Lennox International Inc.
2005 Annual Report
Lennox International (LII), through our subsidiaries, is a leading
provider of climate control solutions for the heating, air condi-
tioning, and refrigeration markets around the world. We have
built our business on a heritage of integrity and innovation
dating back to 1895. Today we are focused on three core
businesses: Heating & Cooling, Service Experts, and
Refrigeration. The 16,000 employees who make up our com-
pany are dedicated to providing trusted brands, innovative
products, unsurpassed quality, and responsive service.
We are focused
on three key businesses:
Heating & Cooling
Service Experts
Refrigeration
We are a leading manufacturer and marketer of heating
We are the company consumers trust most for their heating,
We are a leading provider of commercial refrigeration sys-
and cooling equipment that improves indoor comfort. Our
cooling, and indoor air quality needs. We operate dealer
tems in markets around the world. Our products are used
product lines include air conditioners, furnaces, heat
service centers in the United States and Canada that sell,
for cold storage applications, primarily to preserve food
pumps, commercial heating and cooling systems, hearth
install, maintain, and service heating and cooling equip-
and other perishables, in supermarkets, convenience stores,
products, and a variety of indoor air quality equipment.
ment for residential and light commercial applications.
restaurants, warehouses, and distribution centers.
Manufacturing Footprint
25 PLANTS IN 11 COUNTRIES
Residential Heating & Cooling
Commercial Heating & Cooling
Refrigeration
Joint Ventures
Business Mix*
Geography
Americas
Europe
Geography
Asia–Pacific
Americas
Europe
Geography
Asia–Pacific
Americas
Europe
Asia–Pacific
87%
8%
5%
87%
8%
5%
87%
8%
5%
m
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.
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y
b
d
e
n
g
i
s
e
d
End Market
Replacement
New Construction
End Market
Replacement
New Construction
End Market
Replacement
New Construction
60%
40%
60%
40%
60%
40%
Customer
Residential
Commercial
Customer
Residential
Commercial
Customer
Residential
Commercial
63%
37%
63%
37%
63%
37%
*company estimates
1,605.9
651.7
1,605.9
641.4
651.7
467.2
641.4
1,605.9
467.2
651.7
641.4
467.2
Heating & Cooling
Residential
Commercial
Heating & Cooling
Residential
Service Experts
Commercial
Refrigeration
Heating & Cooling
Service Experts
Residential
Refrigeration
Commercial
Service Experts
Refrigeration
197.7
53.7
197.7
17.0
53.7
40.3
17.0
197.7
40.3
53.7
17.0
40.3
Heating & Cooling
Residential
Commercial
Heating & Cooling
Residential
Service Experts
Commercial
Refrigeration
Heating & Cooling
Service Experts
Residential
Refrigeration
Commercial
Service Experts
Refrigeration
Geography
Americas
Europe
Asia–Pacific
87%
8%
5%
End Market
Replacement
New Construction
60%
40%
Customer
Residential
Commercial
63%
37%
LENNOX INTERNATIONAL 1.
1,605.9
651.7
Heating & Cooling
Residential
Commercial
Geography
Americas
Europe
Asia–Pacific
87%
8%
5%
End Market
Replacement
New Construction
60%
40%
Financial Highlights
641.4
467.2
Customer
Residential
Commercial
63%
37%
Service Experts
Refrigeration
2005 Net Sales1
(In millions of dollars)
2005 Segment Profit1
(In millions of dollars)
1,605.9
651.7
641.4
467.2
Heating & Cooling
Residential
Commercial
Service Experts
Refrigeration
197.7
53.7
17.0
40.3
Heating & Cooling
Residential
Commercial
Service Experts
Refrigeration
For the year ended December 31,
2005
2004
2003
2002
2001
(In millions, except per share data)
Statement of Operations Data
197.7
53.7
Heating & Cooling
Residential
Commercial
Net sales
Net income (loss)
17.0
40.3
Service Experts
Refrigeration
Net income (loss) per diluted share
Loss (income) from discontinued operations, net of income tax
(Gains), losses and other expenses, net of income tax
Realized gains on settled futures contracts, net of income tax2
Restructuring charge, net of income tax
Goodwill impairment, net of income tax
Adjusted income from continuing operations
Diluted earnings per share, as adjusted
Dividends per share
Other Data
Capital expenditures
$ 3,366.2
$ 2,982.7
$ 2,789.9 $ 2,727.4 $ 2,802.7
150.7
(134.4)
2.11
(2.24)
86.4
1.36
(203.5)
(3.11)
(40.6)
(0.72)
1.4
(34.1)
10.7
1.6
—
130.3
1.83
40.9
—
—
—
184.8
91.3
1.39
0.41
0.385
0.3
1.9
—
—
—
88.6
1.39
0.38
(6.0)
(5.2)
—
6.1
247.9
39.3
0.68
0.38
(6.0)
—
—
51.9
—
5.3
0.09
0.38
$
63.3
$
40.3
$
39.7
$
22.4
$
16.6
Research and development expenses
40.3
37.6
38.0
38.2
37.3
Balance Sheet Data
Total assets
Total debt
Stockholders’ equity
$ 1,737.6
$ 1,518.6
$ 1,720.1
$ 1,510.9
$ 1,793.4
120.5
794.4
310.5
472.9
362.3
577.7
379.9
433.6
517.8
654.0
1 Residential is net of eliminations; Segment Profit excludes unallocated corporate expense
2 Included in (gains), losses and other expenses, net of income tax
Our total company sales increased 13% to a record
$3.4 billion, with all of our business segments contri-
buting to this growth. Our adjusted income from
continuing operations was $130 million, or $1.83 per
diluted share, comparing very favorably with the
$91 million, or $1.39 per share, we earned in 2004.
And we ended the year with our strongest balance
sheet since we became a public company in 1999,
reflected in a 13% total debt to capitalization ratio.
LENNOX INTERNATIONAL 3.
To Our Shareholders
2005: FOCUSED TO DELIVER 2005 was a record-breaking year for
Lennox International. We delivered on our commitment to increase
the focus on our core businesses and solidly execute our value-
building strategies. The results are clear: supported by enhanced
operational efficiencies, effective pricing, favorable weather patterns,
and a sustained strength in the residential new construction
market, LII set several key performance records.
Our total company sales increased 13% to a record $3.4 billion,
with all of our business segments contributing to this growth.
Our adjusted income from continuing operations—which we
have reconciled in the Financial Highlights table included with
this annual report—was $130 million, or $1.83 per diluted share,
comparing very favorably with the $91 million, or $1.39 per share,
we earned in 2004. And we ended the year with our strongest
balance sheet since we became a public company in 1999,
reflected in a 13% total debt to capitalization ratio.
Our focus on cash flow and debt reduction has proven to be very
effective. We generated cash from operations of $227 million and
Robert E. Schjerven Chief Executive Officer
John W. Norris, Jr. Chairman of the Board
invested $63 million in capital expenditures, providing full-year free
cash flow of $164 million. During the year we made voluntary contri-
butions of $26 million to pension plans and, in October 2005, we
completed the conversion of our outstanding convertible subordinated
We will remember 2005 as a landmark year for LII—
the starting point for our next great period of opportunity and growth.
notes, eliminating $144 million in debt and $9 million
in annual pre-tax interest expense.
sourcing organization, including the establishment of a pro-
curement office in Shanghai, to provide more centralized
direction and coordination of buying and sourcing activities.
The new organization works closely with all our businesses
to drive excellence in key areas of corporate procurement
through coordinated efforts.
It is gratifying that the equity markets have acknowledged
and rewarded our company for the progress we have made.
Finishing 2005 with total debt of $121 million, we are
We continue to deliver superior returns to our shareholders
extremely pleased that we have reduced the debt on our
with total return in 2005 of more than 40%. For the past
balance sheet by $570 million over the past five years.
five years, our average annual return has been almost 33%,
Thanks to these efforts, debt reduction is no longer our
significantly outperforming the broader market indices over
top priority. In September, our board of directors author-
the same period—truly an exceptional performance.
ized the repurchase of up to 10 million shares of our
stock, while in December the board raised our dividend
by 10%. Through these actions, we are returning more
value to our shareholders. We continue to evaluate
prospects to build long-term value by investing in
our core businesses and exploring strategic growth
opportunities.
Corporate-wide initiatives supported our strong
financial performance. In particular, our drive for
product innovation is a vital part of our past, pres-
ent, and future. It is notable that approximately
30% of our equipment sales in 2005 came from
products introduced in the last three years.
While striving to provide our customers mean-
ingful product innovation and enhanced services
and programs, we have not lost focus on our
internal operations. In 2005, we overcame
approximately $67 million in higher costs for
steel, copper, aluminum, and related com-
ponents. To effectively manage escalations in
materials costs, LII created a global strategic
No matter which superlatives we use to describe Lennox
International’s performance in 2005, it will be remembered
as a highly successful and important year for our company
and for our shareholders.
HEATING AND COOLING Taking advantage of strong
demand, driven in part by favorable cooling season weather,
our Residential Heating & Cooling business posted impres-
sive results. Unprecedented demand, combined with price
realization across all of our brands, drove segment revenue
growth of 19%.
Continuing our drive to offer industry-leading products,
Lennox introduced the XC21, the world’s first residential
air conditioner rated at 20+ SEER for energy efficiency.
Focusing on energy-efficient products such as the XC21
helped us win our third consecutive ENERGY STAR®
LENNOX INTERNATIONAL 5.
Manufacturer of the Year award from the Environmental
Protection Agency. The XC21 is part of our fast-growing,
top-of-the-line Dave Lennox Signature Collection® of heat-
ing and cooling products, which now represent 18% of
total Lennox brand equipment sales.
Increased sales for premium comfort products was only
products, from entry-level to full-featured, when
one of many selling success stories: in 2005 we established
the regulation took effect on January 23, 2006.
a dozen new distributors for our Armstrong Air and Ducane
lines, which are aimed at the middle and value tiers of the
market, respectively. Armstrong Air also won a Product
Showcase Award at the prestigious HVAC Comfortech
trade show for its Enhanced 80v and Advantage II series of
80% efficient furnaces. Our national consumer advertising
efforts were also effective, including an award-winning
“Home Comfort Makeover Contest.”
Commercial Heating & Cooling finished another
strong year, with revenue advancing 12%.
Strong sales increases in our domestic National
Accounts helped drive this improvement. We
have now established nine commercial regional
distribution centers to place products more stra-
tegically, allowing us to increase our penetration
in the replacement market by shortening our
Our Residential Heating & Cooling management team was
response time. We also introduced the innovative
very focused on the new National Appliance Energy
S-Class, expanding the capacity of our core roof-
Conservation Act (NAECA) regulation that raised the mini-
top line up to 50 tons. The capacity increase and
mum efficiency for residential air conditioning by 30%
the addition of variable air volume capabilities allow
to 13 SEER. This change had a major impact on all of our
us to expand our growth opportunities by effectively
residential cooling lines and was one of the largest and
serving new market segments.
most comprehensive projects in our history. We used it as
an opportunity to not only comply with the new energy
efficiency requirement, but also to standardize product
platforms across our brands while maintaining meaningful
brand differentiation through unique product features and
visual design. Organizational alignment and close coopera-
tion across our business units allowed us to be fully ready
with a comprehensive and competitive range of new
While commercial equipment demand in the U.S.
and Canada continued to improve, European demand
remains stagnant. We strengthened our management
team and realigned our organization to a more pan-
European structure to improve our performance in this
challenging market.
SERVICE EXPERTS With a renewed focus on the more
profitable service and replacement segments of the resi-
dential and light commercial market, Service Experts
Service Experts Centers
Superior Service
took advantage of a robust market and strong advertising and marketing
programs to return to profitability in 2005. Segment revenue advanced
5% and segment profit improved dramatically by $19 million. Service
Experts’ progress is meeting our expectations, and we are confident
the improvement will continue.
Strong management and leadership at the service center level are vital
for the continued improvement of Service Experts. The General
Manager Fast Track program, designed to aggressively and comprehen-
sively train new general managers through a combination of extensive
classroom work and on-the-job training, trained 38 candidates in
three classes.
Effective marketing and branding are helping drive improvement. An
increased emphasis on providing the best customer service in the industry
was launched with the introduction of “Standards of Excellence,” focus-
ing on issues consumers revealed were most important to them—includ-
ing quality, responsiveness, and professional certification. The introduction
of a new logo and service uniform further differentiated Service Experts in
the markets it serves. The growing Indoor Air Quality (IAQ) market was
targeted with the “Home Health Report Card” program, a whole-house
approach to indoor air quality which looks beyond the traditional air condi-
tioning and heating equipment to create a healthier indoor environment.
Winning consumer trust is a key to success in the service and replacement
business, and Service Experts is proving to be a leader. Over 80% of the
company’s 1,200 service technicians are now certified by North American
Technical Excellence (NATE), giving Service Experts the largest network of
certified technicians in the industry.
REFRIGERATION Refrigeration sales advanced 5% in 2005. Solid gains in
the Americas more than offset weaker performance in the Asia-Pacific region.
Thanks in part to a new world-class product development process to ensure
high-value products reach the market quicker than ever before, we intro-
duced several innovations last year. Our Extended Thin Profile unit coolers
LENNOX INTERNATIONAL 7.
To establish a powerful common identity for
consumers and employees, Service Experts
launched a branding initiative in 2005. A new
logo, service uniforms, and a new national
spokesperson—“Sam the Service Expert”—
were chosen with the help of extensive con-
sumer research. The Service Experts Standards
of Excellence were also developed. These
standards were summed up in a new tagline—
“Expertise You Can Rely On. Guaranteed.”—
reflecting the company’s 100% customer
satisfaction guarantee. Service Experts is now
harnessing the selling power of a common
brand and promise through extensive use in
websites, service truck signage, and advertising.
FPO
Lennox introduced the world’s first resi-
dential air conditioner rated at over 20 SEER
(Seasonal Energy Efficiency Rating) —the
XC21, the most energy-efficient central air
conditioner available on the market. Basing
the XC21 design on detailed input from more
than 14,000 homeowners and contractors,
Lennox combines state-of-the-art in home
comfort and serviceability. A new cabinet
design and color, part of a new look for
the entire Lennox product line, add
to the unit’s attractively unique
appearance.
LENNOX INTERNATIONAL 9.
Driving Innovation
feature one of the most compact cabinet designs on the market, allowing
supermarket and convenience store owners to fit the coolers in limited space
while providing more room for shelving. ServiceMate™ is an innovative
feature for air-cooled condensing units that provides immediate, visual feed-
back on the status of system control components, reducing diagnostic time
and equipment downtime.
We welcomed new leadership for our Asia-Pacific operations, an impor-
tant priority in a market with excellent long-term growth potential. In
Australia, we consolidated Kirby and Lovelocks into a single wholesale
operation and introduced a new look for our storefronts under the
Heatcraft Refrigeration banner. Our operation in Brazil, benefiting from
our domestic marketing and product development expertise, has
made significant progress and is now solidly profitable. Revenue has
doubled in the past two years and export sales to other South
American markets are growing.
Effective marketing and customer interfacing remain a key to growth.
We completed comprehensive research to identify key industry
trends, market segments and needs, growth opportunities, and the
relative strength of our brands. This resulted in a specific, targeted
business growth strategy moving forward. In conjunction with our
growth plans, we also developed a comprehensive customer interface
strategy to effectively manage customer interactions and strengthen
relationships with our best customers.
Creating Value
Return to Shareholders
LII VS. S&P SmallCap 600
50%
40%
30%
20%
10%
0
-10%
-20%
A FOUNDATION FOR GROWTH Today, Lennox International
is a different company than we were just a few years ago. Our
balance sheet is strong, with cash on hand providing an appropri-
ate degree of operating flexibility. Our prospects for continued
strength in cash flow generation are very good. We have exited
non-core businesses that were draining resources, and we continue
2001
2002
2003
2004
2005
working hard to improve the profitability of any underperforming busi-
LENNOX INTERNATIONAL
S&P SMALLCAP 600
nesses that remain. Our company is truly at a new and very exciting
point in its history.
We have built a solid, stable foundation for a new period of growth.
Profitable long-term growth requires careful planning and the ability to
move quickly when opportunities arise. Thorough analyses of options
for capital deployment position us well to move rapidly when appro-
priate, and our management team continues to work to identify the
best opportunities to profitably grow our core businesses.
We will remember 2005 as a landmark year for LII—the starting point
for our next great period of opportunity and growth. Our 16,000
employees worldwide have worked hard to help bring us to this
significant crossroads. We intend to continue strengthening the
foundation they have built, as we follow through on our commit-
ment to provide the best possible value for you, our shareholders.
S&P
Robert E. Schjerven
John W. Norris, Jr.
Chief Executive Officer
Chairman of the Board
50
40
30
20
10
0
-10
-20
50
40
30
20
10
0
-10
-20
50
40
30
20
10
0
-10
-20
50
40
30
20
10
0
-10
-20
Lennox
LENNOX INTERNATIONAL 11.
It is gratifying that the equity markets have acknowl-
edged and rewarded our company for the progress
we have made. We continue to deliver superior
returns to our shareholders with total return in 2005
of more than 40%. For the past five years, our average
annual return has been almost 33%—truly an excep-
tional performance.
Board of Directors
Linda G. Alvarado
President and CEO
Alvarado Construction, Inc.
Committees: 4, 6
Steven R. Booth
President
PolyTech Molding Inc.
Committees: 5, 6
Thomas W. Booth
Vice President, Corporate Technology
Lennox International Inc.
Committees: 1, 5
David V. Brown
Owner/Director
Plantation Farm Camp
Committees: 6
James J. Byrne
Chairman
Byrne Technology Partners Ltd.
Committees: 1, 4, 6
Janet K. Cooper
Senior Vice President and Treasurer
Qwest Communications International Inc.
Committees: 2, 5
Management Team
Robert E. Schjerven
Chief Executive Officer
Harry J. Ashenhurst
Chief Administrative Officer,
Interim President and
Chief Operating Officer
Worldwide Refrigeration
C. L. (Jerry) Henry
Former Chairman, President and CEO
Johns Manville Corporation
Committees: 2, 3
Terry D. Stinson
President North America—Commercial
Thomas Group, Inc.
Committees: 1, 3, 4
Richard L. Thompson
Vice Chairman of the Board
Lennox International Inc.
Former Group President
Caterpillar Inc.
Committee Legend
(bold indicates chairperson)
1: Acquisition
2: Audit
3: Board Governance
4: Compensation & Human Resources
5: Pension & Risk Management
6: Public Policy
John E. Major
President
Technology Solutions Group
Committees: 1, 2, 4
John W. Norris, Jr.
Chairman of the Board
Lennox International Inc.
John W. (Bo) Norris, III
Chairman
Environmental Funders Network
Committees: 5, 6
Robert E. Schjerven
CEO
Lennox International Inc.
Paul W. Schmidt
Corporate Controller
General Motors Corporation
Committees: 2, 3
Scott J. Boxer
President and Chief Operating Officer
Service Experts
Robert J. McDonough
President and Chief Operating Officer
Worldwide Heating & Cooling
Susan K. Carter
Chief Financial Officer
Linda A. Goodspeed
Chief Technology Officer
William F. Stoll, Jr.
Chief Legal Officer
David L. Inman
Vice President, Controller and
Chief Accounting Officer
UNITED STATES 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 fiscal year ended December 31, 2005
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
¥
n
For the transition period from
to
Commission File Number 001-15149
Lennox International Inc.
(Exact name of Registrant as specified in its charter)
Delaware
(State or other jurisdiction of
incorporation or organization)
42-0991521
(I.R.S. Employer
Identification Number)
2140 Lake Park Blvd.
Richardson, Texas 75080
(Address of principal executive offices, including zip code)
(Registrant's telephone number, including area code): (972) 497-5000
Securities Registered Pursuant to Section 12(b) of the Act:
Title of each class
Name of each exchange on which registered
Common Stock, $.01 par value per share
New York Stock Exchange
Securities Registered Pursuant to Section 12(g) of the Act: None
Indicate by checkmark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the
Securities Act. Yes ¥
No n
Indicate by checkmark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of
the Exchange Act. Yes n
No ¥
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13
or 15(d) of the Exchange Act during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing requirements for the last
90 days. Yes ¥
No n
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not
contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. ¥
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer or a non-
accelerated filer (see definition of ""accelerated filer'' and ""large accelerated filer'' in Rule 12b-2 of the
Exchange Act.)
Large Accelerated Filer ¥
Accelerated Filer n
Non-Accelerated Filer n
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act). Yes n
No ¥
As of June 30, 2005, the aggregate market value of the common stock held by non-affiliates of the
registrant was $976,507,362 based on the closing price of the registrant's common stock on the New York
Stock Exchange on such date. Common stock held by non-affiliates excludes common stock held by the
registrant's executive officers, directors and stockholders whose ownership exceeds 5% of the common stock
outstanding at June 30, 2005. As of February 27, 2006, there were 71,400,844 shares of the registrant's
common stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's Proxy Statement to be filed with the Securities and Exchange Commission in
connection with the registrant's 2006 Annual Meeting of Stockholders to be held on April 20, 2006 are
incorporated by reference into Part III of this report.
LENNOX INTERNATIONAL INC.
FORM 10-K
For the Fiscal Year Ended December 31, 2005
INDEX
PART I
Business ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
ITEM 1.
ITEM 1A. Risk FactorsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
ITEM 1B. Unresolved Staff Comments ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Properties ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
ITEM 2.
Legal Proceedings ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
ITEM 3.
Submission of Matters to a Vote of Security Holders ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
ITEM 4.
PART II
ITEM 5. Market for Registrant's Common Equity, 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 Risk ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
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
ITEM 9B. Other InformationÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
PART III
ITEM 10. Directors and Executive Officers of the RegistrantÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
ITEM 11. Executive Compensation ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
ITEM 12.
Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
ITEM 13. Certain Relationships and Related Transactions ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Principal Accounting Fees and ServicesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
ITEM 14.
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PART IV
ITEM 15. Exhibits, Financial Statement Schedules ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
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i
PART I
Item 1. Business
The Company
Lennox International Inc. (""LII'' or the ""Company''), through 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 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 Prod-
ucts,'' ""Service Experts'' and others.
Shown below are the Company's four business segments, the key products and brand names within each
segment and 2005 net sales by segment. Segment financial data for the years 2005, 2004 and 2003, including
financial information about foreign and domestic operations, is included in Note 3 of the Notes to
Consolidated Financial Statements in ""Item B. Financial Statements and Supplementary Data'' and
incorporated herein by reference.
Segment
Products/Services
Brand Names
2005 Net Sales
(In Millions)
$1,685.8
651.7
2,337.5
641.4
467.2
Residential Heating &
Cooling
Commercial Heating
& Cooling
Total Heating & Cooling
Service Experts
Refrigeration
Eliminations
Lennox, Armstrong Air,
Furnaces, air conditioners,
Ducane, Aire-Flo, AirEase,
heat pumps, packaged
heating and cooling systems,
Concord, Magic-Pak,
indoor air quality equipment, Advanced Distributor
pre-fabricated fireplaces and
freestanding stoves
Unitary heating and air
conditioning equipment and
applied systems
Products (ADP), Superior,
Whitfield, Security Chimneys
Lennox, Armstrong Air
Sales, installation and service Service Experts, various
individual service center
of residential and light
commercial heating and
names
cooling equipment
Chillers, condensing units,
unit coolers, fluid coolers, air Control, Chandler
cooled condensers and air
handlers
Bohn, Larkin, Climate
Refrigeration, Heatcraft
Worldwide Refrigeration,
Friga-Bohn, HK
Refrigeration, Kirby,
Lovelocks, Frigus-Bohn
Total
(79.9)
$3,366.2
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-fired furnace, which
was substantially more durable than the cast iron furnaces used at that time. Manufacturing these furnaces
grew into a significant business and was diverting the Lennox Machine Shop from its core focus. As a result,
in 1904, a group of investors headed by D.W. Norris bought the furnace business and named it the Lennox
Furnace Company. In 1991, the Company reincorporated as a Delaware corporation and completed its initial
public offering in 1999. Over the years, D.W. Norris ensured ownership of the Company was distributed to
succeeding generations of his family. The Company believes a significant portion of LII's outstanding
1
common stock is currently broadly distributed among descendants of, or persons otherwise related to, D.W.
Norris.
Business Strategy
The Company's business strategy is designed to capitalize on its competitive strengths in order to expand
its profitability and market share in the HVACR markets. The key elements of this strategy include:
Profitable Growth in Heating & Cooling in North America
The Company intends to grow in the residential and light commercial heating, ventilation and air
conditioning (""HVAC'') market in North America by:
‚ improving replacement sales of commercial heating and cooling equipment by enhancing distribution
capabilities to shorten lead times;
‚ introducing innovative new residential and commercial products;
‚ expanding the offering of residential and commercial Indoor Air Quality (IAQ) related products and
services;
‚ improving penetration and growing its share of original equipment manufacturers' purchases by Lennox
independent dealers; and
‚ expanding the geographic market presence of the Company's Armstrong Air, Ducane and other brands
of residential heating and cooling products sold to distributors and wholesalers through the addition of
new customers.
Exploit Global Refrigeration Opportunities
The Company believes increasing international demand for commercial refrigeration products presents
substantial opportunities. Refrigeration equipment generally has similar designs 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 intends to promote organic growth through investments
in its international manufacturing and distribution facilities, as well as explore opportunities for joint ventures
and strategic alliances to expand market penetration.
Focus on Profitable Growth of Service Experts
Company-owned heating and air conditioning contractors, also referred to as dealer service centers,
enable LII to extend its distribution directly to the end consumer in the United States and Canada, thereby
permitting it to participate in the revenues and margins available at the retail level. The Company's dealer
network is focused primarily on service and replacement opportunities in residential and light commercial
markets in metropolitan areas, which the Company believes are more stable and profitable than new
construction. The Company has assembled an experienced management team to manage the dealer
operations. A portfolio of management procedures and best practices, including a training program for new
general managers, common IT systems and financial controls, regional accounting centers, an inventory
management program and a focus on service agreements, is designed to enhance the quality, effectiveness and
profitability of this business. The Company believes the retail sales and service market represents a significant
growth opportunity because it is large and highly fragmented, comprised of approximately 85,000 contractors.
While no significant acquisitions are currently planned, the Company intends to selectively expand and/or
rationalize service centers to optimize the performance of its dealer network.
2
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 designs and efficiency levels, and at a range of price points intended to
provide a complete line of home comfort systems. The Company believes that by maintaining a broad product
line marketed under multiple brand names it can address different market segments and penetrate multiple
distribution channels.
The ""Lennox'' and ""Aire-Flo'' brands of residential heating and air conditioning products are sold
directly to a network of approximately 7,000 installing dealers, making the Company one of the largest
wholesale distributors of residential heating and air conditioning products in North America. The ""Armstrong
Air,'' ""Ducane,'' ""AirEase,'' ""Concord,'' ""Magic-Pak'' and ""Advanced Distributor Products'' brands are sold
through third party distributors.
The Company's Advanced Distributor Products operation builds evaporator coils and air handlers under
the ""Advanced Distributor Products'' brand as well as the ""Lennox,'' ""Armstrong Air,'' ""AirEase,''
""Concord'' and ""Ducane'' brands. In addition to supplying the Company with components for its heating and
cooling products, Advanced Distributor Products produces evaporator coils to be used in connection with
competitors' heating and cooling products as an alternative to such competitors' brand name components. The
Company has achieved a significant 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
fireplaces, free standing pellet and gas stoves, fireplace inserts, gas logs and accessories. Many of the fireplaces
are built with a blower or fan option and are efficient heat sources as well as attractive amenities to the home.
The Company currently markets its hearth products under the ""Lennox,'' ""Superior,'' ""Whitfield'' and
""Security Chimneys'' brand names.
Commercial Heating & Cooling
North America.
In North America, the Company sells unitary heating and cooling equipment that is
used in light commercial applications, such as low-rise office buildings, restaurants, retail centers, churches
and schools, as opposed to larger applied systems. The Company's product offerings for these applications
include rooftop units that range from two to 50 tons of cooling capacity and split system/air handler
combinations, which range from 1.5 to 20 tons, and are distributed primarily through commercial contractors.
The Company believes the success of its products is attributable to their efficiency, design flexibility, low life
cycle cost, ease of service and advanced control technology.
Europe.
In Europe, the Company manufactures and sells unitary products, which range from two to
30 tons, and applied systems with up to 500 tons of cooling capacity. LII's European products consist of small
package units, rooftop units, chillers, air handlers and fan coils that serve medium-rise commercial buildings,
shopping malls, other retail and entertainment buildings, institutional applications and other field-engineered
applications. LII manufactures heating and cooling products in several locations in Europe and markets these
products through both direct and indirect distribution channels in Europe, Russia and the Middle East.
Service Experts
Through approximately 130 Company-owned dealer service centers in its Service Experts segment, the
Company provides installation, preventive maintenance, emergency repair and replacement of heating and
cooling systems directly to both residential and light commercial customers in the United States and Canada.
In connection with these services, the Company sells a wide range of equipment, parts and supplies
manufactured by LII and other non-LII brands produced by third parties.
3
Refrigeration
The Company manufactures and markets equipment for the global commercial refrigeration market
through subsidiaries organized under the Heatcraft Worldwide Refrigeration name. These products are sold to
distributors, installing contractors and original equipment manufacturers.
North America. The Company's commercial refrigeration products for the North American market
include condensing units, unit coolers, fluid 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.
In international markets, LII manufactures and markets refrigeration products including
condensing units, unit coolers, air-cooled condensers, fluid coolers, refrigeration racks and small chillers. 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. This venture produces a smaller range of products,
and therefore the product line is complemented with imports from the United States, which are sold through
the joint venture's distribution network.
Marketing and Distribution
The Company utilizes multiple channels of distribution and offers different brands at various price points
in order to better penetrate the HVACR markets. The Company's products and services are sold through a
combination of distributors, independent and Company-owned dealer service centers, wholesalers, manufac-
turers' representatives, original equipment manufacturers and national accounts. Dedicated sales forces and
manufacturers' representatives 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 effectiveness, the Company has active cross-functional and cross-organizational teams
coordinating approaches to pricing, product design, distribution and national account customers.
An example of the competitive strength of the Company's marketing and distribution strategy is in the
North American residential heating and cooling market in which LII uses three distinctly different
distribution approaches: the one-step distribution system, the two-step distribution system and sales made
directly to consumers. The Company distributes its ""Lennox'' and ""Aire-Flo'' brands in a one-step process
directly to dealers that install these heating and cooling products. The Company distributes its ""Armstrong
Air,'' ""Ducane,'' ""AirEase,'' ""Concord,'' Magic-Pak'' and ""Advanced Distributor Products'' brands through
the traditional two-step distribution process whereby it sells its products to distributors who, in turn, sell the
products to dealers and to installing contractors. In addition, the Company provides heating and cooling
products and services directly to consumers through Company-owned Service Experts dealer service centers.
Over the years, the ""Lennox'' brand has become synonymous with ""Dave Lennox,'' a highly recognizable
advertising icon in the heating and cooling industry. The ""Dave Lennox'' image is utilized in television and
print advertising, as well as in numerous locally produced dealer ads, open houses and trade events.
Manufacturing
The Company operates manufacturing facilities in the United States and throughout the world. LII has
embraced lean-manufacturing principles, a manufacturing philosophy which reduces waste in manufactured
products by shortening the timeline between the customer order and delivery, across its manufacturing
operations, accompanied by initiatives to achieve high product quality. 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.
4
Strategic Sourcing
The Company relies on various suppliers to furnish the raw materials and components used in the
manufacturing of its products. To maximize its buying effectiveness in the marketplace, the Company has
developed a central strategic sourcing group that consolidates required purchases of materials and components
across business segments. The strategic sourcing group generally concentrates 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 significant 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 1.5 to 6.5 horsepower range. This joint venture provides the Company with the majority of
its domestic compressor requirements for its unitary residential and commercial cooling equipment.
Research and Development and Technology
An important part of LII's growth strategy is continued investment in research and product development
to both develop new products as well as make improvements to existing product lines. As a result, the
Company spent an aggregate of $40.3 million, $37.6 million and $38.0 million on research and development
during 2005, 2004 and 2003, respectively. 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 heat transfer, indoor air quality and materials used in the construction and application of its products.
Technological advances are disseminated from these ""centers for excellence'' to LII's operating divisions, as
appropriate. The Company uses advanced, commercially available computer-aided design, computer-aided
manufacturing, computational fluid 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 certified by applicable industry associations.
Seasonal Nature of Business
Total Company sales and related segment income tend to be seasonally higher in the second and third
quarters of the year because, in the U.S. and Canada, summer is the peak season for sales of air conditioning
equipment and services.
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 beneficial. The Company
owns or licenses several trademarks it considers important in the marketing of its products, including Lennox»,
Armstrong AirTM, DucaneTM, Advanced Distributor Products», Aire-FloTM, AirEase», Concord», Magic-Pak»,
Superior», Whitfield», Earth StoveTM, Security ChimneysTM, Service Experts», Bohn», LarkinTM, Climate
ControlTM, Chandler Refrigeration», KirbyTM, Heatcraft Worldwide RefrigerationTM, LovelocksTM,
HK RefrigerationTM, Frigus-BohnTM and Friga-BohnTM. These trademarks have no fixed expiration date 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 significant
competitive factors facing the Company are product reliability, product performance, service and price, with
the relative importance of these factors varying among its businesses. In its Service Experts segment, the
Company faces competition from independent dealers, as well as dealers owned by utility companies and other
consumer services providers. Listed below are some of the companies LII views as significant competitors in
each segment it serves, with relevant brand names, when different than the company name, shown in
parentheses.
5
‚ Residential Heating & Cooling Ì United Technologies Corp. (Carrier, Bryant, Tempstar, Com-
fortmaker, Heil, Areoaire, Keeprite); Goodman Manufacturing Company, L.P. (Janitrol, Amana);
American Standard Companies Inc. (Trane, American Standard); Paloma Co., Ltd. (Rheem, Ruud);
Johnson Controls, Inc. (York, Weatherking); Nordyne (Westinghouse, Frigidaire, Tappan, Philco,
Kelvinator, Gibson); HNI Corporation (Heatilator, Heat-n-Glo); CFM Corporation (Majestic).
‚ Commercial Heating & Cooling Ì United Technologies Corp. (Carrier); American Standard Compa-
nies Inc. (Trane); Johnson Controls, Inc. (York); 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 December 31, 2005, the Company employed approximately 16,000 employees, of whom approxi-
mately 5,000 were salaried and 11,000 were hourly. The number of hourly workers the Company employs may
vary in order to match its labor needs during periods of fluctuating demand. Approximately 4,000 employees
are represented by unions. The Company believes its relationships with its employees and with the unions
representing certain of its employees are generally good and does not anticipate any material adverse
consequences resulting from negotiations to renew any collective bargaining agreements.
On October 6, 2005, Lennox Industries Inc., a subsidiary of the Company, announced that it had ratified
a collective bargaining agreement with The International Union United Automobile, Aerospace and
Agricultural Implement Workers of America (""UAW'') Local 893, Unit 11 with respect to its Marshalltown,
Iowa manufacturing facility, a major manufacturer of residential air conditioning and heating equipment. The
previous collective bargaining agreement between Lennox Industries Inc. and the UAW expired by its terms
on October 31, 2004; however, the employees at the Marshalltown facility continued to work under its terms
until the new collective bargaining agreement was ratified.
Environmental 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 affect or could
affect the Company's domestic operations include, among others, the National Appliance Energy Conserva-
tion Act of 1987, as amended (""NAECA''), the Clean Air Act, the Clean Water Act, the Resource
Conservation and Recovery Act, the Comprehensive Environmental Response, Compensation and Liability
Act, the National Environmental Policy Act, the Toxic Substances Control Act, any regulations promulgated
under these acts and various other international, federal, state and local laws and regulations governing
environmental matters. The Company believes it is in substantial compliance with such existing environmental
laws and regulations and does not expect that any compliance measures taken by the Company will have a
material effect on the Company's capital expenditures, earnings or competitive position in fiscal 2006.
Energy Efficiency. The Company is subject to appliance efficiency regulations promulgated under
NAECA and various state regulations concerning the energy efficiency of its products. As of January 23,
2006, all residential central air conditioners manufactured after such date must comply with a minimum 13
seasonal energy efficiency rating, or ""SEER,'' standard under NAECA. The Company has successfully
developed energy-efficient products that meet this standard. Similar new standards are being promulgated for
commercial air conditioning and refrigeration equipment. The Company is actively involved in participation of
the development of these new standards and is prepared to have product in place in advance of the
implementation of all such regulations being considered by the Department of Energy.
Refrigerants. The use of hydrochlorofluorocarbons, or ""HCFCs,'' as a refrigerant for air conditioning
and refrigeration equipment is common practice in the industry. However, international and country specific
regulations require the use of certain substances deemed to be ozone depleting, including HCFCs, to be
6
phased out over a particular period of time. Under the Clean Air Act and implementing regulations, the use of
all HCFCs in new equipment within the U.S. must be phased out by 2010. The Company, together with major
chemical manufacturers, is reviewing and addressing the potential impact of these regulations on its product
offerings and has developed and continues to develop new products that replace the use of HCFCs with the
widely accepted Hydroflurocarbons, or ""HFCs,'' and other approved substitutes. LII has been an active
participant in the ongoing international dialogue on this subject and believes it is well positioned to react in a
timely manner to any changes in the regulatory landscape. In addition, the Company is taking proactive steps
to implement responsible use principles and guidelines with respect to limiting refrigerants from escaping into
the atmosphere throughout the life span of HVAC and refrigeration equipment.
Remediation Activity.
In addition to affecting the Company's ongoing operations, applicable environ-
mental laws can impose obligations to remediate hazardous substances at LII's 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 is aware of contamination at some of its facilities; however, the Company does not
presently believe that any future remediation costs at such facilities will be material to the Company's results
of operations.
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.
European WEEE and RoHS Compliance. Beginning in August 2005, various electrical and electronic
equipment sold in the European Union (""EU'') is required to comply with the Directive on Waste Electrical
and Electronic Equipment (""WEEE'') and, as of July 2006, such equipment must also comply with the
Directive on Restriction of Use of Certain Hazardous Substances (""RoHS''). WEEE aims to prevent waste
by encouraging reuse and recycling and RoHS restricts the use of six hazardous substances in electrical and
electronic products. All HVAC and refrigeration products and certain components of such products ""put in
the market'' in the EU (whether or not manufactured in the EU) are potentially subject to WEEE and RoHS.
Because all HVAC and refrigeration manufacturers selling within or from the EU are subject to the standards
promulgated under WEEE and RoHS, LII believes that neither WEEE nor RoHS uniquely impact the
Company as compared to such other manufacturers. Similar directives are being introduced in other parts of
the world, including the United States. For example, the California Electronic Waste Recycling Act is already
in effect and both China and Japan are expected to implement local equivalents to RoHS around the same
time as the EU. The Company is actively monitoring the development of such directives and believes it is well
positioned to comply with WEEE and RoHS as well as similar directives in the required time frames.
Available Information
The Company's web site 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 filed 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 filed
with, or furnished to, the Securities and Exchange Commission (the ""SEC'').
Certifications
The Company's Chief Executive Officer submitted the 2005 New York Stock Exchange (the ""NYSE'')
Annual CEO Certification regarding the Company's compliance with the NYSE's corporate governance
listing standards to the NYSE on May 13, 2005.
The certifications of the Chief Executive Officer and Chief Financial Officer of the Company pursuant to
Section 302 and Section 906 of the Sarbanes-Oxley Act of 2002 are filed and furnished, respectively, as
exhibits to this Form 10-K.
7
Executive Officers of the Company
The executive officers of the Company, their present positions and their ages are as follows:
Name
John W. Norris, Jr. ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Robert E. Schjerven ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Harry J. Ashenhurst, Ph.D ÏÏÏÏÏÏÏÏÏÏ
Age
70
63
57
Scott J. Boxer ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
55
Susan K. Carter ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
47
Linda A. GoodspeedÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
44
Robert J. McDonough ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
46
William F. Stoll, Jr. ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
57
David L. Inman ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
51
Position
Chairman of the Board
Chief Executive Officer
Executive Vice President and Chief
Administrative Officer and Interim President and
Chief Operating Officer, Worldwide
Refrigeration
Executive Vice President and President and
Chief Operating Officer, Service Experts
Executive Vice President and Chief Financial
Officer
Executive Vice President and Chief Technology
Officer
Executive Vice President and President and
Chief Operating Officer, Worldwide Heating &
Cooling
Executive Vice President, Chief Legal Officer
and Secretary
Vice President, Controller and Chief Accounting
Officer
The following biographies describe the business experience of the Company's executive officers:
John W. Norris, Jr. 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 Officer of the Company in 1980, serving 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 and also serves as a director of AmerUs Group Co., a life insurance and annuity company.
Mr. Norris will retire from the Company's Board of Directors effective July 21, 2006.
Robert E. Schjerven was named Chief Executive Officer of the Company in 2001 and has served on the
Board of Directors since that time. Prior to his appointment as Chief Executive Officer, he served as Chief
Operating Officer of the Company in 2000 and as President and Chief Operating Officer 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 Officer of Armstrong Air Conditioning Inc., a subsidiary of the Company. Mr. Schjerven
spent the first 20 years of his career with The Trane Company, an international manufacturer and marketer of
HVAC systems, and McQuay-Perfex Inc.
Harry J. Ashenhurst was appointed Chief Administrative Officer in 2000. Dr. Ashenhurst joined the
Company in 1989 as Vice President of Human Resources, was named Executive Vice President, Human
Resources of 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. Dr. Ashenhurst is also responsible for risk management, corporate safety, facilities and
government affairs. On June 2, 2005, Dr. Ashenhurst assumed additional responsibilities as interim President
and Chief Operating Officer of the Company's Worldwide Refrigeration segment, while the Company
8
conducts an internal and external search for a permanent replacement. Prior to joining the Company,
Dr. Ashenhurst worked as an independent management consultant with the consulting firm of Roher, Hibler
and Replogle.
Scott J. Boxer joined the Company in 1998 as Executive Vice President, Lennox Global Ltd., a subsidiary
of the Company, and President, European Operations. He was appointed President of Lennox Industries Inc.,
a subsidiary of the Company, in 2000 and was named President and Chief Operating Officer of the Company's
Service Experts segment in July 2003. Prior to joining the Company, Mr. Boxer spent 26 years with York
International Corporation, a HVACR manufacturer, in various roles, including President, Unitary Products
Group Worldwide, where he reported directly to the Chairman of that company and directed residential and
light commercial heating and air conditioning operations worldwide. Mr. Boxer is an Executive Board
Member of the Air-Conditioning & Refrigeration Institute and Chairman of the Board of Trustees of North
American Technical Excellence, Inc.
Susan K. Carter was appointed Executive Vice President and Chief Financial Officer in August 2004.
Ms. Carter also served as Treasurer of the Company from August 2004 through September 2005. Prior to
joining the Company, Ms. Carter was Vice President of Finance and Chief Accounting Officer of Cummins,
Inc., a global power leader and manufacturer of engines, electric power generation systems, and engine-related
products from 2002 to 2004. From 1996 to 2002, Ms. Carter served as Vice President and Chief Financial
Officer of Transportation & Power Systems and held other senior financial management positions at
Honeywell, Inc., formerly AlliedSignal, Inc. She also previously served in senior financial management
positions at Crane Co. and DeKalb Corporation.
Linda A. Goodspeed was appointed Executive Vice President and Chief Technology Officer in September
2001. Prior to joining the Company, Ms. Goodspeed served as President and Chief Operating Officer of
Partminer, Inc., a privately held electronics business-to-business supply chain parts and service company from
2000 to 2001. Beginning her career in engineering with Ford Motor Company in 1984, Ms. Goodspeed moved
to Nissan research and development in 1989 and joined General Electric (""GE'') Appliances in 1996. She
became GE's Range Product Development Manager in 1997 and was promoted to Product General Manager
in 1999. She also became General Manager in 1999 for Six Sigma, managing a team of 160 GE quality leaders
spanning operations across the company.
Robert J. McDonough was named President and Chief Operating Officer of Worldwide Heating &
Cooling in July 2003. Previously, he had served as President, Worldwide Refrigeration and International
Operations since 2001. Mr. McDonough joined Heatcraft, Inc., a subsidiary of the Company, in 1990 as a
Division Sales Manager, when the Company acquired Larkin Coils. 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. Mr. McDonough held a number of sales
positions at Larkin Coils before becoming National Sales Manager in 1987.
William F. Stoll, Jr. became Executive Vice President, Chief Legal Officer and Secretary of the
Company in March 2004. Most recently, Mr. Stoll served as Executive Vice President and Chief Legal
Officer of 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 was named Vice President, Controller and Chief Accounting Officer 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 financial systems
within the Company since 1978 including Controller of Armstrong Air Conditioning Inc., a subsidiary of the
Company.
Item 1A. Risk Factors
References in this item to ""we,'' ""our'' or ""us'' refer to Lennox International Inc. and its subsidiaries,
unless the context requires otherwise.
9
Forward-Looking Statements
This Annual Report on Form 10-K contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of
1934, as amended, that are based on information currently available to management as well as management's
assumptions and beliefs. All statements, other than statements of historical fact, included in this Form 10-K
constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of
1995, including but not limited to statements identified by the words ""may,'' ""will,'' ""should,'' ""plan,''
""predict,'' ""anticipate,'' ""believe,'' ""intend,'' ""estimate'' and ""expect'' and similar expressions. Such state-
ments reflect our current views with respect to future events, based on what we believe are reasonable
assumptions; however, such statements are subject to certain risks and uncertainties. In addition to the specific
uncertainties discussed elsewhere in this Form 10-K, the risk factors set forth below may affect our
performance and results of operations. Should one or more of these risks or uncertainties materialize, or
should underlying assumptions prove incorrect, actual results may differ materially from those in the forward-
looking statements. We disclaim any intention or obligation to update or review any forward-looking
statements or information, whether as a result of new information, future events or otherwise.
Risk Factors
The following risk factors and other information included in this Form 10-K should be carefully
considered. We believe these are the principal material risks currently facing our business, however, additional
risks and uncertainties not presently known to us or that we presently deem less significant may also impair our
business operations. If any of the following risks actually occur, our business, financial condition or results of
operations could be materially adversely affected.
Cooler than Normal Summers and Warmer than Normal Winters May Depress Our Sales.
Demand for our products and for our services is strongly affected by the weather. Cooler than normal
summers depress our sales of replacement air conditioning and refrigeration products and warmer than normal
winters have the same effect on our heating products.
Implementation of the New Minimum Efficiency Standard for Residential Air Conditioners Mandated
by NAECA Could Adversely Impact Our Results of Operations.
We are subject to appliance efficiency regulations promulgated under NAECA and various state
regulations concerning the energy efficiency of our products. As of January 23, 2006, all residential central air
conditioners manufactured after such date must comply with a minimum 13 SEER standard under NAECA.
This standard increased the minimum SEER standard by 30 percent. We are currently in compliance with the
new standard; however, air conditioning products with ratings lower than 13 SEER manufactured prior to
January 23, 2006 can continue to be sold legally after that date. Therefore, quantities of non-13 SEER
compliant product that remain in the industry's distribution pipeline after January 23, 2006 may have an
adverse effect on our operating results during the 2006 cooling season. We are unable to predict the extent to
which this may occur. Similar new standards are being promulgated for commercial air conditioning and
refrigeration equipment. Implementation of the new 13 SEER minimum efficiency standard for residential air
conditioners and any new standards for commercial air conditioning and refrigeration equipment could
adversely impact our results of operations, due to lower factory productivity, increased costs of production and
distribution, potential margin pressures, increased costs related to warranty and product liability claims and
higher levels of working capital and we may not be able to realize the price increases required to offset the
increases in cost of goods sold.
We May Incur Substantial Costs as a Result of Warranty and Product Liability Claims Which Could
Negatively Affect Our Profitability.
The development, manufacture, sale and use of our products involve risks of warranty and product
liability claims. In addition, because we own installing heating and air conditioning dealers in the United
10
States and Canada, we incur the risk of liability claims for the installation and service of heating and air
conditioning products. Our product liability insurance policies have limits that, if exceeded, may result in
substantial costs that would have an adverse effect on our future profitability. In addition, warranty claims are
not covered by our product liability insurance and certain product liability claims may not be covered by our
product liability insurance either.
Our Business Could be Adversely Affected by an Economic Downturn.
Our business is affected by a number of economic factors, including the level of economic activity in the
markets in which we operate. Our sales in the residential and commercial new construction market correlate
to the number of new homes and buildings that are built, which in turn is influenced by cyclical factors such as
interest rates, inflation, consumer spending habits, employment rates and other macroeconomic factors over
which we have no control. In the HVACR business, a decline in economic activity as a result of these cyclical
or other factors typically results in a decline in new construction and replacement purchases, which could
result in a decrease in our sales and profitability.
We May Not be Able to Compete Favorably in the Highly Competitive HVACR Business.
Substantially all of the markets in which we operate are highly competitive. The most significant
competitive factors we face are product reliability, product performance, service and price, with the relative
importance of these factors varying among our product lines. Other factors that affect competition in the
HVACR market include the development and application of new technologies, an increasing emphasis on the
development of more efficient HVACR products, and new product introductions. Our competitors may have
greater financial resources than we have, allowing them to invest in more extensive research and development
and/or marketing activity. In addition, our Service Experts segment faces competition from independent
dealers and dealers owned by utility companies and other consumer service providers, some of whom may be
able to provide their products or services at lower prices than we can. We may not be able to compete
successfully against current and future competitors and current and future competitive pressures may cause us
to reduce our prices or lose market share, or could negatively affect our cash flow, which could have an
adverse effect on our future financial results.
We May Not be Able to Successfully Develop and Market New Products.
Our future success depends on our continued investment in research and new product development and
our ability to commercialize new technological advances in the HVACR industry. If we are unable to continue
to successfully develop and market new products or to achieve technological advances on a pace consistent
with that of our competitors, our business and results of operations could be adversely impacted.
We Use a Variety of Raw Materials and Components in Our Business and Price Increases or Significant
Supply Interruptions Could Increase Our Operating Costs and/or Depress Sales.
We depend on raw materials, such as copper, aluminum and steel, and components purchased from third
parties. We generally concentrate purchases for a given raw material or component with one or two suppliers.
Although we believe there are alternative suppliers for all of our key raw material and component needs, if a
supplier is unable or unwilling to meet our supply requirements, we could experience supply interruptions or
cost increases, either of which could have an adverse effect on our gross profit. In addition, although we
regularly pre-purchase a portion of our raw materials at a fixed price each year to hedge against price
increases, a large increase in raw materials prices could significantly increase our cost of goods sold. Increases
in the prices or quantities of raw materials or components we require or significant supply interruptions could
affect the prices we charge for our products and services negatively impacting our competitive position, which
may result in depressed sales.
11
Because a Significant Percentage of Our Workforce is Unionized, We Face Risks of Work Stoppages
and Other Labor Relations Problems.
As of December 31, 2005, approximately 24% of our workforce was unionized. As we expand our
operations, we may be subject to increased unionization of our workforce. While we believe our relationships
with the unions representing our employees are generally good, the results of future negotiations with these
unions and the effects of any production interruptions or labor stoppages could have an adverse effect on our
financial results.
We are Subject to Litigation and Environmental Regulations that Could Have an Adverse Effect on Our
Results of Operations.
We are involved in various claims and lawsuits incidental to our business, including those involving
product liability, labor relations and environmental matters, some of which claim significant damages. Given
the inherent uncertainty of litigation, we cannot be certain that existing litigation or any future adverse
developments will not have a material adverse impact on our financial condition. In addition, we are subject to
extensive and changing federal, state and local laws and regulations designed to protect the environment.
These laws and regulations could impose liability for remediation costs and civil or criminal penalties in cases
of non-compliance. Compliance with environmental laws increases our costs of doing business. Because these
laws are subject to frequent change, we are unable to predict the future costs resulting from environmental
compliance.
Any Future Determination that a Significant Impairment of the Value of Our Goodwill Intangible Asset
has Occurred Could Have a Material Adverse Affect on Our Results of Operations.
As of December 31, 2005, we had goodwill, net of accumulated amortization, of approximately
$223.9 million on our Consolidated Balance Sheet. Any future determination that a significant impairment of
the value of goodwill has occurred would require a write-down of the impaired portion of unamortized goodwill
to fair value, which would reduce our assets and stockholders' equity and could have a material adverse affect
on our results of operations.
We May Not be Able to Successfully Integrate and Operate Businesses that We may Acquire.
From time to time, we may seek to complement or expand our business through strategic acquisitions.
The success of these transactions will depend, in part, on our ability to integrate and operate the acquired
businesses profitably. If we are unable to successfully integrate acquisitions with our operations, we may not
realize the anticipated benefits associated with such transactions, which could adversely affect our business
and results of operations.
12
Item 1B. Unresolved Staff Comments
None.
Item 2. Properties
The following chart lists the Company's major domestic and international manufacturing, distribution
and office facilities and indicates the business segment that uses such facilities, the approximate size of such
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
Orange, CA
Laval, Canada
Des Moines, IA
Headquarters
Residential Heating & Cooling
Residential Heating & Cooling
Residential Heating & Cooling
Residential Heating & Cooling
Residential Heating & Cooling
Residential Heating & Cooling
Residential Heating & Cooling
Residential Heating & Cooling
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
Wuxi, China
Carrollton, TX
Commercial Heating & Cooling
Commercial Heating & Cooling
Commercial Heating & Cooling
Refrigeration
Refrigeration
Refrigeration
Refrigeration
Refrigeration
Refrigeration
Refrigeration
Refrigeration
Refrigeration
Refrigeration
Research & Development facility
Approx. Sq. Ft.
(In thousands)
Owned/Leased
311
1,300
Owned & Leased
Owned & Leased
613
375
329
300
295
200
67
152
352
500
161
133
129
71
322
232
145
412
172
160
80
65
48
23
130
Owned
Owned
Owned
Leased
Owned
Leased
Leased
Owned
Leased
Owned
Owned
Owned
Owned
Owned
Owned
Owned
Owned
Owned
Owned
Owned
Owned
Leased
Owned
Owned
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 offices and district warehouses and additional facilities worldwide
for use as sales and service offices and regional warehouses. The vast majority of the Company-owned service
center facilities in LII's Service Experts segment are leased. The Company believes that its properties are in
good condition, suitable and adequate for its present requirements and that its principal plants are generally
adequate to meet its production needs.
13
As previously disclosed, on February 7, 2006, Allied Air Enterprises, a division of LII's Heating &
Cooling business, announced that it has commenced plans to close its current operations in Bellevue, Ohio.
The consolidation will be a phased process expected to be completed by the end of the first quarter of fiscal
2007.
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 unspecified emissions from the South Plant in Grenada,
Mississippi, previously owned by Heatcraft Inc. The Mississippi Supreme Court has ordered that these four
lawsuits be severed and transferred to Grenada County. This will require plaintiffs' counsel to maintain a
separate lawsuit for each of the approximately 112 original plaintiffs. Since the court order, there has been no
action taken towards instigating the individual lawsuits. It is not possible to predict with certainty the outcome
of these matters or an estimate of any potential loss. Based on present knowledge, management believes that it
is unlikely that any final resolution of these matters will result in a material liability for the Company.
In March 2004, the Company announced that the Audit Committee of the Company's Board of Directors
initiated an independent inquiry into certain accounting matters related to the Company's Canadian service
centers in its Service Experts segment. Immediately prior to such announcement, the Company contacted the
Fort Worth office of the SEC to inform them of the existence and details of such allegations and the related
independent inquiry. Independent counsel for the Audit Committee communicated the results of the
independent inquiry to the SEC. On January 31, 2005, the Company announced the SEC investigation was
converted to a formal status and the Company continues to fully cooperate with the SEC by producing
information and documentation in response to requests from the SEC. The Company is unable to predict the
ultimate outcome of this matter.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of stockholders of the Company during the fourth quarter of fiscal
2005.
14
PART II
Item 5. Market for Registrant's Common Equity, 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 2005
and 2004 were as follows:
Price Range Per Common Share
2005
2004
High
Low
High
Low
First QuarterÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Second Quarter ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Third Quarter ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Fourth Quarter ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$22.99
22.41
27.42
30.60
$19.33
18.65
20.50
24.81
$19.22
19.26
18.31
20.50
$14.75
15.34
14.74
13.97
During 2005 and 2004, the Company declared quarterly cash dividends as set forth below:
Dividends per
Common Share
2004
2005
First QuarterÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Second Quarter ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Third Quarter ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Fourth Quarter ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$0.10
0.10
0.10
0.11
$ .095
.095
.095
.100
Fiscal Year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$0.41
$0.385
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 the close of business on
February 27, 2006, there were approximately 879 record holders of the Company's common stock.
The Company expects quarterly dividends will continue to be paid in 2006. On March 13, 2006, the
Company's Board of Directors approved a cash dividend of $0.11 per share of outstanding common stock. The
dividend will be paid on April 7, 2006 to all common stockholders of record as of March 24, 2006.
On September 19, 2005, the Company announced that the Board of Directors (i) authorized a stock
repurchase program, pursuant to which the Company may repurchase up to ten million shares of the
Company's common stock, from time to time, through open market-purchases; and (ii) terminated a prior
repurchase program that was announced November 2, 1999. In the fourth quarter of 2005, the Company made
the following repurchases of common stock under the new stock repurchase program:
Period
October 1 through
Total
Number of
Shares
Purchased
Average Price
Paid per Share
(including fees)
Total Number of
Shares Purchased as
Part of Publicly
Announced Plans or
Programs
Maximum Number
of Shares that may
yet be Purchased
Under the Plans or
Programs
October 31 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
November 1 through November 30 ÏÏÏÏ
December 1 through December 31 ÏÏÏÏ
Ì
447,400
Ì
Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
447,400
$ Ì
$28.65
$ Ì
$28.65
Ì
447,400
Ì
447,400
10,000,000
9,552,600
9,552,600
9,552,600
15
Item 6. Selected Financial Data (unaudited)
The table below shows the selected financial data of the Company for the five years ended December 31,
2005:
Statements of Operations Data
Net Sales ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Operational (Loss) Income From Continuing
OperationsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Income (Loss) From Continuing Operations ÏÏÏÏ
Net Income (Loss) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Diluted Earnings (Loss) Per Share From
Continuing OperationsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Dividends Per Share ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Other Data
Capital Expenditures ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Research & Development ExpensesÏÏÏÏÏÏÏÏÏÏÏÏ
Balance Sheet Data
Total Assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total Debt ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Stockholders' Equity ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
2005
For the Year Ended December 31,
2004
2002
2003
(In millions, except per share data)
2001
$3,366.2
$2,982.7
$2,789.9
$2,727.4
$2,802.7
253.4
152.1
150.7
2.13
0.41
63.3
40.3
$
(36.6)
(93.5)
(134.4)
(1.56)
0.385
$
40.3
37.6
$
157.8
86.7
86.4
1.36
0.38
39.7
38.0
101.3
(209.5)
(203.5)
0.66
0.38
22.4
38.2
$
(7.3)
(46.6)
(40.6)
(0.83)
0.38
$
16.6
37.3
$1,737.6
120.5
794.4
$1,518.6
310.5
472.9
$1,720.1
362.3
577.7
$1,510.9
379.9
433.6
$1,793.4
517.8
654.0
In 2004, the Company recorded a non-cash goodwill impairment charge of $208.0 million, which is
included as a component of operating income in the accompanying Consolidated Statements of Operations.
Upon the adoption of Statement of Financial Accounting Standards No. 142 ""Goodwill and Other Intangible
Assets'' (""SFAS No. 142'') on January 1, 2002, the Company recorded a $283.7 million ($247.9 million, net
of tax) goodwill impairment charge. See further discussion in Note 2 Ì Summary of Significant Accounting
Policies in the Notes to the Consolidated Financial Statements.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Overview
Lennox International Inc. (""LII'' or the ""Company'') participates in four reportable business segments
of the heating, ventilation, air conditioning and refrigeration (""HVACR'') industry. The first 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 in
the United States and primarily rooftop products, chillers and air handlers in Europe. Combined, the
Residential Heating & Cooling and Commercial Heating & Cooling segments form LII's Heating & Cooling
business. The third reportable segment is Service Experts, which includes sales and installation of, and
maintenance and repair services for, HVAC equipment. The fourth reportable segment is Refrigeration, in
which LII manufactures and sells unit coolers, condensing units and other commercial refrigeration products.
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 influenced by national and regional economic and
demographic factors, such as interest rates, the availability of financing, regional population and employment
trends, new construction, general economic conditions and consumer confidence. In addition to economic
cycles, demand for LII's products and services is seasonal and dependent on the weather. Hotter than normal
16
summers generate strong demand for replacement air conditioning and refrigeration products and services and
colder than normal winters have the same effect 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. Higher prices
for these commodities and related components continue to present a challenge to LII. Commodity prices and
related component costs in LII's manufacturing businesses increased by approximately $67 million for the
year ended December 31, 2005 compared to the same period in 2004. LII mitigated the impact of higher
commodity prices in 2005 through a combination of price increases, commodity futures contracts, improved
production efficiency and cost reduction initiatives. Warranty expense is estimated based on historical trends
and other factors.
Continuing to improve the performance of the Service Experts business segment remains a top priority of
LII's management. Initiatives within the Service Experts business segment in 2005 included increasing focus
on revenue generating activities and continuing to strengthen the leadership at Service Experts through its
general manager development program. This general manager development program graduated its first class in
the latter part of 2004 and its second class during the first quarter of 2005. A third class graduated during the
fourth quarter of 2005. These general managers have assumed leadership positions at dealer service centers.
Notable events impacting LII's financial condition and results of operations in 2005 include, without
limitation, the following:
‚ Due to competitive cost pressures, on April 4, 2005, Lennox Hearth Products Inc., a subsidiary of the
Company, commenced plans to relocate its Whitfield pellet stove and Lennox cast iron stove product
lines from Burlington, Washington to a third party production facility in Juarez, Mexico, discontinue
its existing steel wood stove line manufactured in Burlington and close the Burlington facility. These
actions were substantially complete as of December 31, 2005. In connection with the plant closure, the
Company recorded pre-tax restructuring charges of $2.4 million for the year ended December 31, 2005,
which are included in Restructuring Charge in the accompanying Consolidated Statements of
Operations. The tax benefit of this charge was $0.8 million.
‚ On June 7, 2005, the Company completed the sale of its 45% interest in its heat transfer joint venture
to Outokumpu Copper Products OY of Finland (Outokumpu) for $39.3 million and the Company
recorded a pre-tax gain of $9.3 million for the year ended December 31, 2005, which is included in
(Gains), Losses and Other Expenses, Net in the accompanying Consolidated Statements of Opera-
tions. The income tax provision on this gain was $2.3 million. In connection with the sale, the
Company entered into an agreement with Outokumpu related to joint remediation of certain existing
environmental matters. In conjunction with the new agreement, the Company updated its estimate of
its portion of the on-going remediation costs and recorded pre-tax expenses of $2.2 million for the year
ended December 31, 2005. The income tax benefit of the remediation expenses was $0.8 million.
‚ As of July 1, 2005, LII adopted Statement of Financial Accounting Standards No. 123 (revised 2004),
""Share-Based Payment'' (""SFAS No. 123R''), using the modified-prospective-transition method. The
cumulative effect of the change in accounting principle related to the adoption of SFAS No. 123R was
not material for the year ended December 31, 2005. Under the standard, companies are required to
recognize compensation cost for share-based compensation issued to or purchased by employees, net of
estimated forfeitures, under stock-based compensation plans using a fair-value-based method effective
not later than January 1, 2006. As permitted by SFAS No. 123R, the Company adopted the standard
early. For more information, see Note 2 Ì Summary of Significant Accounting Policies Ì Stock-
Based Compensation in the Notes to Consolidated Financial Statements.
‚ On September 7, 2005, the Company called for redemption all of its outstanding 6.25% convertible
subordinated notes due 2009 (""Convertible Notes'') on October 7, 2005. The redemption price was
17
103.571% of the principal amount, plus accrued and unpaid interest to the redemption date. As of
September 7, 2005, there was $143.75 million aggregate principal amount of Convertible Notes
outstanding, which could be converted into the Company's common stock at a rate of 55.2868 shares of
common stock per $1,000 principal amount of Convertible Notes at anytime before the close of
business on the business day prior to the redemption date. As of October 6, 2005, the holders of all of
the Convertible Notes had converted the Convertible Notes into an aggregate of approximately
7.9 million shares of common stock.
‚ On September 19, 2005, LII announced its Board of Directors had authorized a stock repurchase
program, pursuant to which the Company may repurchase up to ten million shares of its common
stock, and had terminated a prior repurchase program that was announced November 2, 1999.
Purchases under the stock repurchase program are made on an open-market basis at prevailing market
prices. The timing of any repurchases depends on market conditions, the market price of LII's common
stock and management's assessment of the company's liquidity needs and investment requirements and
opportunities. No time limit was set for completion of the program and there is no guarantee as to the
exact number of shares that will be repurchased. As of December 31, 2005, LII had repurchased
447,400 shares of its common stock.
‚ In 2005, management successfully managed the transition to the new National Appliance Energy
Conservation Act regulation requiring a 13 seasonal energy efficiency rating, or ""SEER,'' standard for
residential central air conditioners. This standard, which applies to central air conditioners manufac-
tured after January 23, 2006, increased by 30 percent the minimum SEER standard that applied to
models produced prior to January 23, 2006. Although this new standard created several engineering,
manufacturing and marketing challenges for the Company, the Company successfully met the new
regulation by January 23, 2006. Air-conditioning products with ratings lower than 13 SEER manufac-
tured prior to January 23, 2006 can continue to be sold legally after such date. It is possible that
quantities of non-13 SEER compliant product may remain in the industry's distribution pipeline after
January 23, 2006 and this may have an adverse effect on operating results during the 2006 cooling
season. However, management is unable to predict the extent to which this may occur. The Company
used the new standard as an opportunity to redesign its entire line of cooling products to standardize
product platforms across its brands and to integrate other improvements in its products. For the
twelve months ended December 31, 2005, expenditures for property, plant and equipment (""Capital
Spending'') of $63.3 million were driven in part by expenditures in connection with this redesign effort.
The Company expects carry-over Capital Spending of approximately $3.9 million related to this
redesign effort to occur early in 2006.
At December 31, 2005 and 2004, LII's projected benefit obligation for its pension plans exceeded the fair
value of the plans' assets by $69.6 million and $75.9 million, respectively. These unfunded obligations may
fluctuate due to changes in discount rates, changes in assumptions and estimates and changes in investment
returns of plan assets. LII's pension expense has increased from $10.0 million for the year ended Decem-
ber 31, 2004 to $11.0 million for the year ended December 31, 2005. LII is projecting an additional $1 million
to $2 million of pension expense in 2006 based on updated mortality tables and demographic assumptions and
discount rate and return on plan assets assumptions of 5.75% and 8.25%, respectively.
LII's annual pension expense is determined in accordance with the actuarial and accounting requirements
of Statement of Financial Accounting Standards No. 87, ""Employers' Accounting for Pensions'', and No. 88,
""Employers' Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and for
Termination Benefits'', and cannot be finalized until year-end. In future years beyond 2006, LII expects
pension expense to stabilize and then decrease as contributions are made, assuming a constant 5.75% discount
rate and an 8.25% return on plan assets.
LII expects to make required contributions to its pension plans to maintain the funded status in future
years. Due to the fluid nature of current pension funding law, LII cannot currently determine the amount or
timing of these contributions. The cash flow required to fund the plans in accordance with minimum funding
standards is not expected to impact LII's ability to operate. For the year ended December 31, 2005, LII's
18
employer contribution to its pension plans totaled $29.8 million, of which $25.2 million was discretionary. LII
will evaluate additional discretionary contributions throughout 2006; however, no discretionary contributions
for 2006 are planned at this time.
LII's fiscal year ends on December 31 and its interim fiscal 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 fiscal quarter are denoted by the last day of the calendar
quarter.
Accounting for Futures Contracts
In connection with the completion of 2005 year-end procedures related to the accounting for futures
contracts for copper and aluminum, the Company determined that these futures contracts, previously
designated as cash flow hedges, did not qualify for hedge accounting under Statement of Financial Accounting
Standards No. 133 ""Accounting for Derivative Instruments and Hedging Activities'' (""SFAS No. 133''), as
the Company's documentation did not meet the criteria specified by SFAS No. 133 in order for the hedging
instruments to qualify for cash flow designation. This determination resulted in two different types of
adjustments to the Company's consolidated financial statements for the year ended December 31, 2005.
First, the Company recorded an unrealized gain of $23.3 million pre-tax, or $14.9 million after-tax, in
(Gains), Losses and Other Expenses, net in the accompanying Consolidated Statements of Operations. This
resulted in an increase in net income of $6.1 million, or $0.08 per share, in the first quarter of 2005, which
included $6.4 million of net income impact related to open futures contracts as of December 31, 2004.
Additionally, this resulted in a decrease in net income of $3.5 million, or $0.05 per share, in the second quarter
of 2005; and an increase in net income of $6.3 million, or $0.09 per share, in the third quarter of 2005, by
releasing amounts previously recorded in the Accumulated Other Comprehensive Income (Loss) component
of Stockholders' Equity. The cumulative impact to previously reported earnings for the nine-month period
ended September 30, 2005 is an increase of $8.9 million. A positive impact to net income of $6.0 million, or
$0.08 per share, also resulted in the fourth quarter of 2005. The Company had previously recorded this
unrealized gain in Accumulated Other Comprehensive Income in the accompanying Consolidated Balance
Sheets.
Second, the Company realized gains of $16.7 million pre-tax, or $10.7 million after-tax, related to settled
futures contracts, which are also recorded in (Gains), Losses and Other Expenses, net in the accompanying
Consolidated Statements of Operations. Of these gains, $8.8 million was previously included in Cost of Goods
Sold for the nine-month period ended September 30, 2005 and should have been included in (Gains), Losses
and Other Expenses, net in the accompanying Consolidated Statements of Operations. The amounts that had
been included in Cost of Goods Sold were $2.0 million, $2.8 million, and $4.0 million for the first, second, and
third quarters of 2005, respectively, and had no impact on previously reported net income. For the fourth
quarter of 2005, and $8.0 million gain was recorded in (Gains), Losses and Other Expenses, net.
19
These adjustments did not affect the Company's cash flows and the impact on results for all periods
presented prior to 2005 was not material. As a result of these adjustments, the Company's Consolidated
Statements of Operations for the quarters ended March 31, June 30, and September 30, 2005 and the
Consolidated Balance Sheets as of March 31, June 30, and September 30, 2005 were restated. The following
table provides the impact on previously reported amounts within the Company's first, second and third
quarters of 2005 related to the Company's accounting for futures contracts for copper and aluminum.
Amounts are in millions and items in parenthesis represent a decrease from the amounts previously reported.
Cost of goods sold ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Gross profit ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Realized gains on settled futures contracts previously included in
For the Three Months Ended
March 31,
2005
June 30,
2005
September 30,
2005
Increase/(Decrease)
$ 2.0
(2.0)
$ 2.8
(2.8)
$ 4.0
(4.0)
cost of goods sold ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
2.0
2.8
Unrealized gains (losses) on open futures contracts previously
included in accumulated other comprehensive income (loss) ÏÏÏÏÏ
(Gains), losses and other expenses, net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Operation income from continuing operationsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Income from continuing operations before income taxes and
cumulative effect of accounting change ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Provision for income taxes previously included in accumulated other
comprehensive income (loss) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Income from continuing operations before cumulative effect of
accounting change ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Income from continuing operations ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Net income and retained earnings ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
9.5
11.5
9.5
9.5
3.4
6.1
6.1
6.1
(5.5)
(2.7)
(5.5)
(5.5)
(2.0)
(3.5)
(3.5)
(3.5)
3.9
10.1
14.0
10.0
10.0
3.7
6.3
6.3
6.3
20
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, 2005, 2004 and 2003:
Years Ended December 31,
2003
2004
2005
Net sales ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Cost of good sold ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
100.0% 100.0% 100.0%
66.6
67.1
66.2
Gross profit ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Selling, general and administrative expense ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
(Gains) losses and other expenses, net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Restructuring chargeÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Goodwill impairment ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
32.9
26.8
(1.5)
0.1
Ì
Operational income (loss) from continuing operationsÏÏÏÏÏÏÏÏÏÏÏÏ
Interest expense, net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Other incomeÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Income (loss) from continuing operations before income taxes and
cumulative effect of accounting change ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Provision for income taxes ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Income (loss) from continuing operations before cumulative effect of
accounting changeÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Cumulative effect of accounting change ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Discontinued operations:
Loss from operations of discontinued operations ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Income tax benefit ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Loss on disposal of discontinued operationsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Income tax benefit ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Loss from discontinued operations ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
7.5
0.5
Ì
7.0
2.5
4.5
Ì
Ì
Ì
Ì
Ì
Ì
33.4
27.7
Ì
Ì
6.9
(1.2)
0.9
Ì
(2.1)
1.0
(3.1)
Ì
1.3
(0.3)
0.5
(0.1)
1.4
33.8
28.1
0.1
Ì
Ì
5.6
1.0
(0.1)
4.7
1.6
3.1
Ì
Ì
Ì
Ì
Ì
Ì
Net income (loss) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
4.5% (4.5)% 3.1%
21
The following table sets forth net sales by business segment and geographic market (dollars in millions):
2005
Year Ended December 31,
2004
2003
Amount
%
Amount
%
Amount
%
Business Segment:
Residential ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Commercial ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$1,685.8
651.7
50.1% $1,419.8
580.8
19.3
47.6% $1,358.7
508.4
19.5
Heating & Cooling ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Service Experts ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Refrigeration ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Corporate and other ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
EliminationsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
2,337.5
641.4
467.2
Ì
(79.9)
69.4
19.1
13.9
Ì
(2.4)
2,000.6
611.7
444.7
Ì
(74.3)
67.1
20.5
14.9
Ì
(2.5)
1,867.1
611.3
387.2
Ì
(75.7)
48.7%
18.2
66.9
21.9
13.9
Ì
(2.7)
Total net sales ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$3,366.2
100.0% $2,982.7
100.0% $2,789.9
100.0%
Geographic Market:
U.S. ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
International ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$2,603.0
763.2
77.3% $2,254.8
727.9
22.7
75.6% $2,135.1
654.8
24.4
76.5%
23.5
Total net sales ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$3,366.2
100.0% $2,982.7
100.0% $2,789.9
100.0%
Year Ended December 31, 2005 Compared to Year Ended December 31, 2004
Net Sales
Net sales increased $383.5 million, or 12.9%, to $3,366.2 million for the year ended December 31, 2005
from $2,982.7 million for the same period in 2004. Excluding the favorable impact of foreign currency
translation, net sales increased $354.6 million, or 11.9%, compared to the same period in 2004. Net sales were
higher in all of the Company's business segments for the year ended December 31, 2005, compared to the year
ended December 31, 2004.
Net sales in the Residential Heating & Cooling business segment increased $266.0 million, or 18.7%, to
$1,685.8 million for the year ended December 31, 2005 from $1,419.8 million for the year ended Decem-
ber 31, 2004. Excluding the favorable impact of foreign currency translation, net sales increased $256.9 mil-
lion, or 18.1%, compared to the year ended December 31, 2004. All units within the segment achieved net
sales increases, led by strong sales of HVAC equipment. LII's Residential Heating & Cooling businesses also
benefited from favorable weather in 2005 during the cooling season as well as price increases in response to
higher commodity prices. According to the National Oceanic and Atmospheric Administration's Climate
Prediction Center, total U.S. cooling degree days from January 2005 through December 2005, on a
population-weighted basis, were 19% above normal and 15% above the same period in 2004. Overall, LII's
Residential Heating & Cooling business segment outperformed the market. According to the Air-Condition-
ing and Refrigeration Institute, U.S. factory shipments of unitary air conditioners and heat pumps were up
16% from January 2005 through December 2005, compared to the same period in 2004.
Net sales in the Commercial Heating & Cooling business segment increased $70.9 million, or 12.2%, to
$651.7 million for the year ended December 31, 2005, compared to the year ended December 31, 2004. After
excluding the favorable impact of foreign currency translation, net sales increased $67.0 million, or 11.5%,
compared to the year ended December 31, 2004. The increase in net sales was due primarily to strong
domestic sales growth, particularly in sales to national accounts and to commercial mechanical contractors,
and to price increases in response to higher commodity prices. After excluding the impact of foreign currency
translation, net sales in the Company's European operations for the year ended December 31, 2005 were
slightly higher compared to the same period in 2004.
22
Net sales in the Service Experts business segment increased $29.7 million, or 4.9%, to $641.4 million for
the year ended December 31, 2005 from $611.7 million for the year ended December 31, 2004. Net sales
increased $22.0 million, or 3.6%, after excluding the favorable impact of foreign currency translation. The
increase in net sales was due primarily to favorable weather during the cooling season.
Refrigeration business segment net sales increased $22.5 million, or 5.1%, to $467.2 million for the year
ended December 31, 2005 compared to $444.7 million for the year ended December 31, 2004. After excluding
the impact of foreign currency translation, net sales increased $12.8 million, or 2.9%, for the year ended
December 31, 2005 compared to the same period in 2004. North and South America had higher net sales due
primarily to growth in original equipment manufacturer sales that service the supermarket, walk-in refrigera-
tion and cold storage market segments, as well as price increases in response to higher commodity prices.
After excluding the impact of foreign currency translation, net sales were lower in the Company's Asia Pacific
operations and flat in the Company's European operations.
Gross Profit
Gross profit was $1,108.0 million for the year ended December 31, 2005, compared to $997.5 million for
the year ended December 31, 2004, an increase of $110.5 million. Gross profit margin declined to 32.9% for
the year ended December 31, 2005 from 33.4% in the same period in 2004. The decline was due to the
realization of $16.7 million of gains related to settled futures contracts included in (gains), losses and other
expenses, net rather than cost of goods sold. See ""Accounting for Futures Contracts'' above. If the Company
had included these realized gains of $16.7 million in cost of goods sold, gross profit would have been
$1,124.7 million and gross profit margin would have been 33.4% for the year ended December 31, 2005.
Higher costs were incurred by LII's manufacturing businesses as prices for commodities and related
components increased by approximately $67 million for the year ended December 31, 2005, compared to the
same period in 2004. LII was able to offset higher commodity prices through price increases. Last in, first out
(""LIFO'') inventory liquidations did not have a material impact on gross profit margins for all periods
presented. The Company's gross profit margin may not be comparable to the gross profit margin of other
entities because some entities include all of the costs related to their distribution network in cost of goods sold,
whereas the Company excludes a portion of such costs from gross profit margin, including such costs in the
Selling, General and Administrative Expense (""SG&A'') line item instead. For more information, see
Note 2 Ì Summary of Significant Accounting Policies Ì Shipping and Handling in the Notes to Consoli-
dated Financial Statements.
Selling, General and Administrative Expense
SG&A expenses were $902.4 million for the year ended December 31, 2005, an increase of $76.3 million,
or 9.2%, from $826.1 million for the year ended December 31, 2004. The $76.3 million increase in SG&A
expenses was due primarily to higher distribution, selling and marketing expenses of $56.4 million driven by
higher sales volumes, unfavorable foreign currency translation (part of which is included in the higher
distribution, selling and marketing expenses), higher expenses for short-term and long-term incentive
compensation programs due to improved LII financial performance coupled with a higher LII common stock
price and expenses associated with personnel changes. As a percentage of total net sales, SG&A expenses
declined to 26.8% for the year ended December 31, 2005 from 27.7% for the year ended December 31, 2004.
The Company has no significant concentration of credit risk among its diversified customer base.
23
(Gains), Losses and Other Expenses, Net
(Gains), losses and other expenses, net were $(50.2) million for the year ended December 31, 2005 and
zero for the year ended December 31, 2004. For the year ended December 31, 2005, (gains), losses and other
expenses, net included the following (in millions):
Year Ended December 31, 2005
Tax (Benefit)
Provision
After-tax
(Gain) Loss
Pre-tax
(Gain) Loss
Realized gains on settled futures contracts ÏÏÏÏÏÏÏÏÏÏÏ
Unrealized gains on open futures contractsÏÏÏÏÏÏÏÏÏÏÏ
Gain on sale of LII's 45% interest in its heat transfer
$(16.7)
(23.3)
$ 6.0
8.4
$(10.7)
(14.9)
joint venture to Outokumpu ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
(9.3)
2.3
(7.0)
Estimated on-going remediation costs in conjunction
with the joint remediation agreement LII entered
into with Outokumpu ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Other items, net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
2.2
(3.1)
(0.8)
0.2
1.4
(2.9)
(Gains), losses and other expenses, net ÏÏÏÏÏÏÏÏÏÏÏÏÏ
$(50.2)
$16.1
$(34.1)
Restructuring Charge
Due to competitive cost pressures, on April 4, 2005, Lennox Hearth Products Inc., a subsidiary of the
Company, commenced plans to relocate its Whitfield pellet stove and Lennox cast iron stove product lines
from Burlington, Washington to a third party production facility in Juarez, Mexico, discontinue its existing
steel wood stove line manufactured in Burlington and close the Burlington facility. These actions were
substantially complete as of December 31, 2005. In connection with the plant closure, the Company recorded
a pre-tax restructuring charge of $2.4 million for the year ended December 31, 2005. The tax benefit of this
charge was $0.8 million.
Goodwill Impairment
Goodwill impairment represents a pre-tax, non-cash, charge of $208.0 million for the year ended
December 31, 2004 in the Company's Service Experts business segment, where lower than expected operating
results occurred. The tax benefit of this charge was $23.2 million. During the first quarter of 2004, the
Company conducted fair-value-based tests, which are required at least annually by SFAS No. 142, and
determined that the carrying value of Service Experts' goodwill exceeded its fair value. These fair-value-based
tests were applied to all Service Experts service centers before consideration of the divestitures previously
announced as part of the Company's Service Experts turnaround plan. An additional $14.8 million of pre-tax
goodwill impairment is included in the $38.9 million pre-tax Loss from Operations of Discontinued Operations
discussed below resulting in a total pre-tax goodwill impairment charge of $222.8 million for the year ended
December 31, 2004. During the first quarter of 2005, LII performed its annual goodwill impairment test and
determined that no further goodwill impairment was necessary.
Interest Expense, Net
Interest expense, net, decreased $11.8 million from $27.2 million for the year ended December 31, 2004
to $15.4 million for the year ended December 31, 2005. The lower interest expense was due primarily to lower
average debt levels, the absence of $1.9 million of make-whole expenses for the year ended December 31,
2004 related to the Company's $35 million pre-payment of certain long-term debt in June 2004 and interest
income earned on higher average cash and cash equivalents. As of December 31, 2005, total debt of
$120.5 million was $190.0 million lower than total debt as of December 31, 2004. As discussed previously, as
of October 6, 2005, the holders of the Convertible Notes had converted all of the $143.75 million aggregate
principal amount of Convertible Notes into an aggregate of approximately 7.9 million shares of common stock.
24
As of December 31, 2005, cash and cash equivalents of $213.5 million was $152.6 million higher than cash
and cash equivalents as of December 31, 2004.
Other (Income) Expense
Other (income) expense was $3.0 million for the year ended December 31, 2005, compared to
($0.8) million for the same period in 2004. The increase in other expense was due primarily to foreign
currency exchange losses, which relate principally to the Company's operations in Canada, Australia and
Europe.
Provision for Income Taxes
The provision for income taxes on continuing operations was $83.0 million for the year ended
December 31, 2005 compared to a provision for income taxes on continuing operations of $30.5 million for the
year ended December 31, 2004. The effective tax rate on continuing operations was 35.3% and (48.4)% for the
years ended December 31, 2005 and December 31, 2004, respectively. Excluding the impact of goodwill
impairment, the provision for income taxes on continuing operations would have been $53.7 million for the
year ended December 31, 2004 and the effective tax rate on continuing operations would have been 37.0% for
the year ended December 31, 2004. These effective rates differ from the statutory federal rate of 35%
principally due to state and local taxes, non-deductible expenses, foreign operating losses for which no tax
benefits have been recognized and foreign taxes at rates other than 35%.
On June 30, 2005, Ohio enacted legislation changing its tax system. As a result of this legislation and in
accordance with Statement of Financial Accounting Standards No. 109, ""Accounting for Income Taxes'', a
provision for income taxes of $1.6 million was recorded for the year ended December 31, 2005.
The American Jobs Creation Act (""AJCA'') was signed into law on October 22, 2004. The AJCA
provided an opportunity to repatriate foreign earnings and claim an 85% dividend received deduction against
the repatriated amount. The Company evaluated the potential effects of repatriation and determined not to
repatriate earnings under this provision.
Cumulative Effect of Accounting Change, Net
As discussed previously, effective July 1, 2005, the Company adopted the fair value recognition provisions
of SFAS No. 123R using the modified-prospective-transition method. The cumulative effect of change in
accounting principle related to the adoption of SFAS No. 123R was not material for the year ended
December 31, 2005.
In March 2005, the Financial Accounting Standards Board (""FASB'') issued FASB Interpretation
No. 47, ""Accounting for Conditional Asset Retirement Obligations Ì An Interpretation of FASB Statement
No. 143'' (""FIN No. 47''), which was effective for the Company as of December 31, 2005. This interpretation
provides additional guidance as to when companies should record the fair value of a liability for a conditional
asset retirement obligation when there is uncertainty about the timing or method of settlement of the
obligation. The cumulative effect of the change in accounting related to the adoption of FIN No. 47 was not
material for the year ended December 31, 2005.
The cumulative effect of change in accounting related to the adoption of SFAS No. 123R and FIN
No. 47 was after-tax income of $0.1 million for the year ended December 31, 2005.
Loss from Discontinued Operations
In the first fiscal quarter of 2004, the Company's Board of Directors approved a turnaround plan designed
to improve the performance of its Service Experts business segment. The plan realigned Service Experts'
dealer service centers to focus on service and replacement opportunities in the residential and light
commercial markets. LII identified approximately 130 centers, whose primary business is residential and light
commercial service and replacement, to comprise the ongoing Service Experts business segment. As of
December 31, 2004, the Company had divested the remaining 48 centers.
25
Under SFAS No. 144, the operating results of the 48 centers that are no longer a part of the Service
Experts business segment for all periods presented are reported as Discontinued Operations in LII's
Consolidated Statements of Operations. The following table details the Company's pre-tax loss from
discontinued operations for the years ended December 31, 2005 and 2004, as well as the cumulative pre-tax
loss incurred through December 31, 2005 (in millions):
Year Ended
December 31,
2005
Year Ended
December 31,
2004
Cumulative
Incurred
through
December 31,
2005
Goodwill impairment ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Impairment of property, plant and equipment ÏÏÏÏÏÏÏÏ
Operating lossÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Other divestiture costsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
SubtotalÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Loss on disposal of centers ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$ Ì
Ì
Ì
2.0
2.0
0.1
$14.8
3.1
14.9
6.1
38.9
14.9
$14.8
3.1
14.9
8.1
40.9
15.0
Total loss from discontinued operations before
income tax ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$2.1
$53.8
$55.9
The pre-tax loss of $2.0 million from discontinued operations for the year ended December 31, 2005 was
primarily related to salary, severance, legal and other related expenses. Any future additional expenses are not
expected to be material. The income tax benefit on discontinued operations was $0.7 million and $12.9 million
for the years ended December 31, 2005 and 2004, respectively. The income tax benefit on discontinued
operations for the year ended December 31, 2004 of $12.9 million includes a $1.6 million tax benefit related to
goodwill impairment. Through December 31, 2005, cumulative proceeds from the sale of the 48 centers
totaled $25.8 million.
Year Ended December 31, 2004 Compared to Year Ended December 31, 2003
Net Sales
Net sales increased $192.8 million, or 6.9%, to $2,982.7 million for the year ended December 31, 2004
from $2,789.9 million for the same period in 2003. Excluding the favorable impact of foreign currency
translation, net sales increased $130.7 million, or 4.7%, compared to the same period in 2003. Excluding the
favorable impact of foreign currency translation, net sales were higher in all of the Company's business
segments, with the exception of Service Experts.
Net sales in the Residential Heating & Cooling business segment increased $61.1 million, or 4.5%, to
$1,419.8 million for the year ended December 31, 2004 from $1,358.7 million for the year ended Decem-
ber 31, 2003. Excluding the impact of foreign currency translation, net sales increased 3.6%, or $48.4 million,
compared to the year ended December 31, 2003. Net sales increases were achieved by all of the Company's
major home comfort businesses in the Residential Heating & Cooling business segment due in part to
sustained strength in residential new construction and price increases in response to rising commodity prices,
although cooler than normal summer weather negatively impacted net sales. According to the National
Association of Home Builders, single-family housing starts of 1.61 million units in 2004 were 7.5% higher than
in 2003. Net sales of premium Dave Lennox Signature collection home comfort products were up 25% for the
year ended December 31, 2004 compared to the same period in 2003. Net sales in the Company's Hearth
Products business segment were up significantly over the same period as a result of increased sales to existing
customers.
Net sales in the Commercial Heating & Cooling business segment increased $72.4 million, or 14.2%, to
$580.8 million for the year ended December 31, 2004 compared to the year ended December 31, 2003.
Excluding the impact of foreign currency translation, net sales increased $56.3 million, or 11.1%, compared to
the year ended December 31, 2003. The increase in net sales was due primarily to strong domestic sales
26
growth, particularly in sales to national accounts, as well as an increase in sales to commercial mechanical
contractors. When adjusted for foreign currency translation, net sales in the Company's European operations
for the year ended December 31, 2004 were also higher compared to the same period in 2003.
Net sales in the Service Experts business segment were flat at $611.7 million for the year ended
December 31, 2004 compared to $611.3 million for the year ended December 31, 2003. After excluding the
favorable impact of foreign currency translation, net sales declined $7.3 million, or 1.2%. The flat net sales
were due in part to cooler than normal summer weather.
Refrigeration business segment net sales increased $57.5 million, or 14.9%, to $444.7 million for the year
ended December 31, 2004 compared to the year ended December 31, 2003. Excluding the impact of foreign
currency translation, net sales increased $30.4 million, or 7.9%, for the year ended December 31, 2004
compared to the same period in 2003. Net sales were higher in all businesses within this segment after
excluding the favorable impact of foreign currency translation and were particularly strong domestically.
Domestic sales were up significantly for the year ended December 31, 2004 compared to the same period in
2003 due in large part to strong activity in large cold storage projects and improved market penetration in the
supermarket sector. Net sales were higher in the Company's Asia Pacific operations as a result of improved
demand for refrigeration equipment, particularly in the supermarket sector. Net sales were also higher in the
Company's European operations.
Gross Profit
Gross profit was $997.5 million for the year ended December 31, 2004 compared to $943.3 million for the
year ended December 31, 2003, an increase of $54.2 million, or 5.7%. Gross profit margin declined to 33.4%
from 33.8% for the year ended December 31, 2004 compared to the same period in 2003. The decline in gross
profit margin was due primarily to declines in the Company's Residential Heating & Cooling and Service
Experts' business segments as well as higher commodity prices overall. Although commodity prices, and
related component costs, in LII's manufacturing businesses increased by approximately $47 million for the
year ended December 31, 2004 compared to the same period in 2003, LII partially mitigated the impact of
rising commodity prices in 2004 through a combination of improved production efficiency, cost reduction
initiatives, hedging programs and price increases.
In the Company's Residential Heating & Cooling business segment, gross profit margins declined 0.4%
for the year ended December 31, 2004 compared to the same period in 2003 due primarily to rising commodity
prices partially offset by higher volumes, a favorable mix of higher-margin premium products and improved
factory performance. Gross profit margins improved 0.1% in the Company's Commercial Heating & Cooling
business segment over the same period due to higher volumes and strong factory performance partially offset
by rising commodity prices. In the Company's Service Experts business segment, gross profit margin declined
0.2% over the same period due in part to unfavorable weather skewing the revenue mix towards lower-margin
maintenance business versus higher-margin replacement business. In the Company's Refrigeration business
segment, gross profit margin was flat over the same period.
LIFO inventory liquidations did not have a material impact on gross profit margins for all periods
presented. The Company's gross profit margin may not be comparable to the gross profit margin of other
entities because some entities include all of the costs related to their distribution network in cost of goods sold,
whereas the Company excludes a portion of such costs from gross profit margin, including such costs in the
SG&A line item instead. For more information, see Note 2 Ì Summary of Significant Accounting Policies Ì
Shipping and Handling in the Notes to Consolidated Financial Statements.
Selling, General and Administrative Expense
SG&A expenses were $826.1 million for the year ended December 31, 2004, an increase of $42.5 million,
or 5.4%, from $783.6 million for the year ended December 31, 2003. Of the $42.5 million increase in SG&A
expenses, approximately $16 million was due to unfavorable foreign currency translation, $11 million due to
consulting fees in connection with Sarbanes-Oxley compliance, $7 million due to investigation costs related to
the Service Experts operations and $1.6 million for a prior period adjustment relating to a Canadian currency
27
translation account in 2003. Higher freight and commissions due primarily to higher sales volumes, higher
distribution and selling expenses and cost increases in overhead expenses accounted for the remaining portion
of the increase in SG&A. As a percentage of total net sales, SG&A expenses improved to 27.7% for the year
ended December 31, 2004 compared to 28.1% for the year ended December 31, 2003. The Company has no
significant concentration of credit risk among its diversified customer base.
Goodwill Impairment
Goodwill impairment represents a pre-tax, non-cash charge of $208.0 million for the year ended
December 31, 2004 in the Company's Service Experts business segment, where lower than expected operating
results occurred. The tax benefit of this charge was $23.2 million. During the first quarter of 2004, the
Company conducted fair-value-based tests, which are required at least annually by SFAS No. 142, and
determined that the carrying value of Service Experts' goodwill exceeded its fair value. These fair-value-based
tests were applied to all Service Experts service centers before consideration of the divestitures announced as
part of the Company's Service Experts turnaround plan. An additional $14.8 million of pre-tax goodwill
impairment is included in the $38.9 million pre-tax loss from operations of discontinued operations discussed
below resulting in a total pre-tax goodwill impairment charge of $222.8 million for the year ended
December 31, 2004.
(Gain), Losses and Other Expenses, Net
(Gains), losses and other expenses, net were a pre-tax expense of $1.9 million for the year ended
December 31, 2003 which included a pre-tax expense of $3.4 million for reserve requirements related to the
Company's 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 offset 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.
Interest Expense, Net
Interest expense, net for the year ended December 31, 2004 decreased $1.2 million from $28.4 million for
the year ended December 31, 2003. The lower interest expense was due primarily to lower average debt levels
partially offset by $1.9 million of expenses related to the Company's $35 million pre-payment of certain long-
term debt in June 2004. The $35 million long-term debt pre-payment was scheduled to be repaid in the third
quarter of 2005. As of December 31, 2004, total debt of $310.5 million was $51.8 million lower than total debt
as of December 31, 2003.
Other (Income) Expense
Other (income) expense was ($0.8) million for the year ended December 31, 2004 and ($2.4) million in
2003. Other (income) expense 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 on continuing operations was $30.5 million for the year ended
December 31, 2004 compared to a provision for income taxes on continuing operations of $45.1 million for the
year ended December 31, 2003. The effective tax rate on continuing operations was (48.4%) and 34.2% for the
year ended December 31, 2004 and December 31, 2003, respectively. Excluding the impact of goodwill
impairment, the provision for income taxes on continuing operations would have been $53.7 million for the
year ended December 31, 2004 and the effective tax rate on continuing operations would have been 37.0% for
the year ended December 31, 2004. These effective rates differ from the statutory federal rate of 35%
principally due to state and local taxes, non-deductible expenses, foreign operating losses for which no tax
benefits have been recognized and foreign taxes at rates other than 35%.
28
Loss from Discontinued Operations
In the first fiscal quarter of 2004, the Company's Board of Directors approved a turnaround plan designed
to improve the performance of its Service Experts business segment. The plan realigned Service Experts'
dealer service centers to focus on service and replacement opportunities in the residential and light
commercial markets. LII identified approximately 130 dealer service centers, whose primary business is
residential and light commercial service and replacement, to comprise the ongoing Service Experts business
segment. As of December 31, 2004, the Company had divested the remaining 48 centers.
Under SFAS No. 144, the operating results of the 48 centers that are no longer a part of the Service
Experts business segment for all periods presented are reported as Discontinued Operations in LII's
Consolidated Statements of Operations. The following table details the Company's pre-tax loss from
discontinued operations for the year ended December 31, 2004 (in millions):
Goodwill impairment ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Impairment of property, plant and equipment ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Operating loss ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Other divestiture costs ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Subtotal ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Loss on disposal of centersÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Year Ended
December 31,
2004
$14.8
3.1
14.9
6.1
38.9
14.9
Total loss from discontinued operations before income tax ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$53.8
No specific reserves were created as a result of the turnaround plan. The income tax benefit on
discontinued operations was $12.9 million for the year ended December 31, 2004, which includes a
$1.6 million income tax benefit related to the goodwill impairment. Through December 31, 2004, proceeds
from the sale of the 48 centers totaled $23.3 million.
Liquidity, Capital Resources and Off-Balance Sheet Arrangements
LII's working capital and capital expenditure requirements are generally met through net cash provided
by operations, bank lines of credit and a revolving period asset securitization arrangement. Working capital
needs are more extensive in the first and second quarter due to the seasonal nature of the Company's business
cycle.
As of December 31, 2005, the Company's debt-to-total-capital ratio was 13%, down from 40% as of
December 31, 2004 primarily due to the redemption of the Convertible Notes and the repayment of debt.
During 2005, cash provided by operations was $228.7 million, compared to $57.4 million in 2004 and
$56.7 million in 2003, respectively. If the effects of the Company's asset securitization program were excluded,
the comparison would have been $228.7 million cash provided by operations in 2005 compared to
$57.4 million cash provided by operations in 2004 and $(42.3) million cash used in operations in 2003. The
increase in cash from operations in 2005 is a reflection of higher earnings and process improvements related to
working capital in 2005 as compared to 2004.
Net cash used in investing activities was $20.8 million in 2005 compared to $17.9 million and
$22.4 million in 2004 and 2003, respectively. Net cash used in investing activities in 2005 includes
$39.3 million of proceeds from the sale of the Company's 45% interest in its heat transfer joint venture to
Outokumpu Copper Products OY of Finland. Net cash used in investing activities in 2004 includes
$21.8 million of proceeds from the sale of discontinued service centers of the Company's Service Experts
segment.
Net cash used in financing activities was $56.9 million in 2005 compared to $55.1 million and
$31.9 million in 2004 and 2003, respectively. The Company paid a total of $24.8 million in dividends on its
29
common stock in 2005 as compared to $22.8 million and $22.1 million in 2004 and 2003, respectively. Net
repayments of long-term debt, short-term borrowings and revolving long-term borrowings totaled approxi-
mately $45.5 million in 2005 as compared to $52.3 million and $19.2 million in 2004 and 2003, respectively.
As of December 31, 2005, $23.1 million of cash and cash equivalents were restricted primarily due to
routine check clearing float on customer payments received in lockbox collections and letters of credit issued
with respect to the operations of its captive insurance subsidiary, which expire on December 30, 2006. These
letter of credit restrictions can be transferred to the Company's revolving lines of credit, as needed.
Capital expenditures of $63.3 million, $40.3 million and $39.7 million in 2005, 2004 and 2003,
respectively, resulted primarily from purchases of production equipment in the manufacturing plants in the
Residential Heating & Cooling and Commercial Heating & Cooling business segments. The Company
projects its capital expenditures to increase in 2006 to approximately $70 million primarily due to factory
expansion to accommodate continued domestic Commercial Heating & Cooling growth and IT investments
for CRM software and the implementation of SAP in Europe.
As of December 31, 2005, the Company had approximately $27.1 million in unfunded post retirement
benefit obligations that relate to the Company's medical and life insurance benefits to eligible employees. The
Company does not intend to pre-fund these obligations at this time. Benefits provided under these plans have
been and will continue to be paid as they arise. Employer contributions were $2.4 million, $2.1 million and
$2.6 million in 2005, 2004 and 2003, respectively. Based on current information, the Company does not expect
a significant change in 2006 and future years. The Company does not expect the cash flow required to pay the
benefits under these plans to impact the Company's ability to operate.
In June 2004, LII made a pre-payment on its long-term debt of $35 million, which was scheduled to
mature in the third quarter of 2005. The pre-payment make-whole amount associated with the debt was
$1.9 million and was expensed in 2004.
As of December 31, 2005, the Company had outstanding long-term debt obligations totaling $119.3 mil-
lion, which was down from $304.5 million and $358.7 million at December 31, 2004 and 2003, respectively.
The amount outstanding as of December 31, 2005 consisted primarily of three issuances of notes with an
aggregate principal outstanding of $118.3 million, with interest rates ranging from 6.73% to 8.0% and
maturities ranging from 2006 to 2010.
The Company has bank lines of credit aggregating $427.5 million, of which $1.2 million was borrowed
and outstanding and $90.7 million was committed to standby letters of credit at December 31, 2005. Of the
remaining $335.6 million, the entire amount was available for future borrowings after consideration of
covenant limitations. Included in the lines of credit are several regional facilities and a multi-currency facility
governed by agreements between the Company and a syndicate of banks. In July 2005, the Company amended
and restated its revolving credit facility to, among other things, increase the borrowing capacity from
$225 million to $400 million and extend the maturity date from September 2006 to July 2010. The facility
contains certain financial covenants and bears interest at a rate equal to, at the Company's option, either
(a) the greater of the bank's prime rate or the federal funds rate plus 0.5%, or (b) the London Interbank
Offered Rate plus a margin equal to 0.475% to 1.20%, depending upon the ratio of total funded debt-to-
adjusted earnings before interest, taxes, depreciation and amortization (""Adjusted EBITDA''), as defined in
the facility. The Company pays a facility fee, depending upon the ratio of total funded debt to Adjusted
EBITDA, equal to 0.15% to 0.30% of the capacity. The facility includes restrictive covenants that limit the
Company's ability to incur additional indebtedness, encumber its assets, sell its assets and make certain
payments, including amounts for share repurchases and dividends. 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 financial statements, as well as compliance certificates, to the banks within specified time
periods.
On September 7, 2005, the Company called for redemption all of its outstanding 6.25% convertible
subordinated notes (""Convertible Notes'') on October 7, 2005. The redemption price was 103.571% of the
principal amount. As of September 7, 2005, there was $143.75 million aggregate principal amount of
30
Convertible Notes outstanding, which could be converted into the Company's common stock at a rate of
55.2868 shares of common stock per $1,000 principal amount of Convertible Notes at any time before the
close of business on the business day prior to the redemption date. As of October 6, 2005, the holders of all of
the Convertible Notes had converted the Convertible Notes into an aggregate of approximately 7.9 million
shares of common stock.
On September 19, 2005, LII announced its Board of Directors had authorized a stock repurchase
program, pursuant to which the Company may repurchase up to ten million shares of its common stock, and
had terminated a prior repurchase program that was announced November 2, 1999. Purchases under the stock
repurchase program are made on an open-market basis at prevailing market prices. The timing of any
repurchases depends on market conditions, the market price of LII's common stock and management's
assessment of the Company's liquidity needs and investment requirements and opportunities. No time limit
was set for completion of the program and there is no guarantee as to the exact number of shares that will be
repurchased. As of December 31, 2005, the Company had repurchased 447,400 shares of common stock at an
average price of $28.65 per share under the stock repurchase program.
In addition to the revolving and term loans described above, LII utilizes the following financing
arrangements 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, 2005 and December 31, 2004, respectively, LII had not sold any of such accounts
receivable. The receivables are sold at a discount from face value, and this discount aggregated
$0.9 million, $2.3 million and $2.9 million in 2005, 2004 and 2003, respectively. 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, in accordance with
Generally Accepted Accounting Principles (""GAAP''), are not capitalized on the balance sheet,
including high-turnover equipment such as autos and service vehicles and short-lived equipment such
as personal computers. These operating leases generated rent expense of approximately $52.9 million,
$55.3 million and $55.9 million in 2005, 2004 and 2003, respectively.
LII's domestic revolving and term loans contain certain financial covenant restrictions. As of Decem-
ber 31, 2005, LII was in compliance with all covenant requirements. LII periodically reviews its capital
structure, including its primary bank facility, to ensure that it has adequate liquidity. LII believes that cash
flow from operations, as well as available borrowings under its revolving credit facility and other sources of
funding, will be sufficient to fund its operations for the foreseeable future.
Contractual Obligations
Summarized below are LII's long-term payment obligations as of December 31, 2005 (in millions):
Long-term debt and capital leases ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Operating leases ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Purchase obligations ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Estimated interest payments on long-term debt and
capital leases ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Payments Due by Period
1 Year
or Less
$ 11.3
44.4
63.0
2-3
Years
$ 72.6
57.1
1.7
4-5
Years
$35.3
29.0
Ì
After
5 Years
$ 0.1
53.3
Ì
Total
$119.3
183.8
64.7
27.3
9.3
13.1
4.6
0.3
Total contractual obligations ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$395.1
$128.0
$144.5
$68.9
$53.7
Purchase obligations consist of copper and aluminum commitments. The above table does not include
retirement, postretirement and warranty liabilities because it is not certain when these liabilities will become
31
due. See Notes 2 and 11 of the Notes to the Company's Consolidated Financial Statements for additional
information.
Market Risk
LII's results of operations can be affected by changes in exchange rates. Net sales and expenses in foreign
currencies are translated into United States dollars for financial reporting purposes based on the average
exchange rate for the period. During 2005, 2004 and 2003, net sales from outside the United States
represented 22.7%, 24.4% and 23.5%, respectively, of total net sales. Historically, foreign currency transaction
gains (losses) have not had a material effect on LII's overall operations. The impact of a 10% change in
exchange rates on income from operations is estimated to be approximately $4.0 million.
The Company's results of operations can be affected 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, 2005, LII had
committed to purchase 45.9 million pounds of aluminum and 33.6 million pounds of copper under such
arrangements through December 2007. As of December 31, 2005, the net fair value of these futures contracts
was $24.0 million. In 2005, the Company determined that these futures contracts did not qualify for hedge
accounting under SFAS No. 133 as the Company's documentation did not meet the criteria specified by
SFAS No. 133 in order for the hedging instruments to qualify for cash flow designation. Accordingly, the
Company recorded an unrealized gain of $23.3 million for the year ended December 31, 2005 in (Gains),
Losses and Other Expenses, net in the accompanying Consolidated Statements of Operations for 2005 related
to these open forward purchase contracts. The impact of a 10% change in commodity prices on the Company's
results from operations is estimated to be approximately $31.0 million, absent any other contravening actions.
In the first quarter of 2006, the Company engaged an outside consultant to assist it in redesigning its
policies, procedures and controls with respect to its commodity hedging activities and the Company will not
initiate any additional hedging contracts until this process is completed.
Critical Accounting Policies
The preparation of financial statements requires the use of judgments and estimates. The critical
accounting policies are described below to provide a better understanding of how the Company develops its
judgments about future events and related estimations and how such policies can impact the financial
statements. A critical accounting policy is one that requires its most difficult, subjective or complex estimates
and assessments and is fundamental to the results of operations. The Company identified 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 benefit projections;
‚ Stock-based compensation;
‚ Estimates of self-insured risks; and
‚ Income taxes.
This discussion and analysis should be read in conjunction with the consolidated financial statements and
related notes in ""Item 8. Financial Statements and Supplementary Data.''
32
Product Warranties
A liability for estimated warranty expense is established by a charge against operations at the time the
Company recognizes revenue. The subsequent costs incurred for warranty claims serve to reduce the accrued
product warranty liability. The Company recorded warranty expense of $36.3 million, $28.2 million and
$24.1 million for the years ended December 31, 2005, 2004 and 2003, 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 also provides for specifically identified warranty obligations. 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. Should actual claim rates differ from the Company's estimates, revisions to the estimated product
warranty liability would be required.
Goodwill and Other Intangible Assets
Goodwill and intangible assets acquired in a purchase business combination and determined to have an
indefinite useful life are not amortized, but instead tested for impairment at least annually by reporting unit 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.''
The Company estimates reporting unit fair values using standard business valuation techniques such as
discounted cash flows and reference to comparable business transactions. The discounted cash flows fair value
estimates are based on management's projected future cash flows and the estimated weighted average cost of
capital. The estimated weighted average cost of capital is based on the risk-free interest rate and other factors
such as equity risk premiums and the ratio of total debt and equity capital.
In addition, the Company periodically reviews intangible assets with estimable useful lives for impair-
ment as events or changes in circumstances indicate that the carrying amount of such assets might not be
recoverable. In order to assess recoverability, the Company compares the estimated expected future cash flows
(undiscounted and without interest charges) identified with each long-lived asset or related asset grouping to
the carrying amount of such assets. For purposes of such comparisons, portions of goodwill are attributed to
related long-lived assets and identifiable intangible assets based upon relative fair values of such assets at
acquisition. If the expected future cash flows do not exceed the carrying value of the asset or assets being
reviewed, an impairment loss is recognized based on the excess of the carrying amount of the impaired assets
over their fair value.
The Company must make assumptions regarding estimated future cash flows and other factors to
determine the fair value of the respective assets in assessing the fair value of its goodwill and other intangibles.
If these estimates or the related assumptions change, the Company may be required to record impairment
charges for these assets in the future.
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 affect collectibility. Such factors include the historical trends of write-offs and recovery of
previously written-off accounts, the financial strength of the customer and projected economic and market
conditions. The evaluation of these factors involves complex, subjective judgments. Thus, changes in these
factors or changes in economic circumstances may significantly impact the consolidated financial statements.
33
Pensions and Postretirement Benefits
The Company has domestic and foreign pension plans covering essentially all employees. The Company
also maintains an unfunded postretirement benefit plan, which provides certain medical and life insurance
benefits to eligible employees. The pension plans are accounted for under provisions of SFAS No. 87,
""Employers' Accounting for Pensions.'' The postretirement benefit plan is accounted for under the provisions
of SFAS No. 106, ""Employers' Accounting for Postretirement Benefits Other than Pensions'' (""FAS 106'').
The benefit plan assets and liabilities included in the Company's financial statements and associated
notes reflect management's assessment as to the long-range performance of its benefit plans. These
assumptions are listed below:
Pension Benefits
2004
2005
Other Benefits
2005
2004
Weighted-average assumptions as of December 31:
Discount rate ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Expected return on plan assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
5.75%
8.25
5.75%
8.75
5.75%
Ì
5.75%
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 effect of periodic rebalancing. These results were adjusted for the
payment of reasonable expenses of the plan from plan assets. This resulted in the selection of the 8.25% long-
term rate of return on assets assumption. Should actual results differ from the Company's estimates, revisions
to the benefit plan assets and liabilities would be required.
To select a discount rate for the purpose of valuing the plan obligations, the Company performed an
analysis in which the duration of projected cash flows from defined benefit and retiree health care plans were
matched with a yield curve based on the appropriate universe of high-quality corporate bonds that were
available. The Company used the results of the yield curve analysis to select the discount rate that matched
the duration and payment stream of the benefits in each plan. The rate was rounded to the nearest quarter of a
percent. This resulted in the selection of the 5.75% discount rate assumption. Should actual results differ from
the Company's estimates, revisions to the benefit plan liabilities would be required.
Stock-Based Compensation
With the implementation of SFAS No. 123R on July 1, 2005, stock-based compensation changes our
financial statements as detailed in Notes 2 and 12 to the Consolidated Financial Statements. Determining the
amount of expense for stock-based compensation, as well as the associated impact to the balance sheets and
statements of cash flows, requires the Company to develop estimates of the fair value of stock-based
compensation expense. The most significant factors of that expense that require estimates or projections
include the expected volatility, expected lives and estimated forfeiture rates of stock-based awards.
For grants made prior to July 1, 2005, an analysis of historical volatility was used to develop the estimate
of expected volatility. Effective July 1, 2005, the Company changed its method of determining expected
volatility on all stock option and stock appreciation rights granted after that date to a combination of historical
volatility and available market implied volatility rates. After giving consideration to recently available
regulatory guidance, the Company believes that a combination of historical volatility and market-based
measures of implied volatility are currently the best available indicators of expected volatility of the
Company's stock price.
The expected lives of stock options and stock appreciation rights are determined based on historical
exercise experience, using a rolling 7-year average and estimated forfeiture rates are derived from historical
forfeiture patterns. The Company believes the historical experience method is the best estimate of future
exercise patterns and forfeitures currently available.
34
Self-Insurance Expense
The Company uses a combination of third party insurance and self-insurance plans (large deductible or
captive) to provide protection against claims relating to worker's compensation, general liability, product
liability, property damage, aviation liability, directors and officers' liability, auto liability, physical damage and
other exposures. LII maintains third party coverage for risks not retained within the Company's large
deductible or captive insurance plans.
The Company utilizes the services of a third party actuary to assist in the determination of its self-
insurance and captive expense and liabilities. The expense and liabilities are determined based on historical
company claims information, as well as industry factors and trends in the level of such claims and payments.
As of December 31, 2005, the Company's self-insurance and captive reserves, calculated on an
undiscounted basis, represent the best estimate of the future payments to be made on losses reported and
unreported for 2005 and prior years. The majority of the Company's self-insured risks (excluding auto liability
and physical damage) have relatively long payout patterns. Pursuant to the Company's accounting policy, LII
does not discount its self-insurance or captive reserves. The Company maintains safety and manufacturing
programs that are designed to improve the safety and effectiveness 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 and captive risks totaled $56.1 million and $54.1 million at
December 31, 2005 and 2004, respectively. Actual payments for claims reserved at December 31, 2005 may
vary depending on various factors including the development and ultimate settlement of reported and
unreported claims. To the extent actuarial assumptions change and claims experience rates differ from
historical rates, the Company's liability may change.
Income Taxes
In determining income for financial statement purposes, the Company must make certain estimates and
judgments in the calculation of tax provisions and the resultant tax liabilities and in the recoverability of
deferred tax assets that arise from temporary differences between the tax and financial statement recognition
of revenue and expense.
In the ordinary course of global business, there may be many transactions and calculations where the
ultimate tax outcome is uncertain. The calculation of tax liabilities involves dealing with uncertainties in the
application of complex tax laws. The Company recognizes potential liabilities for anticipated tax audit issues
in the U.S. and other tax jurisdictions based on an estimate of the ultimate resolution of whether, and the
extent to which, additional taxes will be due. Although the Company believes the estimates are reasonable, no
assurance can be given that the final outcome of these matters will not be different than what is reflected in
the historical income tax provisions and accruals.
As part of the Company's financial process, the Company must assess the likelihood that its deferred tax
assets can be recovered. If recovery is not likely, the provision for taxes must be increased by recording a
reserve in the form of a valuation allowance for the deferred tax assets that are estimated not to be ultimately
recoverable. In this process, certain relevant criteria are evaluated including the existence of deferred tax
liabilities that can be used to absorb deferred tax assets, the taxable income in prior carryback years that can
be used to absorb net operating losses and credit carrybacks and taxable income in future years. The
Company's judgment regarding future taxable income may change due to future market conditions, changes in
U.S. or international tax laws and other factors. These changes, if any, may require material adjustments to
these deferred tax assets and an accompanying reduction or increase in net income in the period when such
determinations are made.
In addition to the risks to the effective tax rate described above, the effective tax rate reflected in
forward-looking statements is based on current tax law. Any significant changes in the tax laws could affect
these estimates.
35
Recent Accounting Pronouncements
In November 2004, the Financial Accounting Standards Board (the ""FASB'') issued Statement of
Financial Accounting Standards No. 151, ""Inventory Cost Ì an amendment of ARB No. 43, Chapter 4''
(""SFAS No. 151''). SFAS No. 151 clarifies the accounting for abnormal amounts of idle facility expenses,
freight, handling costs, and spoilage. It also requires that allocation of fixed production overheads to inventory
be based on the normal capacity of production facilities. SFAS No. 151 is effective for inventory costs
incurred during fiscal years beginning after June 15, 2005. The Company is evaluating the provisions of this
standard to determine the effects, if any, on the Company's consolidated financial statements.
Subsequent Events
On February 7, 2006, Allied Air Enterprises, a division of the Company's Heating & Cooling segment,
announced that it has commenced plans to consolidate its manufacturing, distribution, research & develop-
ment, and administrative operations in South Carolina, and close its current operations in Bellevue, Ohio. The
consolidation will be a phased process expected to be completed by the end of the first quarter of fiscal 2007.
The Company expects the consolidation to improve Allied Air Enterprises' operating efficiency, eliminate
redundant fixed costs, and provide customers with improved service. In conjunction with these actions, the
Company currently expects to incur restructuring-related charges of approximately $20.0 million pre-tax.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
The information required by this item is included under the caption ""Market Risk'' in Item 7 above.
36
Item 8. Financial Statements and Supplementary Data
MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Management of Lennox International Inc. (the ""Company'') is responsible for establishing and
maintaining adequate internal control over financial reporting and for the assessment of the effectiveness of
internal control over financial reporting. As defined by the Securities and Exchange Commission, internal
control over financial reporting is a process designed by, or under the supervision of, the Company's principal
executive and principal financial officers, and effected by the Company's Board of Directors, management and
other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the
preparation of the consolidated financial statements in accordance with U.S. generally accepted accounting
principles.
The Company's internal control over financial reporting includes written policies and procedures that
(1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the
Company's transactions and dispositions of the Company's assets; (2) provide reasonable assurance that
transactions are recorded as necessary to permit preparation of the financial statements in accordance with
generally accepted accounting principles, and that receipts and expenditures of the Company are being made
only in accordance with authorization of management and directors of the Company; and (3) provide
reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition
of the Company's assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect
misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions, or that the degree of compliance with the
policies or procedures may deteriorate.
Management has undertaken an assessment of the effectiveness of the Company's internal control over
financial reporting as of December 31, 2005, based on criteria established in Internal Control Ì Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO
Framework). Management's assessment included an evaluation of the design of the Company's internal
control over financial reporting and testing of the operational effectiveness of those controls. As a result of
management's assessment, the following material weakness in internal control over financial reporting was
identified as of December 31, 2005:
‚ The Company did not maintain effectively designed internal controls to ensure accounting for
derivative financial instrument transactions in accordance with U.S. generally accepted accounting
principles. Specifically, the Company did not have policies and procedures in place to ensure
compliance with requirements to prepare contemporaneous documentation and assess hedge effective-
ness at the inception of certain derivative financial instrument transactions. Furthermore, the Company
did not have policies and procedures in place to review the propriety of accounting for certain
commodity futures contract transactions subsequent to the inception of such contracts. These
deficiencies in internal control over financial reporting resulted in material errors related to the
recognition and classification of gains and losses on derivative contracts, and resulted in restatements of
the Company's previously-filed interim consolidated financial statements for the first three quarters of
the year-ended December 31, 2005.
As a result of the material weakness in internal control over financial reporting described in the preceding
paragraph, management has concluded that as of December 31, 2005, the Company's internal control over
financial reporting was not effective to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external purposes in accordance with U.S. generally
accepted accounting principles.
KPMG LLP, the independent registered public accounting firm that audited the Company's consolidated
financial statements included in this report, has issued an audit report on management's assessment of internal
control over financial reporting, a copy of which appears on the next page of this Annual Report on
Form 10-K.
37
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders
Lennox International Inc.:
We have audited management's assessment, included in the accompanying Management's Report on
Internal Control Over Financial Reporting (Item 8), that Lennox International Inc. (the Company) did not
maintain effective internal control over financial reporting as of December 31, 2005, because of the effect of
the material weakness identified in management's assessment, based on criteria established in Internal
Control Ì Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO). The Company's management is responsible for maintaining effective internal control
over financial reporting and for its assessment of the effectiveness of internal control over financial reporting.
Our responsibility is to express an opinion on management's assessment and an opinion on the effectiveness of
the Company's internal control over financial reporting based on our audit.
We conducted our audit 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 effective internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating
management's assessment, testing and evaluating the design and operating effectiveness of internal control,
and performing such other procedures as we considered necessary in the circumstances. We believe that our
audit provides a reasonable basis for our opinion.
A company's internal control over financial reporting is a process designed to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting principles. A company's internal control
over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records
that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the
company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation
of financial statements in accordance with generally accepted accounting principles, and that receipts and
expenditures of the company are being made only in accordance with authorizations of management and
directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect
misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions, or that the degree of compliance with the
policies or procedures may deteriorate.
A material weakness is a control deficiency, or combination of control deficiencies, that results in more
than a remote likelihood that a material misstatement of the annual or interim financial statements will not be
prevented or detected. The following material weakness has been identified and included in management's
assessment as of December 31, 2005:
‚ The Company did not maintain effectively designed internal controls to ensure accounting for
derivative financial instrument transactions in accordance with U.S. generally accepted accounting
principles. Specifically, the Company did not have policies and procedures in place to ensure
compliance with requirements to prepare contemporaneous documentation and assess hedge effective-
ness at the inception of certain derivative financial instrument transactions. Furthermore, the Company
did not have policies and procedures in place to review the propriety of accounting for certain
commodity futures contract transactions subsequent to the inception of such contracts. These
deficiencies in internal control over financial reporting resulted in material errors related to the
recognition and classification of gains and losses on derivative contracts, and resulted in restatements of
the Company's previously-filed interim consolidated financial statements for the first three quarters of
the year-ended December 31, 2005.
38
We also have audited, in accordance with the standards of the Public Company Accounting Oversight
Board (United States), the consolidated balance sheets of Lennox International Inc. and subsidiaries as of
December 31, 2005 and 2004, and the related consolidated statements of operations, stockholders' equity and
cash flows for each of the years in the three-year period ended December 31, 2005. In connection with our
audits of the consolidated financial statements, we have also audited financial statement schedule II. The
aforementioned material weakness was considered in determining the nature, timing, and extent of audit tests
applied in our audit of the 2005 consolidated financial statements and the financial statement schedule and
this report does not affect our report dated March 16, 2006, which expressed an unqualified opinion on those
consolidated financial statements and the financial statement schedule.
In our opinion, management's assessment that Lennox International Inc. did not maintain effective
internal control over financial reporting as of December 31, 2005, is fairly stated, in all material respects, based
on criteria established in Internal Control Ì Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO). Also, in our opinion, because of the effect of the
material weakness described above on the achievement of the objectives of the control criteria, the Company
has not maintained effective internal control over financial reporting as of December 31, 2005, based on
criteria established in Internal Control Ì Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO).
/s/ KPMG LLP
Dallas, Texas
March 16, 2006
39
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders
Lennox International Inc.:
We have audited the accompanying consolidated balance sheets of Lennox International Inc. and
subsidiaries as of December 31, 2005 and 2004, and the related consolidated statements of operations,
stockholders' equity, and cash flows for each of the years in the three-year period ended December 31, 2005.
In connection with our audits of the consolidated financial statements, we have also audited financial
statement schedule II. These consolidated financial statements and financial statement schedule II are the
responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated
financial statements and financial statement schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable
basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material
respects, the financial position of Lennox International Inc. and subsidiaries as of December 31, 2005 and
2004, and the results of their operations and their cash flows for each of the years in the three-year period
ended December 31, 2005, in conformity with U.S. generally accepted accounting principles. Also in our
opinion, the related financial statement schedule for the years ended December 31, 2005, 2004 and 2003,
when considered in relation to the basic consolidated financial statements taken as a whole, present fairly, in
all material respects, the information set forth therein.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight
Board (United States), the effectiveness of Lennox International Inc.'s internal control over financial
reporting as of December 31, 2005, based on criteria established in Internal Control Ì Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report
dated March 16, 2006 expressed an unqualified opinion on management's assessment of the effectiveness of
internal control over financial reporting and an adverse opinion on the effectiveness of internal control over
financial reporting because of the existence of a material weakness.
/s/ KPMG LLP
Dallas, Texas
March 16, 2006
40
LENNOX INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
As of December 31, 2005 and 2004
(In millions, except share data)
As of December 31,
2004
2005
CURRENT ASSETS:
ASSETS
Cash and cash equivalents ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Accounts and notes receivable, net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Inventories ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Deferred income taxesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Other assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Assets held for sale ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total current assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
PROPERTY, PLANT AND EQUIPMENT, netÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
GOODWILL ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
DEFERRED INCOME TAXES ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
OTHER ASSETS ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$ 213.5
508.4
242.4
20.3
62.6
Ì
1,047.2
255.7
223.9
71.9
138.9
$
60.9
472.5
247.2
13.1
45.9
5.1
844.7
234.0
225.4
82.8
131.7
TOTAL ASSETS ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$1,737.6
$1,518.6
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
Liabilities held for sale ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$
Total current liabilities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
LONG-TERM DEBTÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
POSTRETIREMENT BENEFITS, OTHER THAN PENSIONSÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
PENSIONS ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
OTHER LIABILITIES ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total liabilities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
1.2
11.3
296.8
321.7
24.8
0.7
656.5
108.0
15.1
80.8
82.8
943.2
$
6.0
36.4
237.0
286.3
14.6
3.7
584.0
268.1
14.2
105.5
73.9
1,045.7
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value, 25,000,000 shares authorized, no shares issued or
outstanding ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Ì
Ì
Common stock, $.01 par value, 200,000,000 shares authorized, 74,671,494 shares
and 66,367,987 shares issued for 2005 and 2004, respectively ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Additional paid-in capital ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Retained earningsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Accumulated other comprehensive incomeÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Deferred compensation ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Treasury stock, at cost, 3,635,947 shares and 3,044,286 shares for 2005 and 2004,
respectively ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total stockholders' equity ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
0.7
649.3
191.0
0.4
Ì
(47.0)
794.4
0.7
454.1
66.8
0.7
(18.2)
(31.2)
472.9
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITYÏÏÏÏÏÏÏÏÏÏÏ
$1,737.6
$1,518.6
The accompanying notes are an integral part of these consolidated financial statements.
41
LENNOX INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended December 31, 2005, 2004 and 2003
(In millions, except per share data)
For the Years Ended December 31,
2003
2004
2005
NET SALES ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
COST OF GOODS SOLD ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Gross ProfitÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$3,366.2
2,258.2
1,108.0
$2,982.7
1,985.2
997.5
$2,789.9
1,846.6
943.3
OPERATING EXPENSES:
Selling, general and administrative expense ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
(Gains), losses and other expenses, net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Restructuring charge ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Goodwill impairment ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Operational income (loss) from continuing operations ÏÏÏÏÏÏÏÏÏÏÏÏ
INTEREST EXPENSE, net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
OTHER EXPENSE (INCOME) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Income (loss) from continuing operations before income taxes and
cumulative effect of accounting changeÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
PROVISION FOR INCOME TAXES ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Income (loss) from continuing operations before cumulative effect
of accounting change ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
CUMULATIVE EFFECT OF ACCOUNTING CHANGE, NET ÏÏÏÏ
Income (loss) from continuing operations ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
DISCONTINUED OPERATIONS:
902.4
(50.2)
2.4
Ì
253.4
15.4
3.0
235.0
83.0
152.0
(0.1)
152.1
Loss from operations of discontinued operations ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Income tax (benefit) expense ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Loss on disposal of discontinued operations ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Income tax benefitÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Loss from discontinued operations ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Net income (loss) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
2.0
(0.5)
0.1
(0.2)
1.4
$ 150.7
826.1
Ì
Ì
208.0
(36.6)
27.2
(0.8)
(63.0)
30.5
(93.5)
Ì
(93.5)
38.9
(9.3)
14.9
(3.6)
40.9
$ (134.4)
$
783.6
1.9
Ì
Ì
157.8
28.4
(2.4)
131.8
45.1
86.7
Ì
86.7
0.1
0.2
Ì
Ì
0.3
86.4
INCOME (LOSS) PER SHARE FROM CONTINUING
OPERATIONS BEFORE CUMULATIVE EFFECT OF
ACCOUNTING CHANGE:
Basic ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Diluted ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
CUMULATIVE EFFECT OF ACCOUNTING CHANGE:
$
$
2.37
2.13
$ (1.56)
$ (1.56)
$
$
1.49
1.36
Basic ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Diluted ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$
Ì $
$ Ì $
Ì $
Ì $
Ì
Ì
INCOME (LOSS) PER SHARE FROM CONTINUING
OPERATIONS:
Basic ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Diluted ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
(LOSS) PER SHARE FROM DISCONTINUED OPERATIONS:
$
$
2.37
2.13
$ (1.56)
$ (1.56)
$
$
1.49
1.36
Basic ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Diluted ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$ (0.02)
$ (0.02)
$ (0.68)
$ (0.68)
$ (0.01)
Ì
$
NET INCOME (LOSS) PER SHARE:
Basic ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Diluted ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
AVERAGE SHARES OUTSTANDING:
Basic ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Diluted ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
CASH DIVIDENDS DECLARED PER SHARE ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$
$
$
2.35
2.11
64.2
73.7
0.41
$ (2.24)
$ (2.24)
60.0
60.0
$ 0.385
$
$
$
1.48
1.36
58.4
68.3
0.38
The accompanying notes are an integral part of these consolidated financial statements.
42
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LENNOX INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 2005, 2004 and 2003
(In millions)
For the Years Ended December 31,
2005
2004
Revised
(See Note 2)
2003
Revised
(See Note 2)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $150.7
$(134.4)
$
86.4
Adjustments to reconcile net income (loss) to net cash provided by operating
activities:
Equity in earnings of unconsolidated affiliates ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Minority interestÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Non-cash restructuring expenses ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Non-cash impairment of long-lived assets and goodwill ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Unrealized gain on futures contracts ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Stock based compensation expense ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Depreciation and amortization ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Deferred income taxes ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Other (gains), losses and expenses, netÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Changes in assets and liabilities, net of effects of divestitures:
Accounts and notes receivable ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
InventoriesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Other current assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Accounts payable ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Accrued expenses ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Income taxes payable and receivable ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Long-term warranty, deferred income and other liabilities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Net cash (used in) provided by operating activities from discontinued
operations ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Net cash provided by operating activities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from the disposal of property, plant and equipment ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Purchases of property, plant and equipment ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Dividends from affiliates ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Additional investment in affiliates ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Proceeds from disposal of investments (continuing operations) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Net cash provided by (used in) investing activities from discontinued operations
Net cash used in investing activities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
(14.2)
0.3
0.9
Ì
(23.3)
28.8
37.4
11.9
(2.9)
(53.6)
0.1
(16.2)
64.4
40.3
23.1
(16.9)
(2.1)
228.7
0.7
(63.3)
Ì
Ì
39.3
2.5
(20.8)
CASH FLOWS FROM FINANCING ACTIVITIES:
(4.2)
Short-term (repayments) borrowings, net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
(36.3)
Long-term debt (repayments) borrowings, netÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
(5.0)
Revolver long-term (repayments) borrowings, net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
25.8
Sales of common stock ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
(1.7)
Payments of deferred financing costsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
(15.8)
Repurchases of common stock ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
5.1
Excess tax benefits related to share based payments ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
(24.8)
Cash dividends paid ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
(56.9)
Net cash used in financing activities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
151.0
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS ÏÏÏÏÏÏÏ
1.6
EFFECT OF EXCHANGE RATES ON CASH AND CASH EQUIVALENTS
CASH AND CASH EQUIVALENTS, beginning of year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
60.9
CASH AND CASH EQUIVALENTS, end of year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $213.5
Supplementary disclosures of cash flow information:
Cash paid during the year for:
Interest ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 16.3
Income taxes (net of refunds) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 66.1
(9.1)
1.0
Ì
208.0
Ì
11.9
42.6
3.2
13.7
(57.3)
(28.3)
(8.0)
(15.4)
2.4
(6.4)
(2.6)
36.1
57.4
1.5
(40.3)
2.8
(3.7)
Ì
21.8
(17.9)
2.0
(56.3)
2.0
20.4
(0.3)
(0.1)
Ì
(22.8)
(55.1)
(15.6)
0.4
76.1
60.9
29.7
17.4
$
$
$
(6.9)
1.7
Ì
Ì
Ì
6.1
46.1
(0.2)
13.2
(145.2)
(0.8)
(2.2)
1.5
19.6
23.8
14.0
(0.4)
56.7
10.2
(39.7)
Ì
(0.6)
8.9
(1.2)
(22.4)
(6.8)
(15.4)
3.0
12.5
(2.7)
(0.4)
Ì
(22.1)
(31.9)
2.4
(0.7)
74.4
76.1
30.1
9.1
$
$
$
The accompanying notes are an integral part of these consolidated financial statements.
44
LENNOX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 2005, 2004 and 2003
1. Nature of Operations:
Lennox International Inc., a Delaware corporation, and subsidiaries (the ""Company'' or ""LII''), 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. The
Company participates in four reportable business segments of the HVACR industry. The first 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 manufactures and sells unit
coolers, condensing units and other commercial refrigeration products. See Note 3 for financial 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 Significant Accounting Policies:
Principles of Consolidation
The consolidated financial 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 $213.5 million and $60.9 million as of
December 31, 2005 and 2004, respectively, consisted of cash, overnight repurchase agreements and investment
grade securities and are stated at cost, which approximates fair value. The Company earned interest income of
$4.2 million, $5.0 million and $3.5 million for the years ended December 31, 2005, 2004 and 2003,
respectively, which is included in interest expense, net in the accompanying Consolidated Statements of
Operations.
As of December 31, 2005 and 2004, $23.1 million and $19.8 million, respectively, of cash and cash
equivalents were restricted primarily due to routine lockbox collections and letters of credit issued with respect
to the operations of the Company's captive insurance subsidiary, which expire on December 30, 2006. These
letter of credit restrictions can be transferred to the Company's revolving lines of credit as needed.
Accounts and Notes Receivable
Accounts and notes receivable are shown in the accompanying Consolidated Balance Sheets, net of
allowance for doubtful accounts of $16.7 million and $18.5 million, as of December 31, 2005 and 2004,
respectively. The Company has no significant concentration of credit risk within its accounts and notes
receivable.
45
LENNOX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)
Inventories
Inventory costs include material, labor, depreciation and plant overhead. Inventories of $129.4 million
and $121.2 million in 2005 and 2004, respectively, are valued at the lower of cost or market using the last-in,
first-out (LIFO) cost method. The remaining portion of the inventory is valued at the lower of cost or market
with cost being determined either on the first-in, first-out (FIFO) basis or average cost. The Company elected
to use the LIFO inventory valuation method for the Company's domestic manufacturing companies in 1974
and continued to elect the LIFO method for new operations through the late 1980's. The types of inventory
include raw materials, purchased components, work-in-process, repair parts and finished goods. Starting in the
late 1990's, the Company began adopting the FIFO inventory valuation method for all new domestic
manufacturing operations (primarily acquisitions). The Company's operating entities with a previous LIFO
election continue to use LIFO accounting. The Company also uses the FIFO inventory method for all of the
Company's foreign-based manufacturing facilities as well as the Company's Service Experts segment, whose
inventory is limited to service parts and finished goods. LIFO inventory liquidations did not have a material
impact on gross margins during the years ended December 31, 2005, 2004 and 2003.
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
The Company periodically reviews long-lived assets for impairment as events or changes in circumstances
indicate that the carrying amount of such assets might not be recoverable. In order to assess recoverability, the
Company compares the estimated expected future cash flows (undiscounted and without interest charges)
identified with each long-lived asset or related asset grouping to the carrying amount of such assets. If the
expected future cash flows do not exceed the carrying value of the asset or assets being reviewed, an
impairment loss is recognized based on the excess of the carrying amount of the impaired assets over their fair
value.
In March 2005, the Financial Accounting Standards Board (""FASB'') issued FASB Interpretation
No. 47, ""Accounting for Conditional Asset Retirement Obligations Ì An Interpretation of FASB Statement
No. 143'' (""FIN No. 47''), which was effective for the Company as of December 31, 2005. This interpretation
provides additional guidance as to when companies should record the fair value of a liability for a conditional
asset retirement obligation when there is uncertainty about the timing or method of settlement of the
obligation. The cumulative effect of the change in accounting related to the adoption of FIN No. 47 was not
material for the year ended December 31, 2005.
Investments in Affiliates
Investments in affiliates 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. If the fair value of an investment in an
affiliate is below its carrying value and the difference is deemed to be other than temporary, the difference
between the fair value and the carrying value is charged to earnings.
Investments in affiliated companies accounted for under the equity method consist of a 24.5% common
stock ownership interest in Alliance Compressor LLC, 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 a 20% common stock ownership interest in Kulthorn
46
LENNOX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)
Kirby Public Company Limited, a Thailand company engaged in the manufacture of compressors for
refrigeration applications. The Company had been accounting for its investment in Kulthorn Kirby Public
Company Limited as a marketable equity security investment. In October 2004, the Company purchased an
additional 1.3% common stock interest for approximately $1.5 million. The Company has adjusted prior years
information to reflect the change to equity accounting.
As of December 31, 2004, the Company held a 45% common stock ownership interest in Outokumpu
Heatcraft, a joint venture engaged in the manufacture and sale of heat transfer components, primarily coils.
The Company accounted for its investment in Outokumpu Heatcraft using the equity method. On June 7,
2005, the Company completed the sale of its 45% interest in its heat transfer joint venture to Outokumpu
Copper Products OY of Finland (Outokumpu) for $39.3 million pursuant to which the Company recorded a
pre-tax gain of $9.3 million, which is included in (Gains), Losses and Other Expenses, Net in the
accompanying Consolidated Statements of Operations. In connection with the sale, the Company entered into
an agreement with Outokumpu related to joint remediation of certain existing environmental matters. In
conjunction with the new agreement, the Company updated its estimate of its portion of the on-going
remediation costs and recorded expenses of $2.2 million for the year ended December 31, 2005.
The Company has recorded $14.2 million, $9.1 million and $6.8 million of equity in the earnings of these
affiliates for the years ended December 31, 2005, 2004 and 2003, respectively, and has included these amounts
in Selling, General and Administrative Expense in the accompanying Consolidated Statements of Operations.
The carrying amount of investments in affiliates as of December 31, 2005 and 2004 is $46.0 million and
$63.0 million, respectively, and is included in long-term Other Assets in the accompanying Consolidated
Balance Sheets.
Goodwill and Other Intangible Assets
Goodwill represents the excess of cost over fair value of assets of businesses acquired. Goodwill and
intangible assets acquired in a purchase business combination and determined to have an indefinite useful life
are not amortized, but instead tested for impairment at least annually in accordance with the provisions of
Statement of Financial Accounting Standards No. 142, ""Goodwill and Other Intangible Assets,''
(""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.'' Goodwill is tested at least annually by reporting unit for
impairment. The Company completes its annual goodwill impairment tests in the first quarter of each fiscal
year.
The Company estimates reporting unit fair values using standard business valuation techniques such as
discounted cash flows and reference to comparable business transactions. The discounted cash flows fair value
estimates are based on management's projected future cash flows and the estimated weighted average cost of
capital. The estimated weighted average cost of capital is based on the risk-free interest rate and other factors
such as equity risk premiums and the ratio of total debt and equity capital.
Based on the results of its annual impairment tests required by SFAS No. 142, the Company determined
that no impairment of its goodwill existed as of December 31, 2005 or 2003, respectively, and in 2004, the
Company recorded an impairment charge associated with its Service Experts segment. This impairment
charge reflected the segment's performance below management's expectations and management's decision to
divest of 48 centers that no longer matched the realigned Service Experts business model (see Note 6 Ì
Divestitures). The Company estimated the fair value of its Service Experts segment using the income method
of valuation, which included the use of estimated discounted cash flows. Based on the comparison, the
carrying value of Service Experts exceeded its fair value. Accordingly, the Company performed the second
step of the test, comparing the implied fair value of Service Experts goodwill with the carrying amount of that
47
LENNOX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)
goodwill. Based on this assessment, the Company recorded a non-cash impairment charge of $208.0 million
($184.8 million, net of tax), which is included as a component of Operating Income in the accompanying
Consolidated Statements of Operations. In 2004, the Company also recognized a $14.8 million ($13.2 million,
net of tax) goodwill impairment charge arising from goodwill allocated to centers held for sale and a
$3.1 million pre-tax impairment charge related to property, plant and equipment. These amounts are included
as a part of Loss from Discontinued Operations in the accompanying Consolidated Statements of Operations.
In addition, the Company periodically reviews long-lived assets with estimable useful lives for impair-
ment as events or changes in circumstances indicate that the carrying amount of such assets might not be
recoverable. In order to assess recoverability, the Company compares the estimated expected future cash flows
(undiscounted and without interest charges) identified with each long-lived asset or related asset grouping to
the carrying amount of such assets. For purposes of such comparisons, portions of goodwill are attributed to
related long-lived assets and identifiable intangible assets based upon relative fair values of such assets at
acquisition. If the expected future cash flows do not exceed the carrying value of the asset or assets being
reviewed, an impairment loss is recognized based on the excess of the carrying amount of the impaired assets
over their fair value.
In assessing the fair value of its goodwill and other intangibles, the Company must make assumptions
regarding estimated future cash flows and other factors to determine the fair value of the respective assets . If
these estimates or the related assumptions change, the Company may be required to record impairment
charges for these assets in the future.
Shipping and Handling
Shipping and handling costs relate to post-production activities and are included as part of Selling,
General and Administrative Expense in the accompanying Consolidated Statements of Operations in the
following amounts (in millions):
2005
$158.2
For the Years Ended December 31,
2004
$139.4
2003
$127.3
Product Warranties
A liability for estimated warranty expense is established by a charge against operations at the time the
Company recognizes revenue. The subsequent costs incurred for warranty claims serve to reduce the accrued
product warranty liability. The Company recorded warranty expense of $36.3 million, $28.2 million and
$24.1 million for the years ended December 31, 2005, 2004 and 2003, 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 also provides for specifically identified warranty obligations. 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.
48
LENNOX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)
Total liabilities for estimated warranty expense are $80.9 million and $71.0 million as of December 31,
2005 and 2004, respectively, and are included in the following captions on the accompanying Consolidated
Balance Sheets (in millions):
December 31,
2004
2005
Accrued Expenses ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Other Liabilities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$25.3
55.6
$26.8
44.2
$80.9
$71.0
The changes in the carrying amount of the Company's total warranty liabilities for the years ended
December 31, 2005 and 2004 are as follows (in millions):
Total warranty liability at December 31, 2003 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Payments made in 2004 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Changes resulting from issuance of new warranties ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Changes in estimates associated with pre-existing liabilities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total warranty liability at December 31, 2004 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Payments made in 2005 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Changes resulting from issuance of new warranties ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Changes in estimates associated with pre-existing warranties ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$ 65.4
(22.6)
26.1
2.1
$ 71.0
(26.4)
28.8
7.5
Total warranty liability at December 31, 2005 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$ 80.9
During the second quarter of 2004, the Company determined that it would no longer produce or sell its
CompleteHeat» product line. Concurrently, the Company adjusted its warranty on this product by an
additional $2.6 million based on the fact that it was discontinuing this product with no like replacement. The
change in warranty liability that results from changes in estimates of other warranties issued prior to 2004 is
not material. The change in warranty liability that resulted from changes in estimates of warranties issued
prior to 2005 was primarily due to revaluing warranty reserves based on higher material input costs and
increased labor allowances on the Company's product lines, including the CompleteHeat» product line.
Income Taxes
Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities
are recognized for the future tax consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax
credit carry forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply
to taxable income in the years in which those temporary differences are expected to be recovered or settled.
The effect of a change in tax rates on deferred tax assets and liabilities 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.
The Service Experts segment also provides HVAC system design and installation services under fixed-price
contracts, which may extend up to one year. Revenue for these services is recognized using the percentage-of-
completion method, based on the percentage of incurred contract costs-to-date in relation to total estimated
49
LENNOX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)
contract costs, after giving effect to the most recent estimates of total cost. The effect of changes to total
estimated contract revenue or cost is recognized in the period such changes are determined. Provisions for
estimated losses on individual contracts are made in the period in which the loss first 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 financial statements.
The Company engages in cooperative advertising, customer rebate, cash discount and other miscellane-
ous programs that result in payments or credits being issued to its customers. The Company's policy is to
record the discounts and incentives as reduction of sales when the sales are recorded, with the exception of
certain cooperative advertising expenditures that are charge to Selling, General and Administrative Expense.
The amounts charged to Selling, General and Administrative Expense were approximately $11.7 million,
$8.9 million and $6.1 million for the years ended December 31, 2005, 2004 and 2003, respectively. Under
these cooperative advertising programs, the Company receives, or will receive, an identifiable benefit (goods
or services) in exchange for the consideration given. The identified benefit is sufficiently separable from the
customer's purchase of the Company's products such that the Company could have entered into an exchange
transaction with a party other than the customer in order to receive the benefit. Additionally, the Company
can reasonably estimate the fair value of the benefit that the Company receives, or will receive, and the
amount of the consideration paid by the Company does not exceed the estimated fair value of the benefit
received.
Cost of Goods Sold
The principal components of cost of goods sold in the Company's manufacturing operations are
component costs, raw materials, factory overhead, labor and estimated costs of warranty expense. In the
Company's Service Experts segment, the principal components of costs of goods sold are equipment, parts and
supplies and labor. These principal components of costs include inbound freight charges, purchasing, receiving
and inspection costs, internal transfer costs and warehousing costs through he manufacturing process.
Selling, General and Administrative Expenses
Selling, general and administrative expenses include (a) all other payroll and benefit costs; (b) outbound
freight, post-production warehousing and distribution costs; (c) advertising; (d) general selling and adminis-
trative costs, which include research and development and information technology costs; (e) other selling,
general and administrative related costs such as insurance, travel, and non-production depreciation and rent;
and (f) equity in earnings of unconsolidated affiliates.
50
LENNOX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)
(Gains), Losses and Other Expenses, Net
(Gain), losses and other expenses, net were $(50.2) million, zero and $1.9 million for the years ended
December 31, 2005, 2004 and 2003, respectively and included the following (in millions):
Realized gains on settled futures contractsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Unrealized gains on open futures contracts ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Gain on sale of LII's 45% interest in its heat transfer joint venture to Outokumpu
Estimated on-going remediation costs in conjunction with the joint remediation
Years Ended December 31,
2003
2004
2005
$(16.7)
(23.3) Ì
(9.3) Ì
$Ì $ Ì
Ì
Ì
agreement LII entered into with Outokumpu ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
2.2
Ì
Ì
Reserve requirements related to the Company's former joint venture agreement
with Outokumpu ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Loss on sale of HVAC distributorÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Gain on sale of Electrical Products Division ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Gain on sale of Europe manufacturing facilityÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Other items, netÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Ì
Ì
Ì
Ì
Ì
Ì
Ì
Ì
(3.1) Ì
3.4
0.8
(2.4)
(1.7)
1.8
(Gains), losses and other expenses, net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$(50.2)
$Ì $ 1.9
Stock-Based Compensation
In December 2004, the FASB issued Statement of Financial Accounting Standards No. 123R ""Share-
Based Payment'' (SFAS No. 123R). SFAS No. 123R requires compensation cost to be measured for all
outstanding unvested share-based awards at fair value for all interim and annual periods beginning after
June 15, 2005. In March 2005, the Securities and Exchange Commission (""SEC'') issued Staff Accounting
Bulletin No. 107 ""Share-Based Payment'' (""SAB No. 107''), which provided further clarification on the
implementation of SFAS No. 123R. On April 14, 2005, the SEC announced a deferral of the effective date of
SFAS No. 123R for calendar year companies until the beginning of 2006; however, the Company elected to
adopt the provisions of SFAS No. 123R early with an implementation date of July 1, 2005, as permitted by the
standard. Prior to July 1, 2005, the Company accounted for stock-based awards under the intrinsic value
method, which follows the recognition and measurement principles of Accounting Principles Board Opinion
No. 25, ""Accounting for Stock Issued to Employees and Related Interpretations'' (""APB No. 25''), as
permitted by FASB Statement of Financial Accounting Standards No. 123, ""Accounting for Stock-Based
Compensation'' (""SFAS No. 123'').
Effective July 1, 2005, the Company adopted the fair value recognition provisions of SFAS No. 123R
using the modified-prospective-transition method. Under that transition method, compensation cost recog-
nized in the second half of 2005 included: (a) compensation cost for all share-based payments granted prior
to, but not yet vested as of July 1, 2005, based on the grant date fair value estimated in accordance with the
original provisions of SFAS No. 123 and (b) compensation cost for all share-based payments granted
subsequent to July 1, 2005, based on the grant-date fair value estimated in accordance with the provisions of
SFAS No. 123R. In accordance with SFAS No. 123R, results for prior periods have not been restated.
Compensation expense of $28.8 million, $11.9 million and $6.1 million was recognized for the year ended
December 31, 2005, 2004 and 2003, respectively, and is included in Selling, General and Administrative
Expense in the accompanying Consolidated Statement of Operations for the year ended December 31, 2005.
The cumulative effect of the change in accounting related to the adoption of SFAS No. 123R was not material
for the year ended December 31, 2005.
51
LENNOX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)
Prior to the adoption of SFAS No. 123R, the Company presented all tax benefits of deductions resulting
from the exercise of stock options as operating cash flows in the Consolidated Statements of Cash Flows.
SFAS No. 123R requires the cash flows from the tax benefits of tax deductions in excess of the compensation
cost recognized for those options (excess tax benefits) to be classified as financing cash flows. The
$6.9 million excess tax benefits classified as a financing cash inflow in the accompanying Consolidated
Statement of Cash Flows as of December 31, 2005 would have been classified as an operating cash inflow if
the Company had not adopted SFAS No. 123R.
Had the Company used the fair value based accounting method for stock-based compensation expense
described by SFAS No. 123 for the fiscal 2005 period, prior to July 1, 2005, and the 2004 and 2003 periods,
the Company's diluted net income (loss) per common and equivalent share for the years ended December 31,
2005, 2004 and 2003, respectively, would have been as set forth in the table below (in millions, except per
share data). As of July 1, 2005, the Company adopted SFAS No. 123R thereby eliminating pro forma
disclosure for periods following such adoption. For purposes of this pro forma disclosure, the value of the
options is estimated using a Black-Scholes-Merton option valuation model and amortized to expense over the
options' vesting periods.
For the Years Ended
December 31,
2004
2005
2003
Net income (loss), as reported ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Add: Reported stock based compensation expense, net of taxes ÏÏÏÏÏ
Deduct: Fair value based compensation expense, net of taxesÏÏÏÏÏÏÏ
$150.7
18.4
(19.4)
$(134.4)
7.5
(10.0)
$86.4
4.0
(9.1)
Net income (loss), pro-forma ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$149.7
$(136.9)
$81.3
Earnings per share:
Basic, as reported ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Basic, pro forma ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Diluted, as reported ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Diluted, pro forma ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$ 2.35
$ 2.33
$ 2.11
$ 2.09
$ (2.24)
$ (2.28)
$ (2.24)
$ (2.28)
$1.48
$1.39
$1.36
$1.28
Research and Development
Research and development costs are expensed as incurred. The Company expended approximately
$40.3 million, $37.6 million and $38.0 million for the years ended December 31, 2005, 2004 and 2003,
respectively, for research and product development activities. Research and development costs are included in
Selling, General and Administrative Expense in 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 $79.6 million, $68.4 million
and $72.4 million for the years ended December 31, 2005, 2004 and 2003, respectively, and is included in
Selling, General and Administrative Expense in the accompanying Consolidated Statements of Operations.
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 effect 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 (Loss) in the accompanying Consolidated Balance Sheets.
52
LENNOX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)
Transaction gains included in Other Income in the accompanying Consolidated Statements of Operations
were $2.7 million, $1.8 million and $4.2 million for the years ended December 31, 2005, 2004 and 2003,
respectively.
Derivatives
Derivative financial 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 flow hedges are initially reported as
a component of other comprehensive income and later classified into cost of goods sold in the period in which
the hedged item also affects earnings. The Company hedges its exposure to the fluctuation on the prices paid
for copper and aluminum 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,
2005 and 2004, the Company had metals futures contracts for which the fair value was $24.0 million and
$10.3 million, respectively. The open futures contracts as of December 31, 2005 mature at various dates to
December 31, 2007. In 2005, the Company determined that these futures contracts did not qualify for hedge
accounting under Statement of Financial Accounting Standards No. 133 ""Accounting for Derivative
Instruments and Hedging Activities'' (""SFAS No. 133'') as the Company's documentation did not meet the
criteria in order for the hedging instruments to qualify for cash flow designation. Accordingly, the Company
recorded an unrealized gain of $23.3 million for the year ended December 31, 2005 related to the open futures
contracts, which is included in (Gains), Losses and Other Expenses, Net in the accompany Consolidated
Statements of Operations.
Use of Estimates
The preparation of financial statements in conformity with generally accepted accounting principles
requires management to make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting period. Actual results could differ from those
estimates.
Reclassifications
Certain amounts have been reclassified from the prior year presentation to conform to the current year
presentation.
Revisions to Consolidated Statements of Cash Flows for the Years Ended December 31, 2004 and 2003
In 2005, the Company has separately disclosed the operating and financing portions of the cash flows
attributable to the Company's discontinued operations, which in prior periods were reported on a combined
basis.
3. Reportable Business Segments:
The Company operates in four reportable business segments of the HVACR markets: Residential
Heating & Cooling, Commercial Heating & Cooling, Service Experts and Refrigeration. The Company's
management uses segment profit (loss) as the primary measure of profitability to evaluate operating
performance and to allocate capital resources. The Company defines segment profit (loss) as a segment's net
53
LENNOX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)
earnings before other expense (income), interest expense, goodwill impairment, restructuring charge, (gains),
losses and other expenses, net and income taxes.
Net sales and segment profit (loss) by business segment, along with a reconciliation of segment profit
(loss) to net earnings (loss) for years ended December 31, 2005, 2004 and 2003 are shown below (in
millions):
For the Years Ended December 31,
2003
2004
2005
Net Sales
Residential ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Commercial ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$1,685.8
651.7
$1,419.8
580.8
$1,358.7
508.4
Heating & CoolingÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Service ExpertsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Refrigeration ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Eliminations ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
2,337.5
641.4
467.2
(79.9)
2,000.6
611.7
444.7
(74.3)
1,867.1
611.3
387.2
(75.7)
$3,366.2
$2,982.7
$2,789.9
Segment Profit (Loss)
Residential ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Commercial ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$ 197.5
53.7
$ 169.7
51.2
$ 152.1
38.0
Heating & CoolingÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Service ExpertsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Refrigeration ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Corporate and otherÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Eliminations ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
251.2
17.0
40.3
(103.1)
0.2
Segment Profit ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
205.6
Reconciliation to income (loss) from continuing operations
before income taxes:
(Gains), losses and other expenses, net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
RestructuringsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Goodwill impairment ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Interest expense, net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Other expense (income) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
(50.2)
2.4
Ì
15.4
3.0
220.9
(2.2)
42.7
(91.6)
1.6
171.4
Ì
Ì
208.0
27.2
(0.8)
190.1
1.0
36.2
(69.0)
1.4
159.7
1.9
Ì
Ì
28.4
(2.4)
$ 235.0
$ (63.0)
$ 131.8
54
LENNOX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)
Total assets by business segment as of December 31, 2005 and 2004 are shown below (in millions):
As of December 31,
2004
2005
Total Assets
Residential ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Commercial ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$ 589.1
234.3
$ 512.0
244.0
Heating & CoolingÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Service ExpertsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Refrigeration ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Corporate and otherÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Eliminations ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
823.4
185.3
308.9
432.1
(12.1)
756.0
187.8
323.9
258.2
(12.4)
Segment assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Discontinued operations (Note 6) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
1,737.6
Ì
1,513.5
5.1
$1,737.6
$1,518.6
Total capital expenditures by business segment for the years ended December 31, 2005, 2004 and 2003
are shown below (in millions):
For the Years Ended
December 31,
2004
2003
2005
Capital Expenditures
Residential ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Commercial ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$34.7
8.6
$24.0
5.5
$19.8
8.5
Heating & Cooling ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Service Experts ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Refrigeration ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Corporate and other ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
43.3
2.0
9.5
8.5
29.5
1.3
5.7
3.8
28.3
2.5
6.6
2.3
$63.3
$40.3
$39.7
The depreciation and amortization expense by business segment for the years ended December 31, 2005,
2004 and 2003 are shown below (in millions):
For the Years Ended
December 31,
2004
2003
2005
Depreciation and Amortization
Residential ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Commercial ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$16.9
4.5
$18.6
4.9
$16.8
4.9
Heating & Cooling ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Service Experts ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Refrigeration ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Corporate and other ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
21.4
2.9
7.3
5.8
23.5
3.4
8.2
7.5
21.7
5.7
8.4
10.3
$37.4
$42.6
$46.1
55
LENNOX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)
The following table sets forth certain financial 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,
2003
2004
2005
Net Sales to External Customers
United States ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Canada ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
International ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$2,603.0
294.6
468.6
$2,254.8
272.7
455.2
$2,135.1
260.2
394.6
Total net sales to external customersÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$3,366.2
$2,982.7
$2,789.9
Long-Lived Assets
United States ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Canada ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
International ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$448.1
105.8
136.5
$414.5
109.4
150.0
Total long-lived assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$690.4
$673.9
As of December 31,
2005
2004
4.
Inventories:
Components of inventories are as follows (in millions):
Finished goods ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Repair parts ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Work in process ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Raw materialsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$174.0
35.8
8.6
79.1
$174.1
38.5
9.2
71.4
As of December 31,
2005
2004
Excess of current cost over last-in, first-out cost ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
5. Property, Plant and Equipment:
Components of property, plant and equipment are as follows (in millions):
297.5
(55.1)
293.2
(46.0)
$242.4
$247.2
As of December 31,
2004
2005
Land ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Buildings and improvements ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Machinery and equipment ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$
30.3
177.1
512.9
$
31.2
177.3
479.3
Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Less Ì accumulated depreciation ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
720.3
(464.6)
687.8
(453.8)
Property, plant and equipment, net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$ 255.7
$ 234.0
56
LENNOX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)
6. Divestitures:
Sale of Interest in Heat Transfer Joint Venture
On June 7, 2005, the Company completed the sale of its 45% interest in its heat transfer joint venture to
Outokumpu Copper Products OY of Finland (Outokumpu) for $39.3 million pursuant to which the Company
recorded a pre-tax gain of $9.3 million, which is included in (Gains), Losses and Other Expenses, net in the
accompanying Consolidated Statements of Operations. In connection with the sale, the Company entered into
an agreement with Outokumpu related to joint remediation of certain existing environmental matters. In
conjunction with the new agreement, the Company updated its estimate of its portion of the on-going
remediation costs and recorded expenses of $2.2 million for the year ended December 31, 2005.
Service Experts Discontinued Operations
In the first fiscal quarter of 2004, the Company's Board of Directors approved a turnaround plan designed
to improve the performance of its Service Experts business segment. The plan realigned Service Experts'
dealer service centers to focus on service and replacement opportunities in the residential and light
commercial markets. The Company identified approximately 130 centers, whose primary business is
residential and light commercial service and replacement. These centers comprise the ongoing Service Experts
business segment. As of December 31, 2004, the Company had divested the remaining 48 centers that no
longer match the realigned business model. The operating results of the 48 centers that are no longer a part of
Service Experts are classified as a Discontinued Operation in the accompanying Consolidated Statements of
Operations for the years ended December 31, 2005, 2004 and 2003. The related assets and liabilities for these
centers are classified as Assets Held for Sale and Liabilities Held for Sale in the accompanying Consolidated
Balance Sheets as of December 31, 2005 and 2004.
A summary of net trade sales, pre-tax operating results and pre-tax loss on disposal of assets for the years
ended December 31, 2005 and 2004, and the major classes of assets and liabilities presented as held for sale at
December 31, 2005 and 2004, are detailed below (in millions):
Discontinued Operations
For the Year
Ended December 31,
2004
2003
2005
Net trade sales ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Pre-tax (loss) income operating results ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Pre-tax loss on disposal of assetsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$ 0.2
(2.0)
(0.1)
$228.9
(38.9)
(14.9)
$325.8
(0.1)
Ì
Current assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Current liabilities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$ Ì $5.1
$3.7
$0.7
December 31,
2004
2005
57
LENNOX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)
The following table details the Company's pre-tax loss from discontinued operations for the years ended
December 31, 2005 and 2004 (in millions):
For the Year
Ended
December 31,
2004
2005
Cumulative incurred
through
December 31
2005
Goodwill impairment ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Impairment of property, plant and equipment ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì
Operating loss ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì
2.0
Other divestiture costs ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$ Ì $14.8
3.1
14.9
6.1
Subtotal ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Loss on disposal of centers ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
2.0
0.1
38.9
14.9
Total loss from discontinued operationsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$2.1
$53.8
$14.8
3.1
14.9
8.1
40.9
15.0
$55.9
The income tax benefit on discontinued operations was $0.7 million and $12.9 million for the years ended
December 31, 2005 and 2004, respectively. The income tax benefit on discontinued operations for the year
ended December 31, 2004 of $12.9 million includes a $1.6 million tax benefit related to goodwill impairment.
Through December 31, 2005, proceeds from the sale of these centers totaled $25.8 million.
7. Restructuring Charges:
During 2001, the Company undertook separate initiatives to restructure its Service Experts operations and
certain of its manufacturing and distribution operations. During 2002, the Company undertook an additional
initiative to restructure its non-core Heat Transfer engineering business. The Company recorded no material
charges for the years ended December 31, 2005, 2004 and 2003, respectively, related to these restructuring
initiatives. As of December 31, 2005 and 2004, the Company had restructuring reserves of $0.8 million and
$1.3 million, respectively related to these restructuring initiatives, which are included in Accrued Expenses in
the accompanying Consolidated Balance Sheets. For the years ended December 31, 2005, 2004 and 2003, the
Company made cash payments of $0.2 million, $0.4 million and $8.4 million, respectively related to these
restructuring initiatives.
Due to competitive cost pressures, on April 4, 2005, Lennox Hearth Products Inc., a subsidiary of the
Company, commenced plans to relocate its Whitfield pellet stove and Lennox cast iron product lines from
Burlington, Washington to a third party production facility in Juarez, Mexico, discontinue its existing steel
wood stove line manufactured in Burlington, and close the Burlington facility. These actions were substantially
complete as of December 31, 2005. In connection with the plant closure, the Company recorded pre-tax
restructuring-related charges of $2.4 million, which are included in Restructuring Charge in the accompanying
Consolidated Statements of Operations for 2005. As of December 31, 2005, the Company had $0.8 million in
restructuring reserves relating to the Burlington plant closure, which are included in Accrued Expenses in the
accompanying December 31, 2005 Consolidated Balance Sheet.
58
LENNOX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)
8. Long-Term Debt and Lines of Credit:
Long-term debt at December 31 consisted of the following (in millions):
Floating rate revolving loans payable ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
6.25% convertible subordinate notes, payable in 2009 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
6.73% promissory notes, payable $11.1 annually through 2008ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
6.56% promissory notes, payable in 2005 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
6.75% promissory notes, payable in 2008 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
8.00% promissory note, payable in 2010 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Capitalized lease obligations and other ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Less current maturities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
2005
2004
$ Ì $
Ì
33.3
Ì
50.0
35.0
1.0
5.0
143.8
44.4
25.0
50.0
35.0
1.3
119.3
(11.3)
304.5
(36.4)
$108.0
$268.1
At December 31, 2005, the aggregate amounts of required principal payments on long-term debt are as
follows (in millions):
2006 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
2007 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
2008 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
2009 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
2010 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Thereafter ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$ 11.3
11.3
61.3
0.2
35.1
0.1
$119.3
In June 2004, LII made a pre-payment on its long-term debt of $35 million, which was scheduled to
mature in the third quarter of 2005. The pre-payment make-whole amount associated with the debt was
$1.9 million and was expensed in 2004 and is included in Interest Expense, net in the accompanying
Consolidated Statements of Operations.
The Company has bank lines of credit aggregating $427.5 million, of which $1.2 million was borrowed
and outstanding and $90.7 million was committed to standby letters of credit at December 31, 2005. Of the
remaining $335.6 million, the entire amount was available for future borrowings after consideration of
covenant limitations. Included in the lines of credit are several regional facilities and a multi-currency facility
governed by agreements between the Company and a syndicate of banks. In July 2005, the Company amended
and restated its revolving credit facility to, among other things, increase the borrowing capacity from
$225 million to $400 million and extend the maturity date from September 2006 to July 2010. As of
December 31, 2005 and 2004, the Company has unamortized debt issuance costs of $2.5 million and
$4.9 million, respectively, which are included in other assets in the accompanying Consolidated Balance
Sheets. The facility contains certain financial covenants and bears interest at a rate equal to, at the Company's
option, either (a) the greater of the bank's prime rate or the federal funds rate plus 0.5%, or (b) the London
Interbank Offered Rate plus a margin equal to 0.475% to 1.20%, depending upon the ratio of total funded
debt-to-adjusted earnings before interest, taxes, depreciation and amortization (""Adjusted EBITDA''), as
defined in the facility. The Company pays a facility fee, depending upon the ratio of total funded debt to
Adjusted EBITDA, equal to 0.15% to 0.30% of the capacity. The facility includes restrictive covenants that
limit the Company's ability to incur additional indebtedness, encumber its assets, sell its assets and make
59
LENNOX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)
certain payments, including amounts for share repurchases and dividends. 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 financial statements, as well as compliance certificates, to the banks within
specified time periods.
On September 7, 2005, the Company called for redemption all of its outstanding 6.25% convertible
subordinated notes (""Convertible Notes'') on October 7, 2005. The redemption price was 103.571% of the
principal amount. As of September 7, 2005, there was $143.75 million aggregate principal amount of
Convertible Notes outstanding, which could be converted into the Company's common stock at a rate of
55.2868 shares of common stock per $1,000 principal amount of Convertible Notes at any time before the
close of business on the business day prior to the redemption date. As of October 6, 2005, the holders of all of
the Convertible Notes had converted the Convertible Notes into an aggregate of approximately 7.9 million
shares of common stock.
LII's domestic revolving and term loans contain certain financial covenant restrictions. As of Decem-
ber 31, 2005, LII was in compliance with all covenant requirements. LII periodically reviews its capital
structure, including its primary bank facility, to ensure that it has adequate liquidity. LII believes that cash
flow from operations, as well as available borrowings under its revolving credit facility and other sources of
funding will be sufficient to fund its operations for the foreseeable future.
Under a revolving period asset securitization arrangement, the Company transfers beneficial 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,
2005 and 2004, the Company had not sold any beneficial interests in accounts receivable. The discount
incurred in the sale of such receivables of $0.9 million, $2.3 million and $2.9 million for the years ended
December 31, 2005, 2004 and 2003, respectively, is included as part of Selling, General and Administrative
Expense in the accompanying Consolidated Statements of Operations.
9.
Income Taxes:
The income tax provision from continuing operations consisted of the following (in millions):
For the Years Ended
December 31,
2004
2003
2005
Current:
Federal ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
State ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Foreign ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$63.9
7.2
14.3
$12.9
3.3
10.2
$32.8
(1.8)
0.2
Total current ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
85.4
26.4
31.2
Deferred:
Federal ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
State ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Foreign ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
(3.1)
4.1
(3.4)
10.9
(7.1)
0.3
6.5
5.3
2.1
Total deferred ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
(2.4)
4.1
13.9
Total income tax provisionÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$83.0
$30.5
$45.1
60
LENNOX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)
Income (loss) from continuing operations before income taxes and cumulative effect of accounting
change was comprised of $195.3 million domestic and $39.7 million foreign for the year ended December 31,
2005, $(92.4) million domestic and $29.4 million foreign for the year ended December 31, 2004 and
$112.0 million domestic and $19.8 million foreign for the year ended December 31, 2003.
The difference between the income tax provision from continuing operations computed at the statutory
federal income tax rate and the financial statement provision for taxes is summarized as follows (in millions):
Provision (benefit) at the U.S. statutory rate of 35%ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Increase (reduction) in tax expense resulting from:
2005
2004
2003
$82.3
$(22.1)
$46.1
State income tax, net of federal income tax benefit ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Foreign losses not providing a current benefit ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Goodwill impairment ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Other permanent itemsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Research tax credit ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Foreign taxes at rates other than 35% and miscellaneous other ÏÏÏÏÏ
7.3
Ì
Ì
(3.1)
(0.7)
(2.8)
1.5
6.2
51.4
1.4
(5.6)
(2.3)
(0.5)
3.6
Ì
(1.9)
(3.6)
1.4
Total income tax provisionÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$83.0
$ 30.5
$45.1
Deferred income taxes reflect the tax consequences on future years of temporary differences between the
tax basis of assets and liabilities and their financial reporting basis and are reflected as current or non-current
depending on the timing of the expected realization. The deferred tax provision for the periods shown
represents the effect of changes in the amounts of temporary differences during those periods.
61
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):
2005
2004
Gross deferred tax assets:
WarrantiesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Net operating losses (foreign and U.S. state) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Postretirement and pension benefitsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Inventory reserves ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Receivable allowanceÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Compensation liabilities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Deferred incomeÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Intangibles ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Other ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$ 28.0
59.5
7.0
5.0
3.9
26.3
8.9
14.1
17.4
$ 24.1
58.6
24.2
3.8
4.2
17.2
9.9
18.7
8.0
Total deferred tax assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Valuation allowance ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
170.1
(50.5)
168.7
(43.0)
Total deferred tax assets, net of valuation allowance ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
119.6
125.7
Gross deferred tax liabilities:
Depreciation ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Insurance liabilities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Other ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
(10.8)
(8.0)
(8.6)
(12.7)
(4.2)
(12.9)
Total deferred tax liabilities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
(27.4)
(29.8)
Net deferred tax assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$ 92.2
$ 95.9
As of December 31, 2005, the Company has $15.8 million and $43.7 million in state and foreign net
operating loss carryforwards, respectively. The state and foreign net operating loss carryforwards begin
expiring in 2006 and 2007, respectively. The deferred tax asset valuation allowance relates primarily to the
operating loss carry forwards in various states in the U.S., European and Canadian tax jurisdictions. The
increase in valuation allowance is primarily the result of foreign and state losses not benefited.
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. In order to fully realize the deferred
tax asset, the Company will need to generate future federal and foreign taxable income of approximately
$69.0 million during the periods in which those temporary differences become deductible and future state
taxable income of approximately $151.7 million prior to the expiration of the net operating loss carry forwards.
U.S. taxable income for the years ended December 31, 2005, 2004 and 2003 was $148.8 million, $2.4 million
and $86.4 million, respectively. Management considers the reversal of existing taxable temporary differences,
projected future taxable income, and tax planning strategies in making this assessment. Based upon the level
of historical taxable income and projections for future taxable income over the periods in which the deferred
tax assets are deductible, management believes it is more likely than not that the Company will realize the
benefits of these deductible differences, net of the existing valuation allowances at December 31, 2005.
No provision has been made for income taxes which may become payable upon distribution of the
Company's foreign subsidiaries' earnings. It is not practicable to estimate the amount of tax that might be
payable, since management's intent is to permanently reinvest these earnings or to repatriate earnings when it
is tax effective to do so.
62
LENNOX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)
The American Jobs Creation Act (""AJCA'') was signed into law on October 22, 2004. The AJCA
provided an opportunity to repatriate foreign earnings and claim an 85% dividend received deduction against
the repatriated amount. The Company evaluated the potential effects of repatriation and determined not to
repatriate earnings under this provision.
10. Current Accrued Expenses:
Significant components of current accrued expenses are as follows (in millions):
December 31,
2005
2004
Accrued wages ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Casualty insurance reservesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Deferred income on service contracts ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Accrued warranties ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Accrued promotionsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Other ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$114.6
61.3
32.8
25.3
31.5
56.2
$ 85.5
58.3
29.3
26.8
26.1
60.3
Total current accrued expenses ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$321.7
$286.3
11. Employee Benefit Plans:
Profit Sharing Plans
The Company maintains noncontributory profit 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 $14.0 million, $10.4 million and $8.5 million
in 2005, 2004 and 2003, respectively. The Company also sponsors several 401(k) plans with employer
contribution-matching requirements. The Company contributed $1.6 million, $2.3 million and $2.5 million in
2005, 2004 and 2003, respectively, to these 401(k) plans.
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 offered 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 first day of the offering period or the last day of the offering period. Under the plan, participating
employees purchased 508,380 shares in 2003.
Pension and Postretirement Benefit Plans
The Company has domestic and foreign pension plans covering essentially all employees. The Company
also maintains an unfunded postretirement benefit plan, which provides certain medical and life insurance
benefits to eligible employees. The pension plans are accounted for under provisions of SFAS No. 87,
""Employers' Accounting for Pensions.'' The postretirement benefit plan is accounted for under the provisions
of SFAS No. 106, ""Employers' Accounting for Postretirement Benefits Other than Pensions'' (""FAS 106'').
63
LENNOX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)
The following tables set forth amounts recognized in the Company's financial statements and the plans'
funded status (dollars in millions):
Accumulated benefit obligation ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Changes in projected benefit obligation:
Pension Benefits
2004
2005
Other Benefits
2005
2004
$262.5
$ 234.6
$ N/A $ N/A
Benefit obligation at beginning of year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Service costÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Interest cost ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Plan participants' contributions ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
AmendmentsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Actuarial loss (gain) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Benefits paidÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
243.1
7.0
13.1
0.1
1.6
17.9
(13.1)
Benefit obligation at end of year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
269.7
224.1
6.6
13.2
0.1
Ì
13.2
(14.1)
243.1
28.3
1.2
1.6
2.2
Ì
(1.6)
(4.6)
27.1
24.3
1.0
1.4
2.1
Ì
3.7
(4.2)
28.3
Changes in plan assets:
Fair value of plan assets at beginning of yearÏÏÏÏÏÏÏÏÏ
Actual return on plan assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Employer contribution ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Plan participants' contributions ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Foreign currency changes ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$167.2
14.0
29.8
0.1
(0.6)
$ 161.4
12.7
1.3
0.1
1.6
$ Ì $ Ì
Ì
2.1
2.1
Ì
Ì
2.4
2.2
Ì
Benefits paidÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
(10.4)
(9.9)
(4.6)
(4.2)
Fair value of plan assets at end of yearÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
200.1
Funded status ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Unrecognized actuarial loss ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Unamortized prior service cost ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Unrecognized net obligation ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
(69.6)
102.1
11.2
0.3
167.2
(75.9)
87.5
10.7
0.2
Ì
Ì
(27.1)
15.5
(4.9)
Ì
(28.3)
18.1
(5.5)
Ì
Net amount recognized ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$ 44.0
$
22.5
$(16.5)
$(15.7)
Amounts recognized in the consolidated balance sheets
consist of:
Prepaid benefit cost ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Accrued benefit liability ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Intangible assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Accumulated other comprehensive lossÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$ 63.1
(81.4)
10.1
52.2
$
40.0
(106.7)
11.4
77.8
$ Ì $ Ì
(15.7)
(16.5)
Ì
Ì
Ì
Ì
Net amount recognized ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$ 44.0
$
22.5
$(16.5)
$(15.7)
64
LENNOX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)
Pension plans with an accumulated benefit obligation in excess of plan
assets:
Projected benefit obligation ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Accumulated benefit obligation ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Fair value of plan assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Pension Benefits
2004
2005
2003
2005
December 31,
2005
2004
$158.2
152.0
88.5
$243.1
234.6
167.2
Other Benefits
2004
2003
Components of net periodic benefit cost:
Service costÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Interest cost ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Expected return on plan assets ÏÏÏÏÏÏÏÏ
Amortization of prior service cost ÏÏÏÏÏ
Recognized actuarial loss ÏÏÏÏÏÏÏÏÏÏÏÏ
Recognized transition obligationÏÏÏÏÏÏÏ
SettlementÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$
7.0
13.1
(13.7)
1.0
3.5
Ì
0.1
$
6.6
13.2
(14.5)
1.0
3.0
Ì
0.7
$
5.4
12.9
(14.7)
0.9
1.1
0.1
Ì
$ 1.2
1.6
Ì
(0.5)
1.0
Ì
Ì
$ 1.0
1.4
Ì
(0.6)
0.8
Ì
Ì
$ 0.9
1.6
Ì
(0.3)
0.7
Ì
Ì
Net periodic benefit costÏÏÏÏÏÏÏÏÏÏÏÏÏ
$ 11.0
$ 10.0
$
5.7
$ 3.3
$ 2.6
$ 2.9
Weighted-average assumptions used to determine benefit
obligations at December 31:
Discount rate ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Rate of compensation increase ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
5.75% 5.75% 5.75% 5.75%
4.28
4.00
Ì
Ì
Pension Benefits
2004
2005
2005
Other
Benefits
2004
Pension Benefits
2004
2005
2003
Other Benefits
2004
2003
2005
Weighted-average assumptions used to determine
net periodic benefit cost for the years ended
December 31:
Discount rate ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Expected long-term return on plan assets ÏÏÏÏÏÏÏÏÏÏ
Rate of compensation increase ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
5.75% 6.00% 6.75% 5.75% 6.00% 6.75%
8.25
4.00
8.75
4.00
8.75
4.00
Ì
Ì
Ì
Ì
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 effect of periodic rebalancing. These results were adjusted for the
payment of reasonable expenses of the plan from plan assets. This resulted in the selection of the 8.25% long-
term rate of return on assets assumption.
To select a discount rate for the purpose of valuing the plan obligations, the Company performed an
analysis in which the duration of projected cash flows from defined benefit and retiree health care plans were
matched with a yield curve based on the appropriate universe of high-quality corporate bonds that were
available. The Company used the results of the yield curve analysis to select the discount rate that matched
65
LENNOX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)
the duration and payment stream of the benefits in each plan. The rate was rounded to the nearest quarter of a
percent. This resulted in the selection of the 5.75% discount rate assumption.
2005
2004
Assumed health care cost trend rates at December 31:
Health care cost trend rate assumed for next yearÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Rate to which the cost rate is assumed to decline (the ultimate trend rate) ÏÏÏÏÏ
Year that the rate reaches the ultimate trend rateÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
10.0% 10.0%
5.0
2011
5.0
2010
Assumed health care cost trend rates have a significant effect 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 effects
(in millions):
1-Percentage-
Point Increase
1-Percentage-
Point Decrease
Effect on total of service and interest cost ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Effect on the post-retirement benefit obligation ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$0.3
3.3
$(0.3)
(2.8)
The Company's U.S.-based pension plan weighted-average asset allocations at December 31, 2005 and
2004, by asset category, are as follows:
Asset Category
Plan Assets at
December 31,
2004
2005
Domestic equity ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
International equity ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Investment Grade BondsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Money Market/Cash/Annuities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
47.6% 56.9%
8.9% 10.8%
26.4% 28.5%
17.1% 3.8%
Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
100% 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%
°/¿3%
°/¿3%
°/¿3%
5% °1%/¿4%
Target
°/¿
The weighted-average asset allocations for the Company's U.S.-based pension plan as of December 31,
2005 is not consistent with the Company's target allocations. This is due primarily to the fact that in late
December 2005, the Company funded contributions of $19.9 million to the U.S.-based pension plan and this
amount was included in the money market and cash asset category as of December 31, 2005.
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 2006 minimum required contribution will be $5.8 million to its
pension plans. The Company will evaluate additional voluntary pension contributions throughout 2006;
however, no voluntary contributions for 2006 are planned at this time. The Company estimates its 2006
contribution to its postretirement benefit plan to be approximately $1.6 million. Included in total plan assets
66
LENNOX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)
above are approximately $25.3 million of assets related to foreign plans with a weighted-average expected rate
of return of 7%.
Expected future benefit payments are shown in the table below (in millions):
2006
2007
2008
2009
2010
2011-2015
Pension benefits ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Other benefits ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$15.5
1.6
$17.6
1.6
$17.5
1.5
$15.7
1.6
$15.6
1.6
$90.7
10.2
12. Stock-Based Compensation Plans:
Incentive Plan
Under the Company's Amended and Restated 1998 Incentive Plan (the ""1998 Incentive Plan''), the
Company is authorized to issue awards for 24,254,706 shares of common stock. As of December 31, 2005,
awards for 20,272,303 shares of common stock had been granted and 3,873,121 shares had been cancelled or
repurchased under the 1998 Incentive Plan. Consequently, as of December 31, 2005, there were
7,855,524 shares available for future issuance.
The 1998 Incentive Plan provides for various long-term incentive and retentive awards, which include
stock options, performance shares, restricted stock awards and stock appreciation rights. A description of these
long-term incentive and retentive awards and related activity within each is provided below.
Stock Options
Under the 1998 Incentive Plan, the exercise price for stock options equals the stock's fair value on the
date of grant. Options granted prior to 1998 vested on the date of grant. Options granted in 1998 and after vest
over three years. Options issued prior to December 2000 expire after ten years and options issued in December
2000 and after expire after seven years.
In addition to the options discussed above, there were 147,775 stock options outstanding as of
December 31, 2005 that were issued in connection with the acquisition of Service Experts Inc. All such
options are fully vested.
Prior to the adoption of SFAS No. 123R, and in accordance with APB No. 25, no stock-based
compensation cost was reflected in net income for grants of stock options to employees because the Company
grants stock options with an exercise price equal to the fair market value of the stock on the date of grant. For
footnote disclosures under SFAS No. 123, the fair value of each option award was estimated on the date of
grant using a Black-Scholes-Merton option valuation model that uses the assumptions noted below. Estimates
of fair value are not intended to predict actual future events or the value ultimately realized by employees who
receive equity awards. Subsequent events are not indicative of the reasonableness of the original estimates
made by the Company. Under SFAS No. 123, the Company used historical data to estimate the expected
volatility for the term of new options and the outstanding period of the option for separate groups of employees
that had similar historical exercise behavior. The risk free interest rate was based on the U.S. Treasury yield
curve in effect at the time of grant.
No stock options were granted from July 1, 2005, the date the Company adopted SFAS No. 123R,
through December 31, 2005. For future stock options grants, the fair value of each stock option award will be
estimated using the Black-Scholes-Merton valuation model and will follow the provisions of SFAS No. 123R
and SAB No. 107. The Company will use historical data and other pertinent information to estimate the
expected volatility for the term of new options and the outstanding period of the option for separate groups of
employees that had similar historical exercise behavior. The risk free interest rate will be based on the
U.S. Treasury yield curve in effect at the time of grant.
67
LENNOX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)
Prior to the adoption of SFAS No. 123R, the fair value of an option was amortized to expense in the pro
forma footnote disclosure using the graded method. Upon the adoption of SFAS No. 123R, options granted
prior to the date of adoption continue to be amortized to expense using the graded method. For options
granted after the date of adoption, the fair value is amortized to expense ratably over the vesting period.
A summary of stock option activity for the years ended December 31, 2005, 2004 and 2003, respectively,
follows (in millions, except per share data):
2005
Years Ended December 31,
2004
2003
Weighted
Average
Exercise
Price per
Share
$14.00
21.57
12.52
16.38
$14.81
$14.58
$ 7.50
Shares
7.5
Ì
(2.0)
(0.1)
5.4
5.1
Weighted
Average
Exercise
Price per
Share
$13.09
18.91
10.37
16.56
$14.00
$13.70
$ 7.27
Shares
9.0
0.4
(1.7)
(0.2)
7.5
6.5
Weighted
Average
Exercise
Price per
Share
$13.03
17.00
10.70
19.07
$13.09
$12.74
$ 6.33
Shares
9.7
0.2
(0.6)
(0.3)
9.0
7.2
Outstanding at beginning of yearÏÏÏÏÏ
Granted ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Exercised ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Forfeited ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Outstanding at end of yearÏÏÏÏÏÏÏÏÏÏ
Exercisable at end of year ÏÏÏÏÏÏÏÏÏÏ
Fair value of options granted ÏÏÏÏÏÏÏÏ
The following table summarizes information about stock options outstanding as of December 31, 2005 (in
millions, except per share data and years):
Range of Exercise
Prices Per Share
Number
Outstanding
Options Outstanding
Weighted-
Average
Remaining
Contractual
Term
(in years)
Weighted-
Average
Exercise
Price
Per Share
Aggregate
Intrinsic
Value
Number
Exercisable
Options Exercisable
Weighted-
Average
Remaining
Contractual
Life
(in years)
Weighted-
Average
Exercise
Price
Per Share
Aggregate
Intrinsic
Value
$7.28 - $49.63ÏÏÏÏÏÏÏÏ
5.4
3.24
$14.81
$72.4
5.1
3.09
$14.58
$69.5
The fair value of each option grant is estimated on the date of grant using the Black-Scholes-Merton
option-pricing model with the following weighted-average assumptions:
December 31,
2004
2005
2003
Expected dividend yield ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Risk-free interest rate ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Expected volatilityÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Expected life (in years) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
2.13% 2.13% 2.24%
4.33% 4.23% 3.75%
40.0% 40.0% 40.0%
7
7
7
As of December 31, 2005, there was approximately $1.1 million of unrecognized compensation cost
related to nonvested options. Such cost is expected to be recognized over a weighted-average period of
1.9 years. The Company's estimated forfeiture rate for stock options was 5% as of December 31, 2005. Total
compensation expense for stock options was $1.3 million for the year ended December 31, 2005.
68
LENNOX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)
The total intrinsic value of options exercised and the resulting tax deductions to realize tax benefits were
as follows (in millions):
For the Years Ended
December 31,
2004
2005
2003
Intrinsic Value of Options Exercised ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Realized Tax Benefits from Tax Deductions ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$23.6
$ 8.8
$12.8
$ 4.8
$3.5
$1.3
The Company's practice is to issue new shares of common stock to satisfy stock option exercises. Excess
tax benefits disclosed in the accompanying Consolidated Statements of Cash Flows have been reduced by the
hypothetical deferred tax asset that would have existed under SFAS No. 123 for these awards.
Performance Shares
Under the 1998 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 fiscal year. Awards
granted prior to 2003 vest 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-defined 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.
Eligible 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.
Prior to the adoption of SFAS No. 123R, and in accordance with APB No. 25, compensation expense
was measured based on the market price of the Company's common stock on the date of grant and recognized
over the performance period. Compensation expense on the additional shares was measured by applying the
market price of the Company's stock at the end of the period to the number of additional shares that were
expected to be earned. Such expense was recognized over the performance period.
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 difference between 100% and the award
distributed will be forfeited. Compensation expense was 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.
Upon the adoption of SFAS No. 123R, all of the performance share plans under the 1998 Incentive Plan
were classified as equity based plans and the fair value of each award is the market price of the stock on the
date of grant and is amortized to expense ratably over the vesting period. The stock-based compensation
expense for any additional shares which may be earned is estimated on the grant date based on the market
price of the stock at the date of grant. The number of shares expected to be earned will be adjusted, as
necessary, to reflect the actual number of shares awarded.
The weighted-average fair value of performance share awards granted during the years ended Decem-
ber 31, 2005, 2004 and 2003 was $29.36, $19.34 and $16.76, respectively.
69
LENNOX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)
A summary of the status of the Company's nonvested performance share awards as of December 31, 2005
and changes during the year ended December 31, 2005 is presented below (in millions, except per share data):
Year Ended
December 31, 2005
Nonvested performance share awards:
Nonvested at December 31, 2004 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Granted ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
VestedÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Forfeited ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Shares
2.0
0.3
(0.3)
(0.2)
Nonvested at December 31, 2005 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
1.8
Weighted-
Average
Grant Date
Fair Value
$14.84
$29.36
$16.21
$13.40
$16.80
As of December 31, 2005, there was approximately $22.3 million of total unrecognized compensation cost
related to nonvested performance share awards. Such cost is expected to be recognized over a weighted-
average period of 2.4 years. The Company's estimated forfeiture rate for performance shares was 12% as of
December 31, 2005. Total compensation expense for performance share awards was $19.6 million, $8.0 million
and $4.4 million for the years ended December 31, 2005, 2004 and 2003, respectively. The Company's practice
is to issue new shares of common stock to satisfy performance share award vestings.
Restricted Stock Awards
Under the 1998 Incentive Plan, restricted stock awards are issued to attract and retain key Company
executives. At the end of a 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. Under APB No. 25, compensation expense was measured based
on the market price of the Company's common stock at the date of grant and was recognized on a straight-line
basis over the performance period.
Upon the adoption of SFAS No. 123R, all restricted stock plans under the 1998 Incentive Plan were
classified as equity based plans and the fair value of each award is the market price of the Company's common
stock on the date of grant and amortized to expense ratably over the vesting period.
The weighted-average fair value of restricted stock awards granted during the years ended December 31,
2005, 2004 and 2003 was $28.76, $19.25 and $15.81, respectively.
70
LENNOX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)
A summary of the status of the Company's nonvested restricted stock awards as of December 31, 2005
and changes during the year ended December 31, 2005 is presented below (in millions, except per share data):
Year Ended
December 31, 2005
Nonvested restricted stock awards:
Nonvested at December 31, 2004 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Granted ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
VestedÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Forfeited ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Shares
1.1
0.3
(0.3)
(0.1)
Nonvested at December 31, 2005 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
1.0
Weighted-
Average
Grant Date
Fair Value
$17.69
$28.76
$16.26
$16.65
$21.25
As of December 31, 2005, there was approximately $13.1 million of total unrecognized compensation cost
related to nonvested restricted stock awards. Such cost is expected to be recognized over a weighted-average
period of 2.2 years. The Company's estimated forfeiture rate for restricted stock awards was 12% as of
December 31, 2005. Total compensation expense for restricted stock awards was $5.3 million, $1.8 million and
$1.7 million for the years ended December 31, 2005, 2004 and 2003, respectively.
The total fair value of restricted stock awards vested and the resulting tax deductions to realize tax
benefits were as follows (in millions):
For the Years Ended
December 30,
2004
2005
2003
Fair Value of Restricted Stock Awards Vested ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Realized Tax Benefits from Tax Deductions ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$5.8
$2.2
$5.7
$2.1
$Ì
$Ì
The Company's practice is to issue new shares of common stock to satisfy restricted stock award vestings.
Excess tax benefits disclosed in the accompanying Consolidated Statements of Cash Flows have been reduced
by the hypothetical deferred tax asset that would have existed under SFAS No. 123 for these awards.
Stock Appreciation Rights
In 2003, the Company began awarding stock appreciation rights. Each recipient is given the ""right'' to
receive a value equal to the future appreciation of the Company's stock price. The value is paid in Company
stock. Stock appreciation rights vest in one-third increments beginning with the first anniversary date after the
grant date.
Prior to the adoption of SFAS No. 123R, compensation expense was 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.
Upon the adoption of SFAS No. 123R, the compensation expense for awards granted prior to the
adoption is the fair value on the date of grant, recognized over the vesting period. The fair value for these
awards was estimated using the Black-Scholes-Merton valuation model and follows the provisions of
SFAS No. 123R and SAB No. 107. The Company used historical data and other pertinent information to
estimate the expected volatility for the term of the award and the outstanding period of the award for separate
groups of employees that had similar historical exercise behavior. The risk free interest rate was based on the
U.S. Treasury yield curve in effect at the time of grant.
71
LENNOX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)
The weighted-average fair value of stock appreciation rights granted during the years ended
December 31, 2005, 2004 and 2003 was $8.65, $6.81 and $6.23, respectively.
Prior to the adoption of SFAS No. 123R, the fair value of a stock appreciation right was amortized to
expense using the graded method. Upon the adoption of SFAS No. 123R, stock appreciation rights granted
prior to the date of adoption continue to be amortized to expense using the graded method. For stock
appreciation rights granted after the date of adoption, the fair value is amortized to expense ratably over the
vesting period.
A summary of stock appreciation rights activity for the year ended December 31, 2005 follows (in
millions, except per share data):
Outstanding at beginning of year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Granted ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
ExercisedÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Forfeited ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Outstanding at end of year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Exercisable at end of yearÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Year Ended
December 31, 2005
Weighted-
Average
Exercise
Price Per
Share
$16.82
$29.36
$16.76
$16.76
$22.22
$16.83
Shares
1.0
0.7
(0.1)
(0.1)
1.5
0.5
The following table summarizes information about stock appreciation rights outstanding as of
December 31, 2005 (in millions, except per share data and years):
Stock Appreciation Rights Outstanding
Stock Appreciation Rights Exercisable
Range of Exercise
Prices Per Share
Number
Outstanding
Weighted-
Average
Remaining Weighted-
Contractual
Term
(in years)
Average
Exercise Price
Per Share
Weighted-
Average
Aggregate
Intrinsic
Value
Number
Exercisable
Remaining Weighted-
Contractual
Life
(in years)
Average
Exercise Price
Per Share
Aggregate
Intrinsic
Value
$16.43 Ì $29.36
1.5
5.81
$22.22
$8.8
0.5
4.95
$16.83
$6.2
The fair value of each stock appreciation right granted after June 30, 2005 through December 31, 2005 is
estimated on the date of grant using the Black-Scholes-Merton option pricing model with the following
weighted-average assumptions:
Expected dividend yield ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Risk-free interest rate ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Expected volatilityÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Expected life (in years) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
December 31,
2005
1.50%
4.39%
31.90%
4.53
As of December 31, 2005, there was approximately $4.9 million of unrecognized compensation cost
related to nonvested stock appreciation rights. Such cost is expected to be recognized over a weighted-average
period of 2.1 years. The Company's estimated forfeiture rate for stock appreciation rights was 9% as of
December 31, 2005. Total compensation expense (income) for stock appreciation rights was $2.6 million,
72
LENNOX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)
$2.1 million and $0 for the years ended December 31, 2005, 2004 and 2003, respectively. The Company's
practice is to issue new shares of common stock to satisfy stock appreciation rights exercises.
13. Commitments and Contingencies:
Operating Leases
The Company has various leases relating principally to the use of operating facilities. Rent expense for
2005, 2004 and 2003 was approximately $52.9 million, $55.3 million and $55.9 million, respectively. Leases
with step rent provisions and escalation clauses are accounted for on a straight-line basis. Minimum lease
payments that are dependent on an existing index or rate, such as the consumer price index or prime interest
rate, are included based on the index or rate existing at the inception of the lease and are adjusted for
subsequent changes in the index or rate as they occur.
The approximate minimum commitments under all non-cancelable leases at December 31, 2005 are as
follows (in millions):
2006 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
2007 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
2008 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
2009 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
2010 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Thereafter ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$ 44.4
32.6
24.5
16.1
12.9
53.3
$183.8
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 trichloroethyl-
ene, dichloroethylene, and vinyl chloride and other unspecified emissions from the South Plant in Grenada,
Mississippi, previously owned by Heatcraft Inc. The Mississippi Supreme Court has ordered that these four
lawsuits be severed and transferred to Grenada County. This will require plaintiffs' counsel to maintain a
separate lawsuit for each of the approximately 112 original plaintiffs. Since the court order, there has been no
action taken towards instigating the individual lawsuits. It is not possible to predict with certainty the outcome
of these matters or an estimate of any potential loss. Based on present knowledge, management believes that it
is unlikely that any final resolution of these matters will result in a material liability for the Company.
In March 2004, the Company announced that the Audit Committee of the Company's Board of Directors
initiated an independent inquiry into certain accounting matters related to the Company's Canadian service
centers in its Service Experts segment. Immediately prior to such announcement, the Company contacted the
Fort Worth office of the SEC to inform them of the existence and details of such allegations and the related
independent inquiry. Independent counsel for the Audit Committee communicated the results of the
independent inquiry to the SEC. On January 31, 2005, the Company announced the SEC investigation was
converted to a formal status and the Company continues to fully cooperate with the SEC by producing
information and documentation in response to requests from the SEC. The Company is unable to predict the
ultimate outcome of this matter.
73
LENNOX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)
14. 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, adjusted for the interest expense and amortization of deferred financing costs associated with the
Company's convertible notes 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 and
convertible notes. Emerging Issues Task Force Issue 04-8, ""The Effect of Contingently Convertible Debt on
Diluted Earnings per Share'' requires that contingently convertible debt securities with a market price trigger
be included in diluted earnings per share, if they are dilutive, regardless of whether the market price trigger
has been met. As of December 31, 2005, the Company had 74,671,494 shares outstanding of which 3,635,947
were held as treasury shares. Diluted earnings per share are computed as follows (in millions, except per share
data):
Years Ended December 31,
2004
2005
2003
Net income (loss) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$150.7
$(134.4)
$86.4
Add: after-tax interest expense and amortization of deferred financing costs on
the Convertible Notes ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
4.6
Ì
6.3
Net income (loss) as adjusted ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$155.3
$(134.4)
$92.7
Weighted average shares outstanding ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Effect of dilutive securities attributable to convertible notes ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Effect of diluted securities attributable to stock options and performance share
awards ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Weighted average shares outstanding, as adjusted ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
64.2
6.0
3.5
73.7
60.0
Ì
Ì
60.0
58.4
7.9
2.0
68.3
Diluted earnings (loss) per share ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$ 2.11
$ (2.24)
$1.36
Additionally, options to purchase 111,064 shares of common stock at prices ranging from $24.91 to
$49.63 per share, options to purchase 1,399,386 shares of common stock at prices ranging from $17.82 to
$49.63 per share and options to purchase 2,699,089 shares of common stock at prices ranging from $15.59 to
$49.63 per share were outstanding for the years ended December 31, 2005, 2004 and 2003, respectively, but
were not included in the diluted earnings per share calculation because the assumed exercise of such options
would have been anti-dilutive. Similarly, for the year ended December 31, 2004, all potentially dilutive
securities, including 7,947,458 shares attributable to convertible notes, were excluded because their effects
were anti-dilutive for that period.
15. Quarterly Financial Information (unaudited):
In connection with the completion of year-end procedures related to the accounting for futures contracts
for copper and aluminum, the Company determined that these futures contracts, previously designated as cash
flow hedges, did not qualify for hedge accounting under SFAS No. 133, as the Company's documentation did
not meet the criteria specified by SFAS No. 133 in order for the hedging instruments to qualify for cash flow
designation.
As a result, the Company recorded an unrealized gain of $23.3 million to (Gains), Losses and Other
Expenses, net for the year ended December 31, 2005 in the accompanying Consolidated Statements of
Operations. This resulted in an increase in net income of $6.1 million, or $0.08 per share, in the first quarter
2005, which included $6.4 million of net income impact related to open futures contracts as of December 31,
2004. Additionally, this resulted in a decrease in net income of $3.5 million, or $0.05 per share, in the second
74
LENNOX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)
quarter 2005; and an increase in net income of $6.3 million, or $0.09 per share, in the third quarter, by
releasing amounts previously recorded in the Accumulated Other Comprehensive Income (Loss) component
of Stockholders' Equity. The cumulative impact to previously reported earnings for the nine-month period
ended September 30, 2005 is an increase of $8.9 million. A positive impact to net income of $6.0 million, or
$0.08 per share, also resulted in the fourth quarter 2005.
During 2005, the Company realized pre-tax gains of $16.7 million related to futures contracts that settled
during the year. Of these gains, $8.8 million was previously included in Cost of Goods Sold for the nine-month
period ended September 30, 2005 and should have been included in (Gains), Losses and Other Expenses, net
in the accompanying Consolidated Statements of Operations. The amounts that had been included in Cost of
Goods Sold were $2.0 million, $2.8 million, and $4.0 million for the first, second, and third quarters of 2005,
respectively, and had no impact on previously reported net income. For the fourth quarter of 2005, an
$8.0 million gain was recorded in Gains, Losses and Other Expenses, net.
These adjustments do not affect the Company's cash flows and, the impact on prior years' results was not
material. The quarterly information presented below for the first, second and third quarters of 2005 has been
restated and reflects the impact of the adjustments discussed above.
The following provides the impact on previously reported amounts within the Company's consolidated
statements of operations for the first, second and third quarters of 2005 related to the Company's accounting
for forward purchase contracts for copper and aluminum. Amounts are in millions and items in parenthesis
represent a decrease from the amounts previously reported.
Cost of goods sold ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Gross profit ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Realized gains on settled futures contracts previously included in
For the Three Months Ended
March 31,
2005
June 30,
2005
September 30,
2005
Increase (Decrease)
$ 2.0
(2.0)
$ 2.8
(2.8)
$ 4.0
(4.0)
cost of goods sold ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
2.0
2.8
Unrealized gains (losses) on open futures contracts previously
included in accumulated other comprehensive income (loss) ÏÏÏÏÏ
(Gains), losses and other expenses, net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Operational income from continuing operations ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Income from continuing operations before income taxes and
cumulative effect of accounting change ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Provision for income taxes previously included in accumulated other
comprehensive income (loss) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Income from continuing operations before cumulative effect of
accounting change ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Income from continuing operations ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Net income and retained earnings ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
9.5
11.5
9.5
9.5
3.4
6.1
6.1
6.1
(5.5)
(2.7)
(5.5)
(5.5)
(2.0)
(3.5)
(3.5)
(3.5)
3.9
10.1
14.0
10.0
10.0
3.7
6.3
6.3
6.3
75
LENNOX INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
For the Three Months Ended March 31, 2005
(Unaudited, in millions, except per share data)
For the
Three Months Ended
March 31, 2005
NET SALES ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
COST OF GOODS SOLD ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Previously
Reported
$700.3
478.5
Gross ProfitÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
221.8
OPERATING EXPENSES:
Restated
$700.3
480.5
219.8
Selling, general and administrative expense ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
(Gains), losses and other expenses, net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
204.3
Ì
204.3
(11.5)
Operational income from continuing operations ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
INTEREST EXPENSE, net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
OTHER EXPENSE ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Income from continuing operations before income taxesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
PROVISION FOR INCOME TAXES ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Income from continuing operations ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
DISCONTINUED OPERATIONS:
Loss from operations of discontinued operations ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Income tax benefit ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Loss on disposal of discontinued operations ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Income tax benefit ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Loss from discontinued operations ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Net income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$
17.5
5.5
0.1
11.9
4.4
7.5
1.6
(0.4)
0.1
(0.2)
1.1
6.4
27.0
5.5
0.1
21.4
7.8
13.6
1.6
(0.4)
0.1
(0.2)
1.1
$ 12.5
INCOME PER SHARE FROM CONTINUING OPERATIONS:
Basic ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
DilutedÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$ 0.12
$ 0.12
$ 0.22
$ 0.21
LOSS PER SHARE FROM DISCONTINUED OPERATIONS:
Basic ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
DilutedÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$(0.02)
$(0.02)
$(0.02)
$(0.02)
NET INCOME PER SHARE:
Basic ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
DilutedÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$ 0.10
$ 0.10
AVERAGE SHARES OUTSTANDING:
Basic ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
DilutedÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
CASH DIVIDENDS DECLARED PER SHARE ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
61.5
72.4
$ 0.10
$ 0.20
$ 0.19
61.5
72.4
$ 0.10
76
LENNOX INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Three Months and Six Months Ended June 30, 2005
(Unaudited, in millions, except per share data)
For the
Three Months Ended
June 30, 2005
For the
Six Months Ended
June 30, 2005
NET SALES ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
COST OF GOODS SOLD ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$867.8
573.8
Gross ProfitÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
294.0
Previously
Reported
Restated
$867.8
576.6
291.2
Previously
Reported
$1,568.1
1,052.3
Restated
$1,568.1
1,057.1
515.8
511.0
OPERATING EXPENSES:
Selling, general and administrative expense ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
(Gains), losses and other expenses, net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Restructuring charge ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Operational income from continuing operations ÏÏÏÏÏÏÏ
INTEREST EXPENSE, net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
OTHER INCOME ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Income from continuing operations before income taxes
PROVISION FOR INCOME TAXES ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Income from continuing operations ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
DISCONTINUED OPERATIONS:
Loss from operations of discontinued operations ÏÏÏÏÏÏÏÏ
Income tax benefit ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Loss on disposal of discontinued operations ÏÏÏÏÏÏÏÏÏÏÏÏ
Income tax benefit ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Loss from discontinued operations ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
224.9
(8.7)
2.2
75.6
4.6
(0.6)
71.6
26.6
45.0
0.2
Ì
Ì
Ì
0.2
224.9
(6.0)
2.2
70.1
4.6
(0.6)
66.1
24.6
41.5
0.2
Ì
Ì
Ì
0.2
429.2
(8.7)
2.2
429.2
(17.5)
2.2
93.1
10.1
(0.5)
83.5
31.0
52.5
1.8
(0.4)
0.1
(0.2)
1.3
97.1
10.1
(0.5)
87.5
32.4
55.1
1.8
(0.4)
0.1
(0.2)
1.3
Net income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$ 44.8
$ 41.3
$
51.2
$
53.8
INCOME PER SHARE FROM CONTINUING
OPERATIONS:
Basic ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
DilutedÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$ 0.73
$ 0.64
$ 0.67
$ 0.59
$
$
0.85
0.77
$
$
0.89
0.80
LOSS PER SHARE FROM DISCONTINUED
OPERATIONS:
Basic ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
DilutedÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$ Ì $ (0.02)
$(0.01)
$ Ì $ Ì $ (0.02)
$ (0.02)
$ (0.02)
NET INCOME PER SHARE:
Basic ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
DilutedÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$ 0.72
$ 0.64
$ 0.67
$ 0.59
AVERAGE SHARES OUTSTANDING:
Basic ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
DilutedÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
CASH DIVIDENDS DECLARED PER SHARE ÏÏÏÏÏÏÏÏÏ
62.0
72.8
$ 0.10
62.0
72.8
$ 0.10
$
$
$
0.83
0.75
61.7
72.5
0.20
$
$
$
0.87
0.78
61.7
72.5
0.20
77
LENNOX INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Three Months and Nine Months Ended September 30, 2005
(Unaudited, in millions, except share and per share data)
For the
Three Months Ended
September 30, 2005
For the
Nine Months Ended
September 30, 2005
NET SALES ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
COST OF GOODS SOLD ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Gross ProfitÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$927.5
612.1
315.4
Previously
Reported
Restated
$927.5
616.1
311.4
Previously
Reported
$2,495.6
1,664.4
831.2
Restated
$2,495.6
1,673.2
822.4
OPERATING EXPENSES:
Selling, general and administrative expense ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
(Gains), losses and other expenses, net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Restructuring charge ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Operational income from continuing operations ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
INTEREST EXPENSE, net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
OTHER EXPENSE ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Income from continuing operations before income taxes and
cumulative effect of accounting changeÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
PROVISION FOR INCOME TAXES ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Income from continuing operations before cumulative effect of
accounting change ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
CUMULATIVE EFFECT OF ACCOUNTING CHANGE, NETÏÏÏÏ
Income from continuing operations ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
DISCONTINUED OPERATIONS:
230.2
0.1
0.2
84.9
4.3
3.5
77.1
28.5
48.6
(0.2)
48.8
230.2
(13.9)
0.2
94.9
4.3
3.5
87.1
32.2
54.9
(0.2)
55.1
659.4
(8.6)
2.4
178.0
14.4
3.0
160.6
59.5
101.1
(0.2)
101.3
659.4
(31.4)
2.4
192.0
14.4
3.0
174.6
64.6
110.0
(0.2)
110.2
Loss from operations of discontinued operations ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Income tax benefitÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Loss on disposal of discontinued operations ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Income tax benefitÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Loss from discontinued operations ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Net income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
0.1
(0.1)
Ì
Ì
Ì
$ 48.8
0.1
(0.1)
Ì
Ì
Ì
$ 55.1
1.9
(0.5)
0.1
(0.2)
1.3
$ 100.0
1.9
(0.5)
0.1
(0.2)
1.3
$ 108.9
INCOME PER SHARE FROM CONTINUING OPERATIONS
BEFORE CUMULATIVE EFFECT OF ACCOUNTING
CHANGE:
Basic ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Diluted ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$ 0.77
$ 0.68
$ 0.87
$ 0.76
$
$
1.63
1.45
$
$
1.77
1.57
CUMULATIVE EFFECT OF ACCOUNTING CHANGE PER
SHARE:
Basic ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Diluted ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$ Ì
$ Ì
$
$ 0.01
$ Ì $
Ì $
Ì $
Ì
Ì
INCOME PER SHARE FROM CONTINUING OPERATIONS:
Basic ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Diluted ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$ 0.77
$ 0.68
$ 0.88
$ 0.76
$
$
1.63
1.45
$
$
1.77
1.57
LOSS PER SHARE FROM DISCONTINUED OPERATIONS:
Basic ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Diluted ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$ Ì
$ Ì
$ Ì $ (0.02)
$ Ì $ (0.02)
$ (0.02)
$ (0.02)
NET INCOME PER SHARE:
Basic ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Diluted ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$ 0.77
$ 0.68
AVERAGE SHARES OUTSTANDING:
Basic ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Diluted ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
CASH DIVIDENDS DECLARED PER SHARE: ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
62.9
74.2
$ 0.10
$ 0.88
$ 0.76
62.9
74.2
$ 0.10
$
$
$
1.61
1.43
62.1
73.1
0.30
$
$
$
1.75
1.55
62.1
73.1
0.30
78
LENNOX INTERNATIONAL INC. AND SUBSIDIARIES
SEGMENT REVENUES AND OPERATING PROFIT
For the Three Months Ended March 31, 2005
(Unaudited, in millions)
For the
Three Months Ended
March 31, 2005
Previously
Reported
Restated
Net Sales
Residential ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Commercial ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$342.7
126.2
$342.7
126.2
Heating and Cooling ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Service ExpertsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Refrigeration ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Eliminations ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
468.9
135.9
111.9
(16.4)
468.9
135.9
111.9
(16.4)
$700.3
$700.3
Segment Profit (Loss)(A)
Residential ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Commercial ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$ 29.6
4.7
$ 28.4
4.4
Heating and Cooling ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Service ExpertsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Refrigeration ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Corporate and other ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Eliminations ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
34.3
(6.3)
8.9
(19.3)
(0.1)
Segment Profit ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
17.5
Reconciliation to income from continuing operations before income taxes
(Gains), losses and other expenses, net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Interest expense, net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Other expenseÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Ì
5.5
0.1
32.8
(6.3)
8.4
(19.3)
(0.1)
15.5
(11.5)
5.5
0.1
$ 11.9
$ 21.4
(A) Segment profit is based upon income (loss) from continuing operations before income taxes included in
the accompanying consolidated statements of operations excluding Goodwill Impairment.
79
LENNOX INTERNATIONAL INC. AND SUBSIDIARIES
SEGMENT REVENUES AND OPERATING PROFIT
For the Three Months and Six Months Ended June 30, 2005
(Unaudited, in millions)
For the
Three Months Ended
June 30, 2005
For the
Six Months Ended
June 30, 2005
Previously
Reported
Restated
Previously
Reported
Restated
Net Sales
Residential ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Commercial ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$434.7
171.2
$434.7
171.2
$ 777.4
297.4
$ 777.4
297.4
Heating and Cooling ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Service ExpertsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Refrigeration ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Eliminations ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
605.9
167.8
116.9
(22.8)
605.9
167.8
116.9
(22.8)
1,074.8
303.7
228.8
(39.2)
1,074.8
303.7
228.8
(39.2)
$867.8
$867.8
$1,568.1
$1,568.1
Segment Profit (Loss)(A)
Residential ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Commercial ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$ 57.3
15.3
$ 55.7
14.7
$
86.9
20.0
$
84.1
19.1
Heating and Cooling ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Service ExpertsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Refrigeration ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Corporate and other ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Eliminations ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Segment Profit ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Reconciliation to income from continuing operations before
income taxes:
(Gains), losses and other expenses, net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Restructuring charge ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Interest expense, net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Other income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
72.6
9.2
10.1
(22.9)
0.1
69.1
(8.7)
2.2
4.6
(0.6)
70.4
9.2
9.5
(22.9)
0.1
66.3
(6.0)
2.2
4.6
(0.6)
106.9
2.9
19.0
(42.2)
Ì
86.6
(8.7)
2.2
10.1
(0.5)
103.2
2.9
17.9
(42.2)
Ì
81.8
(17.5)
2.2
10.1
(0.5)
$ 71.6
$ 66.1
$
83.5
$
87.5
(A) Segment profit (loss) is based upon income (loss) from continuing operations before income taxes
included in the accompanying consolidated statements of operations excluding Goodwill Impairment.
80
LENNOX INTERNATIONAL INC. AND SUBSIDIARIES
SEGMENT REVENUES AND OPERATING PROFIT
For the Three Months and Nine Months Ended September 30, 2005
(Unaudited, in millions)
For the
Three Months Ended
September 30, 2005
For the
Nine Months Ended
September 30, 2005
Previously
Reported
Restated
Previously
Reported
Restated
Net Sales
Residential ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Commercial ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$464.9
191.9
$464.9
191.9
$1,242.3
489.3
$1,242.3
489.3
Heating and Cooling ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Service ExpertsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Refrigeration ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Eliminations ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
656.8
171.8
119.6
(20.7)
656.8
171.8
119.6
(20.7)
1,731.6
475.5
348.4
(59.9)
1,731.6
475.5
348.4
(59.9)
$927.5
$927.5
$2,495.6
$2,495.6
Segment Profit (Loss)(A)
Residential ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Commercial ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$ 67.0
26.8
$ 65.0
25.9
$ 153.9
46.8
$ 149.1
45.0
Heating and Cooling ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Service ExpertsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Refrigeration ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Corporate and other ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Eliminations ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Segment Profit ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Reconciliation to income from continuing operations before
income taxes and cumulative effect of accounting change:
(Gains), losses and other expenses, net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Restructuring charge ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Interest expense, net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Other expenseÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
93.8
7.9
12.0
(28.5)
Ì
85.2
0.1
0.2
4.3
3.5
90.9
7.9
10.9
(28.5)
Ì
81.2
(13.9)
0.2
4.3
3.5
200.7
10.8
31.0
(70.7)
Ì
171.8
(8.6)
2.4
14.4
3.0
194.1
10.8
28.8
(70.7)
Ì
163.0
(31.4)
2.4
14.4
3.0
$ 77.1
$ 87.1
$ 160.6
$ 174.6
(A) Segment profit (loss) is based upon income (loss) from continuing operations before income taxes and
cumulative effect of accounting change included in the accompanying consolidated statements of
operations excluding Goodwill Impairment.
81
LENNOX INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
As of March 31, 2005
(unaudited, in millions, except share and per share data)
March 31, 2005
Previously
Reported
Restated
CURRENT ASSETS:
ASSETS
Cash and cash equivalents ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Accounts and notes receivable, netÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Inventories ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Deferred income taxes ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Other assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Assets held for saleÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$
Total current assetsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
PROPERTY, PLANT AND EQUIPMENT, net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
GOODWILL, netÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
DEFERRED INCOME TAXESÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
OTHER ASSETS ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
84.2
450.2
275.8
13.1
42.4
1.2
866.9
236.3
222.5
82.1
137.3
$
84.2
449.8
275.8
16.8
42.4
1.2
870.2
236.3
222.5
82.1
137.3
TOTAL ASSETSÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$1,545.1
$1,548.4
CURRENT LIABILITIES:
LIABILITIES AND STOCKHOLDERS' EQUITY
Short-term debtÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Current maturities of long-term debt ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Accounts payable ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Accrued expenses ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Income taxes payable ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Liabilities held for saleÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$
Total current liabilities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
LONG-TERM DEBT ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
POSTRETIREMENT BENEFITS, OTHER THAN PENSIONS ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
PENSIONS ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
OTHER LIABILITIES ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
3.8
36.3
281.6
259.9
16.7
2.4
600.7
269.1
14.7
105.1
78.6
$
3.8
36.3
281.6
259.9
20.1
2.4
604.1
269.1
14.7
105.1
78.6
Total liabilitiesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
1,068.2
1,071.6
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value, 25,000,000 shares authorized, no shares issued or
outstandingÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Common stock, $.01 par value, 200,000,000 shares authorized, 67,005,959 shares issued
Additional paid-in capitalÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Retained earnings ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Accumulated other comprehensive income (loss) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Deferred compensationÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Treasury stock, at cost, 3,106,822 shares ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total stockholders' equity ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Ì
0.7
465.1
66.9
(7.4)
(16.0)
(32.4)
476.9
Ì
0.7
465.1
73.1
(13.7)
(16.0)
(32.4)
476.8
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$1,545.1
$1,548.4
82
LENNOX INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
As of June 30, 2005
(unaudited, in millions, except share and per share data)
June 30, 2005
Previously
Reported
Restated
CURRENT ASSETS:
ASSETS
Cash and cash equivalents ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Accounts and notes receivable, netÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Inventories ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Deferred income taxes ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Other assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Assets held for saleÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$
Total current assetsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
PROPERTY, PLANT AND EQUIPMENT, net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
GOODWILL, netÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
DEFERRED INCOME TAXESÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
OTHER ASSETS ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
93.6
541.9
257.5
16.0
41.7
0.1
950.8
238.1
219.1
80.4
111.8
$
93.6
541.6
257.5
17.6
41.7
0.1
952.1
238.1
219.1
80.4
111.8
TOTAL ASSETSÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$1,600.2
$1,601.5
CURRENT LIABILITIES:
LIABILITIES AND STOCKHOLDERS' EQUITY
Short-term debtÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Current maturities of long-term debt ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Accounts payable ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Accrued expenses ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Income taxes payable ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Liabilities held for saleÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$
Total current liabilities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
LONG-TERM DEBT ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
POSTRETIREMENT BENEFITS, OTHER THAN PENSIONS ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
PENSIONS ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
OTHER LIABILITIES ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
1.0
11.3
294.7
282.7
38.9
0.9
629.5
263.0
15.1
105.6
85.7
$
1.0
11.3
294.7
282.7
40.4
0.9
631.0
263.0
15.1
105.6
85.7
Total liabilitiesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
1,098.9
1,100.4
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value, 25,000,000 shares authorized, no shares issued or
outstandingÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Common stock, $.01 par value, 200,000,000 shares authorized, 66,948,311 shares issued
Additional paid-in capitalÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Retained earnings ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Accumulated other comprehensive income (loss) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Deferred compensationÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Treasury stock, at cost; 3,183,631 shares, 3,107,074 shares and 3,106,822 shares at
September 30, 2005, June 30, 2005 and March 31, 2005, respectively ÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total stockholders' equity ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Ì
0.7
463.9
105.6
(23.5)
(13.0)
(32.4)
501.3
Ì
0.7
463.9
108.1
(26.2)
(13.0)
(32.4)
501.1
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$1,600.2
$1,601.5
83
LENNOX INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
As of September 30, 2005
(unaudited, in millions, except share and per share data)
September 30, 2005
Previously
Reported
Restated
CURRENT ASSETS:
ASSETS
Cash and cash equivalents ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Accounts and notes receivable, netÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Inventories ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Deferred income taxes ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Other assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Assets held for saleÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total current assetsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
PROPERTY, PLANT AND EQUIPMENT, net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
GOODWILL, netÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
DEFERRED INCOME TAXESÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
OTHER ASSETS ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$ 176.2
567.4
254.0
14.0
50.5
0.1
1,062.2
244.6
225.6
85.3
121.4
$ 176.2
567.4
254.0
19.2
50.5
0.1
1,067.4
244.6
225.6
85.3
121.4
TOTAL ASSETSÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$1,739.1
$1,744.3
CURRENT LIABILITIES:
LIABILITIES AND STOCKHOLDERS' EQUITY
Short-term debtÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Current maturities of long-term debt ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Accounts payable ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Accrued expenses ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Income taxes payable ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Liabilities held for saleÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$
Total current liabilities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
LONG-TERM DEBT ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
POSTRETIREMENT BENEFITS, OTHER THAN PENSIONS ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
PENSIONS ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
OTHER LIABILITIES ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
2.5
114.3
312.9
311.6
41.4
1.1
783.8
119.3
15.5
106.1
80.5
$
2.5
114.3
312.9
311.6
46.4
1.1
788.8
119.3
15.5
106.1
80.5
Total liabilitiesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
1,105.2
1,110.2
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value, 25,000,000 shares authorized, no shares issued or
outstandingÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Ì
Ì
Common stock, $.01 par value, 200,000,000 shares authorized, 68,313,156 shares,
66,948,311 shares and 67,005,959 shares issued at September 30, 2005, June 30,
2005 and March 31, 2005, respectively ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Additional paid-in capitalÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Retained earnings ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Accumulated other comprehensive income (loss) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Deferred compensationÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Treasury stock, at cost, 3,183,631 shares, 3,107,074 shares and 3,106,822 shares at
September 30, 2005, June 30, 2005 and March 31, 2005, respectively ÏÏÏÏÏÏÏÏÏÏÏÏÏ
Total stockholders' equity ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
0.7
519.2
148.1
Ì
Ì
(34.1)
633.9
0.7
519.2
157.0
(8.8)
Ì
(34.0)
634.1
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$1,739.1
$1,744.3
84
Financial results (in millions, except per share data)
Net Sales
Gross Profit
Net (Loss) Income
2005
2004
2005
2004
2005
2004
First Quarter ÏÏÏÏÏ
Second Quarter ÏÏÏ
Third Quarter ÏÏÏÏ
Fourth Quarter ÏÏÏ
$ 700.3
867.8
927.5
870.6
$ 664.0
805.4
771.9
741.4
$ 219.8(1) $225.6
275.3
258.4
238.2
291.2(1)
311.4(1)
285.6
$ 12.5(1)(3) $(194.1)(2)
41.3(1)
55.1(1)
41.8
34.4
19.0
6.3
Fiscal year ÏÏÏÏÏ
$3,366.2
$2,982.7
$1,108.0
$997.5
$150.7
$(134.4)
Basic
Earnings per
Common Share
Diluted
Earnings per
Common Share
2005
2004
2005
2004
First QuarterÏÏÏ
Second Quarter
Third Quarter ÏÏ
Fourth Quarter
$0.20(1)(3) $(3.26)
0.57
0.32
0.10
0.67(1)
0.88(1)
0.59
$0.19(1)(3) $(3.26)
0.51
0.29
0.11
0.59(1)
0.76(1)
0.55
Fiscal yearÏÏÏ
$2.35
$(2.24)
$2.11
$(2.24)
Dividends
per
Common Share
2005
$0.10
0.10
0.10
0.11
$0.41
2004
$ .095
.095
.095
.100
$0.385
(1) Quarterly financial information has been restated.
(2) In 2004, the Company recorded a non-cash impairment charge of $208.0 million, which is included as a
component of operating income in the accompanying Consolidated Statements of Operations.
(3) In 2005, the Company recorded $6.4 million of net income related to open futures contracts as of
December 31, 2004.
Stock Prices
Price Range Per Common Share
2005
2004
High
Low
High
Low
First QuarterÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Second Quarter ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Third Quarter ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Fourth Quarter ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$22.99
22.41
27.42
30.60
$19.33
18.65
20.50
24.81
$19.22
19.26
18.31
20.50
$14.75
15.34
14.74
13.97
16. Treasury Stock:
On September 19, 2005, LII announced its Board of Directors had authorized a stock repurchase
program, pursuant to which the Company may repurchase up to ten million shares of its common stock, and
had terminated a prior repurchase program that was announced November 2, 1999. Purchases under the stock
repurchase program are made on an open-market basis at prevailing market prices. The timing of any
repurchases depends on market conditions, the market price of LII's common stock and management's
assessment of the Company's liquidity needs and investment requirements and opportunities. No time limit
was set for completion of the program and there is no guarantee as to the exact number of shares that will be
repurchased. As of December 31, 2005, the Company had repurchased 447,400 shares of common stock at an
average price of $28.65 per share under the stock repurchase program.
85
17. Comprehensive Income:
The accumulated balances, shown net of tax for each classification of comprehensive income as of
December 31, 2005, 2004 and 2003, are as follows (in millions):
Foreign
Currency
Translation
Adjustment
Minimum
Pension Liab.
December 31, 2002 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Net change during 2003 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$(40.8)
63.7
December 31, 2003 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Net change during 2004 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
22.9
23.0
December 31, 2004 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Net change during 2005 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$ 45.9
(10.9)
$(37.2)
(5.2)
(42.4)
(9.0)
$(51.4)
17.0
Hedges
Total
$(0.7)
1.8
$(78.7)
60.3
1.1
5.1
$ 6.2
$
(6.4)
(18.4)
19.1
0.7
(0.3)
December 31, 2005 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$ 35.0
$(34.4)
$(0.2)
$
0.4
The net change in hedges during 2004 was $5.9 million, net of tax of $(2.1) million, in reclassifications to
earnings and $2.1 million, net of tax of $(0.8) million, in changes in the fair value of derivative contracts.
In 2005, the Company determined that these futures contracts did not qualify for hedge accounting under
SFAS No. 133, as the Company's documentation did not meet the criteria specified by SFAS No. 133 in
order for the hedging instruments to qualify for cash flow designation. Accordingly, the Company recorded an
unrealized gain of $23.3 million for the year ended December 31, 2005 related to open futures contracts, which
is included (Gains), Losses and Other Expenses, Net in the accompanying Consolidated Statements of
Operations for 2005. Additionally during 2005, the Company realized pre-tax gains of $16.7 million related to
futures contracts that settled during the year, which is included in (Gains), Losses and Other Expenses, Net
in the accompanying Consolidated Statements of Operations.
18. Goodwill:
The Company evaluates the impairment of goodwill under the guidance of SFAS No. 142, for each of its
reporting units. As a result of the annual impairment tests required by SFAS No. 142 the Company recorded
an impairment charge in the first quarter of 2004 associated with its Service Experts segment. This
impairment charge reflects the segment's performance below management's expectations and management's
decision to divest of 48 centers that no longer matched the realigned Service Experts business model. See
Note 6 Ì Divestitures. The impairment test requires a two-step process. The first step compares the fair value
of the units with goodwill against their aggregate carrying values, including goodwill. The Company estimated
the fair value of its Service Experts segment using the income method of valuation, which includes the use of
estimated discounted cash flows. Based on the comparison, the carrying value of Service Experts exceeded its
fair value. Accordingly, the Company performed the second step of the test, comparing the implied fair value
of Service Experts' goodwill with the carrying amount of that goodwill. Based on this assessment, the
Company recorded a non-cash impairment charge of $208.0 million ($184.8 million, net of tax), which is
included as a component of operating income in the accompanying Consolidated Statements of Operations for
2004. The Company also recognized a $14.8 million ($13.2 million, net of tax) goodwill impairment charge
arising from goodwill allocated to centers held for sale. This amount is included as a part of loss from
discontinued operations in the accompanying Consolidated Statements of Operations for 2004. During the first
quarter of 2005, the Company performed its annual goodwill impairment test and determined that no further
impairment charge was required.
86
The changes in the carrying amount of goodwill related to continuing operations for the years ended
December 31, 2005 and 2004, by segment, are as follows (in millions):
Segment
Balance
December 31,
2003
Goodwill
Impairment
Foreign Currency
Translation & Other
Balance
December 31,
2004
ResidentialÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Commercial ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Heating and Cooling ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Service Experts ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Refrigeration ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$ 26.1
29.1
55.2
306.7
70.6
$ Ì
Ì
Ì
(208.0)
Ì
Total for continuing operations ÏÏÏÏÏÏÏÏÏÏÏ
$432.5
$(208.0)
Discontinued operations ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
14.8
(14.8)
TotalÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$447.3
$(222.8)
$ Ì
1.6
1.6
(3.0)
2.3
$ 0.9
Ì
$ 0.9
$ 26.1
30.7
56.8
95.7
72.9
$225.4
Ì
$225.4
Segment
Balance
December 31,
2004
Goodwill
Impairment
Foreign Currency
Translation & Other
Balance
December 31,
2005
ResidentialÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Commercial ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$ 26.1
30.7
Heating and Cooling ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Service Experts ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Refrigeration ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
56.8
95.7
72.9
TotalÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$225.4
$Ì
Ì
Ì
Ì
Ì
$Ì
$ Ì
(2.5)
(2.5)
2.5
(1.5)
$(1.5)
$ 26.1
28.2
54.3
98.2
71.4
$223.9
The change in the Service Experts segment in 2004 includes the release of $9.2 million of liabilities for
contingencies that were established in connection with the acquisition of Service Experts. Remaining changes
are due to foreign currency translation.
As of December 31, 2005 and 2004, identifiable intangible assets, subject to amortization, are recorded in
Other Assets in the accompanying Consolidated Balance Sheets and are comprised of the following
(in millions):
2005
2004
Gross
Amount
Amortization
Accumulated
Gross
Amount
Accumulated
Amortization
Deferred financing costs ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
Non-compete agreements and other ÏÏÏÏÏÏÏÏÏÏÏÏ
$ 5.8
9.1
Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
$14.9
$ (3.3)
(7.7)
$(11.0)
$ 8.9
9.3
$18.2
$ (4.0)
(7.9)
$(11.9)
Amortization of intangible assets for the years ended December 31, 2005, 2004 and 2003 was
approximately $1.9 million, $3.6 million and $4.6 million, respectively. Amortization expense for 2006 to 2010
is estimated to be approximately $1.2 million in 2006, $0.7 million in 2007, $0.6 million in 2008, $0.5 million
in 2009 and $0.3 million in 2010. As of December 31, 2005, the Company had $14.3 million of intangible
assets, consisting of $10.1 million of pension intangible assets and $4.2 million of trademarks and others, which
are not subject to amortization.
19. 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
87
of AOC Land Investment, L.L.C. (""AOC Land''). AOC Land owns 70% of AOC Development II, L.L.C.
(""AOC Development''), which owns essentially all of One Lake Park, L.L.C. (""One Lake Park''). LII is
leasing part of an office building owned by One Lake Park for use as the LII corporate headquarters. The
lease, initiated in 1998, has a remaining term of approximately 17 years and the lease payments for 2005, 2004
and 2003 were approximately $2.9 million, $3.2 million and $2.9 million, respectively. LII also leased a portion
of Lennox Center, a retail complex owned by AOC Development, for use as offices. The lease, initiated in
2000, terminated in March 2003 and the lease payments for 2003 were $20,430. LII believes that the terms of
its leases with One Lake Park and AOC Development were, when entered into, comparable to terms that
could have been obtained from unaffiliated third parties.
LII does not enter into any transactions in which it directors, executive officers or principal stockholders
and their affiliates have a material interest unless such transactions are approved by a majority of the
disinterested members of its Board of Directors and are on terms that are no less favorable to it than those that
it could obtain from unaffiliated third parties.
20. 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.
21. 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 fair
values of each of the Company's long-term debt instruments are based on the quoted market prices for the
same issues or on the amount of future cash flows associated with each instrument using current market rates
for debt instruments of similar maturities and credit risk. The estimated fair value of non-convertible long-
term debt (including current maturities) was $122.6 million and $160.8 million at December 31, 2005 and
2004, respectively. The fair values presented are estimates and are not necessarily indicative of amounts for
which the Company could settle such instruments currently or indicative of the intent or ability of the
Company to dispose of or liquidate them.
22. Subsequent Events:
On February 7, 2006, Allied Air Enterprises, a division of the Company's Heating & Cooling segment,
announced that it has commenced plans to consolidate its manufacturing, distribution, research & develop-
ment, and administrative operations in South Carolina, and close its current operations in Bellevue, Ohio. The
consolidation will be a phased process expected to be completed by the end of the first quarter of fiscal 2007.
The Company expects the consolidation to improve Allied Air Enterprises' operating efficiency, eliminate
redundant fixed costs, and provide customers with improved service.
88
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A. Controls and Procedures
Disclosure Controls and Procedures
The Company carried out an evaluation, under the supervision and with the participation of the
Company's management, including its Chief Executive Officer and Chief Financial Officer (the Company's
principal executive officer and principal financial officer, respectively), of the effectiveness of its disclosure
controls and procedures as of the end of the period covered by this report and concluded that, as a result of the
material weakness identified in Management's Report on Internal Control Over Financial Reporting (Item 8),
the Company's disclosure controls and procedures as of December 31, 2005 were not effective.
Management's Annual Report on Internal Control Over Financial Reporting
See ""Management's Report on Internal Control Over Financial Reporting'' included in Item 8 ""Financial
Statements and Supplementary Data.''
Attestation Report of the Independent Registered Public Accounting Firm
See ""Attestation Report of the Independent Registered Public Accounting Firm'' included in Item 8
""Financial Statements and Supplementary Data.''
Changes in Internal Control Over Financial Reporting
During the quarter ended December 31, 2005, there were no changes in the Company's internal control
over financial reporting that have materially affected, or are reasonably likely to materially affect, the
Company's internal control over financial reporting.
Remediation Efforts
In the first quarter of 2006, the Company engaged an outside consultant to assist it in redesigning its
policies, procedures, and controls with respect to its commodity hedging activities in order to comply with the
requirements of SFAS 133 and the Company does not plan to enter into any new contracts intended to hedge
its exposure to fluctuations in copper and aluminum commodity prices until this process is completed.
Item 9B. Other Information
None.
PART III
Item 10. Directors and Executive Officers of the Registrant
The section of the Company's 2006 Proxy Statement captioned ""Proposal: Election of Directors''
identifies members of the Board of Directors of the Company and nominees for election to the Board of
Directors at the Company's 2006 Annual Meeting, and is incorporated in this Item 10 by reference.
Item 1 ""Business Ì Executive Officers of the Company'' of this Form 10-K identifies executive officers
of the Company and is incorporated in this Item 10 by reference.
The section of the Company's 2006 Proxy Statement captioned ""Corporate Governance Ì Board of
Directors and Board Committees Ì Audit Committee'' identifies members of the Audit Committee of the
Board of Directors and the Company's audit committee financial expert, and is incorporated in this Item 10 by
reference.
89
The section of the Company's 2006 Proxy Statement captioned ""Section 16(a) Beneficial Ownership
Reporting Compliance'' is incorporated in this Item 10 by reference.
The section of the Company's 2006 Proxy Statement captioned ""Corporate Governance Ì Other
Corporate Governance Policies Ì Code of Conduct and Code of Ethical Conduct'' includes information
regarding the Company's Code of Conduct and Code of Ethical Conduct and is incorporated in this Item 10
by reference.
Item 11. Executive Compensation
The information in the sections of the Company's 2006 Proxy Statement captioned ""Directors Compen-
sation,'' ""Executive Compensation'' and ""Certain Relationships and Related Party Transactions Ì Compen-
sation Committee Interlocks and Insider Participation'' is incorporated in this Item 11 by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters
The information in the sections of the Company's 2006 Proxy Statement captioned ""Equity Compensa-
tion Plan Information'' and ""Ownership of Common Stock'' is incorporated in this Item 12 by reference.
Item 13. Certain Relationships and Related Transactions
The information in the section of the Company's 2006 Proxy Statement captioned ""Certain Relationships
and Related Party Transactions'' is incorporated in this Item 13 by reference.
Item 14. Principal Accounting Fees and Services
The information in the section of the Company's 2006 Proxy Statement captioned ""Independent
Registered Public Accountants'' is incorporated in this Item 14 by reference.
Item 15. Exhibits, Financial Statement Schedules
Financial Statements
PART IV
The following financial statements are included in Part II, Item 8 of this Form 10-K:
‚ Management's Report on Internal Control Over Financial Reporting
‚ Attestation Report of the Independent Registered Public Accounting Firm
‚ Report of the Independent Registered Public Accounting Firm
‚ Consolidated Balance Sheets as of December 31, 2005 and 2004
‚ Consolidated Statements of Operations for the Years Ended December 31, 2005, 2004 and 2003
‚ Consolidated Statements of Stockholders' Equity for the Years Ended December 31, 2005, 2004 and
2003
‚ Consolidated Statements of Cash Flows for the Years Ended December 31, 2005, 2004 and 2003
‚ Notes to Consolidated Financial Statements for the Years Ended December 31, 2005, 2004 and 2003
Financial Statement Schedules
The following financial statement schedules are included in this Form 10-K:
‚ Report of the Independent Registered Public Accounting Firm (see Part II, Item 8 of this
Form 10-K).
90
‚ Schedule II Ì Valuation and Qualifying Accounts and Reserves (see Schedule II immediately
following the signature page of this Form 10-K).
Financial statement schedules not included in this Form 10-K have been omitted because they are not
applicable or the required information is shown in the Consolidated Financial Statements or Notes thereto.
Exhibits
A list of the exhibits required to be filed or furnished as part of this Form 10-K is set forth in the Index to
Exhibits, which immediately precedes such exhibits, and is incorporated herein by reference.
91
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 Officer
March 16, 2006
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 Officer and Director March 16, 2006
Robert E. Schjerven
(Principal Executive Officer)
/s/ SUSAN K. CARTER
Susan K. Carter
/s/ DAVID L. INMAN
David L. Inman
/s/
JOHN W. NORRIS, JR.
John W. Norris, Jr.
/s/ LINDA G. ALVARADO
Linda G. Alvarado
/s/ STEVEN R. BOOTH
Steven R. Booth
/s/ THOMAS W. BOOTH
Thomas W. Booth
/s/ DAVID V. BROWN
David V. Brown
/s/
JAMES J. BYRNE
James J. Byrne
/s/
JANET K. COOPER
Janet K. Cooper
Executive Vice President and Chief
Financial Officer
(Principal Financial Officer)
March 16, 2006
Vice President, Controller and
Chief Accounting Officer
(Principal Accounting Officer)
March 16, 2006
Chairman of the Board of Directors
March 16, 2006
Director
March 16, 2006
Director
March 16, 2006
Director
March 16, 2006
Director
March 16, 2006
Director
March 16, 2006
Director
March 16, 2006
92
Signature
/s/ C.L. (JERRY) HENRY
C.L. (Jerry) Henry
/s/
JOHN E. MAJOR
John E. Major
/s/
JOHN W. NORRIS III
John W. Norris III
/s/ PAUL W. SCHMIDT
Paul W. Schmidt
/s/ TERRY D. STINSON
Terry D. Stinson
/s/ RICHARD L. THOMPSON
Richard L. Thompson
Title
Director
Date
March 16, 2006
Director
March 16, 2006
Director
March 16, 2006
Director
March 16, 2006
Director
March 16, 2006
Director
March 16, 2006
93
LENNOX INTERNATIONAL INC.
SCHEDULE II Ì VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
For the Years Ended December 31, 2005, 2004 and 2003
(In Millions)
2003:
Allowance for doubtful accounts ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
2004:
Allowance for doubtful accounts ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
2005:
Allowance for doubtful accounts ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ
(1) Uncollectible accounts charged off, net of recoveries.
Balance at
beginning
of Year
Additions
charged to
cost and
expenses
Deductions (1)
Balance
at end
of Year
$20.8
$10.8
$(16.0)
$15.6
$15.6
$10.3
$ (7.4)
$18.5
$18.5
$ 6.7
$ (8.5)
$16.7
94
Exhibit
Number
3.1
3.2
4.1
4.2
10.1
10.2
10.3
10.4
10.5
10.6
INDEX TO EXHIBITS
Exhibit Name
Restated Certificate of Incorporation of Lennox International Inc. ("LII'') (filed as Exhibit 3.1 to
LII's Registration Statement on Form S-1 (Registration No. 333-75725) filed on April 6, 1999 and
incorporated herein by reference).
Amended and Restated Bylaws of LII (filed as Exhibit 3.2 to LII's Current Report on Form 8-K
filed on February 28, 2005 and incorporated herein by reference).
Specimen Stock Certificate for the Common Stock, par value $.01 per share, of LII (filed as
Exhibit 4.1 to LII's Amendment to Registration Statement on Form S-1/A (Registration
No. 333-75725) filed on June 16, 1999 and incorporated herein by reference).
Rights Agreement, dated as of July 27, 2000, between LII and ChaseMellon Shareholder Services,
L.L.C., as Rights Agent, which includes as Exhibit A the form of Certificate of Designations of
Series A Junior Participating Preferred Stock setting forth the terms of the Preferred Stock, as
Exhibit B the form of Rights Certificate and as Exhibit C the Summary of Rights to Purchase
Preferred Stock (filed as Exhibit 4.1 to LII's Current Report on Form 8-K filed on July 28, 2000 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.
Second Amended and Restated Receivables Purchase Agreement, dated as of June 16, 2003, by and
among LPAC Corp., Lennox Industries Inc., Blue Ridge Asset Funding Corporation, Liberty Street
Funding Corp., the Liberty Street Investors named therein, The Bank of Nova Scotia and Wachovia
Bank, N.A. (filed as Exhibit 10.1 to LII's Quarterly Report on Form 10-Q for the quarter ended
June 30, 2003 and incorporated herein by reference).
Fourth Amendment to Second Amended and Restated Receivables 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 Second Amended and Restated Receivables Purchase Agreement, as
amended (the ""Purchase Agreement''), The Bank of Nova Scotia, YC SUSI Trust, Bank of
America, N.A. and The Yorktown Investors (as defined in Purchase Agreement) (filed as
Exhibit 10.3 to LII's Annual Report on Form 10-K for the year ended December 31, 2003 and
incorporated herein by reference).
Fifth Amendment to Second Amended and Restated Receivables Purchase Agreement, dated as of
December 20, 2004, by and among Lennox Industries Inc., LPAC Corp., Liberty Street Funding
Corp., the investors named in the Purchase Agreement, The Bank of Nova Scotia, YC SUSI Trust,
Bank of America, N.A. and The Yorktown Investors (as defined in the Purchase Agreement) (filed
as Exhibit 10.1 to LII's Form 8-K filed December 21, 2004 and incorporated herein by reference).
Sixth Amendment to Second Amended and Restated Receivables Purchase Agreement, dated
December 14, 2005, by and among Lennox Industries Inc., LPAC Corp., Liberty Street Funding
Corp., the investors named in the Purchase Agreement, The Bank of Nova Scotia, YC SUSI Trust,
Bank of America, National Association and the Yorktown Investors (as defined in the Purchase
Agreement) (filed as Exhibit 10.1 to LII's Form 8-K filed December 20, 2005 and incorporated
herein by reference).
Assignment and Assumption Agreement, dated as of May 5, 2004, by and among EagleFunding
Capital Corporation and YC SUSI Trust, Fleet National Bank and Bank of America, N.A., Fleet
Securities, Inc. and Bank of America, N.A., The Bank of Nova Scotia and LPAC Corp. (filed as
Exhibit 10.10 to LII's Annual Report on Form 10-K for the year ended December 31, 2003 and
incorporated herein by reference).
Purchase and Sale Agreement, dated as of June 19, 2000, by and among Lennox Industries Inc.,
Heatcraft Inc. and LPAC Corp. (filed as Exhibit 10.1 to LII's Quarterly Report on Form 10-Q for
the quarter ended June 30, 2000 and incorporated herein by reference).
95
Exhibit
Number
10.7
10.8
10.9
10.10
Exhibit Name
First Amendment to Purchase and Sale Agreement, dated as of June 7, 2002, among Lennox
Industries Inc., Heatcraft Inc., Armstrong Air Conditioning Inc. and LPAC Corp. (filed as
Exhibit 10.2 to LII's Quarterly Report on Form 10-Q for the quarter ended June 30, 2002 and
incorporated herein by reference).
Second Amendment to Purchase and Sale Agreement, dated as of June 16, 2003, by and among
LPAC Corp., Lennox Industries Inc., Armstrong Air Conditioning Inc., Advanced Distributor
Products LLC and Heatcraft Refrigeration Products LLC (filed as Exhibit 10.2 to LII's Quarterly
Report on Form 10-Q for the quarter ended June 30, 2003 and incorporated herein by reference).
Omnibus Amendment Number One to the Amended and Restated Receivables Purchase Agreement
and the Purchase and Sale Agreement, dated as of January 31, 2003, by and 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. (filed as Exhibit 10.12 to LII's Annual Report on Form 10-K for the year
ended December 31, 2002 and incorporated herein by reference).
First Omnibus Amendment to Transaction Documents, dated as of December 31, 2003, among LII,
Lennox Industries Inc., Advanced Distributor Products LLC, Heatcraft Refrigeration Products
LLC, LPAC Corp., Blue Ridge Asset Funding Corporation, Wachovia Bank, N.A., Liberty Street
Funding Corp., The Bank of Nova Scotia, EagleFunding Capital Corporation, Fleet National Bank,
Fleet Securities Inc., and The Liberty Street Investors (as defined therein) (filed as Exhibit 10.9 to
LII's Annual Report on Form 10-K for the year ended December 31, 2003 and incorporated herein
by reference).
10.11* Amended and Restated 1998 Incentive Plan of Lennox International Inc. (filed as Exhibit 10.1 to
LII's Quarterly Report on Form 10-Q for the quarter ended March 31, 2005 and incorporated herein
by reference).
10.12* Form of Performance Share Program Award Agreement under the 1998 Incentive Plan of LII (filed
as Exhibit 10.3 to LII's Current Report on Form 8-K filed on December 13, 2005 and incorporated
herein by reference).
10.13* Form of Employee Restricted Stock Grant Agreement under the 1998 Incentive Plan of LII (filed as
Exhibit 10.4 to LII's Current Report on Form 8-K filed on December 13, 2005 and incorporated
herein by reference).
10.14* Form of Employee Stock Appreciation Rights Agreement under the 1998 Incentive Plan of LII
(filed as Exhibit 10.5 to LII's Current Report on Form 8-K filed on December 13, 2005 and
incorporated herein by reference).
10.15* Form of Non-Employee Director Restricted Stock Grant Agreement under the 1998 Incentive Plan
of LII (filed as Exhibit 10.6 to LII's Current Report on Form 8-K filed on December 13, 2005 and
incorporated herein by reference).
10.16* Form of Non-Employee Director Stock Appreciation Rights Agreement under the 1998 Incentive
Plan of LII (filed as Exhibit 10.7 to LII's Current Report on Form 8-K filed on December 13, 2005
and incorporated herein by reference).
10.17* Lennox International Inc. Profit Sharing Restoration Plan (filed as Exhibit 10.9 to LII's Registration
Statement on Form S-1 (Registration No. 333-75725) filed on April 6, 1999 and incorporated herein
by reference).
10.18* Lennox International Inc. Supplemental Executive Retirement Plan (filed as Exhibit 10.10 to LII's
Registration Statement on Form S-1 (Registration No. 333-75725) filed on April 6, 1999 and
incorporated herein by reference).
10.19* Lennox International Inc. Non-employee Directors' Compensation and Deferral Plan (filed as
Exhibit 10.22 to LII's Annual Report on Form 10-K for the year ended December 31, 2002 and
incorporated herein by reference).
10.20* Amendment to the Lennox International Inc. Non-employee Directors' Compensation and Deferral
Plan, dated May 17, 2002 (filed as Exhibit 10.23 to LII's Annual Report on Form 10-K for the year
ended December 31, 2002 and incorporated herein by reference).
96
Exhibit
Number
Exhibit Name
10.21* Form of Indemnification Agreement entered into between LII and certain executive officers and
directors of LII (filed as Exhibit 10.15 to LII's Registration Statement on Form S-1 (Registration
No. 333-75725) filed on April 6, 1999 and incorporated herein by reference).
10.22* Form of Employment Agreement entered into between LII and certain executive officers of LII
(filed as Exhibit 10.1 to LII's Quarterly Report on Form 10-Q for the quarter ended September 30,
2000 and incorporated herein by reference).
10.23* Form of Amended and Restated Change of Control Employment Agreement entered into between
LII and certain executive officers of LII (filed as Exhibit 10.2 to LII's Quarterly Report on
Form 10-Q for the quarter ended September 30, 2000 and incorporated herein by reference).
10.25
10.24* Form of Change of Control Employment Agreement entered into between LII and each of Susan K.
Carter and William F. Stoll, Jr. (filed as Exhibit 10.1 to LII's Current Report on Form 8-K filed on
August 31, 2005 and incorporated herein by reference).
Second Amended and Restated Credit Agreement, dated July 8, 2005, among LII, Bank of America,
N.A., as administrative agent, JPMorgan Chase Bank, N.A., as syndication agent, Banc of America
Securities LLC and J.P. Morgan Securities, Inc., as Joint Lead Arrangers, and the other Lenders
party thereto (filed as Exhibit 10.1 to LII's Current Report on Form 8-K filed on July 12, 2005 and
incorporated herein by reference).
Second Amended and Restated Pledge Agreement, dated July 8, 2005, between LII and Bank of
America, N.A., as collateral agent for itself and other creditors of LII under the Second Amended
and Restated Credit Agreement (filed as Exhibit 10.2 to LII's Current Report on Form 8-K filed on
July 12, 2005 and incorporated herein by reference).
10.26
10.27* Summary of Fiscal 2006 Target Short-Term Incentive Percentages for the Named Executive
Officers of LII (filed as Exhibit 10.1 to LII's Current Report on Form 8-K filed on December 13,
2005 and incorporated herein by reference).
10.28* Summary of Fiscal 2006 Annual Compensation for the Non-Employee Members of the Board of
Directors of LII (filed as Exhibit 10.2 to LII's Current Report on Form 8-K filed on December 13,
2005 and incorporated herein by reference).
Subsidiaries of LII (filed herewith).
Consent of KPMG LLP (filed herewith).
Certification of the principal executive officer (filed herewith).
Certification of the principal financial officer (filed herewith).
Certification of the principal executive officer and the principal financial officer of the Company
pursuant to 18 U.S.C. Section 1350 (filed herewith).
21.1
23.1
31.1
31.2
32.1
* Management contract or compensatory plan or arrangement.
97
Corporate Information
Annual Meeting
Our annual shareholders meeting will be held
on April 20, 2006 at 9:00 a.m. local time. Any
shareholder with proper identification may attend.
The meeting will be held at:
University of Texas at Dallas
School of Management
Southeast corner of Drive A and University Parkway
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
e-mail: investor@lennoxintl.com
Stock Exchange
Lennox International’s trading symbol is LII.
The common stock of LII has traded on the
New York Stock Exchange since July 29, 1999.
SEC Filings
A copy of the Lennox International Inc. Annual
Report on Form 10-K and other reports filed with the
Securities and Exchange Commission for 2005 are
available through our corporate website or will be
furnished, without charge, on written request to:
Lennox International Investor Relations
P.O. Box 799900
Dallas, TX 75379-9900
Transfer Agent and Registrar
Mellon Investor Services is Lennox International’s
Transfer Agent. All inquiries should be directed to:
Lennox International Inc.
c/o Mellon Investor Services
P.O. Box 3315
South Hackensack, NJ
07606-1915
LII stockholders can access their account for auto-
mated information 24 hours a day, 7 days a week
by dialing 1-800-797-5603.
Independent Auditors
KPMG LLP
Dallas, TX
Dividend Information
In recent years, Lennox International has declared
dividends four times a year. The amount and timing
of dividend payments are determined by our board
of directors.
Forward-Looking Statements
This annual report contains forward-looking state-
ments within the meaning of the Private Securities
Litigation Reform Act of 1995. These statements are
subject to numerous risks and uncertainties that
could cause actual results to differ materially from
such statements. For information concerning these
risks and uncertainties, see Lennox International’s
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.
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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 us at
www.lennoxinternational.com.
2140 Lake Park Blvd.
Richardson, TX 75080
www.lennoxinternational.com