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SECURITIES AND EXCHANGE COMMISSION
SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY
PERIOD ENDED MARCH 31, 2008
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______________ to ________________
RICHARDSON, TEXAS
75080
(972-497-5000)
Yesþ Noo
Large Accelerated Filerþ | Accelerated Filero | Non-Accelerated Filero | Smaller Reporting Companyo |
Yeso Noþ
For the Three Months Ended March 31, 2008
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Item 1. | Financial Statements. |
As of March 31, 2008 and December 31, 2007
(In millions, except share and per share data)
March 31, | December 31, | |||||||
2008 | 2007 | |||||||
(unaudited) | ||||||||
ASSETS | ||||||||
CURRENT ASSETS: | ||||||||
Cash and cash equivalents | $ | 120.3 | $ | 145.5 | ||||
Short-term investments | 34.7 | 27.7 | ||||||
Accounts and notes receivable, net | 490.8 | 492.5 | ||||||
Inventories, net | 379.5 | 325.7 | ||||||
Deferred income taxes | 25.1 | 30.9 | ||||||
Other assets | 85.9 | 48.4 | ||||||
Total current assets | 1,136.3 | 1,070.7 | ||||||
PROPERTY, PLANT AND EQUIPMENT, net | 318.8 | 317.9 | ||||||
GOODWILL, net | 264.5 | 262.8 | ||||||
DEFERRED INCOME TAXES | 88.1 | 94.0 | ||||||
OTHER ASSETS | 72.7 | 69.2 | ||||||
TOTAL ASSETS | $ | 1,880.4 | $ | 1,814.6 | ||||
LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
CURRENT LIABILITIES: | ||||||||
Short-term debt | $ | 5.5 | $ | 4.8 | ||||
Current maturities of long-term debt | 36.4 | 36.4 | ||||||
Accounts payable | 330.4 | 289.8 | ||||||
Accrued expenses | 319.2 | 352.1 | ||||||
Income taxes payable | — | 1.1 | ||||||
Total current liabilities | 691.5 | 684.2 | ||||||
LONG-TERM DEBT | 359.7 | 166.7 | ||||||
POSTRETIREMENT BENEFITS, OTHER THAN PENSIONS | 16.1 | 16.2 | ||||||
PENSIONS | 34.3 | 34.8 | ||||||
OTHER LIABILITIES | 109.8 | 104.2 | ||||||
Total liabilities | 1,211.4 | 1,006.1 | ||||||
COMMITMENTS AND CONTINGENCIES | ||||||||
STOCKHOLDERS’ EQUITY: | ||||||||
Preferred stock, $.01 par value, 25,000,000 shares authorized, no shares issued or outstanding | — | — | ||||||
Common stock, $.01 par value, 200,000,000 shares authorized, 83,546,395 shares and 81,897,439 shares issued for 2008 and 2007, respectively | 0.8 | 0.8 | ||||||
Additional paid-in capital | 788.4 | 760.7 | ||||||
Retained earnings | 445.4 | 447.4 | ||||||
Accumulated other comprehensive income | 81.5 | 63.6 | ||||||
Treasury stock, at cost, 24,866,016 shares and 19,844,677 shares for 2008 and 2007, respectively | (647.1 | ) | (464.0 | ) | ||||
Total stockholders’ equity | 669.0 | 808.5 | ||||||
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY | $ | 1,880.4 | $ | 1,814.6 | ||||
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For the Three Months Ended March 31, 2008 and 2007
(Unaudited, in millions, except per share data)
For the | ||||||||
Three Months Ended | ||||||||
March 31, | ||||||||
2008 | 2007 | |||||||
NET SALES | $ | 767.1 | $ | 791.5 | ||||
COST OF GOODS SOLD | 564.3 | 586.9 | ||||||
Gross profit | 202.8 | 204.6 | ||||||
OPERATING EXPENSES: | ||||||||
Selling, general and administrative expenses | 193.7 | 191.1 | ||||||
(Gains), losses and other expenses, net | (3.3 | ) | (0.7 | ) | ||||
Restructuring charges | 2.8 | 2.3 | ||||||
Equity in earnings of unconsolidated affiliates | (3.1 | ) | (2.7 | ) | ||||
Operational income | 12.7 | 14.6 | ||||||
INTEREST EXPENSE, net | 2.7 | 0.9 | ||||||
Income before income taxes | 10.0 | 13.7 | ||||||
PROVISION FOR INCOME TAXES | 3.7 | 5.1 | ||||||
Net income | $ | 6.3 | $ | 8.6 | ||||
NET INCOME PER SHARE: | ||||||||
Basic | $ | 0.10 | $ | 0.13 | ||||
Diluted | $ | 0.10 | $ | 0.12 | ||||
AVERAGE SHARES OUTSTANDING: | ||||||||
Basic | 60.3 | 67.5 | ||||||
Diluted | 62.7 | 70.9 | ||||||
CASH DIVIDENDS DECLARED PER SHARE | $ | 0.14 | $ | 0.13 |
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For the Three Months Ended March 31, 2008 (unaudited) and the Year Ended December 31, 2007
(In millions, except per share data)
Accumulated | ||||||||||||||||||||||||||||||||
Common Stock | Additional | Other | Treasury | Total | ||||||||||||||||||||||||||||
Issued | Paid-In | Retained | Comprehensive | Stock | Stockholders’ | Comprehensive | ||||||||||||||||||||||||||
Shares | Amount | Capital | Earnings | Income (Loss) | at Cost | Equity | Income (Loss) | |||||||||||||||||||||||||
BALANCE AS OF DECEMBER 31, 2006 | 77.0 | $ | 0.8 | $ | 706.6 | $ | 312.5 | $ | (5.1 | ) | $ | (210.4 | ) | $ | 804.4 | |||||||||||||||||
Impact of adoption of FIN No. 48 | — | — | — | 0.9 | — | — | 0.9 | |||||||||||||||||||||||||
ADJUSTED BALANCE AS OF JANUARY 1, 2007 | 77.0 | $ | 0.8 | $ | 706.6 | $ | 313.4 | $ | (5.1 | ) | $ | (210.4 | ) | $ | 805.3 | |||||||||||||||||
Net income | — | — | — | 169.0 | — | — | 169.0 | $ | 169.0 | |||||||||||||||||||||||
Dividends, $0.53 per share | — | — | — | (35.0 | ) | — | — | (35.0 | ) | — | ||||||||||||||||||||||
Foreign currency translation adjustments, net | — | — | — | — | 62.9 | — | 62.9 | 62.9 | ||||||||||||||||||||||||
Pension and postretirement liability changes, net of tax benefit of $0.0 | — | — | — | — | 3.2 | — | 3.2 | 3.2 | ||||||||||||||||||||||||
Stock-based compensation expense | — | — | 21.0 | — | — | — | 21.0 | — | ||||||||||||||||||||||||
Reversal of previously recorded stock-based compensation expense related to share-based awards canceled in restructuring | — | — | (2.1 | ) | — | — | — | (2.1 | ) | — | ||||||||||||||||||||||
Derivatives, net of tax provision of $1.3 | — | — | — | — | 2.6 | — | 2.6 | 2.6 | ||||||||||||||||||||||||
Common stock issued | 4.9 | — | 21.5 | — | — | — | 21.5 | — | ||||||||||||||||||||||||
Treasury stock purchases | — | — | — | — | — | (253.6 | ) | (253.6 | ) | — | ||||||||||||||||||||||
Tax benefits of stock-based compensation | — | — | 20.1 | — | — | — | 20.1 | — | ||||||||||||||||||||||||
Other tax-related items | — | — | (6.4 | ) | — | — | — | (6.4 | ) | — | ||||||||||||||||||||||
Comprehensive income | — | — | — | — | — | — | — | $ | 237.7 | |||||||||||||||||||||||
BALANCE AS OF DECEMBER 31, 2007 | 81.9 | $ | 0.8 | $ | 760.7 | $ | 447.4 | $ | 63.6 | $ | (464.0 | ) | $ | 808.5 | ||||||||||||||||||
Net income | — | — | — | 6.3 | — | — | 6.3 | $ | 6.3 | |||||||||||||||||||||||
Dividends, $0.14 per share | — | — | — | (8.3 | ) | — | — | (8.3 | ) | — | ||||||||||||||||||||||
Foreign currency translation adjustments, net | — | — | — | — | 9.2 | — | 9.2 | 9.2 | ||||||||||||||||||||||||
Stock-based compensation expense | — | — | 3.2 | — | — | — | 3.2 | — | ||||||||||||||||||||||||
Derivatives, net of tax provision of $4.8 | — | — | — | — | 8.7 | — | 8.7 | 8.7 | ||||||||||||||||||||||||
Common stock issued | 1.6 | — | 12.3 | — | — | — | 12.3 | — | ||||||||||||||||||||||||
Treasury stock purchases | — | — | — | — | — | (183.1 | ) | (183.1 | ) | — | ||||||||||||||||||||||
Tax benefits of stock-based compensation | — | — | 12.2 | — | — | — | 12.2 | — | ||||||||||||||||||||||||
Comprehensive income | — | — | — | — | — | — | — | $ | 24.2 | |||||||||||||||||||||||
BALANCE AS OF MARCH 31, 2008 | 83.5 | $ | 0.8 | $ | 788.4 | $ | 445.4 | $ | 81.5 | $ | (647.1 | ) | $ | 669.0 | ||||||||||||||||||
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For the Three Months Ended March 31, 2008 and 2007
(Unaudited, in millions)
For the | ||||||||
Three Months Ended | ||||||||
March 31, | ||||||||
2008 | 2007 | |||||||
CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||
Net income | $ | 6.3 | $ | 8.6 | ||||
Adjustments to reconcile net income to net cash used in operating activities: | ||||||||
Equity in earnings of unconsolidated affiliates | (3.1 | ) | (2.7 | ) | ||||
Restructuring expenses, net of cash paid | (1.1 | ) | (1.8 | ) | ||||
Unrealized gain on futures contracts | (2.8 | ) | (0.5 | ) | ||||
Stock-based compensation expense | 3.2 | 6.2 | ||||||
Depreciation and amortization | 12.7 | 11.8 | ||||||
Capitalized interest | (0.3 | ) | (0.4 | ) | ||||
Deferred income taxes | 7.2 | 2.8 | ||||||
Other items, net | 10.8 | 3.7 | ||||||
Changes in assets and liabilities, net of effects of acquisitions: | ||||||||
Accounts and notes receivable | 5.5 | 2.8 | ||||||
Inventories | (54.7 | ) | (93.2 | ) | ||||
Other current assets | (13.6 | ) | (3.2 | ) | ||||
Accounts payable | 34.4 | 59.9 | ||||||
Accrued expenses | (33.7 | ) | (38.4 | ) | ||||
Income taxes payable | (15.4 | ) | (35.3 | ) | ||||
Long-term warranty, deferred income and other liabilities | 11.7 | 4.6 | ||||||
Net cash used in operating activities | (32.9 | ) | (75.1 | ) | ||||
CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||||
Proceeds from the disposal of property, plant and equipment | 0.3 | 0.1 | ||||||
Purchases of property, plant and equipment | (9.5 | ) | (9.9 | ) | ||||
Purchases of short-term investments | (21.7 | ) | — | |||||
Proceeds from sales and maturities of short-term investments | 14.9 | — | ||||||
Net cash used in investing activities | (16.0 | ) | (9.8 | ) | ||||
CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||||
Short-term borrowings (payments), net | 0.5 | (0.2 | ) | |||||
Revolver long-term borrowings | 193.0 | 35.5 | ||||||
Proceeds from stock option exercises | 12.3 | 12.0 | ||||||
Repurchases of common stock | (183.1 | ) | (16.5 | ) | ||||
Excess tax benefits related to share-based payments | 10.8 | 11.0 | ||||||
Cash dividends paid | (8.7 | ) | (8.7 | ) | ||||
Net cash provided by financing activities | 24.8 | 33.1 | ||||||
DECREASE IN CASH AND CASH EQUIVALENTS | (24.1 | ) | (51.8 | ) | ||||
EFFECT OF EXCHANGE RATES ON CASH AND CASH EQUIVALENTS | (1.1 | ) | 1.1 | |||||
CASH AND CASH EQUIVALENTS, beginning of period | 145.5 | 144.3 | ||||||
CASH AND CASH EQUIVALENTS, end of period | $ | 120.3 | $ | 93.6 | ||||
Supplementary disclosures of cash flow information: | ||||||||
Cash paid during the period for: | ||||||||
Interest | $ | 2.5 | $ | 0.3 | ||||
Income taxes (net of refunds) | $ | 5.9 | $ | 28.9 | ||||
Non-cash items: | ||||||||
Impact of adoption of FIN No. 48 | $ | — | $ | 0.9 | ||||
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(Unaudited)
1. | General: |
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2. | Accounts and Notes Receivable: |
3. | Inventories: |
As of | As of | |||||||
March 31, | December 31, | |||||||
2008 | 2007 | |||||||
Finished goods | $ | 288.8 | $ | 247.7 | ||||
Work in process | 13.3 | 10.5 | ||||||
Raw materials and repair parts | 150.4 | 137.9 | ||||||
452.5 | 396.1 | |||||||
Excess of current cost over last-in, first-out cost | (73.0 | ) | (70.4 | ) | ||||
Total inventories | $ | 379.5 | $ | 325.7 | ||||
4. | Goodwill: |
Balance at | Balance at | |||||||||||
Segment | December 31, 2007 | Changes(1) | March 31, 2008 | |||||||||
Residential Heating & Cooling | $ | 33.7 | $ | — | $ | 33.7 | ||||||
Commercial Heating & Cooling | 32.1 | 1.7 | 33.8 | |||||||||
Service Experts | 112.5 | (2.7 | ) | 109.8 | ||||||||
Refrigeration | 84.5 | 2.7 | 87.2 | |||||||||
Total | $ | 262.8 | $ | 1.7 | $ | 264.5 | ||||||
(1) | Relate to changes in foreign currency translation rates. |
5. | Short-Term Investments: |
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6. | Cash, Lines of Credit and Financing Arrangements: |
Short-Term | Current | Long-Term | ||||||||||||||
Description of Obligation as of March 31, 2008 | Debt | Maturities | Maturities | Total | ||||||||||||
Domestic promissory notes (1) | $ | — | $ | 36.1 | $ | 35.0 | $ | 71.1 | ||||||||
Domestic revolving credit facility | — | — | 324.0 | 324.0 | ||||||||||||
Other foreign obligations | 5.5 | 0.3 | 0.7 | 6.5 | ||||||||||||
Total Debt | $ | 5.5 | $ | 36.4 | $ | 359.7 | $ | 401.6 | ||||||||
Short-Term | Current | Long-Term | ||||||||||||||
Description of Obligation as of December 31, 2007 | Debt | Maturities | Maturities | Total | ||||||||||||
Domestic promissory notes (1) | $ | — | $ | 36.1 | $ | 35.0 | $ | 71.1 | ||||||||
Domestic revolving credit facility | — | — | 131.0 | 131.0 | ||||||||||||
Other foreign obligations | 4.8 | 0.3 | 0.7 | 5.8 | ||||||||||||
Total Debt | $ | 4.8 | $ | 36.4 | $ | 166.7 | $ | 207.9 | ||||||||
(1) | Domestic promissory notes as of March 31, 2008 and December 31, 2007 consisted of the following (in millions): |
March 31, | December 31, | |||||||
2008 | 2007 | |||||||
6.73% promissory notes, payable $11.1 annually through 2008 | $ | 11.1 | $ | 11.1 | ||||
6.75% promissory notes, payable in 2008 | 25.0 | 25.0 | ||||||
8.00% promissory note, payable in 2010 | 35.0 | 35.0 |
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7. | Product Warranties: |
Total product warranty liability at December 31, 2007 | $ | 98.4 | ||
Payments made in 2008 | (5.9 | ) | ||
Changes resulting from issuance of new warranties | 6.5 | |||
Changes in estimates associated with pre-existing liabilities | 0.3 | |||
Changes in foreign currency translation rates | 0.4 | |||
Total product warranty liability at March 31, 2008 | $ | 99.7 | ||
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8. | Pension and Postretirement Benefit Plans: |
For the | ||||||||||||||||
Three Months Ended March 31, | ||||||||||||||||
2008 | 2007 | 2008 | 2007 | |||||||||||||
Pension Benefits | Other Benefits | |||||||||||||||
Service cost | $ | 1.8 | $ | 1.8 | $ | 0.2 | $ | 0.2 | ||||||||
Interest cost | 4.1 | 3.7 | 0.2 | 0.2 | ||||||||||||
Expected return on plan assets | (4.5 | ) | (4.4 | ) | — | — | ||||||||||
Amortization of prior service cost | 0.1 | 0.2 | (0.5 | ) | (0.4 | ) | ||||||||||
Amortization of net loss | 1.2 | 1.2 | 0.3 | 0.2 | ||||||||||||
Settlements and curtailments | — | 0.7 | — | — | ||||||||||||
Total net periodic benefit cost | $ | 2.7 | $ | 3.2 | $ | 0.2 | $ | 0.2 | ||||||||
9. | Stock-Based Compensation: |
Stock | ||||||||
Stock | Appreciation | |||||||
Options | Rights | |||||||
Shares outstanding | 1.4 | 1.9 | ||||||
Weighted-average exercise price per share outstanding | $ | 15.45 | $ | 30.15 | ||||
Shares exercisable | 1.4 | 0.8 | ||||||
Weighted-average exercise price per exercisable share | $ | 15.45 | $ | 25.82 | ||||
Unrecognized expense | — | $ | 7.4 | |||||
Expected weighted-average period to be recognized (in years) | — | 2.2 | ||||||
Weighted-average estimated forfeiture rate | — | 15 | % |
Performance | Restricted | |||||||
Share Units | Stock Units | |||||||
Nonvested units | 0.8 | 0.7 | ||||||
Weighted-average grant date fair value per unit | $ | 27.16 | $ | 31.78 | ||||
Unrecognized expense | $ | 13.8 | $ | 11.2 | ||||
Expected weighted-average period to be recognized (in years) | 2.1 | 2.2 | ||||||
Weighted-average estimated forfeiture rate | 29 | % | 16 | % |
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10. | Income Taxes: |
11. | Restructuring Charges: |
For the Three Months | ||||||||
Ended March 31, | ||||||||
2008 | 2007 | |||||||
Consolidation of U.S. Refrigeration operations | $ | 1.3 | $ | — | ||||
Consolidation of Lennox Hearth Products operations | 1.2 | — | ||||||
Integration of Australia and New Zealand operations | 0.3 | — | ||||||
Allied Air Enterprises consolidation | — | 2.2 | ||||||
Pension settlement(1) | — | 0.7 | ||||||
Other | — | (0.6 | ) | |||||
Total | $ | 2.8 | $ | 2.3 | ||||
(1) | Amount not reflected in restructuring reserves as this item is related to the Company’s pension obligation and is included in pension liabilities as of March 31, 2007. |
Balance as | Reversal | Balance as | ||||||||||||||||||||||
of | Charged | of Prior | of | |||||||||||||||||||||
December 31, | to | Period | Cash | Non-Cash | March 31, | |||||||||||||||||||
Description of reserves | 2007 | Earnings | Charges | Utilization | Utilization | 2008 | ||||||||||||||||||
Severance and related expense | $ | 15.2 | $ | 0.2 | $ | — | $ | (1.9 | ) | $ | — | $ | 13.5 | |||||||||||
Equipment moves | — | 0.8 | — | (0.8 | ) | — | — | |||||||||||||||||
Recruiting and relocation | — | — | — | — | — | — | ||||||||||||||||||
Lease termination | 1.5 | — | — | (0.3 | ) | — | 1.2 | |||||||||||||||||
Other | — | 1.8 | — | (0.9 | ) | (0.9 | ) | — | ||||||||||||||||
Total restructuring reserves | $ | 16.7 | $ | 2.8 | $ | — | $ | (3.9 | ) | $ | (0.9 | ) | $ | 14.7 | ||||||||||
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12. | Earnings per Share: |
For the | ||||||||
Three Months Ended | ||||||||
March 31, | ||||||||
2008 | 2007 | |||||||
Net income | $ | 6.3 | $ | 8.6 | ||||
Weighted-average shares outstanding — basic | 60.3 | 67.5 | ||||||
Effect of diluted securities attributable to share-based payments | 2.4 | 3.4 | ||||||
Weighted-average shares outstanding — diluted | 62.7 | 70.9 | ||||||
Diluted earnings per share | $ | 0.10 | $ | 0.12 | ||||
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13. | Comprehensive Income: |
For the | ||||||||
Three Months Ended | ||||||||
March 31, | ||||||||
2008 | 2007 | |||||||
Net income | $ | 6.3 | $ | 8.6 | ||||
Foreign currency translation adjustments | 9.2 | 7.4 | ||||||
Effective portion of gains on future contracts designated as cash flow hedges | 8.7 | 5.4 | ||||||
Total comprehensive income | $ | 24.2 | $ | 21.4 | ||||
14. | Investments in Affiliates: |
15. | Derivatives: |
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16. | Fair Value Measurements: |
Level 1 | — | Quoted prices foridenticalinstruments in active markets at the measurement date. | ||
Level 2 | — | Quoted prices forsimilarinstruments 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 areunobservableinputs 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. |
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Fair Value Measurements on a Recurring Basis as of March 31, 2008 | ||||||||||||||||
Significant | ||||||||||||||||
Quoted Prices in | Other | Significant | ||||||||||||||
Active Markets for | Observable | Unobservable | ||||||||||||||
Identical Assets | Inputs | Inputs | ||||||||||||||
(Level 1) | (Level 2) | (Level 3) | Total | |||||||||||||
Assets: | ||||||||||||||||
Derivatives, net(1) | $ | — | $ | 14.3 | $ | — | $ | 14.3 | ||||||||
Short-term investments | — | 34.7 | — | 34.7 |
(1) | Derivatives are recorded in Other Current Assets and Other Non-Current Assets in the accompanying Consolidated Balance Sheets. |
17. | Commitments and Contingencies: |
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• | Lynette Brown, et al., vs. Koppers Industries, Inc., Heatcraft Inc., Lennox International Inc., et al., Circuit Court of Washington County, Civil Action No. CI 2002-479; | ||
• | Likisha Booker, et al., vs. Koppers Industries, Inc., Heatcraft Inc., Lennox International Inc., et al., Circuit Court of Holmes County; Civil Action No. 2002-549; | ||
• | Walter Crowder, et al., vs. Koppers Industries, Inc., Heatcraft Inc. and Lennox International Inc., et al., Circuit Court of Leflore County, Civil Action No. 2002-0225; and | ||
• | Benobe Beck, et al., vs. Koppers Industries, Inc., Heatcraft Inc. and Lennox International Inc., et al., Circuit Court of the First Judicial District of Hinds County, No. 03-000030. |
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18. | Share Repurchase Plan: |
Average Price | Total Number of | Approximate Dollar | ||||||||||||||
Paid per | Shares Purchased | Value of Shares that | ||||||||||||||
Total Number | Share | as Part of Publicly | may yet be Purchased | |||||||||||||
of Shares | (including | Announced Plans | Under the Plans or | |||||||||||||
Period | Purchased(1) | fees) | or Programs | Programs | ||||||||||||
January 1 through January 31 | 1,951,792 | $ | 36.51 | 1,926,669 | $ | 226,412,444 | ||||||||||
February 1 through February 29 | 1,419,035 | $ | 37.24 | 1,409,415 | $ | 173,925,208 | ||||||||||
March 1 through March 31 | 1,650,512 | $ | 35.75 | 1,394,678 | $ | 123,905,357 | ||||||||||
Total | 5,021,339 | $ | 36.47 | 4,730,762 | ||||||||||||
(1) | In addition to purchases under the 2007 Share Repurchase Plan, this column reflects the surrender to LII of 290,577 shares of common stock to satisfy tax-withholding obligations in connection with the exercise of stock appreciation rights and the distribution of shares of the Company’s common stock pursuant to vested performance share units. |
19. | Reportable Business Segments: |
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For the | ||||||||
Three Months Ended | ||||||||
March 31, | ||||||||
2008 | 2007 | |||||||
Net Sales | ||||||||
Residential Heating & Cooling | $ | 329.2 | $ | 361.1 | ||||
Commercial Heating & Cooling | 165.2 | 162.7 | ||||||
Service Experts | 140.1 | 143.9 | ||||||
Refrigeration | 154.8 | 141.3 | ||||||
Eliminations(1) | (22.2 | ) | (17.5 | ) | ||||
$ | 767.1 | $ | 791.5 | |||||
Segment Profit (Loss) | ||||||||
Residential Heating & Cooling | $ | 13.2 | $ | 19.9 | ||||
Commercial Heating & Cooling | 6.2 | 8.5 | ||||||
Service Experts | (7.6 | ) | (3.8 | ) | ||||
Refrigeration | 14.8 | 12.5 | ||||||
Corporate and other | (12.2 | ) | (20.6 | ) | ||||
Eliminations(1) | (1.7 | ) | (0.1 | ) | ||||
Subtotal that includes segment profit and eliminations | 12.7 | 16.4 | ||||||
Reconciliation to income before income taxes: | ||||||||
(Gains), losses and other expenses, net | (3.3 | ) | (0.7 | ) | ||||
Restructuring charges | 2.8 | 2.3 | ||||||
Interest expense, net | 2.7 | 0.9 | ||||||
Less: Realized gains on settled futures contracts not designated as cash flowhedges (2) | 0.4 | 0.5 | ||||||
Less: Foreign currency exchange gains (losses) (2) | 0.1 | (0.3 | ) | |||||
$ | 10.0 | $ | 13.7 | |||||
(1) | Eliminations consist of intercompany sales between business segments, such as products sold to Service Experts by the Residential Heating & Cooling segment. | |
(2) | Realized gains (losses) on settled futures contracts not designated as cash flow hedges and foreign currency gains (losses) are a component of (Gains), Losses and Other Expenses, net in the accompanying Consolidated Statements of Operations. |
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As of | As of | |||||||
March 31, | December 31, | |||||||
2008 | 2007 | |||||||
Total Assets | ||||||||
Residential Heating & Cooling | $ | 579.1 | $ | 548.5 | ||||
Commercial Heating & Cooling | 347.6 | 336.6 | ||||||
Service Experts | 203.5 | 200.4 | ||||||
Refrigeration | 409.3 | 388.1 | ||||||
Corporate and other | 355.5 | 349.6 | ||||||
Eliminations(1) | (14.6 | ) | (8.6 | ) | ||||
Segment assets | $ | 1,880.4 | $ | 1,814.6 | ||||
(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. |
20. | Related Party Transactions: |
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Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations. |
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• | Net sales for the three months ended March 31, 2008 were $767.1 million and were negatively impacted on a year-over-year basis due primarily to unfavorable economic conditions in the U.S. and Southern Europe. Foreign currency translation rates had a favorable impact on net sales in 2008. | ||
• | Operational income for the three months ended March 31, 2008 was $12.7 million. As a percentage of net sales, operational income decreased from 1.8% in 2007 to 1.7% in 2008. | ||
• | Net income for the three months ended March 31, 2008 was $6.3 million. Diluted net income per share was $0.10 per share in 2008, down from $0.12 per share in 2007. | ||
• | Cash used in operating activities was $32.9 million for the three months ended March 31, 2008, improved from $75.1 million in 2007, primarily due to favorable changes in inventory and income taxes payable. |
For the Three Months Ended March 31, | ||||||||||||||||
2008 | 2007 | |||||||||||||||
Dollars | Percent | Dollars | Percent | |||||||||||||
Net sales | $ | 767.1 | 100.0 | % | $ | 791.5 | 100.0 | % | ||||||||
Cost of goods sold | 564.3 | 73.6 | 586.9 | 74.2 | ||||||||||||
Gross profit | 202.8 | 26.4 | 204.6 | 25.8 | ||||||||||||
Selling, general and administrative expenses | 193.7 | 25.3 | 191.1 | 24.1 | ||||||||||||
(Gains), losses and other expenses, net | (3.3 | ) | (0.4 | ) | (0.7 | ) | (0.1 | ) | ||||||||
Restructuring charges | 2.8 | 0.4 | 2.3 | 0.3 | ||||||||||||
Equity in earnings of unconsolidated affiliates | (3.1 | ) | (0.4 | ) | (2.7 | ) | (0.3 | ) | ||||||||
Operational income | $ | 12.7 | 1.7 | % | $ | 14.6 | 1.8 | % | ||||||||
Net income | $ | 6.3 | 0.8 | % | $ | 8.6 | 1.1 | % | ||||||||
For the Three Months Ended March 31, | ||||||||||||||||
2008 | 2007 | |||||||||||||||
Dollars | Percent | Dollars | Percent | |||||||||||||
Geographic Market: | ||||||||||||||||
U.S. | $ | 534.3 | 69.7 | % | $ | 589.9 | 74.5 | % | ||||||||
Canada | 81.5 | 10.6 | 65.1 | 8.2 | ||||||||||||
International | 151.3 | 19.7 | 136.5 | 17.3 | ||||||||||||
Total net sales | $ | 767.1 | 100.0 | % | $ | 791.5 | 100.0 | % | ||||||||
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For the Three Months Ended | ||||||||
March 31, | ||||||||
2008 | 2007 | |||||||
Realized (gains) on settled future contracts not designated as cash flow hedges | $ | (0.4 | ) | $ | (0.5 | ) | ||
Unrealized (gains) on unsettled future contracts not designated as cash flow hedges | (2.7 | ) | (0.3 | ) | ||||
Ineffective portion of (gains) on cash flow hedges | (0.1 | ) | (0.2 | ) | ||||
Other items, net | (0.1 | ) | 0.3 | |||||
(Gains), losses and other expenses, net | $ | (3.3 | ) | $ | (0.7 | ) | ||
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Three Months Ended | ||||||||||||||||
March 31, | ||||||||||||||||
2008 | 2007 | Difference | % Change | |||||||||||||
Net sales | $ | 329.2 | $ | 361.1 | $ | (31.9 | ) | (8.8 | )% | |||||||
Profit | 13.2 | 19.9 | (6.7 | ) | (33.7 | ) | ||||||||||
% of net sales | 4.0 | % | 5.5 | % |
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Three Months Ended | ||||||||||||||||
March 31, | ||||||||||||||||
2008 | 2007 | Difference | % Change | |||||||||||||
Net sales | $ | 165.2 | $ | 162.7 | $ | 2.5 | 1.5 | % | ||||||||
Profit | 6.2 | 8.5 | (2.3 | ) | (27.1 | ) | ||||||||||
% of net sales | 3.8 | % | 5.2 | % |
Three Months Ended | ||||||||||||||||
March 31, | ||||||||||||||||
2008 | 2007 | Difference | % Change | |||||||||||||
Net sales | $ | 140.1 | $ | 143.9 | $ | (3.8 | ) | (2.6 | )% | |||||||
(Loss) | (7.6 | ) | (3.8 | ) | (3.8 | ) | (100.0 | ) | ||||||||
% of net sales | (5.4 | )% | (2.6 | )% |
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Three Months Ended | ||||||||||||||||
March 31, | ||||||||||||||||
2008 | 2007 | Difference | % Change | |||||||||||||
Net sales | $ | 154.8 | $ | 141.3 | $ | 13.5 | 9.6 | % | ||||||||
Profit | 14.8 | 12.5 | 2.3 | 18.4 | ||||||||||||
% of net sales | 9.6 | % | 8.8 | % |
Three Months Ended | ||||||||
March 31, | ||||||||
2008 | 2007 | |||||||
Net cash used in operating activities | $ | (32.9 | ) | $ | (75.1 | ) | ||
Net cash used in investing activities | (16.0 | ) | (9.8 | ) | ||||
Net cash provided by financing activities | 24.8 | 33.1 |
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Short-Term | Current | Long-Term | ||||||||||||||
Description of Obligation as of March 31, 2008 | Debt | Maturities | Maturities | Total | ||||||||||||
Domestic promissory notes(1) | $ | — | $ | 36.1 | $ | 35.0 | $ | 71.1 | ||||||||
Domestic revolving credit facility | — | — | 324.0 | 324.0 | ||||||||||||
Other foreign obligations | 5.5 | 0.3 | 0.7 | 6.5 | ||||||||||||
Total Debt | $ | 5.5 | $ | 36.4 | $ | 359.7 | $ | 401.6 | ||||||||
Short-Term | Current | Long-Term | ||||||||||||||
Description of Obligation as of December 31, 2007 | Debt | Maturities | Maturities | Total | ||||||||||||
Domestic promissory notes (1) | $ | — | $ | 36.1 | $ | 35.0 | $ | 71.1 | ||||||||
Domestic revolving credit facility | — | — | 131.0 | 131.0 | ||||||||||||
Other foreign obligations | 4.8 | 0.3 | 0.7 | 5.8 | ||||||||||||
Total Debt | $ | 4.8 | $ | 36.4 | $ | 166.7 | $ | 207.9 | ||||||||
(1) | Domestic promissory notes as of March 31, 2008 and December 31, 2007 consisted of the following (in millions): |
March 31, | December 31, | |||||||
2008 | 2007 | |||||||
6.73% promissory notes, payable $11.1 annually through 2008 | $ | 11.1 | $ | 11.1 | ||||
6.75% promissory notes, payable in 2008 | 25.0 | 25.0 | ||||||
8.00% promissory note, payable in 2010 | 35.0 | 35.0 |
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Fair Value Measurements
Effective January 1, 2008, we adopted Statement of Financial Accounting Standards No. 157,Fair Value Measurements (“SFAS No. 157”), which establishes a framework for measuring fair value in generally accepted accounting principles, clarifies the definition of fair value within that framework, and expands disclosures about the use of fair value measurements. SFAS No. 157 is effective for fiscal years beginning after November 15, 2007. However, in February 2008, the Financial Accounting Standards Board (“FASB”) issued FASB Staff Position No. FAS 157-2,Effective Date of FASB Statement No.157 (“FSP No. 157-2”), which deferred the effective date of SFAS No. 157 for one year for non-financial assets and liabilities, except for certain items that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually). We are currently evaluating the impact of SFAS No. 157 on our Consolidated Financial Statements for items within the scope of FSP No. 157-2, which will become effective on January 1, 2009.
Fair Value Hierarchy
The three-level fair value hierarchy for disclosure of fair value measurements defined by SFAS No. 157 is as follows:
Level 1 - | Quoted prices foridenticalinstruments in active markets at the measurement date. | |
Level 2 - | Quoted prices forsimilarinstruments 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 areunobservableinputs 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 valuation techniques are applied to all of the assets and liabilities carried at fair value as of January 1, 2008, upon adoption of SFAS No. 157. 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, yields 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 the creditworthiness of either party and constraints on liquidity. Where appropriate, these amounts were incorporated into our valuations as of March 31, 2008, the measurement date.
Our adoption of SFAS No. 157 has resulted in changes to the valuation techniques used when determining the fair value of our derivative instruments. These derivatives are primarily valued using estimated future cash flows that are based directly on observed prices from exchange-traded derivatives. We also take into account the counterparty’s creditworthiness, or our own creditworthiness, as appropriate. The calculation of the credit adjustment for derivatives is based upon observable credit default swap spreads and interpolation between these observable spreads for interim periods without observable spreads; however, these inputs are insignificant to the fair value measurement. The effect of adopting these changes to the valuation techniques resulted in a net credit adjustment to the fair value of our derivative instruments of $0.1 million as of March 31, 2008, the measurement date.
The majority of our short-term investments are managed by professional investment advisors. The net asset values are furnished in statements received from the investment advisor and reflect valuations based upon the respective pricing policies utilized by the investment advisor. We have assessed the classification of the inputs used to value these investments as Level 2 through examination of pricing policies and significant inputs and through discussions with investment managers. The fair values of our short-term investments are based on several observable inputs including, but not limited to, benchmark yields, reported trades, broker/dealer quotes, issuer spreads and benchmark securities. The adoption of SFAS No. 157 resulted in no net changes to the valuations for these securities.
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• | We are eligible to transfer beneficial interests in a portion of our trade accounts receivable to third parties in exchange for cash through the use of a revolving period asset securitization arrangement. Our continued involvement in the transferred assets is limited to servicing. These transfers are accounted for as sales rather than secured borrowings and are reported as a reduction of Accounts and Notes Receivable, Net in the Consolidated Balance Sheets. As of March 31, 2008 and December 31, 2007, respectively, we had not sold any such accounts receivable. | ||
• | We also lease real estate and machinery and equipment pursuant to leases that, in accordance with generally accepted accounting principles, 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. |
Item 3. | Quantitative and Qualitative Disclosures About Market Risk. |
Item 4. | Controls and Procedures. |
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Item 1. | Legal Proceedings. |
Item 1A. | Risk Factors. |
Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds. |
Item 6. | Exhibits. |
3.1 | — | Restated Certificate of Incorporation of Lennox International Inc. (“LII”) (filed as Exhibit 3.1 to LII’s Registration Statement on Form S-1 (Registration Statement No. 333-75725) filed on April 6, 1999 and incorporated herein by reference). | ||
3.2 | — | Amended and Restated Bylaws of LII (filed as Exhibit 3.1 to LII’s Current Report on Form 8-K filed on July 26, 2007 and incorporated herein by reference). | ||
4.1 | — | Specimen Stock Certificate for the Common Stock, par value $.01 per share, of LII (filed as Exhibit 4.1 to LII’s Amendment to Registration Statement on Form S-1/A (Registration No. 333-75725) filed on June 16, 1999 and incorporated herein by reference). | ||
4.2 | — | Rights Agreement, dated as of July 27, 2000, between LII and ChaseMellon Shareholder Services, L.L.C., as Rights Agent, which includes as Exhibit A the form of Certificate of Designations of Series A Junior Participating Preferred Stock setting forth the terms of the Preferred Stock, as Exhibit B the form of Rights Certificate and as Exhibit C the Summary of Rights to Purchase Preferred Stock (filed as Exhibit 4.1 to LII’s Current Report on Form 8-K filed on July 28, 2000 and incorporated herein by reference). | ||
LII is a party to several debt instruments under which the total amount of securities authorized under any such instrument does not exceed 10% of the total assets of LII and its subsidiaries on a consolidated basis. Pursuant to paragraph 4(iii)(A) of Item 601(b) of Regulation S-K, LII agrees to furnish a copy of such instruments to the Securities and Exchange Commission upon request. | ||||
31.1 | — | Certification of the principal executive officer (filed herewith). | ||
31.2 | — | Certification of the principal financial officer (filed herewith). | ||
32.1 | — | Certification of the principal executive officer and the principal financial officer pursuant to 18 U.S.C. Section 1350 (filed herewith). |
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LENNOX INTERNATIONAL INC. | ||||
Date: May 1, 2008 | /s/ Susan K. Carter | |||
Susan K. Carter | ||||
Chief Financial Officer (on behalf of registrant and as principal financial officer) | ||||
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Exhibit No. | Description | |||
3.1 | — | Restated Certificate of Incorporation of Lennox International Inc. (“LII”) (filed as Exhibit 3.1 to LII’s Registration Statement on Form S-1 (Registration Statement No. 333-75725) filed on April 6, 1999 and incorporated herein by reference). | ||
3.2 | — | Amended and Restated Bylaws of LII (filed as Exhibit 3.1 to LII’s Current Report on Form 8-K filed on July 26, 2007 and incorporated herein by reference). | ||
4.1 | — | Specimen Stock Certificate for the Common Stock, par value $.01 per share, of LII (filed as Exhibit 4.1 to LII’s Amendment to Registration Statement on Form S-1/A (Registration No. 333-75725) filed on June 16, 1999 and incorporated herein by reference). | ||
4.2 | — | Rights Agreement, dated as of July 27, 2000, between LII and ChaseMellon Shareholder Services, L.L.C., as Rights Agent, which includes as Exhibit A the form of Certificate of Designations of Series A Junior Participating Preferred Stock setting forth the terms of the Preferred Stock, as Exhibit B the form of Rights Certificate and as Exhibit C the Summary of Rights to Purchase Preferred Stock (filed as Exhibit 4.1 to LII’s Current Report on Form 8-K filed on July 28, 2000 and incorporated herein by reference). | ||
LII is a party to several debt instruments under which the total amount of securities authorized under any such instrument does not exceed 10% of the total assets of LII and its subsidiaries on a consolidated basis. Pursuant to paragraph 4(iii)(A) of Item 601(b) of Regulation S-K, LII agrees to furnish a copy of such instruments to the Securities and Exchange Commission upon request. | ||||
31.1 | — | Certification of the principal executive officer (filed herewith). | ||
31.2 | — | Certification of the principal financial officer (filed herewith). | ||
32.1 | — | Certification of the principal executive officer and the principal financial officer pursuant to 18 U.S.C. Section 1350 (filed herewith). |
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