Lennox International Inc.
2010 Annual Report
Innovation.
Productivity.
Performance.
major new innovative products for growth
reduced cost structure
transformational investments in the business
growth markets with significant pent-up demand
disciplined use of free cash flow
4000
3500
3000
2500
2000
1500
1000
500
0
8
7
6
5
4
nYSE: LII
2
6
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4
,
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6
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2007 2008
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2010
REVENUE [$ in millions]
%
7
.
7
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5
.
7
%
0
.
7
%
0
.
7
%
8
.
5
4000
3500
3000
2500
2000
4000
1500
3500
3
lennox international inc.
Through our subsidiaries, Lennox International Inc. (LII) is a leading provider of climate control
solutions for the heating, air conditioning, and refrigeration markets around the world. We have
built our business on a heritage of integrity and innovation dating back to 1895. Today we are
focused on four core businesses: Residential Heating & Cooling, Commercial Heating & Cooling,
Service Experts, and Refrigeration. Our employees are dedicated to providing innovative products,
trusted brands, unsurpassed quality, and responsive service.
2007 2008
500
2500
0
2000
1000
3000
2006
2009
2010
1500
1
2
0
SEGMENT PROFIT MARGIN
1000
4,000
3,500
3,000
2,500
2,000
1,500
1,000
500
0
8
7
6
5
4
3
2
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500
0
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9
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$
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1
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$
2006
2007 2008
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50
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50
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2
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2006
2007 2008
2009
2010
4000
3500
3000
2500
2000
4,000
1500
3,500
1000
3,000
500
2,500
0
2,000
REVENUE [$ in millions]
1,500
1,000
500
0
8
7
6
5
4
8
3
7
2
6
1
5
0
4
2006
2007 2008
2009
2010
REVENUE [$ in millions]
%
7
.
7
%
5
.
7
%
7
.
7
%
5
.
7
%
0
.
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8
.
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8
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2006
2007 2008
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SHARE PRICE
3
SEGMENT PROFIT MARGIN
3
2
1
0
50
40
30
50
20
40
10
30
0
20
10
0
F i n a n c i a l h i g h l i g h t S
(in millions, except per share data)
StatEmEntS oF opErationS Data
Net Sales
Operational Income From Continuing Operations
Income From Continuing Operations
Net Income
Diluted Earnings Per Share From Continuing Operations
Dividends Per Share
othEr Data
Capital Expenditures
Research and Development Expenses
BalancE ShEEt Data at pErioD EnD
Total Assets
Total Debt
Stockholders’ Equity
Lennox International Inc.
Innovation. Productivity. Performance.
1.
2
1
0
2006
2007 2008
2009
2010
SEGMENT PROFIT MARGIN
For the Years Ended December 31,
1
6
.
0
3
$
2
4
.
1
4
$
4
0
.
9
3
$
9
2
.
2
3
$
2010
2009
2008
2007
2006
$ 3,096.4
$ 2,847.5
$ 3,441.1
$ 3,691.7
190.4
117.1
116.2
2.10
0.60
109.2
61.8
51.1
1.09
0.56
218.6
123.8
122.8
2.12
0.56
264.9
1
6
.
0
3
$
165.7
169.0
2.39
2006
0.53
2007 2008
2.27
2009
0.46
SHARE PRICE
2
4
.
1
4
$
$ 3,662.1
4
0
.
9
3
$
9
2
.
2
3
$
222.7
167.1
166.0
9
2
.
7
4
$
9
2
.
7
4
$
2010
$
45.8
$
49.5
58.8
48.9
$
62.1
46.0
$
70.2
43.6
$
74.8
42.2
2006
2007 2008
2009
2010
$ 1,692.0
$ 1,543.9
$ 1,659.5
$ 1,814.6
SHARE PRICE
$ 1,719.8
319.0
589.7
231.5
604.4
420.4
458.6
207.9
808.5
109.2
804.4
50
40
30
50
20
40
10
30
0
20
10
0
To Our Stockholders
todd m. Bluedorn
richard l. thompson
Delivering strong earnings and cash flow performance in
2010, Lennox International is firmly positioned for success
in growth markets with significant pent-up demand. Without
exception, our end markets returned to growth in 2010—
and we expect growth to continue in 2011.
We’re ready to take advantage. We introduced a host of major new products and made outstanding progress in
enhancing our distribution and manufacturing. We have also aggressively reduced our cost structure and are well
positioned for continued significant margin expansion. While continuing to make transformational investments
in our business, we also are making strategic acquisitions in our core businesses, paying a competitive
dividend, and repurchasing stock—including $144 million in 2010 and $700 million over the last four years.
Total company revenue for 2010 was $3.1 billion, up 9% from the prior year, including a positive 2 point impact
from foreign exchange. Total segment profit margin was up 120 basis points to 7.0%. Diluted earnings per
share from continuing operations on a GAAP basis was $2.10, up 93% from $1.09 in the prior year.
Cash generated from operations for the year was $186 million. The company invested $46 million in capital
assets, resulting in free cash flow of $140 million. Total debt as of December 31, 2010 was $319 million. Total
cash and cash equivalents were $160 million ending the year.
Driven by our employees and our values, we will make the most of market opportunities by continued focus on
our strategic priorities:
innovative product systems and solutions: We introduced a host of new products that won customer accolades
and industry awards in 2010, including four Dealer Design awards from leading industry publication ACHR
News—the most of any manufacturer. These products are also winning in the market with sales: 35% of our
Lennox International Inc.
2010 Annual Report
2.
revenue in 2010 came from products introduced in the past three years, up 10 percentage points from two
years ago.
Expanding on our innovative solutions in refrigeration, we signed an agreement with The Manitowoc Company,
Inc. in December to acquire substantially all the assets of its Kysor/Warren business. The $145 million acquisition
was closed in January 2011. Kysor/Warren is a leading manufacturer of refrigerated systems and display cases
for North American supermarkets. Our refrigeration subsystems, combined with Kysor/Warren’s systems
and display cases, will provide complete solutions using the most advanced technologies to maximize
energy efficiency.
manufacturing and sourcing excellence: We continued ramping up our 300,000-plus sq. ft. Saltillo, Mexico
facility in 2010 and are on track to achieve an annual $20 million in savings exiting 2011. Our global sourcing
strategy continues to provide significant savings, with our spending outside North America increasing from
15% to 40% over the past few years. We saved approximately $30 million in 2010 on top of $20 million in savings
in 2009. We expect to achieve an incremental $30 million of savings in 2011.
Distribution excellence: Major progress continued on doubling our physical distribution locations in North
America through a new regional distribution network. Six of eight planned regional distribution centers are in
place, with all eight expected by the end of 2011. Sixty-two PartsPlus™ storefronts were in place by the end of
2010, with a total of 100 planned by the end of 2011 and 133 by the end of 2012. We expect a $25 million pre-tax
benefit from this initiative in 2013.
geographic expansion: Our business outside North America improved from roughly breakeven in 2009 to
a 4% operating margin in 2010. After realigning organizations and distribution, as well as restructuring our
factories, we are confident this business is well positioned for growth and profitability.
Expense reduction: We have lowered our cost structure by $58 million over the last 4 years through restructuring
actions around the world, and we expect additional savings in 2011. As markets continue to grow, we will
benefit from leverage on our factory fixed cost, with room for significant growth in the coming years without adding
factories. We will benefit from leverage on selling, general, and administrative expenses (SG&A) as we plan for
these expenses to grow at half the rate of revenue growth on a long-term basis. And we are increasingly
focused on other opportunities for productivity improvement with product platform cost reductions and
enhanced freight and logistics operations.
After several challenging years for our industry, our end markets are expected to continue the growth they
began in 2010. Thanks to our strong focus on reducing costs, making transformative investments, developing
innovative products and enhancing our manufacturing and distribution, Lennox International is well positioned
to take advantage of recovering markets and continue to build shareholder value.
todd m. Bluedorn
richard l. thompson
Chief Executive Officer
Chairman of the Board
Lennox International Inc.
Innovation. Productivity. Performance.
3.
L e n n o x I n t e r n a t I o n a L
operates in 4 key businesses
rESiDEntial hEating & cooling
commErcial hEating & cooling
We offer a wide range of home heating
We provide indoor comfort solutions
and cooling equipment for both the
for low-rise office buildings, schools,
residential replacement and new
restaurants, retail establishments, and
construction markets in the United
other light commercial applications in
States and Canada. Our product lines
the Americas and Europe. Products
include air conditioners, furnaces, heat
include packaged rooftop units, split
pumps, hearth products, and indoor
systems, chillers, commercial controls,
air quality equipment that improve
indoor air quality systems, and related
indoor comfort.
equipment.
Lennox International Inc.
2010 Annual Report
4.
17%
Refrigeration
19%
Service
45%
Residential
19%
Commercial
22%
Refrigeration
6%
Service
25%
Commercial
47%
Residential
2010 REVENUE(1)
(1) Excluding eliminations
2010 SEGMENT PROFIT(2)
(2) Excluding eliminations and unallocated corporate expense
SErvicE ExpErtS
rEFrigEration
We are the service company consumers
We are a leading provider of commercial
trust for their heating, cooling, and indoor
refrigeration systems in markets around
air quality needs. We operate dealer
the world. Our products are primarily used
serv ice centers in the United States and
to preserve food and other perishables
Canada that sell, install, maintain, and
in supermarkets, convenience stores,
service heating and cooling equipment
restaurants, warehouses, and distribution
for residential and light commercial
centers, in addition to other applications
applications.
such as data centers, phar ma ceutical,
and industrial process cooling.
Lennox International Inc.
Innovation. Productivity. Performance.
5.
Lennox International Inc.
2010 Annual Report
6.
1
6
8
,
1
$
0
7
6
,
1
$
3
9
4
,
1
3$
9
2
,
1
$
7
1
4
,
1
$
2006
2007 2008
2009
2010
2,000
1,500
1,000
500
0
%
4
.
1
%1
4
.
0
%1
8
.
9
%
3
.
9
%
6
.
8
2006
2007 2008
2009
2010
12
10
8
6
4
2
0
20%
New
Construction
80%
Replacement
REVENUE [$ in millions]
SEGMENT PROFIT MARGIN
2010 BUSINESS MIX
r e s I d e n t I a L h e a t I n g & c o o L I n g
2000
1500
1000
500
0
12
the residential market is expected to continue its recovery in 2011, and lii residential is
ready to capitalize on our investments in innovative products. We successfully introduced
a host of exciting new products that are winning industry awards, growing sales in the
marketplace, and minimizing the impact on our environment. among other prestigious
awards, lennox received the 2011 EnErgY Star® award for Excellence in Energy Efficient
product Design.
10
8
6
harnessing solar power for heating, cooling, and other home energy needs, our SunSource®
home Energy System is only the beginning of a new era in sustainable home comfort. the
most efficient lennox air conditioners and heat pumps are now manufactured “solar ready.”
4
2
Featuring a compact 33-inch design for use in a wide variety of applications, our new gas
furnace platform is a winner with dealers and homeowners. precise comfort™ technology
automatically adjusts heat and airflow in increments as small as 1% with an industry-leading
98.2% efficiency rating.
0
tying the system together, the icomfort touch® programmable thermostat uses an intuitive
touchscreen interface to make installation and comfort adjustments quick and easy. Winner
of an ACHR News Dealer Design award in 2010, the simplicity of the icomfort touch makes
it easier for homeowners to customize their indoor environments and provide more
energy-efficient comfort.
continuing to support these new products through an enhanced distribution strategy, we
are well on our way to completing a multi-year initiative to more than double our physical
distribution locations across north america. Six of our eight planned regional distribution
centers are in place, with all eight expected to be in operation by the end of 2011. our
partsplus wholesale store initiative grew to 62 stores by the end of 2010, with 100 expected
by the end of 2011 and 133 stores planned to be in place by the end of 2012. We expect our
new distribution network to increase our same-day/next-day service levels to 85%, drive
improvements in logistics productivity and cost savings, and increase market share in an
industry where physical distribution drives market gains.
Led by successful launches of our SunSource®
Home Energy System, icomfort Touch®
thermostat and compact gas furnace
platform, our new products are winning
industry awards and growing sales in the
marketplace.
Lennox International Inc.
Innovation. Productivity. Performance.
7.
For more information on individual product claims, refer
to Lennox advertisements or visit www.lennox.com.
Lennox International Inc.
2010 Annual Report
8.
1000
800
600
400
200
0
5
7
8
$
5
3
8
$
1
5
7
$
0
2
6
$
5
9
5
$
2006
2007 2008
2009
2010
1,000
800
600
400
200
0
%
5
.
1
1
%
2
.
1
1
%
2
.
1
1
%
7
.
9
%
3
.
8
2006
2007 2008
2009
2010
12
10
8
6
4
2
0
30%
Europe
70%
North America
REVENUE [$ in millions]
SEGMENT PROFIT MARGIN
2010 GEOGRAPHIC
REVENUE MIX
c o M M e r c I a L h e a t I n g & c o o L I n g
led by successful launches of our Energence® and landmark® rooftop products, enhanced
factory productivity and successful execution of growth strategies in targeted vertical markets,
2010 was an outstanding year for our commercial business.
10
12
8
Featuring our advanced prodigy® controller to provide real-time diagnostics and the
color-keyed SmartWire™ system to reduce installation and service time, our new Energence®
3- to 50-ton rooftop product line won industry awards and sales. it was selected as a gold
product winner by Consulting-Specifying Engineer magazine, and won a Silver award as part
of the prestigious Dealer Design awards sponsored by ACHR News. We introduced the
Energence product across north america through an exciting demonstration truck
campaign, taking the product directly to customers so they could experience the unit’s
award-winning design first hand.
4
6
2
0
We also launched our competitive landmark® rooftop line, focusing on the significant
growth potential in the emergency replacement market. the Energence and landmark
products led the way in a successful redesign of 70% of our existing product line, launching
on time and meeting cost and performance targets.
We continued to grow our national accounts business and are providing the comfort
systems for the majority of big box retail square footage in north america. also focusing on
growth in key vertical markets, our sales to governments and schools grew by 50% in 2010—
and we are targeting significant additional growth in these markets for 2011. thanks to
streamlining our distribution and restructuring our factory footprint, our European business
returned to growth and profitability in 2010 and is well-positioned for the future.
Featuring our advanced Prodigy®
controller, our award-winning
Energence® rooftop line exceeds
industry efficiency minimums by
up to 30 percent.
Lennox International Inc.
Innovation. Productivity. Performance.
9.
For more information on individual product claims, refer
to Lennox advertisements or visit www.lennox.com.
Lennox International Inc.
2010 Annual Report
10.
0
9
5
$
2006
2007 2008
2009
2010
800
700
600
500
400
300
200
100
0
%
3
.
3
2006
2007 2008
2009
2010
4.0
3.5
3.0
2.5
2.0
1.5
1.0
0.5
0
25%
Commercial
75%
Residential
REVENUE [$ in millions]
SEGMENT PROFIT MARGIN
2010 CUSTOMER MIX
s e r v I c e e x p e r t s
4.0
Service Experts continues to drive success in the local markets we serve by effectively
leveraging our national resources to increase efficiency and productivity.
3.5
3.0
Focusing on improving service technician efficiency and sales, we developed and implemented
technician performance measurement systems, highlighting revenue productivity and
efficiency metrics. coupled with communications training and technical certification
programs, the new measurement systems are serving to maximize individual technical and
sales performance. We also continue to further enhance technician productivity, inventory
control and cash flow by utilizing the latest mobile and handheld technologies.
1.0
2.5
1.5
2.0
0.5
aiming to increase the efficiency and success rate for our initial customer contacts, we
deployed an inbound interactive voice response (ivr) system to assist with calls before
they reach our customer contact center. the ivr reduced the cost per booked call by 7%,
while handling 24% more call volume. the ivr also helped optimize our customers’ experience
by reducing call transfers and immediately directing them to the appropriate Service Experts
department.
0.0
800
700
600
500
400
300
200
100
0
We continue our initiative for natE (north american technical Excellence) certification for
our technicians, with 86% currently certified. natE is the largest non-profit certification
organization supported by our industry, letting homeowners know their equipment is
being serviced by technicians who have thoroughly tested knowledge of hvac service
and installation.
Fuel costs are a significant part of our business, and we are making strides to dramatically
improve fuel efficiency and environmental sustainability. in 2010, we began transitioning our
service fleet to more fuel-efficient vehicles. We intend to transition at least 50% of our fleet
to more fuel-efficient vehicles over the next five years.
We successfully implemented several systems
and programs focused on enhancing the success
rate of our initial customer contacts and the
efficiency and sales of our service technicians.
Lennox International Inc.
Innovation. Productivity. Performance.
11.
Lennox International Inc.
2010 Annual Report
12.
800
700
600
500
400
300
200
100
0
1
5
5
$
2006
2007 2008
2009
2010
%
1
.
1
1
2006
2007 2008
2009
2010
12
10
8
6
4
2
0
REVENUE [$ in millions]
SEGMENT PROFIT MARGIN
r e f r I g e r a t I o n
17%
Europe
36%
Asia Pacific
40%
North America
7%
South America
2010 GEOGRAPHIC
REVENUE MIX
10
12
our refrigeration business continues to excel in providing sustainable innovative system
solutions to our customers around the world. We have expanded the use of microchannel
heat exchanger technology throughout our north american, European, asian, and australian
businesses. our innovative ½-6 horsepower air-cooled condensing unit solutions have been
honored by various customers and influential industry publications, including a Silver
Dealer Design award from ACHR News. We continue to expand this technology into new
applications, including large remote condensers with reduced refrigerant of up to 70% and
increased energy performance for supermarket refrigeration systems.
4
6
8
another example of our global sustainable product development is the launch of co2 systems
in our north american, European, and australian businesses, utilizing a natural refrigerant
to help our supermarket customers reduce their global warming impact by more than
50%. We continue to work with our customers to develop the optimal life cycle climate
performance of their refrigeration systems.
2
0
800
700
600
500
400
300
200
100
0
We continue to invest in operational excellence initiatives across our global operations
focused on improving employee safety, as well as improving productivity and quality
performance for our customers. as part of these initiatives, we further streamlined our
manufacturing operations by closing our parets, Spain, and milperra, australia operations,
while continuing to make investments in our china business.
in December 2010, we signed an agreement to acquire substantially all the assets of Kysor/
Warren, a leading manufacturer of refrigerated systems and display cases for north
american supermarkets, and completed the transaction in January 2011. By combining
Kysor/Warren’s innovation and service with our industry-leading refrigeration subsystems,
we can now provide a complete refrigeration solution using the most advanced technologies
that maximize energy efficiency, environmental sustainability, and economic value to
supermarket customers.
Through our acquisition of Kysor/Warren and
launches of new products utilizing innovative
microchannel and CO2 technologies, we can
provide complete refrigeration solutions
optimizing energy efficiency, environmental
sustainability, and economic value.
Lennox International Inc.
Innovation. Productivity. Performance.
13.
For more information on individual product claims, refer to Heatcraft
Worldwide Refrigeration advertisements or visit www.heatcraftrpd.com.
l E n n o x i n t E r n a t i o n a l
Board of Directors and
Management Team
Board of Directors
richard l. thompson
Chairman of the Board
Lennox International Inc.
todd m. Bluedorn
Chief Executive Officer
Lennox International Inc.
James J. Byrne
Chairman
Byrne Technology Partners, Ltd.
Committees: 3, 4
Janet K. cooper
Former Senior Vice President and Treasurer
Qwest Communications International Inc.
Committees: 1, 4
c. l. (Jerry) henry
Former Chairman, President and
Chief Executive Officer
Johns Manville Corporation
Committees: 1, 2
John E. major
Chairman
Broadcom Corporation
Committees: 1, 3
John W. norris, iii
Chair
Environmental Funders Partnership
Committees: 2, 4
paul W. Schmidt
Former Corporate Controller
General Motors Corporation
Committees: 1, 2
terry D. Stinson
Chief Executive Officer
Stinson Consulting, LLC
Committees: 2, 3
Jeffrey D. Storey, m.D.
President
Cheyenne Women’s Clinic
Committees: 3, 4
gregory t. Swienton
Chairman and Chief Executive Officer
Ryder System, Inc.
Committees: 3, 4
management team
todd m. Bluedorn
Chief Executive Officer
robert W. hau
Executive Vice President and Chief Financial Officer
prakash Bedapudi
Executive Vice President and Chief Technology Officer
harry J. Bizios
Executive Vice President, President and Chief Operating Officer
LII Commercial Heating & Cooling
michael J. Blatz
Executive Vice President, President and Chief Operating Officer
Service Experts
James W. Borzi
Vice President, Operations
David W. moon
Executive Vice President, President and Chief Operating Officer
Worldwide Refrigeration
Daniel m. Sessa
Executive Vice President and Chief Human Resources Officer
John D. torres
Executive Vice President, Chief Legal Officer and Secretary
Douglas l. Young
Executive Vice President, President and Chief Operating Officer
LII Residential Heating & Cooling
roy a. rumbough, Jr.
Vice President, Controller, and Chief Accounting Officer
Committee Legend (bold indicates chairperson)
1: Audit
2: Board Governance
3: Compensation & Human Resources
4: Public Policy
Lennox International Inc.
2010 Annual Report
14.
2010
F o r m
1 0 - K
¥
n
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, 2010
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
OR
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 whether the registrant has submitted electronically and posted on its corporate Web site, if
any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T(§232.405 of
this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post
such files). Yes ¥
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. n
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer,
or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting
company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer ¥
Accelerated filer n
Non-accelerated filer n
(Do not check if a smaller reporting company)
Smaller reporting company 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, 2010, the aggregate market value of the common stock held by non-affiliates of the registrant was
approximately $2,219,266,287 based on the closing price of the registrant’s common stock on the New York Stock
Exchange on such date. As of February 7, 2011, there were 53,720,904 shares of the registrant’s common stock
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant’s Definitive Proxy Statement to be filed with the Securities and Exchange Commission in
connection with the registrant’s 2011 Annual Meeting of Stockholders to be held on May 12, 2011 are incorporated by
reference into Part III of this report.
LENNOX INTERNATIONAL INC.
FORM 10-K
For the Fiscal Year Ended December 31, 2010
INDEX
PART I
ITEM 1.
Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
ITEM 1A. Risk Factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
ITEM 1B. Unresolved Staff Comments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
ITEM 2.
Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
ITEM 3.
(Removed and Reserved) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
ITEM 4.
PART II
ITEM 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Selected Financial Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
ITEM 6.
ITEM 7. Management’s Discussion and Analysis of Financial Condition and Results of
Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
ITEM 7A. Quantitative and Qualitative Disclosures about Market Risk . . . . . . . . . . . . . . . . . . . . . .
Financial Statements and Supplementary Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
ITEM 8.
Changes in and Disagreements With Accountants on Accounting and Financial
ITEM 9.
Disclosure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
ITEM 9A. Controls and Procedures. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
ITEM 9B. Other Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
PART III
ITEM 10. Directors, Executive Officers and Corporate Governance . . . . . . . . . . . . . . . . . . . . . . . . .
ITEM 11. Executive Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
ITEM 12.
Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
ITEM 13. Certain Relationships and Related Transactions, and Director Independence. . . . . . . . . . .
Principal Accounting Fees and Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
ITEM 14.
Page
1
10
14
15
16
16
16
19
19
37
38
105
105
105
105
105
106
106
106
PART IV
ITEM 15. Exhibits, Financial Statement Schedules . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
106
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
SCHEDULE II — VALUATION AND QUALIFYING ACCOUNTS AND RESERVE . . .
INDEX TO EXHIBITS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
107
109
110
i
PART I
Item 1. Business
References in this Annual Report on Form 10-K to “we,” “our,” “us,” “LII” or the “Company” refer to Lennox
International Inc. and its subsidiaries, unless the context requires otherwise.
The Company
Through our subsidiaries, we are a leading global provider of climate control solutions. We design, man-
ufacture and market a broad range of products for the heating, ventilation, air conditioning and refrigeration
(“HVACR”) markets. We have leveraged our expertise to become an industry leader known for innovation, quality
and reliability. Our products and services are sold through multiple distribution channels under well-established
brand names including “Lennox,” “Armstrong Air,” “Ducane,” “Bohn,” “Larkin,” “Advanced Distributor Products,”
“Service Experts” and others.
Shown below are our four business segments, the key products and brand names within each segment and
2010 net sales by segment. Segment financial data for 2010, 2009 and 2008, including financial information about
foreign and domestic operations, is included in Note 19 of the Notes to our Consolidated Financial Statements in
“Item 8. Financial Statements and Supplementary Data” and is incorporated herein by reference.
Segment
Products/Services
Brand Names
Residential Heating &
Cooling
Commercial Heating &
Cooling
Service Experts
Refrigeration
Eliminations
Furnaces, air conditioners,
heat pumps, packaged
heating and cooling systems,
indoor air quality equipment,
pre-fabricated fireplaces,
freestanding stoves
Unitary heating and air
conditioning equipment,
applied systems
Sales, installation and service
of residential and light
commercial heating and
cooling equipment
Condensing units, unit
coolers, fluid coolers, air
cooled condensers, air
handlers, process chillers,
compressorized racks
Lennox, Armstrong Air,
Ducane, Aire-Flo, AirEase,
Concord, Magic-Pak,
Advanced Distributor
Products, Superior, Country
Stoves, Security Chimneys
Lennox, Allied Commercial
Service Experts, various
individual service center
names
Heatcraft Worldwide
Refrigeration, Bohn, Larkin,
Climate Control, Chandler
Refrigeration, Friga-Bohn,
HK Refrigeration, Hyfra,
Kirby, Frigus-Bohn
Total
2010 Net Sales
(In millions)
$1,417.4
620.0
590.3
550.9
(82.2)
$3,096.4
We were founded in 1895 in Marshalltown, Iowa when Dave Lennox, the owner of a machine repair business
for the railroads, successfully developed and patented a riveted steel coal-fired furnace, which was substantially
more durable than the cast iron furnaces used at that time. Manufacturing these furnaces grew into a significant
business and was diverting the Lennox Machine Shop from its core focus. As a result, in 1904, a group of investors
headed by D.W. Norris bought the furnace business and named it the Lennox Furnace Company. We reincorporated
as a Delaware corporation in 1991 and completed our initial public offering in 1999.
1
Products and Services
Residential Heating & Cooling
Heating & Cooling Products. We manufacture and market a broad range of furnaces, air conditioners, heat
pumps, packaged heating and cooling systems, accessories to improve indoor air quality, replacement parts and
related products for both the residential replacement and new construction markets in North America. These
products are available in a variety of designs and efficiency levels and at a range of price points, and are intended to
provide a complete line of home comfort systems. We believe that by maintaining a broad product line marketed
under multiple brand names, we can address different market segments and penetrate multiple distribution
channels. We are building a network of PartsPlus stores across the United States that provide an easy access
solution for contractors and independent dealers to obtain universal service and replacement parts, supplies,
convenience items, tools, Lennox equipment and OEM parts.
The “Lennox” and “Aire-Flo” brands are sold directly to a network of approximately 7,000 independent
installing dealers, making us one of the largest wholesale distributors of residential heating and air conditioning
products in North America. The “Armstrong Air,” “Ducane,” “AirEase,” “Concord,” “Magic-Pak” and “Advanced
Distributor Products” brands are sold through independent distributors.
Our Advanced Distributor Products operation builds evaporator coils and air handlers under the “Advanced
Distributor Products” brand, as well as the “Lennox,” “Armstrong Air,” “AirEase,” “Concord” and “Ducane”
brands. In addition to supplying us with components for our heating and cooling systems, Advanced Distributor
Products also sells evaporator coils to our competitors for use in their heating and cooling products.
Hearth Products. Our hearth products include factory-built gas, wood-burning and electric fireplaces; free
standing wood-burning, pellet and gas stoves; wood-burning, pellet and gas fireplace inserts; gas logs, venting
products and accessories. Many of our fireplaces are built with a blower or fan option and are efficient heat sources
as well as attractive amenities to the home. We currently market our hearth products under the “Lennox,”
“Superior,” “Country Collection” and “Security Chimneys” brand names.
Commercial Heating & Cooling
North America.
In North America, we manufacture and sell unitary heating and cooling equipment used in
light commercial applications, such as low-rise office buildings, restaurants, retail centers, churches and schools.
Our product offerings for these applications include rooftop units ranging from 2 to 50 tons of cooling capacity and
split system/air handler combinations, which range from 1.5 to 20 tons of cooling capacity. These products are
distributed primarily through commercial contractors and directly to national account customers. We believe the
success of our products is attributable to their efficiency, design flexibility, total cost of ownership, low life-cycle
cost, ease of service and advanced control technology.
Europe.
In Europe, we manufacture and sell unitary products, which range from 2 to 70 tons of cooling
capacity, and applied systems with up to 200 tons of cooling capacity. Our European products consist of small
package units, rooftop units, chillers, air handlers and fan coils that serve medium-rise commercial buildings,
shopping malls, other retail and entertainment buildings, institutional applications and other field-engineered
applications. We manufacture heating and cooling products in several locations in Europe and market these
products through both direct and indirect distribution channels in Europe, Russia, Turkey and the Middle East.
Service Experts
Approximately 100 company-owned Service Experts dealer service centers provide installation, preventive
maintenance, emergency repair and replacement of heating and cooling systems directly to residential and light
commercial customers throughout the U.S. and Canada. In connection with these services, we sell a wide range of
our manufactured equipment, parts and supplies, and third-party branded products. We focus primarily on service
and replacement opportunities, which we believe are more stable and profitable than new construction in our
Service Experts segment. We also have a growing Lennox National Account Services business that focuses on
providing service and preventive maintenance to commercial national account customers. We use a portfolio of
management procedures and best practices, including standards of excellence for customer service, common
2
information technology systems and financial controls, a national accounting center and an inventory management
program designed to enhance the quality, effectiveness and profitability of operations.
Refrigeration
We manufacture and market equipment for the global commercial refrigeration market under the Heatcraft
Worldwide Refrigeration name. We sell these products to distributors, installing contractors, engineering design
firms, original equipment manufacturers and end-users.
North America. Our commercial refrigeration products for the North American market include condensing
units, unit coolers, fluid coolers, air-cooled condensers, compressor racks and air handlers. These products are sold
for refrigeration applications, primarily to preserve food and other perishables, and are used by supermarkets,
convenience stores, restaurants, refrigerated warehouses and distribution centers. As part of the sale of commercial
refrigeration products, we routinely provide application engineering for consulting engineers, contractors and
others. We also sell products for non-food and various industry applications, such as telecommunications,
dehumidification and medical applications. In January 2011 we completed a transaction with The Manitowoc
Company, Inc. by which we acquired substantially all the assets of its Kysor/Warren business. Kysor/Warren is a
leading manufacturer of refrigerated systems and display cases for supermarkets throughout North America. This
acquisition provides us with a platform for additional business growth by extending the value chain for us directly to
food retail and supermarket customers.
International.
In international markets, we manufacture and market refrigeration products including con-
densing units, unit coolers, air-cooled condensers, fluid coolers, compressor racks and process chillers. We have
manufacturing locations in Germany, France, Australia, New Zealand, Brazil and China. We also own a 50%
common stock interest in a joint venture in Mexico that produces unit coolers, air-cooled condensers, condensing
units and compressor racks of the same design and quality as those manufactured by our U.S. business. This joint
venture product line is complemented with imports from the U.S., which are sold through the joint venture’s
distribution network. We also own an 8% common stock interest in a manufacturer in Thailand that produces
compressors for use in our products and for other HVACR customers.
Business Strategy
Our business strategy is to sustain and expand our premium market position through organic growth and
acquisitions while maintaining our focus on cost reductions to drive margin expansion and support growth in target
business segments. This strategy is supported by five strategic priorities that are underlined by our values and our
people. The five strategic priorities are:
Innovative Product and System Solutions
In all of our markets, we are continually building on our heritage of innovation by developing residential,
commercial, and refrigeration products that give families and business owners more precise control over more
aspects of their indoor environments, while significantly lowering their energy costs.
Manufacturing and Sourcing Excellence
We maintain our commitment to manufacturing and sourcing excellence by driving low-cost assembly through
rationalization of our facilities and product lines, maximizing factory efficiencies, and leveraging our purchasing
power and sourcing initiatives to expand the use of lower-cost components that meet our high-quality requirements.
Distribution Excellence
By investing resources in expanding our distribution network, we are making products available to our
customers in a timely, cost-efficient manner. Additionally, we provide enhanced dealer support through the use of
technology, training, advertising and merchandising.
3
Geographic Expansion
We are growing our international presence by continuing to extend our successful domestic business model
and product knowledge into international markets.
Expense Reduction
Through our cost management initiatives, we are focused on areas to reduce operating, manufacturing, and
administrative costs.
Marketing and Distribution
We utilize multiple channels of distribution and offer different brands at various price points in order to better
penetrate the HVACR markets. Our products and services are sold through a combination of distributors,
independent and company-owned dealer service centers, other installing contractors, wholesalers, manufacturers’
representatives and original equipment manufacturers and to national accounts. Dedicated sales forces and
manufacturers’ representatives are deployed across our business segments and brands in a manner designed to
maximize our ability to service a particular distribution channel. To optimize enterprise-wide effectiveness, we have
active cross-functional and cross-organizational teams coordinating approaches to pricing, product design, dis-
tribution and national account customers.
An example of the competitive strength of our marketing and distribution strategy is in the North American
residential heating and cooling market. We use three distinctly different distribution approaches in this market: the
company-owned distribution system, the independent distribution system and sales made directly to end-users. We
distribute our “Lennox” and “Aire-Flo” brands in a company-owned process directly to independent dealers that
install these heating and cooling products and, in some cases, we sell “Lennox” commercial products directly to
national account customers. We distribute our “Armstrong Air,” “Ducane,” “AirEase,” “Concord,” “Magic-Pak” and
“Advanced Distributor Products” brands through the traditional independent distribution process pursuant to which
we sell our products to distributors who, in turn, sell the products to installing contractors. In addition, we provide
heating and cooling replacement products and services directly to consumers through company-owned Service
Experts dealer service centers.
Over the years, the “Lennox” brand has become synonymous with “Dave Lennox,” a highly recognizable
advertising icon in the heating and cooling industry. We utilize the “Dave Lennox” image in mass media
advertising, as well as in numerous locally produced dealer advertisements, open houses and trade events.
Manufacturing
We operate manufacturing facilities in the U.S. and international locations. We have embraced lean-man-
ufacturing principles, a manufacturing philosophy that reduces waste in manufactured products by shortening the
timeline between the customer order and delivery, accompanied by initiatives designed to achieve high product
quality across our manufacturing operations. In our facilities most impacted by seasonal demand, we manufacture
both heating and cooling products to balance seasonal production demands and maintain a relatively stable labor
force. We are generally able to hire temporary employees to meet changes in demand.
Strategic Sourcing
We rely on various suppliers to furnish the raw materials and components used in the manufacturing of our
products. To maximize our buying effectiveness in the marketplace, our central strategic sourcing group consol-
idates required purchases of materials, components and indirect items across business segments. The goal of the
strategic sourcing group is to develop global strategies for a given component group, concentrate purchases with
three to five suppliers and develop long-term relationships with these vendors. By developing these strategies and
relationships, we leverage our material needs to reduce costs and improve financial and operating performance.
Compressors, motors and controls constitute our most significant component purchases, while steel, copper and
aluminum account for the bulk of our raw material purchases. We own equity interests in joint ventures that
4
manufacture compressors. These joint ventures provide us with compressors for our residential, commercial and
refrigeration businesses.
Our centrally led supplier development group works with selected suppliers to reduce their costs and improve
their quality and delivery performance. We seek to accomplish this by employing the same business excellence
tools utilized by our business segments to drive improvements in the area of lean manufacturing and six sigma, a
disciplined, data-driven approach and methodology for improving quality.
Research and Development and Technology
An important part of our growth strategy is continued investment in research and product development to both
develop new products and make improvements to existing product lines. As a result, we spent an aggregate of
$49.5 million, $48.9 million and $46.0 million on research and development during 2010, 2009 and 2008,
respectively. We operate a global engineering and technology organization that focuses on new technology
invention, product development, and process improvements.
Intellectual property and innovative designs are leveraged across our businesses. We leverage product
development cycle time improvement and product data management systems to commercialize new products
to market more rapidly. We use advanced, commercially available computer-aided design, computer-aided
manufacturing, computational fluid dynamics and other sophisticated design tools to streamline the design and
manufacturing processes. We use complex computer simulations and analyses in the conceptual design phase
before functional prototypes are created.
We also operate a full line of prototype machine equipment and advanced laboratories certified by applicable
industry associations.
Seasonal Nature of Business
Our sales and related segment profit tend to be seasonally higher in the second and third quarters of the year
because summer is the peak season for sales of air conditioning equipment and services in the U.S. and Canada.
Our markets are driven by seasonal weather patterns. HVAC products and services are sold year round, but the
volume and mix of product sales and service change significantly by season. The industry ships roughly twice as
many units during June as it does in December. Overall, cooling equipment represents a substantial portion of the
annual HVAC market. In between the heating season (roughly November through February) and cooling season
(roughly May through August) are periods commonly referred to as shoulder seasons when the distribution channel
transitions its buying patterns from one season to the next. These seasonal fluctuations in mix and volume drive our
sales and related segment profit, resulting in somewhat higher sales in the second and third quarters due to the larger
cooling season relative to the heating season.
Patents and Trademarks
We hold numerous patents that relate to the design and use of our products. We consider these patents
important, but no single patent is material to the overall conduct of our business. We proactively obtain patents to
further our strategic intellectual property objectives. We own or license several trademarks and service marks we
consider important in the marketing of our products and services, including LENNOX», ARMSTRONG AIR»,
DUCANETM, ALLIED COMMERCIALTM, AIRE-FLO», CONCORD», ADP ADVANCED DISTRIBUTOR
PRODUCTS», MAGIC-PAK», HUMIDITROLTM, PRODIGY», HEATCRAFT» WORLDWIDE REFRIGERA-
TION, BOHN», CHANDLER REFRIGERATION», KIRBYTM AND LARKIN», among others. We protect our
marks through national registrations and common law rights.
Competition
Substantially all markets in which we participate are highly competitive. The most significant competitive
factors we face are product reliability, product performance, service and price, with the relative importance of these
factors varying among our businesses. Listed below are some of the companies we view as significant competitors
5
in each of our four business segments, with relevant brand names, when different from the company name, shown in
parentheses.
(cid:129) Residential Heating & Cooling — United Technologies Corp. (Carrier, Bryant, Tempstar, Comfortmaker,
Heil, Arcoaire); Goodman Global, Inc. (Goodman, Amana); Ingersoll-Rand plc (Trane, American Stan-
dard); Paloma Co., Ltd. (Rheem, Ruud); Johnson Controls, Inc. (York, Weatherking); Daiken; Nordyne
(Maytag, Westinghouse, Frigidaire, Tappan, Philco, Kelvinator, Gibson); HNI Corporation (Heatilator,
Heat-n-Glo); and Monessen Hearth Company (Majestic).
(cid:129) Commercial Heating & Cooling — United Technologies Corp. (Carrier); Ingersoll-Rand plc (Trane);
Johnson Controls, Inc. (York); AAON, Inc.; and Daikin Industries, Ltd. (McQuay).
(cid:129) Service Experts — Local independent dealers; dealers owned by utility companies, including, for example,
Direct Energy; and national HVAC service providers such as Sears and American Residential Services.
(cid:129) Refrigeration — United Technologies Corp.
(Carrier); Ingersoll-Rand plc (Hussmann); Emerson Electric
Co. (Copeland); GEA Group (Kuba, Searle, Goedhart); and Alfa Laval (Alfa Laval, Fincoil, Helpman).
Employees
As of December 31, 2010, we employed approximately 11,800 employees, of whom approximately 4,800
were salaried and 7,000 were hourly. The number of hourly workers we employ may vary in order to match our
labor needs during periods of fluctuating demand. Approximately 2,400 employees are represented by unions. We
believe our relationships with our employees and with the unions representing our employees are good and
currently we do not anticipate any material adverse consequences resulting from negotiations to renew any
collective bargaining agreements.
Environmental Regulation
Our operations are subject to evolving and often increasingly stringent international, federal, state and local
laws and regulations concerning the environment. Environmental laws that affect or could affect our domestic
operations include, among others, the National Appliance Energy Conservation Act of 1987, as amended
(“NAECA”), the Energy Policy Act, the Clean Air Act, the Clean Water Act, the Resource Conservation and
Recovery Act, the Comprehensive Environmental Response, Compensation and Liability Act, the National
Environmental Policy Act, the Toxic Substances Control Act, any regulations promulgated under these acts
and various other international, federal, state and local laws and regulations governing environmental matters. We
believe we are in substantial compliance with such existing environmental laws and regulations.
Energy Efficiency. The U.S. Department of Energy is conducting rule makings to evaluate the current
minimum efficiency standards for residential heating and cooling products. On December 19, 2007, federal
legislation was enacted authorizing the U.S. Department of Energy to study the establishment of regional efficiency
standards for residential furnaces, air conditioners and heat pumps. We anticipate that the U.S. Department of
Energy will establish regional standards for furnaces and air conditioners as part of the rulemakings. We have
established a process that we believe will allow us to offer new products that meet or exceed these new standards in
advance of implementation. Similar new standards are being promulgated for commercial air conditioning and
refrigeration equipment. We are actively involved in U.S. Department of Energy and Congressional activities
related to energy efficiency standards. We are prepared to have compliant product in place in advance of the
implementation of all such regulations being considered by the U.S. Department of Energy or Congress.
Refrigerants. The use of hydrochlorofluorocarbons, “HCFCs,” and hydroflurocarbons “HFCs” as refriger-
ants for air conditioning and refrigeration equipment is common practice in the HVACR industry. We have
complied with applicable rules and regulations governing the use of HCFCs and HFCs. The United States Congress,
Environmental Protection Agency and other international regulatory bodies are considering steps to phase down the
future use of HFCs in HVACR products. We have been an active participant in the ongoing international and
domestic dialogue on this subject and believe we are well positioned to react in a timely manner to any changes in
the regulatory landscape. In addition, we are taking proactive steps to implement responsible use principles and
6
guidelines with respect to limiting refrigerants from escaping into the atmosphere throughout the life span of our
HVACR equipment.
Remediation Activity.
In addition to affecting our ongoing operations, applicable environmental laws can
impose obligations to remediate hazardous substances at our properties, at properties formerly owned or operated
by us and at facilities to which we have sent or send waste for treatment or disposal. We are aware of contamination
at some of our facilities; however, based on facts presently known, we do not believe that any future remediation
costs at such facilities will be material to our results of operations. For more information, see Note 10 in the Notes to
our Consolidated Financial Statements.
In the past, we have received notices that we are a potentially responsible party along with other potentially
responsible parties in Superfund proceedings under the Comprehensive Environmental Response, Compensation
and Liability Act for cleanup of hazardous substances at certain sites to which the potentially responsible parties are
alleged to have sent waste. Based on the facts presently known, we do not believe environmental cleanup costs
associated with any Superfund sites where we have received notice that we are a potentially responsible party will
be material.
European WEEE and RoHS Compliance.
In the European marketplace, electrical and electronic equipment
is required to comply with the Directive on Waste Electrical and Electronic Equipment (“WEEE”) and the Directive
on Restriction of Use of Certain Hazardous Substances (“RoHS”). WEEE aims to prevent waste by encouraging
reuse and recycling and RoHS restricts the use of six hazardous substances in electrical and electronic products. All
HVACR products and certain components of such products “put on the market” in the EU (whether or not
manufactured in the EU) are potentially subject to WEEE and RoHS. Because all HVACR manufacturers selling
within or from the EU are subject to the standards promulgated under WEEE and RoHS, we believe that neither
WEEE nor RoHS uniquely impact us as compared to such other manufacturers. Similar directives are being
introduced in other parts of the world, including the U.S. For example, California, China and Japan have all adopted
unique versions of RoHS possessing similar intent. We are actively monitoring the development of such directives
and believe we are well positioned to comply with such directives in the required time frames.
Available Information
Our web site address is www.lennoxinternational.com. We make available, free of charge through our web
site, our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and
amendments to those reports filed or furnished pursuant to the Securities Exchange Act of 1934, as amended,
as soon as reasonably possible after such material is electronically filed with, or furnished to, the Securities and
Exchange Commission. The information on our web site is not a part of, or incorporated by reference into, this
annual report on Form 10-K.
You can also read and copy any document that we file, including this Annual Report on Form 10-K, at the
Securities and Exchange Commission’s Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549.
Call the Securities and Exchange Commission at 1-800-SEC-0330 for information on the operation of the Public
Reference Room. In addition, the Securities and Exchange Commission maintains an Internet site at www.sec.gov
that contains reports, proxy and information statements, and other information regarding issuers, including Lennox
International, that file electronically with the Securities and Exchange Commission.
7
Executive Officers of the Company
Our executive officers, their present positions and their ages are as follows:
Name
Age
Position
Todd M. Bluedorn . . . . . . . . . . . . . . . . .
Prakash Bedapudi . . . . . . . . . . . . . . . . .
47 Chief Executive Officer
44 Executive Vice President and Chief Technology
Harry J. Bizios . . . . . . . . . . . . . . . . . . .
Officer
60 Executive Vice President and President and Chief
Operating Officer, LII Commercial Heating &
Cooling
Michael J. Blatz . . . . . . . . . . . . . . . . . .
45 Executive Vice President and President and Chief
Operating Officer, Service Experts
James W. Borzi . . . . . . . . . . . . . . . . . . .
Robert W. Hau . . . . . . . . . . . . . . . . . . .
48 Vice President, Operations
45 Executive Vice President and Chief Financial
Officer
David W. Moon. . . . . . . . . . . . . . . . . . .
49 Executive Vice President and President and Chief
Operating Officer, LII Worldwide Refrigeration
Daniel M. Sessa . . . . . . . . . . . . . . . . . .
46 Executive Vice President and Chief Human
Resources Officer
John D. Torres. . . . . . . . . . . . . . . . . . . .
52 Executive Vice President, Chief Legal Officer and
Douglas L. Young . . . . . . . . . . . . . . . . .
Secretary
48 Executive Vice President and President and Chief
Operating Officer, LII Residential Heating &
Cooling
Roy A. Rumbough, Jr.
. . . . . . . . . . . . .
55 Vice President, Controller and Chief Accounting
Officer
The following biographies describe the business experience of our executive officers:
Todd M. Bluedorn became Chief Executive Officer and was elected to our Board of Directors in April 2007.
Mr. Bluedorn previously served in numerous senior management positions for United Technologies since 1995,
including President, Americas — Otis Elevator Company beginning in 2004; President, North America — Com-
mercial Heating, Ventilation and Air Conditioning for Carrier Corporation beginning in 2001; and President,
Hamilton Sundstrand Industrial beginning in 2000. He began his professional career with McKinsey & Company in
1992, after receiving an MBA from Harvard University in 1992 and serving in the United States Army as a combat
engineer officer and United States Army Ranger from 1985 to 1990. He also holds a BS in Electrical Engineering
from the United States Military Academy at West Point. Mr. Bluedorn currently serves on the board of directors of
Eaton Corporation, a diversified industrial manufacturer.
Prakash Bedapudi became Executive Vice President and Chief Technology Officer in July 2008. He had
previously served as vice president, global engineering and program management for Trane Inc. Commercial
Systems from 2006 through 2008, and as vice president, engineering and technology for Trane’s Residential
Systems division from 2003 through 2006. Prior to his career at Trane, Mr. Bedapudi served in senior engineering
leadership positions for GE Transportation Systems, a division of General Electric Company, and for Cummins
Engine Company. He holds a BS in Mechanical/Automotive Engineering from Karnataka University, India and an
MS in Mechanical/Aeronautical Engineering from the University of Cincinnati.
Harry J. Bizios was appointed Executive Vice President and President and Chief Operating Officer of LII’s
Commercial Heating & Cooling segment in October 2006. Mr. Bizios had previously served as Vice President and
General Manager, LII Worldwide Commercial Systems since 2005 and as Vice President and General Manager of
Lennox North American Commercial Products from 2003 to 2005. Mr. Bizios began his career with LII in 1976 as
an industrial engineer at LII’s manufacturing facility in Marshalltown, Iowa, subsequently serving in several senior
leadership roles before being appointed Vice President and General Manager of Lennox Industries Commercial
from 1998 to 2003. He holds a BS in Engineering Operations from Iowa State University.
8
Michael J. Blatz was appointed Executive Vice President and President and Chief Operating Officer of LII’s
Service Experts segment in July 2010. He had previously served as Executive Vice President, Operations since May
2009. Mr. Blatz joined LII in August 2007 as Vice President, Operations. Mr. Blatz was previously Vice President
and General Manager for Tyler Refrigeration, a division of Carrier Corporation, a United Technologies company.
His career at Carrier Corporation began in 2003 and encompassed senior leadership positions in supply chain,
product management, and manufacturing operations. He also served as Director of Operations and Director of
Worldwide Procurement at Dell Computer Corporation and held engineering and product development roles at
Case Corporation before joining Carrier Corporation. He holds a BS in mechanical engineering from the United
States Military Academy at West Point and an MS in management and an MS in mechanical engineering, both from
the Massachusetts Institute of Technology.
James W. Borzi was appointed Vice President, Operations in June 2010. He had previously served as Senior
Vice President, Global Operations, for AEES, Inc., a Platinum Equity company from 2009 to June 2010. From 2006
to 2009, Mr. Borzi served as Senior Vice President, Operations, Americas for the Electrical and Electronic Solutions
division of Alcoa, Inc. Prior to joining Alcoa, he spent 21 years at General Motors Corporation and Delphi
Corporation, holding senior leadership positions in manufacturing, supply chain, logistics and general manage-
ment. He earned a BS in Mechanical Engineering from Pennsylvania State University and an MS in Manufacturing
Management from Kettering University.
Robert W. Hau was appointed Executive Vice President and Chief Financial Officer in October 2009. He had
previously served as Vice President and Chief Financial Officer for Honeywell International’s Aerospace Business
Group since 2006. Mr. Hau first joined Honeywell (initially AlliedSignal) in 1987 and served in a variety of senior
financial leadership positions, including Vice President and Chief Financial Officer for the company’s Aerospace
Electronic Systems Unit and for its Specialty Materials Business Group. He holds a BSBA in Finance & Marketing
from Marquette University and an MBA in Finance from the University of Southern California.
David W. Moon was appointed Executive Vice President and President and Chief Operating Officer of LII’s
Worldwide Refrigeration segment in August 2006. Mr. Moon had previously served as Vice President and General
Manager of Worldwide Refrigeration, Americas Operations since 2002. Prior to serving in that position, he served
as Managing Director in Australia beginning in 1999, where his responsibilities included heat transfer manufac-
turing and distribution, refrigeration wholesaling and manufacturing, and HVAC manufacturing and distribution in
Australia and New Zealand. Mr. Moon originally joined LII in 1998 as Operations Director, Asia Pacific. Prior to
that time, Mr. Moon held various management positions at Allied Signal, Inc., Case Corporation, and Tenneco Inc.
in the United States, Hong Kong, Taiwan and Germany. He holds a BS in Civil Engineering and an MBA from Texas
A&M University.
Daniel M. Sessa was appointed Executive Vice President and Chief Human Resources Officer in June 2007.
Mr. Sessa previously served in numerous senior human resources and legal leadership positions for United
Technologies Corporation since 1996, including Vice President, Human Resources for Otis Elevator Company —
Americas from 2005 to 2007, Director, Employee Benefits and Human Resources Systems for United Technologies
Corporation from 2004 to 2005, and Director, Human Resources for Pratt & Whitney from 2002 to 2004. He holds a
JD from the Hofstra University School of Law and a BA in Law & Society from the State University of New York at
Binghamton.
John D. Torres was appointed Executive Vice President and Chief Legal Officer in December 2008. He had
previously served as Senior Vice President, General Counsel and Secretary for Freescale Semiconductor, a
semiconductor manufacturer that was originally part of Motorola. He joined Motorola’s legal department as
Senior Counsel in 1996 and was appointed Vice President, General Counsel of the company’s semiconductor
business in 2001. Prior to joining Motorola, Mr. Torres served 13 years in private practice in Phoenix, specializing in
commercial law. He holds a BA from Notre Dame and a JD from the University of Chicago.
Douglas L. Young was appointed Executive Vice President and President and Chief Operating Officer of LII’s
Residential Heating & Cooling segment in October 2006. Mr. Young had previously served as Vice President and
General Manager of North American Residential Products since 2003 and as Vice President and General Manager
of Lennox North American Residential Sales, Marketing, and Distribution from 1999 to 2003. Prior to his career
with LII, Mr. Young was employed in the Appliances division of GE, where he held various management positions
9
before serving as General Manager of Marketing for GE Appliance division’s retail group from 1997 to 1999 and as
General Manager of Strategic Initiatives in 1999. He holds a BSBA from Creighton University and an MS in
Management from Purdue University.
Roy A. Rumbough, Jr. was appointed Vice President, Controller and Chief Accounting Officer in July 2006. He
had previously served as Vice President, Corporate Controller of Maytag Corporation, a position he held since 2002.
From 1998 to 2002, he served as Vice President, Controller of Blodgett Corporation, a portfolio of food service
equipment companies and former affiliate of Maytag. Mr. Rumbough’s career at Maytag spanned 17 years and
included internal audit, financial planning and analysis, and business unit controller roles. Prior to his career at
Maytag, he worked for Deloitte and Touche, LLP. He holds a BA in Accounting from North Carolina State
University and an MBA from the Kellogg School of Management, Northwestern University.
Item 1A. Risk Factors
Forward-Looking Statements
This Annual Report on Form 10-K contains forward-looking statements within the meaning of Section 27A of
the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, that
are based on information currently available to management as well as management’s assumptions and beliefs. All
statements, other than statements of historical fact, included in this Annual Report on Form 10-K constitute
forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including
but not limited to statements identified by the words “may,” “will,” “should,” “plan,” “predict,” “anticipate,”
“believe,” “intend,” “estimate” and “expect” and similar expressions. Such statements reflect our current views with
respect to future events, based on what we believe are reasonable assumptions; however, such statements are subject
to certain risks and uncertainties. In addition to the specific uncertainties discussed elsewhere in this Annual Report
on Form 10-K, the risk factors set forth below may affect our performance and results of operations. Should one or
more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results
may differ materially from those in the forward-looking statements. We disclaim any intention or obligation to
update or review any forward-looking statements or information, whether as a result of new information, future
events or otherwise.
Risk Factors
The following risk factors and other information included in this Annual Report on Form 10-K should be
carefully considered. We believe these are the principal material risks currently facing our business; however,
additional risks and uncertainties not presently known to us or that we presently deem less significant may also
impair our business operations. If any of the following risks actually occur, our business, financial condition or
results of operations could be materially adversely affected.
Global General Business, Economic and Market Conditions Could Adversely Affect Our Financial
Performance and Limit our Access to the Capital Markets
Future disruptions in U.S. or global financial and credit markets might have an adverse impact on our business.
The tightening or unavailability of credit adversely affects the ability of our customers to obtain financing for
significant purchases and operations and could result in a decrease in sales of our products and services and may
impact the ability of our customers to make payments to us. Similarly, tightening of credit may adversely affect our
supplier base and increase the potential for one or more of our suppliers to experience financial distress or
bankruptcy. Our business may also be adversely affected by future decreases in the general level of economic
activity, which may cause our customers to cancel, decrease or delay their purchases of our products and services.
If financial markets were to deteriorate, or costs of capital were to increase significantly due to a lowering of
our credit ratings, prevailing industry conditions, the volatility of the capital markets or other factors, we may be
unable to obtain new financing on acceptable terms, or at all. A deterioration in our financial performance could also
limit our future ability to access amounts currently available under our domestic revolving credit facility. In
addition, availability under our asset securitization agreement may be adversely impacted by credit quality and
performance of our customer accounts receivable. The availability under our asset securitization agreement is based
10
on the amount of accounts receivable that meet the eligibility criteria of the asset securitization agreement. If
receivable losses increase or credit quality deteriorates, the amount of eligible receivables could decline and, in turn,
lower the availability under the asset securitization.
We cannot predict the likelihood of occurrence, the duration and severity of any future disruption in financial
markets or adverse economic conditions in the U.S. and other countries.
Our Financial Performance Is Dependent on the Conditions of the U.S. Construction Industry.
Our business is affected by the performance of the U.S. construction industry. Our sales in the residential and
commercial new construction market correlate to the number of new homes and buildings that are built, which in
turn is influenced by cyclical factors such as interest rates, inflation, availability of financing, consumer spending
habits and confidence, employment rates and other macroeconomic factors over which we have no control. For the
last several years the U.S. housing industry has experienced a significant downturn, resulting in a decline in the
demand for the products and services we sell into the residential new construction market.
Cooler than Normal Summers and Warmer than Normal Winters May Depress Our Sales.
Demand for our products and for our services is strongly affected by the weather. Cooler than normal summers
depress our sales of replacement air conditioning and refrigeration products and services, and warmer than normal
winters have the same effect on our heating products and services.
Price Volatility for Commodities We Purchase or Significant Supply Interruptions Could Have an Adverse
Effect on Our Cash Flow or Results of Operations.
In the manufacture of our products, we depend on raw materials, such as steel, copper and aluminum, and
components purchased from third parties. We generally concentrate purchases for a given raw material or
component with a small number of suppliers. If a supplier is unable or unwilling to meet our supply requirements,
we could experience supply interruptions or cost increases, either of which could have an adverse effect on our
results of operations. In addition, although we regularly pre-purchase a portion of our raw materials at fixed prices
each year to hedge against price increases, an increase in raw materials prices not covered by our fixed price
arrangements could significantly increase our cost of goods sold and negatively impact our margins if we are unable
to effectively pass such price increases on to our customers. Alternatively, if we increase our prices in response to
increases in the prices or quantities of raw materials or components we require or encounter significant supply
interruptions, our competitive position could be adversely affected, which may result in depressed sales.
In addition, we use derivatives to hedge price risk associated with forecasted purchases of certain raw
materials. Our hedged price could result in our paying higher or lower prices for commodities as compared to the
market prices for those commodities when purchased. Decreases in spot prices below our hedged prices can also
require us to post letters of credit as collateral with our hedge counterparties, which would temporarily reduce our
borrowing capacity under our domestic revolving credit facility.
Our Ability to Meet Customer Demand may be Limited by Our Single-Location Production Facilities,
Reliance on Certain Key Suppliers and Unanticipated Significant Shifts in Customer Demand.
We manufacture many of our products at single-location production facilities, and we rely on certain suppliers
who also may concentrate production in single locations. Any significant interruptions in production at one or more
of our facilities, or at a facility of one of our suppliers, could negatively impact our ability to deliver our products to
our customers. Further, even with all of our facilities running at full production, we could potentially be unable to
fully meet demand during an unanticipated period of exceptionally high demand.
Our inability to meet our customers’ demand for our products could have a material adverse impact on our
business, financial condition and results of operations.
11
We May Incur Substantial Costs as a Result of Warranty and Product Liability Claims Which Could Have
an Adverse Effect on Our Results of Operations.
The development, manufacture, sale and use of our products involve risks of warranty and product liability
claims. In addition, because we own installing heating and air conditioning dealers in the U.S. and Canada, we incur
the risk of liability claims for the installation and service of heating and air conditioning products. Our product
liability insurance policies have limits that, if exceeded, may result in substantial costs that would have an adverse
effect on our results of operations. In addition, warranty claims are not covered by our product liability insurance
and certain product liability claims may also not be covered by our product liability insurance.
For some of our HVAC products, we provide warranty terms ranging from one to 20 years to customers for
certain components such as compressors or heat exchangers. For select products, we have provided lifetime
warranties for heat exchangers. Warranties of such extended lengths pose a risk to us as actual future costs may
exceed our current estimates of those costs. Warranty expense is recorded on the date that revenue is recognized and
requires significant assumptions about what costs will be incurred in the future. We may be required to record
material adjustments to accruals and expense in the future if actual costs for these warranties are different from our
assumptions.
We May Not be Able to Compete Favorably in the Highly Competitive HVACR Business.
Substantially all of the markets in which we operate are highly competitive. The most significant competitive
factors we face are product reliability, product performance, service and price, with the relative importance of these
factors varying among our product lines. Other factors that affect competition in the HVACR market include the
development and application of new technologies, an increasing emphasis on the development of more efficient
HVACR products and new product introductions. The establishment of manufacturing in low-cost countries could
also provide cost advantages to existing and emerging competitors. Our competitors may have greater financial
resources than we have, allowing them to invest in more extensive research and development and/or marketing
activity. In addition, our Service Experts segment faces competition from independent dealers and dealers owned by
utility companies and other consumer service providers, some of whom may be able to provide their products or
services at lower prices than we can. We may not be able to compete successfully against current and future
competitors and current and future competitive pressures may cause us to reduce our prices or lose market share, or
could negatively affect our cash flow, all of which could have an adverse effect on our results of operations.
There Is No Guarantee That Our Efforts to Reduce Costs Will Be Successful.
As part of our strategic priorities of manufacturing and sourcing excellence and expense reduction, we are
engaged in various manufacturing rationalization actions designed to lower our cost structure. We are reorganizing
our North American distribution network in order to better serve our customers’ needs by deploying parts and
equipment inventory closer to them. We continue to rationalize and reorganize various support and administrative
functions in order to reduce ongoing selling and administrative expenses. If we cannot successfully implement such
restructuring strategies or other cost savings plans, we may not achieve our expected cost savings in the time
anticipated, or at all. In such case, our results of operations and profitability may be negatively impaired, making us
less competitive and potentially causing us to lose market share.
We May Not be Able to Successfully Develop and Market New Products.
Our future success depends on our continued investment in research and new product development and our
ability to commercialize new technological advances in the HVACR industry. If we are unable to continue to
successfully develop and market new products or to achieve technological advances on a pace consistent with that of
our competitors, our business and results of operations could be adversely impacted.
We May Not be Able to Successfully Integrate and Operate Businesses that We May Acquire.
From time to time, we may seek to complement or expand our business through strategic acquisitions. The
success of these transactions will depend, in part, on our ability to integrate and operate the acquired businesses
profitably. If we are unable to successfully integrate acquisitions with our operations, we may not realize the
12
anticipated benefits associated with such transactions, which could adversely affect our business and results of
operations.
Because a Significant Percentage of Our Workforce is Unionized, We Face Risks of Work Stoppages and
Other Labor Relations Problems.
As of December 31, 2010, approximately 20% of our workforce was unionized. The results of future
negotiations with these unions and the effects of any production interruptions or labor stoppages could have an
adverse effect on our results of operations.
We are Subject to Litigation and Environmental Regulations that Could Have an Adverse Effect on Our
Results of Operations.
We are involved in various claims and lawsuits incidental to our business, including those involving product
liability, labor relations and environmental matters, some of which claim significant damages. Given the inherent
uncertainty of litigation, we cannot be certain that existing litigation or any future adverse legal developments will
not have a material adverse impact on our financial condition. In addition, we are subject to extensive and changing
federal, state and local laws and regulations designed to protect the environment. These laws and regulations could
impose liability for remediation costs and civil or criminal penalties in cases of non-compliance. Compliance with
environmental laws increases our costs of doing business. Because these laws are subject to frequent change, we are
unable to predict the future costs resulting from environmental compliance.
Our International Operations Subject Us to Risks Associated with Foreign Currency Fluctuations and
Changes in Local Government Regulation.
We earn revenues, pay expenses, own assets and incur liabilities in countries using currencies other than the
U.S. dollar. Because our consolidated financial statements are presented in U.S. dollars, we must translate revenues,
income and expenses, as well as assets and liabilities, into U.S. dollars at exchange rates in effect during or at the end
of each reporting period. Therefore, increases or decreases in the value of the U.S. dollar against other major
currencies may affect our net operating revenues, operating income and the value of balance sheet items
denominated in foreign currencies. Because of the geographic diversity of our operations, weaknesses in some
currencies might be offset by strengths in others over time. However, we cannot assure that fluctuations in foreign
currency exchange rates, particularly the strengthening of the U.S. dollar against major currencies, would not
materially affect our financial results.
In addition to the currency exchange risks inherent in operating in foreign countries, our international sales and
operations, including our purchases of raw materials from international suppliers, are subject to risks associated
with changes in local government laws, regulations and policies, including those related to tariffs and trade barriers,
investments, taxation, exchange controls, and employment regulations. Our international sales and operations are
also sensitive to changes in foreign national priorities, including government budgets, as well as to political and
economic instability. International transactions may involve increased financial and legal risks due to differing legal
systems and customs in foreign countries. The ability to manage these risks could be difficult and may limit our
operations and make the manufacture and sale of our products internationally more difficult, which could negatively
affect our business and results of operations.
Any Future Determination that a Significant Impairment of the Value of Our Goodwill Intangible Asset
has Occurred Could Have a Material Adverse Effect on Our Results of Operations.
As of December 31, 2010, we had goodwill of $271.8 million on our Consolidated Balance Sheet. Any future
determination that an impairment of the value of goodwill has occurred would require a write-down of the impaired
portion of goodwill to fair value, which would reduce our assets and stockholders’ equity and could have a material
adverse effect on our results of operations.
13
Declines in Capital Markets Could Necessitate Increased Cash Contributions by Us to Our Pension Plans
to Maintain Required Levels of Funding.
Volatility in the capital markets may have a significant impact on the funding status of our defined benefit
pension plans. If the performance of the capital markets depresses the value of our defined benefit pension plan
assets, our plans may be underfunded and we would have to make contributions to the pension plans. The amount of
contributions we may be required to make to our pension plans in the future is uncertain and could be significant,
which may have a material impact on our results of operations.
Item 1B. Unresolved Staff Comments
None.
14
Item 2. Properties
The following chart lists our principal domestic and international manufacturing, distribution and office
facilities as of February 1, 2011 and indicates the business segment that uses such facilities, the approximate size of
such facilities and whether such facilities are owned or leased:
Location
Segment
Type or Use
of Facility
Approx. Sq. Ft.
Owned/Leased
(In thousands)
Marshalltown, IA
Blackville, SC
Orangeburg, SC
Grenada, MS
Union City, TN
Laval, Canada
Saltillo, Mexico
Columbus, OH
McDonough, GA
Atlanta, GA
Brampton, Canada
Calgary, Canada
Kansas City, KS
Carrollton, TX
Ontario, CA
Des Moines, IA
Middleton , PA
Stuttgart, AR
Longvic, France
Mions, France
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
Residential & Commercial
Heating & Cooling
Residential & Commercial
Heating & Cooling
Residential & Commercial
Heating & Cooling
Residential & Commercial
Heating & Cooling
Residential & Commercial
Heating & Cooling
Residential & Commercial
Heating & Cooling
Residential & Commercial
Heating & Cooling
Commercial Heating & Cooling
Commercial Heating & Cooling
Commercial Heating & Cooling
Tifton, GA
Stone Mountain, GA
Refrigeration
Refrigeration
Columbus, GA(1)
Refrigeration
Midland, GA(1)
Milperra, Australia
Refrigeration
Refrigeration
Mt. Wellington, New Zealand Refrigeration
Refrigeration
Genas, France
Manufacturing & Distribution
Manufacturing
Manufacturing & Distribution
Manufacturing & Distribution
Manufacturing
Manufacturing
Manufacturing
Distribution
Distribution
Distribution
Distribution
Distribution
Distribution
Distribution
Distribution
Distribution
Distribution
Manufacturing
Manufacturing
Manufacturing, Research &
Development
Manufacturing
Manufacturing &Business Unit
Headquarters
Manufacturing, Warehousing &
Offices
Warehousing & Offices
Manufacturing & Business Unit
Headquarters
Distribution & Offices
Manufacturing, Distribution &
Offices
San Jose dos Campos, Brazil Refrigeration
Manufacturing, Warehousing &
Carrollton, TX
Richardson, TX
Corporate and other
Corporate and other
Offices
Research & Development
Corporate Headquarters
1,300
369
771
300
295
152
300
144
254
119
129
110
115
252
128
352
129
787
133
129
599
145
395
138
830
110
175
148
130
311
Owned & Leased
Owned
Owned & Leased
Leased
Owned
Owned
Owned
Leased
Leased
Leased
Leased
Leased
Leased
Leased
Leased
Leased
Leased
Owned
Owned
Owned
Owned & Leased
Owned
Owned & Leased
Leased
Owned
Owned
Owned
Owned
Owned
Owned & Leased
(1) These properties were acquired on January 14, 2011, as part of the acquisition of Kysor/Warren.
15
In addition to the properties described above, we lease over 100 facilities in the U.S. for use as sales and service
offices and district warehouses and additional facilities worldwide for use as sales and service offices and regional
warehouses. The majority of our Service Experts’ service center facilities are leased. We routinely evaluate our
production facilities to ensure adequate capacity, effective cost structure, and consistency with our business
strategy. We believe that our properties are in good condition, suitable and adequate for their present requirements
and that our principal plants are generally adequate to meet our production needs. However, certain production
facilities are operating at less than full capacity due to restructuring activities. See Note 16 to the Consolidated
Financial Statements for additional information regarding restructuring activities.
The Residential & Commercial Heating & Cooling distribution network is currently in the process of being
redesign for greater productivity, cost improvement, and customer reach. Included in the table above are our large
warehouses that hold a significant inventory balance.
Item 3. Legal Proceedings
On February 6, 2008, a class action lawsuit was filed against us in the U.S. District Court for the Northern
District of California styled Keilholtz v. Lennox Hearth Products, Inc., Lennox Industries, Inc. and Lennox
International, Inc. The lawsuit, which involves no personal injury claims, alleges that certain of our single-pane,
glass-front, gas fireplaces are hazardous and that consumers were not adequately warned, and seeks economic
damages. On February 16, 2010, the court issued an order certifying a nationwide class of plaintiffs.
On August 23, 2010, the Company and the plaintiffs entered into a binding Memorandum of Understanding
(MOU) containing tentative terms for settlement of the case. At the parties’ request, the court stayed the lawsuit
shortly after the MOU was signed. On January 11, 2011, the court granted preliminary approval of the settlement.
The court set June 2, 2011, as the date for the final approval hearing.
We are involved in a number of other claims and lawsuits incident to the operation of our businesses. Insurance
coverages are maintained and estimated costs are recorded for such claims and lawsuits. It is management’s opinion
that none of these claims or lawsuits will have a material adverse effect on our financial position, results of
operations or cash flows. Costs related to such matters were not material to the periods presented.
Item 4.
(Removed and Reserved)
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of
PART II
Equity Securities
Market Price for Common Stock
Our common stock is listed for trading on the New York Stock Exchange under the symbol “LII.” The high and
low sales prices for our common stock for each quarterly period during 2010 and 2009 were as follows:
Price Range Per Common Share
2010
2009
High
Low
High
Low
First Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Second Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Third Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Fourth Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$45.50
51.09
46.99
49.32
$38.06
40.31
40.10
39.14
$34.97
34.70
38.03
41.11
$23.47
25.21
30.07
33.16
16
Dividends
During 2010 and 2009, we declared quarterly cash dividends as set forth below:
Dividends per
Common Share
2010
2009
First Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $0.15
0.15
Second Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
0.15
Third Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
0.15
Fourth Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$0.14
0.14
0.14
0.14
Fiscal Year. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $0.60
$0.56
The amount and timing of dividend payments are determined by our Board of Directors and subject to certain
restrictions under our credit facilities and promissory notes. As of the close of business on February 7, 2011, there
were approximately 623 holders of record of our common stock.
17
Comparison of Total Stockholder Return
The following performance graph compares our cumulative total returns with the cumulative total returns of
the Standards & Poor’s Midcap 400 Index, a broad index of mid-size U.S. companies of which the Company is a
part, and a peer group of U.S. industrial manufacturing and service companies in the heating, ventilation, air
conditioning and refrigeration businesses from December 31, 2005 through December 31, 2010. The graph assumes
that $100 was invested on December 31, 2005, with dividends reinvested. Peer group returns are weighted by
market capitalization. Our peer group includes AAON, Inc., Ingersoll-Rand plc, Comfort Systems USA, Inc.,
United Technologies Corporation, Johnson Controls Inc., and Watsco, Inc.
Comparison of 5 Year Cumulative Total Return
Assumes Initial Investment of $100
December 2010
200.00
150.00
100.00
50.00
0.00
2005
2006
2007
2008
2009
2010
Lennox International, Inc.
S&P Midcap 400 Index
Peer Group
This performance graph and other information furnished under this Part II Item 5(a) of this Form 10-K shall not
be deemed to be “soliciting material” or to be “filed” with the Securities and Exchange Commission or subject to
Regulation 14A or 14C, or to the liabilities of Section 18 of the Exchange Act of 1934.
Our Purchase of LII Equity Securities
In June 2008 our Board of Directors approved a new share repurchase plan for $300 million, pursuant to which
we are authorized to repurchase shares of our common stock through open market purchases (the “2008 Share
Repurchase Plan”). The 2008 Share Repurchase Program has no stated expiration date. In the fourth quarter of
2010, we repurchased shares of our common stock as follows:
Total Number
of Shares
Purchased (1)
Average Price
Paid per Share
(including fees)
Total Number of
Shares Purchased as
Part of Publicly
Announced Plans or
Programs
Approximate Dollar
Value of Shares that
may yet be Purchased
Under the Plans or
Programs
(In millions)
October 1 through October 31 . . . . .
November 1 through November 30. .
December 1 through December 31 . .
Total . . . . . . . . . . . . . . . . . . . . . . . .
1,243
5,537
67,856
74,636
$42.02
$42.04
$46.50
$46.10
—
—
—
—
$141.0
$141.0
$141.0
(1) Since there were no repurchases under the 2008 Share Repurchase Plan in the fourth quarter of 2010, this
column reflects the surrender to LII of 74,636 shares of common stock to satisfy tax-withholding obligations in
connection with the vesting of restricted stock units and performance share units.
18
Item 6. Selected Financial Data
The table below shows selected financial data for the five years ended December 31, 2010:
2010
For the Years Ended December 31,
2009
2007
2008
(In millions, except per share data)
2006
Statements of Operations Data
Net Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $3,096.4
190.4
Operational Income From Continuing Operations . .
117.1
Income From Continuing Operations . . . . . . . . . . .
Net Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
116.2
Diluted Earnings Per Share From Continuing
2.10
0.60
Operations. . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Dividends Per Share . . . . . . . . . . . . . . . . . . . . . . .
Other Data
Capital Expenditures . . . . . . . . . . . . . . . . . . . . . . . $
Research and Development Expenses . . . . . . . . . . .
Balance Sheet Data at Period End
Total Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,692.0
319.0
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total Debt
589.7
Stockholders’ Equity . . . . . . . . . . . . . . . . . . . . . . .
45.8
49.5
$2,847.5
109.2
61.8
51.1
$3,441.1
218.6
123.8
122.8
$3,691.7
264.9
165.7
169.0
$3,662.1
222.7
167.1
166.0
1.09
0.56
58.8
48.9
$
2.12
0.56
62.1
46.0
2.39
0.53
70.2
43.6
2.27
0.46
74.8
42.2
$
$
$
$1,543.9
231.5
604.4
$1,659.5
420.4
458.6
$1,814.6
207.9
808.5
$1,719.8
109.2
804.4
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussions should be read in conjunction with the other sections of this report, including the
consolidated financial statements and related notes contained in Item 8 of this Annual Report on Form 10-K.
Overview
We operate in four reportable business segments of the heating, ventilation, air conditioning and refrigeration,
(“HVACR”) industry. Our reportable segments are Residential Heating & Cooling, Commercial Heating &
Cooling, Service Experts and Refrigeration. For more detailed information regarding our reportable segments,
see Note 19 in the Notes to our Consolidated Financial Statements.
Our products and services are sold through a combination of distributors, independent and company-owned
dealer service centers, other installing contractors, wholesalers, manufacturers’ representatives, original equipment
manufacturers and to national accounts. The demand for our products and services is seasonal and dependent on the
weather. Warmer than normal summer temperatures generate strong demand for replacement air conditioning and
refrigeration products and services and colder than normal winter temperatures have the same effect on heating
products and services. Conversely, cooler than normal summers and warmer than normal winters depress HVACR
sales and services. In addition to weather, demand for our products and services is influenced by national and
regional economic and demographic factors, such as interest rates, the availability of financing, regional population
and employment trends, new construction, general economic conditions and consumer spending habits and
confidence. A substantial portion of the sales in each of our business segments is attributable to replacement
business, with the balance comprised of new construction business.
The principal elements of cost of goods sold in our manufacturing operations are components, raw materials,
factory overhead, labor and estimated costs of warranty expense. In our Service Experts segment, the principal
components of cost of goods sold are equipment, parts and supplies and labor. The principal raw materials used in
our manufacturing processes are steel, copper and aluminum. In recent years, the volatility of commodity prices and
related components has impacted us and the HVACR industry in general. We endeavor to mitigate the impact of
higher commodity prices through a combination of price increases, commodity contracts, improved production
19
efficiency and cost reduction initiatives. We also partially mitigate volatility in the prices of these commodities by
entering into futures contracts and fixed forward contracts.
Company Highlights
(cid:129) Net sales for 2010 were $3,096.4 million, compared to $2,847.5 million in 2009 and were favorably
impacted by higher volumes across all segments.
(cid:129) Operational income from continuing operations for 2010 was $190.4 million compared to $109.2 million for
2009. The improvement to operational income was primarily due to higher sales volumes and productivity.
(cid:129) Net income for 2010 was $116.2 million compared to $51.1 million in 2009. Diluted earnings per share from
continuing operations was $2.10 per share in 2010 compared to $1.09 per share in 2009.
(cid:129) We generated $185.8 million of cash flow from operating activities in 2010 compared to $225.5 million in
2009.
(cid:129) During 2010, we returned $144.3 million to shareholders through share repurchases.
20
Results of Operations
The following table provides a summary of our financial results, including information presented as a
percentage of net sales (dollars in millions):
2010
For the Years Ended December 31,
2009
2008
Dollars
Percent
Dollars
Percent
Dollars
Percent
Net sales . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cost of goods sold . . . . . . . . . . . . . . . . . . . .
$3,096.4
2,204.6
100.0% $2,847.5
2,059.4
71.2
100.0% $3,441.1
2,506.6
72.3
100.0%
72.8
Gross profit . . . . . . . . . . . . . . . . . . . . . . .
891.8
28.8
788.1
27.7
934.5
27.2
Selling, general and administrative
expenses . . . . . . . . . . . . . . . . . . . . . . . . . .
Losses (gains) and other expenses, net. . . . . .
Restructuring charges . . . . . . . . . . . . . . . . . .
Impairment of assets . . . . . . . . . . . . . . . . . . .
Income from equity method investments . . . .
Operational income from continuing
685.7
10.2
15.6
—
(10.1)
22.1
0.3
0.5
—
(0.3)
644.9
(6.6)
41.5
6.4
(7.3)
22.6
(0.2)
1.5
0.2
(0.2)
686.9
(1.9)
30.4
9.1
(8.6)
operations . . . . . . . . . . . . . . . . . . . . . . .
$ 190.4
6.2% $ 109.2
3.8% $ 218.6
Net income . . . . . . . . . . . . . . . . . . . . . . . . .
$ 116.2
3.8% $
51.1
1.8% $ 122.8
The following table sets forth net sales by geographic market (dollars in millions):
20.0
(0.1)
0.9
0.3
(0.3)
6.4%
3.6%
2010
For the Years Ended December 31,
2009
2008
Dollars
Percent
Dollars
Percent
Dollars
Percent
Geographic Market:
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
U.S.
Canada . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
International . . . . . . . . . . . . . . . . . . . . . . . . .
$2,255.4
336.6
504.4
72.8% $2,033.1
327.0
10.9
487.4
16.3
71.4% $2,429.2
363.9
11.5
648.0
17.1
70.6%
10.6
18.8
Total net sales. . . . . . . . . . . . . . . . . . . . . .
$3,096.4
100.0% $2,847.5
100.0% $3,441.1
100.0%
Year Ended December 31, 2010 Compared to Year Ended December 31, 2009 — Consolidated Results
Net Sales
Sales increased 8.7% for 2010 as compared to 2009 due to increased sales volumes of 5% primarily driven by
growth across all four business segments. Volume improved in all four reportable business segments, led by strength
in Residential Heating & Cooling and Service Experts. Price and mix of approximately 2% also had a favorable
impact on sales. Changes in foreign currency exchange rates favorably impacted net sales by 2%.
Gross Profit
Gross profit margins improved approximately 110 basis points to 28.8% for 2010, compared to gross profit
margins of 27.7% in 2009. This improvement was primarily driven by lower product costs from material savings
and manufacturing efficiencies of approximately 140 basis points. Gross profit margin comparisons were also
favorably impacted by 60 basis points for expenses related to a product quality issue that were recorded in 2009 with
no such expenses in 2010. Partially offsetting these positive impacts to gross profit margins were commodities
headwinds of 50 basis points and increased freight and distribution expenses that decreased gross profit margins by
approximately 50 basis points primarily in the Residential Heating & Cooling segment.
21
Selling, General and Administrative Expenses
Selling, general and administrative (“SG&A”) expenses increased by $40.8 million in 2010 as compared to
2009, and as a percentage of sales, SG&A expenses were down 50 basis points from 22.6% in 2009 to 22.1% in
2010. SG&A expenses increased $16 million due to increased variable incentive compensation driven by improved
financial performance and $35 million related to increased variable selling, advertising, and promotion expenses in
support of our sales growth. These increases were partially offset by lower bad debt expense and pension costs.
Losses (Gains) and Other Expenses, Net
Losses (gains) and other expenses, net for 2010 and 2009 included the following (in millions):
For the Years
Ended
December 31,
2010
2009
Realized (gains) losses on settled futures contracts . . . . . . . . . . . . . . . . . . . . . . . . . .
Unrealized gains on unsettled futures contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gain on the disposal of a business, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Special legal contingency charge . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Acquisition expenses. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign currency exchange losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other items, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ (1.5)
(0.6)
(0.1)
6.8
4.8
0.4
0.4
$ 3.7
(7.1)
(4.1)
—
—
0.7
0.2
Losses (gains) and other expenses, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$10.2
$(6.6)
The change in gains and losses on settled futures contracts was primarily due to increases in commodity prices
relative to the futures contract prices during 2010 as compared to 2009. Conversely, the change in unrealized gains
related to unsettled futures contracts was primarily due to lower commodity prices relative to the futures contract
prices for those contracts. For more information, see Note 8 in the Notes to the Consolidated Financial Statements.
For more information regarding the special legal contingency charge, see Note 10 in the Notes to the Consolidated
Financial Statements. Acquisition expenses relate to an acquisition consummated subsequent to year end. For more
information, see Note 24 in the Notes to the Consolidated Financial Statements.
Restructuring Charges
Restructuring charges were $15.6 million in 2010 compared to $41.5 million in 2009. The lower restructuring
charges in 2010 were primarily due to a smaller number of large projects in 2010. The restructuring charges in 2010
primarily consisted of manufacturing rationalization projects in Australia in the Refrigeration segment which
totaled $8.6 million as well as administrative reorganizations in our Service Experts segment which totaled
$2.1 million. The remaining restructuring charges in 2010 were primarily related to projects announced prior to
2010. Restructuring charges in 2009 primarily consisted of three large manufacturing rationalization projects
totaling $25.2 million and $11.3 million in various corporate and business unit administrative reorganizations. For a
detailed discussion regarding restructuring activities, see Note 16 in the Notes to the Consolidated Financial
Statements.
Income from Equity Method Investments
Investments over which we do not exercise control but have significant influence are accounted for using the
equity method of accounting. Income from equity method investments increased to $10.1 million in 2010 as
compared to $7.3 million in 2009 primarily due to the improved performance of our U.S. joint venture in
compressor manufacturing, which experienced increased sales and profitability.
22
Interest Expense, net
Interest expense, net increased to $12.8 million in 2010 as compared to $8.2 million in 2009. The increase in
interest expense was primarily attributable to higher debt levels, and the issuance of $200 million of our senior
unsecured notes at 4.91% with a higher interest rate than our revolver.
Income Taxes
The income tax provision was $59.5 million in 2010 as compared to $39.1 million in 2009. The effective tax
rate was 33.7% for 2010 as compared to 38.8% for 2009. Our effective rates differ from the statutory federal rate of
35% for certain items, such as state and local taxes, non-deductible expenses, foreign operating losses for which no
tax benefits have been recognized and foreign taxes at rates other than 35%.
Discontinued Operations
During 2008 and 2009, we announced plans to sell twelve service centers. We sold all of these service centers
during 2009 and 2010.
The pre-tax operating loss from discontinued operations was $1.1 million in 2010 as compared to $13.1 million
in 2009. Included in the 2009 loss from discontinued operations was an impairment charge of $2.7 million related to
service centers where the estimated selling price of the assets was below the net book value of those assets, gains on
disposal of assets and liabilities of $2.3 million, and a write-off of $4.0 million of goodwill related to the sale of
these service centers.
Year Ended December 31, 2010 Compared to Year Ended December 31, 2009 — Results by Segment
Residential Heating & Cooling
The following table details our Residential Heating & Cooling segment’s net sales and profit for 2010 and 2009
(dollars in millions):
Net sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Profit. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
% of net sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Years Ended
December 31,
2010
2009
Difference % Change
$1,417.4
132.3
$1,293.5
111.7
$123.9
20.6
9.6%
18.4
9.3%
8.6%
The increase in sales was due to the recovery of the U.S. residential end markets, primarily the replacement
market. Sales volumes increased net sales by 8% in 2010 as compared to 2009, while price and mix were relatively
flat at a 1% increase. The positive impact of changes in foreign currency exchange rates also increased sales by 1%.
Segment profit increased $20.6 million, including $25 million due to the increase in sales and $14 million due
to material savings and manufacturing efficiencies partially offset by commodities headwinds of $9 million. These
were partially offset by higher SG&A expenses of $14 million consisting primarily of increased variable selling
expenses and incentive compensation.
Commercial Heating & Cooling
The following table details our Commercial Heating & Cooling segment’s net sales and profit for 2010 and
2009 (dollars in millions):
Years Ended
December 31,
2010
2009
Difference % Change
Net sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $620.0
69.3
Profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
11.2%
% of net sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$594.6
49.3
8.3%
$25.4
20.0
4.3%
40.6
23
Our Commercial Heating & Cooling business experienced increased sales volumes of nearly 3% during 2010
primarily due to introductions of energy efficient products and an increase in planned replacement business at
national retail accounts as well as strong growth in the schools market. Price and mix were favorable by 2%. Foreign
currency exchange rates decreased sales by 1%.
Segment profit increased $20.0 million, including nearly $19 million due to the increase in net sales and
$3 million due to material savings and manufacturing efficiencies. These increases were partially offset by higher
SG&A expenses of $3 million consisting primarily of increased variable selling expenses and incentive
compensation.
Service Experts
The following table details our Service Experts segment’s net sales and profit for 2010 and 2009 (dollars in
millions):
Years Ended
December 31,
2010
2009
Difference % Change
Net sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $590.3
19.3
Profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
3.3%
% of net sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$535.4
16.6
3.1%
$54.9
2.7
10.3%
16.3
Net sales increased primarily due to the improvements in the residential service and replacement end markets.
In addition, we have had significant growth in our commercial service business. The sales increase was primarily
due to an increase in sales volumes of 5%. Price and mix increased sales by 3%. Foreign currency exchange rates
increased sales by 2%.
Segment profit increased $2.7 million, including nearly $6 million due to the increase in sales. Higher selling
expenses of $3 million partially offset the favorable effect of higher revenues.
Refrigeration
The following table details our Refrigeration segment’s net sales and profit for 2010 and 2009 (dollars in
millions):
Years Ended
December 31,
2010
2009
Difference % Change
Net sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $550.9
61.4
Profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
11.1%
% of net sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$512.7
48.9
9.5%
$38.2
12.5
7.5%
25.6
Net sales increased due to higher sales volumes of about 1% and the favorable impact of changes in foreign
currency exchange rates of 5%. Price and mix also increased sales by approximately 1%.
Segment profit increased $12.5 million, including $10 million due to the increase in sales and almost
$3 million in improved material savings and manufacturing efficiencies as those factors more than offset
commodity price pressures.
Corporate and Other
Corporate and other expenses were $65.5 million in 2010, up from $62.5 million in 2009. The increase was
primarily driven by increases in stock-based and incentive compensation expenses of approximately $8 million,
partially offset by lower pension costs of approximately $4 million.
24
Year Ended December 31, 2009 Compared to Year Ended December 31, 2008 — Consolidated Results
Net Sales
Net sales decreased 17.3% for 2009 as compared to 2008. The decrease in net sales was due to decreased sales
volumes of approximately 18% across all segments and was driven by declines in the overall end markets we serve.
For the year, we saw rates of decline increase across all segments. However, our end markets showed improvement
late in the year and particularly in the fourth quarter, with our residential HVAC end markets showing growth in the
fourth quarter. The commercial HVAC and refrigeration markets were still down from a year ago, but the rate of
decline continued to slow in the fourth quarter. The declines in unit volumes were partially offset by pricing gains of
approximately 1% and positive sales mix of almost 1%. Changes in foreign currency exchange rates adversely
impacted revenues by 1%.
Gross Profit
Gross profit margins improved 50 basis points to 27.7% for 2009, compared to gross margins of 27.2% in 2008.
Gross profit margins improved by approximately 150 basis points due to pricing actions. Lower product costs
favorably impacted our gross profit margins as material savings were offset by increases in other product costs,
including under-absorbed overhead on lower volume and distribution costs. A charge for a product quality issue
lowered gross profit margins by 80 basis points in 2009.
Selling, General and Administrative Expenses
Selling, general and administrative (“SG&A”) expenses decreased by approximately $42.0 million in 2009 as
compared to 2008 and as a percentage of total net sales, SG&A expenses were 22.6% for 2009 and 20.0% for 2008.
Expenses decreased generally due to cost reductions, including headcount savings, totaling $35 million, and the
impact of changes in foreign exchange rates of $12 million. In the comparison of 2009 to 2008, the positive impact
in 2008 of a $10 million one-time change in our vacation policy partially offset these reductions to SG&A expenses.
Research and development expenses increased slightly as we continued to invest in future product offerings.
Losses (Gains) and Other Expenses, Net
Gains and other expenses, net for 2009 and 2008 included the following (in millions):
For the Years
Ended
December 31,
2009
2008
Realized losses on settled futures contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 3.7
(7.1)
Net change in unrealized (gains) losses on unsettled futures contracts . . . . . . . . . . . .
(4.1)
Gain on sale of business, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(0.1)
Gains on disposals of fixed assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
0.7
Foreign currency exchange losses (gains) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
0.3
Other items, net. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 0.9
5.1
—
(4.8)
(3.2)
0.1
Losses (gains) and other expenses, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $(6.6)
$(1.9)
The change in gains and losses on futures contracts was primarily due to decreases in commodity prices
relative to the futures contract prices during 2009 as compared to 2008 for the contracts that settled during the
period. Conversely, the change in unrealized (gains) losses related to unsettled futures contracts not designated as
cash flow hedges was primarily due to higher commodity prices relative to the futures contract prices for those
contracts. Gains and Other Expenses, net for 2009 includes a net gain on the sale of a European business in our
Commercial Heating & Cooling segment. We sold assets totaling $5.9 million and recorded a net loss of
$2.7 million, after related transaction costs. Upon liquidation of this business, we recorded previously deferred
currency gains of $6.8 million. Gains on disposal of fixed assets in 2008 included gains recorded on the sale-
leaseback of two properties located in North America in 2008. No such transactions occurred in 2009. The change in
25
foreign currency losses (gains) was primarily due to a favorable catch-up adjustment of $4.5 million related to
foreign currency fluctuations on intercompany loans recorded in 2008. For more information, see Note 22 in the
Notes to the Consolidated Financial Statements.
Restructuring Charges
Restructuring charges were $41.5 million in 2009 compared to $30.4 million in 2008. In 2009, we announced
three large manufacturing rationalization projects which included $9.7 million for the closure of the Blackville,
South Carolina facility, $7.8 million for the closure of our Parets, Spain facility, and $7.7 million for the closure of
our Mions, France facility. In addition, we had $11.3 million in restructuring charges in 2009 related to various
reorganizations of corporate and business unit administrative functions. Restructuring charges in 2009 were higher
than 2008 due to the number of large restructuring projects in 2009. We realized approximately $24 million from
restructuring savings in 2009. For a detailed discussion regarding restructuring activities, see Note 16 in the Notes to
the Consolidated Financial Statements.
Impairment of Assets
In 2009, we recorded $6.0 million in impairment charges related to the abandonment of information
technology assets that had not yet been placed in service due to our significant restructuring activities and our
exiting of a business in the European region.
In 2008, we recorded $9.1 million of impairment charges related to our investment in a joint venture in
Thailand. The carrying value of this investment at year-end 2008 was $1.8 million and, due to a loss of significant
influence over the venture, it was no longer accounted for under the equity method in 2009.
Results from Equity Method and Other Equity Investments
Investments over which we do not exercise control but have significant influence are accounted for using the
equity method of accounting. Income from equity method investments decreased to $7.3 million in 2009, compared
to $8.6 million in 2008, primarily due to a decrease in the performance of our Mexican joint venture and our
U.S. joint venture in compressor manufacturing due to lower sales volumes.
Interest Expense, Net
Interest expense, net, decreased to $8.2 million in 2009 from $14.2 million in 2008. The decrease in interest
expense was primarily attributable to a decrease in the average amounts borrowed in 2009 as compared to 2008, and
the remainder of the decrease is due to a lower interest rate paid on variable rate debt.
Provision for Income Taxes
The income tax provision was $39.1 million in 2009, compared to $80.5 million in 2008. The effective tax rate
was 38.8% for 2009 as compared to 39.4% for 2008. Our effective rates differ from the statutory federal rate of 35%
for certain items, such as state and local taxes, non-deductible expenses, foreign operating losses for which no tax
benefits have been recognized and foreign taxes at rates other than 35%.
Discontinued Operations
We have reclassified a pre-tax loss of $13.1 million in 2009 as discontinued operations as compared to a pre-
tax loss of $1.8 million during 2008. Included in the 2009 loss from discontinued operations was an impairment
charge of $2.7 million related to service centers where the estimated selling price of the assets was below the net
book value of those assets, gains on disposal of assets and liabilities of $2.3 million, and a write-off of $4.0 million
of goodwill related to the sale of these service centers. The loss from discontinued operations in 2008 included a
provision of $4.4 million for an unfavorable judgment in litigation related to the sale of a service center in 2004 that
was included in discontinued operations. This contingency was settled in 2009 for $6.1 million.
26
Year Ended December 31, 2009 Compared to Year Ended December 31, 2008 — Results by Segment
Residential Heating & Cooling
The following table summarizes our Residential Heating & Cooling segment’s net sales and profit for 2009 and
2008 (dollars in millions):
Net sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Profit. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
% of net sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Years Ended
December 31,
2009
2008
Difference % Change
$1,293.5
111.7
$1,493.4
145.8
$(199.9)
(34.1)
(13.4)%
(23.4)
8.6%
9.8%
The decrease in net sales was due to continuing weakness early in 2009 in the U.S. residential new construction
market and softer replacement business as consumers remained cautious due to the economic environment. Sales
from the Hearth business within Residential Heating & Cooling continued to be down significantly. However, sales
to the residential HVAC end markets showed improvement late in the year and particularly in the fourth quarter,
with our residential HVAC end markets showing growth in the fourth quarter. Reduced sales volumes decreased net
sales by nearly 15% in 2009 as compared to 2008. The unfavorable impact of changes in foreign currency exchange
rates also decreased net sales by almost 1%. The decrease in net sales was partially offset by pricing gains of almost
2% related to increases that were enacted in the later quarters of 2008. Our sales mix was flat.
Segment profit declined $30 million due to a decrease in net sales. The decrease in 2009 was also partially due
to the positive impact in 2008 of a $7 million one-time change in our vacation policy and gains related to the sale-
leaseback of two properties of $4 million. The decline in segment profit was partially offset by lower product costs
of $4 million resulting from material savings partially offset by increases in other product costs, including under-
absorbed manufacturing overhead, and SG&A cost reductions, including headcount savings, of $7 million.
In 2009, a $24.4 million charge related to a vendor-supplied materials quality issue was not included in our
Residential Heating & Cooling segment’s profit as it is considered an unusual and nonrecurring item.
Commercial Heating & Cooling
The following table summarizes our Commercial Heating & Cooling segment’s net sales and profit for 2009
and 2008 (dollars in millions):
Years Ended
December 31,
2009
2008
Difference % Change
Net sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $594.6
49.3
Profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
8.3% 11.2%
% of net sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$835.3
93.3
$(240.7)
(44.0)
(28.8)%
(47.2)
Our Commercial Heating & Cooling business experienced lower sales volumes of 31%, primarily due to weak
new construction in North America and overall weakness in European business. The unfavorable impact of changes
in foreign currency exchange rates on net sales was 2%. As an offset to these negative impacts, sales mix was
positive at 4%. Pricing was flat for 2009.
Segment profit declined $59 million due to a decrease in net sales. The unfavorable comparison of 2009 to
2008 was also partially due to the positive impact in 2008 of a $4 million one-time change in our vacation policy.
These declines were partially offset by lower product costs of $5 million resulting from material savings partially
offset by increases in other product costs, including under-absorbed manufacturing overhead. SG&A cost reduc-
tions, including headcount savings, of over $15 million partially also offset the decline in segment profit.
27
Service Experts
The following table summarizes our Service Experts segment’s net sales and profit from continuing operations
for 2009 and 2008 (dollars in millions):
Years Ended
December 31,
2009
2008
Difference % Change
Net sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $535.4
16.6
Profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
3.1%
% of net sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$586.3
18.5
$(50.9)
(1.9)
(8.7)%
(10.3)
3.2%
The decrease in net sales was primarily due to the decline in the residential new construction and residential
service and replacement end markets resulting from the weakness of the U.S. economy. The sales decrease was
primarily due to a decrease in sales volumes of 7% as both price and sales mix were flat. The unfavorable impact of
changes in foreign currency exchange rates decreased net sales by 1%.
Segment profit declined $9 million due to a decrease in net sales. Reduced costs of sales of $2 million due to
lower fuel costs and increased technician productivity and SG&A cost reductions, including headcount savings, of
almost $5 million partially offset this decline.
Refrigeration
The following table summarizes our Refrigeration segment’s net sales and profit for 2009 and 2008 (dollars in
millions):
Years Ended
December 31,
2009
2008
Difference % Change
Net sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $512.7
48.9
Profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
9.5%
% of net sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$618.2
60.2
$(105.5)
(11.3)
(17.1)%
(18.8)
9.7%
Net sales decreased due to lower sales volumes of 16% and the unfavorable impact of changes in foreign
currency exchange rates of 3%. Pricing gains of approximately 2% partially offset these negative impacts.
Segment profit declined $21 million due to a decrease in net sales and increased product costs of $1 million, as
other product costs, including under-absorbed manufacturing overhead, more than offset materials savings in 2009.
Offsetting these unfavorable impacts were SG&A cost reductions, including headcount savings, of $10 million.
Corporate and Other
Corporate and other expenses increased to $62.5 million in 2009, up from $53.8 million in 2008. Comparisons
to the prior year were affected by a favorable adjustment for foreign currency exchange rates of approximately
$4.5 million that was recorded in the second quarter of 2008.
Accounting for Futures Contracts
Realized gains and losses on settled futures contracts are a component of segment profit (loss). Unrealized
gains and losses on open futures contracts are excluded from segment profit (loss) as they are subject to changes in
fair value until their settlement date. Both realized and unrealized gains and losses on futures contracts are a
component of Losses (Gains) and Other Expenses, net in the accompanying Consolidated Statements of Operations.
See Note 19 to our Consolidated Financial Statements for more information and a reconciliation of segment profit to
net income.
28
Liquidity and Capital Resources
Our working capital and capital expenditure requirements are generally met through internally generated
funds, bank lines of credit and a revolving period asset securitization arrangement. Working capital needs are
generally greater in the first and second quarters due to the seasonal nature of our business cycle.
Statement of Cash Flows
The following table summarizes our cash activity for 2010, 2009 and 2008 (in millions):
Net cash provided by operating activities. . . . . . . . . . . . . . . . . . . . . .
Net cash used in investing activities . . . . . . . . . . . . . . . . . . . . . . . . .
Net cash used in financing activities . . . . . . . . . . . . . . . . . . . . . . . . .
$185.8
(61.4)
(93.5)
2010
2009
(In millions)
$ 225.5
(14.0)
(211.7)
2008
$ 183.2
(66.5)
(132.0)
Net cash provided by operating activities
During 2010, cash provided by operating activities was lower than in 2009 primarily due to increased working
capital needs in support of our sales growth. An increase in accounts receivable resulted in a cash use of
$29.3 million and an increase in inventories resulted in a cash use of $31.1 million. This was partially offset by
increased accounts payable of $33.6 million. Increased net income of $116.2 million in 2010 up from $51.1 million
in 2009 partially offset these unfavorable working capital impacts to operating cash flows.
We contributed $5.6 million to our defined benefit pension plans in 2010 as compared to $42.2 million in 2009.
We made no payments on our asset securitization program in 2010 as compared to payments of $30.0 million in
2009. We received cash of $37.9 million in 2009 from collateral previously posted related to commodity hedge
derivative loss positions in 2008, partially offsetting the positive impacts on operating cash flows in 2010 compared
to 2009. We paid $26.6 million for restructuring activities in 2010 resulting in a negative impact on operating cash
flows of $11.0 million in 2010 as compared to an $18.6 million source of cash in 2009.
Net cash used in investing activities
Net cash used in investing activities in 2010 increased due to the net purchase of businesses of $3.6 million and
restricted cash of $12.2 million. Investing activities in 2009 included net cash of $10.0 million from the sale of
businesses and the net positive cash flow impact of $33.3 million for net short-term investments which negatively
impacted the comparison of 2010 investing cash flow to those experienced in 2009. Capital expenditures were
$45.8 million, $58.8 million and $62.1 million in 2010, 2009 and 2008, respectively. In 2010 capital expenditures
were lower due to project timing and are anticipated to increase in 2011 to similar levels as 2009 and 2008. On
January 14, 2011, we paid $145.2 million, including a purchase price working capital adjustment, to complete the
Kysor/Warren acquisition.
Net cash used in financing activities
Net borrowings of long-term debt, short-term borrowings and revolving long-term payments totaled approx-
imately $86.6 million in 2010 compared to net payments of $189.3 million in 2009. During 2010, we used
approximately $144.3 million to repurchase approximately 3.3 million shares of our common stock under our share
repurchase plans.
Debt Position and Financial Leverage
Our debt-to-total capital ratio increased to 35.1% as of December 31, 2010 from 27.7% as of December 31,
2009 due to higher outstanding debt. For a detailed description regarding our debt including our debt covenants, see
Note 11 in the Notes to the Consolidated Financial Statements.
As of December 31, 2010, we had outstanding long-term debt obligations totaling $317.0 million, which
increased from $193.8 million as of December 31, 2009. The amount outstanding as of December 31, 2010
29
consisted primarily of outstanding borrowings of $100.0 million under our domestic revolving credit facility, which
matures in 2012, and $200.0 million of senior unsecured notes.
As of December 31, 2010, we had outstanding borrowings of $100.0 million under our $650.0 million
domestic revolving credit facility and $69.5 million was committed to standby letters of credit. The remaining
$480.5 million was available for future borrowings subject to covenant limitations. The facility matures in October
2012. As of December 31, 2010, we were in compliance with all covenant requirements.
Our domestic revolving credit facility includes a subfacility for swingline loans of up to $50.0 million and
provides for the issuance of letters of credit for the full amount available under the domestic revolving credit facility.
Our weighted average borrowing rate on the domestic revolving credit facility was 0.96% and 0.84% as of
December 31, 2010 and 2009, respectively.
Our domestic revolving credit facility contains financial covenants relating to leverage and interest coverage.
Other covenants contained in our domestic revolving credit facility restrict, among other things, mergers, asset
dispositions, guarantees, debt, liens, acquisitions, investments, affiliate transactions and our ability to make
restricted payments. The financial covenants require us to maintain defined levels of Consolidated Indebtedness
to Adjusted EBITDA Ratio and a Cash Flow (defined as EBITDA minus capital expenditures) to Net Interest
Expense Ratio. The required ratios as of December 31, 2010 are detailed below:
Consolidated Indebtedness to Adjusted EBITDA Ratio not greater than . . . . . . . . . . . . . . . . . . . . . . 3.5 : 1.0
Cash Flow to Net Interest Expense Ratio no less than . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.0 : 1.0
Our domestic revolving credit facility contains customary events of default. These events of default include
nonpayment of principal or interest, breach of covenants or other restrictions or requirements, default on any other
indebtedness or receivables securitizations (cross default), and bankruptcy. A cross default under our revolving
credit facility could occur if:
(cid:129) we fail to pay any principal or interest when due on any other indebtedness or receivables securitization of at
least $40.0 million; or
(cid:129) we are in default in the performance of, or compliance with any term of any other indebtedness or receivables
securitization in an aggregate principal amount of at least $40.0 million, or any other condition exists which
would give the holders the right to declare such indebtedness due and payable prior to its stated maturity.
Each of our major debt agreements contains provisions by which a default under one agreement causes a
default in the others (a cross default). If a cross default under the revolving credit facility, our senior unsecured
notes, or our revolving period asset securitization program were to occur, it could have a wider impact on our
liquidity than might otherwise occur from a default of a single debt instrument or lease commitment.
If any event of default occurs and is continuing, lenders with a majority of the aggregate commitments may
require the administrative agent to terminate our right to borrow under our domestic revolving credit facility and
accelerate amounts due under our domestic revolving credit facility (except for a bankruptcy event of default, in
which case such amounts will automatically become due and payable and the lenders’ commitments will
automatically terminate).
On May 6, 2010, we issued $200.0 million of senior unsecured notes due May 15, 2017 bearing fixed interest at
4.90% as a result of a public offering of securities. We received proceeds of $199.8 million from the offering for a
yield of 4.91%. We also paid and capitalized $1.9 million of debt issue costs related to the issuance. We pay interest
on the notes semiannually on May 15 and November 15.
The proceeds from the issuance were used to repay outstanding indebtedness under our domestic revolving
credit facility, working capital and other general corporate purposes, including repurchases of shares of our
common stock pursuant to our previously announced share repurchase plans.
Upon a change of control, holders of our notes will have the right to require us to repurchase all or a portion of
the senior unsecured notes at a repurchase price equal to 101% of the principal amount of the notes repurchased,
plus accrued and unpaid interest, if any. The notes are guaranteed, on a senior unsecured basis, by each of our
domestic subsidiaries that guarantee payment by us of any indebtedness under our domestic revolving credit
30
facility. The indenture governing the notes contains covenants that, among other things, limit our ability and the
ability of the subsidiary guarantors to: create or incur certain liens; enter into certain sale and leaseback
transactions; enter into certain mergers, consolidations and transfers of substantially all of our assets; and transfer
certain properties. The indenture also contains a cross default provision which is triggered if we default on other
debt of at least $75 million in principal which is then accelerated, and such acceleration is not rescinded within
30 days of the notice date.
Under a revolving period asset securitization arrangement (“ASA”), we are eligible to transfer beneficial
interests in a portion of our trade accounts receivable to third parties in exchange for cash. Our continued
involvement in the transferred assets includes servicing, collection and administration of the transferred beneficial
interests. The sale of the beneficial interests in our trade accounts receivable are reflected as secured borrowings.
The fair values assigned to the retained and transferred interests are based primarily on the receivables’ carrying
value given the short term to maturity and low credit risk. The ASA provides for a maximum securitization amount
of $100 million or 100% of the net pool balance as defined by the ASA. However, eligibility for securitization is
limited based on the amount and quality of the qualifying accounts receivable and is calculated monthly. The
beneficial interest sold cannot exceed the maximum amount even if our qualifying accounts receivable is greater
than the maximum amount at any point in time. The eligible amounts available and beneficial interests sold were as
follows (in millions):
Eligible amount available under the ASA on qualified accounts receivable . .
Beneficial interest sold . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Remaining amount available . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
As of
December 31,
2010
As of
December 31,
2009
$100.0
—
$100.0
$72.5
—
$72.5
As of December 31, 2010, $12.2 million of cash and cash equivalents were restricted and held in a trust for our
captive insurance subsidiary.
We periodically review our capital structure, including our primary bank facility, to ensure that it has adequate
liquidity. We believe that cash flows from operations, as well as available borrowings under our revolving credit
facility and other existing sources of funding, will be sufficient to fund our operations for the foreseeable future and
share repurchases under the terms of our 2008 Share Repurchase Plan.
During the third quarter of 2008, we amended the lease agreement for our corporate headquarters. While the
same party continues to be the lessor under the lease, the amendment, among other things, replaced the debt
participant and moderately increased the rent payments. The amendment also provides for financial covenants
consistent with our domestic revolving credit agreement and we are in compliance with these financial covenants.
The lease will continue to be accounted for as an operating lease.
During 2008, we expanded our Tifton, Georgia manufacturing facility using the proceeds from Industrial
Development Bonds (“IDBs”). We entered into a lease agreement with the owner of the property and the issuer of
the IDBs, and through our lease payments fund the interest payments to investors in the IDBs. We also guaranteed
the repayment of the IDBs and entered into letters of credit totaling $15.5 million to fund a potential repurchase of
the IDBs in the event that investors exercised their right to tender the IDBs to the Trustee. As of December 31, 2010
and 2009, we recorded both a long-term asset and a corresponding long-term obligation of $14.3 million related to
these transactions.
Off Balance Sheet Arrangements
In addition to the credit facilities and promissory notes described above, we also lease real estate and
machinery and equipment pursuant to operating leases that are not capitalized on the balance sheet, including high-
turnover equipment such as autos and service vehicles and short-lived equipment such as personal computers. Rent
expense for these leases was $64.3 million, $64.4 million and $64.2 million in 2010, 2009 and 2008, respectively.
31
Contractual Obligations
Summarized below are our contractual obligations as of December 31, 2010 (in millions):
Payments Due by Period
4-5
2-3
Years
Years
1 Year
or Less
Total
Total debt obligations . . . . . . . . . . . . . . . . . . . . . . . $319.0
171.4
Operating leases . . . . . . . . . . . . . . . . . . . . . . . . . . .
15.9
Purchase obligations . . . . . . . . . . . . . . . . . . . . . . . .
100.5
. . . .
Estimated interest payments on long-term debt
Total contractual obligations . . . . . . . . . . . . . . . . $606.8
$ 2.0
54.2
15.9
19.4
$91.5
$101.4
68.1
—
30.8
$ 1.2
29.3
—
24.4
$200.3
$54.9
$260.1
After
5 Years
$214.4
19.8
—
25.9
As of December 31, 2010, the liability for uncertain tax positions, including interest and penalties, was
$1.1 million. Due to the uncertainty regarding the timing of payments associated with these liabilities, we are unable
to make a reasonable estimate of the amount and period in which these liabilities might be paid.
Purchase obligations consist of aluminum commitments. The above table does not include retirement,
postretirement and warranty liabilities because it is not certain when these liabilities will be funded. For additional
information regarding our contractual obligations, see Note 10, Note 11 and Note 12 of the Notes to the
Consolidated Financial Statements. Contractual obligations related to capital leases as of December 31, 2010
were included as part of long-term debt in the table above.
Fair Value Measurements
Fair Value Hierarchy
The three-level fair value hierarchy for disclosure of fair value measurements are defined as follows:
Level 1 — Quoted prices for identical instruments in active markets at the measurement date.
Level 2 — Quoted prices for similar instruments in active markets; quoted prices for identical or similar
instruments in markets that are not active; and model-derived valuations in which all significant
inputs and significant value drivers are observable in active markets at the measurement date and
for the anticipated term of the instrument.
Level 3 — Valuations derived from valuation techniques in which one or more significant inputs or significant
value drivers are unobservable inputs that reflect the reporting entity’s own assumptions about the
assumptions market participants would use in pricing the asset or liability developed based on the
best information available in the circumstances.
Fair Value Techniques
General
Our valuation techniques are applied to all of the assets and liabilities carried at fair value. Where available, the
fair values are based upon quoted prices in active markets. However, if quoted prices are not available, then the fair
values are based upon quoted prices for similar assets or liabilities or independently sourced market parameters,
such as credit default swap spreads, yield curves, reported trades, broker/dealer quotes, interest rates and benchmark
securities. For assets and liabilities with a lack of observable market activity, if any, the fair values are based upon
discounted cash flow methodologies incorporating assumptions that, in our judgment, reflect the assumptions a
marketplace participant would use. To ensure that financial assets and liabilities are recorded at fair value, valuation
adjustments may be required to reflect either party’s creditworthiness and ability to pay. Where appropriate, these
amounts were incorporated into our valuations as of December 31, 2010 and 2009, the measurement dates.
32
Derivatives
Derivatives are primarily valued using estimated future cash flows that are based directly on observed prices
from exchange-traded derivatives and, therefore, have been classified as Level 2. We also take into account the
counterparty’s creditworthiness, or our own creditworthiness, as appropriate. An adjustment has been recorded in
order to reflect the risk of credit default, but these adjustments have been insignificant to the overall value of the
derivatives.
Pension Plan Assets
The majority of our commingled pool/collective trust, mutual funds and balanced pension trusts are managed
by professional investment advisors. The net asset values (“NAV”) per share are furnished in monthly and/or
quarterly statements received from the investment advisors and reflect valuations based upon their pricing policies.
We have assessed the classification of the inputs used to value these investments at Level 1 for mutual funds and
Level 2 for commingled pool/collective trusts and balance pension trusts through examination of their pricing
policies and the related controls and procedures. The fair values we report are based on the pool or trust’s NAV per
share. The NAV’s per share are calculated periodically (daily or no less than one time per month) as the aggregate
value of each pool or trust’s underlying assets divided by the number of units owned.
Market Risk
Commodity Price Risk
We enter into commodity futures contracts to stabilize prices expected to be paid for raw materials and parts
containing high copper and aluminum content. These contracts are for quantities equal to or less than quantities
expected to be consumed in future production.
Fluctuations in metal commodity prices impact the value of the derivative instruments that we hold. When
metal commodity prices rise, the fair value of our futures contracts increases and conversely, when commodity
prices fall, the fair value of our futures contracts decreases.
Information about our exposure to market risks related to metal commodity prices and a sensitivity analysis
related to our metal commodity hedges is presented below (in millions):
21.3
Notional amount (pounds) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Carrying amount and fair value of asset . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $20.2
Change in fair value from 10% change in forward prices . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2.0
Interest Rate Risk
Our results of operations can be affected by changes in interest rates due to variable rates of interest on our
revolving credit facilities, cash, cash equivalents and short-term investments.
In order to partially mitigate interest rate risk, we use a hedging strategy to eliminate the variability of cash
flows in the interest payments for the first $100 million of the total variable-rate debt outstanding under the
domestic revolving credit facility that is solely due to changes in the benchmark interest rate. This strategy allows us
to fix a portion of our interest payments while also taking advantage of historically low interest rates.
On June 12, 2009, we entered into a $100 million pay-fixed, receive-variable interest rate swap with a large
financial institution at a fixed interest rate of 2.66%. The variable portion of the interest rate swap is tied to 1-Month
LIBOR (the benchmark interest rate). The interest rates under both the interest rate swap and the underlying debt are
reset, the swap is settled with the counterparty, and interest is paid, on a monthly basis. The interest rate swap
expires October 12, 2012. We account for the interest rate swap as a cash flow hedge.
33
Information about our exposure to interest rate risk and a sensitivity analysis related to our interest rate swap is
presented below (in millions):
Notional amount . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Impact of a 100 basis point change in the benchmark interest rate:
$100.0
Carrying amount and fair value of liability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 2.0
$ 1.3
Foreign Currency Exchange Rate Risk
Our results of operations can be affected by changes in exchange rates. Net sales and expenses in foreign
currencies are translated into U.S. dollars for financial reporting purposes based on the average exchange rate for the
period. During 2010, 2009 and 2008, net sales from outside the U.S. represented 27.2%, 28.6% and 29.4%,
respectively, of our total net sales. Historically, foreign currency transaction gains (losses) have not had a material
effect on our overall operations. As of December 31, 2010, the impact to net income of a 10% change in exchange
rates is estimated to be approximately $4.4 million.
Critical Accounting Policies
The preparation of financial statements requires the use of judgments and estimates. The critical accounting
policies are described below to provide a better understanding of how we develop our judgments about future events
and related estimations and how such policies can impact our financial statements. A critical accounting policy is
one that requires difficult, subjective or complex estimates and assessments and is fundamental to the results of
operations. We consider our most critical accounting policies to be:
(cid:129) goodwill and other intangible assets;
(cid:129) product warranties;
(cid:129) pension and postretirement benefits;
(cid:129) self-insurance expense;
(cid:129) derivative accounting; and
(cid:129) income taxes.
This discussion and analysis should be read in conjunction with our Consolidated Financial Statements and
related Notes in “Item 8. Financial Statements and Supplementary Data.”
Goodwill and Other Intangible Assets
We assign goodwill to the reporting units that benefit from the synergies of our acquisitions, which are the
reporting units that report the results of such acquisitions. If we reorganize our management structure, the related
goodwill is allocated to the affected reporting units based upon the relative fair values of those reporting units.
Assets and liabilities, including deferred income taxes, are generally directly assigned to the reporting units through
our segment reporting system as part of our financial closing process. However, certain assets and liabilities,
including information technology assets and pension, self-insurance, and environmental liabilities, are commonly
managed and are not allocated to the segments in the normal course of our financial reporting process and therefore
must be assigned to the reporting units based upon appropriate methods. We test goodwill for impairment by
reporting unit annually in the first quarter of each fiscal year.
Reporting units that we test are generally equivalent to our business segments, or in some cases, one level
below. We review our reporting unit structure each year as part of our annual goodwill impairment testing and
reporting units are determined based upon a review of the periodic financial information supplied to and reviewed
by our Chief Executive Officer (the chief operating decision maker). We aggregate operating units reviewed into
reporting units when those operating units share similar economic characteristics.
34
We estimate reporting unit fair values using standard business valuation techniques such as discounted cash
flows and reference to comparable business transactions. The discounted cash flow approach is the principal
technique we use. We use comparable business transactions as a reasonableness test of our principal technique as we
believe that the discounted cash flow approach provides greater detail and opportunity to reflect specific facts,
circumstances and economic conditions for each reporting unit. Comparable business transactions are often limited
in number, the information can be dated, and may require significant adjustments due to differences in the size of the
business, markets served, product offered, and other factors. We therefore believe that in our circumstances, this
makes comparisons to business transactions less reliable than the discounted cash flows method.
The discounted cash flows used to estimate fair value are based on assumptions regarding each reporting unit’s
estimated projected future cash flows and the estimated weighted-average cost of capital that a market participant
would use in evaluating the reporting unit in a purchase transaction. The estimated weighted-average cost of capital
is based on the risk-free interest rate and other factors such as equity risk premiums and the ratio of total debt to
equity capital. In performing these impairment tests, we take steps to ensure that appropriate and reasonable cash
flow projections and assumptions are used. We reconcile our estimated enterprise value to our market capitalization
and determine the reasonableness of the cost of capital used by comparing to market data. We also perform
sensitivity analyses on the key assumptions used, such as the weighted-average cost of capital and terminal growth
rates.
In the aggregate, there has been an excess of fair value over the carrying value of the net assets of our reporting
units of over $1.0 billion in both 2010 and 2009. The average rate used to discount the estimated cash flows for each
reporting unit was 10.1% in 2010 and 11.2% in 2009.
Below is a sensitivity analysis regarding the aggregate fair value of our reporting units to changes in average
discount rates for 2010 (in millions):
Approximate decrease in fair value from a 100 basis point increase in discount rate . . . . . . . $(400)
Approximate increase in fair value from a 100 basis point decrease in discount rate . . . . . . . $ 600
We also monitor economic, legal, regulatory and other factors for LII as a whole and for each reporting unit
between annual impairment tests to ensure that there are no indicators that make it more likely than not that there
has been a decline in the fair value of the reporting unit below its carrying value. Specifically, we monitor industry
trends, our market capitalization, recent and forecasted financial performance of our reporting units, and the timing
and nature of our restructuring activities. While our recent financial performance is below historical levels, we do
not currently believe that there are any indicators of impairment. If these estimates or the related assumptions
change, we may be required to record non-cash impairment charges for these assets in the future.
Product Warranties
The estimate of our liability for future warranty costs requires us to make significant assumptions about the
amount, timing and nature of the costs we will incur in the future. As some of the warranties we issue extend
10 years or more in duration, a relatively small adjustment to an assumption may have a significant impact on our
overall liability. We review the assumptions used to determine the liability periodically and we adjust our
assumptions based upon factors such as actual failure rates and cost experience. Numerous factors could affect
actual failure rates and cost experience, including the amount and timing of new product introductions, changes in
manufacturing techniques or locations, components or suppliers used. Should actual warranty costs differ from our
estimates, we may be required to record adjustments to accruals and expense in the future. For more information see
Note 10 in the Notes to the Consolidated Financial Statements.
Pensions and Postretirement Benefits
We have domestic and foreign pension plans covering essentially all employees and we also maintain an
unfunded postretirement benefit plan, which provides certain medical and life insurance benefits to eligible
employees. In order to calculate the liability and the expense for the plans, we have to make several assumptions
including the discount rate and expected return on assets. The assumed discount rates of 5.47% for pension benefits
of our U.S. qualified pension plans and 5.30% for other benefits were used to calculate the liability as of
35
December 31, 2010. Our assumed discount rates are selected using the yield curve for high-quality corporate bonds,
which is dependent upon risk-free interest rates and current credit market conditions. In 2010, we have utilized
8.00% as the assumed long-term rate of return on assets, which is 25 basis points lower than our 2009 estimate.
These are long-term estimates of equity values and are not dependent on short-term variations of the equity markets.
Differences between actual experience and our assumptions are quantified as actuarial gains and losses. These
actuarial gains and losses do not immediately impact our earnings as they are deferred in accumulated other
comprehensive income (“AOCI”) and are amortized into net periodic benefit cost over the estimated service period.
For two of our pension plans, nearly all of the participants were considered inactive because the plan benefits were
frozen by the company. As a result, we increased the amortization term for these plans from the remaining service
lives of participants to their average life expectancy. The change in amortization term had a favorable $3.4 million
impact to expense. The timing and amount of our contributions also impact funding levels and the expected return
on assets. In 2010, we contributed $5.6 million to our pension plans and we contributed $42.2 million in 2009.
The assumed long-term rate of return on assets and the discount rate have significant effects on the amounts
reported for our defined benefit plans. A 25 basis point decrease in the long-term rate of return on assets or discount
rate would have the following effects (in millions):
25 Basis Point
Decrease in Long-
Term Rate of
Return
25 Basis Point
Decrease in
Discount Rate
Effect on net periodic benefit cost . . . . . . . . . . . . . . . . . . . . . . . . .
Effect on the postretirement benefit obligations . . . . . . . . . . . . . . . .
$ 0.5
N/A
$0.6
9.9
Assumed healthcare cost trend rates have a significant effect on the amounts reported for our healthcare plan.
For 2010, our assumed healthcare cost trend rate was 8.50%. In 2010, we lengthened our assumption regarding the
decline in healthcare cost trend assumption to the ultimate trend rate of 5.0% from 8 to 10 years A one percentage-
point change in assumed healthcare cost trend rates would have the following effects (in millions):
1-Percentage-Point
Increase
1-Percentage-Point
Decrease
Effect on total of service and interest cost . . . . . . . . . . . . . . . .
Effect on the postretirement benefit obligation . . . . . . . . . . . . .
$0.2
1.6
$(0.2)
(1.4)
Should actual results differ from our estimates and assumptions, revisions to the benefit plan liabilities and the
related expenses would be required. For more information, see Note 12 in the Notes to our Consolidated Financial
Statements.
Self-Insurance Expense
We use a combination of third-party insurance and self-insurance plans (large deductible or captive) to provide
protection against claims relating to workers’ compensation/employers’ liability, general liability, product liability,
auto liability, auto physical damage and other exposures. Prior to the third quarter of 2009, these policies were
written by a third-party insurance provider, which was then reinsured by our captive insurance subsidiary. Starting
with the third quarter of 2009, we use large deductible insurance plans for workers’ compensation/employers’
liability, general liability, product liability, and auto liability. These policies are written through third-party
insurance providers. We also carry umbrella or excess liability insurance for all third-party and self-insurance
plans, except for directors’ and officers’ liability, property damage and various other insurance programs. We
believe the limit within our excess policy is adequate for companies of our size in our industry. We believe that the
deductibles and liability limits retained by LII and the captive are customary for companies of our size in our
industry and are appropriate for our business.
In addition, we use third-party insurance plans for property damage, aviation liability, directors’ and officers’
liability, and other exposures. Each of these policies may include per occurrence and annual aggregate limits.
However, we believe these limits are customary for companies of our size in our industry and are appropriate for our
business.
36
The self-insurance expense and liabilities are primarily determined based on our historical claims information,
as well as industry factors and trends. We maintain safety and manufacturing programs that are designed to improve
the safety and effectiveness of our business processes and, as a result, reduce the level and severity of our various
self-insurance risks. In recent years, our actual claims experience has been trending favorably and therefore, both
self-insurance expense and the related liability have decreased. To the extent actuarial assumptions change and
claims experience rates differ from historical rates, our liability may change. The self-insurance liabilities recorded
in Accrued Expenses in the accompanying Consolidated Balance Sheets were $61.3 million as of December 31,
2010 and $60.4 million as of December 31, 2009.
Derivative Accounting
We use futures contracts and fixed forward contracts to mitigate our exposure to volatility in commodity prices
in the ordinary course of business. Fluctuations in metal commodity prices impact the value of the derivative
instruments that we hold. When metal commodity prices rise, the fair value of our futures contracts increases and
conversely, when commodity prices fall, the fair value of our futures contracts decreases. We are required to prepare
and maintain contemporaneous documentation for futures contracts to be formally designated as cash flow hedges.
Our failure to comply with the strict documentation requirements could result in the de-designation of cash flow
hedges, which may significantly impact our consolidated financial statements.
Income Taxes
In determining income for financial statement purposes, we must make certain estimates and judgments in the
calculation of tax provisions and the resultant tax liabilities and in the recoverability of deferred tax assets that arise
from temporary differences between the tax and financial statement recognition of revenue and expense. In the
ordinary course of global business, there may be many transactions and calculations where the ultimate tax outcome
is uncertain. The calculation of tax liabilities involves dealing with uncertainties in the application of complex tax
laws. We recognize potential liabilities for anticipated tax audit issues in the U.S. and other tax jurisdictions based
on an estimate of the ultimate resolution of whether, and the extent to which, additional taxes will be due. Although
we believe the estimates are reasonable, no assurance can be given that the final outcome of these matters will not be
different than what is reflected in the historical income tax provisions and accruals.
As part of our financial reporting process, we must assess the likelihood that our deferred tax assets can be
recovered. If recovery is not likely, the provision for taxes must be increased by recording a reserve in the form of a
valuation allowance for the deferred tax assets that are estimated not to be ultimately recoverable. In this process,
certain relevant criteria are evaluated, including the existence of deferred tax liabilities that can be used to absorb
deferred tax assets, the taxable income in prior carryback years that can be used to absorb net operating losses and
credit carrybacks and taxable income in future years. Our judgment regarding future taxable income may change
due to future market conditions, changes in U.S. or international tax laws and other factors. These changes, if any,
may require material adjustments to these deferred tax assets and an accompanying reduction or increase in net
income in the period when such determinations are made. In addition to the risks to the effective tax rate described
above, the effective tax rate reflected in forward-looking statements is based on current tax law. Any significant
changes in the tax laws could affect these estimates.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
The information required by this item is included under the caption “Market Risk” in Item 7 above.
37
Item 8. Financial Statements and Supplementary Data
MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Our management is responsible for establishing and maintaining adequate internal control over financial
reporting. As defined by the Securities and Exchange Commission, internal control over financial reporting is a
process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation
of the consolidated financial statements in accordance with U.S. generally accepted accounting principles.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect
misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions, or that the degree of compliance with the
policies or procedures may deteriorate.
Management, including our Chief Executive Officer and Chief Financial Officer, has undertaken an assess-
ment of the effectiveness of the Company’s internal control over financial reporting as of December 31, 2010, based
on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission. Management’s assessment included an evaluation of the design of the
Company’s internal control over financial reporting and testing of the operational effectiveness of those controls.
Based on this assessment, management concluded that as of December 31, 2010, the Company’s internal
control over financial reporting was effective.
KPMG LLP, the independent registered public accounting firm that audited the Company’s consolidated
financial statements, has issued an audit report including an opinion on the effectiveness of our internal control over
financial reporting as of December 31, 2010, a copy of which is included herein.
38
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders
Lennox International Inc.:
We have audited the accompanying consolidated balance sheets of Lennox International Inc. and subsidiaries
(the Company) as of December 31, 2010 and 2009, and the related consolidated statements of operations,
stockholders’ equity and comprehensive income (loss), and cash flows for each of the years in the three-year
period ended December 31, 2010. In connection with our audits of the consolidated financial statements, we also
have audited the financial statement schedule. We also have audited the Company’s internal control over financial
reporting as of December 31, 2010, based on criteria established in Internal Control — Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Lennox International
Inc.’s management is responsible for these consolidated financial statements, the financial statement schedule, for
maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal
control over financial reporting, included in the accompanying Management’s Report on Internal Control Over
Financial Reporting. Our responsibility is to express an opinion on these consolidated financial statements, the
financial statement schedule and the effectiveness of the Company’s internal control over financial reporting based
on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board
(United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about
whether the financial statements are free of material misstatement and whether effective internal control over
financial reporting was maintained in all material respects. Our audits of the consolidated financial statements
included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by management, and evaluating the overall
financial statement presentation. Our audit of internal control over financial reporting included obtaining an
understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and
testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our
audits also included performing such other procedures as we considered necessary in the circumstances. We believe
that our audits provide a reasonable basis for our opinions.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of financial statements for external purposes in
accordance with generally accepted accounting principles. A company’s internal control over financial reporting
includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail,
accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable
assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance
with generally accepted accounting principles, and that receipts and expenditures of the company are being made
only in accordance with authorizations of management and directors of the company; and (3) provide reasonable
assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s
assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect
misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions, or that the degree of compliance with the
policies or procedures may deteriorate.
39
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects,
the financial position of Lennox International Inc. and subsidiaries as of December 31, 2010 and 2009, and the
results of their operations and their cash flows for each of the years in the three-year period ended December 31,
2010, in conformity with U.S. generally accepted accounting principles. Also in our opinion, the related financial
statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole,
present fairly, in all material respects, the information set forth therein. Also in our opinion, Lennox International
Inc. maintained, in all material respects, effective internal control over financial reporting as of December 31, 2010,
based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission.
/s/ KPMG LLP
Dallas, Texas
February 18, 2011
40
LENNOX INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
As of December 31, 2010 and 2009
(In millions, except share and per share data)
2010
2009
ASSETS
CURRENT ASSETS:
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 160.0
Restricted cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
12.2
Accounts and notes receivable, net of allowances of $12.8 and $15.6 in 2010 and
2009, respectively. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Inventories, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
PROPERTY, PLANT AND EQUIPMENT, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
GOODWILL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
DEFERRED INCOME TAXES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
OTHER ASSETS, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
384.8
286.2
36.7
67.0
946.9
324.3
271.8
87.2
61.8
TOTAL ASSETS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,692.0
LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES:
Short-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Current maturities of long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income taxes payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
LONG-TERM DEBT. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
POSTRETIREMENT BENEFITS, OTHER THAN PENSIONS . . . . . . . . . . . . . . . . . . .
PENSIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
OTHER LIABILITIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1.4
0.6
273.8
334.5
5.3
615.6
317.0
15.9
88.1
65.7
1,102.3
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS’ EQUITY:
$ 124.3
—
357.0
250.2
34.9
67.5
833.9
329.6
257.4
74.6
48.4
$1,543.9
$
2.2
35.5
238.2
317.9
—
593.8
193.8
13.4
66.7
71.8
939.5
Preferred stock, $.01 par value, 25,000,000 shares authorized, no shares issued or
outstanding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
—
—
Common stock, $.01 par value, 200,000,000 shares authorized, 86,480,816 shares
and 85,567,485 shares issued for 2010 and 2009, respectively . . . . . . . . . . . . . . . .
Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Retained earnings. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accumulated other comprehensive income (loss). . . . . . . . . . . . . . . . . . . . . . . . . . . .
Treasury stock, at cost, 32,784,503 shares and 29,292,512 shares for 2010 and 2009,
(947.1)
respectively . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total stockholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
589.7
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY . . . . . . . . . . . . . . $1,692.0
0.9
863.5
642.2
30.2
0.9
839.1
558.6
(0.8)
(793.4)
604.4
$1,543.9
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, 2010, 2009 and 2008
(In millions, except per share data)
NET SALES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $3,096.4
2,204.6
COST OF GOODS SOLD . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$2,847.5
2,059.4
$3,441.1
2,506.6
Gross profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
891.8
788.1
934.5
2010
2009
2008
OPERATING EXPENSES:
Selling, general and administrative expenses . . . . . . . . . . . . . . . . . . . . . .
Losses (Gains) and Other Expenses, net . . . . . . . . . . . . . . . . . . . . . . . . .
Restructuring charges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Impairment of assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income from equity method investments . . . . . . . . . . . . . . . . . . . . . . . . .
Operational income from continuing operations . . . . . . . . . . . . . . . . . .
INTEREST EXPENSE, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
OTHER EXPENSE, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income from continuing operations before income taxes . . . . . . . . . . .
PROVISION FOR INCOME TAXES . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income from continuing operations . . . . . . . . . . . . . . . . . . . . . . . . . . .
DISCONTINUED OPERATIONS:
Loss from discontinued operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income tax benefit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loss from discontinued operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
685.7
10.2
15.6
—
(10.1)
190.4
12.8
1.0
176.6
59.5
117.1
1.1
(0.2)
0.9
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 116.2
EARNINGS PER SHARE — BASIC:
Income from continuing operations. . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Loss from discontinued operations . . . . . . . . . . . . . . . . . . . . . . . . . . .
2.14
(0.01)
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
2.13
EARNINGS PER SHARE — DILUTED:
Income from continuing operations. . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Loss from discontinued operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2.10
(0.02)
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
2.08
AVERAGE SHARES OUTSTANDING:
Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
CASH DIVIDENDS DECLARED PER SHARE . . . . . . . . . . . . . . . . . . . . $
54.6
55.8
0.60
$
$
$
$
$
$
644.9
(6.6)
41.5
6.4
(7.3)
109.2
8.2
0.1
100.9
39.1
61.8
13.1
(2.4)
10.7
51.1
1.11
(0.19)
0.92
1.09
(0.19)
0.90
55.6
56.6
0.56
686.9
(1.9)
30.4
9.1
(8.6)
218.6
14.2
0.1
204.3
80.5
123.8
1.8
(0.8)
1.0
$ 122.8
$
$
$
$
$
2.18
(0.01)
2.17
2.12
(0.01)
2.11
56.7
58.3
0.56
The accompanying notes are an integral part of these consolidated financial statements.
42
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T
LENNOX INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 2010, 2009 and 2008
(In millions)
2010
2009
2008
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 116.2
$ 51.1
$ 122.8
Adjustments to reconcile net income to net cash provided by operating activities:
Income from equity method investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Dividends from affiliates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Restructuring expenses, net of cash paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Impairment of assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Provision for bad debts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Unrealized (gain) loss on derivative contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Return (posting) of collateral for hedges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Stock-based compensation expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(Repayments) proceeds from sales of accounts receivable under asset securitization . . . . . . . . .
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Pension costs in excess of (less than) contributions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other items, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Changes in assets and liabilities, net of effects of acquisitions and divestitures:
Accounts and notes receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income taxes payable and receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net cash provided by operating activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from the disposal of property, plant and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Purchases of property, plant and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from sale of businesses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Acquisition of business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Return of investment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Restricted cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Purchases of short-term investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from sales and maturities of short-term investments . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net cash used in investing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
CASH FLOWS FROM FINANCING ACTIVITIES:
(10.1)
12.3
(11.0)
—
6.3
(0.7)
—
15.4
53.5
—
(9.5)
4.5
2.4
(29.3)
(31.1)
(5.5)
33.6
31.8
18.8
(11.8)
185.8
0.2
(45.8)
3.6
(7.2)
—
(12.2)
—
—
(61.4)
(7.3)
11.3
18.6
6.4
12.6
(7.0)
37.9
12.8
52.9
(30.0)
6.7
(25.4)
7.7
41.2
51.8
10.8
(5.4)
3.8
(7.0)
(18.0)
225.5
0.6
(58.8)
10.0
—
0.9
—
(16.9)
50.2
(14.0)
(8.6)
14.3
0.6
9.1
17.0
5.1
(37.9)
11.8
50.6
30.0
25.0
(19.5)
(12.8)
53.5
14.7
0.7
(44.0)
(41.5)
(1.7)
(6.0)
183.2
5.8
(62.1)
—
(4.7)
—
—
(64.2)
58.7
(66.5)
(0.8)
Short-term (payments) borrowings, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
—
Proceeds from capital lease . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(35.9)
Long-term payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
199.8
Issuance of senior unsecured notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(76.5)
Revolver credit facility (payments) borrowings, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(1.0)
Additional investments in affiliates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
3.5
Proceeds from stock option exercises . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(1.8)
Payments of deferred financing costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(153.7)
Repurchases of common stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
5.3
Excess tax benefits related to share-based payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(32.4)
Cash dividends paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(93.5)
Net cash used in financing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
30.9
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS . . . . . . . . . . . . . . . . . . . . . . . . .
4.8
EFFECT OF EXCHANGE RATES ON CASH AND CASH EQUIVALENTS . . . . . . . . . . . . . . . . . . .
CASH AND CASH EQUIVALENTS, beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
124.3
CASH AND CASH EQUIVALENTS, end of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 160.0
(4.3)
—
(1.7)
—
(183.3)
—
9.4
—
(5.6)
4.9
(31.1)
(211.7)
(0.2)
2.4
122.1
$ 124.3
1.4
15.3
(36.4)
—
213.5
—
19.7
(0.3)
(323.8)
11.0
(32.4)
(132.0)
(15.3)
(8.1)
145.5
$ 122.1
Supplementary disclosures of cash flow information:
Cash paid during the year for:
Interest
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 12.4
$
8.4
$ 17.6
Income taxes (net of refunds) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 45.5
$ 32.1
$ 41.9
The accompanying notes are an integral part of these consolidated financial statements.
44
LENNOX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 2010, 2009 and 2008
1. Nature of Operations:
Lennox International Inc., a Delaware corporation, through its subsidiaries (referred to herein as “we,” “our,”
“us,” “LII” or the “Company”), is a leading global provider of climate control solutions. We design, manufacture,
market and service a broad range of products for the heating, ventilation, air conditioning and refrigeration
(“HVACR”) markets. We operate in four reportable business segments of the HVACR industry: Residential
Heating & Cooling, Commercial Heating & Cooling, Service Experts, and Refrigeration. See Note 19 for financial
information regarding our reportable segments.
We sell our products and services through a combination of distributors, independent and company-owned
dealer service centers, other installing contractors, wholesalers, manufacturers’ representatives, original equipment
manufacturers and to national accounts.
2. Summary of Significant Accounting Policies:
Principles of Consolidation
The consolidated financial statements include the accounts of Lennox International Inc. and the accounts of
our majority-owned subsidiaries. All intercompany transactions, profits and balances have been eliminated.
Cash and Cash Equivalents
We consider all highly liquid temporary investments with original maturity dates of three months or less to be
cash equivalents. Cash and cash equivalents consisted primarily of bank deposits and US Treasury money market
securities.
During the first quarter of 2010, our captive insurance subsidiary entered into an agreement in which cash was
placed into a trust for the benefit of a third-party insurance provider. The purpose of the trust is to pay workers
compensation claims for policy years 2003 — 2009 until the liabilities are fully extinguished. These policies were
written by the third-party insurance provider, and then reinsured by our captive insurance subsidiary. This
transaction was classified as restricted cash on the accompanying Consolidated Balance Sheets. The balance at
December 31, 2010 was $12.2 million.
Accounts and Notes Receivable
Accounts and notes receivable are shown in the accompanying Consolidated Balance Sheets, net of allowance
for doubtful accounts. The allowance for doubtful accounts is generally established during the period in which
receivables are recognized and is maintained at a level deemed appropriate based on historical and other factors that
affect collectability. Such factors include the historical trends of write-offs and recovery of previously written-off
accounts, the financial strength of the customer and projected economic and market conditions. We determine the
delinquency status of receivables predominantly based on contractual terms and write off uncollectible receivables
after management’s review of factors that affect collectability as noted above, among other considerations. We have
no significant concentrations of credit risk within our accounts and notes receivable.
Inventories
Inventory costs include material, labor, depreciation and plant overhead. Inventories of $123.8 million and
$100.8 million as of December 31, 2010 and 2009, respectively, were valued at the lower of cost or market using the
last-in, first-out (“LIFO”) cost method. The remaining portion of the inventory is valued at the lower of cost or
market with cost being determined either on the first-in, first-out (“FIFO”) basis or average cost. We elected to use
the LIFO cost method for our domestic manufacturing companies in 1974 and continued to elect the LIFO cost
method for new operations through the late 1980s. The types of inventory include raw materials, purchased
45
LENNOX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
components, work-in-process, repair parts and finished goods. Starting in the late 1990s, we began adopting the
FIFO cost method for all new domestic manufacturing operations (primarily acquisitions). Our operating entities
with a previous LIFO election continue to use the LIFO cost method. We also use the FIFO cost method for all of our
foreign-based manufacturing facilities as well as our Service Experts segment, whose inventory is limited to service
parts and finished goods.
Property, Plant and Equipment
Property, plant and equipment is stated at cost, net of accumulated depreciation. Expenditures that increase the
utility or extend the useful lives of fixed assets are capitalized and expenditures for maintenance and repairs are
charged to expense as incurred. Depreciation is computed using the straight-line method over the following
estimated useful lives:
Buildings and improvements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Machinery and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2 to 40 years
1 to 15 years
We periodically review long-lived assets for impairment as events or changes in circumstances indicate that the
carrying amount of such assets might not be recoverable. In order to assess recoverability, we compare the estimated
expected future undiscounted cash flows identified with each long-lived asset or related asset group to the carrying
amount of such assets. If the expected future cash flows do not exceed the carrying value of the asset or assets being
reviewed, an impairment loss is recognized based on the excess of the carrying amount of the impaired assets over
their fair value.
Goodwill
Goodwill represents the excess of cost over fair value of assets of acquired businesses. Goodwill and intangible
assets determined to have an indefinite useful life are not amortized, but are instead tested for impairment at least
annually. We complete our annual goodwill impairment tests in the first quarter of each fiscal year and continuously
monitor our operations for indicators of goodwill impairment based on current market conditions.
We assign goodwill to the reporting units that benefit from the synergies of our acquisitions, which are the
reporting units that report the results of such acquisitions. If we reorganize our management structure, the related
goodwill is allocated to the affected reporting units based upon the relative fair values of those reporting units.
Assets and liabilities, including deferred income taxes, are generally directly assigned to the reporting units through
our segment reporting system as part of our financial closing process. However, certain assets and liabilities,
including information technology assets and pension, self-insurance, and environmental liabilities, are commonly
managed and are not allocated to the segments in the normal course of our financial reporting process and therefore
must be assigned to the reporting units based upon appropriate methods.
Reporting units that we test are generally equivalent to our business segments, or in some cases, one level
below. We review our reporting unit structure each year as part of our annual goodwill impairment testing and
reporting units are determined based upon a review of the periodic financial information supplied to and reviewed
by our Chief Executive Officer (the chief operating decision maker). We aggregate operating units reviewed into
reporting units when those operating units share similar economic characteristics.
We estimate reporting unit fair values using standard business valuation techniques such as discounted cash
flows and reference to comparable business transactions and observable fair values of comparable entities. The
discounted cash flow approach is the principal technique we use. We use comparable business transactions and
observable fair values of comparable entities as a reasonableness test of our principal technique as we believe that
the discounted cash flow approach provides greater detail and opportunity to reflect specific facts, circumstances
and economic conditions for each reporting unit. Comparable business transactions are often limited in number, the
information can be dated, and may require significant adjustments due to differences in the size of the business,
46
LENNOX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
markets served, product offered, and other factors. We therefore believe that in our circumstances, this makes
comparisons to comparable business transactions less reliable than the discounted cash flows method.
The discounted cash flows used to estimate fair value are based on assumptions regarding each reporting unit’s
estimated projected future cash flows and the estimated weighted-average cost of capital that a market participant
would use in evaluating the reporting unit in a purchase transaction. The estimated weighted-average cost of capital
is based on the risk-free interest rate and other factors such as equity risk premiums and the ratio of total debt to
equity capital. In performing these impairment tests, we take steps to ensure that appropriate and reasonable cash
flow projections and assumptions are used. We reconcile our estimated enterprise value to our market capitalization
and determine the reasonableness of the cost of capital used by comparing to market data. We also perform
sensitivity analyses on the key assumptions used, such as the weighted-average cost of capital and terminal growth
rates.
We also monitor economic, legal, regulatory and other factors for LII as a whole and for each reporting unit
between annual impairment tests to ensure that there are no indicators that make it more likely than not that there
has been a decline in the fair value of any reporting unit below its carrying value. Specifically, we monitor industry
trends, our market capitalization, recent and forecasted financial performance of our reporting units, and the timing
and nature of our restructuring activities. While our recent financial performance is below historical levels, we
determined that no impairment of our goodwill existed as of December 31, 2010, 2009 or 2008. If these estimates or
the related assumptions change, we may be required to record non-cash impairment charges for these assets in the
future. For additional disclosures on goodwill, see Note 5.
Intangible and Other Assets
We amortize intangible assets with finite lives over their respective estimated useful lives to their estimated
residual values.
Identifiable intangible and other assets that have finite lives are amortized over their estimated useful lives as
follows:
Asset
Deferred financing costs
Customer relationships
Useful Life
Effective interest method
Straight-line method up to 10 years
We periodically review intangible assets with estimable useful lives for impairment as events or changes in
circumstances indicate that the carrying amount of such assets might not be recoverable. In order to assess
recoverability, we compare the estimated expected undiscounted future cash flows identified with each intangible
asset or related asset group to the carrying amount of such assets. If the expected future cash flows do not exceed the
carrying value of the asset or assets being reviewed, an impairment loss is recognized based on the excess of the
carrying amount of the impaired assets over their fair value.
In assessing the fair value of our other intangibles, we must make assumptions that a market participant would
make regarding estimated future cash flows and other factors to determine the fair value of the respective assets. If
these estimates or the related assumptions change, we may be required to record impairment charges for these assets
in the future.
Product Warranties
For some of our heating, ventilation and air conditioning (“HVAC”) products, we provide warranty terms
ranging from one to 20 years to customers for certain components such as compressors or heat exchangers. For
select products, we also provide lifetime warranties for heat exchangers. A liability for estimated warranty expense
is recorded on the date that revenue is recognized. Our estimates of future warranty costs are determined for each
product line. The number of units that we expect to repair or replace is determined by applying the estimated failure
47
LENNOX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
rate, which is generally based on historical experience, to the number of units that have been sold and are still under
warranty. The estimated units to be repaired under warranty are multiplied by the average cost to repair or replace
such products to determine the estimated future warranty cost. We do not discount product warranty liabilities as the
amounts are not fixed and the timing of future cash payments is neither fixed nor reliably determinable. We also
provide for specifically identified warranty obligations. Estimated future warranty costs are subject to adjustment
from time to time depending on changes in actual failure rate and cost experience. Subsequent costs incurred for
warranty claims serve to reduce the accrued product warranty liability.
Pensions and Postretirement Benefits
We provide pension and postretirement medical benefits to eligible domestic and foreign employees and
recognize pension and postretirement benefit costs over the estimated service life or average life expectancy of
those employees. We also recognize the funded status of our benefit plans, as measured at year-end by the difference
between plan assets at fair value and the benefit obligation, in the Consolidated Balance Sheets. Changes in the
funded status are recognized in the year in which the changes occur through accumulated other comprehensive
income (“AOCI”). Actuarial gains or losses are amortized into net period benefit cost over the estimated service life
of covered employees or average life expectancy of participants depending on the plan.
The benefit plan assets and liabilities reflect assumptions about the long-range performance of our benefit
plans. Should actual results differ from management’s estimates, revisions to the benefit plan assets and liabilities
would be required. For additional disclosures on pension and postretirement medical benefits, including how we
determine the assumptions used, see Note 12.
Self-Insurance
Self-insurance expense and liabilities, calculated on an undiscounted basis, are actuarially determined based
primarily on our historical claims information, as well as industry factors and trends. As of December 31, 2010, self-
insurance and captive reserves represent the best estimate of the future payments to be made on losses reported and
unreported for 2010 and prior years. The majority of our self-insured risks (excluding auto liability and physical
damage) will be paid over an extended period of time.
Actual payments for claims reserved as of December 31, 2010 may vary depending on various factors,
including the development and ultimate settlement of reported and unreported claims. To the extent actuarial
assumptions change and claims experience rates differ from historical rates, our liability may change. For additional
disclosures on self-insured risks and reserves, see Note 10.
Derivatives
We use futures contracts and fixed forward contracts to mitigate the exposure to volatility in commodity prices
and foreign exchange rates, and we use an interest rate swap to hedge changes in the benchmark interest rate related
to our revolving credit facility. We hedge only exposures in the ordinary course of business and do not hold or trade
derivatives for profit. All derivatives are recognized in the Consolidated Balance Sheets at fair value. Classification
of each hedging instrument is based upon whether the maturity of the instrument is less than or greater than
12 months. For more information, see Note 8.
Income Taxes
Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are
recognized for the future tax consequences attributable to differences between the financial statement carrying
amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carry
forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be recovered or settled. The effect of a
48
LENNOX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
change in tax rates on deferred tax assets and liabilities is recognized in income in the period that includes the
enactment date.
Unrecognized tax benefits are accounted for as required by the Financial Accounting Standards Board
(“FASB”) Accounting Standards Codification (“ASC”) Topic 740. For more information, see Note 9.
Revenue Recognition
Our Residential Heating & Cooling, Commercial Heating & Cooling and Refrigeration segments’ revenue
recognition practices depend upon the shipping terms for each transaction. Shipping terms are primarily FOB
Shipping Point and, therefore, revenues are recognized for these transactions when products are shipped to
customers and title passes. However, certain customers in our smaller operations, primarily outside of North
America, have shipping terms where title and risk of ownership do not transfer until the product is delivered to the
customer. For these transactions, revenues are recognized on the date that the product is received and accepted by
such customers. We have experienced returns for miscellaneous reasons and we record a reserve for these returns
based on historical experience at the time we recognize revenue. Our historical rate of returns are insignificant as a
percentage of sales.
Our Service Experts segment recognizes sales, installation, maintenance and repair revenues at the time the
services are completed. The Service Experts segment also provides HVAC system design and installation services
under fixed-price contracts, which may extend up to one year. Revenue for these services is recognized using the
percentage-of-completion method, based on the percentage of incurred contract costs-to-date in relation to total
estimated contract costs, after giving effect to the most recent estimates of total cost. The effect of changes to total
estimated contract revenue or cost is recognized in the period such changes are determined. Provisions for estimated
losses on individual contracts are made in the first period in which the loss becomes probable.
We engage in cooperative advertising, customer rebate, cash discount and other miscellaneous programs that
result in payments or credits being issued to our customers. Our policy is to record the discounts and incentives as a
reduction of sales when the sales are recorded, with the exception of certain cooperative advertising expenditures
that are charged to Selling, General and Administrative (“SG&A”) Expenses. Under these cooperative advertising
programs, we receive, or will receive, an identifiable benefit (goods or services) in exchange for the consideration
given.
Cost of Goods Sold
The principal components of cost of goods sold in our manufacturing operations are component costs, raw
materials, factory overhead, labor, estimated costs of warranty expense, and freight and distribution costs. In our
Service Experts segment, the principal components of cost of goods sold are equipment, vehicle costs, parts and
supplies, and labor.
Selling, General and Administrative Expenses
SG&A expenses include all other payroll and benefit costs, advertising, commissions, research and devel-
opment, information technology costs, and other selling, general and administrative related costs such as insurance,
travel, non-production depreciation and rent.
Stock-Based Compensation
We recognize compensation expense for stock-based arrangements over the required employee service
periods. We base stock-based compensation costs on the estimated grant-date fair value of the stock-based awards
that are expected to ultimately vest and adjust expected vesting rates to actual rates as additional information
becomes known. We also adjust performance achievement rates based on our best estimates of those rates at the end
of the performance period.
49
LENNOX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Translation of Foreign Currencies
All assets and liabilities of foreign subsidiaries and joint ventures are translated into U.S. dollars using rates of
exchange in effect at the balance sheet date. Revenues and expenses are translated at weighted average exchange
rates during the year. The unrealized translation gains and losses are included in AOCI in the accompanying
Consolidated Balance Sheets. Transaction gains and losses are included in Losses (Gains) and Other Expenses, net
in the accompanying Consolidated Statements of Operations.
Use of Estimates
The preparation of financial statements requires us to make estimates and assumptions about future events.
These estimates and the underlying assumptions affect the amounts of assets and liabilities reported, disclosures
about contingent assets and liabilities, and reported amounts of revenues and expenses. Such estimates include the
valuation of accounts receivable, inventories, goodwill, intangible assets, and other long-lived assets, contingen-
cies, guarantee obligations, indemnifications, and assumptions used in the calculation of income taxes, pension and
postretirement medical benefits, among others. These estimates and assumptions are based on our best estimates
and judgment.
We evaluate our estimates and assumptions on an ongoing basis using historical experience and other factors,
including the current economic environment. We believe these estimates and assumptions to be reasonable under
the circumstances and adjust such estimates and assumptions when facts and circumstances dictate. Volatile equity,
foreign currency, and commodity markets, have combined to increase the uncertainty inherent in such estimates and
assumptions. As future events and their effects cannot be determined with precision, actual results could differ
significantly from these estimates. Changes in those estimates resulting from continuing changes in the economic
environment will be reflected in the financial statements in future periods.
Reclassifications
Certain amounts have been reclassified from the prior year presentation to conform to the current year
presentation.
3.
Inventories:
Components of inventories are as follows (in millions):
Finished goods . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Work in process . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Raw materials and repair parts. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Excess of current cost over last-in, first-out cost. . . . . . . . . . . . . . . . . . . . . . .
For the Years Ended
December 31,
2010
2009
$213.7
6.5
137.0
357.2
(71.0)
$182.3
7.2
132.7
322.2
(72.0)
Total inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$286.2
$250.2
Repair parts are primarily utilized in service operations and to fulfill our warranty obligations.
The Company recorded income of $0.7 million and $1.3 million from LIFO inventory liquidations during 2010
and 2009, respectively.
50
LENNOX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
4. Property, Plant and Equipment:
Components of property, plant and equipment are as follows (in millions):
For the Years Ended
December 31,
2010
2009
Land . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 39.3
226.5
Buildings and improvements. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
625.4
Machinery and equipment
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
17.8
Construction in progress and equipment not yet in service . . . . . . . . . . . . . . . . .
$ 37.7
220.2
583.0
39.7
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less-accumulated depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
909.0
(584.7)
880.6
(551.0)
Property, plant and equipment, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 324.3
$ 329.6
The balances above include capital lease assets composed of buildings and improvements and machinery and
equipment totaling $17.1 million and $17.6 million, net of accumulated depreciation of $5.6 million and
$4.5 million for the years ended December 31, 2010 and 2009, respectively.
During 2009, the Company recorded $6.0 million in impairment charges related to the abandonment of
information technology assets that had not yet been placed in service. There were no impairment charges during
2010.
5. Goodwill, Intangible and Other Assets:
Goodwill
The changes in the carrying amount of goodwill related to continuing operations, by segment, are as follows (in
millions):
Segment
Residential
Heating
& Cooling
Commercial
Heating
& Cooling
Service
Experts
Refrigeration
Total
Balance as of January 1, 2009:
Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accumulated impairment loss . . . . . . . . . . . .
Changes(1) . . . . . . . . . . . . . . . . . . . . . . . . . .
Balance as of December 31, 2009:
Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accumulated impairment loss . . . . . . . . . . . .
Changes(2) . . . . . . . . . . . . . . . . . . . . . . . . . .
Balance as of December 31, 2010:
Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accumulated impairment loss . . . . . . . . . . . .
$31.2
—
31.2
0.1
$31.3
—
31.3
(1.3)
$ 301.8
(208.0)
93.8
13.1
$ 314.9
(208.0)
106.9
9.7
30.0
—
324.6
(208.0)
$73.6
—
73.6
11.9
$85.5
—
85.5
6.0
91.5
—
$ 440.3
(208.0)
232.3
25.1
$ 465.4
(208.0)
257.4
14.4
479.8
(208.0)
$30.0
$ 116.6
$91.5
$ 271.8
$33.7
—
33.7
—
$33.7
—
33.7
—
33.7
—
$33.7
51
LENNOX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(1) Changes in 2009 primarily relate to changes in foreign currency translation rates, offset by the write-off of
$4.4 million of goodwill related to the sale of businesses, primarily in the Service Experts segment.
(2) During 2010, our Service Experts segment acquired a company which resulted in additional goodwill of
$4.0 million. The other changes are related to fluctuations in foreign currency translation rates.
Intangible and Other Assets
Identifiable intangible and other assets subject to amortization are recorded in Other Assets in the accom-
panying Consolidated Balance Sheets and were comprised of the following (in millions):
Deferred financing costs . . . . .
Customer relationships . . . . . .
Other . . . . . . . . . . . . . . . . . . .
Gross
Amount
$ 9.2
4.5
4.5
Total . . . . . . . . . . . . . . . . . .
$18.2
For the Years Ended December 31,
2010
Accumulated
Amortization
Net
Amount
Gross
Amount
2009
Accumulated
Amortization
Net
Amount
$ (6.3)
(1.5)
(3.2)
$(11.0)
$2.9
3.0
1.3
$7.2
$ 7.3
3.3
3.4
$14.0
$(5.5)
(1.1)
(2.3)
$(8.9)
$1.8
2.2
1.1
$5.1
Amortization of intangible assets was as follows (in millions):
For the Years Ended
December 31,
2009
2008
2010
Amortization expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$2.0
$1.6
$1.5
Estimated intangible amortization expense for the next five years is as follows (in millions):
2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1.9
1.5
2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
0.9
2013 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
0.9
2014 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
0.9
2015 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1.1
Thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
As of December 31, 2010 and 2009, we had $4.9 million and $4.8 million respectively of intangible assets
primarily consisting of trademarks, which are not subject to amortization.
6.
Joint Ventures and Other Equity Investment:
Joint Ventures
We participate in two joint ventures; the largest is located in the U.S. and the other in Mexico. These joint
ventures are engaged in the manufacture and sale of compressors, unit coolers and condensing units. Because we
exert significant influence over these affiliates based upon our respective 25% and 50% ownership, but do not
control them due to venture partner participation, they have been accounted for under the equity method and their
financial position and results of operations are not consolidated. We purchase compressors from our U.S. joint
venture for use in certain of our products.
52
LENNOX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The combined balance of equity method investments included in Other Assets, net totaled (in millions):
As of
December 31,
2010
2009
Other Assets, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $28.2
$30.0
Purchases of compressors from our U.S. joint venture that were included in Cost of Goods Sold in the
Consolidated Statements of Operations were approximately (in millions):
For the Years Ended
December 31,
2009
2008
2010
Purchases of compressors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$86.1
$95.0
$123.2
During 2008, the Company loaned $1.6 million to its joint venture in Mexico due to that entity’s cash needs
related to margin calls on forward commodity contracts and operating cash requirements. The joint venture partner
loaned equal amounts under identical terms to the joint venture; and therefore, the investment continues to be
recorded under the equity method. As of December 31, 2010 and 2009, the outstanding loan balance was
$0.9 million and $1.6 million, respectively.
Other Investment
LII also has an investment in a compressor manufacturer located in Thailand. During 2008, under the equity
method we recorded investment losses of $0.3 million and dividends of $1.1 million as reductions to the investment
balance. We also recorded $9.1 million of impairment charges related to this investment in 2008.
Also, as a result of a rights offering in 2008, our percentage of equity ownership declined from 13% to 9%.
While formerly accounted for under the equity method, the investment of $18.0 million in 2010 and $5.4 million in
2009 was accounted for as an available-for-sale marketable equity security. A net gain of $12.5 million in 2010 was
recorded in AOCI. The fair value of the investment was measured based upon the quoted market price of the
investee’s common stock as listed on the Stock Exchange of Thailand, multiplied by the number of shares owned.
For more information on the valuation of this investment, see Note 20.
7. Current Accrued Expenses:
Significant components of current accrued expenses are presented below (in millions):
For the Years Ended
December 31,
2010
2009
Accrued compensation and benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Self insurance reserves . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued warranties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued product quality issue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued rebates and promotions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Derivative contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total continuing operations accrued expenses . . . . . . . . . . . . . . . . . . . . . . . . .
Discontinued operations accrued expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 87.6
61.3
34.9
31.2
16.0
38.2
2.2
63.1
$334.5
—
Total current accrued expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$334.5
$ 66.4
60.4
32.7
31.5
21.6
36.7
2.0
65.3
$316.6
1.3
$317.9
53
LENNOX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
8. Derivatives:
General
Our earnings and cash flows are subject to fluctuations due to changes in commodity prices, interest rates, and
foreign currency exchange rates, and we seek to mitigate a portion of these risks by entering into derivative
contracts. The derivatives we use are commodity futures contracts, interest rate swaps, and currency forward
contracts. We do not use derivatives for speculative purposes.
The derivatives we enter into may be, but are not always, accounted for as hedges. To qualify for hedge
accounting, the derivatives must be highly effective in reducing the risk exposure that they are designed to hedge,
and it must be probable that the underlying transaction will occur. For instruments designated as cash flow hedges,
we must formally document, at inception, the relationship between the derivative and the hedged item, the risk
management objective, the hedging strategy for use of the hedged instrument, and how hedge effectiveness is, and
will be, assessed. This documentation also includes linking the derivatives that are designated as cash flow hedges to
forecasted transactions. We assess hedge effectiveness at inception and at least quarterly throughout the hedge
designation period.
We recognize all derivatives as either assets or liabilities at fair value in the Consolidated Balance Sheets,
regardless of whether or not hedge accounting is applied. For more information on the fair value of these derivative
instruments, see Note 20. We report cash flows arising from our hedging instruments consistent with the
classification of cash flows from the underlying hedged items. Accordingly, cash flows associated with our
derivative programs are classified as operating activities in the accompanying Consolidated Statements of Cash
Flows.
We monitor our derivative positions and credit ratings of our counterparties and do not anticipate losses due to
counterparty non-performance.
Hedge Accounting
The derivatives that we use as hedges of commodity prices and movements in interest rates are accounted for as
cash flow hedges. The effective portion of the gain or loss on the derivatives accounted for as hedges is recorded, net
of applicable taxes, in AOCI, a component of Stockholders’ Equity in the accompanying Consolidated Balance
Sheets. When earnings are affected by the variability of the underlying cash flow, the applicable offsetting amount
of the gain or loss from the derivatives that is deferred in AOCI is reclassified into earnings in the same financial
statement line item that the hedged item is recorded in. Ineffectiveness, if any, is recorded in earnings each period. If
the hedging relationship ceases to be highly effective, the net gain or loss shall remain in AOCI and will be
reclassified into earnings when earnings are affected by the variability of the underlying cash flow. If it becomes
probable that the forecasted transaction will not occur by the end of the originally specified period or within two
months thereafter, the net gain or loss remaining in AOCI will be reclassified to earnings immediately.
Accounting for Derivatives When Hedge Accounting is Not Applied
We may also enter into derivatives that economically hedge certain of our risks, even though hedge accounting
does not apply or we elect not to apply hedge accounting to these instruments. The changes in fair value of the
derivatives act as an economic offset to changes in the fair value of the underlying items. Changes in the fair value of
instruments not designated as cash flow hedges are recorded in earnings throughout the term of the derivative
instrument and are reported in Losses (Gains) and Other Expenses, net in the accompanying Consolidated
Statements of Operations.
54
LENNOX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Objectives and Strategies for Using Derivative Instruments
Commodity Price Risk
We utilize a cash flow hedging program to mitigate our exposure to volatility in the prices of metal
commodities we use in our production processes. The hedging program includes the use of futures contracts,
and we enter into these contracts based on our hedging strategy. We use a dollar cost averaging strategy for our
hedge program. As part of this strategy, a higher percentage of commodity price exposures are hedged near term
with lower percentages hedged at future dates. This strategy provides us with protection against near-term price
volatility caused by market speculators and market forces, such as supply variation, while allowing us to adjust to
market price movements over time. Upon entering into futures contracts, we lock in prices and are subject to
derivative losses should the metal commodity prices decrease and gains should the prices increase.
Interest Rate Risk
A portion of our debt bears interest at variable interest rates and therefore, we are subject to variability in the
cash paid for interest expense. In order to mitigate a portion of this risk, we use a hedging strategy to eliminate the
variability of cash flows in the interest payments associated with the first $100 million of the total variable-rate debt
outstanding under our revolving credit facility that is solely due to changes in the benchmark interest rate. This
strategy allows us to fix a portion of our interest payments.
On June 12, 2009, we entered into a $100 million pay-fixed, receive-variable interest rate swap with a large
financial institution at a fixed interest rate of 2.66%. The variable portion of the interest rate swap is tied to the
1-Month LIBOR (the benchmark interest rate). The interest rates under both the interest rate swap and the
underlying debt are reset, the swap is settled with the counterparty, and interest is paid, on a monthly basis. The
interest rate swap expires October 12, 2012. We account for the interest rate swap as a cash flow hedge.
Foreign Currency Risk
Foreign currency exchange rate movements create a degree of risk by affecting the U.S. dollar value of assets
and liabilities arising in foreign currencies. Our objective for entering into foreign currency forward contracts is to
mitigate the impact of short-term currency exchange rate movements on certain short-term intercompany trans-
actions. In order to meet that objective, we periodically enter into foreign currency forward contracts that act as
economic hedges against changes in foreign currency exchange rates. These forward contracts are not designated as
hedges and generally expire during the quarter that we entered into them.
Cash Flow Hedges
We include (gains) losses in AOCI in connection with our commodity cash flow hedges. The (gains) losses
related to commodity price hedges are expected to be reclassified into earnings within the next 18 months based on
the prices of the commodities at settlement date. Assuming that commodity prices remain constant, $10.9 million of
derivative gains are expected to be reclassified into earnings within the next 12 months. Commodity futures
contracts that are designated as cash flow hedges and are in place as of December 31, 2010 are scheduled to mature
through May 2012.
The (gains) losses related to our interest rate swap are expected to be reclassified into earnings within the next
22 months based on the term of the swap. Assuming that the benchmark interest rate remains constant, $1.4 million
of derivative losses are expected to be reclassified into earnings within the next 12 months.
55
LENNOX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
We recorded the following amounts related to our cash flow hedges (in millions):
As of December 31,
2009
2010
Commodity Price Hedges:
Gains included in AOCI, net of tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Provision for income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$(11.7)
6.7
$(7.2)
4.1
Interest Rate Swap:
Losses included in AOCI, net of tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Benefit from income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 2.3
(1.3)
$ 1.4
(0.8)
We had the following outstanding commodity futures contracts designated as cash flow hedges (in millions):
Copper . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Derivatives not Designated as Cash Flow Hedges
As of December 31,
2010
2009
(Pounds)
(Pounds)
12.6
18.5
For commodity derivatives not designated as cash flow hedges, we follow the same hedging strategy as for
derivatives designated as cash flow hedges. We elect not to designate these derivatives as cash flow hedges at
inception of the arrangement. We had the following outstanding commodity futures contracts not designated as cash
flow hedges (in millions):
Copper . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Aluminum . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
As of December 31,
2010
2009
(Pounds)
(Pounds)
0.9
1.4
0.9
1.4
During 2010, we entered into foreign currency forward contracts with notional amounts of $217.0 million and
£16.5 million, of which $35.0 million and £2.0 million were outstanding at December 31, 2010. During 2009, we
entered into foreign currency forward contracts with notional amounts of $123.6 million, of which $12.2 million
were outstanding at December 31, 2009.
56
LENNOX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Information About the Location and Amounts of Derivative Instruments
For information on the location and amounts of derivative fair values in the Consolidated Balance Sheets and
derivative gains and losses in the Consolidated Statements of Operations, see the tabular information presented
below (in millions):
Fair Values of Derivative Instruments
As of December 31,
2010
Balance Sheet
Location
Fair Value
2009
Balance Sheet
Location
Fair Value
Asset Derivatives
Derivatives designated as hedging
instruments under FASB ASC
Topic 815
Commodity futures contracts . . . . . .
Commodity futures contracts . . . . . .
Other Assets
(Current)
Other Assets
(Non-current)
Derivatives not designated as
hedging instruments under FASB
ASC Topic 815
Commodity futures contracts . . . . . .
Commodity futures contracts . . . . . .
Foreign currency forward
Other Assets
(Current)
Other Assets
(Non-Current)
contracts . . . . . . . . . . . . . . . . . . . Other Assets (Current)
Total Asset for Derivatives . . . . . . . .
Liability Derivatives
Derivatives designated as hedging
instruments under FASB ASC
Topic 815
Interest rate swap . . . . . . . . . . . . . . Accrued Expenses
Interest rate swap . . . . . . . . . . . . . . Other Liabilities
Total Liability for Derivatives . . . . . .
$17.4
1.3
18.7
1.4
0.1
0.2
1.7
$20.4
2.2
1.4
$ 3.6
Other Assets
(Current)
Other Assets
(Non-current)
Other Assets
(Current)
Other Assets
(Non-Current)
Other Assets (Current)
Accrued Expenses
Other Liabilities
$11.1
0.3
11.4
1.1
—
—
1.1
$12.5
2.0
0.3
$ 2.3
57
LENNOX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The Effect of Derivative Instruments on the Consolidated Statements of Operations
Derivatives in FASB ASC
Topic 815 Cash Flow
Hedging Relationships
Location of Loss or (Gain)
Reclassified from AOCI into Income
(Effective Portion)
Amount of Loss or (Gain)
Reclassified
from AOCI into Income
(Effective Portion)
For the Years Ended
December 31,
2009
2010
2008
Commodity futures contracts . . . . . . . . . . . . . . . .
Interest rate swap . . . . . . . . . . . . . . . . . . . . . . . .
Cost of Goods Sold
Interest Expense, net
$(11.2)
2.4
$19.6
1.3
$(7.0)
—
$ (8.8)
$20.9
$(7.0)
Derivatives in FASB ASC
Topic 815 Cash Flow
Hedging Relationships
Location of Loss or (Gain)
Recognized in Income on
Derivatives
(Ineffective Portion)
Amount of Loss or
(Gain) Recognized
in Income on Derivatives
(Ineffective Portion)
For the Years Ended
December 31,
2009
2010
2008
Commodity futures contracts . . . . . . . . . . . Losses (Gains) and Other Expenses, net
$(0.4)
$(0.1)
$0.3
Derivatives Not Designated
as Hedging Instruments under
FASB ASC Topic 815
Location of (Gain) or Loss
Recognized in Income on
Derivatives
Amount of Loss or (Gain)
Recognized in Income on
Derivatives
For the Years Ended
December 31,
2009
2010
2008
Commodity futures contracts . . . . . . . . . . . Losses (Gains) and Other Expenses, net
Foreign currency forward contracts . . . . . . Losses (Gains) and Other Expenses, net
$(1.7)
(0.2)
$(3.4)
3.1
$5.7
—
$(1.9)
$(0.3)
$5.7
For more information on the valuation of these derivative instruments, see Note 20.
58
LENNOX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
9.
Income Taxes:
Our income tax provision (benefits) from continuing operations consisted of the following (in millions):
For the Years Ended
December 31,
2009
2008
2010
Current:
Federal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
State. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$54.7
6.0
7.3
$17.5
5.0
8.1
$32.4
5.8
11.0
Total current . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
68.0
30.6
49.2
Deferred:
Federal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
State. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total deferred . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(6.9)
(1.6)
—
(8.5)
9.9
3.0
(4.4)
8.5
27.1
4.2
—
31.3
Total income tax provision . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$59.5
$39.1
$80.5
Income from continuing operations before income taxes was comprised of the following (in millions):
For the Years Ended
December 31,
2009
2008
2010
Domestic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $157.2
19.4
Foreign . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 99.7
1.2
$186.9
17.4
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $176.6
$100.9
$204.3
The difference between the income tax provision from continuing operations computed at the statutory federal
income tax rate and the financial statement provision for taxes is summarized as follows (in millions):
For the Years Ended
December 31,
2009
2008
2010
Provision at the U.S. statutory rate of 35% . . . . . . . . . . . . . . . . . . . . . . . .
Increase (reduction) in tax expense resulting from:
$61.8
$35.3
$71.5
State income tax, net of federal income tax benefit . . . . . . . . . . . . . . . .
Other permanent items . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Research tax credit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Decrease in tax audit reserves . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Change in valuation allowance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign taxes at rates other than 35% and miscellaneous other . . . . . . . .
2.5
(2.3)
(0.5)
(0.2)
(1.8)
—
3.8
(2.8)
(0.6)
(1.6)
4.5
0.5
7.7
(1.2)
—
—
1.1
1.4
Total income tax provision . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$59.5
$39.1
$80.5
Deferred income taxes reflect the tax consequences on future years of temporary differences between the tax
basis of assets and liabilities and their financial reporting basis and are reflected as current or non-current depending
on the classification of the asset or liability generating the deferred tax. The deferred tax provision for the periods
shown represents the effect of changes in the amounts of temporary differences during those periods.
59
LENNOX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Deferred tax assets (liabilities) were comprised of the following (in millions):
For the Years Ended
December 31,
2010
2009
Gross deferred tax assets:
Warranties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net operating losses (foreign and U.S. state) . . . . . . . . . . . . . . . . . . . . . . . . .
Postretirement and pension benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Inventory reserves . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Receivables allowance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Compensation liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Insurance liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 32.0
42.2
42.6
4.1
6.4
17.3
7.8
15.4
10.6
Total deferred tax assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Valuation allowance. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
178.4
(24.3)
Total deferred tax assets, net of valuation allowance . . . . . . . . . . . . . . . . . .
154.1
Gross deferred tax liabilities:
Depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Intangibles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(11.1)
(6.6)
(12.5)
Total deferred tax liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(30.2)
$ 36.0
48.3
30.2
6.3
4.3
20.3
8.0
2.4
10.5
166.3
(30.9)
135.4
(14.6)
(4.1)
(7.2)
(25.9)
Net deferred tax assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$123.9
$109.5
As of December 31, 2010 and 2009, we had $6.5 million and $9.6 million in tax effected state net operating
loss carryforwards, respectively, and $35.8 million and $38.7 million in tax effected foreign net operating loss
carryforwards, respectively. The state and foreign net operating loss carryforwards begin expiring in 2011. The
deferred tax asset valuation allowance relates primarily to the operating loss carryforwards in various states in the
U.S., European and Asian tax jurisdictions. The decrease in the valuation allowance is primarily the result of foreign
and state losses which were not previously benefited and currency fluctuation.
In assessing the realizability of deferred tax assets, we consider whether it is more likely than not that some
portion or all of the deferred tax assets will not be realized. We consider the reversal of existing taxable temporary
differences, projected future taxable income, and tax planning strategies in making this assessment. Based upon the
level of historical taxable income and projections for future taxable income over the periods in which the deferred
tax assets are deductible, we believe it is more likely than not that we will realize the benefits of these deductible
differences, net of the existing valuation allowances, as of December 31, 2010.
In order to realize the net deferred tax asset, we will need to generate future foreign taxable income of
approximately $98.5 million during the periods in which those temporary differences become deductible. We also
will need to generate U.S. federal income of approximately $46.8 million in addition to our carryback capacity to
fully realize the federal deferred tax asset. U.S. taxable income for the years ended December 31, 2010 and 2009
was $150.5 million and $36.7 million, respectively.
A limited provision has been made for income taxes which may become payable upon distribution of our
foreign subsidiaries’ earnings related to the Czech Republic. It is not practicable to estimate the amount of tax that
60
LENNOX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
might be payable with regard to any other distribution of foreign subsidiary earnings because our intent is to
permanently reinvest these earnings or to repatriate earnings when it is tax effective to do so.
A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows (in millions):
Balance as of December 31, 2008 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $14.9
0.1
Increases related to prior year tax positions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(7.2)
Decreases related to prior year tax positions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
0.1
Increases related to current year tax positions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(6.4)
Settlements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Balance as of December 31, 2009 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1.5
(0.4)
Decreases related to prior year tax positions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(0.1)
Settlements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Balance as of December 31, 2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1.0
Included in the balance of unrecognized tax benefits as of December 31, 2010 are potential benefits of
$0.7 million that, if recognized, would affect the effective tax rate on income from continuing operations. As of
December 31, 2010, we had recognized $0.1 million (net of federal tax benefits) in interest and penalties in income
tax expense.
The Internal Revenue Service (“IRS”) completed its examination of our consolidated tax returns for the years
1999 — 2003 and issued a Revenue Agent’s Report (“RAR”) on April 6, 2006. We reached a settlement with the IRS
in December 2008 that resulted in an immaterial impact to the Consolidated Statements of Operations.
The IRS completed its examination of our consolidated tax returns for the years 2004-2005 and issued an RAR
on July 31, 2008. We reached a settlement with the IRS in the fourth quarter of 2009 that resulted in an immaterial
impact to the Consolidated Statements of Operations.
The IRS completed its examination of our consolidated tax returns for the years 2006-2007 and issued an RAR
on June 1, 2009. We reached a settlement with the IRS in the third quarter of 2009 that resulted in an immaterial
impact to the Consolidated Statements of Operations.
We are currently under examination for our U.S. federal income taxes for 2008, 2009 and 2010. We are subject
to examination by numerous other taxing authorities in jurisdictions such as Australia, Belgium, France, Canada,
and Germany. We are generally no longer subject to U.S. federal, state and local, or non-U.S. income tax
examinations by taxing authorities for years before 2004.
During 2010, numerous states, including Colorado, Maine, Utah, the District of Columbia, California and
Connecticut, enacted legislation effective for tax years beginning on or after January 1, 2010, including require-
ments for combined reporting, changes to apportionment methods and changes to nexus requirements. We
determined the impact of these changes to be immaterial.
61
LENNOX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
10. Commitments and Contingencies:
Leases
The approximate minimum commitments under all non-cancelable leases outstanding as of December 31,
2010 are as follows (in millions):
Operating
Leases
Capital
Leases
2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2013 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2014 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2015 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 54.2
40.4
27.7
17.4
11.9
19.8
Total minimum lease payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$171.4
Less amount representing interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Present value of minimum payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 1.1
1.0
0.9
0.7
0.6
14.8
19.1
1.5
$17.6
On June 22, 2006, we entered into an agreement with a financial institution to lease our corporate headquarters
in Richardson, Texas for a term of seven years (the “Lake Park Lease”). The leased property consists of an office
building of approximately 192,000 square feet, land and related improvements. During the term, the Lake Park
Lease requires us to pay base rent in quarterly installments, payable in arrears. At the end of the term, we must do
one of the following: (i) purchase the property for approximately $41.2 million; (ii) make a final payment under the
lease equal to approximately 82% of the Lease Balance and return the property to the financial institution in good
condition; (iii) arrange for the sale of the leased property to a third party; or (iv) renew the lease under mutually
agreeable terms. If we elect to sell the property to a third party and the sales proceeds are less than the Lease
Balance, we must pay any such deficit to the financial institution. Any such payment cannot exceed 82% of the
Lease Balance.
Our obligations under the Lake Park Lease are secured by a pledge of our interest in the leased property and are
also guaranteed by us and certain of our subsidiaries. The Lake Park Lease, as amended, contains restrictive
covenants that are consistent with those of our revolving credit facility. We were in compliance with these financial
covenants as of December 31, 2010. The Lake Park Lease is accounted for as an operating lease.
Environmental
Applicable environmental laws can potentially impose obligations to remediate hazardous substances at our
properties, at properties formerly owned or operated by us and at facilities to which we have sent or send waste for
treatment or disposal. We are aware of contamination at some facilities; however, we do not presently believe that
any future remediation costs at such facilities will be material to our results of operations.
The amount and timing of cash payments are reliably determinable and, therefore, we have recorded
environmental reserves at their present values.
62
LENNOX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The following information relates to our environmental reserve (in millions except percentages):
Discounted liabilities recorded in:
Accrued Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Other Long-Term Liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
Undiscounted liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Discount rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
For the Years Ended
December 31,
2010
2009
1.1
3.3
4.4
4.8
1.3%-7.9%
$
$
1.3
3.0
4.3
5.8
$
3.3%-9.9%
Estimates of future costs are subject to change due to changing environmental remediation regulations and/or
site-specific requirements.
Product Warranties
Total liabilities for estimated warranty are included in the following captions on the accompanying Consol-
idated Balance Sheets (in millions):
For the Years
Ended
December 31,
2010
2009
Accrued Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $31.2
44.3
Other Liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$31.5
50.0
$75.5
$81.5
The changes in the total warranty liabilities for the years ended December 31, 2010 and 2009 were as follows
(in millions):
Total warranty liability as of December 31, 2008 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 94.1
(27.3)
Payments made in 2009 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
25.7
Changes resulting from issuance of new warranties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(12.7)
Changes in estimates associated with pre-existing liabilities . . . . . . . . . . . . . . . . . . . . . . . . .
1.7
Changes in foreign currency translation rates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total warranty liability as of December 31, 2009 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 81.5
(27.6)
Payments made in 2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
27.6
Changes resulting from issuance of new warranties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(6.2)
Changes in estimates associated with pre-existing liabilities . . . . . . . . . . . . . . . . . . . . . . . . .
0.2
Changes in foreign currency translation rates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total warranty liability as of December 31, 2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 75.5
Accrued product quality issue (not covered under warranty) . . . . . . . . . . . . . . . . . . $16.0
$21.6
63
As of
December 31,
2010
2009
LENNOX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
At the end of each accounting period, we evaluate our warranty liabilities and during the second quarter of each
year, we perform a complete reevaluation of our HVAC warranty liabilities. As a result of our annual evaluation, we
recorded a reduction in warranty liabilities in the second quarter of 2010 that is the principal amount contained
within the changes in estimates associated with pre-existing liabilities of $6.2 million above.
We incur the risk of liability claims for the installation and service of heating and air conditioning products,
and we maintain liabilities for those claims that we self-insure. We are involved in various claims and lawsuits
related to our products. Our product liability insurance policies have limits that, if exceeded, may result in
substantial costs that could have an adverse effect on our results of operations. In addition, warranty claims are not
covered by our product liability insurance and certain product liability claims may also not be covered by our
product liability insurance. There have been no material changes in the circumstances since our latest fiscal year-
end.
We also may incur costs related to our products that may not be covered under our warranties and are not
covered by insurance, and we may, from time to time, repair or replace installed products experiencing quality
issues in order to satisfy our customers and to protect our brand. These product quality issues may be caused by
vendor-supplied components that fail to meet required specifications.
We have identified a product quality issue in a heating and cooling product line produced in 2006 and 2007 that
we believe results from a vendor-supplied materials quality issue. We have recorded an expense of $24.4 million in
2009 for the portion of the issue that was probable and reasonably estimable. There were no material charges
recorded in 2010. As of December 31, 2010 and 2009, $16.0 million and $21.6 million, respectively, was accrued
for this matter. We may incur additional charges in the future as more information becomes available. The expense
for this product quality issue, and the related liability, has not been included in the tables related to our estimated
warranty liabilities. The expense related to this product quality issue was classified in Cost of Goods Sold in the
Consolidated Statements of Operations and the related liability is included in Accrued Expenses in the accom-
panying Consolidated Balance Sheets.
Self Insurance
We use a combination of third-party insurance and self-insurance plans (large deductible or captive) to provide
protection against claims relating to workers’ compensation/employers’ liability, general liability, product liability,
auto liability, auto physical damage and other exposures. Prior to the third quarter of 2009, these policies were
written by a third-party insurance provider, which was then reinsured by our captive insurance subsidiary. Starting
with the third quarter of 2009, we use large deductible insurance plans for workers’ compensation/employers’
liability, general liability, product liability, and auto liability. These policies are written through third-party
insurance providers. We also carry umbrella or excess liability insurance for all third-party and self-insurance
plans, except for directors’ and officers’ liability, property damage and various other insurance programs. We
believe the limit within our excess policy is adequate for companies of our size in our industry. We believe that the
deductibles and liability limits retained by LII and the captive are customary for companies of our size in our
industry and are appropriate for our business.
In addition, we use third-party insurance plans for property damage, aviation liability, directors’ and officers’
liability, and other exposures. Each of these policies may include per occurrence and annual aggregate limits.
However, we believe these limits are customary for companies of our size in our industry and are appropriate for our
business.
We maintain safety and manufacturing programs that are designed to improve the safety and effectiveness of
our business processes and, as a result, reduce the level and severity of our various self-insurance risks. In recent
years, our actual claims experience has been trending favorably and therefore, both self-insurance expense and the
related liability have decreased.
64
LENNOX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Since we have a captive insurance company, we are required to maintain specified levels of liquid assets from
which we must pay claims. The majority of our self-insured risks (excluding auto liability and physical damage)
will be paid over an extended period of time. To the extent actuarial assumptions change and claims experience rates
differ from historical rates, our liability may change.
The self-insurance liabilities recorded in Accrued Expenses in the accompanying Consolidated Balance Sheets
were $61.3 million and $60.4 million as of December 31, 2010 and 2009, respectively.
Litigation
We are involved in a number of claims and lawsuits incident to the operation of our businesses. Insurance
coverages are maintained and estimated costs are recorded for such claims and lawsuits. It is management’s opinion
that none of these claims or lawsuits will have a material adverse effect on our financial position, results of
operations or cash flows. Costs related to such matters were not material to the periods presented.
We estimate the costs to settle pending litigation based on experience involving similar claims and specific
facts known. We do not believe that any current or pending or threatened litigation will have a material adverse
effect on our financial position. Litigation and arbitration, however, involve uncertainties and it is possible that the
eventual outcome of litigation could adversely affect our results of operations for a particular period.
We estimate the costs to settle pending litigation based on experience involving similar claims and specific
facts known. We do not believe that any current or pending or threatened litigation with have a material adverse
effect on our financial position. Litigation and arbitration, however, involve uncertainties and it is possible that the
eventual outcome of litigation could adversely affect our results of operations for a particular period. We are the
defendant in a class action lawsuit related to certain hearth products we produced and sold that claims such products
are hazardous and that consumers were not adequately warned. On August 23, 2010, the Company and the plaintiffs
entered into a binding Memorandum of Understanding (“MOU”) and have reached tentative terms for settlement of
the case. At the parties’ request, the court stayed the lawsuit shortly after the MOU was signed. On January 11, 2011,
the court granted preliminary approval of the settlement. The court set June 2, 2011 as the date for the final approval
hearing. Total charges related to this matter recorded in 2010 were $9.3 million. These charges are included in
Selling, General and Administrative Expenses and Losses (Gains) and Other Expenses, Net in the accompanying
Consolidated Statement of Operations.
11. Long-Term Debt, Lines of Credit and Asset Securitization:
Long-Term Debt and Lines of Credit
The following tables summarize our outstanding debt obligations and the classification in the accompanying
Consolidated Balance Sheet (in millions):
Description of Obligation
As of December 31, 2010
Domestic revolving credit
facility . . . . . . . . . . . . . . . . .
Senior unsecured notes . . . . . .
Capital lease obligations . . . . .
Other obligations . . . . . . . . . . .
Total debt . . . . . . . . . . . . . .
Short-Term Debt
Current Maturities
Long-Term Maturities
Total
$ —
—
—
1.4
$1.4
$ —
—
0.6
—
$0.6
65
$100.0
200.0
17.0
—
$317.0
$100.0
200.0
17.6
1.4
$319.0
LENNOX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Description of Obligation
As of December 31, 2009
Domestic promissory
Short-Term Debt
Current Maturities
Long-Term Maturities
Total
notes(1) . . . . . . . . . . . . . . . .
$ —
Domestic revolving credit
facility . . . . . . . . . . . . . . . . .
Capital lease obligations . . . . .
Other obligations . . . . . . . . . . .
—
—
2.2
Total debt . . . . . . . . . . . . . .
$2.2
$35.0
—
0.4
0.1
$35.5
$ —
$ 35.0
176.5
17.1
0.2
$193.8
176.5
17.5
2.5
$231.5
(1) The domestic promissory notes matured on June 1, 2010 and were prepaid during the first quarter of 2010.
As of December 31, 2010, the aggregate amounts of required principal payments on long-term debt are as
follows (in millions):
2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2013 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2014 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2015 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 0.6
100.7
0.7
0.6
0.6
214.4
As of December 31, 2010, we had outstanding borrowings of $100.0 million under our $650.0 million
domestic revolving credit facility and $69.5 million was committed to standby letters of credit. The remaining
$480.5 million was available for future borrowings subject to covenant limitations. The facility matures in October
2012. As of December 31, 2010, we were in compliance with all covenant requirements.
We have additional borrowing capacity through several of our foreign subsidiaries used primarily to finance
seasonal borrowing needs. We had $1.4 million and $2.5 million of obligations outstanding through our foreign
subsidiaries as of December 31, 2010 and 2009, respectively. Available borrowing capacity at December 31, 2010
and 2009, under foreign facilities was $10.1 million and $12.6 million, respectively.
Our domestic revolving credit facility includes a subfacility for swingline loans of up to $50.0 million and
provides for the issuance of letters of credit for the full amount available under the domestic revolving credit facility.
Our weighted average borrowing rate on the domestic revolving credit facility was 0.96% and 0.84% as of
December 31, 2010 and 2009, respectively.
Our domestic revolving credit facility contains financial covenants relating to leverage and interest coverage.
Other covenants contained in our domestic revolving credit facility restrict, among other things, mergers, asset
dispositions, guarantees, debt, liens, acquisitions, investments, affiliate transactions and our ability to make
restricted payments. The financial covenants require us to maintain defined levels of Consolidated Indebtedness
to Adjusted EBITDA Ratio and a Cash Flow (defined as EBITDA minus capital expenditures) to Net Interest
Expense Ratio. The required ratios as of December 31, 2010 are detailed below:
Consolidated Indebtedness to Adjusted EBITDA Ratio not greater than . . . . . . . . . . . . . . . 3.5 : 1.0
Cash Flow to Net Interest Expense Ratio no less than . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.0 : 1.0
Our domestic revolving credit facility contains customary events of default. These events of default include
nonpayment of principal or interest, breach of covenants or other restrictions or requirements, default on any other
66
LENNOX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
indebtedness or receivables securitizations (cross default), and bankruptcy. A cross default under our revolving
credit facility could occur if:
(cid:129) we fail to pay any principal or interest when due on any other indebtedness or receivables securitization of at
least $40.0 million; or
(cid:129) we are in default in the performance of, or compliance with any term of any other indebtedness or receivables
securitization in an aggregate principal amount of at least $40.0 million, or any other condition exists which
would give the holders the right to declare such indebtedness due and payable prior to its stated maturity.
Each of our major debt agreements contains provisions by which a default under one agreement causes a
default in the others (a cross default). If a cross default under the revolving credit facility, our senior unsecured
notes, or our revolving period asset securitization program were to occur, it could have a wider impact on our
liquidity than might otherwise occur from a default of a single debt instrument or lease commitment.
If any event of default occurs and is continuing, lenders with a majority of the aggregate commitments may
require the administrative agent to terminate our right to borrow under our domestic revolving credit facility and
accelerate amounts due under our domestic revolving credit facility (except for a bankruptcy event of default, in
which case such amounts will automatically become due and payable and the lenders’ commitments will
automatically terminate).
On May 6, 2010, we issued $200.0 million of senior unsecured notes due May 15, 2017 bearing fixed interest at
4.90% as a result of a public offering of securities. We received proceeds of $199.8 million from the offering for a
yield of 4.91%. We also paid and capitalized $1.9 million of debt issue costs related to the issuance. We pay interest
on the notes semiannually on May 15 and November 15.
The notes are guaranteed, on a senior unsecured basis, by each of our domestic subsidiaries that guarantee
payment by us of any indebtedness under our domestic revolving credit facility. The indenture governing the notes
contains covenants that, among other things, limit our ability and the ability of the subsidiary guarantors to: create or
incur certain liens; enter into certain sale and leaseback transactions; enter into certain mergers, consolidations and
transfers of substantially all of our assets; and transfer certain properties. The indenture also contains a cross default
provision which is triggered if we default on other debt of at least $75 million in principal which is then accelerated,
and such acceleration is not rescinded within 30 days of the notice date.
During 2008, we expanded our Tifton, Georgia manufacturing facility using the proceeds from Industrial
Development Bonds (“IDBs”). We entered into a lease agreement with the owner of the property and the issuer of
the IDBs, and through our lease payments fund the interest payments to investors in the IDBs. We also guaranteed
the repayment of the IDBs and entered into letters of credit totaling $15.5 million to fund a potential repurchase of
the IDBs in the event that investors exercised their right to tender the IDBs to the Trustee. As of December 31, 2010
and 2009, we recorded both a capital lease asset and a corresponding long-term obligation of $14.3 million related
to these transactions.
Credit Rating
At December 31, 2010, our senior credit rating was Baa3, with a stable outlook, by Moody’s and BBB-, with a
stable outlook, by Standard & Poor’s Rating Group (“S&P”).
Asset Securitization
Under a revolving period asset securitization arrangement (“ASA”), we are eligible to sell beneficial interests
in a portion of our trade accounts receivable to participating financial institutions for cash. The current arrangement
expires November 18, 2011 and is subject to renewal and contains a provision whereby we retain the right to
repurchase all of the outstanding beneficial interests transferred. Our continued involvement in the transferred
assets includes servicing, collection and administration of the transferred beneficial interests.
67
LENNOX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The accounts receivable sold under the ASA are high quality domestic customer accounts that have not aged
significantly and the program takes into account an allowance for uncollectable accounts. The receivables
represented by the retained interest that we service are exposed to the risk of loss for any uncollectible amounts
in the pool of receivables sold under the ASA. The fair values assigned to the retained and transferred interests are
based on the sold accounts receivable carrying value given the short term to maturity and low credit risk.
The ASA contains certain restrictive covenants relating to the quality of our accounts receivable and cross-
default provisions with our Credit Agreement. The administrative agent under the ASA is also a participant in our
Credit Agreement. The participating financial institution has an investment grade credit rating. We continue to
evaluate its credit rating and have no reason to believe it will not perform under the ASA. As of December 31, 2010,
we were in compliance with all covenant requirements.
The ASA provides for a maximum securitization amount of $100.0 million or 100% of the net pool balance as
defined by the ASA. However, eligibility for securitization is limited based on the amount and quality of the
qualifying accounts receivable and is calculated monthly. The beneficial interest sold cannot exceed the maximum
amount even if our qualifying accounts receivable is greater than the maximum amount at any point in time. The
eligible amounts available were as follows (in millions):
For the Years
Ended
December 31,
2010
2009
Eligible amount available under the ASA on qualified accounts receivable . . . . . . . $100.0
—
Beneficial interest sold . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$72.5
—
Remaining amount available . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $100.0
$72.5
Under the ASA, we pay certain discount fees to use the program and have the facility available to us. These
fees relate to both the used and unused portions of the securitization. The used fee is based on the beneficial interest
sold and calculated on the average floating commercial paper rate determined by the purchaser of the beneficial
interest, plus a program fee of 0.75%. The rate as of December 31, 2010 and 2009 was 1.06% and 1.38%,
respectively. The unused fee is based on 102% of the maximum available amount less the beneficial interest sold
and calculated at 0.375% fixed rate throughout the term of the agreement. We recorded these fees in Selling,
General and Administrative Expenses in the accompanying Consolidated Statements of Operations. The amounts
recorded were as follows (in millions):
For the Years Ended
December 31,
2009
2008
2010
Discount fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$0.5
$0.7
$0.2
12. Employee Benefit Plans:
Defined Contribution Plans
We maintain noncontributory profit sharing plans for our eligible domestic and Canadian salaried employees.
These plans are discretionary, as our contributions are determined annually by the Board of Directors. We also
sponsor several defined contribution plans with employer contribution-matching requirements. We recorded the
following (in millions):
Provisions for profit sharing contributions . . . . . . . . . . . . . . . . . . . . . . . . . . $ — $ — $3.0
$1.6
Contributions to defined contribution plans . . . . . . . . . . . . . . . . . . . . . . . . . $12.1
$12.4
68
For the Years Ended
December 31,
2009
2010
2008
LENNOX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Pension and Postretirement Benefit Plans
We provide pension and postretirement medical benefits to eligible domestic and foreign employees. In the
third quarter of 2008, we announced that we were freezing our defined benefit pension and profit sharing plans for
our domestic and Canadian salaried employees and moving to an enhanced defined contribution plan in 2009 for
our domestic salaried employees and 2010 for our Canadian salaried employees. We also maintain an unfunded
postretirement benefit plan, which provides certain medical and life insurance benefits to eligible employees. In
2006, we amended the postretirement benefit plan to (i) eliminate post-65 coverage for current and future nonunion
retirees and (ii) gradually shift the pre-65 medical coverage cost from us to participants starting in 2007 such that by
2010, pre-65 retirees would be paying 100% of the cost. As a result of this amendment, the postretirement plan will
still exist in 2010 and eligible nonunion participants will still be able to receive group coverage rates. However, we
will no longer be paying any portion of the participants’ premiums.
The following tables set forth amounts recognized in our financial statements and the plans’ funded status
(dollars in millions):
Pension Benefits
2010
2009
Other Benefits
2010
2009
Accumulated benefit obligation . . . . . . . . . . . . . . . . . . . . . . . $333.2
Changes in projected benefit obligation:
$296.1
$ N/A
$ N/A
Benefit obligation at beginning of year . . . . . . . . . . . . . . . $299.4
5.0
Service cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
17.6
Interest cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
—
Plan participants’ contributions . . . . . . . . . . . . . . . . . . . . .
—
Amendments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
34.0
Actuarial loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
0.4
Effect of exchange rates . . . . . . . . . . . . . . . . . . . . . . . . . .
(2.6)
Settlements and curtailments . . . . . . . . . . . . . . . . . . . . . . .
(17.5)
Benefits paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$284.6
5.6
17.5
—
—
9.1
3.9
(2.6)
(18.7)
$ 14.4
0.6
0.8
0.8
(0.1)
2.4
—
—
(1.9)
$ 14.1
0.5
0.8
1.0
—
1.3
—
(0.9)
(2.4)
Benefit obligation at end of year . . . . . . . . . . . . . . . . . . . . $336.3
$299.4
$ 17.0
$ 14.4
Changes in plan assets:
Fair value of plan assets at beginning of year . . . . . . . . . . . $231.1
27.6
Actual gain return on plan assets . . . . . . . . . . . . . . . . . . . .
5.6
Employer contribution . . . . . . . . . . . . . . . . . . . . . . . . . . . .
—
Plan participants’ contributions . . . . . . . . . . . . . . . . . . . . .
0.4
Effect of exchange rates . . . . . . . . . . . . . . . . . . . . . . . . . .
(2.6)
Plan settlements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(17.5)
Benefits paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$174.0
33.0
42.2
—
3.0
(2.4)
(18.7)
$ — $ —
—
1.4
1.0
—
—
(2.4)
—
1.1
0.8
—
—
(1.9)
Fair value of plan assets at end of year . . . . . . . . . . . . . . .
244.6
231.1
—
—
Funded status / net amount recognized . . . . . . . . . . . . . . . . . $ (91.7)
$ (68.3)
$(17.0)
$(14.4)
Net amount recognized consists of:
Current liability. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (3.6)
(88.1)
Non-current liability . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ (1.6)
(66.7)
$ (1.1)
(15.9)
$ (1.0)
(13.4)
Net amount recognized . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (91.7)
$ (68.3)
$(17.0)
$(14.4)
69
LENNOX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Included in the Non-Current Pension Liability on the Consolidated Balance Sheets were plans with an over-
funded position of $0.1 million as of December 31, 2010 and 2009 (in millions).
For the Years Ended
December 31,
2010
2009
Pension plans with a benefit obligation in excess of plan assets:
Projected benefit obligation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accumulated benefit obligation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Fair value of plan assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$335.6
332.5
243.8
$298.7
295.4
230.3
Our U.S.-based pension plans comprised approximately 88.7% of the projected benefit obligation and 88.9%
of plan assets as of December 31, 2010.
Pension Benefits
2009
2010
2008
2010
Other Benefits
2009
2008
Components of net periodic benefit cost as
of December 31:
Service cost . . . . . . . . . . . . . . . . . . . . . . . . $ 5.0
17.6
Interest cost . . . . . . . . . . . . . . . . . . . . . . . .
(19.5)
Expected return on plan assets . . . . . . . . . .
0.5
Amortization of prior service cost . . . . . . . .
5.1
Recognized actuarial loss . . . . . . . . . . . . . .
1.4
Settlements and curtailments. . . . . . . . . . . .
$ 5.6
17.5
(16.7)
0.5
8.9
1.0
$ 6.8
16.4
(17.6)
0.6
4.6
3.1
$ 0.5
$ 0.6
0.8
0.8
—
—
(1.9)
(1.9)
1.2
1.2
— (0.6)
$ 0.8
0.8
—
(1.9)
1.1
—
Net periodic benefit cost. . . . . . . . . . . . . . . $ 10.1
$ 16.8
$ 13.9
$ 0.7
$ — $ 0.8
70
LENNOX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The following table sets forth amounts recognized in AOCI in our financial statements for 2010 and 2009 (in
millions):
Pension Benefits
2010
2009
Other Benefits
2010
2009
Amounts recognized in other comprehensive income
(loss):
Prior service costs. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Actuarial loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ (3.5)
(176.2)
$
(4.0)
(156.6)
$ 14.7
(19.8)
$ 16.5
(18.7)
Subtotal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(179.7)
66.2
(160.6)
58.6
(5.1)
1.9
(2.2)
0.8
Net amount recognized . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$(113.5)
$(102.0)
$ (3.2)
$ (1.4)
Changes recognized in other comprehensive income
(loss):
Current year prior service costs . . . . . . . . . . . . . . . . . . . .
Current year actuarial loss (gain) . . . . . . . . . . . . . . . . . . .
Effect of exchange rates . . . . . . . . . . . . . . . . . . . . . . . . .
Amortization of prior service (costs) credits . . . . . . . . . . .
Amortization of actuarial loss . . . . . . . . . . . . . . . . . . . . .
$ — $ —
(7.5)
1.5
(0.5)
(9.9)
25.8
0.3
(0.5)
(6.5)
(0.1)
2.4
—
1.9
(1.3)
$ —
0.5
—
2.5
(1.3)
Total recognized in other comprehensive income . . . . . . .
$ 19.1
$ (16.4)
$ 2.9
$ 1.7
Total recognized in net periodic benefit cost and other
comprehensive income (loss) . . . . . . . . . . . . . . . . . . . .
$ 29.2
$
0.4
$ 3.6
$ 1.7
The estimated prior service (costs) credits and actuarial gains (losses) that will be amortized from AOCI in
2011 are $(0.5) million and $(9.5) million, respectively, for pension benefits and $1.9 million and $(1.2) million,
respectively, for other benefits.
The following tables set forth the weighted-average assumptions used to determine Benefit Obligations and
Net Periodic Benefit Cost for the U.S.-based plans in 2010 and 2009:
Weighted-average assumptions used to determine benefit
obligations as of December 31:
Discount rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Rate of compensation increase . . . . . . . . . . . . . . . . . . . . . . . . . .
5.45%
4.23
6.07% 5.30% 5.95%
—
4.23
—
Pension Benefits
2010
2009
Other Benefits
2010
2009
Pension Benefits
2009
2010
2008
Other Benefits
2009
2010
2008
Weighted-average assumptions used to determine
net periodic benefit cost for the years ended
December 31:
Discount rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Expected long-term return on plan assets . . . . . . . . .
Rate of compensation increase . . . . . . . . . . . . . . . .
71
6.07% 6.27% 6.48% 5.95% 6.42% 6.36%
8.00
4.23
8.25
4.34
8.25
4.19
—
—
—
—
—
—
LENNOX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The following tables set forth the weighted-average assumptions used to determine Benefit Obligations and
Net Periodic Benefit Cost for the non-U.S.-based plans in 2010 and 2009:
Weighted-average assumptions used to determine benefit obligations as of
December 31:
Discount rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Rate of compensation increase . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
5.43% 5.98%
3.94
3.98
Pension
Benefits
2010
2009
Pension Benefits
2009
2010
2008
Weighted-average assumptions used to determine net periodic benefit cost
for the years ended December 31:
Discount rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Expected long-term return on plan assets . . . . . . . . . . . . . . . . . . . . . . . . . .
Rate of compensation increase . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
5.98% 6.57% 5.60%
6.24
5.59
3.90
3.98
6.61
4.22
To develop the expected long-term rate of return on assets assumption for the U.S. plans, we considered the
historical returns and the future expectations for returns for each asset category, as well as the target asset allocation
of the pension portfolio and the effect of periodic rebalancing. These results were adjusted for the payment of
reasonable expenses of the plan from plan assets. This resulted in the selection of the 8.00% long-term rate of return
on assets assumption. A similar process was followed for the non-U.S.-based plans.
To select a discount rate for the purpose of valuing the plan obligations for the U.S. plans, we performed an
analysis in which the duration of projected cash flows from defined benefit and retiree healthcare plans were
matched with a yield curve based on the appropriate universe of high-quality corporate bonds that were available.
We used the results of the yield curve analysis to select the discount rate that matched the duration and payment
stream of the benefits in each plan. This resulted in the selection of the 5.47% discount rate assumption for the
U.S. qualified pension plans, 5.28% for the U.S. non-qualified pension plans, and 5.30% for the other benefits. A
similar process was followed for the non-U.S.-based plans.
Assumed health care cost trend rates as of December 31:
Health care cost trend rate assumed for next year . . . . . . . . . . . . . . . . . . . . . . . . .
Rate to which the cost rate is assumed to decline (the ultimate trend rate) . . . . . . .
Year that the rate reaches the ultimate trend rate . . . . . . . . . . . . . . . . . . . . . . . . . .
8.50% 8.75%
5.00% 5.00%
2020
2017
2010
2009
Assumed health care cost trend rates have a significant effect on the amounts reported for our healthcare plan.
A one percentage-point change in assumed healthcare cost trend rates would have the following effects (in
millions):
Effect on total of service and interest cost
. . . . . . . . . . . . . . . . . . . . .
Effect on the postretirement benefit obligation . . . . . . . . . . . . . . . . . .
$0.2
1.6
$(0.2)
(1.4)
1-Percentage-
Point Increase
1-Percentage-
Point Decrease
72
LENNOX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Expected future benefit payments are shown in the table below (in millions):
Years Ended December 31,
2011
2012
2013
2014
2015
2016- 2020
Pension benefits . . . . . . . . . . . . . . . . . . . . .
Other benefits . . . . . . . . . . . . . . . . . . . . . .
$18.4
1.1
$16.9
1.1
$18.7
1.1
$17.9
1.2
$19.0
1.2
$103.6
7.1
We believe that by adequately diversifying the plan assets, asset returns can be optimized at an acceptable level
of risk. Since equity securities have historically generated higher returns than fixed income securities and the plan is
not fully funded, we believe it is appropriate to allocate more assets to equities than fixed income securities. In
addition, these categories are further diversified among various asset classes including high yield and emerging
markets debt, and international and emerging markets equities in order to avoid significant concentrations of risk.
Our U.S. pension plan represents approximately 90%, our Canadian pension plan approximately 6%, and our
United Kingdom (“U.K.”) pension plan approximately 4% of the total fair value of our plan assets as of
December 31, 2010.
Our U.S. pension plans’ weighted-average asset allocations as of December 31, 2010 and 2009, by asset
category, are as follows:
Asset Category
Plan Assets as of
December 31,
2010
2009
U.S. equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
International equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Fixed income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Money market/cash/guaranteed investment contracts . . . . . . . . . . . . . . . . . . . . . . . .
33.1% 33.2%
28.5
36.8
1.6
25.8
36.8
4.2
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
100.0% 100.0%
U.S. pension plan investments are invested within the following range targets:
Asset Category
U.S. equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
International equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Fixed income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Money market/cash/guaranteed investment contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Target
36.0%
24.0%
38.0%
2.0%
Our Canadian pension plan is invested in only one asset, which is a balanced fund that maintains diversification
among various asset classes, including Canadian common stocks, bonds and money market securities, U.S. equities,
other international equities and fixed income investments. Our U.K. pension plan was invested in a broad mix of
assets consisting of U.K., U.S. and international equities, U.K. fixed income securities, including corporate and
government bonds, and bank deposits.
73
LENNOX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The fair values of our pension plan assets, by asset category, are as follows:
Fair Value Measurements as of
December 31, 2010
Significant
Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
Total
Assets Category:
Cash and cash equivalents . . . . . . . . . . . .
Commingled pools / Collective Trusts . . .
U.S. equity(1) . . . . . . . . . . . . . . . . . . .
International equity(2) . . . . . . . . . . . . .
Fixed income(3) . . . . . . . . . . . . . . . . .
Mutual funds . . . . . . . . . . . . . . . . . . . . .
U.S. equity(4) . . . . . . . . . . . . . . . . . . .
International equity(4) . . . . . . . . . . . . .
Fixed income(5) . . . . . . . . . . . . . . . . .
Balanced pension trust(6) . . . . . . . . . . . .
U.S. equity . . . . . . . . . . . . . . . . . . . . .
International equity . . . . . . . . . . . . . . .
Bonds . . . . . . . . . . . . . . . . . . . . . . . . .
Pension fund . . . . . . . . . . . . . . . . . . . . .
U.S. equity(7) . . . . . . . . . . . . . . . . . . .
International equity(7) . . . . . . . . . . . . .
Fixed income(8) . . . . . . . . . . . . . . . . .
Money market instruments(9) . . . . . . .
Guaranteed investment contracts . . . . . . .
$ 3.9
$ —
$—
$ 3.9
—
—
—
38.2
6.5
6.2
—
—
—
—
—
—
—
—
33.7
53.8
74.0
—
—
—
2.1
7.4
5.3
1.1
5.7
4.1
0.8
1.8
—
—
—
—
—
—
—
—
—
—
—
—
—
—
33.7
53.8
74.0
38.2
6.5
6.2
2.1
7.4
5.3
1.1
5.7
4.1
0.8
1.8
Total. . . . . . . . . . . . . . . . . . . . . . . . . .
$54.8
$189.8
$—
$244.6
74
LENNOX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Fair Value Measurements as of
December 31, 2009
Significant
Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
Total
Assets Category:
Cash and cash equivalents . . . . . . . . . . . .
Commingled pools / Collective Trusts . . .
U.S. equity(1) . . . . . . . . . . . . . . . . . . .
International equity(2) . . . . . . . . . . . . .
Fixed income(3) . . . . . . . . . . . . . . . . .
Mutual funds . . . . . . . . . . . . . . . . . . . . .
U.S. equity(4) . . . . . . . . . . . . . . . . . . .
International equity(4) . . . . . . . . . . . . .
Fixed income(5) . . . . . . . . . . . . . . . . .
Balanced pension trust(6) . . . . . . . . . . . .
U.S. equity . . . . . . . . . . . . . . . . . . . . .
International equity . . . . . . . . . . . . . . .
Bonds . . . . . . . . . . . . . . . . . . . . . . . . .
Guaranteed investment contracts . . . . . . .
$ 8.9
$ —
$—
$ 8.9
—
—
—
23.0
6.0
6.0
—
—
—
—
45.5
47.2
69.7
—
—
—
2.0
7.0
5.1
10.7
—
—
—
—
—
—
—
—
—
—
45.5
47.2
69.7
23.0
6.0
6.0
2.0
7.0
5.1
10.7
Total. . . . . . . . . . . . . . . . . . . . . . . . . .
$43.9
$187.2
$—
$231.1
75
LENNOX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Additional information about assets measured at Net Asset Value (“NAV”) per share (in millions):
As of December 31, 2010
Fair Value
Redemption Frequency
(if currently eligible)
Redemption Notice
Period
Assets Category:
Commingled pools / Collective Trusts
U.S. equity(1) . . . . . . . . . . . . . . . . . . . . .
International equity(2) . . . . . . . . . . . . . . .
Fixed income(3) . . . . . . . . . . . . . . . . . . .
Mutual funds . . . . . . . . . . . . . . . . . . . . . . .
U.S. equity(4) . . . . . . . . . . . . . . . . . . . . .
International equity(4) . . . . . . . . . . . . . . .
Fixed income(5) . . . . . . . . . . . . . . . . . . .
Balanced pension trust(6) . . . . . . . . . . . . . .
U.S. equity . . . . . . . . . . . . . . . . . . . . . . .
International equity . . . . . . . . . . . . . . . . .
Bonds . . . . . . . . . . . . . . . . . . . . . . . . . . .
Pension fund . . . . . . . . . . . . . . . . . . . . . . .
U.S. equity(7) . . . . . . . . . . . . . . . . . . . . .
International equity(7) . . . . . . . . . . . . . . .
Fixed income(8) . . . . . . . . . . . . . . . . . . .
Money market instruments(9) . . . . . . . . .
$ 33.7
53.8
74.0
n/a
Monthly
Quarterly
n/a
10 — 15 days
15 days
38.2
6.5
6.2
2.1
7.4
5.3
1.1
5.7
4.1
0.8
n/a
n/a
n/a
Daily
Daily
Daily
Daily
Daily
Daily
Daily
n/a
n/a
n/a
5 days
5 days
5 days
7 days
7 days
7 days
7 days
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$238.9
As of December 31, 2009
Fair Value
Redemption Frequency
(if currently eligible)
Redemption Notice
Period
Assets Category:
Commingled pools / Collective Trusts
U.S. equity(1) . . . . . . . . . . . . . . . . . . . . .
International equity(2) . . . . . . . . . . . . . . .
Fixed income(3) . . . . . . . . . . . . . . . . . . .
Mutual funds . . . . . . . . . . . . . . . . . . . . . . .
U.S. equity(4) . . . . . . . . . . . . . . . . . . . . .
International equity(4) . . . . . . . . . . . . . . .
Fixed income(5) . . . . . . . . . . . . . . . . . . .
Balanced pension trust(6) . . . . . . . . . . . . . .
U.S. equity . . . . . . . . . . . . . . . . . . . . . . .
International equity . . . . . . . . . . . . . . . . .
Bonds . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 45.5
47.2
69.7
Daily
Daily, Monthly
Quarterly
4 days
4 — 15 days
15 days
23.0
6.0
6.0
2.0
7.0
5.1
n/a
n/a
n/a
Daily
Daily
Daily
n/a
n/a
n/a
5 days
5 days
5 days
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$211.5
76
LENNOX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(1) This category includes investments primarily in U.S. equity securities that include large, mid and small
capitalization companies.
(2) This category includes investments primarily in Non-U.S. equity securities that include large, mid and small
capitalization companies in large developed markets as well as emerging markets equities.
(3) This category includes investments in U.S. investment grade and high yield fixed income securities, non-U.S.
fixed income securities and emerging markets fixed income securities.
(4) These funds seek capital appreciation and generally invest in common stocks of U.S. and Non-U.S. issuers.
They may invest in growth stocks or value stocks.
(5) This fund seeks to provide inflation protection. It currently invests at least 80% of its assets in inflation-indexed
bonds issued by the U.S. government. It may invest in bonds of any maturity, though the fund typically
maintains a dollar-weighted average maturity of 7 to 20 years.
(6) The investment objectives of the fund are to provide long-term capital growth and income by investing
primarily in a well-diversified, balanced portfolio of Canadian common stocks, bonds and money market
securities. The fund also holds a portion of its assets in U.S. and non-U.S. equities.
(7) This category includes investments in U.S. and Non-U.S. equity securities and aims to provide returns
consistent with the markets in which it invests and provide broad exposure to countries around the world.
(8) This category includes investments in U.K. government index-linked securities (index-linked gilts) that have
maturity periods of 5 years or longer and investment grade corporate bonds denominated in sterling.
(9) This fund invests in U.K. money market instruments and includes cash, bank deposits and short-term fixed
interest investments.
The majority of our commingled pool /collective trust, mutual funds and balanced pension trusts are managed
by professional investment advisors. The NAVs per share are furnished in monthly and/or quarterly statements
received from the investment advisors and reflect valuations based upon their pricing policies. We have assessed the
classification of the inputs used to value these investments at Level 1 for mutual funds and Level 2 for commingled
pool / collective trusts and balance pension trusts through examination of their pricing policies and the related
controls and procedures. The fair values we report are based on the pool or trust’s NAV per share. The NAV’s per
share are calculated periodically (daily or no less than one time per month) as the aggregate value of each pool or
trust’s underlying assets divided by the number of units owned.
See Note 20 for information about our fair value hierarchies and valuation techniques.
77
LENNOX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
13. Comprehensive Income (Loss):
Our accumulated balances, shown net of tax for each classification of comprehensive income (loss) are as
follows (in millions):
Balance as of December 31, 2007 . . .
Net change in currency translation
and pension and postretirement
liability during 2008 . . . . . . . . . . . .
Net change associated with 2008
derivative and other transactions . . .
Reclassification of derivative gains
into earnings . . . . . . . . . . . . . . . . .
Balance as of December 31, 2008 . . .
Net change in currency translation
and pension and postretirement
liability during 2009 . . . . . . . . . . . .
Net change associated with 2009
derivative and other transactions . . .
Reclassification of derivative gains
into earnings . . . . . . . . . . . . . . . . .
Balance as of December 31, 2009 . . .
Net change in currency translation
and pension and postretirement
liability during 2010 . . . . . . . . . . . .
Net change associated with 2010
derivative and other transactions . . .
Reclassification of derivative gains
into earnings . . . . . . . . . . . . . . . . .
Foreign
Currency
Translation Adjustment
Pension and
Postretirement
Liability
Derivatives
and Other
$118.7
(55.6)
0.5
Total
63.6
(84.9)
(55.9)
—
(140.8)
—
—
33.8
59.5
—
—
—
—
(14.9)
(14.9)
(6.7)
(6.7)
$(111.5)
$(21.1)
$ (98.8)
8.1
—
—
—
10.7
19.7
67.6
10.7
19.7
$ 93.3
$(103.4)
$ 9.3
$
(0.8)
28.2
—
—
(13.3)
—
—
14.9
27.5
27.5
(11.4)
(11.4)
Balance as of December 31, 2010 . . .
$121.5
$(116.7)
$ 25.4
$ 30.2
14. Share Repurchases:
During 2008, our Board of Directors approved a $300.0 million share repurchase plan authorizing the
repurchase of shares of our common stock through open market purchases (the “2008 Plan”). Also, during 2007, our
Board of Directors approved a $500.0 million share repurchase plan authorizing the repurchase of shares of our
common stock through open market purchases (the “2007 Plan”).
78
LENNOX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The following table summarizes the share repurchase activity for years ended December 31, 2010, 2009 and
2008, by share repurchase plan and those related to share-based payments (in millions, except per share data):
Related to
Share-Based
Payments
2008 Plan
2007 Plan
Total Share
Repurchase
Activity
2010 share repurchase activity:
Number of shares . . . . . . . . . . . . . . . . . . . . . . .
Weighted average price per share . . . . . . . . . . .
Amount Repurchased . . . . . . . . . . . . . . . . . . . .
2009 share repurchase activity:
Number of shares . . . . . . . . . . . . . . . . . . . . . . .
Weighted average price per share . . . . . . . . . . .
Amount repurchased . . . . . . . . . . . . . . . . . . . . .
2008 share repurchase activity:
Number of shares . . . . . . . . . . . . . . . . . . . . . . .
Weighted average price per share . . . . . . . . . . .
Amount repurchased . . . . . . . . . . . . . . . . . . . . .
0.2
$44.83
9.4
$
0.2
$30.55
5.6
$
0.4
$35.10
$ 12.5
3.3
$43.97
$144.3
—
$ —
$ —
0.6
$24.32
$ 14.7
—
$ —
$ —
—
$ —
$ —
8.3
$35.72
$296.6
3.5
$44.02
$153.7
0.2
$30.55
$ 5.6
9.3
$34.95
$323.8
15. Stock-Based Compensation Plans:
Stock-Based Compensation expense is included in SG&A Expenses in the accompanying Consolidated
Statements of Operations as follows (in millions):
For the Years Ended
December 31,
2009
2008
2010
Compensation expense(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$15.4
$12.8
$11.8
(1) Stock-Based Compensation expense is recorded in our Corporate and other business segment.
Excess tax benefits classified as a financing cash inflow in the accompanying Consolidated Statements of Cash
Flows were as follows (in millions):
For the Years Ended
December 31,
2009
2008
2010
Excess tax benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $5.3
$4.9
$11.0
Incentive Plan
Under the Lennox International Inc. 2010 Incentive Plan, as amended and restated (the “2010 Incentive Plan”),
we are authorized to issue awards for 24,254,706 shares of common stock. As of December 31, 2010, awards for
20,478,607 shares of common stock had been granted, net of cancellations and repurchases. Consequently, as of
December 31, 2010, there were 3,776,099 shares available for future issuance.
The 2010 Incentive Plan provides for various long-term incentive awards, which include stock options,
performance share units, restricted stock units and stock appreciation rights. A description of these long-term
incentive awards and related activity within each award category is provided below.
79
LENNOX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Performance Share Units
Total compensation expense for performance share units was $4.1 million, $1.8 million and $3.4 million for
the years ended December 31, 2010, 2009 and 2008, respectively. The weighted-average fair value of performance
share units granted during the years ended December 31, 2010, 2009 and 2008 was $44.85, $35.26 and $26.83 per
share, respectively.
Under the 2010 Incentive Plan, performance share units are granted to certain employees at the discretion of
the Board of Directors with a three-year performance period beginning January 1st of each year. Upon meeting the
performance and vesting criteria, performance share units are converted to an equal number of shares of our
common stock. Outstanding awards granted prior to 2003 vest after ten years of service at the target amount.
Performance share units vest if, at the end of the three-year performance period, at least the threshold
performance level has been attained. To the extent that the payout level attained is less than 100%, the difference
between 100% and the units earned and distributed will be forfeited. Eligible participants may also earn additional
units of our common stock, which would increase the potential payout from 101% to 200% of the units granted,
depending on LII’s performance over the three-year performance period. The payout level for shares paid during
years ended December 31, 2010, 2009 and 2008 was 127.68%, 200% and 200%, respectively.
Performance share units under the 2010 Incentive Plan are classified as equity awards, with the fair value of
each unit equal to the average of the high and low market price of the stock on the date of grant for units granted
prior to December 2007. The fair value of units granted after December 2007 is the average of the high and low
market price of the stock on the date of grant discounted by the expected dividend rate over the service period. Units
are amortized to expense ratably over the service period. The compensation expense for any additional units which
may be earned is estimated each reporting period based on the fair value of the stock at the date of grant. The number
of units expected to be earned will be adjusted, as necessary, to reflect the actual number of units awarded.
A summary of the status of our undistributed performance share units as of December 31, 2010, and changes
during the year then ended, is presented below (in millions, except per share data):
Year Ended December 31, 2010
Weighted-Average
Grant Date
Fair Value per Share
Shares
Undistributed performance share units:
1.0
Undistributed as of December 31, 2009 . . . . . . . . . . . . . . . . . . . . . .
Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
0.2
Additional shares earned. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . —
(0.3)
Distributed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(0.1)
Forfeited . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Undistributed as of December 31, 2010(1) . . . . . . . . . . . . . . . . . . . .
0.8
$28.68
44.85
30.85
27.07
22.52
33.90
(1) Undistributed performance share units as of December 31, 2010 include approximately 0.8 million units with a
weighted-average grant date fair value of $33.90 per share that had not yet vested.
As of December 31, 2010, we had $12.6 million of total unrecognized compensation cost related to nonvested
performance share units. Such cost is expected to be recognized over a weighted-average period of 2.4 years. Our
estimated forfeiture rate for performance share units was 20.5% as of December 31, 2010.
80
LENNOX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The total fair value of performance share units distributed and the resulting tax deductions to realize tax
benefits were as follows (in millions):
For the Years Ended
December 31,
2009
2008
2010
Fair value of performance share units distributed . . . . . . . . . . . . . . . . . . . . . $13.2
5.0
Realized tax benefits from tax deductions . . . . . . . . . . . . . . . . . . . . . . . . . .
$9.6
3.7
$28.2
10.7
Our practice is to issue new shares of common stock to satisfy performance share unit distributions.
Restricted Stock Units
Total compensation expense for restricted stock units was $6.6 million, $6.6 million and $4.6 million for the
years ended December 31, 2010, 2009 and 2008, respectively. The weighted-average fair value of restricted stock
units granted during the years ended December 31, 2010, 2009 and 2008 was $44.80, $35.09 and $27.48 per share,
respectively.
Under the 2010 Incentive Plan, restricted stock units are issued to attract and retain key employees. Generally,
at the end of a three-year retention period, the units will vest and be distributed in shares of our common stock to the
participant.
Restricted stock units under the 2010 Incentive Plan are classified as equity awards, with the fair value of each
unit equal to the average of the high and low market price of the stock on the date of grant for units granted prior to
December 2007. The fair value of units granted after December 2007 is the average of the high and low market price
of the stock on the date of grant discounted by the expected dividend rate over the service period. Units are
amortized to compensation expense ratably over the service period.
A summary of the status of our nonvested restricted stock units as of December 31, 2010 and changes during
the year then ended is presented below (in millions, except per share data):
Year Ended December 31, 2010
Nonvested restricted stock units:
Nonvested as of December 31, 2009 . . . . . . . . . . . . . . . . . . . . . . . . .
Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Vested . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Forfeited . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Shares
0.7
0.2
(0.2)
(0.1)
Nonvested as of December 31, 2010 . . . . . . . . . . . . . . . . . . . . . . . . .
0.6
Weighted-Average
Grant Date
Fair Value per Share
$31.14
44.80
32.96
30.90
34.44
As of December 31, 2010, we had $13.0 million of total unrecognized compensation cost related to nonvested
restricted stock units. Such cost is expected to be recognized over a weighted-average period of 2.4 years. Our
estimated forfeiture rate for restricted stock units was 16.7% as of December 31, 2010.
The total fair value of restricted stock units vested and the resulting tax deductions to realize tax benefits were
as follows (in millions):
Fair value of restricted stock units vested . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Realized tax benefits from tax deductions . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$9.4
3.6
$8.3
3.2
$6.4
2.4
81
For the Years Ended
December 31,
2009
2008
2010
LENNOX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Our practice is to issue new shares of common stock to satisfy restricted stock unit vestings.
Stock Appreciation Rights
Total compensation expense for stock appreciation rights was $4.7 million, $4.4 million and $3.8 million for
the years ended December 31, 2010, 2009 and 2008, respectively. The weighted-average fair value of stock
appreciation rights granted during the years ended December 31, 2010, 2009 and 2008 was $13.75, $10.96 and
$6.84 per share, respectively.
In 2003, we began awarding stock appreciation rights. Each recipient is given the “right” to receive a value
equal to the future appreciation of our common stock price. The value is paid in shares of our common stock. Stock
appreciation rights generally vest in one-third increments beginning on the first anniversary date after the grant date,
and expire after seven years.
Compensation expense for stock appreciation rights granted is based on the fair value on the date of grant and
is recognized over the service period. The fair value for these awards is estimated using the Black-Scholes-Merton
valuation model. We use historical stock price data and other pertinent information to estimate the expected
volatility and the outstanding period of the award for separate groups of employees that have similar historical
exercise behavior to estimate expected life. The risk-free interest rate was based on zero-coupon U.S. Treasury
instruments with a remaining term equal to the expected life of the stock appreciation right at the time of grant.
The fair value of each stock appreciation right granted in 2010, 2009 and 2008 is estimated on the date of grant
using the following assumptions:
For the Years Ended
December 31,
2009
2008
2010
Expected dividend yield . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Risk-free interest rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Expected volatility . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Expected life (in years) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1.46% 1.57% 2.05%
1.46% 1.78% 1.40%
39.93% 39.81% 34.08%
4.12
4.04
4.18
A summary of stock appreciation rights activity are as follows (in millions, except per share data):
2010
Weighted-
Average
Exercise
Price per
Share
$31.06
46.78
27.20
31.97
$34.89
$31.81
Shares
2.9
0.5
(0.7)
(0.2)
2.5
1.5
Years Ended December 31,
2009
Weighted-
Average
Exercise
Price per
Share
$29.59
36.94
28.31
30.59
$31.06
$29.58
Shares
2.7
0.6
(0.2)
(0.2)
2.9
1.6
2008
Weighted-
Average
Exercise
Price per
Share
$29.14
28.36
21.68
32.68
$29.59
$28.65
Shares
2.2
1.0
(0.3)
(0.2)
2.7
1.1
Outstanding at beginning of year . . . . . . . . . . .
Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Exercised . . . . . . . . . . . . . . . . . . . . . . . . . . .
Forfeited . . . . . . . . . . . . . . . . . . . . . . . . . . .
Outstanding at end of year . . . . . . . . . . . . . . . .
Exercisable at end of year . . . . . . . . . . . . . . . .
82
LENNOX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The following table summarizes information about stock appreciation rights outstanding as of December 31,
2010 (in millions, except per share data and years):
Range of Exercise
Prices per Share
$16.76-$46.78
Stock Appreciation Rights Outstanding
Stock Appreciation Rights Exercisable
Weighted-Average
Remaining
Contractual Term
(in years)
Aggregate Intrinsic
Value
Weighted-Average
Remaining
Contractual Life
(in years)
Aggregate Intrinsic
Value
4
31.3
4
22.6
As of December 31, 2010, we had $10.2 million of unrecognized compensation cost related to nonvested stock
appreciation rights. Such cost is expected to be recognized over a weighted-average period of 2.3 years. Our
estimated forfeiture rate for stock appreciation rights was 18% as of December 31, 2010.
The total intrinsic value of stock appreciation rights exercised and the resulting tax deductions to realize tax
benefits were as follows (in millions):
For the Years Ended
December 31,
2009
2010
2008
Intrinsic value of stock appreciation rights exercised . . . . . . . . . . . . . . . . . . . $10.1
3.9
Realized tax benefits from tax deductions . . . . . . . . . . . . . . . . . . . . . . . . . . .
$1.5
0.6
$5.5
2.1
Our practice is to issue new shares of common stock to satisfy the exercise of stock appreciation rights.
16. Restructuring Charges:
As part of our strategic priorities of manufacturing and sourcing excellence and expense reduction, we have
initiated various manufacturing rationalization actions designed to lower our cost structure. We also continue to
reorganize our North American distribution network in order to better serve our customers’ needs by deploying
parts and equipment inventory closer to them. We have also initiated a number of activities that rationalize and
reorganize various support and administrative functions to reduce ongoing selling and administrative expenses.
Information on Total Restructuring Charges and Related Reserves
Restructuring charges incurred include the following amounts (in millions):
For the Years Ended
December 31,
2009
2010
2008(1)
Manufacturing rationalizations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $11.1
0.1
Reorganization of distribution network . . . . . . . . . . . . . . . . . . . . . . . . . . .
4.4
Reorganizations of corporate and business unit administrative functions . .
$30.1
0.1
11.3
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $15.6
$41.5
$19.7
2.9
7.8
$30.4
(1) Restructuring charges for manufacturing rationalizations included pension curtailment charges of $0.9 million
for 2008 have not been reflected in restructuring reserves as these items relate to our pension obligation. These
amounts also include pension settlement charges of $0.2 million in 2008.
The components of the $15.6 million of restructuring charges recorded in 2010 are discussed in greater detail
in later sections of this footnote.
In 2009, restructuring charges for manufacturing rationalizations included $9.7 million related to the
consolidation of Residential Heating & Cooling manufacturing operations from Blackville, South Carolina into
our operations in Orangeburg, South Carolina and Saltillo, Mexico. Manufacturing rationalizations recorded in
83
LENNOX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
2009 also included $7.8 million of charges related to the consolidation of certain Refrigeration manufacturing
operations located in Parets, Spain into our existing operations in Genas, France. Restructuring charges for
manufacturing rationalizations recorded in 2009 also included $7.7 million related to the consolidation of certain
Commercial Heating & Cooling manufacturing operations located in Mions, France into our existing manufac-
turing operations in Longvic, France. Restructuring charges for manufacturing rationalizations recorded in 2009
also included $2.1 million related to the closure of our Refrigeration operations in Danville, Illinois and consolidate
Danville manufacturing, support, and warehouse functions into our Tifton, Georgia and Stone Mountain, Georgia
operations and $1.1 million related to the transition of production of selected Refrigeration products currently
manufactured in Milperra, Australia to its sister facility in Wuxi, China.
In 2009, restructuring charges related to reorganizations of corporate and business unit selling and admin-
istrative functions included $3.9 million related to reorganization of Commercial Heating & Cooling’s selling and
administrative functions in Northern Europe through a series of restructuring actions. Reorganizations of corporate
and business unit selling and administrative functions in 2009 also included charges of $1.9 million related to the
relocation of Residential Heating & Cooling factory-built fireplace headquarters from Orange, California to
Nashville, Tennessee and the consolidation of customer and technical service departments into our existing hearth
products plant in Union City, Tennessee. Restructuring charges in 2009 for corporate and business unit selling and
administrative functions also included $1.9 million related to the reorganization of the management structure of our
Refrigeration administrative and support functions across the globe. Restructuring charges recorded in 2009 also
included $1.8 million related to the centralization of certain Service Experts administrative and support functions
and $1.1 million related to the reorganization of our Commercial Heating & Cooling selling and administrative
organization in the United States and Canada.
In 2008, restructuring charges for manufacturing rationalizations included $9.8 million related to the closure of
our Refrigeration operations in Danville, Illinois and consolidation of manufacturing, support and warehouse
functions in our Tifton, Georgia and Stone Mountain, Georgia operations. Manufacturing rationalizations also
included charges of $3.4 million related to the transition of production of certain Residential Heating & Cooling
products from our Marshalltown, Iowa manufacturing facility to our new manufacturing operations in Saltillo,
Mexico and $3.1 million related to the transition of production of selected Refrigeration products manufactured in
Milperra, Australia to its sister facility in Wuxi, China. We also recorded $1.6 million in restructuring charges
related to the closure of Lennox Hearth Products Inc.’s operations in Lynwood, California, part of our Residential
Heating & Cooling operations, and the consolidation of our U.S. factory-built fireplace manufacturing operations
into our facility in Union City, Tennessee.
In 2008, restructuring charges for reorganizations of corporate and business unit administrative functions
included $4.1 million related to the reorganization of the Northern European sales support and administrative
functions of the Commercial business unit and $1.1 million in charges related to the rationalization of our corporate
administrative functions, primarily in the human resources and information technology areas.
84
LENNOX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Restructuring reserves are included in Accrued Expenses in the accompanying Consolidated Balance Sheets.
The table below details activity within the restructuring reserves for the years ended December 31, 2010 and 2009
(in millions):
Balance as of
December 31,
2009
Charged
to
Earnings
Cash
Utilization
Non-Cash
Utilization and Other
Balance as of
December 31,
2010
Description of Reserves
Severance and related expense. . . . .
Asset write-offs and accelerated
depreciation . . . . . . . . . . . . . . . .
Equipment moves . . . . . . . . . . . . . .
Lease termination . . . . . . . . . . . . . .
Other(1) . . . . . . . . . . . . . . . . . . . . .
$21.1
$ 9.0
$(22.5)
—
—
0.3
0.8
2.6
0.8
0.5
2.7
—
(0.8)
(0.5)
(2.8)
Total restructuring reserves . . . . .
$22.2
$15.6
$(26.6)
$(1.4)
(2.6)
—
—
—
$(4.0)
$6.2
—
—
0.3
0.7
$7.2
(1) Charges classified as ‘Other’ include $1.0 million third-party services related to restructuring activities and
$0.8 million of facilities clean-up and demolition costs.
Description of Reserves
Severance and related expense . . . . . . . . .
Asset write-offs and accelerated
depreciation. . . . . . . . . . . . . . . . . . . . .
Equipment moves . . . . . . . . . . . . . . . . . .
Lease termination . . . . . . . . . . . . . . . . . .
Other(1) . . . . . . . . . . . . . . . . . . . . . . . . .
Balance as of
December 31,
2008
Charged
to
Earnings
Cash
Utilization
Non-Cash
Utilization and
Other
Balance as of
December 31,
2009
$ 9.3
$27.8
$(16.0)
$ —
$21.1
—
—
0.6
1.0
7.7
1.5
0.8
3.7
—
(1.4)
(1.1)
(4.4)
(7.7)
(0.1)
—
0.5
—
—
0.3
0.8
Total restructuring reserves . . . . . . . . .
$10.9
$41.5
$(22.9)
$(7.3)
$22.2
(1) Charges classified as ‘Other’ include $1.7 million of manufacturing inefficiencies, $0.8 million third-party
services related to restructuring activities and $0.7 million of facilities clean-up and demolition costs.
Manufacturing Rationalization Activities
Information regarding the restructuring charges related to manufacturing rationalizations is as follows (in
millions):
Charges
Incurred in
2010
Charges
Incurred to
Date
Total Charges
Expected to be
Incurred
Severance and related expense . . . . . . . . . . . . . . . . . . . . . .
Asset write-offs and accelerated depreciation . . . . . . . . . . .
Equipment moves . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 6.0
2.1
0.6
2.4
$11.1
$31.2
10.5
2.7
6.2
$50.6
$31.2
10.5
3.6
8.4
$53.7
Restructuring expense for significant manufacturing rationalization activities related to the following:
(cid:129) In the third quarter of 2010, we began to exit contract coil manufacturing in our Refrigeration operations in
Milperra, Australia. Total restructuring charges related to this action recorded in 2010 were $3.3 million,
85
LENNOX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
which was composed of severance of $2.8 million and other charges of $0.5 million. This action was
primarily completed during 2010.
(cid:129) In the first quarter of 2010, we began to exit OEM coil manufacturing in our Refrigeration operations in
Milperra, Australia. Total restructuring charges related to this action recorded in 2010 were $5.3 million,
which was composed of severance of $4.0 million, asset write-offs of $1.1 million and other charges of
$0.2 million. This action was completed during 2010.
(cid:129) In the fourth quarter of 2009, we began the consolidation of certain Refrigeration manufacturing operations
located in Parets, Spain into our existing operations in Genas, France. During 2010 we recorded restructuring
charges totaling $1.4 million, primarily composed of equipment move costs, severance and other plant
closure costs. This action was completed during 2010.
(cid:129) In the first quarter of 2009, we began the consolidation of Residential Heating & Cooling manufacturing
operations from Blackville, South Carolina into our operations in Orangeburg, South Carolina and Saltillo,
Mexico. Total restructuring charges recorded related to this action in 2010 were $1.4 million, primarily
composed of equipment move costs, accelerated depreciation, severance and other plant closure costs. The
consolidation is expected to be completed during the fourth quarter of 2011.
(cid:129) Additionally, during 2010, we reversed $0.8 million of restructuring severance charges related to the
consolidation of certain Commercial Heating & Cooling manufacturing operations located in Mions, France
into our existing manufacturing operations in Longvic, France to adjust estimated amounts to actual.
Reorganization of Distribution Network
In the fourth quarter of 2008, we commenced the transition of activities currently performed at our North
American Parts Center in Des Moines, Iowa to other locations, including our North American Distribution Center in
Marshalltown, Iowa. We incurred $0.1 million of restructuring charges, which was composed of severance, during
2010 related to this transition. To date, we have incurred $3.2 million, which was composed primarily of severance,
and we expect the total cost to be $3.6 million related to this restructuring activity. The total cost of this restructuring
activity will be composed of severance of $2.6 million, equipment moving costs of $0.3 million and other costs of
$0.7 million. The transition is expected to be completed in the fourth quarter of 2011.
Reorganizations of Corporate and Business Unit Administrative Functions
Information regarding the restructuring charges related to the reorganization of the support and administrative
functions is as follows (in millions):
Charges
Incurred in
2010
Charges
Incurred to
Date
Total Charges
Expected to be
Incurred
Severance and related expense . . . . . . . . . . . . . . . . . . . . . .
Asset write-offs and accelerated depreciation . . . . . . . . . . .
Lease termination . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$2.8
0.6
0.7
0.3
$4.4
$23.4
1.4
2.4
0.9
$28.1
$23.4
1.4
2.4
0.9
$28.1
We incurred costs related to the following significant restructuring actions in our support and administrative
activities:
(cid:129) In the fourth quarter of 2010, we began to reorganize the management structure of our Service Experts
business. Restructuring charges recorded in 2010 related to his action, totaled $1.1 million and was primarily
composed of severance. Total anticipated restructuring charges related to this action are expected to total
86
LENNOX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
$1.1 million and consist principally of severance. We anticipate that this action will be completed in the third
quarter of 2011.
(cid:129) During the second quarter of 2010, we reorganized certain administrative operations of an acquired company
within our Service Experts segment. Restructuring charges recorded in 2010 related to his action, totaled
$1.0 million and was primarily composed of asset write-offs and lease termination costs. This action was
completed during 2010.
(cid:129) In the third quarter of 2009, we initiated the relocation of Residential Heating & Cooling factory-built
fireplace headquarters from Orange, California to Nashville, Tennessee and the consolidation of customer
and technical service departments into our existing hearth products plant in Union City, Tennessee. As a
result of this action, we recorded restructuring charges of $1.8 million during 2010, which primarily
consisted of employee relocation and lease termination costs. Total restructuring charges related to this
action totaled $3.8 million and consisted principally of severance, recruiting, relocation costs and lease
termination costs. We completed this action during 2010.
(cid:129) During 2009 and 2008, we reorganized various administrative functions in our Commercial Heating &
Cooling and Refrigeration segments. As a result of these actions, we recorded restructuring severance
charges of $0.4 million during 2010. These actions were completed during 2010.
17. Discontinued Operations:
Service Experts Discontinued Operations
A summary of net trade sales and pre-tax operating losses classified as Discontinued Operations in the
accompanying Consolidated Statements of Operations are detailed below (in millions):
For the Years Ended
December 31,
2009
2008
2010
Net trade sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Pre-tax operating loss(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 0.2
(1.1)
$ 26.1
(13.1)
$52.5
(1.8)
(1) Included in the pre-tax operating loss from discontinued operations are losses on the disposal of the assets and
liabilities of the service centers sold of $0.2 million in 2010, and gains on disposal of the assets and liabilities of
service centers sold of $2.3 million in 2009. Also, included in the 2009 pre-tax operating loss from discontinued
operations is an impairment charge of $2.7 million related to service centers where the estimated selling price of
the assets is below the net book value of those assets and a write-off of $4.0 million of goodwill related to the
sale of these service centers. The pre-tax operating loss from discontinued operations in 2008 includes a
provision of $4.4 million for an unfavorable judgment related to the sale of a service center in 2004 that was
included in discontinued operations. This contingency was settled in 2009 for $6.1 million.
The assets and liabilities of the discontinued operations are presented as follows in the accompanying
Consolidated Balance Sheets (in millions):
For the Years
Ended
December 31,
2010
2009
Assets of discontinued operations:
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$— $3.6
Liabilities of discontinued operations:
Accrued expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$— $1.3
87
LENNOX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
18. Earnings Per Share:
Basic earnings per share are computed by dividing net income by the weighted-average number of common
shares outstanding during the period. Diluted earnings per share are computed by dividing net income by the sum of
the weighted-average number of shares and the number of equivalent shares assumed outstanding, if dilutive, under
our stock-based compensation plans.
The computations of basic and diluted earnings per share for Income from Continuing Operations were as
follows (in millions, except per share data):
For the Years Ended
December 31,
2009
2008
2010
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Add: Loss (income) from discontinued operations . . . . . . . . . . . . . . . . .
$116.2
0.9
$51.1
10.7
$122.8
1.0
Income from continuing operations . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$117.1
$61.8
$123.8
Weighted-average shares outstanding — basic . . . . . . . . . . . . . . . . . . . .
Effect of dilutive securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Weighted-average shares outstanding — diluted . . . . . . . . . . . . . . . . . . .
54.6
1.2
55.8
55.6
1.0
56.6
56.7
1.6
58.3
Earnings per share from continuing operations:
Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 2.14
$ 2.10
$1.11
$1.09
$ 2.18
$ 2.12
Stock appreciation rights were outstanding, but not included in the diluted earnings per share calculation
because the assumed exercise of such rights would have been anti-dilutive. The details are as follows:
Options to purchase common stock (number of shares) . . . .
Price ranges per share . . . . . . . . . . . . . . . . . . . . . . . . . . . .
273,429
$ 46.78
2010
2009
—
$N/A
2008
668,451
$34.52 to $37.11
For the Years Ended December 31,
88
LENNOX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
19. Reportable Business Segments:
We operate in four reportable business segments of the HVACR industry. Our segments are organized
primarily by the nature of the products and services provided. The table below details the nature of the operations of
each reportable segment:
Segment
Product or Services
Markets Served
Geographic Areas
Residential Heating &
Cooling
Commercial Heating &
Cooling
Heating
Air Conditioning
Hearth Products
Rooftop Products
Chillers Air Handlers
Residential Replacement
Residential New
Construction
Light Commercial
Service Experts
Refrigeration
Equipment Sales
Installation Maintenance
Repair
Unit Coolers Condensing
Units Other Commercial
Refrigeration Products
Residential Light
Commercial
Light Commercial Food
Preservation and Non-
Food/Industrial
United States
Canada
United States
Canada
Europe
United States
Canada
United States
Canada
Europe
Asia Pacific
South America
Transactions between segments, such as products sold to Service Experts by the Residential Heating &
Cooling segment, are recorded on an arm’s-length basis using the market price for these products. The eliminations
of these intercompany sales and any associated profit are noted in the reconciliation of segment results to the income
from continuing operations before income taxes below.
We use segment profit or loss as the primary measure of profitability to evaluate operating performance and to
allocate capital resources. We define segment profit or loss as a segment’s income or loss from continuing
operations before income taxes included in the accompanying Consolidated Statements of Operations excluding
certain items. See the reconciliation of segment profit to Income from Continuing Operations Before Income Taxes
below for more detail on the items excluded from segment profit.
Our corporate costs include those costs related to corporate functions such as legal, internal audit, treasury,
human resources, tax compliance and senior executive staff. Corporate costs also include the long-term share-based
incentive awards provided to employees throughout LII. We recorded these share-based awards as Corporate costs
as they are determined at the discretion of the Board of Directors and based on the historical practice of doing so for
internal reporting purposes.
89
LENNOX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Net sales and segment profit (loss) by business segment, along with a reconciliation of segment profit to
Income from Continuing Operations Before Income Taxes are shown below (in millions):
For the Years Ended December 31,
2010
2008
2009
Net Sales
Residential Heating & Cooling . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,417.4
620.0
Commercial Heating & Cooling . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
590.3
Service Experts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
550.9
Refrigeration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(82.2)
Eliminations(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$1,293.5
594.6
535.4
512.7
(88.7)
$1,493.4
835.3
586.3
618.2
(92.1)
$3,096.4
$2,847.5
$3,441.1
Segment Profit (Loss)(2)
Residential Heating & Cooling . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 132.3
69.3
Commercial Heating & Cooling . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
19.3
Service Experts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
61.4
Refrigeration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(65.5)
Corporate and other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
0.2
Eliminations(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 111.7
49.3
16.6
48.9
(62.5)
0.5
$ 145.8
93.3
18.5
60.2
(53.8)
(0.7)
Subtotal that includes segment profit and eliminations . . . . . . . . . . . . .
217.0
164.5
263.3
Reconciliation to income from continuing operations before income
taxes:
Special product quality adjustments . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Items in losses (gains) and other expenses, net that are excluded from
segment profit(3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Restructuring charges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Impairment of assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest expense, net
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other expense, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(0.2)
18.3
11.2
15.6
—
12.8
1.0
(10.9)
41.5
6.4
8.2
0.1
—
5.2
30.4
9.1
14.2
0.1
Income from continuing operations before income taxes . . . . . . . . . . . . . $ 176.6
$ 100.9
$ 204.3
(1) Eliminations consist of intercompany sales between business segments, such as products sold to Service
Experts by the Residential Heating & Cooling segment.
(2) We define segment profit and loss as a segment’s income or loss from continuing operations before income
taxes included in the accompanying Consolidated Statements of Operations: Excluding:
(cid:129) Special product quality adjustments.
(cid:129) Items within Losses (Gains) and Other Expenses, net that are noted in(3).
(cid:129) Restructuring charges.
(cid:129) Goodwill and equity method investment impairments.
(cid:129) Interest expense, net.
(cid:129) Other expense, net.
(3) Items in Losses (Gains) and Other Expenses, net that are excluded from segment profit are net change in
unrealized gains and/or losses on open future contracts, discount fee on accounts sold, realized gains and/or
90
LENNOX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
losses on marketable securities, special legal contingency charge, and other items. For more information about
Losses (Gains) and Other Expenses, net see Note 22.
Included in our Residential Heating & Cooling business segment profit for 2008 is a gain on the sale of fixed
assets of $4.1 million. The gains or losses in our other business segments were immaterial for 2010, 2009 and 2008.
On a consolidated basis, no revenues from transactions with a single customer were 10% or greater of our
consolidated net sales for any of the periods presented.
Total assets by business segment are shown below (in millions). The assets in the Corporate and other segment
are primarily comprised of cash, short-term investments and deferred tax assets. Assets recorded in the operating
segments represent those assets directly associated with those segments.
For the Years Ended
December 31,
2010
2009
Total Assets
Residential Heating & Cooling . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 519.8
252.7
Commercial Heating & Cooling . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
186.2
Service Experts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
389.7
Refrigeration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
354.9
Corporate and other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(11.3)
Eliminations(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Discontinued operations (See Note 17) . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,692.0
—
$ 484.2
238.5
173.1
357.5
297.3
(10.3)
1,540.3
3.6
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,692.0
$1,543.9
(1) Eliminations consist of net intercompany receivables and intercompany profit included in inventory from
products sold between business segments, such as products sold to Service Experts by the Residential
Heating & Cooling segment.
Total capital expenditures by business segment are shown below (in millions):
For the Years Ended
December 31,
2009
2008
2010
Capital Expenditures
Residential Heating & Cooling . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commercial Heating & Cooling . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Service Experts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Refrigeration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Corporate and other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$19.4
6.2
0.8
6.9
12.5
$31.7
6.8
0.7
7.4
12.2
$33.2
7.0
0.3
7.6
14.0
Total capital expenditures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$45.8
$58.8
$62.1
Excluded from capital expenditures for 2008 are capital leases of $7.4 million relating to our Residential
Heating & Cooling and $14.6 million relating to our Refrigeration business segment. There were no capital leases in
2010 and 2009.
91
LENNOX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The depreciation and amortization expense by business segment are shown below (in millions):
For the Years Ended
December 31,
2009
2008
2010
Depreciation and Amortization
Residential Heating & Cooling . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commercial Heating & Cooling . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Service Experts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Refrigeration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Corporate and other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$21.7
8.0
2.2
8.7
12.9
$22.2
8.0
1.9
9.9
10.9
$22.2
8.2
1.9
9.2
9.1
Total depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . .
$53.5
$52.9
$50.6
The equity method investees are shown below (in millions):
For the Years Ended
December 31,
2009
2010
2008
Income from Equity Method Investments
Refrigeration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1.3
8.8
Corporate and other(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$10.1
$0.5
6.8
$7.3
$1.3
7.3
$8.6
(1) A significant portion of income for equity method investments is allocated to our Residential Heating &
Cooling and Commercial Heating & Cooling segments. We allocated $5.6 million, $5.9 million, and
$4.5 million to those segments in 2010, 2009 and 2008, respectively.
The following table sets forth certain financial information relating to our operations by geographic area based
on the domicile of our operations (in millions):
For the Years Ended December 31,
2010
2008
2009
Net Sales to External Customers by Point of Shipment
United States. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $2,255.4
336.6
Canada . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
504.4
International . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$2,033.1
327.0
487.4
$2,429.2
363.9
648.0
Total net sales to external customers . . . . . . . . . . . . . . . . . . $3,096.4
$2,847.5
$3,441.1
As of December 31,
2010
2009
Property, Plant and Equipment, net
United States . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $225.5
33.0
Mexico . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Canada . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
6.0
59.8
International . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$232.7
30.3
6.0
60.6
Total property, plant and equipment, net. . . . . . . . . . . . . . . . . . . . . . . . . . . . $324.3
$329.6
92
LENNOX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
20. Fair Value Measurements:
Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly
transaction between market participants at the measurement date. Our framework for measuring fair value is
established on a three-level hierarchy for fair value measurements based upon the transparency of inputs to the
valuation of an asset or liability as of the measurement date and requires consideration of our creditworthiness when
valuing certain liabilities.
Fair Value Hierarchy
The three-level fair value hierarchies for disclosure of fair value measurements are defined as follows:
Level 1 — Quoted prices for identical instruments in active markets at the measurement date.
Level 2 — Quoted prices for similar instruments in active markets; quoted prices for identical or similar
instruments in markets that are not active; and model-derived valuations in which all significant inputs and
significant value drivers are observable in active markets at the measurement date and for the anticipated term of the
instrument.
Level 3 — Valuations derived from valuation techniques in which one or more significant inputs or significant
value drivers are unobservable inputs that reflect the reporting entity’s own assumptions about the assumptions
market participants would use in pricing the asset or liability developed based on the best information available in
the circumstances.
Fair Value Techniques
Our fair value valuation techniques are applied to all of the assets and liabilities carried at fair value. Where
available, the fair values are based upon quoted prices in active markets. However, if quoted prices are not available,
then the fair values are based upon quoted prices for similar assets or liabilities or independently sourced market
parameters, such as credit default swap spreads, yield curves, reported trades, broker/dealer quotes, interest rates
and benchmark securities. For assets and liabilities with a lack of observable market activity, if any, the fair values
are based upon discounted cash flow methodologies incorporating assumptions that, in our judgment, reflect the
assumptions a marketplace participant would use. To ensure that financial assets and liabilities are recorded at fair
value, valuation adjustments may be required to reflect either party’s creditworthiness and ability to pay. Where
appropriate, these amounts were incorporated into our valuations as of December 31, 2010 and 2009, the
measurement dates.
Assets and Liabilities Measured at Fair Value on a Recurring Basis
The following table presents the fair value hierarchy for those assets and liabilities measured at fair value on a
recurring basis (in millions):
Fair Value Measurements on a Recurring Basis as of
December 31, 2010
Significant
Other
Observable
Inputs
(Level 2)
Quoted Prices in
Active Markets
for
Identical Assets
(Level 1)
Significant
Unobservable
Inputs
(Level 3)
Total
Assets:
Investment in marketable equity securities(1) . . . . . .
Derivatives, net(2) . . . . . . . . . . . . . . . . . . . . . . . . .
$18.0
—
$ —
16.8
$—
—
$18.0
16.8
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LENNOX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Fair Value Measurements on a Recurring Basis as of
December 31, 2009
Significant
Other
Observable
Inputs
(Level 2)
Quoted Prices in
Active Markets
for
Identical Assets
(Level 1)
Significant
Unobservable
Inputs
(Level 3)
Total
Assets:
Investment in marketable equity securities(1) . . . . . .
Derivatives, net(2) . . . . . . . . . . . . . . . . . . . . . . . . .
$5.4
—
$ —
10.2
$—
—
$ 5.4
10.2
(1) Investment in marketable equity securities is recorded in Other Long-Term Assets in the accompanying
Consolidated Balance Sheets. See Note 6 for more information.
(2) For more information on the recording of derivatives in the accompanying Consolidated Balance Sheets, see
Note 8.
Derivatives are primarily valued using estimated future cash flows that are based directly on observed prices
from exchange-traded derivatives and, therefore, have been classified as Level 2. We also take into account the
counterparty’s creditworthiness, or our own creditworthiness, as appropriate.
Other Fair Value Measurements
The carrying amounts of cash and cash equivalents, accounts and notes receivable, net, accounts payable and
other current liabilities approximate fair value due to the short maturities of these instruments. The fair values of
each of our long-term debt instruments are based on the quoted market prices for the same issues or on the amount of
future cash flows associated with each instrument using current market rates for debt instruments of similar
maturities and credit risk. The estimated fair value of long-term debt (including our domestic revolving credit
facility, capital lease obligations, foreign obligations and any related current maturities) was $114.6 million and
$242.5 million as of December 31, 2010 and 2009, respectively. The estimated fair value of our senior unsecured
notes was $203.0 million as of December 31, 2010. The fair values presented are estimates and are not necessarily
indicative of amounts for which we could settle such instruments currently or indicative of our intent or ability to
dispose of or liquidate them.
21. Quarterly Financial Information (unaudited):
Financial results
The following tables provide information on net sales, gross profit, net income, earnings per share and
dividends per share by quarter (in millions, except per share data):
Net Sales
Gross Profit
2010(1)
2009(2)
2010(1)
2009(2)
First Quarter . . . . . . . . . . . . . . . . . . . . .
Second Quarter . . . . . . . . . . . . . . . . . . .
Third Quarter . . . . . . . . . . . . . . . . . . . . .
Fourth Quarter . . . . . . . . . . . . . . . . . . . .
$644.1
872.1
818.2
762.0
$580.5
784.0
749.5
733.5
$174.3
264.7
232.8
220.0
$136.4
226.2
221.7
203.8
Net (Loss) Income
2010(1)
2009(2)
$ (1.6)
48.3
41.8
27.7
$(18.1)
31.7
31.0
6.5
94
LENNOX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Basic
(Loss) Earnings
per Common
Share
2010
2009
Diluted
(Loss) Earnings
per
Common Share
2010
2009
Dividends per
Common Share
2010
2009
First Quarter . . . . . . . . . . . . . . . . . . . . . . . . $(0.02)
0.88
Second Quarter . . . . . . . . . . . . . . . . . . . . . .
0.78
Third Quarter . . . . . . . . . . . . . . . . . . . . . . .
0.52
Fourth Quarter . . . . . . . . . . . . . . . . . . . . . .
$(0.33)
0.57
0.56
0.12
$(0.02)
0.86
0.76
0.51
$(0.33)
0.56
0.54
0.11
$0.15
0.15
0.15
0.15
$0.14
0.14
0.14
0.14
(1) The following unusual or infrequent pre-tax items were included in the 2010 quarterly results:
We recorded an adjustment to pension cost in the fourth quarter resulted in a reduction of pension cost by
$4.1 million as compared to the prior year and by $3.5 million as compared to the third quarter.
We recorded LIFO related adjustments in the fourth quarter that increased gross profit by $2.5 million
We recorded restructuring charges throughout 2010 as follows: first quarter — $7.2 million, second quarter —
$3.2 million, third quarter — $4.7 million and fourth quarter — $0.5 million.
(2) The following unusual or infrequent pre-tax items were included in the 2009 quarterly results:
We recorded restructuring charges throughout 2009 as follows: first quarter — $11.2 million, second quarter —
$4.7 million, third quarter — $11.5 million and fourth quarter — $14.1 million.
We recorded a $6.0 million impairment charge related to the abandonment of information technology assets in
the fourth quarter.
We recorded expenses related to a specific product quality issue as follows: first quarter — $ —, second
quarter — $4.2 million, third quarter — $0.9 million, and fourth quarter — $19.3 million.
We recorded a net gain of $3.8 million related to the sale and liquidation of a foreign business in the fourth
quarter.
22. Losses (Gains) and Other Expenses, net:
Losses (Gains) and Other Expenses, net were as follows (in millions):
For the Years Ended
December 31,
2009
2010
2008
Realized losses (gains) on settled futures contracts . . . . . . . . . . . . . . . . . . .
Net change in unrealized (gains) losses on unsettled futures contracts . . . . .
Gain on disposal of a business, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Losses (gains) on disposals of fixed assets . . . . . . . . . . . . . . . . . . . . . . . . .
Special legal contingency charge(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Acquisition expenses(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign currency exchange losses (gains) . . . . . . . . . . . . . . . . . . . . . . . . . .
Other items, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ (1.5)
(0.6)
(0.1)
0.1
6.8
4.8
0.4
0.3
$ 3.7
(7.1)
(4.1)
(0.1)
—
—
0.7
0.3
$ 0.9
5.1
—
(4.8)
—
—
(3.2)
0.1
Losses (Gains) and Other Expenses, net . . . . . . . . . . . . . . . . . . . . . . . . . . .
$10.2
$(6.6)
$(1.9)
(1) For more information on the special legal contingency charge, see Note 10.
(2) Acquisition expenses relate to an acquisition consummated subsequent to year end. For more information, see
Note 24.
95
LENNOX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
23. Supplemental Information:
Below is information about expenses included in our Statements of Operations (in millions):
For the Years Ended
December 31,
2009
2008
2010
Research and development . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Advertising, promotions and marketing . . . . . . . . . . . . . . . . . . . . . . . . . . .
Rent expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$49.5
73.5
64.3
$48.9
59.5
64.4
$46.0
71.1
64.2
Interest Expense, net
The components of Interest Expense, net were as follows (in millions):
For the Years Ended
December 31,
2009
2008
2010
Interest expense, net of capitalized interest . . . . . . . . . . . . . . . . . . . . . . . . . $13.7
0.9
Interest income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$9.4
1.2
$18.0
3.8
24. Subsequent Events (unaudited):
On January 14, 2011, we completed a transaction with The Manitowoc Company, Inc. by which we to acquired
substantially all the assets of its Kysor/Warren business. Kysor/Warren is a leading manufacturer of refrigerated
systems and display cases for supermarkets throughout North America. Under the terms of the agreement, the total
consideration for the acquisition is $138 million, subject to a post-closing purchase price working capital
adjustment.
25. Condensed Consolidating Financial Statements
The Company’s senior unsecured notes are unconditionally guaranteed by certain of the Company’s subsid-
iaries (the “Guarantor Subsidiaries”) while they are not by other subsidiaries (the “Non-Guarantor Subsidiaries”).
As results of these guarantee arrangements, we are required to present the following condensed consolidating
financial statements.
The condensed consolidating financial statements reflect the investments in subsidiaries of the Company using
the equity method of accounting. Intercompany account balances have been included in Accounts and Notes
Receivable, Other (Current) Assets, Other Assets, net, Short-Term Debt, Accounts Payable, and Long-Term Debt
line items of the Parent, Guarantor and Non-Guarantor balance sheets. The principal elimination entries eliminate
investments in subsidiaries and intercompany balances and transactions.
96
LENNOX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Condensed consolidating financial statements of the Company, its Guarantor Subsidiaries and Non-Guarantor
Subsidiaries as of December 31, 2010 and 2009 and for the for each of the fiscal years of the three-year period ended
December 31, 2010 are shown below:
Condensed Consolidating Balance Sheets
As of December 31, 2010
(In millions)
Parent
Guarantor
Subsidiaries
Non-Guarantor
Subsidiaries
Eliminations Consolidated
ASSETS
CURRENT ASSETS:
Cash and cash equivalents . . . . . . . . . . . .
Restricted cash . . . . . . . . . . . . . . . . . . . .
Accounts and notes receivable, net . . . . . .
Inventories, net . . . . . . . . . . . . . . . . . . . .
Deferred income taxes . . . . . . . . . . . . . . .
Other assets. . . . . . . . . . . . . . . . . . . . . . .
$
81.1
—
(1,169.7)
—
—
19.3
$
14.7
—
933.3
163.7
27.6
21.0
net
Total current assets . . . . . . . . . . . . . . .
PROPERTY, PLANT AND EQUIPMENT,
. . . . . . . . . . . . . . . . . . . . . . . . . . .
GOODWILL . . . . . . . . . . . . . . . . . . . . . .
DEFERRED INCOME TAXES . . . . . . . .
OTHER ASSETS, net . . . . . . . . . . . . . . .
(1,069.3)
1,160.3
—
—
—
2,068.3
202.8
50.8
77.3
415.6
$
64.2
12.2
613.2
128.7
12.1
121.2
951.6
121.6
225.8
22.6
51.8
$
— $ 160.0
—
12.2
384.8
8.0
286.2
(6.2)
36.7
(3.0)
67.0
(94.5)
(95.7)
946.9
(0.1)
(4.8)
(12.7)
(2,473.9)
324.3
271.8
87.2
61.8
TOTAL ASSETS . . . . . . . . . . . . . . . . .
$
999.0
$1,906.8
$1,373.4
$(2,587.2)
$1,692.0
LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES:
Short-term debt . . . . . . . . . . . . . . . . . . . .
Current maturities of long-term debt
. . . .
Accounts payable . . . . . . . . . . . . . . . . . .
Accrued expenses . . . . . . . . . . . . . . . . . .
Income taxes payable . . . . . . . . . . . . . . .
$
Total current liabilities . . . . . . . . . . . . .
LONG-TERM DEBT. . . . . . . . . . . . . . . .
POSTRETIREMENT BENEFITS,
OTHER THAN PENSIONS . . . . . . . . .
PENSIONS . . . . . . . . . . . . . . . . . . . . . . .
OTHER LIABILITIES. . . . . . . . . . . . . . .
31.1
—
8.1
6.6
(36.1)
9.7
300.0
—
—
5.8
$
—
0.2
133.1
262.0
30.6
425.9
5.4
15.9
77.4
46.8
Total liabilities . . . . . . . . . . . . . . . . . . .
315.5
571.4
$
1.8
0.4
131.0
115.5
28.3
277.0
139.6
—
10.7
25.9
453.2
$
(31.5)
—
1.6
(49.6)
(17.5)
(97.0)
(128.0)
—
—
(12.8)
$
1.4
0.6
273.8
334.5
5.3
615.6
317.0
15.9
88.1
65.7
(237.8)
1,102.3
COMMITMENTS AND
CONTINGENCIES . . . . . . . . . . . . . . .
TOTAL STOCKHOLDERS’ EQUITY . . . . .
TOTAL LIABILITIES AND
683.5
1,335.4
920.2
(2,349.4)
589.7
STOCKHOLDERS’ EQUITY . . . . . .
$
999.0
$1,906.8
$1,373.4
$(2,587.2)
$1,692.0
97
LENNOX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Condensed Consolidating Balance Sheets
As of December 31, 2009
(In millions)
Parent
Guarantor
Subsidiaries
Non-Guarantor
Subsidiaries
Eliminations Consolidated
ASSETS
CURRENT ASSETS:
Cash and cash equivalents . . . . . . . . . . . . . $
Accounts and notes receivable, net . . . . . .
Inventories, net . . . . . . . . . . . . . . . . . . . . .
Deferred income taxes . . . . . . . . . . . . . . .
Other assets . . . . . . . . . . . . . . . . . . . . . . .
Total current assets . . . . . . . . . . . . . . . .
PROPERTY, PLANT AND EQUIPMENT,
net . . . . . . . . . . . . . . . . . . . . . . . . . . . .
GOODWILL . . . . . . . . . . . . . . . . . . . . . .
DEFERRED INCOME TAXES . . . . . . . . .
OTHER ASSETS, net . . . . . . . . . . . . . . . .
—
—
—
1,905.1
TOTAL ASSETS . . . . . . . . . . . . . . . . . $ 943.1
0.8
(975.0)
—
—
12.2
(962.0)
$
6.6
775.1
139.4
25.4
19.1
965.6
207.8
46.7
67.3
371.4
$1,658.8
$ 116.9
558.3
113.7
15.8
93.0
897.7
121.8
215.4
21.2
41.5
$1,297.6
$
— $ 124.3
357.0
250.2
34.9
67.5
(1.4)
(2.9)
(6.3)
(56.8)
(67.4)
833.9
—
(4.7)
(13.9)
(2,269.6)
$(2,355.6)
329.6
257.4
74.6
48.4
$1,543.9
LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES:
Short-term debt. . . . . . . . . . . . . . . . . . . . . $
Current maturities of long-term debt . . . . .
Accounts payable . . . . . . . . . . . . . . . . . . .
Accrued expenses . . . . . . . . . . . . . . . . . . .
Income taxes payable . . . . . . . . . . . . . . . .
Total current liabilities . . . . . . . . . . . . .
LONG-TERM DEBT . . . . . . . . . . . . . . . .
POSTRETIREMENT BENEFITS, OTHER
THAN PENSIONS . . . . . . . . . . . . . . . .
PENSIONS . . . . . . . . . . . . . . . . . . . . . . .
OTHER LIABILITIES . . . . . . . . . . . . . . .
Total liabilities . . . . . . . . . . . . . . . . . . .
COMMITMENTS AND
CONTINGENCIES . . . . . . . . . . . . . . . .
TOTAL STOCKHOLDERS’ EQUITY . . . . .
TOTAL LIABILITIES AND
25.1
35.0
7.9
5.1
(17.5)
55.6
176.5
—
—
2.6
234.7
$
—
—
115.4
192.5
(21.6)
286.3
98.8
13.4
56.3
50.9
505.7
$
2.5
0.5
122.7
154.3
43.2
323.2
117.4
—
10.5
32.9
484.0
$
(25.4)
—
(7.8)
(34.0)
(4.1)
(71.3)
(198.9)
—
(0.1)
(14.6)
(284.9)
$
2.2
35.5
238.2
317.9
—
593.8
193.8
13.4
66.7
71.8
939.5
708.4
1,153.1
813.6
(2,070.7)
604.4
STOCKHOLDERS’ EQUITY . . . . . . $ 943.1
$1,658.8
$1,297.6
$(2,355.6)
$1,543.9
98
LENNOX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Condensed Consolidating Statements of Operations
For the Year Ended December 31, 2010
(In millions)
NET SALES. . . . . . . . . . . . . . . . . . . . . . . .
COST OF GOODS SOLD . . . . . . . . . . . . . .
$ — $2,128.0
1,545.8
0.2
Parent
Guarantor
Subsidiaries
Non-
Guarantor
Subsidiaries
$1,220.8
907.8
Eliminations
Consolidated
$(252.4)
(249.2)
$3,096.4
2,204.6
Gross profit . . . . . . . . . . . . . . . . . . . . . . .
(0.2)
582.2
313.0
(3.2)
891.8
OPERATING EXPENSES:
Selling, general and administrative
expenses . . . . . . . . . . . . . . . . . . . . . . .
(Gains) losses and other expenses, net . . .
Restructuring charges . . . . . . . . . . . . . . .
(Income) loss from equity method
—
(0.6)
480.3
6.5
5.7
205.4
4.3
9.9
—
—
—
685.7
10.2
15.6
investments . . . . . . . . . . . . . . . . . . . . .
(138.8)
(11.8)
(10.1)
150.6
(10.1)
Operational income from continuing
operations . . . . . . . . . . . . . . . . . . . .
INTEREST (INCOME) EXPENSE, net . . . .
. . . . . . . . . . . . . . .
OTHER EXPENSE, net
139.2
12.4
—
101.5
(3.0)
—
Income from continuing operations
before income taxes . . . . . . . . . . . . .
126.8
104.5
(BENEFIT FROM) PROVISION FOR
INCOME TAXES . . . . . . . . . . . . . . . . . .
(4.4)
Income from continuing operations . . .
Loss from discontinued operations . . . . . .
131.2
—
Net income . . . . . . . . . . . . . . . . . . . . .
$ 131.2
$
34.3
70.2
—
70.2
$
103.5
3.4
1.0
99.1
29.6
69.5
0.9
68.6
(153.8)
—
—
(153.8)
—
(153.8)
—
190.4
12.8
1.0
176.6
59.5
117.1
0.9
$(153.8)
$ 116.2
99
LENNOX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
For the Year Ended December 31, 2009
(In millions)
NET SALES. . . . . . . . . . . . . . . . . . . . . . . . .
COST OF GOODS SOLD. . . . . . . . . . . . . . .
$ — $1,939.1
1,440.8
0.2
Parent
Guarantor
Subsidiaries
Non-
Guarantor
Subsidiaries
$1,147.1
857.2
Gross profit. . . . . . . . . . . . . . . . . . . . . . . .
(0.2)
498.3
289.9
OPERATING EXPENSES:
Selling, general and administrative
expenses . . . . . . . . . . . . . . . . . . . . . . . .
(Gains) losses and other expenses, net . . . .
Restructuring charges . . . . . . . . . . . . . . . .
Impairment of assets . . . . . . . . . . . . . . . . .
(Income) loss from equity method
—
(6.7)
—
—
453.0
(0.7)
16.2
—
191.8
0.8
25.3
6.4
Eliminations
Consolidated
$2,847.5
2,059.4
788.1
$(238.7)
(238.8)
0.1
0.1
—
—
—
investments . . . . . . . . . . . . . . . . . . . . . .
(39.1)
Operational income from continuing
operations . . . . . . . . . . . . . . . . . . . . .
INTEREST (INCOME) EXPENSE, net . . . . .
OTHER EXPENSE, net . . . . . . . . . . . . . . . .
Income from continuing operations
before income taxes . . . . . . . . . . . . . .
PROVISION FOR INCOME TAXES. . . . . . .
Income from continuing operations . . . .
Loss from discontinued operations . . . . . . .
45.6
(0.8)
—
46.4
0.2
46.2
—
Net income . . . . . . . . . . . . . . . . . . . . . .
$ 46.2
$
5.4
24.4
7.2
—
17.2
6.3
10.9
—
10.9
(7.3)
33.7
72.9
1.9
0.1
70.9
32.2
38.7
10.7
28.0
$
(33.7)
(0.1)
—
(33.6)
0.4
(34.0)
—
$ (34.0)
$
100
644.9
(6.6)
41.5
6.4
(7.3)
109.2
8.2
0.1
100.9
39.1
61.8
10.7
51.1
LENNOX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
For the Year Ended December 31, 2008
(In millions)
Parent
Guarantor
Subsidiaries
Non-Guarantor
Subsidiaries
Eliminations
Consolidated
NET SALES . . . . . . . . . . . . . . . . . . . . . $ — $2,193.6
1,589.2
COST OF GOODS SOLD . . . . . . . . . . .
0.2
Gross profit
. . . . . . . . . . . . . . . . . . . .
(0.2)
604.4
$1,396.9
1,067.0
329.9
$(149.4)
(149.8)
0.4
$3,441.1
2,506.6
934.5
OPERATING EXPENSES:
Selling, general and administrative
expenses . . . . . . . . . . . . . . . . . . . . .
Losses (gains) and other expenses,
net . . . . . . . . . . . . . . . . . . . . . . . . .
Restructuring charges . . . . . . . . . . . . .
Impairment of assets . . . . . . . . . . . . . .
Income from equity method
—
5.1
—
—
investments . . . . . . . . . . . . . . . . . . .
(139.2)
Operational income from continuing
operations . . . . . . . . . . . . . . . . . .
INTEREST EXPENSE, net . . . . . . . . . . .
OTHER EXPENSE, net . . . . . . . . . . . . .
133.9
7.7
—
Income from continuing operations
477.0
209.9
(5.9)
10.7
—
(6.6)
129.2
6.3
—
(1.0)
19.7
9.1
(8.6)
100.8
0.1
0.1
—
(0.1)
—
—
145.8
(145.3)
0.1
—
686.9
(1.9)
30.4
9.1
(8.6)
218.6
14.2
0.1
before income taxes . . . . . . . . . . .
126.2
122.9
100.6
(145.4)
204.3
(BENEFIT FROM) PROVISION FOR
INCOME TAXES . . . . . . . . . . . . . . . .
(2.9)
Income from continuing
operations . . . . . . . . . . . . . . . . . .
Loss from discontinued operations . . . .
129.1
—
Net income . . . . . . . . . . . . . . . . . . . $ 129.1
$
43.6
79.3
—
79.3
39.6
61.0
1.0
60.0
$
0.2
80.5
(145.6)
—
123.8
1.0
$(145.6)
$ 122.8
101
LENNOX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
For the Year Ended December 31, 2010
(In millions)
CASH FLOWS FROM OPERATING
ACTIVITIES:
. . . . . . . . . . . . . . . . . . . . . .
$(115.4)
315.3
$ (14.1)
$—
$ 185.8
Parent
Guarantor
Subsidiaries
Non-Guarantor
Subsidiaries
Eliminations Consolidated
CASH FLOWS FROM INVESTING
ACTIVITIES:
Proceeds from the disposal of property,
plant and equipment . . . . . . . . . . . . . . . .
Purchases of property, plant and
equipment . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from sale of businesses . . . . . . . .
Acquisition of business. . . . . . . . . . . . . . . .
Restricted cash . . . . . . . . . . . . . . . . . . . . . .
Net cash used in investing activities . . . .
CASH FLOWS FROM FINANCING
ACTIVITIES:
Short-term payments, net . . . . . . . . . . . . . .
Long-term payments. . . . . . . . . . . . . . . . . .
Issuance of senior unsecured notes . . . . . . .
. . . . . .
Revolver long-term borrowings, net
Additional investment in affiliate . . . . . . . .
Proceeds from stock option exercises . . . . .
Payments of deferred financing costs . . . . .
Repurchases of common stock . . . . . . . . . .
Excess tax benefits related to share-based
payments . . . . . . . . . . . . . . . . . . . . . . . .
Intercompany debt . . . . . . . . . . . . . . . . . . .
Intercompany financing activity . . . . . . . . .
Intercompany investments . . . . . . . . . . . . . .
Intercompany dividends . . . . . . . . . . . . . . .
Cash dividends paid . . . . . . . . . . . . . . . . . .
Net cash provided by (used in) financing
activities . . . . . . . . . . . . . . . . . . . . . . .
INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS . . . . . . . . . . . . . . .
EFFECT OF EXCHANGE RATES ON CASH
AND CASH EQUIVALENTS . . . . . . . . . . .
CASH AND CASH EQUIVALENTS,
beginning of period . . . . . . . . . . . . . . . . . .
CASH AND CASH EQUIVALENTS, end of
—
—
—
—
—
—
—
(35.0)
199.8
(76.5)
—
3.5
(1.8)
(153.7)
5.3
90.8
194.6
(7.9)
9.0
(32.4)
0.1
(33.7)
0.1
(7.2)
—
(40.7)
—
(0.1)
—
—
—
—
—
—
—
(107.8)
(158.6)
—
—
—
195.7
(266.5)
80.3
—
0.8
8.1
—
6.6
0.1
(12.1)
3.5
—
(12.2)
(20.7)
(0.8)
(0.8)
—
—
(1.0)
—
—
—
—
17.0
(36.0)
7.9
(9.0)
—
(22.7)
(57.5)
4.8
116.9
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
0.2
(45.8)
3.6
(7.2)
(12.2)
(61.4)
(0.8)
(35.9)
199.8
(76.5)
(1.0)
3.5
(1.8)
(153.7)
5.3
—
—
—
—
(32.4)
(93.5)
30.9
4.8
124.3
period . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 81.1
$ 14.7
$ 64.2
$—
$ 160.0
102
LENNOX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
For the Year Ended December 31, 2009
(In millions)
CASH FLOWS FROM OPERATING
ACTIVITIES:
. . . . . . . . . . . . . . . . . . . . . .
$ 54.0
$ 87.0
$ 84.5
$—
$ 225.5
Parent
Guarantor
Subsidiaries
Non-Guarantor
Subsidiaries
Eliminations Consolidated
CASH FLOWS FROM INVESTING
ACTIVITIES:
Proceeds from the disposal of property,
plant and equipment . . . . . . . . . . . . . . . .
Purchases of property, plant and
equipment . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from sale of businesses . . . . . . . .
Return of investment . . . . . . . . . . . . . . . . .
Purchases of short-term investments . . . . . .
Proceeds from sales and maturities of short-
term investments. . . . . . . . . . . . . . . . . . .
Net cash provided by (used in) investing
activities . . . . . . . . . . . . . . . . . . . . . . .
CASH FLOWS FROM FINANCING
ACTIVITIES:
Short-term payments, net . . . . . . . . . . . . . .
Long-term payments. . . . . . . . . . . . . . . . . .
Revolver long-term payments, net . . . . . . . .
Proceeds from stock option exercises . . . . .
Repurchases of common stock . . . . . . . . . .
Excess tax benefits related to share-based
payments . . . . . . . . . . . . . . . . . . . . . . . .
Intercompany debt . . . . . . . . . . . . . . . . . . .
Intercompany financing activity . . . . . . . . .
Intercompany dividends . . . . . . . . . . . . . . .
Cash dividends paid . . . . . . . . . . . . . . . . . .
Net cash used in financing activities . . . .
DECREASE IN CASH AND CASH
EQUIVALENTS. . . . . . . . . . . . . . . . . . . . .
EFFECT OF EXCHANGE RATES ON CASH
AND CASH EQUIVALENTS . . . . . . . . . . .
CASH AND CASH EQUIVALENTS,
beginning of period . . . . . . . . . . . . . . . . . .
CASH AND CASH EQUIVALENTS, end of
—
—
—
—
—
—
—
—
—
(183.3)
9.4
(5.6)
4.9
21.0
126.5
5.0
(31.1)
(53.2)
0.8
—
—
0.2
(48.3)
1.1
—
—
—
(47.0)
—
—
—
—
—
—
(12.5)
(24.0)
—
—
(36.5)
3.5
—
3.1
0.4
(10.5)
8.9
0.9
(16.9)
50.2
33.0
(4.3)
(1.7)
—
—
—
—
(8.5)
(102.5)
(5.0)
—
(122.0)
(4.5)
2.4
119.0
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
0.6
(58.8)
10.0
0.9
(16.9)
50.2
(14.0)
(4.3)
(1.7)
(183.3)
9.4
(5.6)
4.9
—
—
—
(31.1)
(211.7)
(0.2)
2.4
122.1
period . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
0.8
$ 6.6
$ 116.9
$—
$ 124.3
103
LENNOX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
For the Year Ended December 31, 2008
(In millions)
CASH FLOWS FROM OPERATING
ACTIVITIES:
. . . . . . . . . . . . . . . . . . . . . .
$
5.5
$ 136.4
$ 41.3
$—
$ 183.2
Parent
Guarantor
Subsidiaries
Non-Guarantor
Subsidiaries
Eliminations Consolidated
CASH FLOWS FROM INVESTING
ACTIVITIES:
Proceeds from the disposal of property,
plant and equipment . . . . . . . . . . . . . . . .
—
1.1
4.7
Purchases of property, plant and
equipment . . . . . . . . . . . . . . . . . . . . . . .
Additional investments in affiliates . . . . . . .
Purchases of short-term investments . . . . . .
Proceeds from sales and maturities of short-
term investments. . . . . . . . . . . . . . . . . . .
Net cash used in investing activities . . . .
CASH FLOWS FROM FINANCING
ACTIVITIES:
Short-term borrowings, net . . . . . . . . . . . . .
Proceeds from capital lease. . . . . . . . . . . . .
Long-term payments. . . . . . . . . . . . . . . . . .
Revolver long-term (payments) borrowings,
net . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from stock option exercises . . . . .
Payments of deferred financing costs . . . . .
Repurchases of common stock . . . . . . . . . .
Excess tax benefits related to share-based
payments . . . . . . . . . . . . . . . . . . . . . . . .
Intercompany debt . . . . . . . . . . . . . . . . . . .
Intercompany activity . . . . . . . . . . . . . . . . .
Intercompany dividends . . . . . . . . . . . . . . .
Cash dividends paid . . . . . . . . . . . . . . . . . .
(1.2)
—
—
—
(1.2)
—
—
(36.3)
213.5
19.7
(0.3)
(323.8)
11.0
(5.8)
150.0
—
(32.4)
(49.3)
(3.1)
—
—
(51.3)
—
—
—
—
—
—
—
—
9.8
(145.5)
41.5
—
Net cash used in financing activities . . . .
(4.4)
(94.2)
DECREASE IN CASH AND CASH
EQUIVALENTS. . . . . . . . . . . . . . . . . . . . .
EFFECT OF EXCHANGE RATES ON CASH
AND CASH EQUIVALENTS . . . . . . . . . . .
CASH AND CASH EQUIVALENTS,
beginning of period . . . . . . . . . . . . . . . . . .
CASH AND CASH EQUIVALENTS, end of
(0.1)
(9.1)
—
0.1
—
12.2
(11.6)
(1.6)
(64.2)
58.7
(14.0)
1.4
15.3
(0.1)
—
—
—
—
—
(4.0)
(4.5)
(41.5)
—
(33.4)
(6.1)
(8.1)
133.2
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
5.8
(62.1)
(4.7)
(64.2)
58.7
(66.5)
1.4
15.3
(36.4)
213.5
19.7
(0.3)
(323.8)
11.0
—
—
—
(32.4)
(132.0)
(15.3)
(8.1)
145.5
period . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ — $
3.1
$119.0
$—
$ 122.1
104
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A. Controls and Procedures
Disclosure Controls and Procedures
As required by Rule 13a-15 under the Securities Exchange Act of 1934, we carried out an evaluation, under the
supervision and with the participation of our current management, including our Chief Executive Officer and Chief
Financial Officer, of the effectiveness of our disclosure controls and procedures as of the end of the period covered
by this report. There are inherent limitations to the effectiveness of any system of disclosure controls and
procedures, including the possibility of human error and circumvention or overriding of the controls and
procedures. Accordingly, even effective disclosure controls and procedures can only provide reasonable assurance
of achieving their control objectives. Based on that evaluation, the Chief Executive Officer and Chief Financial
Officer have concluded that, as of December 31, 2010, our disclosure controls and procedures were effective to
provide reasonable assurance that information required to be disclosed by us in the reports we file or submit under
the Securities Exchange Act of 1934 is recorded, processed, summarized and reported, within the time periods
specified in the applicable rules and forms, and that such information is accumulated and communicated to
management, including our Chief Executive Officer and Chief Financial Officer, to allow timely decisions
regarding required disclosure.
Management’s Annual Report on Internal Control Over Financial Reporting
See “Management’s Report on Internal Control Over Financial Reporting” included in Item 8 “Financial
Statements and Supplementary Data.”
Attestation Report of the Independent Registered Public Accounting Firm
See “Report of Independent Registered Public Accounting Firm” included in Item 8 “Financial Statements and
Supplementary Data.”
Changes in Internal Control Over Financial Reporting
There were no changes during the quarter ended December 31, 2010 in our internal control over financial
reporting that have materially affected, or are reasonably likely to materially affect, our internal control over
financial reporting.
Item 9B. Other Information
None.
PART III
Item 10. Directors, Executive Officers and Corporate Governance
The information in the sections of our 2011 Proxy Statement captioned “Proposal 1: Election of Directors,”
“Section 16(a) Beneficial Ownership Reporting Compliance,” and “Corporate Governance” is incorporated in this
Item 10 by reference. Part I, Item 1 “Business — Executive Officers of the Company” of this Annual Report on
Form 10-K identifies our executive officers and is incorporated in this Item 10 by reference.
Item 11. Executive Compensation
The sections of our 2011 Proxy Statement captioned “Executive Compensation,” “Director Compensation”
and “Certain Relationships and Related Party Transactions — Compensation Committee Interlocks and Insider
Participation” are incorporated in this Item 11 by reference.
105
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters
The sections of our 2011 Proxy Statement captioned “Equity Compensation Plan Information” and “Own-
ership of Common Stock” are incorporated in this Item 12 by reference.
Item 13. Certain Relationships and Related Transactions, and Director Independence
The sections of our 2011 Proxy Statement captioned “Corporate Governance — Director Independence” and
“Certain Relationships and Related Party Transactions” are incorporated in this Item 13 by reference.
Item 14. Principal Accounting Fees and Services
The section of our 2011 Proxy Statement captioned “Independent Registered Public Accountants” is incor-
porated in this Item 14 by reference.
PART IV
Item 15. Exhibits, Financial Statement Schedules
Financial Statements
The following financial statements are included in Part II, Item 8 of this Annual Report on Form 10-K:
(cid:129) Report of Independent Registered Public Accounting Firm
(cid:129) Consolidated Balance Sheets as of December 31, 2010 and 2009
(cid:129) Consolidated Statements of Operations for the Years Ended December 31, 2010, 2009 and 2008
(cid:129) Consolidated Statements of Stockholders’ Equity for the Years Ended December 31, 2010, 2009 and 2008
(cid:129) Consolidated Statements of Cash Flows for the Years Ended December 31, 2010, 2009 and 2008
(cid:129) Notes to Consolidated Financial Statements for the Years Ended December 31, 2010, 2009 and 2008
Financial Statement Schedules
The financial statement schedule included in this Annual Report on Form 10-K is Schedule II — Valuation and
Qualifying Accounts and Reserves for the Years Ended December 31, 2010, 2009, and 2008 (see Schedule II
immediately following the signature page of this Annual Report on Form 10-K).
Financial statement schedules not included in this Annual Report on Form 10-K have been omitted because
they are not applicable or the required information is shown in the Consolidated Financial Statements or Notes
thereto.
Exhibits
A list of the exhibits required to be filed or furnished as part of this Annual Report on Form 10-K is set forth in
the Index to Exhibits, which immediately precedes such exhibits, and is incorporated herein by reference.
106
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/ TODD M. BLUEDORN
Todd M. Bluedorn
Chief Executive Officer
February 18, 2011
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the
following persons on behalf of the registrant in the capacities and on the dates indicated.
Signature
Title
Date
/s/ TODD M. BLUEDORN
Todd M. Bluedorn
/s/ ROBERT W. HAU
Robert W. Hau
/s/ ROY A. RUMBOUGH
Roy A. Rumbough
/s/ RICHARD L. THOMPSON
Richard L. Thompson
/s/
JAMES J. BYRNE
JAMES J. BYRNE
/s/
JANET K. COOPER
Janet K. Cooper
/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
Chief Executive Officer and Director
(Principal Executive Officer)
February 18, 2011
Executive Vice President and
Chief Financial Officer
(Principal Financial Officer)
Vice President, Controller and
Chief Accounting Officer
(Principal Accounting Officer)
February 18, 2011
February 18, 2011
Chairman of the Board of Directors
February 18, 2011
Director
February 18, 2011
Director
February 18, 2011
Director
February 18, 2011
Director
February 18, 2011
Director
February 18, 2011
Director
February 18, 2011
107
Signature
/s/ TERRY D. STINSON
Terry D. Stinson
/s/
JEFFREY D. STOREY, MD
Jeffrey D. Storey, MD
/s/ GREGORY T. SWIENTON
Gregory T. Swienton
Title
Director
Date
February 18, 2011
Director
February 18, 2011
Director
February 18, 2011
108
LENNOX INTERNATIONAL INC.
SCHEDULE II — VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
For the Years Ended December 31, 2010, 2009 and 2008
(In Millions)
Balance at
Beginning
of Year
Additions
Charged
to Cost and
Expenses
Write-offs
Recoveries
Other
Balance
at end
of Year
2008:
Allowance for doubtful accounts . . . . . . .
2009:
Allowance for doubtful accounts . . . . . . .
2010:
Allowance for doubtful accounts . . . . . . .
$16.5
$17.0
$(15.2)
$0.6
$(1.0)
$17.9
$17.9
$12.6
$(17.8)
$1.4
$ 1.5
$15.6
$15.6
$ 6.3
$ (9.9)
$1.2
$(0.4)
$12.8
109
Exhibit
Number
INDEX TO EXHIBITS
Exhibit Name
3.1
3.2
4.1
4.2.
4.3.
4.4.
10.1
10.2
10.3
10.4
10.5
10.6
10.7
10.8
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 3.1 to LII’s Current Report on Form 8-K filed on
March 15, 2010 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).
Indenture, dated as of May 3, 2010, between LII and U.S. Bank National Association, as trustee (filed as
Exhibit 4.1 to LII’s Post-Effective Amendment No. 1 to Registration Statement on S-3 (Registration
No. 333-155796) filed on May 3, 2010 and incorporated herein by reference).
Form of First Supplemental Indenture among LII, the guarantors party thereto and U.S. Bank National
Association, as trustee (filed as Exhibit 4.2 to LII’s Post-Effective Amendment No. 1 to Registration Statement
on S-3 (Registration No. 333-155796) filed on May 3, 2010 and incorporated herein by reference).
Form of 4.900% Notes due 2017 (filed as Exhibit 4.3 to LII’s Current Report on Form 8-K filed on May 6,
2010 and incorporated herein by reference).
Receivables Purchase Agreement dated as of November 25, 2009, by and among Lennox Industries Inc.,
LPAC Corp., Victory Receivables Corporation, as a Purchaser, The Bank of Tokyo-Mitsubishi UFJ, LTD,
New York Branch, as a Liquidity Bank, and The Bank of Toyko-Mitsubishi UFJ, LTD, New York Branch,
as Administrative Agent and the BTMU Purchaser Agent (filed as Exhibit 10.1 to LII’s Current Report on
Form 8-K filed on December 2, 2009 and incorporated herein by reference).
Amendment No. 1 dated November 19, 2010, to the Receivables Purchase Agreement, dated as of
November 25, 2009, with Victory Receivables Corporation, as a Purchaser, The Bank of Tokyo-
Mitsubishi UFJ, LTD., New York Branch, as a Liquidity Bank, and The Bank of Tokyo-Mitsubishi UFJ,
LTD., New York Branch as Administrative Agent and the BTMU Purchaser Agent (filed as Exhibit 10.1 to
LII’s Current Report on Form 8-K filed on November 19, 2010 and incorporated herein by reference).
Third Amended and Restated Credit Agreement, dated October 12, 2007, among LII, Bank of America,
N.A., as administrative agent, swingline lender and issuing bank, JPMorgan Chase Bank, N.A. and
Wachovia Bank, National Association, as co-syndication agents, and the Lenders party thereto (filed as
Exhibit 10.1 to LII’s Current Report on Form 8-K filed on October 15, 2007 and as Exhibit 10.1 to LII’s
Quarterly Report on Form 10-Q for the quarter ended June 30, 2009 and incorporated herein by reference).
to Third Amended and Restated Revolving Credit Facility Agreement, dated
First Amendment
February 22, 2010, by and among LII, Bank of America, N.A., as administrative agent, and the
lenders named therein (filed as Exhibit 10.1 to LII’s Current Report on Form 8-K filed on
February 22, 2010 and incorporated herein by reference).
Lease Agreement, dated as of June 22, 2006, by and between BTMU Capital Corporation, as lessor, and
Lennox Procurement Company Inc., as lessee (filed as Exhibit 10.1 to LII’s Current Report on Form 8-K
filed on June 28, 2006 and incorporated herein by reference).
Memorandum of Lease, Deed of Trust, Assignment of Leases and Rents, Security Agreement and Fixture
Filing, dated as of June 22, 2006, by and among Lennox Procurement Company Inc., BTMU Capital
Corporation and Jeffrey L. Bell, as Deed of Trust Trustee, for the benefit of BTMU Capital Corporation
(filed as Exhibit 10.3 to LII’s Current Report on Form 8-K filed on June 28, 2006 and incorporated herein
by reference).
First Omnibus Amendment to Operative Documents, dated as of September 22, 2008, among LII, Lennox
Procurement Company Inc., Lennox Industries Inc., Allied Air Enterprises Inc., Service Experts LLC,
Lennox Global Ltd., BTMU Capital Corporation and Compass Bank (filed as Exhibit 10.1 to LII’s Current
Report on Form 8-K filed on September 25, 2008 and incorporated herein by reference).
Subsidiary Guaranty, dated as of September 22, 2008, made by LII, Allied Air Enterprises Inc., Service
Experts LLC. and Lennox Global Ltd., as guarantors, in favor of BTMU Capital Corporation and the other
parties specified therein (filed as Exhibit 10.2 to LII’s Current Report on Form 8-K filed on September 25,
2008 and incorporated herein by reference).
110
Exhibit
Number
Exhibit Name
10.9*
Lennox International Inc. 2010 Incentive Plan, as amended and restated (filed as Exhibit 10.1 to LII’s
Current Report on Form 8-K filed on May 19, 2010 and incorporated herein by reference).
10.10* Form of Long-Term Incentive Award Agreement for U.S. Employees — Vice President and Above (for
use under the 2010 Incentive Plan) (filed as Exhibit 10.2 to LII’s Current Report on Form 8-K filed on
December 13, 2010 and incorporated herein by reference).
10.11* Form of Restricted Stock Unit Award Agreement for Non-Employee Directors (for use under the 2010
Incentive Plan) (filed as Exhibit 10.1 to LII’s Current Report on Form 8-K filed on December 13, 2010 and
incorporated herein by reference).
10.12* Amended and Restated 1998 Incentive Plan of Lennox International Inc. (filed as Exhibit 10.1 to LII’s
Quarterly Report on Form 10-Q for the quarter ended March 31, 2005 and incorporated herein by
reference).
10.13* Form of 2009 Long-Term Incentive Award Agreement for U.S. Employees of LII under the 1998
Incentive Plan of LII (filed as Exhibit 10.4 to LII’s Current Report on Form 8-K filed on December 17,
2008 and incorporated herein by reference).
10.14* Form of 2009 Long-Term Incentive Award Agreement Non-Employee Director under the 1998 Incentive
Plan of LII (filed as Exhibit 10.9 to LII’s Annual Report on Form 10-K for the year ended December 31,
2008 and incorporated by reference).
10.15* Lennox International Inc. Profit Sharing Restoration Plan, as amended and restated effective January 1,
2009 (filed as Exhibit 10.3 to LII’s Current Report on Form 8-K filed on December 17, 2008 and
incorporated herein by reference).
10.16* Lennox International Inc. Supplemental Retirement Plan, as amended and restated effective January 1,
2009 (filed as Exhibit 10.2 to LII’s Current Report on Form 8-K filed on December 17, 2008 and
incorporated herein by reference).
10.17* Form of Indemnification Agreement entered into between LII and certain executive officers and directors
of LII (filed as Exhibit 10.15 to LII’s Registration Statement on Form S-1 (Registration No. 333-75725)
filed on April 6, 1999 and incorporated herein by reference).
10.18* Form of Employment Agreement entered into between LII and certain executive officers of LII (filed as
Exhibit 10.30 to LII’s Annual Report on Form 10-K for the year ended December 31, 2006 and
incorporated herein by reference).
10.19* Form of Amendment to Employment Agreement entered into between LII and certain executive officers
of LII (filed as Exhibit 10.2 to LII’s Current Report on Form 8-K filed on December 12, 2007 and
incorporated herein by reference).
10.20* Form of Change of Control Employment Agreement entered into between LII and certain executive
officers of LII (filed as Exhibit 10.1 to LII’s Current Report on Form 8-K filed on December 17, 2008 and
incorporated herein by reference).
10.21* Lennox International Inc. Directors’ Retirement Plan (as Amended and Restated as of January 1, 2010)
(filed as Exhibit 10.1 to LII’s Current Report on Form 8-K filed on December 16, 2009 and incorporated
herein by reference).
10.22* Lennox International Inc. 2007 Long-Term Incentive Award Agreement, Non-Employee Directors, dated
as of December 7, 2007 (filed as Exhibit 10.27 to LII’s Annual Report on Form 10-K for the year ended
December 31, 2007 and incorporated herein by reference).
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 LII pursuant to
18 U.S.C. Section 1350 (filed herewith).
21.1
23.1
31.1
31.2
32.1
111
Exhibit
Number
Exhibit Name
Exhibit No. (101).INS** XBRL Instance Document
Exhibit No. (101).SCH** XBRL Taxonomy Extension Schema Document
Exhibit No. (101).CAL** XBRL Taxonomy Extension Calculation Linkbase Document
Exhibit No. (101).LAB** XBRL Taxonomy Extension Label Linkbase Document
Exhibit No. (101).PRE** XBRL Taxonomy Extension Presentation Linkbase Document
Exhibit No. (101).DEF** XBRL Taxonomy Extension Definition Linkbase Document
* Management contract or compensatory plan or arrangement.
** In accordance with Regulation S-T, the XBRL-related information in Exhibit No. (101) to this Annual Report on
Form 10-K shall be deemed “furnished” and not “filed.”
112
The following are the subsidiaries of Lennox International Inc. and the states or jurisdictions in which they are organized. Subsidiaries are
indented below their immediate parent entity. The names of certain subsidiaries have been omitted because, considered in the aggregate as a
single subsidiary, they would not constitute, as of the end of the year covered by this report, a “significant subsidiary” as that term is defined in
Rule 1-02(w) of Regulation S-X under the Securities Exchange Act of 1934.
Lennox International Inc. Subsidiaries
EXHIBIT 21.1
Name
Lennox Industries Inc.
SEE ANNEX A
Service Experts LLC
SEE ANNEX B
GM Development Center LLC
Lennox Inc.
Heatcraft Inc
Bohn de Mexico S.A. de C.V.
Frigus-Bohn S.A. de C.V.
Kysor/Warren de Mexico, S. de R.L. de C.V.
Kysor/Warren Services, S. de R.L. de C.V.
Lennox Participacoes Ltda.
Heatcraft do Brasil Ltda.
Frigo-Bohn do Brasil Ltda.
Heatcraft do Brasil Ltda.
Advanced Distributor Products LLC
Heatcraft Refrigeration Products LLC
Kysor/Warren de Mexico, S. de R.L. de C.V.
Kysor/Warren Services, S. de R.L. de C.V.
LPAC Corp.
Heatcraft do Brasil Ltda.
Heatcraft Technologies Inc.
Alliance Compressor LLC
LPAC Corp.
Allied Air Enterprises Inc.
LPAC Corp.
Lennox Global Ltd.
SEE ANNEX D
Lennox Procurement Company Inc.
Lake Park Insurance, Ltd.
Ownership
Jurisdiction of Inc.
100% Iowa
100% Delaware
100% Delaware
100% Canada
100% Mississippi
50% Mexico
50% Mexico
0.05% Mexico
1% Mexico
1% Brazil
0.01% Brazil
99% Brazil
66.74% Brazil
100% Delaware
100% Delaware
99.95% Mexico
Mexico
99%
5% Delaware
33.25% Brazil
100% Delaware
24.5% Delaware
80% Delaware
100% Delaware
5% Delaware
100% Delaware
100% Delaware
100% Bermuda
ANNEX A
TO
EXHIBIT 21.1
Lennox Industries Inc. Subsidiaries
Name
Lennox Industries (Canada) Ltd.
LII United Products, S. de R.L. de C.V.
LII United Comfort Systems, S. de R.L. de C.V.
Lennox Canada Inc.
SEE ANNEX C
Lennox Hearth Products LLC
Cheminées Sécurité International Ltée
LPAC Corp.
LII United Products, S. de R.L. de C.V.
LII Comercial S. de R.L. de C.V.
LII United Comfort Systems, S. de R.L. de C.V.
Lennox National Account Services Inc. — California
Lennox National Account Services LLC
Ownership
Jurisdiction of Inc.
100% Canada
99.97% Mexico
99% Mexico
100% Canada
100% Delaware
100% Canada
10% Delaware
0.03% Mexico
0.03% Mexico
1% Mexico
100% California
100% Florida
Tradewinds Mechanical Services, LLC
100% New Hampshire
ANNEX B
TO
EXHIBIT 21.1
Service Experts LLC Subsidiaries
The following are all organized in the state indicated and owned 100% by Service Experts LLC, unless otherwise noted:
A. Frank Woods and Sons LLC — Virginia
AC/DAC, LLC — Tennessee
Air Experts LLC — Georgia
Artic Aire of Chico, Inc. — California
Atmostemp LLC — New Jersey
Austin Brothers LLC — Tennessee
Barlow Heating and Air Conditioning LLC — Delaware
Becht Heating & Cooling LLC — Delaware
Berkshire Air Conditioning LLC — Tennessee
Broad Ripple Heating & Air Conditioning LLC — Delaware
Calverley Air Conditioning & Heating LLC — Delaware
Chief/Bauer Heating & Air Conditioning LLC — Delaware
Climate Control LLC — Alabama
Climate Masters Service LLC — Colorado
Coastal Air Conditioning Service LLC — Georgia
Comfort Masters Heating & Cooling LLC — Delaware
Comfortech LLC — Tennessee
Cook Heating & Air Conditioning LLC — Michigan
Cool Breeze LLC — Ohio
D.A. Bennett LLC — New York
DiMarco Mechanical LLC — Ohio
Doler Plumbing & Heating LLC — Delaware
ANNEX B
TO
EXHIBIT 21.1
Service Experts LLC Subsidiaries (cont’d.)
Epperson LLC — South Carolina
Eveready LLC — Virginia
Falso Service Experts LLC — New York
Fras-Air Contracting LLC*— New Jersey
Freschi Air Systems, Inc. — Tennessee
General Conditioning LLC* — New Jersey
Golden Seal Heating & Air Conditioning LLC — Delaware
Gordon’s Specialty Company LLC — Oklahoma
H.S. Stevenson & Sons LLC — Ohio
Jack Nelson Co. LLC — Oklahoma
Klawinski LLC — Delaware
Knochelmann Plumbing, Heating & Air LLC — Kentucky
Kruger’s Heating & Air Conditioning LLC — Delaware
Lake Arbor Heating LLC — Colorado
Mathews Heating & Air Conditioning LLC — Tennessee
Midland Heating and Air Conditioning LLC — South Carolina
Miller Refrigeration, A/C, & Htg. Co. — North Carolina
Neal Harris Heating, Air Conditioning & Plumbing LLC — Missouri
Norrell Heating and Air Conditioning LLC — Alabama
Pardee Refrigeration LLC — South Carolina
Parker-Pearce Service Experts LLC — Maryland
Peachtree Service Experts LLC — Georgia
Peitz Heating and Cooling LLC — South Dakota
R&M Climate Control LLC — Tennessee
Roland J. Down LLC — New York
Rolf Griffin Heating & Air Conditioning LLC — Delaware
ANNEX B
TO
EXHIBIT 21.1
Service Experts LLC Subsidiaries (cont’d.)
San Antonio Air Conditioning LLC — Delaware
Sanders Indoor Comfort LLC — South Carolina
Service Experts DFW LLC — Tennessee
Service Experts of Indiana LLC — Tennessee
Service Experts of Memphis LLC — Tennessee
Service Experts of Northeast Louisiana LLC — Louisiana
Service Experts of Northwest Louisiana LLC — Louisiana
Service Experts of Orange — California
Service Experts of Salt Lake City LLC — Tennessee
Service Experts of the Bay Area, Inc. — California
Service Experts of the Triangle LLC — North Carolina
Service Experts of Utah LLC — Delaware
Service Experts, LLC — Florida
Steel City Heating & Air LLC — Alabama
Strand Brothers LLC — Tennessee
Strogen’s HVAC LLC — New Hampshire
Sunbeam Service Experts LLC — New York
Sunset Service Experts LLC — New York
Sylvester’s LLC — Tennessee
Teays Valley Heating and Cooling LLC — West Virginia
The McElroy Service Co. LLC — Nebraska
TML LLC — Idaho
Wesley G. Wood LLC — Pennsylvania
*
10% membership interest owned by Class B member/employee as bona fide company representative for state licensing purposes.
ANNEX C
TO
EXHIBIT 21.1
Lennox Canada Inc. Subsidiaries
The following are all organized in Canada and owned 100% by Lennox Canada Inc.:
Bryant Heating & Cooling Co. Ltd.
Dearie Contracting Ottawa Inc.
ANNEX D
TO
EXHIBIT 21.1
Lennox Global Ltd. Subsidiaries
Name
Heatcraft Refrigeration Asia Pte Ltd.
Heatcraft Refrigeration (Wuxi) Co. Ltd.
LGL Europe Holding Co.
SEE ANNEX E
Lennox Participacoes Ltda.
Frigo-Bohn do Brasil Ltda.
LGL Belgium BVBA
LGL Australia (US) Inc.
SEE ANNEX F
LII Comercial S. de R.L. de C.V.
Lennox India Technology Centre Private Ltd.
Ownership
100%
100%
Jurisdiction of Inc.
Rep. of Singapore
China
100%
Delaware
99%
1%
0.2%
Brazil
Brazil
Belgium
100%
Delaware
99.97%
0.1%
Mexico
India
ANNEX E
TO
EXHIBIT 21.1
LGL Europe Holding Co. Subsidiaries
Name
LGL Holland B.V.
Lennox India Technology Centre Private Ltd.
Etablissements Brancher S.A.S.
LGL France S.A.S.
Hyfra Ind. GmbH
Lennox France S.A.S.
Lennox Refac, S.A.
LGL Refrigeration Italia s.r.l.
LGL Germany GmbH
Hyfra Ind. GmbH
Lennox Deutschland GmbH
Lennox Global Spain S.L.
LGL Refrigeration Spain S.A.
Lennox Refac, S.A.
Redi sur Andalucia
Lennox Portugal Lda
Lennox Polska sp. z.o.o.
Lennox Benelux B.V.
Lennox Benelux N.V.
Lennox Polska sp. z.o.o.
Lennox Zao
HCF-Lennox Limited
Lennox Industries
EKOKLIMA a.s.
Lennox Zao
Ownership
100%
Jurisdiction of Inc.
Netherlands
99.9%
100%
100%
0.1%
100%
0.1%
1%
100%
99.9%
100%
100%
100%
99.9%
70%
100%
99.5%
100%
100%
0.5%
1%
India
France
France
Germany
France
Spain
Italy
Germany
Germany
Germany
Spain
Spain
Spain
Spain
Portugal
Poland
Netherlands
Belgium
Poland
Russia
100% United Kingdom
99% United Kingdom
15%
Czech Republic
99%
Russia
ANNEX F
TO
EXHIBIT 21.1
LGL Australia (US) Inc. Subsidiaries
Name
LGL Co Pty Ltd
IGLL Pty Ltd
LGL Australia Finance Pty Ltd
LGL Australia Finance Pty Ltd
LGL Australia Holdings Pty Ltd
Heatcraft Australia Pty Ltd
Heatcraft Geelong Pty Ltd
Heatcraft Tasmania Pty Ltd
Kulthorn Kirby Public Company Limited
Heatcraft New Zealand Limited
Les Burk Wholesalers Unit Trust
Ownership
100%
100%
10%
90%
100%
100%
75%
75%
7.7%
100%
100%
Jurisdiction of Inc.
Australia
Australia
Australia
Australia
Australia
Australia
Australia
Australia
Thailand
New Zealand
Australia
Consent of Independent Registered Public Accounting Firm
To the Board of Directors Lennox International Inc.:
We consent to the incorporation by reference in the Registration Statement Nos. 333-127540, 333-91130, 333-91128, 333-71416, 333-
60122, 333-52046, 333-86989, 333-83961 and 333-83959 on Form S-8, and Registration Statement No. 333-155796 on Form S-3 of Lennox
International Inc. and subsidiaries of our report dated February 18, 2011, with respect to the consolidated balance sheets of Lennox
International Inc. and subsidiaries as of December 31, 2010 and 2009, and the related consolidated statements of operations, stockholders’
equity and comprehensive income (loss), and cash flows for each of the years in the three-year period ended December 31, 2010, and the
related financial statement schedule, and the effectiveness of internal control over financial reporting as of December 31, 2010, which report
appears in the December 31, 2010 annual report on Form 10-K of Lennox International Inc.
Exhibit 23.1
/s/ KPMG LLP
Dallas, Texas
February 18, 2011
Exhibit 31.1
CERTIFICATION
I, Todd M. Bluedorn, certify that:
1.
I have reviewed this annual report on Form 10-K of Lennox International Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly
present in all material respects the financial condition, results of operations and cash flows of the registrant as
of, and for, the periods presented in this report;
4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over
financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be
designed under our supervision, to ensure that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those entities, particularly during the
period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial
reporting to be designed under our supervision, 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;
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this
report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of
the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred
during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an
annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s
internal control over financial reporting; and
5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal
control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of
directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over
financial reporting which are reasonably likely to adversely affect the registrant’s ability to record,
process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant
role in the registrant’s internal control over financial reporting.
Date:
February 18, 2011
/s/ Todd M. Bluedorn
Todd M. Bluedorn
Chief Executive Officer
Exhibit 31.2
CERTIFICATION
I, Robert W. Hau, certify that:
1.
I have reviewed this annual report on Form 10-K of Lennox International Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly
present in all material respects the financial condition, results of operations and cash flows of the registrant as
of, and for, the periods presented in this report;
4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over
financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be
designed under our supervision, to ensure that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those entities, particularly during the
period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial
reporting to be designed under our supervision, 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;
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this
report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of
the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred
during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an
annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s
internal control over financial reporting; and
5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal
control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of
directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over
financial reporting which are reasonably likely to adversely affect the registrant’s ability to record,
process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant
role in the registrant’s internal control over financial reporting.
Date:
February 18, 2011
/s/ Robert W. Hau
Robert W. Hau
Chief Financial Officer
Exhibit 32.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of Lennox International Inc. (the “Company”) on Form 10-K for the
fiscal year ended December 31, 2010 as filed with the Securities and Exchange Commission on the date hereof (the
“Report”), each of the undersigned, Todd M. Bluedorn, Chief Executive Officer of the Company, and Robert W.
Hau, Chief Financial Officer of the Company, certifies, pursuant to 18 U.S.C. section 1350, as adopted pursuant to
section 906 of the Sarbanes-Oxley Act of 2002, that to his or her knowledge:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange
Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial
condition and results of operations of the Company.
/s/ Todd M. Bluedorn
Todd M. Bluedorn
Chief Executive Officer
February 18, 2011
/s/ Robert W. Hau
Robert W. Hau
Chief Financial Officer
February 18, 2011
A signed original of this written statement has been provided to the Company and will be retained by the
Company and furnished to the Securities and Exchange Commission or its staff upon request. The foregoing
certification is being furnished to the Securities and Exchange Commission as an exhibit to the Report.
Corporate Information
Corporate Headquarters
Lennox International Inc.
2140 Lake Park Blvd.
Richardson, TX 75080
972-497-5000
For more information on Lennox International
and our subsidiaries, visit us at
www.lennox international.com.
Annual Meeting
Our annual stockholders meeting will be held on
May 12, 2011 at 1:00 p.m. Central Standard Time.
Any stockholder with proper identification may
attend. The meeting will be held at:
Lennox International Inc.
Corporate Headquarters
2140 Lake Park Boulevard
Richardson, TX 75080
Investor Inquiries
Investors and financial analysts interested in
obtaining infor ma tion about Lennox International
should contact:
Steve Harrison
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 Lennox International’s Annual Report
on Form 10-K for fiscal 2010 and other reports
filed with the Securities and Exchange Com mis-
sion are available through our corporate web-
site at www.lennoxinternational.com or will be
furnished, without charge, on written request to:
Lennox International Investor Relations
P.O. Box 799900
Dallas, TX 75379-9900
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Transfer Agent and Registrar
Mellon Investor Services is Lennox International’s Transfer Agent. All
inquiries should be directed to:
Lennox International Inc.
c/o BNY Mellon Shareowner Services
480 Washington Boulevard
Jersey City, NJ 07310
LII stockholders can access their account for automated infor mation
24 hours a day, 7 days a week by dialing 1-800-797-5603, or via the
Internet at www.bnymellon.com/shareowner.
Independent Registered Public Accountants
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 statements within the
meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended, that
are based on information currently available to management as well as
management’s assumptions and beliefs. All statements, other than
statements of historical fact, included in this Annual Report constitute
forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995, including but not limited to statements
identified by the words “may,” “will,” “should,” “plan,” “predict,” “anticipate,”
“believe,” “intend,” “estimate” and “expect” and similar expressions.
Such statements reflect LII’s current views with respect to future events,
based on what LII believe are reasonable assumptions; however, such
statements are subject to certain risks and uncertainties. For informa-
tion concerning these risks and uncertainties, see LII’s publicly available
filings with the Securities and Exchange Commission. 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. LII disclaims any intention or
obligation to update or review any forward-looking statements or informa-
tion, whether as a result of new information, future events or otherwise.
2140 Lake Park Blvd.
Richardson, TX 75080
www.lennoxinternational.com