
CertiÑcate and as Exhibit C the Summary of Rights to Purchase Preferred Stock
(Ñled as Exhibit 4.1 to LII's Current Report on Form 8-K dated July 27, 2000 and
incorporated herein by reference).

Ì Indenture, dated as of May 8, 2002, between LII and The Bank of New York, as
Trustee, relating to LII's 6.25% Convertible Subordinated Notes due June 1, 2009
(Ñled as Exhibit 10.2 to LII's Quarterly Report on Form 10-Q for the quarter ended
March 31, 2002 and incorporated herein by reference).

Ì Registration Rights Agreement, dated as of May 8, 2002, between LII and UBS
Warburg LLC and the other initial purchasers relating to LII's 6.25% Convertible
Subordinated Notes due June 1, 2009 (Ñled as Exhibit 10.3 to LII's Quarterly
Report on Form 10-Q for the quarter ended March 31, 2002 and incorporated
herein by reference).
LII is a party to several debt instruments under which the total amount of securities
authorized under any such instrument does not exceed 10% of the total assets of LII
and its subsidiaries on a consolidated basis. Pursuant to paragraph 4(iii)(A) of
Item 601(b) of Regulation S-K, LII agrees to furnish a copy of such instruments to
the Securities and Exchange Commission upon request.

Ì Amended and Restated Credit Facility Agreement dated as of September 11, 2003
among LII, the lenders listed thereto, JPMorgan Chase Bank, Bank of Nova Scotia,
The Bank of Tokyo-Mitsubishi, Ltd. And Wells Fargo Bank Texas, N.A., including
an Amended and Restated Intercreditor Agreement as Exhibit F thereto and an
Amended and Restated Pledge Agreement as Attachment D thereto (Ñled as
Exhibit 10.1 to LII's Quarterly Report on Form 10-Q for the quarter ended
September 30, 2003 and incorporated herein by reference).

Ì First Amendment to Amended and Restated Credit Facility Agreement dated as of
August 27, 2004 among LII, the lenders party thereto, and JPMorgan Chase Bank,
as administrative agent (Ñled herewith).

Ì Fourth Amendment to Second Amended and Restated Receivable Purchase
Agreement dated as of June 11, 2004, by and among Lennox Industries Inc., LPAC
Corp., Liberty Street Funding Corp., the investors named in the Purchase Agree-
ment, The Bank of Nova Scotia, YC SUSI Trust, Bank of America, N.A. and The
Yorktown Investors (Ñled herewith).

Ì Second Amended and Restated Receivables Purchase Agreement, dated as of
June 16, 2003, among LPAC Corp., Lennox Industries Inc., Blue Ridge Asset
Funding Corporation, Liberty Street Funding Corp., The Bank of Nova Scotia and
Wachovia Bank, N.A. (Ñled as Exhibit 10.1 to LII's Quarterly Report on
Form 10-Q for the quarterly period ended June 30, 2003 and incorporated herein by
reference).

Exhibit Number

Exhibit Name

10.5

10.6

10.7

10.8

10.9

10.10

10.11

10.12

10.13

10.14

Ì Purchase and Sale Agreement, dated as of June 19, 2000, among Lennox Industries
Inc., Heatcraft Inc. and LPAC Corp. (Ñled as Exhibit 10.1 to LII's Quarterly
Report on Form 10-Q for the quarterly period ended June 30, 2000 and incorpo-
rated herein by reference).

Ì First Amendment to the Purchase and Sale Agreement, dated as of June 17, 2002,
among Lennox Industries Inc., Heatcraft Inc., Armstrong Air Conditioning Inc. and
LPAC Corp. (Ñled as Exhibit 10.2 to LII's Quarterly Report on Form 10-Q for the
quarterly period ended June 30, 2002 and incorporated herein by reference).

Ì Second Amendment to Purchase and Sale Agreement, dated as of June 16, 2003,
by and among LPAC Corp., Lennox Industries Inc., Advanced Distributor Products
LLC and Heatcraft Refrigeration Products LLC (Ñled as Exhibit 10.2 to LII's
Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2003 and
incorporated herein by reference).

Ì Omnibus Amendment Number One to the Amended and Restated Receivables
Purchase Agreement and the Purchase and Sale Agreement, dated as of Janu-
ary 15, 2003, among Lennox Industries Inc., Heatcraft Inc., Armstrong Air
Conditioning Inc., Advanced Distributor Products LLC, Heatcraft Refrigeration
Products LLC, LPAC Corp., Blue Ridge Asset Funding Corporation and Wachovia
Bank, N.A. (Ñled as Exhibit 10.12 to LII's Annual Report on Form 10-K for the
Ñscal year ended December 31, 2002 and incorporated herein by reference).

Ì First Omnibus Amendment to Transaction Documents, dated as of December 31,
2003 among LII, Lennox Industries Inc., Armstrong Air Conditioning Inc., Ad-
vanced Distributor Products LLC, Heatcraft Refrigeration Products LLC, LPAC
Corp., Blue Ridge Asset Funding Corporation, Wachovia Bank, National Associa-
tion, Liberty Street Funding Corp., The Bank of Nova Scotia, EagleFunding
Capital Corporation, Fleet National Bank and The Liberty Street Investors (Ñled
herewith).

Ì Assignment and Assumption Agreement dated as of May 5, 2004, by and among
EagleFunding Capital Corporation and YC SUSI Trust, Fleet National Bank and
Back of America, N.A., Fleet Securities, Inc. and Bank of America, N.A., The
Bank of Nova Scotia and LPAC Corp. (Ñled here within).

Ì Receivables Purchase Agreement dated as of June 27, 2003 among LPAC Corp. II,
Lennox Industries Inc., Jupiter Securitization Corporation, The Financial Institu-
tions from time to time parties thereto, and Bank One, NA. (Ñled as Exhibit 10.3 to
LII's Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2003
and incorporated herein by reference).

Ì Amendment No. 1 to Receivables Purchase Agreement dated as of September 11,
2003 among LPAC Corp. II, Lennox Industries Inc., Jupiter Securitization Corpo-
ration, The Financial Institutions from time to time parties thereto, and Bank One,
NA. (Ñled as Exhibit 10.2 to LII's Quarterly Report on Form 10-Q for the
quarterly period ended September 30, 2003 and incorporated herein by reference).
Ì Amendment No. 2 to Receivables Purchase Agreement dated as of June 25, 2004
among LPAC Corp. II, Lennox Industries Inc., Jupiter Securitization Corporation,
The Financial Institutions from time to time parties thereto, and Bank One, NA.
(Ñled herewith).

Ì Amendment No. 1 to Receivables Sale Agreement dated as September 11, 2003
among Armstrong Air Conditioning Inc., and Lennox Hearth Products Inc., and
LPAC Corp. II (Ñled as Exhibit 10.3 to LII's Quarterly Report on Form 10-Q for
the quarterly period ended September 30, 2003 and incorporated herein by refer-
ence).

Exhibit Number

10.15

10.16

10.17

10.18

10.19*

10.20*

10.21*

10.22*

10.23*

10.24*

10.25*

10.26*

10.27*

10.28*

Exhibit Name

Ì Joint Venture and Members Agreement dated July 18, 2002, between LII,
Outokumpu Copper Products Oy, Outokumpu Copper Holdings, Inc. and Heatcraft
Heat Transfer LLC (Ñled as Exhibit 10.7 to LII's Quarterly Report on Form 10-Q
for the quarterly period ended September 30, 2002 and incorporated herein by
reference).

Ì Shareholders Agreement dated July 18, 2002, between LGL Holland B.V.,
Outokumpu Copper Products Oy and Outokumpu Heatcraft B.V. (Ñled as
Exhibit 10.8 to LII's Quarterly Report on Form 10-Q for the quarterly period ended
September 30, 2002 and incorporated herein by reference).

Ì Shared Services Agreement dated August 30, 2002, between LII, Outokumpu
Heatcraft USA LLC and Outokumpu Heatcraft B.V. (Ñled as Exhibit 10.9 to LII's
Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2002
and incorporated herein by reference).

Ì Joint Technology Development Agreement, dated August 30, 2002, between LII,
Outokumpu Oyj, Outokumpu Heatcraft USA LLC, Outokumpu Heatcraft B.V.
and Advanced Heat Transfer LLC (Ñled as Exhibit 10.10 to LII's Quarterly Report
on Form 10-Q for the quarterly period ended September 30, 2002 and incorporated
herein by reference).

Ì 1998 Incentive Plan of Lennox International Inc. (Ñled as Exhibit 10.8 to LII's
Registration Statement on Form S-1 (Registration No. 333-75725) and incorpo-
rated herein by reference).

Ì Amendment, dated as of December 15, 2000, to 1998 Incentive Plan of Lennox
International Inc. (Ñled as Exhibit 10.18 to LII's Annual Report on Form 10-K for
the Ñscal year ended December 31, 2000 and incorporated herein by reference).
Ì Amendment dated May 17, 2002, to 1998 Incentive Plan of Lennox International
Inc. (Ñled as Exhibit 10.19 to LII's Annual Report on Form 10-K for the Ñscal year
ended December 31, 2002 and incorporated herein by reference).

Ì Lennox International Inc. ProÑt Sharing Restoration Plan (Ñled as Exhibit 10.9 to
LII's Registration Statement on Form S-1 (Registration No. 333-75725) and
incorporated herein by reference).

Ì Lennox International Inc. Supplemental Executive Retirement Plan (Ñled as
Exhibit 10.10 to LII's Registration Statement on Form S-1 (Registration
No. 333-75725) and incorporated herein by reference).

Ì Lennox International Inc. Non-employee Directors' Compensation and Deferral
Plan (Ñled as Exhibit 10.22 to LII's Annual Report on Form 10-K for the Ñscal year
ended December 31, 2002 and incorporated herein by reference).

Ì Amendment dated May 17, 2002, to Lennox International Inc. Non-employee
Directors' Compensation and Deferral Plan (Ñled as Exhibit 10.23 to LII's Annual
Report on Form 10-K for the Ñscal year ended December 31, 2002 and incorporated
herein by reference).

Ì Form of IndemniÑcation Agreement entered into between LII and certain executive
oÇcers and directors (Ñled as Exhibit 10.15 to LII's Registration Statement on
Form S-1 (Registration No. 333-75725) and incorporated herein by reference).
Ì Form of revised Employment Agreement entered into between LII and certain
executive oÇcers (Ñled as Exhibit 10.1 to LII's Quarterly Report on Form 10-Q for
the quarterly period ended September 30, 2000 and incorporated herein by refer-
ence).

Ì Form of Amended and Restated Change of Control Employment Agreement
entered into between LII and certain executive oÇcers (Ñled as Exhibit 10.2 to
LII's Quarterly Report on Form 10-Q for the quarterly period ended September 30,
2000 and incorporated herein by reference).

12.1

Ì Computation of Ratio of Earnings to Fixed Charges (Ñled herewith).

Exhibit Number

Exhibit Name

21.1
23.1
31.1
31.2
32.1

99.1
99.2
99.3
99.4

Ì Subsidiaries of LII (Ñled herewith).
Ì Consent of KPMG LLP (Ñled herewith).
Ì CertiÑcation of the principal executive oÇcer (Ñled herewith).
Ì CertiÑcation of the principal Ñnancial oÇcer (Ñled herewith).
Ì CertiÑcation of the principal executive oÇcer and the principal Ñnancial oÇcer of

the Company pursuant to 18 U.S.C. Section 1350 (Ñled herewith).
Ì Information regarding the Directors of the Company (Ñled herewith).
Ì Executive Compensation Information (Ñled herewith).
Ì BeneÑcial Ownership of Common Stock (Ñled herewith).
Ì Principal Accounting Fees and Services (Ñled herewith).

* Management contracts and compensatory plans and arrangements required to be Ñled as exhibits to this

Form 10-K pursuant to Item 14(c).

Board of

Directors

Linda G. Alvarado

President and CEO

Janet K. Cooper

Walden W. O’Dell

Senior Vice President and Treasurer

Chairman of the Board, President and CEO

Alvarado Construction, Inc.

Qwest Communications International Inc.

Diebold, Inc.

Committees: 3, 6, 7

Committees: 2, 4, 5

Committees: 3, 6

Steven R. Booth

President

PolyTech Molding Inc.

Committees: 1, 6, 7

Thomas W. Booth

Vice President, Corporate Technology

Lennox International Inc.

Committees: 1, 6

David V. Brown

Owner/Director

Plantation Camp

Committees: 1, 5, 7

James J. Byrne

Chairman

C. L. (Jerry) Henry

Robert E. Schjerven

Former Chairman, President and CEO

CEO

Johns Manville Corporation

Lennox International Inc.

Committees: 1, 2, 3

John E. Major

President

MTSG

Committees: 1, 2, 4, 5

John W. Norris, Jr.

Chairman of the Board

Lennox International Inc.

John W. (Bo) Norris III

Terry D. Stinson

CEO

Xelus, Inc.

Committees: 1, 2, 3

Richard L. Thompson

Former Group President

Caterpillar Inc.

Committees: 3, 4, 5

Committee Legend (bold indicates chairperson)

Assistant Director of Philanthropy

1: Acquisition

5: Human Resources

Maine Chapter, The Nature Conservancy

2: Audit

6: Pension & Risk Management

Byrne Technology Partners Ltd.

Committees: 6, 7

Committees: 4, 5, 7

3: Board Governance 7: Public Policy

4: Compensation

Leadership

Management Team

Robert E. Schjerven

Chief Executive Ofﬁcer

Linda A. Goodspeed

Chief Technology Ofﬁcer

Harry J. Ashenhurst

Chief Administrative Ofﬁcer

William F. Stoll, Jr.

Chief Legal Ofﬁcer

Susan K. Carter

Chief Financial Ofﬁcer

Scott J. Boxer

President and Chief Operating Ofﬁcer

Service Experts

Robert J. McDonough

President and Chief Operating Ofﬁcer

Worldwide Heating and Cooling

Michael G. Schwartz

President and Chief Operating Ofﬁcer

Worldwide Refrigeration

David L. Inman

Vice President, Controller, and

Chief Accounting Ofﬁcer

Investors

Corporate Information

Annual Meeting

Transfer Agent and Registrar

Our annual shareholders meeting will be

Mellon Investor Services is Lennox

held on November 16, 2004 at 9:00 a.m.

International’s Transfer Agent.

local time. Any shareholder with proper

All inquiries should be directed to:

identiﬁcation may attend. The meeting

will be held at:

Lennox International Inc.

c/o Mellon Investor Services

University of Texas at Dallas

P.O. Box 3315

Conference Center

South Hackensack, NJ

Rutford Avenue and Drive A

07606-1915

Richardson, TX 75083

Investor Inquiries

Investors and ﬁnancial analysts interested

in obtaining information about Lennox

International should contact:

Bill Moltner

Vice President, Investor Relations

Phone: 972-497-6670

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

KPMG LLP

Dallas, TX

e-mail: investor@lennoxintl.com

Dividend Information

Stock Exchange

In recent years, Lennox International has

declared dividends four times a year. The

Lennox International’s trading symbol is

amount and timing of dividend payments

LII. The common stock of LII has traded

are determined by our board of directors.

on the New York Stock Exchange since

July 29, 1999.

SEC Filings

Forward-Looking Statements

This annual report contains forward-looking

statements within the meaning of the

A copy of the Lennox International Inc.

Private Securities Litigation Reform Act

Annual Report (Form 10-K) and other

of 1995. These statements are subject to

reports ﬁled with the Securities and

numerous risks and uncertainties that

Exchange Commission for 2003 are

could cause actual results to differ

available through our corporate website

materially from such statements. For

or will be furnished, without charge, on

information concerning these risks and

written request to:

uncertainties, see Lennox International’s

Lennox International Investor Relations

P.O. Box 799900

Dallas, TX 75379-9900

publicly available ﬁlings with the Securities

and Exchange Commission. LII disclaims

any intention or obligation to update or

revise any forward-looking statements,

whether as a result of new information,

future events or otherwise.

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.

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2140 Lake Park Blvd.
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www.lennoxinternational.com

2003 Annual Report