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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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Form 10-K
[X] ANNUAL REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2000
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number 001-15149
Lennox International Inc.
(Exact name of Registrant as specified in its charter)
Delaware 42-0991521
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) 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:
Name of each exchange
Title of each class on which registered
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Common Stock, $.01 par value per share New York Stock Exchange
Securities Registered Pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the last 90 days. Yes [X] No [_]
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. [X]
As of March 1, 2001, there were 56,050,163 shares of the registrant"s Common
Stock outstanding, and the aggregate market value of the Common Stock held by
non-affiliates of the registrant was $457,762,383 based on the closing price of
the Common Stock on the New York Stock Exchange Composite Transactions on such
date.*
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant"s definitive Proxy Statement to be filed with the
Securities and Exchange Commission pursuant to Regulation 14A in connection
with the 2001 annual meeting of stockholders (the "Proxy Statement") are
incorporated herein by reference into Part III of this Report. Such proxy
statement will be filed with the Securities and Exchange Commission not later
than 120 days after the registrant's fiscal year ended December 31, 2000.
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* Excludes the Common Stock held by the registrant's executive officers,
directors and stockholders whose ownership exceeds 5% of the Common Stock
outstanding at March 1, 2001. Exclusion of such shares should not be
construed to indicate that any such person possesses the power, direct or
indirect, to direct or cause the direction of the management or policies of
the registrant or that such person is controlled by or under common control
with the registrant.
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LENNOX INTERNATIONAL INC.
FORM 10-K
For the Fiscal Year Ended December 31, 2000
INDEX
Page
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PART I
ITEM 1. Business..................................................... 1
ITEM 2. Properties................................................... 13
ITEM 3. Legal Proceedings............................................ 14
ITEM 4. Submission of Matters to a Vote of Security Holders.......... 14
PART II
ITEM 5. Market for Registrant's Common Stock and Related Stockholder
Matters...................................................... 14
ITEM 6. Selected Financial Data...................................... 15
ITEM 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations.................................... 15
ITEM 7A. Quantitative and Qualitative Disclosures about Market Risk... 22
ITEM 8. Financial Statements and Supplementary Data.................. 23
ITEM 9. Changes In and Disagreements With Accountants on Accounting
and Financial Disclosure..................................... 49
PART III
ITEM 10. Directors and Executive Officers of the Registrant........... 49
ITEM 11. Executive Compensation....................................... 49
ITEM 12. Security Ownership of Certain Beneficial Owners and
Management................................................... 49
ITEM 13. Certain Relationships and Related Transactions............... 49
PART IV
ITEM 14. Exhibits, Financial Statement Schedules and Reports on Form
8-K.......................................................... 49
PART I
ITEM 1. Business
The Company
Lennox International Inc. (including its subsidiaries, "Lennox" or the
"Company") is a leading global provider of climate control solutions. The
Company designs, manufactures and markets a broad range of products for the
heating, ventilation, air conditioning and refrigeration ("HVACR") markets. The
Company's products are sold under well-established brand names including
"Lennox", "Armstrong Air", "Ducane", "Bohn", "Larkin", "Heatcraft", "Advanced
Distributor Products" and others. The Company is also one of the largest
manufacturers in North America of heat transfer products, such as evaporator
coils and condenser coils. The Company has leveraged its expertise in heat
transfer technology, which is critical to the efficient operation of any
heating or cooling system, to become an industry leader known for its product
innovation and the quality and reliability of its products. The Company is also
a leader in the growing market for hearth products, which includes pre-
fabricated fireplaces and related products. Historically, the Company has sold
its "Lennox" brand of residential heating and air conditioning products
directly to a network of installing dealers, which currently numbers
approximately 6,500, making it the largest wholesale distributor of these
products in North America. In September 1998, the Company initiated a program
to acquire dealers or service centers in metropolitan areas in the United
States and Canada so that it can provide heating and air conditioning products
and services directly to consumers. The Company greatly expanded this program
with the acquisition of Service Experts Inc. in January 2000.
Shown below are the Company's five business segments, the key products and
brand names within each segment and 2000 net sales by segment. Segment
financial data for the years 1998 through 2000, including financial information
about foreign and domestic operations, is included in Note 3 of the Notes to
Consolidated Financial Statements on pages 32 and 33 herein.
Segment Products/Services Brand Names 2000 Net Sales
------- ----------------- ----------- --------------
(in millions)
North American Furnaces, heat pumps, air Lennox, Armstrong Air, Air- $1,221.8
Residential conditioners, packaged heating Ease, Concord, Magic-Pak,
and cooling systems and Ducane, Advanced Distributor
related products; pre- Products, Superior,
fabricated fireplaces, free Whitfield and Security
standing stoves, fireplace Chimneys
inserts and accessories
North American Retail Sales, installation and Service Experts, various 1,053.2
service of residential and individual service center
light commercial comfort names
equipment
Commercial Air Unitary air conditioning and Lennox, Alcair and Janka 469.2
Conditioning applied systems
Commercial Refrigeration Chillers, condensing units, Bohn, Friga-Bohn, Larkin, 358.3
unit coolers, fluid coolers, Climate Control, Chandler
air cooled condensers and air Refrigeration, Kirby, Muller
handlers and Lovelock
Heat Transfer Heat transfer coils, other Heatcraft, Friga-Bohn, Kirby 246.8
heat transfer products and and Muller
equipment and tooling to
manufacture coils
Eliminations (101.9)
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Total $3,247.4
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The Company was founded in 1895 in Marshalltown, Iowa when Dave Lennox, who
owned a machine repair business for the railroads, successfully developed and
patented a riveted steel coal-fired furnace which
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was substantially more durable than the cast iron furnaces used at the time. By
1904, the manufacture of these furnaces had grown into a significant business
and was diverting the Lennox Machine Shop from its core business. As a result,
in 1904, a group of investors headed by D.W. Norris bought the furnace business
and named it the Lennox Furnace Company. Over the years, D.W. Norris ensured
that ownership of the Company was distributed to all generations of his family.
The Company believes that more than fifty percent of the Company's ownership
currently is broadly distributed among approximately 110 descendants of or
persons otherwise related to D.W. Norris. In 1991, the Company reincorporated
as a Delaware corporation. On August 3, 1999, the Company completed the initial
public offering of its common stock.
In 1999, the Company expanded its hearth products line through the
acquisition of Security Chimneys International, Ltd. In May 1999, the Company
acquired Livernois Engineering Holding Company and related patents. Livernois
produces heat transfer manufacturing equipment for the HVACR and automotive
industries. The Company acquired James N. Kirby Pty. Ltd., an Australian
company that participates in the commercial refrigeration and heat transfer
markets in Australia, in June 1999. In October 1999, the Company acquired
substantially all of the assets of the air conditioning and heating division of
The Ducane Company, Inc. based in South Carolina. The Ducane acquisition gives
the Company additional capacity to manufacture heating and air conditioning
products. In January 2000, the Company completed the acquisition of Service
Experts Inc. in exchange for approximately 12.2 million shares of Lennox common
stock and the assumption of $175 million of debt, of which $163 million was
concurrently repaid. Service Experts provides residential and commercial
heating, ventilation and air conditioning ("HVAC") services and replacement
equipment through approximately 120 dealers in approximately 36 states.
Forward Looking Statements
This Annual Report on Form 10-K ("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 upon management's beliefs, as well as assumptions made by and
information currently available to management. All statements other than
statements of historical fact included in this Form 10-K constitute forward-
looking statements within the meaning of the Private Securities Litigation
Reform Act of 1995, including but not limited to statements identified by the
words "may", "will", "should", "plan", "predict", "anticipate", "believe",
"intend", "estimate" and "expect" and similar expressions. Such statements
reflect the current views of Lennox with respect to future events, based on
what it believes are reasonable assumptions; however, such statements are
subject to certain risks, uncertainties and assumptions. These include, but are
not limited to, warranty and product liability claims; the Company's ability to
successfully complete and integrate acquisitions; the Company's ability to
manage new lines of business; the consolidation trend in the HVACR industry;
adverse reaction from the Company's customers from its acquisitions or other
activities; the impact of the weather on the Company's business; competition in
the HVACR business; increases in the prices of components and raw materials;
general economic conditions in the U.S. and abroad; labor relations problems;
operating risks; and environmental risks. 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. The Company disclaims any intention or obligation to update or
review any forward-looking statements or information, whether as a result of
new information, future events or otherwise.
Growth Strategy
The Company's growth strategy is designed to capitalize on its competitive
strengths in order to expand its market share and profitability in the
worldwide HVACR markets. The key elements of this strategy include:
Expand Market in North America
The Company's acquisition of heating and air conditioning dealers or service
centers in the United States and Canada represents a new direction for the
heating and air conditioning industry because, to its knowledge,
2
no other major manufacturer has made a significant investment in retail
distribution. This strategy enables the Company to extend its distribution
directly to the consumer, thereby permitting it to participate in the revenues
and margins available at the retail level while strengthening and protecting
its brand equity. The Company believes that the retail sales and service market
represents a significant growth opportunity because this market is large and
highly fragmented. The retail sales and service market in the United States is
estimated to be comprised of over 30,000 dealers or service centers. The
Company started this program in September 1998 and as of December 31, 2000, it
had acquired over 200 dealers in the United States and Canada for an aggregate
purchase price of approximately $630 million, including the acquisition of
Service Experts in January 2000. The Company has assembled an experienced
management team to administer the dealer operations and the Company has
developed a portfolio of training programs, management procedures and goods and
services that it believes will enhance the quality, effectiveness and
profitability of dealer operations. No further acquisitions are planned as of
the date of this report.
The Company has initiated a program to strengthen its independent dealer
network by providing all dealers with a broad array of services and support.
Participants in the Company's associate dealer program receive retirement and
other benefits in exchange for agreeing that at least 75% of their residential
heating and air conditioning purchases will be of the Company's products. As of
December 31, 2000, over 1,650 dealers in the United States and Canada had
joined the Company's associate dealer program. All independent dealers,
including participants in the associate dealer program, are provided with
access to the Company-sponsored volume purchasing programs with third parties
for goods and services used in their businesses. Additionally, International
Service Leadership, Inc., a wholly owned subsidiary of the Company, offers HVAC
industry training, programs and support materials to dealers (including
Company-owned dealers) throughout North America.
The Company also intends to increase its market share in North America by:
. selectively expanding its "Lennox" independent dealer network;
. promoting the cross-selling of its "Armstrong Air", "Aire-Flo" and
other residential heating and air conditioning brands to its existing
network of "Lennox" dealers as a second line;
. promoting the cross-selling of its hearth products to its "Lennox"
dealer base;
. expanding the geographic market for the "Armstrong Air", "Air-Ease" and
"Ducane" brands of residential heating and air conditioning products
from its traditional presence in the Northeast and Central United
States to the Southern and Western portions of the United States; and
. exploiting the fragmented third-party evaporator coil market.
Increase Presence in Hearth Products Market
The Company manufactures and sells one of the broadest lines of hearth
products in North America, offering multiple brands of hearth products at a
range of price points. The Company believes that this broad product line will
allow it to compete successfully in the hearth products market since many
distributors prefer to concentrate their product purchases with a limited
number of suppliers. The Company believes that it can increase its penetration
of this market by selling in the traditional hearth products distribution
channels and through its historical HVAC distribution channels. Many of Lennox'
heating and air conditioning dealers have begun to expand their product
offerings to include hearth products. In 2000, a new President and Chief
Operating Officer was appointed and management was significantly restructured
for the hearth products business. Additionally, the Company is implementing a
new brand strategy emphasizing the Lennox brand, since the Company believes
that the Lennox brand represents both the highest brand awareness and brand
preference by consumers of any brand in the hearth products industry. The
Company currently is also targeting increased sales to hearth specialty
retailers and new home construction builders.
Exploit International Opportunities
Worldwide demand for residential and commercial heating, air conditioning,
refrigeration and heat transfer products is increasing. The Company believes
that the increasing international demand for these products
3
presents substantial opportunities, especially in emerging markets and
particularly for heat transfer and refrigeration products. An example is the
increasing use of refrigeration products to preserve perishables including food
products in underdeveloped countries. Refrigeration products generally have the
same design and applications globally. To take advantage of international
opportunities, the Company has made substantial investments in manufacturing
facilities in Europe, Latin America and Asia Pacific through acquisitions,
including James N. Kirby Pty. Ltd., which has operations in Australia, and Ets.
Brancher S.A. with operations in Europe. The Company's international sales have
grown from $112.0 million in 1996 to $687.6 million in 2000. The Company
intends to continue to focus on expanding its international operations through
internal growth to take advantage of international growth opportunities.
Technology and Product Innovation
An important part of Lennox' growth strategy is to continue to invest in
research and new product development. The Company has designated a number of
its facilities as "centers for excellence" that are responsible for the
research and development of core competencies vital to its success, such as
combustion technology, vapor compression, heat transfer and low temperature
refrigeration. Technological advances are disseminated from these "centers for
excellence" to all of Lennox' operating divisions.
Products
North American Residential Products
Heating and Air Conditioning Products. The Company manufactures and markets
a broad range of furnaces, heat pumps, air conditioners, packaged heating and
cooling systems and related products. These products are available in a variety
of product designs and efficiency levels at a range of price points intended to
provide a complete line of home comfort systems for both the residential
replacement and new construction markets. The Company markets these products
through multiple brand names. In addition, Lennox manufactures a complete line
of replacement parts. The Company believes that by maintaining a broad product
line with multiple brand names, it can address different market segments and
penetrate multiple distribution channels.
The Company's Advanced Distributor Products division builds evaporator
coils, unit heaters and air handlers under the "Advanced Distributor Products"
brand as well as the "Lennox", "Armstrong Air" and "Ducane" brands. This
division supplies the Company with components for its heating and air
conditioning products and produces evaporator coils to be used in connection
with competitors' heating and air conditioning products and as an alternative
to such competitors' brand name components. The Company started this business
in 1993 and has been able to achieve an approximate 20% share of this market
for evaporator coils through the application of its technological and
manufacturing skills.
Hearth Products. The Company believes that it is the only North American
HVACR manufacturer that also designs, manufactures and markets residential
hearth products. The Company's hearth products include prefabricated gas and
wood burning fireplaces, free standing pellet and gas stoves, fireplace
inserts, gas logs and accessories. Many of the fireplaces are built with a
blower or fan option and are efficient heat sources as well as attractive
amenities to the home. The Company currently markets its hearth products under
the "Lennox", "Superior", "Whitfield", "Earth Stove" and "Security Chimneys"
brand names. The Company believes that its strong relationship with its dealers
and its brand names will assist in selling into this market.
North American Retail
Through Company-owned dealers in the United States and Canada, the Company
provides installation, maintenance, repair and replacement services for heating
and air conditioning systems directly to both residential and light commercial
customers. Installation services include the installation of heating and air
conditioning systems in new construction and the replacement of existing
systems. Other services include preventative maintenance, emergency repairs and
the replacement of parts associated with heating and air conditioning systems.
The Company also sells a wide range of mechanical and electrical equipment,
parts and supplies in connection with these services.
4
Commercial Air Conditioning
The Company manufactures and sells commercial air conditioning equipment in
North America, Europe, Asia Pacific and South America.
North America. In the North American commercial markets, the Company's air
conditioning equipment is used in applications such as low-rise office
buildings, restaurants, retail and supermarket centers, churches and schools.
The Company's product offerings for these applications include rooftop units
which range from two to 30 tons of cooling capacity and split system/air
handler combinations which range from two to 20 tons. In North America, the
Company sells unitary equipment as opposed to larger applied systems. The
Company's L Series was introduced in 1995 and has been well received by the
national accounts market where it is sold to restaurants, mass merchandisers
and other retail outlets. The Company believes that this product's success is
attributable to its efficiency, design flexibility, low life cycle cost, ease
of service and advanced control technology.
International. The Company competes in the commercial air conditioning
market in Europe through its ownership of Ets. Brancher S.A. and its operating
subsidiaries. LGL France S.A. manufactures and sells unitary products which
range from two to 30 tons and applied systems which range up to 500 tons.
Lennox' European products consist of chillers, air handlers, fan coils and
large rooftop units and serve medium rise buildings, shopping malls, other
retail and entertainment buildings, institutional applications and other field
engineered applications. Lennox manufactures its air conditioning products in
several locations throughout Europe, including sites in the United Kingdom,
France, Holland and Spain and markets such products through various
distribution channels in these countries and in Italy, Germany, Belgium, the
Czech Republic, Eastern Europe and the Middle East.
In Australia, the Company distributes its residential and light commercial
heating and air conditioning products manufactured in North America and also
manufactures commercial heating and air conditioning products (packaged and
split systems) ranging in size from two to 60 tons.
Commercial Refrigeration
North America. The Company is one of the leading manufacturers of commercial
refrigeration products in North America. The Company's refrigeration products
include condensing units, unit coolers, fluid coolers, air-cooled condensers
and air handlers. The Company's refrigeration products are sold for cold
storage applications to preserve food and other perishables. These products are
used by supermarkets, convenience stores, restaurants, warehouses and
distribution centers. As part of its sale of commercial refrigeration products,
the Company routinely provides application engineering for consulting
engineers, contractors and others.
International. Lennox manufactures and markets refrigeration products
through manufacturing facilities and joint ventures located in France and
Spain. The Company's refrigeration products include small chillers, unit
coolers, air-cooled condensers, fluid coolers and refrigeration racks. These
products are sold to distributors, installing contractors and original
equipment manufacturers.
The Company also owns 50% of a joint venture in Mexico that produces unit
coolers and condensing units of the same design and quality as those
manufactured by the Company in the United States. Since this venture produces a
smaller range of products, the product line is complemented with imports from
the United States which are sold through the joint venture's distribution
network. Sales are made in Mexico to wholesalers, installing contractors and
original equipment manufacturers. As production volumes increase, there exists
the potential to export some products from the joint venture into North America
and Latin America.
The Company owns an 84% interest in Heatcraft do Brasil S.A., a Brazilian
company that manufactures condensing units and unit coolers. The Company
believes this joint venture gives it the leading market share for commercial
refrigeration products in its served markets in Brazil.
5
The Company acquired the assets of Lovelock Luke Pty. Ltd., a distributor of
refrigeration and related equipment in Australia in 1998. This acquisition
gives the Company an established commercial refrigeration business in
Australia.
In June 1999, the Company acquired James N. Kirby Pty. Ltd. for
approximately $65 million. Kirby is an Australian company that manufactures
commercial refrigeration and heat transfer products in Australia and
distributes commercial refrigeration equipment through its own and Lovelock's
distribution network. Kirby also designs and manufactures precision machining
stations primarily for the automobile industry. The Kirby acquisition provides
a technological and manufacturing base for the growth of the Company's
commercial refrigeration and heat transfer business in the Asia Pacific region.
Heat Transfer
The Company is one of the largest manufacturers of heat transfer components,
including coils, in the United States, Europe, Australia, Mexico and Brazil.
These products are used primarily by original equipment manufacturers of
residential and commercial air conditioning products, transportation air
conditioning and refrigeration systems and commercial refrigeration products. A
portion of the Company's original equipment manufacturer coils is produced for
use in its residential and commercial HVACR products. The Company also produces
private label replacement coils for use in other manufacturers' HVACR
equipment. The Company believes that the engineering expertise of its sales
force, combined with its flexible manufacturing processes and systems, provide
it with an advantage in the application engineering, designing and
manufacturing of these products for its customers. Advanced computer software
enables the Company to predict with a high degree of accuracy the performance
of complete air conditioning and refrigeration systems. The Company also
supplies heat transfer manufacturing equipment to the automotive industry
through Livernois.
In addition to supplying the original equipment manufacturer market, the
Company also produces replacement coils for large commercial air conditioning,
heating and industrial processing systems. Many of these coils are specially
designed for particular systems and in the event of a failure may need to be
replaced quickly. The Company is the industry leader in this market and has
designed its manufacturing processes and systems in North America so that it
can deliver custom coils within 48 hours of receipt of an order. This premium
service enables the Company to receive superior prices and generate attractive
margins.
The Company also produces coils in France and the Czech Republic for the
European market. The Company's joint venture in Mexico produces evaporator and
condenser coils for use in that country and for export to the Caribbean and the
United States. The Company's Brazilian joint venture manufactures heat transfer
coils that are sold to both HVACR manufacturers and automotive original
equipment manufacturers in Brazil.
Marketing and Distribution
The Company manages numerous distribution channels for its products in order
to better penetrate the HVACR market. Generally, the Company's products are
sold through a combination of distributors, independent and company-owned
dealers or service centers, wholesalers, manufacturers' representatives,
original equipment manufacturers and national accounts. The Company has also
established separate distribution networks in each country in which it conducts
operations. The Company deploys dedicated sales forces across all its business
segments and brands in a manner designed to maximize the ability of each sales
force to service its particular distribution channel. To maximize enterprise-
wide effectiveness, the Company has active cross-functional and cross-
organizational teams working on issues such as pricing and coordinated
approaches to product design and national account customers with interests
cutting across business segments.
A principal example of the competitive strength of the Company's marketing
and distribution strategy is in the North American residential heating and air
conditioning market, in which it uses three distinctly different distribution
approaches -- the one-step distribution system, the two-step distribution
system and sales made
6
directly to consumers through Company-owned dealers. The Company markets and
distributes its "Lennox" and "Aire-Flo" brands of heating and air conditioning
products directly to approximately 6,500 independent dealers that install these
products.
The Company distributes its "Armstrong Air", "Air-Ease", "Concord", "Ducane"
and "Magic-Pak" brands of residential heating and air conditioning products
through the traditional two-step distribution process whereby it sells its
products to distributors who, in turn, sell the products to a local installing
dealer. Accordingly, by using multiple brands and distribution channels, the
Company is able to better penetrate the North American residential heating and
air conditioning market. In addition, the Company provides heating and air
conditioning products and services directly to consumers through Company-owned
dealers.
Through the years, the "Lennox" brand has become synonymous with the "Dave
Lennox" image, which is utilized in national television and print advertising
as well as in numerous locally produced dealer ads, open houses and trade
events and is easily the best recognized advertising icon in the heating and
air conditioning industry.
Manufacturing
The Company operates 16 manufacturing facilities in the United States and
Canada and 20 outside the United States and Canada. In its facilities most
impacted by seasonal demand, the Company manufactures both heating and air
conditioning products to smooth seasonal production demands and maintain a
relatively stable labor force. The Company is generally able to hire temporary
employees to meet changes in demand.
Purchasing
The Company relies on various suppliers to furnish the raw materials and
components used in the manufacture of its products. To maximize its buying
power in the marketplace, the Company utilizes a "purchasing council" that
consolidates purchases of its entire domestic requirements of particular items
across all business segments. The purchasing council generally concentrates its
purchases for a given material or component with one or two suppliers, although
the Company believes that there are alternative suppliers for all of its key
raw material and component needs. Compressors, motors and controls constitute
the Company's most significant component purchases, while steel, copper and
aluminum account for the bulk of the Company's raw material purchases. Although
most of the compressors used by the Company are purchased directly from major
compressor manufacturers, the Company owns a 24.5% interest in a joint venture
to manufacture compressors in the one and one-half to seven horsepower range.
The Company expects that this joint venture, which began limited production in
April 1998, will be capable of providing the Company with a substantial portion
of its compressor requirements in the residential air conditioning market.
Technology and Research and Development
The Company supports an extensive research and development program focusing
on the development of new products and improvements to its existing product
lines. The Company spent an aggregate of $36.5 million, $39.1 million and $33.3
million on research and development during 2000, 1999 and 1998, respectively.
The Company has a number of research and development facilities located around
the world, including a limited number of "centers for excellence" that are
responsible for the research and development of particular core competencies
vital to its business, such as combustion technology, vapor compression, heat
transfer and low temperature refrigeration.
The Company uses advanced, commercially available computer-aided design,
computer-aided manufacturing, computational fluid dynamics and other
sophisticated software not only to streamline the design and manufacturing
processes, but also to give it the ability to run complex computer simulations
on a product design before a working prototype is created. The Company operates
a full line of metalworking equipment and advanced laboratories certified by
applicable industry associations.
7
Patents and Trademarks
The Company holds numerous patents that relate to the design and use of its
products. The Company considers these patents important, but no single patent
is material to the overall conduct of its business. The Company's policy is to
obtain and protect patents whenever such action would be beneficial to it. No
patent which the Company considers material will expire in the next five years.
The Company owns several trademarks that it considers important in the
marketing of its products, including Lennox(R), Heatcraft(R), CompleteHeat(R),
Raised Lance(TM), Larkin(TM), Climate Control(TM), Chandler Refrigeration(R),
Bohn(R), Advanced Distributor Products(R), Armstrong Air(TM), Aire-Flo(TM),
Air-Ease(R), Concord(R), Magic-Pak(R), Superior(R), Whitfield(R), Security
Chimneys(R), Janka(TM), Alcair(TM), Ducane(TM) and Friga-Bohn(TM). These
trademarks have no fixed expiration dates and the Company believes its rights
in these trademarks are adequately protected.
Competition
Substantially all of the markets in which the Company participates are
highly competitive. The most significant competitive factors facing the Company
are product reliability, product performance, service and price, with the
relative importance of these factors varying among its product lines. In
addition, the Company faces competition from independent dealers and dealers
owned by consolidators and utility companies. The Company's competitors may
have greater financial and marketing resources than it has. Listed below are
some of the companies that the Company views as its main manufacturing
competitors in each segment the Company serves, with relevant brand names, when
different than the company name, shown in parentheses.
. North American residential -- United Technologies Corporation
(Carrier); Goodman Manufacturing Company (Janitrol, Amana); American
Standard Companies Inc. (Trane); York International Corporation; Hon
Industries, Inc. (Heatilator); and CFM Majestic, Inc. (Majestic).
. Commercial air conditioning -- United Technologies Corporation
(Carrier); American Standard Companies Inc. (Trane); York International
Corporation; Daikin Industries, Ltd.; and McQuay International.
. Commercial refrigeration -- United Technologies Corporation (Carrier
CRO); Tecumseh Products Co.; Copeland Corporation; and Ingersoll-Rand
Company (Hussman).
. Heat transfer -- Modine Manufacturing Company and Super Radiator Coils.
Employees
As of March 1, 2001, the Company employed approximately 24,000 employees,
approximately 5,700 of which were represented by unions. The number of hourly
workers the Company employs may vary in order to match its labor needs during
periods of fluctuating demand. The Company believes that its relationships with
its employees and with the unions representing some of its employees are
generally good and does not anticipate any material adverse consequences
resulting from negotiations to renew any collective bargaining agreements.
Regulation
The Company's operations are subject to evolving and often increasingly
stringent federal, state, local and international laws and regulations
concerning the environment. Environmental laws that affect or could affect the
Company's domestic operations include, among others, the Clean Air Act, the
Clean Water Act, the Resource Conservation and Recovery Act, the Comprehensive
Environmental Response, Compensation and Liability Act, the Occupational Safety
and Health Act, the National Environmental Policy Act, the Toxic Substances
Control Act, any regulations promulgated under these acts and various other
Federal, state and local laws and regulations governing environmental matters.
The Company believes it is in substantial compliance with such existing
environmental laws and regulations. The Company's non-United States operations
are also subject to various environmental statutes and regulations. Generally,
these statutes and regulations impose
8
operational requirements that are similar to those imposed in the United
States. The Company believes it is in substantial compliance with applicable
non-United States environmental statutes and regulations.
Refrigerants. In the past decade, there has been increasing regulatory and
political pressure to phase out the use of certain ozone depleting substances,
including hydrochlorofluorocarbons, which are sometimes referred to as "HCFCs".
This development is of particular importance to the Company and its competitors
because of the common usage of HCFCs as refrigerants for air conditioning and
refrigeration equipment. As discussed below, the Company does not believe that
implementation of the phase out schedule for HCFCs contained in the current
regulations will have a material adverse effect on its financial position or
results of operations. The Company does believe, however, that there will
likely be continued pressure by the international environmental community for
the United States and other countries to accelerate the phase out schedule. The
Company has been an active participant in the ongoing international dialogue on
these issues and believes that it is well positioned to react to any changes in
the regulatory landscape.
In 1987 the United States became a signatory to an international agreement
titled the Montreal Protocol on Substances that Deplete the Ozone Layer. The
Montreal Protocol requires its signatories to phase out HCFCs on an orderly
basis. All countries in the developed world have become signatories to the
Montreal Protocol. The manner in which these countries implement the Montreal
Protocol and regulate HCFCs differs widely. The 1990 U.S. Clean Air Act
amendments implement the Montreal Protocol by establishing a program to limit
the production, importation and use of specified ozone depleting substances,
including HCFCs currently used as refrigerants by the Company and its
competitors. Under the Clean Air Act and implementing regulations, all HCFCs
must be phased out between 2010 and 2030. The Company believes that these
regulations, as currently in effect, will not have a material adverse effect on
its operations. Nonetheless, as the supply of virgin and recycled HCFCs falls,
it will be necessary to address the need to substitute permitted substances for
HCFCs. Further, the United States is under pressure from the international
environmental community to accelerate the current 2030 deadline for phase out
of HCFCs. An accelerated phase out schedule could adversely affect the
Company's future financial results and the industry generally.
The Company, together with major chemical manufacturers, is continually in
the process of reviewing and addressing the potential impact of refrigerant
regulations on its products. The Company believes that the combination of
products that presently utilize HCFCs, and products in the field which can be
retrofitted to alternate refrigerants, provide a complete line of commercial
and industrial products. Therefore, the Company does not foresee any material
adverse impact on its business or competitive position as a result of the
Montreal Protocol, the 1990 Clean Air Act amendments or their implementing
regulations. However, the Company believes that the implementation of severe
restrictions on the production, importation or use of refrigerants the Company
employs in larger quantities or acceleration of the current phase out schedule
could have such an impact on the Company and its competitors.
The Company is subject to appliance efficiency regulations promulgated under
the National Appliance Energy Conservation Act of 1987, as amended, and various
state regulations concerning the energy efficiency of its products. The Company
has developed and is developing products which comply with National Appliance
Energy Conservation Act regulations and does not believe that such regulations
will have a material adverse effect on its business. The United States
Department of Energy began in 1998 its review of national standards for comfort
products covered under National Appliance Energy Conservation Act. It is
anticipated that the National Appliance Energy Conservation Act regulations
requiring manufacturers to phase in new higher efficiency products will not
take effect prior to 2006. The Company believes it is well positioned to comply
with any new standards that may be promulgated by the Department of Energy and
does not foresee any adverse material impact from a National Appliance Energy
Conservation Act standard change.
Remediation Activity. In addition to affecting the Company's ongoing
operations, applicable environmental laws can impose obligations to remediate
hazardous substances at its properties, at properties formerly owned or
operated by the Company and at facilities to which it sent or sends waste for
treatment or disposal. The Company's Grenada facility is subject to an
administrative order issued by the Mississippi Department of
9
Environmental Quality under which the Company will conduct groundwater
remediation. The expenditures from this groundwater remediation are not
expected to materially affect the Company's financial condition or results of
operations. The Company is aware of contamination at some of its other
facilities; however, the Company does not presently believe that any future
remediation costs at such facilities will be material.
The Company has received notices in the past that it is a potentially
responsible party along with other potentially responsible parties in
Superfund proceedings under the Comprehensive Environmental Response,
Compensation and Liability Act for cleanup of hazardous substances at certain
sites to which the potentially responsible parties are alleged to have sent
waste. Based on the facts presently known, the Company does not believe that
environmental cleanup costs associated with any Superfund sites where the
Company has received notice that it is a potentially responsible party will be
material.
Service Center Operations. The heating and air conditioning dealers
acquired in the United States and Canada are subject to various federal, state
and local laws and regulations, including:
. permitting and licensing requirements applicable to service technicians
in their respective trades;
. building, heating, ventilation, air conditioning, plumbing and
electrical codes and zoning ordinances;
. laws and regulations relating to consumer protection, including laws
and regulations governing service contracts for residential services;
and
. laws and regulations relating to worker safety and protection of the
environment.
A large number of state and local regulations governing the residential and
commercial maintenance services trades require various permits and licenses to
be held by individuals. In some cases, a required permit or license held by a
single individual may be sufficient to authorize specified activities for all
of the Company's service technicians who work in the geographic area covered
by the permit or license.
Executive Officers of the Company
The executive officers of the Company, their present positions and their
ages are as follows:
Name Age Position
---- --- --------
John W. Norris, Jr....... 65 Chairman of the Board
Robert E. Schjerven...... 58 Chief Executive Officer
Harry J. Ashenhurst...... 52 Executive Vice President and Chief
Administrative Officer
Scott J. Boxer........... 50 Executive Vice President and President, Lennox
Industries Inc.
Carl E. Edwards, Jr...... 59 Executive Vice President, Chief Legal Officer
and Secretary
H. E. French............. 59 Executive Vice President and Chief Technology
Officer
Robert J. McDonough...... 42 Executive Vice President and President,
Worldwide Refrigeration and European and Latin
American Operations
James L. Mishler......... 46 Executive Vice President and President, Service
Experts Inc.
W. Lane Pennington....... 45 Executive Vice President and President,
Worldwide Heat Transfer and Asia Pacific
Operations
Michael G. Schwartz...... 42 Executive Vice President and President, North
American Distributed Products
Richard A. Smith......... 55 Executive Vice President and Chief Financial
Officer
John J. Hubbuch.......... 58 Vice President, Controller and Chief Accounting
Officer
Scott E. Messel.......... 42 Vice President and Treasurer
10
The following biographies describe the business experience of the Company's
executive officers.
John W. Norris, Jr. was elected Chairman of the Board of Directors of the
Company in 1991. He has served as a Director of the Company since 1966. After
joining the Company in 1960, Mr. Norris held a variety of key positions
including Vice President of Marketing, President of Lennox Industries (Canada)
Ltd., a subsidiary of the Company, and Corporate Senior Vice President. He
became President of the Company in 1977 and was appointed President and Chief
Executive Officer of the Company in 1980. Mr. Norris is on the Board of
Directors of the Air-Conditioning & Refrigeration Institute, of which he was
Chairman in 1986. He is also an active Board member of the Gas Appliance
Manufacturers Association, where he was Chairman from 1980 to 1981. Mr. Norris
also serves as a Director of AmerUs Life Holdings, Inc., a life insurance and
annuity company, and Metroplex Regional Advisory Board of The Chase Manhattan
Bank.
Robert E. Schjerven was named Chief Executive Officer of the Company in
2001. Prior to his election as Chief Executive Officer, he served as Chief
Operating Officer of the Company in 2000 and as President and Chief Operating
Officer of Lennox Industries Inc., a subsidiary of the Company, from 1995 to
2000. He joined the Company in 1986 as Vice President of Marketing and
Engineering for Heatcraft Inc., a subsidiary of the Company. From 1988 to 1991
he held the position of Vice President and General Manager of Heatcraft. From
1991 to 1995 he served as President and Chief Operating Officer of Armstrong
Air Conditioning Inc., which is also a subsidiary of the Company. Mr. Schjerven
spent the first 20 years of his career with the Trane Company, an HVACR
manufacturer, and McQuay-Perfex Inc.
Harry J. Ashenhurst was named Executive Vice President and Chief
Administrative Officer of the Company in 2000. He joined the Company in 1989 as
Vice President of Human Resources. Dr. Ashenhurst was named Executive Vice
President, Human Resources, for the Company in 1990 and in 1994 was appointed
Executive Vice President, Human Resources and Administration, assuming
responsibility for the Public Relations and Communications and Aviation
departments. Prior to joining the Company, he worked as an independent
management consultant with the consulting firm of Roher, Hibler and Replogle.
While at Roher, Hibler and Replogle, Dr. Ashenhurst was assigned to work as a
corporate psychologist for the Company.
Scott J. Boxer was named Executive Vice President of the Company and
President of Lennox Industries Inc., a subsidiary of the Company, in 2000. He
joined the Company in 1998 as Executive Vice President, Lennox Global Ltd., a
subsidiary of the Company, and President, European Operations. Prior to joining
the Company, Mr. Boxer spent 26 years with York International Corporation, an
HVACR manufacturer, in various roles, most recently as President, Unitary
Products Group Worldwide, where he reported directly to the Chairman of that
company and was responsible for directing that company's residential and light
commercial heating and air conditioning operations worldwide.
Carl E. Edwards, Jr. was named Executive Vice President, Chief Legal Officer
and Secretary of the Company in 2000. He joined the Company in February 1992 as
Vice President and General Counsel, became the Secretary of the Company in
April 1992, and was named Executive Vice President, General Counsel and
Secretary in December 1992. Prior to joining the Company, he was Vice
President, General Counsel and Secretary for Elcor Corporation. Mr. Edwards
also serves as a Director of Kentucky Electric Steel Inc.
H. E. French was appointed Executive Vice President and Chief Technology
Officer of the Company in 2000. Mr. French joined the Company in 1989 as Vice
President and General Manager of the Refrigeration Products division for
Heatcraft Inc., a subsidiary of the Company. In 1995, he was named President
and Chief Operating Officer of Armstrong Air Conditioning Inc., a subsidiary of
the Company. In 1997, he was named President and Chief Operating Officer of
Heatcraft Inc. Prior to joining the Company, Mr. French spent 11 years in
management with Wickes/Larkin, Inc.
Robert J. McDonough was named Executive Vice President of the Company and
President, Worldwide Refrigeration and European and Latin American Operations
in 2000. He joined the Company's Heatcraft Inc. subsidiary in 1990, where he
held the positions of Director of Sales and Marketing, Vice President of Sales
and
11
Marketing and Vice President and General Manager. Prior to his career at
Heatcraft, Mr. McDonough was employed with Larkin Coils, Inc. from 1982 to 1990
where he held engineering, product management and sales management positions.
James L. Mishler was named Executive Vice President of the Company and
President of Service Experts Inc., a subsidiary of the Company, in 2000. He
joined the Company in 1996 as Vice President, Sales and Marketing for Lennox
Industries Inc., a subsidiary of the Company. In 1999, he was appointed
President of Lennox Retail Inc., a new subsidiary of the Company entering a new
business segment. Prior to joining the Company, he was Vice President, Sales
for Pella Corporation, a manufacturer of windows and doors. Mr. Mishler began
his career at Whirlpool Corporation, an appliance manufacturer, in 1978, where
he held various sales management positions. In 1992, he left Whirlpool to serve
as Vice President of Sales Operations for Frigidaire Corporation, an appliance
manufacturer, and later as Executive Vice President of Sales and Marketing for
Frigidaire.
W. Lane Pennington was appointed to his current position of Executive Vice
President of the Company and President, Worldwide Heat Transfer and Asia
Pacific Operations, in 2000. He joined the Company in 1997 as Vice President,
Asia Pacific Operations, and was named Executive Vice President, Lennox Global
Ltd., and President, Asia Pacific Operations in 1998. From 1988 until 1997, Mr.
Pennington was with Hilti International Corp., a worldwide supplier of
specialized building products and engineering services for the commercial
construction industry, where he most recently served as President, Hilti Asia
Limited, based in Hong Kong.
Michael G. Schwartz was named Executive Vice President of the Company and
President, North American Distributed Products in 2000. Mr. Schwartz previously
served as President and Chief Operating Officer of Armstrong Air Conditioning
Inc., a subsidiary of the Company, from 1997 to 2000. He joined Heatcraft Inc.,
a subsidiary of the Company, in 1990 when the Company acquired Bohn Heat
Transfer Inc. and served as Director of Sales and Marketing, Original Equipment
Manufacturer Products. He also served as Vice President of Commercial Products
for Heatcraft from 1995 to 1997. Mr. Schwartz began his career with Bohn Heat
Transfer Inc. in 1981.
Richard A. Smith was named Executive Vice President and Chief Financial
Officer for the Company in 2001. Mr. Smith was most recently CFO and Chief
Administrative Officer for Zonetrader, Inc., a leading provider of full-service
asset management solutions. Before joining Zonetrader, Inc., Mr. Smith had
served since 1990 as Vice President of Finance and Chief Financial Officer for
Arvin Industries, Inc., a leading global manufacturer of automotive components.
Mr. Smith began his career with Ralston Purina Company, a pet food
manufacturer, and later joined May Department Stores, serving first as Vice
President and Treasurer and later as Vice President and Controller of that
company's Payless Shoe Source division.
John J. Hubbuch was named Vice President, Controller and Chief Accounting
Officer of the Company in 1999. Mr. Hubbuch joined the Company in 1986 as the
Division Controller for Heatcraft Inc., a subsidiary of the Company. In 1989 he
became Heatcraft's Group Controller. In 1992 he was appointed Corporate
Controller of the Company and in 1994 he was named Vice President and Corporate
Controller of the Company. From 1982 to 1986, Mr. Hubbuch was the Division
Controller for McQuay-Perfex Inc./SnyderGeneral.
Scott E. Messel joined the Company as Vice President and Treasurer in 1999.
Prior to joining the Company, he was the Corporate Treasurer for Flowserve
Corporation, a provider of industrial flow management services, from 1998 to
1999. From 1983 to 1998, Mr. Messel held various treasury and finance positions
with Ralston Purina Company, a pet food manufacturer, including Vice President
and Director, International Treasury, from 1991 to 1998.
12
ITEM 2. Properties
Real Property and Leases
The following chart lists the Company's major domestic and international
manufacturing, distribution and office facilities and whether such facilities
are owned or leased:
Domestic Facilities
Description and Approximate
Location Size Principal Products Owned/Leased
-------- ------------------------------ ------------------------ ----------------
Richardson, TX World headquarters and Not Applicable Owned and Leased
offices; Lennox Industries
headquarters; 311,000 square
feet
Bellevue, OH Armstrong headquarters, Residential furnaces, Owned and Leased
factory and distribution residential and light
center; 800,000 square feet commercial air
conditioners and heat
pumps
Grenada, MS Heatcraft Heat Transfer Coils and copper tubing, Owned and Leased
Division headquarters and evaporator coils, gas-
factory, 1,000,000 square fired unit heaters and
feet; Advanced Distributor residential air handlers
Products factory, 300,000 and custom order
square feet, commercial replacement coils
products factory; 217,000
square feet
Stone Mountain, GA Heatcraft Refrigeration Commercial and Owned
Products Division industrial condensing
headquarters, R&D and factory; units, packaged chillers
145,000 square feet and custom refrigeration
racks
Marshalltown, IA Lennox Industries heating and Residential heating and Owned and Leased
air conditioning products cooling products, gas
factory, 1,000,000 square furnaces, split-system
feet; distribution center, condensing units, split-
300,000 square feet system heat pumps and
CompleteHeat
Des Moines, IA Lennox Industries distribution Central supplier of Leased
center and light Lennox repair parts
manufacturing; 352,000 square
feet
Carrollton, TX Lennox Industries heating and Not Applicable Owned
air conditioning products
development and research
facility; 130,000 square feet
Stuttgart, AR Lennox Industries light Commercial rooftop Owned and Leased
commercial heating and air equipment and
conditioning factory; 500,000 accessories
square feet
Union City, TN Lennox Hearth Products Gas and wood burning Owned
factory; 295,000 square feet fireplaces
Lynwood, CA Lennox Hearth Products Gas and wood burning Leased
headquarters and factory; fireplaces
200,000 square feet
Blackville, SC Excel Comfort Systems Inc. Residential heating and Owned
headquarters and factory; cooling products
375,000 square feet
Orangeburg, SC Allied Air Enterprises Residential heating and Owned
headquarters and factory; cooling products
329,000 square feet
13
International Facilities
Description and Approximate
Location Size Principal Products Owned/Leased
-------- ------------------------------ ------------------------ ------------
Genas, France Friga-Bohn factory; 16,000 Heat exchangers for Owned
square meters refrigeration and air
conditioning,
refrigeration products,
condensers, fluid
coolers, pressure
vessels, liquid
receivers and
refrigeration components
Mions, France LGL France headquarters and Air cooled chillers, Owned
factories; 12,000 square water cooled chillers,
meters reversible chillers and
packaged boilers
Prague, Czech Republic Janka and Friga-Coil Air handling equipment, Owned
factories; 30,000 square heat transfer coils
meters
Milperra, Australia James N. Kirby Pty. Ltd. Refrigeration condensing Owned
headquarters and factory; units and condensers,
412,000 square feet heat transfer coils,
machine tools
San Jose dos Campos, Heatcraft do Brasil Refrigeration condensing Owned
Brazil headquarters and factory; units, unit coolers and
160,000 square feet heat transfer coils
Etobicoke, Canada Lennox Canada factory; 212,000 Multi-position gas Owned
square feet furnaces and gas
fireplaces
In addition to the properties described above and excluding dealer
facilities, the Company leases over 55 facilities in the United States for use
as sales offices and district warehouses and additional facilities worldwide
for use as sales and service offices and regional warehouses. The vast
majority of Company-owned service center facilities are leased and the
remainder are owned. The Company believes that its properties are in good
condition and adequate for its present requirements. The Company also believes
that its principal plants are generally adequate to meet its production needs.
ITEM 3. Legal Proceedings
The Company is involved in various claims and lawsuits incidental to its
business. In the opinion of the Company's management, these claims and suits
in the aggregate will not have a material adverse effect on its business,
financial condition, liquidity or results of operations.
ITEM 4. Submission of Matters to a Vote of Security Holders
There were no matters submitted to a vote of security holders during the
fourth quarter of fiscal year 2000.
PART II
ITEM 5. Market for Registrant's Common Stock and Related Stockholder Matters
The Company's common stock is listed for trading on the New York Stock
Exchange under the symbol "LII". The high and low sales prices for the
Company's common stock for each quarterly period during 2000 and 1999 are set
forth in Note 14 of the Notes to Consolidated Financial Statements on page 47
herein. During 2000 and 1999, the Company declared quarterly cash dividends as
set forth in Note 14 of the Notes to Consolidated Financial Statements on page
47 herein. The quarterly dividend declared in December 2000 was paid on
January 5, 2001. The amount and timing of dividend payments are determined by
the Company's Board of Directors and subject to certain restrictions under the
Company's credit agreements. As of March 1, 2001, there were approximately
13,800 beneficial holders of the Company's common stock.
14
ITEM 6. Selected Financial Data
The table below shows the selected financial data of the Company for the
five years ended December 31, 2000:
For the Year Ending December 31,
---------------------------------------------
2000 1999 1998 1997(1) 1996
-------- -------- -------- -------- --------
(in millions, except per share data)
Statement of Operations Data
Net Sales....................... $3,247.4 $2,361.7 $1,821.8 $1,444.4 $1,364.5
Income (Loss) From Operations... 158.6 155.9 106.6 (35.2) 100.6
Net Income (Loss)............... 59.1 73.2 52.5 (33.6) 54.7
Diluted Earnings (Loss) Per
Share.......................... 1.05 1.81 1.47 (0.99) 1.59
Dividends Per Share............. 0.380 0.350 0.325 0.275 0.260
Other Data
Capital Expenditures............ $ 58.3 $ 76.7 $ 52.4 $ 34.6 $ 31.9
Research & Development
Expenses....................... 36.5 39.1 33.3 25.4 23.2
Balance Sheet Data
Working Capital................. $ 311.3 $ 424.6 $ 263.3 $ 335.9 $ 326.0
Total Assets.................... 2,055.0 1,683.7 1,151.6 970.4 819.7
Total Debt...................... 690.5 577.0 317.4 198.5 184.8
Stockholders' Equity............ 743.1 597.9 375.6 325.2 360.9
- --------
Note (1): Includes product inspection charge of $140.0 million. Excluding this
charge, Income From Operations is $104.8 million, Net Income is $51.7
million and Diluted Earnings Per Share is $1.53.
ITEM 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Overview
The Company participates in five reportable business segments of the HVACR
industry. The first segment is the North American residential market, in which
Lennox manufactures and markets a full line of heating, air conditioning and
hearth products for the residential replacement and new construction markets in
the United States and Canada. The second segment is the North American retail
market which includes sales and installation of, and maintenance and repair
services for, HVACR equipment by Lennox-owned service centers in the United
States and Canada. The third segment is the global commercial air conditioning
market, in which Lennox manufactures and sells rooftop products and applied
systems for commercial applications. The fourth segment is the global
commercial refrigeration market, which consists of unit coolers, condensing
units and other commercial refrigeration products. The fifth segment is the
heat transfer market, in which Lennox designs, manufactures and sells
evaporator and condenser coils, copper tubing and related manufacturing
equipment to original equipment manufacturers and other specialty purchasers on
a global basis.
Lennox sells its products to numerous types of customers, including
distributors, installing dealers, property owners, national accounts and
original equipment manufacturers. The demand for Lennox' products is influenced
by national and regional economic and demographic factors, such as interest
rates, the availability of financing, regional population and employment trends
and general economic conditions, especially consumer confidence. In addition to
economic cycles, demand for Lennox' products is seasonal and dependent on the
weather. Hotter than normal summers generate strong demand for replacement air
conditioning and refrigeration products and colder than normal winters have the
same effect on heating products. Conversely, cooler than normal summers and
warmer than normal winters depress sales of HVACR products.
The principal components of cost of goods sold are labor, raw materials,
component costs, factory overhead and estimated costs of warranty expense. The
principal raw materials used in Lennox' manufacturing
15
processes are copper, aluminum and steel. In instances where Lennox is unable
to pass on to its customers increases in the costs of copper and aluminum,
Lennox enters into forward contracts for the purchase of those materials.
Lennox attempts to minimize the risk of price fluctuations in key components by
entering into contracts, typically at the beginning of the year, which
generally provide for fixed prices for its needs throughout the year. These
hedging strategies enable Lennox to establish product prices for the entire
model year while minimizing the impact of price increases of components and raw
materials on its margins. Warranty expense is estimated based on historical
trends and other factors.
In September 1997, Lennox increased its ownership in Ets. Brancher, a
holding company owning its European operations, from 50% to 70%. As a result,
Lennox assumed control of the venture and began including the financial
position and operating results of the venture in its consolidated financial
statements for the fourth quarter of 1997. Previously, Lennox used the equity
method of accounting for its investment in this entity. In the fourth quarter
of 1998, Lennox restructured its ownership of its various European entities to
allow for more efficient transfer of funds and to provide for tax optimization.
In April 2000, Lennox acquired the remaining 30% of its European holding
company.
Lennox acquired Superior Fireplace Company, Marco Mfg., Inc. and Pyro
Industries, Inc. in the third quarter of 1998 and Security Chimneys
International, Ltd. in the first quarter of 1999 for an aggregate purchase
price of approximately $120 million. These acquisitions, which were later
merged to form Lennox Hearth Products Inc., give Lennox one of the broadest
lines of hearth products in the industry.
Lennox acquired James N. Kirby Pty. Ltd. ("Kirby"), an Australian company
that participates in the commercial refrigeration and heat transfer markets in
Australia, in June 1999 for approximately $65 million in cash, common stock and
seller financing. In addition, Lennox assumed approximately $20.5 million of
Kirby's debt.
Lennox purchased the HVAC related assets of The Ducane Company, Inc. in
October 1999 for approximately $53 million in cash. This purchase added to the
brands offered in the North American residential segment.
In September 1998, Lennox initiated a program to acquire high quality
heating and air conditioning dealers in metropolitan areas in the United States
and Canada to market "Lennox" and other brands of heating and air conditioning
products. This strategy is enabling Lennox to extend its distribution directly
to the consumer and to participate in the revenues and margins available at the
retail level while strengthening and protecting its brand equity. Lennox
believes that the retail sales and service market represents a significant
growth opportunity because this market is large and highly fragmented. The
retail sales and service market in the United States is estimated to be
comprised of over 30,000 dealers.
On January 21, 2000, Lennox completed the acquisition of Service Experts
Inc., an HVAC company comprised of HVAC retail businesses across the United
States, for approximately $307 million, including 12.2 million shares of Lennox
common stock and the assumption of $175 million of debt. The acquisition added
an additional 120 service centers to the U.S. retail network. The success of
the Service Experts acquisition, along with Lennox' other acquisitions, will
depend on Lennox' ability to integrate these businesses into its business
without substantial costs, delays or other operational or financial
difficulties. Through December 31, 2000, Lennox had acquired over 200 service
centers in North America for an aggregate purchase price of approximately $630
million. Lennox will, for the foreseeable future, concentrate on addressing
these integration and operational issues rather than making additional
acquisitions.
Lennox' fiscal year ends on December 31 of each year and its fiscal quarters
are each comprised of 13 weeks. For convenience, throughout this Management's
Discussion and Analysis of Financial Condition and Results of Operations, the
13 week periods comprising each fiscal quarter are denoted by the last day of
the calendar quarter.
16
Results of Operations
The following table sets forth, as a percentage of net sales, Lennox'
statement of income data for the years ended December 31, 2000, 1999 and 1998.
Year Ended
December 31,
-------------------
2000 1999 1998
----- ----- -----
Net sales............................................... 100.0% 100.0% 100.0%
Cost of goods sold...................................... 68.0 68.5 68.4
----- ----- -----
Gross profit.......................................... 32.0 31.5 31.6
Selling, general and administrative expense............. 27.1 24.9 25.7
----- ----- -----
Income from operations................................ 4.9 6.6 5.9
Interest expense, net................................... 1.7 1.4 0.9
Other................................................... 0.1 0.0 0.1
Minority interest....................................... 0.0 0.0 0.0
----- ----- -----
Income before income taxes............................ 3.1 5.2 4.9
Provision for income taxes.............................. 1.3 2.1 2.0
----- ----- -----
Net income............................................ 1.8% 3.1% 2.9%
===== ===== =====
The following table sets forth net sales by business segment and geographic
market (dollars in millions):
Years Ended December 31,
-------------------------------------------------
2000 1999 1998
--------------- --------------- ---------------
Amount % Amount % Amount %
-------- ----- -------- ----- -------- -----
Business Segment:
North American
residential............ $1,221.8 37.6% $1,174.2 49.7% $1,005.5 55.2%
North American retail... 1,053.2 32.4 218.1 9.2 9.8 0.5
Commercial air
conditioning........... 469.2 14.4 452.8 19.2 392.1 21.5
Commercial
refrigeration.......... 358.3 11.0 327.3 13.9 237.3 13.0
Heat transfer........... 246.8 7.6 220.0 9.3 178.7 9.8
Eliminations............ (101.9) (3.0) (30.7) (1.3) (1.6) --
-------- ----- -------- ----- -------- -----
Total net sales....... $3,247.4 100.0% $2,361.7 100.0% $1,821.8 100.0%
======== ===== ======== ===== ======== =====
Geographic Market:
U.S..................... $2,559.8 78.8% $1,730.4 73.3% $1,472.3 80.8%
International........... 687.6 21.2 631.3 26.7 349.5 19.2
-------- ----- -------- ----- -------- -----
Total net sales....... $3,247.4 100.0% $2,361.7 100.0% $1,821.8 100.0%
======== ===== ======== ===== ======== =====
Year Ended December 31, 2000 Compared to Year Ended December 31, 1999
Net Sales
Net sales increased $885.7 million, or 37.5%, to $3,247.4 million for the
year ended December 31, 2000 from $2,361.7 million for the year ended December
31, 1999.
Net sales in the North American residential segment were $1,221.8 million
for the year ended December 31, 2000, an increase of $47.6 million, or 4.1%,
from $1,174.2 million for the year ended December 31, 1999. Sales from
acquisitions contributed $51.5 million to the increase in sales for the year.
The acquisition of Ducane's HVAC product lines was the primary reason for the
acquisition sales increase.
Lennox' traditional North American residential businesses had a decrease in
sales of $3.9 million, or 0.3%, from the prior year. This decrease was a
result of unfavorable weather and a decline in sales in the
17
Company's hearth products business. Mild weather conditions in key markets for
Lennox negatively impacted sales in both the early months of 2000 and
especially the third quarter of 2000. Over 50% of the Company's North American
residential equipment sales are concentrated in geographic locations that had a
cold summer in 2000. Cooling degree days through August of 2000 were 50% below
1999 levels in the Northeast region of the United States and 27% below 1999
levels in the Upper Midwest region of the United States. This unusually cool
summer reduced the stress on existing air conditioning equipment, which
depressed equipment sales and reduced demand for profitable add-on air
conditioning in those markets where air conditioning is a discretionary
purchase. The Company's hearth products business sales decreased 12.3% as a
result of declining housing starts and a delay in realizing synergies from the
individual hearth operations acquired primarily in the third quarter of 1998
and first quarter of 1999.
Net sales in the North American retail segment were $1,053.2 million for the
year ended December 31, 2000, an increase of $835.1 million from $218.1 million
for the year ended December 31, 1999. This increase was almost entirely due to
acquisitions.
Commercial air conditioning net sales increased $16.4 million, or 3.6%, to
$469.2 million for the year ended December 31, 2000 compared to the year ended
December 31, 1999. North American sales grew 8.1% over the prior year. This
growth is primarily a result of two additional commercial sales districts and
the introduction of the Company's cost effective Value line product.
International commercial air conditioning sales also grew 8.1% over the prior
year, when compared in local currencies. Converted to U.S. dollars, however,
the increase was negated, primarily due to the decrease in the Euro exchange
rate from the prior year.
Net sales related to the commercial refrigeration segment were $358.3
million for the year ended December 31, 2000, an increase of $31.0 million, or
9.5%, from $327.3 million for the year ended December 31, 1999. Of this
increase, $27.5 million was due to the acquisition of James N. Kirby Pty. Ltd.
North American commercial refrigeration sales increased 9.7% due to strong
sales in the walk-in cooler segment and some large cold storage projects that
were completed. Europe and Australia, two of the Company's key refrigeration
markets, had significant decreases in the value of their currency compared to
the U.S. dollar. Excluding the impact of currency fluctuations and
acquisitions, international sales grew 4.5%.
Heat transfer segment revenues increased $26.8 million, or 12.2%, to $246.8
million for the year ended December 31, 2000 compared to the year ended
December 31, 1999. Of this increase, $22.0 million was due to the acquisitions
of James N. Kirby Pty. Ltd. and Livernois Engineering Holding Company. The
Company's traditional businesses increased sales 5.0%, after adjusting for the
impact of currency exchange.
Gross Profit
Gross profit was $1,040.4 million for the year ended December 31, 2000,
compared to $744.3 million for the year ended December 31, 1999, an increase of
$296.1 million. The majority of this increase is attributable to increased
sales in 2000 as compared to 1999. Gross profit margin was 32.0% for the year
ended December 31, 2000 and 31.5% for the year ended December 31, 1999. The
gross profit margins of the Company's traditional businesses increased 0.2% for
the twelve months of 2000 compared to the twelve months of 1999.
Selling, General and Administrative Expense
Selling, general and administrative expenses were $881.8 million for the
year ended December 31, 2000, an increase of $293.4 million, or 49.9%, from
$588.4 million for the year ended December 31, 1999. Selling, general and
administrative expenses represented 27.1% and 24.9% of total revenues for the
twelve months of 2000 and 1999, respectively. Of the $293.4 million increase,
$272.9 million, or 93%, was related to increased infrastructure associated with
acquisitions. The majority of the remaining $20.5 million increase was due to
fees for an asset securitization program implemented in June of 2000, charges
taken to close two operations in Latin America and increased expenses
associated with North American retail.
18
Interest Expense, Net
Interest expense, net, for the year ended December 31, 2000, increased to
$56.2 million from $33.1 million for the year ended December 31, 1999. The
increase in interest expense is attributable to the increased use of credit
lines and short-term borrowings to fund acquisitions.
Other
Other expense (income) was $1.8 million for the year ended December 31, 2000
and $(0.3) million for the year ended December 31, 1999. Other expense is
primarily comprised of currency exchange gains or losses, which relate
principally to the Company's operations in Canada, Australia and Europe.
Provision for Income Taxes
The provision for income taxes was $41.9 million for the year ended December
31, 2000 and $50.1 million for the year ended December 31, 1999. The effective
tax rate of 41.5% and 40.6% for the years ended December 31, 2000 and 1999,
respectively, differs from the statutory federal rate of 35.0% principally due
to state and local taxes, non-deductible goodwill expenses and foreign
operating losses for which no tax benefits have been recognized.
Year Ended December 31, 1999 Compared to Year Ended December 31, 1998
Net Sales
Net sales increased $539.9 million, or 29.6%, to $2,361.7 million for the
year ended December 31, 1999 from $1,821.8 million for the year ended December
31, 1998.
Net sales related to the North American residential segment were $1,174.2
million for the year ended December 31, 1999, an increase of $168.7 million, or
16.8%, from $1,005.5 million for the year ended December 31, 1998. Of the
$168.7 million increase, $110.7 million was due to sales from the hearth
products acquisitions, acquired heating and air conditioning distributors and
the acquisition of Ducane's HVAC product lines. Excluding acquisitions, there
was an increase of $58.0 million in North American residential net sales,
primarily due to a 2.9% increase in sales of Lennox' existing business, almost
all of which resulted from increased sales volumes, principally caused by two
factors. First, the hot summer in 1998 depleted the inventory levels at Lennox'
customers causing these customers to increase their purchases in the first
quarter of 1999 to refill their inventories. Second, Lennox' volume increased
as a result of sales to new dealers, which were added as a result of programs
to expand Lennox' dealer base.
Sales in the North American retail segment were $218.1 million for the year
ended December 31, 1999, an increase of $208.3 million over the $9.8 million
for the year ended December 31, 1998. The increase was solely a result of
acquisitions.
Commercial air conditioning net sales increased $60.7 million, or 15.5%, to
$452.8 million for the year ended December 31, 1999 compared to the year ended
December 31, 1998. Of this increase, $29.8 million was due to increased sales
volumes in North America primarily due to the effectiveness of commercial sales
districts and $30.9 million was due to increased international sales, $6.5
million of which was due to acquisitions. Net sales related to the commercial
refrigeration segment were $327.3 million for the year ended December 31, 1999,
an increase of $90.0 million, or 37.9%, from $237.3 million for the year ended
December 31, 1998. Of this increase, $86.8 million was due to the international
acquisitions of Heatcraft do Brasil, the Lovelock Luke Pty. Ltd. business and
James N. Kirby Pty. Ltd. North American commercial refrigeration sales
increased $8.0 million primarily due to strong sales to Lennox' supermarket
customers and increased activity with Lennox' large distributors. Heat transfer
revenues increased $41.3 million, or 23.1%, to $220.0 million for the year
ended December 31, 1999 compared to the year ended December 31, 1998. Of this
increase, $7.3 million was due to increased sales volumes in Lennox' existing
North American business and
19
$37.7 million was due to the acquisitions of James N. Kirby Pty. Ltd. and
Livernois Engineering Holding Company.
Gross Profit
Gross profit was $744.3 million for the year ended December 31, 1999
compared to $576.2 million for the year ended December 31, 1998, an increase of
$168.1 million, or 29.2%. Gross profit margin was 31.5% for the year ended
December 31, 1999 and 31.6% for the year ended December 31, 1998. The increase
of $168.1 million in gross profit was primarily attributable to increased sales
in 1999 as compared to 1998. The gross profit margins of Lennox' traditional
businesses increased 0.7% for the twelve months ended December 31,1999 compared
to the twelve months ended December 31, 1998.
Selling, General and Administrative Expense
Selling, general and administrative expenses were $588.4 million for the
year ended December 31, 1999, an increase of $118.8 million, or 25.3%, from
$469.6 million for the year ended December 31, 1998. Selling, general and
administrative expenses represented 24.9% and 25.7% of total revenues for the
twelve months ended December 31, 1999 and 1998, respectively. Of the $118.8
million increase, $99.5 million, or 83.8%, was related to increased
infrastructure associated with acquisitions. The majority of the remaining
$19.3 million increase was due to increases in selling, general and
administrative expenses for the North American residential segment which was
primarily comprised of increases in costs due to additions of personnel,
increased information technology costs and increased sales and marketing
expenses.
Interest Expense, Net
Interest expense, net, for the year ended December 31, 1999 increased to
$33.1 million from $16.2 million for the year ended December 31, 1998. The
increase in interest expense is attributable to the increased use of credit
lines and short-term borrowings to fund acquisitions, to make payments related
to the Pulse inspection program and for increased working capital relating to
increased sales.
Other
Other expense (income) was $(0.3) million for the year ended December 31,
1999 and $1.6 million for the year ended December 31, 1998. Other expense is
primarily comprised of currency exchange gains or losses. The majority of the
reduction in other expense was due to the strengthening of the Canadian dollar.
Minority Interest
Minority interest in subsidiaries' net losses of $(0.1) million for the year
ended December 31, 1999 and $(0.9) million for the year ended December 31, 1998
represents the minority interest in Ets. Brancher, Heatcraft do Brasil and
Kirby joint ventures.
Provision for Income Taxes
The provision for income taxes was $50.1 million for the year ended December
31, 1999 and $37.2 million for the year ended December 31, 1998. The effective
tax rate of 40.6% and 41.4% for the years ended December 31, 1999 and 1998,
respectively, differs from the statutory federal rate of 35.0% principally due
to state and local taxes, non-deductible goodwill expenses and foreign
operating losses for which no tax benefits have been recognized.
Liquidity and Capital Resources
As a result of Lennox' domestic and international growth in 2000, capital
requirements have related principally to acquisitions, the expansion of its
production capacity and increased working capital needs that have accompanied
sales growth.
20
Net cash provided by operating activities totaled $245.1 million, $70.6
million and $5.0 million for 2000, 1999 and 1998, respectively. The increase in
cash from operating activities from 1999 to 2000 is primarily due to the sale
of $130 million of accounts receivable, increased cash income and an increase
in accounts payable. The increase in cash from operating activities from 1998
to 1999 is due primarily to increased cash income, reduced inventory levels and
lower tax payments. Net cash used in investing activities totaled $302.9
million, $407.4 million and $212.4 million for 2000, 1999 and 1998,
respectively. Spending for capital improvements decreased $18.4 million in 2000
versus 1999 and increased $24.3 million in 1999 over 1998. Investments in
acquired businesses accounted for a decrease in investment spending of $86.4
million in 2000 versus 1999 and an increase of $173.7 million for 1999 over
1998. Net cash provided by financing activities was $70.4 million, $338.7
million and $89.5 million for 2000, 1999 and 1998, respectively. Cash for
financing activities was provided by increasing debt $111.2 million in 2000 and
$223.5 million in 1999. A public offering of stock, along with the exercise of
stock options, generated $141.9 million of cash in 1999.
Lennox' capital expenditures were $58.3 million, $76.7 million and $52.4
million for 2000, 1999 and 1998, respectively. Capital expenditures in 2000
related primarily to production equipment and retail facility expansion. These
capital expenditures were financed using cash flow from operations and
available borrowings under Lennox' revolving credit facility.
Acquisitions in 2000 were primarily related to the expansion of the retail
initiative begun in 1998. The Company spent approximately $242 million in cash
and issued $147 million of common stock in 2000 towards this retail expansion,
bringing the total to date to approximately $630 million. No further
acquisitions are planned as of the date of this report.
In June 1999, Lennox acquired James N. Kirby Pty. Ltd., a refrigeration and
heat transfer manufacturer in Australia. The purchase price included 577,500
shares of the Company's common stock with the understanding that if the stock
does not trade at a price greater than $29.09 per share for five consecutive
days from the period from June 2000 to June 2001, then Lennox is obligated to
pay the former owners the difference between the trading price for the last
five days of this period and $29.09 for each share.
At December 31, 2000, Lennox had long-term debt obligations outstanding
totaling $659.0 million. This long-term debt consists primarily of six issues
of notes with an aggregate principal amount of $243.9 million, interest rates
ranging from 6.56% to 8.0% and maturities ranging from 2001 to 2008, and
amounts aggregating $341.7 million borrowed under two $300.0 million revolving
credit agreements. The notes and revolving credit agreements contain
restrictive covenants, including financial maintenance covenants and covenants
that place limitations on Lennox' ability to incur additional indebtedness,
encumber its assets, sell its assets or pay dividends. Upon a change of
control, Lennox must make an offer to repurchase the notes at a price equal to
100% of the principal amount of the notes, plus accrued and unpaid interest.
Lennox' debt service requirement (including principal and interest payments)
for its currently outstanding long-term debt is approximately $79 million for
2001. As of December 31, 2000, Lennox had approximate minimum commitments on
all non-cancelable operating leases of $61.0 million and $35.8 million in 2001
and 2002, respectively.
Lennox' Board of Directors has authorized the purchase of up to 5,000,000 of
its common shares. Through December 2000, 3,587,300 shares have been
repurchased at a total cost of $37.7 million. As of March 2001, there were no
commitments outstanding to purchase the remaining 1,412,700 shares.
Lennox believes that its cash flow from operations and its credit facilities
will be adequate to fund its ongoing operations.
21
Market Risk
Lennox' results of operations can be affected by changes in exchange rates.
Net sales and expenses in currencies other than the United States dollar are
translated into United States dollars for financial reporting purposes based on
the average exchange rate for the period. During 2000, 1999 and 1998, net sales
from outside the United States represented 21.2%, 26.7% and 19.2%,
respectively, of total net sales. Historically, foreign currency transaction
gains (losses) have not had a material effect on Lennox' overall operations.
The Company from time to time enters into foreign exchange contracts to
hedge receivables or payables denominated in foreign currencies. These
contracts do not subject the Company to risk from exchange rate movements
because the gains or losses on the contracts offset losses or gains,
respectively, on the items being hedged. As of December 31, 2000, the Company
had obligations to deliver $9.0 million of various currencies over the next six
months and to take possession of $20.0 million of various currencies over the
next 18 months. The fair value of the various contracts was insignificant as of
December 31, 2000 and a net asset of $1.3 million as of December 31, 1999.
The Company enters into commodity futures contracts to stabilize prices to
be paid for raw materials and parts containing high copper and aluminum
content. These contracts are for quantities equal to, or less than, quantities
expected to be consumed in future production. As of December 31, 2000, the
Company was committed for 33.5 million pounds of aluminum and 44.1 million
pounds of copper under such arrangements. The fair value of these commodity
contracts was an asset of $0.3 million at December 31, 2000 and an asset of
$3.0 million at December 31, 1999.
The Company has contracts with various suppliers to purchase raw materials
with high aluminum content at fixed prices over the next 12 months, thereby
stabilizing costs for these products. As of December 31, 2000, 10.2 million
pounds of such aluminum content was so committed. The fair value of these
commitments was insignificant at December 31, 2000 and December 31, 1999.
Inflation
Historically, inflation has not had a material effect on Lennox' results of
operations.
Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities." This statement establishes accounting and reporting
standards for derivative instruments, including certain derivatives embedded in
other contracts (collectively referred to as derivatives) and for hedging
activities. This statement, for Lennox, is effective with the first quarter of
2001. Lennox does not believe that the adoption of this pronouncement will have
a significant impact on its financial statements.
The Securities and Exchange Commission (SEC) issued Staff Accounting
Bulletin (SAB) 101, "Revenue Recognition in Financial Statements," in December
1999. This bulletin, for the Company, was effective with the fourth quarter of
2000. The SAB summarizes the SEC staff's views in applying generally accepted
accounting principles to revenue recognition in financial statements. The
Company's revenue recognition policies are consistent with SAB 101.
ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk
The information required by this item is included under Item 7 above.
22
ITEM 8. Financial Statements and Supplementary Data
Report of Management
The Company's management is responsible for the preparation and accuracy of
the financial statements. Management believes that the financial statements for
the three years ended December 31, 2000, have been prepared in conformity with
generally accepted accounting principles and set forth a fair presentation of
the financial condition and results of operations.
In meeting its responsibility for the reliability of the financial
statements, management relies on a system of internal accounting controls.
Management believes that the accounting systems and related controls that it
maintains are sufficient to provide reasonable assurance that financial records
are reliable for preparing financial statements and maintaining accountability
for assets. These systems and controls are tested and evaluated regularly by
the Company's internal auditors.
The Audit Committee of the Board of Directors, which is composed solely of
Directors who are independent of the Company, is responsible for monitoring the
Company's accounting and reporting practices. The Audit Committee meets
periodically with the Company's management, the internal auditors and the
independent accountants and monitors the accounting affairs of the Company. The
independent accountants have free access to the Audit Committee and the Board
of Directors to discuss internal accounting control, auditing and financial
reporting matters.
The independent public accountants are engaged to express an opinion on the
Company's consolidated financial statements. They have developed an overall
understanding of our accounting and financial controls and have conducted other
tests as they consider necessary to support their opinion on the financial
statements. The opinion of the independent public accountants is based on
procedures which they believe to be sufficient to provide reasonable assurance
that the financial statements contain no material errors.
Report of Independent Public Accountants
To the Stockholders and Board of Directors of
Lennox International Inc.:
We have audited the accompanying consolidated balance sheets of Lennox
International Inc. (a Delaware corporation) and Subsidiaries as of December 31,
2000 and 1999 and the related consolidated statements of income, stockholders'
equity and cash flows for each of the three years in the period ended December
31, 2000. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Lennox International Inc.
and Subsidiaries as of December 31, 2000 and 1999 and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2000, in conformity with accounting principles generally accepted
in the United States.
ARTHUR ANDERSEN LLP
Dallas, Texas,
February 13, 2001
23
LENNOX INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
As of December 31, 2000 and 1999
(In thousands, except share data)
As of December 31,
ASSETS ----------------------
2000 1999
---------- ----------
CURRENT ASSETS:
Cash and cash equivalents............................ $ 40,633 $ 29,174
Accounts and notes receivable, net................... 399,136 443,107
Inventories.......................................... 359,531 345,424
Deferred income taxes................................ 47,063 25,367
Other assets......................................... 54,847 44,526
---------- ----------
Total current assets............................... 901,210 887,598
PROPERTY, PLANT AND EQUIPMENT, net..................... 354,172 329,966
GOODWILL, net.......................................... 739,468 394,252
OTHER ASSETS........................................... 60,181 71,857
---------- ----------
TOTAL ASSETS....................................... $2,055,031 $1,683,673
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Short-term debt...................................... $ 31,467 $ 22,219
Current maturities of long-term debt................. 31,450 34,554
Accounts payable..................................... 260,208 196,143
Accrued expenses..................................... 242,347 200,221
Income taxes payable................................. 24,448 9,859
---------- ----------
Total current liabilities.......................... 589,920 462,996
LONG-TERM DEBT......................................... 627,550 520,276
DEFERRED INCOME TAXES.................................. 941 928
POSTRETIREMENT BENEFITS, OTHER THAN PENSIONS........... 14,284 15,125
OTHER LIABILITIES...................................... 77,221 72,377
---------- ----------
Total liabilities.................................. 1,309,916 1,071,702
---------- ----------
MINORITY INTEREST...................................... 2,058 14,075
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, 60,368,599 shares and 46,161,607 shares
issued for 2000 and 1999, respectively.............. $ 604 $ 462
Additional paid-in capital........................... 372,690 215,523
Retained earnings.................................... 447,377 409,851
Accumulated other comprehensive loss................. (37,074) (12,706)
Deferred compensation................................ (6,457) (2,848)
Treasury stock, at cost, 3,332,784 shares and
1,172,200 shares for 2000 and 1999, respectively.... (34,083) (12,386)
---------- ----------
Total stockholders' equity......................... 743,057 597,896
---------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY......... $2,055,031 $1,683,673
========== ==========
The accompanying notes are an integral part of these consolidated financial
statements.
24
LENNOX INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
For the Years Ended December 31, 2000, 1999 and 1998
(In thousands, except per share data)
For the Years Ended December 31,
----------------------------------
2000 1999 1998
---------- ---------- ----------
NET SALES................................. $3,247,357 $2,361,667 $1,821,836
COST OF GOODS SOLD........................ 2,206,968 1,617,332 1,245,623
---------- ---------- ----------
Gross profit............................ 1,040,389 744,335 576,213
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSE.................................. 881,778 588,388 469,610
---------- ---------- ----------
Income from operations.................. 158,611 155,947 106,603
INTEREST EXPENSE, net..................... 56,193 33,096 16,184
OTHER..................................... 1,842 (287) 1,602
MINORITY INTEREST......................... (374) (100) (869)
---------- ---------- ----------
Income before income taxes.............. 100,950 123,238 89,686
PROVISION FOR INCOME TAXES................ 41,892 50,084 37,161
---------- ---------- ----------
Net income.............................. $ 59,058 $ 73,154 $ 52,525
========== ========== ==========
EARNINGS PER SHARE:
Basic................................... $ 1.06 $ 1.85 $ 1.50
Diluted................................. $ 1.05 $ 1.81 $ 1.47
The accompanying notes are an integral part of these consolidated financial
statements.
25
LENNOX INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
For the Years Ended December 31, 2000, 1999 and 1998
(In thousands, except per share data)
Common Stock
-------------- Additional Treasury Total
Shares Paid-In Retained Accumulated Other Deferred Stock Stockholders' Comprehensive
Issued Amount Capital Earnings Comprehensive Loss Compensation at Cost Equity Income (Loss)
------ ------ ---------- -------- ------------------ ------------ -------- ------------- -------------
BALANCE AT
DECEMBER 31,
1997............. 34,407 $344 $ 19,260 $309,610 $ (4,029) $ -- $ -- $325,185
Net income...... -- -- -- 52,525 -- -- -- 52,525 $ 52,525
Dividends,
$0.325 per
share.......... -- -- -- (11,284) -- -- -- (11,284) --
Foreign currency
translation
adjustments.... -- -- -- -- (3,919) -- -- (3,919) (3,919)
Minimum pension
liability
adjustments,
net of tax
provision of
$526........... -- -- -- -- (564) -- -- (564) (564)
Common stock
repurchased.... (506) (5) (8,505) -- -- -- -- (8,510) --
Common stock
issued......... 1,646 16 22,134 -- -- -- -- 22,150 --
--------
Comprehensive
income......... -- -- -- -- -- -- -- -- $ 48,042
------ ---- -------- -------- -------- ------- -------- -------- --------
BALANCE AT
DECEMBER 31,
1998............. 35,547 355 32,889 350,851 (8,512) -- -- 375,583
Net income...... -- -- -- 73,154 -- -- -- 73,154 $ 73,154
Dividends,
$0.350 per
share.......... -- -- -- (14,154) -- -- -- (14,154) --
Foreign currency
translation
adjustments.... -- -- -- -- ( 4,029) -- -- (4,029) (4,029)
Minimum pension
liability
adjustments,
net of tax
provision of
$626........... -- -- -- -- (165) -- -- (165) (165)
Deferred
compensation... -- -- -- -- -- (2,848) -- (2,848) --
Common stock
repurchased.... (8) -- (152) -- -- -- (12,386) (12,538) --
Common stock
issued......... 10,623 107 182,786 -- -- -- -- 182,893 --
--------
Comprehensive
income......... -- -- -- -- -- -- -- -- $ 68,960
------ ---- -------- -------- -------- ------- -------- -------- --------
BALANCE AT
DECEMBER 31,
1999............. 46,162 462 215,523 409,851 (12,706) (2,848) (12,386) 597,896
Net income...... -- -- -- 59,058 -- -- -- 59,058 $ 59,058
Dividends,
$0.380 per
share.......... -- -- -- (21,532) -- -- -- (21,532) --
Foreign currency
translation
adjustments.... -- -- -- -- (23,418) -- -- (23,418) (23,418)
Minimum pension
liability
adjustments,
net of tax
provision of
$487........... -- -- -- -- (950) -- -- (950) (950)
Deferred
compensation... -- -- -- -- -- (3,609) -- (3,609) --
Common stock
repurchased.... -- -- -- -- -- -- (25,316) (25,316) --
Common stock
issued......... 14,207 142 157,167 -- -- -- 3,619 160,928 --
--------
Comprehensive
income......... -- -- -- -- -- -- -- -- $ 34,690
------ ---- -------- -------- -------- ------- -------- -------- ========
BALANCE AT
DECEMBER 31,
2000............. 60,369 $604 $372,690 $447,377 $(37,074) $(6,457) $(34,083) $743,057
====== ==== ======== ======== ======== ======= ======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
26
LENNOX INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 2000, 1999 and 1998
(In thousands)
For the Years Ended
December 31,
-------------------------------
2000 1999 1998
--------- --------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income................................... $ 59,058 $ 73,154 $ 52,525
Adjustments to reconcile net income to net
cash provided by operating activities:
Minority interest........................... (374) (100) (869)
Joint venture losses........................ 1,346 3,046 3,111
Depreciation and amortization............... 84,409 57,442 43,545
Loss on disposal of equipment............... 1,290 675 570
Other....................................... (1,066) 283 (130)
Changes in assets and liabilities, net of
effects of acquisitions and dispositions:
Accounts and notes receivable............... 93,347 (19,579) (20,567)
Inventories................................. (3,324) (9,289) (52,445)
Other current assets........................ (1,171) (6,793) (4,739)
Accounts payable............................ 31,046 (26,499) 29,851
Accrued expenses............................ (13,465) (17,595) (17,040)
Deferred income taxes....................... (21,030) 4,535 26,424
Income taxes payable and receivable......... 23,284 18,263 (18,610)
Long-term warranty, deferred income and
other liabilities.......................... (8,257) (6,966) (36,662)
--------- --------- ---------
Net cash provided by operating activities.. 245,093 70,577 4,964
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from the disposal of property, plant
and equipment............................... 3,828 944 538
Purchases of property, plant and equipment... (58,306) (76,712) (52,435)
Investments in joint ventures................ (1,029) (3,412) (458)
Acquisitions, net of cash acquired........... (247,373) (333,739) (160,063)
Proceeds from the sale of businesses......... -- 5,490 --
--------- --------- ---------
Net cash used in investing activities...... (302,880) (407,429) (212,418)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Short-term borrowings (repayments)........... 10,384 (37,722) 36,724
Repayments of long-term debt................. (42,890) (58,346) (12,499)
Long-term borrowings......................... 143,671 319,561 75,044
Sales of common stock........................ 790 141,895 9,607
Repurchases of common stock.................. (25,316) (12,538) (8,510)
Cash dividends paid.......................... (16,263) (14,154) (10,820)
--------- --------- ---------
Net cash provided by financing activities.. 70,376 338,696 89,546
--------- --------- ---------
INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS.................................. 12,589 1,844 (117,908)
EFFECT OF EXCHANGE RATES ON CASH AND CASH
EQUIVALENTS.................................. (1,130) (1,059) (1,505)
CASH AND CASH EQUIVALENTS, beginning of year.. 29,174 28,389 147,802
--------- --------- ---------
CASH AND CASH EQUIVALENTS, end of year........ $ 40,633 $ 29,174 $ 28,389
========= ========= =========
Supplementary disclosures of cash flow
information:
Cash paid during the year for:
Interest.................................... $ 52,675 $ 33,981 $ 20,351
========= ========= =========
Income taxes................................ $ 44,922 $ 43,938 $ 29,347
========= ========= =========
The accompanying notes are an integral part of these consolidated financial
statements.
27
LENNOX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 2000, 1999 and 1998
1. Nature of Operations:
Lennox International Inc., a Delaware corporation, and subsidiaries (the
"Company" or "Lennox"), is a global designer, manufacturer and marketer of a
broad range of products for the heating, ventilation, air conditioning and
refrigeration ("HVACR") markets. The Company participates in five reportable
business segments of the HVACR industry. The first segment is the North
American residential market, in which Lennox manufactures and markets a full
line of heating, air conditioning and hearth products for the residential
replacement and new construction markets in the United States and Canada. The
second segment is the North American retail market which includes sales and
installation of, and maintenance and repair services for, HVACR equipment by
Lennox-owned service centers in the United States and Canada. The third segment
is the global commercial air conditioning market, in which Lennox manufactures
and sells rooftop products and applied systems for commercial applications. The
fourth segment is the global commercial refrigeration market, which consists of
unit coolers, condensing units and other commercial refrigeration products. The
fifth segment is the heat transfer market, in which Lennox designs,
manufactures and sells evaporator and condenser coils, copper tubing and
related manufacturing equipment to original equipment manufacturers and other
specialty purchasers on a global basis. See Note 3 for financial information
regarding the Company's reportable segments.
The Company sells its products to numerous types of customers, including
distributors, installing dealers, homeowners, national accounts and OEMs.
2. Summary of Significant Accounting Policies:
Principles of Consolidation
The consolidated financial statements include the accounts of Lennox
International Inc. and its subsidiaries. All intercompany transactions and
balances have been eliminated. Investments in joint ventures where the Company
has a 50% or less ownership interest are being accounted for using the equity
method of accounting.
Cash Equivalents
The Company considers all highly liquid temporary investments with original
maturity dates of three months or less to be cash equivalents. Cash equivalents
consist of investment grade securities and are stated at cost which
approximates fair value. The Company earned interest income of $2.9 million,
$2.6 million and $4.5 million for the years ended December 31, 2000, 1999 and
1998, respectively, which is included in interest expense, net in the
accompanying Consolidated Statements of Income.
Accounts and Notes Receivable
Accounts and notes receivable have been shown net of an allowance for
doubtful accounts of $23.8 million and $21.2 million as of December 31, 2000
and 1999, respectively. The Company has no significant credit risk
concentration among its diversified customer base.
Inventories
Inventory costs include applicable material, labor, depreciation and plant
overhead. Inventories of $181.2 million and $183.7 million in 2000 and 1999,
respectively, are valued at the lower of cost or market using the last-in,
first-out (LIFO) cost method. The remaining portion of the inventory is valued
at the lower of cost or market with cost being determined either on the first-
in, first-out (FIFO) basis or average cost.
28
LENNOX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
For the Years Ended December 31, 2000, 1999 and 1998
Property, Plant and Equipment
Property, plant and equipment is stated at cost, net of accumulated
depreciation. Expenditures for renewals and betterments are capitalized and
expenditures for maintenance and repairs are charged to expense as incurred.
Gains and losses resulting from the dispositions of property, plant and
equipment are included in Other in the accompanying Consolidated Statements of
Income. Depreciation is computed using the straight-line method over the
following estimated useful lives:
Buildings and improvements 10 to 39 years
Machinery and equipment 3 to 10 years
Goodwill and Other Intangible Assets
Goodwill and other intangible assets have been recorded based on their fair
value at the date of acquisition and are being amortized on a straight-line
basis over periods generally ranging from thirty to forty years. As of December
31, 2000 and 1999, accumulated amortization was $60.7 million and $41.5
million, respectively.
The Company periodically reviews long-lived assets and identifiable
intangibles for impairment as events or changes in circumstances indicate that
the carrying amount of such assets may not be recoverable. In order to assess
recoverability, the Company compares the estimated expected future cash flows
(undiscounted and without interest charges) identified with each long-lived
asset or related asset grouping to the carrying amount of such assets. For
purposes of such comparisons, portions of goodwill are attributed to related
long-lived assets and identifiable intangible assets based upon relative fair
values of such assets at acquisition. If the expected future cash flows do not
exceed the carrying value of the asset or assets being reviewed, an impairment
loss is recognized based on the excess of the carrying amount of the impaired
assets over their fair value. As a result of these periodic reviews, there have
been no adjustments to the carrying value of long-lived assets, identifiable
intangibles, or goodwill in 2000, 1999 and 1998.
Shipping and Handling
Shipping and handling costs are included as part of Selling, General and
Administrative Expense in the accompanying Consolidated Statements of Income in
the following amounts (in thousands):
For the Years Ended December 31,
--------------------------------------------------------------------------------------
2000 1999 1998
-------- -------- -------
$130,084 $116,169 $89,250
Product Warranties
A liability for estimated warranty expense is established by a charge
against operations at the time products are sold. The subsequent costs incurred
for warranty claims serve to reduce the product warranty liability. The Company
recorded warranty expense of $24.0 million, $21.5 million and $15.6 million for
the years ended December 31, 2000, 1999 and 1998, respectively.
The Company's estimate of future warranty costs is determined for each
product line. The number of units that are expected to be repaired or replaced
is determined by applying the estimated failure rate, which is generally based
on historical experience, to the number of units that have been sold and are
still under warranty. The estimated units to be repaired under warranty are
multiplied by the average cost (undiscounted) to repair or replace such
products to determine the Company's estimated future warranty cost. The
Company's estimated future warranty cost is subject to adjustment from time to
time depending on actual experience.
29
LENNOX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
For the Years Ended December 31, 2000, 1999 and 1998
Total liabilities for estimated warranty expense are $62.0 million and $55.7
million as of December 31, 2000 and 1999, respectively, and are included in the
following captions on the accompanying Consolidated Balance Sheets (in
thousands):
December 31,
---------------
2000 1999
------- -------
Accrued expenses............................................. $23,359 $17,272
Other liabilities............................................ 38,624 38,400
------- -------
$61,983 $55,672
======= =======
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 carryforwards. 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 on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date.
Revenue Recognition
Sales are recorded when products are shipped or when services are rendered.
Research and Development
Research and development costs are expensed as incurred. The Company
expended approximately $36.5 million, $39.1 million and $33.3 million for the
years ended December 31, 2000, 1999 and 1998, respectively, for research and
product development activities. Research and development costs are included in
Selling, General and Administrative Expense on the accompanying Consolidated
Statements of Income.
Advertising
Production costs of commercials and programming are charged to operations in
the period first aired. The costs of other advertising, promotion and marketing
programs are charged to operations in the period incurred. Expense relating to
advertising, promotions and marketing programs was $82.8 million, $62.3 million
and $50.2 million for the years ended December 31, 2000, 1999 and 1998,
respectively.
Translation of Foreign Currencies
All assets and liabilities of foreign subsidiaries and joint ventures are
translated into United States dollars using rates of exchange in effect at the
balance sheet date. Revenues and expenses are translated at average exchange
rates during the respective years. The unrealized translation gains and losses
are accumulated in a separate component of stockholders' equity. Transaction
gains (losses) included in Other in the accompanying Consolidated Statements of
Income were $(1,842,000), $287,000 and $(1,602,000) for the years ended
December 31, 2000, 1999 and 1998, respectively.
Foreign Currency Contracts
During 1997, the Company sold forward to May 2003, 165.5 million French
francs as a partial hedge of its investment in its European subsidiary. The
contracted future sales price of the French francs was $31.7
30
LENNOX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
For the Years Ended December 31, 2000, 1999 and 1998
million. On December 31, 1999, the fair value of the contracts was $6.3
million. In March 2000, the hedge contracts were redeemed for a net cash
settlement of $4.0 million. The gain, net of tax, resulting from these
contracts was recorded as a component of accumulated other comprehensive loss
in the accompanying 2000, 1999 and 1998 Consolidated Statements of
Stockholders' Equity.
The Company from time to time enters into foreign exchange contracts to
hedge receivables or payables denominated in foreign currencies. These
contracts do not subject the Company to risk from exchange rate movements
because the gains or losses on the contracts offset losses or gains,
respectively, on the items being hedged. As of December 31, 2000, the Company
had obligations to deliver $9.0 million of various currencies over the next six
months and to take possession of $20.0 million of various currencies over the
next 18 months. The fair value of the various contracts was insignificant as of
December 31, 2000 and a net asset of $1.3 million as of December 31, 1999.
Purchase Commitments
The Company has contracts with various suppliers to purchase raw materials
with high aluminum content at fixed prices over the next 12 months. As of
December 31, 2000, 10.2 million pounds of such aluminum content was so
committed. The fair value of these commitments was insignificant at December
31, 2000 and December 31, 1999.
Commodity Contracts
The Company enters into commodity futures contracts to stabilize prices to
be paid for raw materials and parts containing high copper and aluminum
content. These contracts are for quantities equal to, or less than, quantities
expected to be consumed in future production. As of December 31, 2000, the
Company was committed for 33.5 million pounds of aluminum and 44.1 million
pounds of copper under such arrangements. The fair value of these commodity
contracts was an asset of $0.3 million at December 31, 2000 and an asset of
$3.0 million at December 31, 1999.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Reclassifications
Certain amounts have been reclassified from the prior year presentation to
conform to the current year presentation.
31
LENNOX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
For the Years Ended December 31, 2000, 1999 and 1998
3. Reportable Business Segments:
In accordance with Statement of Financial Accounting Standards ("SFAS") No.
131, the Company discloses business segment data for its reportable business
segments, which have been determined using the "management approach." The
management approach is based on the way segments are organized within the
Company for making operating decisions and assessing performance. The Company's
business operations are organized within five reportable business segments as
follows (in thousands):
For the Years Ended December 31,
----------------------------------
2000 1999 1998
---------- ---------- ----------
Net Sales
North American residential............. $1,221,847 $1,174,166 $1,005,536
North American retail.................. 1,053,235 218,093 9,785
Commercial air conditioning............ 469,155 452,803 392,053
Commercial refrigeration............... 358,257 327,266 237,264
Heat transfer(1)....................... 246,750 219,995 178,772
Eliminations........................... (101,887) (30,656) (1,574)
---------- ---------- ----------
$3,247,357 $2,361,667 $1,821,836
========== ========== ==========
Income (Loss) from Operations
North American residential............. $ 109,053 $ 128,842 $ 123,116
North American retail.................. 34,011 10,456 590
Commercial air conditioning............ 12,421 10,435 (6,579)
Commercial refrigeration............... 31,102 25,915 20,383
Heat transfer.......................... 14,971 12,592 12,700
Corporate and other(2)................. (39,673) (30,241) (43,327)
Eliminations........................... (3,274) (2,052) (280)
---------- ---------- ----------
$ 158,611 $ 155,947 $ 106,603
========== ========== ==========
As of December 31,
----------------------
2000 1999
---------- ----------
Total Assets
North American residential......................... $ 529,492 $ 583,269
North American retail.............................. 800,719 304,604
Commercial air conditioning........................ 215,656 251,226
Commercial refrigeration........................... 239,783 252,176
Heat transfer...................................... 149,813 179,615
Corporate and other................................ 144,547 127,320
Eliminations....................................... (24,979) (14,537)
---------- ----------
$2,055,031 $1,683,673
========== ==========
- --------
(1) The heat transfer segment had intersegment sales of $20,987, $22,493 and
$32,307 in 2000, 1999 and 1998, respectively.
(2) Includes a $5,100 charge in 2000 for closing certain Latin American
operations.
32
LENNOX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
For the Years Ended December 31, 2000, 1999 and 1998
For the Years Ended
December 31,
-----------------------
2000 1999 1998
------- ------- -------
Capital Expenditures
North American residential........................ $20,467 $16,313 $16,033
North American retail............................. 9,365 1,507 166
Commercial air conditioning....................... 10,984 8,666 7,129
Commercial refrigeration.......................... 7,299 9,402 7,367
Heat transfer..................................... 5,224 16,388 12,136
Corporate and other(1)............................ 4,967 24,436 9,604
------- ------- -------
$58,306 $76,712 $52,435
======= ======= =======
- --------
(1) The increase in corporate and other for 1999 is primarily due to an
increase in expenditures related to the implementation of SAP and the
construction of headquarters offices.
For the Years Ended
December 31,
-----------------------
2000 1999 1998
------- ------- -------
Depreciation and Amortization
North American residential........................ $22,206 $18,852 $16,513
North American retail............................. 24,017 5,108 306
Commercial air conditioning....................... 7,927 7,556 6,364
Commercial refrigeration.......................... 11,990 11,437 9,382
Heat transfer..................................... 11,265 9,855 5,914
Corporate and other............................... 7,004 4,634 5,066
------- ------- -------
$84,409 $57,442 $43,545
======= ======= =======
The following table sets forth certain financial information relating to the
Company's operations by geographic area (in thousands):
For the Years Ended December 31,
--------------------------------
2000 1999 1998
---------- ---------- ----------
Net Sales to External Customers
United States........................... $2,559,835 $1,730,362 $1,472,342
Canada.................................. 285,834 250,184 104,954
International........................... 401,688 381,121 244,540
---------- ---------- ----------
Total net sales to external
customers............................ $3,247,357 $2,361,667 $1,821,836
========== ========== ==========
As of December 31,
-------------------
2000 1999
---------- --------
Long-Lived Assets
United States......................................... $ 910,630 $548,963
Canada................................................ 98,712 98,258
International......................................... 144,479 148,854
---------- --------
Total long-lived assets............................. $1,153,821 $796,075
========== ========
33
LENNOX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
For the Years Ended December 31, 2000, 1999 and 1998
4. Inventories:
Components of inventories are as follows (in thousands):
As of December
31,
-----------------
2000 1999
-------- --------
Finished goods............................................ $216,547 $219,303
Repair parts.............................................. 35,024 36,153
Work in process........................................... 23,606 20,957
Raw materials............................................. 132,298 117,209
-------- --------
407,475 393,622
Reduction for last-in, first-out.......................... 47,944 48,198
-------- --------
$359,531 $345,424
======== ========
5. Property, Plant and Equipment:
Components of property, plant and equipment are as follows (in thousands):
As of December 31,
--------------------
2000 1999
--------- ---------
Land................................................... $ 26,660 $ 24,899
Buildings and improvements............................. 179,646 171,322
Machinery and equipment................................ 586,019 499,018
--------- ---------
Total.............................................. 792,325 695,239
Less--accumulated depreciation......................... (438,153) (365,273)
--------- ---------
Property, plant and equipment, net..................... $ 354,172 $ 329,966
========= =========
6. Acquisitions:
Hearth Companies
During June and July 1998, the Company purchased substantially all of the
assets and certain liabilities of Superior Fireplace Co. and all of the
outstanding stock of Marco Mfg. Inc. and Pyro Industries Inc. The aggregate
purchase price for these acquisitions was $102.9 million, of which $99.1
million was in cash and $3.8 million was in the form of a note payable in 1999.
These acquisitions were accounted for in accordance with the purchase method of
accounting. Accordingly, the aggregate purchase price was allocated to assets
totaling $131.5 million and to liabilities totaling $28.6 million of the
acquired companies based upon the fair value of those assets and liabilities.
As a result, the Company recorded goodwill of approximately $73.8 million which
is being amortized on a straight-line basis over 40 years. The results of
operations of the acquired Hearth companies have been fully consolidated with
those of the Company since the dates of acquisition and are included in the
North American residential segment.
Heatcraft do Brasil
During August 1998, the Company purchased 84% of the outstanding stock of
Heatcraft do Brasil, a Brazilian company engaged in the manufacture and sale of
refrigeration, automotive air conditioning equipment and heat transfer
products. The purchase price of $20.5 million in cash was allocated to the
acquired assets and
34
LENNOX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
For the Years Ended December 31, 2000, 1999 and 1998
liabilities based upon the fair value of those assets and liabilities and the
excess of $11.3 million was allocated to goodwill, which is being amortized on
a straight-line basis over 40 years. The results of operations of Heatcraft do
Brasil have been consolidated with those of the Company since the date of
acquisition and are included in the commercial refrigeration segment.
1998 Service Centers
In September 1998, the Company's Lennox Industries Inc. subsidiary undertook
a program of acquiring businesses ("the Service Centers") that had been retail
outlets for the Company's and other manufacturers' products. In 1998, fourteen
of these businesses (the "1998 Service Centers") in Canada were purchased for
$22.9 million in cash. These acquisitions were accounted for in accordance with
the purchase method of accounting and accordingly the purchase price was
allocated to the fair values of the assets acquired and liabilities assumed,
with the excess of $19.0 million being allocated to goodwill, which is being
amortized on a straight-line basis over 40 years. The results of the operations
of the 1998 Service Centers have been fully consolidated with those of the
Company since the dates of acquisition and are included in the North American
retail segment.
The following table presents the unaudited pro forma results as if the
Hearth Companies, Heatcraft do Brasil and the 1998 Service Centers had been
acquired on January 1, 1998 (in thousands except per share data).
Year Ended
December 31,
------------
1998
------------
Net sales....................................................... $1,944,036
Net income...................................................... 47,325
Basic earnings per share........................................ 1.36
Diluted earnings per share...................................... 1.32
1999 Service Centers
In 1999, the Company acquired forty-six additional Service Centers in Canada
and thirty-three in the United States (the "1999 Service Centers"), bringing
the total number acquired to ninety-three. The cost to acquire the 1999 Service
Centers was $218.0 million, $209.1 million of which was paid in cash and $8.9
million of which was paid in shares of the Company's stock (802,723 shares).
Under the purchase method of accounting, $58.1 million was allocated to the
fair values of the assets and liabilities acquired and the excess of $159.9
million was allocated to goodwill, which is being amortized on a straight-line
basis over 40 years. The results of operations of the 1999 Service Centers
acquired have been fully consolidated with the results of the Company since the
various dates of acquisition and are included in the North American retail
segment.
Livernois
In May 1999, the Company acquired Livernois Engineering Holding Company, its
operating subsidiary and its licensed patents for $20.5 million. Livernois
produces heat transfer manufacturing equipment for the HVACR and automotive
industries. The purchase price, consisting of cash of $13.1 million and $7.4
million in shares of the Company's common stock (304,953 shares), was
allocated, based on fair value, to identifiable assets totaling $16.0 million
and to liabilities totaling $3.0 million, with $7.5 million being allocated to
goodwill. The goodwill is being amortized on a straight-line basis over 40
years. The acquisition was accounted
35
LENNOX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
For the Years Ended December 31, 2000, 1999 and 1998
for in accordance with the purchase method of accounting. The results of the
operations of Livernois have been fully consolidated with those of the Company
since the date of acquisition and are included in the heat transfer segment.
Kirby
In June 1999, the Company acquired the outstanding stock of James N. Kirby
Pty. Ltd. ("Kirby"), an Australian manufacturer and distributor of
refrigeration and heat transfer products. The purchase price of $65.5 million
was paid in cash and in shares of the Company's common stock (650,430 shares)
in the amounts of $49.4 million and $16.1 million, respectively. If Lennox
common stock does not trade at a price greater than $29.09 per share for five
consecutive days from the period from June 2000 to June 2001, then Lennox is
obligated to pay the former owners of Kirby the difference between the trading
price for the last five days of this period and $29.09 for 577,500 of the
shares of Lennox common stock (approximately $12.2 million as of December 31,
2000). The acquisition was accounted for in accordance with the purchase method
of accounting, and accordingly, the purchase price was allocated, based on fair
value, to identifiable assets totaling $83.2 million and to liabilities
totaling $56.7 million, with $39.0 million being allocated to goodwill, which
is being amortized on a straight-line basis over 40 years. In order to finance
the cash portion of the purchase price, the Company borrowed approximately
$48.3 million in the form of three promissory notes. The first promissory note
of $16.1 million bore interest at 5.68% and was paid in December 1999 as part
of a permanent financing arrangement. The second promissory note of $11.4
million which bore no interest was paid in December 1999. The third promissory
note of $20.8 million is payable $11.0 million in 2001 and $9.8 million in
2002. The stated interest rate on the third promissory note increases from no
interest in year one to 4% in year three. Accordingly, the Company recorded a
discount on the third promissory note of $2.3 million, which is being amortized
over three years, to record the promissory note at fair value. The goodwill is
being amortized on a straight-line basis over 40 years. In conjunction with the
acquisition, the Company assumed a $20.5 million promissory note bearing
interest at 5.5% which was paid upon the arranging of permanent financing. The
results of the operations of James N. Kirby Pty. Ltd. have been fully
consolidated with those of the Company since the date of acquisition and are
included in the commercial refrigeration and heat transfer segments.
Excel Comfort Systems Inc.
In October 1999, the Company purchased certain heating and air conditioning
manufacturing related assets from The Ducane Company, Inc. and a related
company. Certain related liabilities were also assumed. The cash purchase price
of $52.8 million was allocated, in accordance with the purchase method of
accounting, to the fair values of the assets ($40.9 million) and the
liabilities ($8.2 million) with $20.1 million being allocated to goodwill. This
goodwill is being amortized on a straight-line basis over 40 years. The results
of operations of the Company include, on a fully consolidated basis, the
results of this acquisition, and are included in the North American residential
segment.
The following table presents the unaudited pro forma results as if the 1999
Service Centers, Livernois, Kirby and Excel had been acquired on January 1,
1998 (in thousands, except per share data):
Year Ended December
31,
---------------------
1999 1998
---------- ----------
Net sales............................................. $2,718,293 $2,357,995
Net income............................................ 83,693 63,606
Basic earnings per share.............................. 2.06 1.73
Diluted earnings per share............................ 2.02 1.70
36
LENNOX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
For the Years Ended December 31, 2000, 1999 and 1998
Service Experts Inc.
On January 21, 2000, the Company acquired Service Experts Inc., a holding
company owning retail outlets for heating and air conditioning products and
services. The acquisition took place in the form of a merger wherein 0.67 of a
share of the Company's common stock was exchanged for each share of Service
Experts Inc. common stock. The 12.2 million shares so exchanged were valued at
approximately $140.5 million. In addition, transaction costs of approximately
$4.1 million were paid and $162.7 million of Service Experts Inc. debt was
assumed and concurrently repaid, resulting in a total purchase price of $307.3
million. The acquisition was accounted for under the purchase method of
accounting, under which, approximately $154.6 million was allocated to the fair
value of the assets acquired, approximately $118.8 million was allocated to the
fair value of liabilities assumed and $271.5 million was allocated to goodwill,
which is being amortized on a straight-line basis over 40 years. The results of
Service Experts Inc. have been fully consolidated with those of the Company
since the date of acquisition.
2000 Service Centers
In 2000, the Company acquired ten Service Centers in the United States and
three Service Centers in Canada (the "2000 Service Centers") for a total price
of approximately $60.0 million in cash. In addition, approximately $21.7
million in contingent considerations was paid in 2000 related to Service
Centers acquired in 1999. Of this $21.7 million, $6.2 million was in the form
of 558,835 shares of the Company's common stock. The purchase of the Service
Centers in 2000 and the additional payments on the 1999 Service Centers were
accounted for under the purchase method of accounting. Based on current
estimates, which are subject to revision at later dates, $85.4 million was
allocated to goodwill, which is being amortized on a straight-line basis over
40 years. The results of operations of the 2000 Service Centers have been fully
consolidated with those of the Company since the respective dates of
acquisition.
Europe
On April 5, 2000, the Company purchased the remaining 30% ownership in Ets.
Brancher S.A., the holding company owning the Company's interest in companies
in France. The Company paid $16.4 million for the interest and under the
purchase method of accounting recorded an elimination of minority interest of
approximately $12.0 million and additional goodwill of approximately $4.4
million.
The following table presents the unaudited pro forma results as if Service
Experts Inc., the 2000 Service Centers and the remaining ownership of Europe
had been acquired January 1, 1999 (in thousands, except per share data):
Year Ended December
31,
---------------------
2000 1999
---------- ----------
Net Sales............................................. $3,296,231 $2,983,517
Net Income............................................ 59,975 68,193
Basic earnings per share.............................. 1.07 1.30
Diluted earnings per share............................ 1.07 1.28
37
LENNOX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
For the Years Ended December 31, 2000, 1999 and 1998
7. Long-Term Debt and Lines of Credit:
Long-term debt at December 31 consists of the following (in thousands):
2000 1999
-------- --------
Floating rate revolving loans payable in 2004, currently at
7.9%........................................................ $341,670 $258,000
6.73% promissory notes, payable $11,111 annually, 2001
through 2008................................................ 88,889 100,000
9.53% promissory notes, retired in 2000...................... -- 11,000
7.06% promissory note, payable $10,000 annually in 2004 and
2005........................................................ 20,000 20,000
6.56% promissory notes, payable in 2005...................... 25,000 25,000
6.75% promissory notes, payable in 2008...................... 50,000 50,000
11.10% mortgage note, retired in 2000........................ -- 6,702
8% promissory note, payable in 2010.......................... 35,000 --
7.75% promissory note, payable in 2005....................... 25,000 --
Promissory notes with options to convert to common stock,
payable $3,451 in 2001 and 2002, $1,546 in 2003 with
interest rates ranging from 5.22% to 5.96%.................. 8,448 --
Promissory note, payable $9,844 in 2001 and $9,024 in 2002... 18,868 22,000
Long-term debt of European subsidiary with interest rates
ranging from 3.6% to 6.5%................................... 7,665 11,745
Floating rate term loan, currently at 7.98%, payable $2,794
in 2001 and 2002............................................ 5,588 9,840
Floating rate term loan, currently 8.24%, payable $3,912 in
2003 and $4,470 in 2004..................................... 8,382 9,840
Floating rate term loan, currently at 7.98%, payable in
2004........................................................ 10,058 8,738
Floating rate term loan, currently at 8.24% payable in 2004.. 11,400 9,903
Floating rate term loan, converted to revolving facility in
2000........................................................ -- 6,560
Capitalized lease obligations and other...................... 3,032 5,502
-------- --------
659,000 554,830
Less current maturities...................................... 31,450 34,554
-------- --------
$627,550 $520,276
======== ========
At December 31, 2000 the aggregate amounts of required payments on long-term
debt are as follows (in thousands):
2001................................................................ $ 31,450
2002................................................................ 29,045
2003................................................................ 17,698
2004................................................................ 389,491
2005................................................................ 72,154
Thereafter.......................................................... 119,162
--------
$659,000
========
The Company has bank lines of credit aggregating $678 million, of which $395
million was outstanding at December 31, 2000 with the remaining $283 million
available for future borrowings, subject to covenant limitations. Included in
the lines of credit are two $300 million domestic facilities governed by
revolving credit facility agreements between the Company and syndicates of
banks. The facilities contain certain financial covenants and bear interest, at
the Company's option, at a rate equal to either (a) the greater of the bank's
prime rate or the federal fund's rate plus 0.5% or (b) the London Interbank
Offered Rate plus a margin equal to 0.5% to 1.25%, depending upon the ratio of
total funded debt to EBITDA. The Company pays a commitment fee equal to 0.10%
to 0.30% of the unused commitment, depending upon the ratio of total funded
debt to
38
LENNOX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
For the Years Ended December 31, 2000, 1999 and 1998
EBITDA. The agreements provide restrictions on the Company's ability to incur
additional indebtedness, encumber its assets, sell its assets, or pay
dividends.
During the second quarter of 2000, the Company entered into an asset
securitization arrangement. Pursuant to the arrangement, $130.0 million of
domestic trade receivables were sold on a non-recourse basis each succeeding
month. The accounts receivable that were sold are shown as a reduction of
accounts and notes receivable, in the accompanying Consolidated Balance Sheets.
The loss on the sale of such receivables of $5.3 million is included as part of
Selling, General and Administrative Expense in the accompanying Consolidated
Statements of Income.
8. Income Taxes:
The income tax provision (benefit) consisted of the following (in
thousands):
For the Years Ended
December 31,
------------------------
2000 1999 1998
------- ------- -------
Current:
Federal.......................................... $34,044 $36,089 $15,820
State............................................ 2,493 1,561 944
Foreign.......................................... 6,660 6,918 (6,027)
------- ------- -------
Total current.................................. 43,197 44,568 10,737
------- ------- -------
Deferred:
Federal.......................................... (3,566) 3,914 30,946
State............................................ (201) 330 2,237
Foreign.......................................... 2,462 1,272 (6,759)
------- ------- -------
Total deferred................................. (1,305) 5,516 26,424
------- ------- -------
Total income tax provision..................... $41,892 $50,084 $37,161
======= ======= =======
The difference between the income tax provision computed at the statutory
federal income tax rate and the financial statement provision for taxes is
summarized as follows (in thousands):
2000 1999 1998
------- ------- -------
Provision at the U.S. statutory rate of 35%....... $35,332 $43,133 $31,390
Increase (reduction) in tax expense resulting
from:
State income tax, net of federal income tax
benefit........................................ 1,485 1,232 705
Foreign losses not providing a current benefit.. 4,954 2,282 3,572
Goodwill and other permanent items.............. 3,243 2,292 1,261
Foreign taxes at rates other than 35% and
miscellaneous other............................ (3,122) 1,145 233
------- ------- -------
Total income tax provision.................... $41,892 $50,084 $37,161
======= ======= =======
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 noncurrent depending
on the timing of the expected realization. The deferred tax provision (benefit)
for the periods shown represents the effect of changes in the amounts of
temporary differences during those periods.
39
LENNOX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
For the Years Ended December 31, 2000, 1999 and 1998
Deferred tax assets (liabilities), as determined under the provisions of
SFAS No. 109, "Accounting for Income Taxes," were comprised of the following at
December 31 (in thousands):
2000 1999
-------- --------
Gross deferred tax assets:
Warranties........................................... $ 23,288 $ 18,997
Foreign NOLs......................................... 22,328 17,767
Postretirement and pension benefits.................. 3,736 6,478
Inventory reserves................................... 9,905 10,549
Receivable allowance................................. 6,812 6,122
Compensation reserves................................ 16,809 5,601
Deferred income...................................... 7,547 1,505
Other................................................ 10,980 4,890
-------- --------
Total deferred tax assets.......................... 101,405 71,909
Valuation allowance................................ (18,490) (17,767)
-------- --------
Net deferred tax assets............................ 82,915 54,142
-------- --------
Gross deferred tax liabilities:
Depreciation......................................... (21,425) (14,440)
Intangibles.......................................... (5,143) (2,327)
Other................................................ (6,924) ( 8,398)
-------- --------
Total deferred tax liabilities..................... (33,492) (25,165)
-------- --------
Net deferred tax asset................................. $ 49,423 $ 28,977
======== ========
The Company has net operating loss carryforwards, mainly in Europe, which
expire at various dates in the future. The deferred tax asset valuation
allowance relates primarily to the operating loss carryforwards in Europe. The
net change in the deferred tax asset valuation reserve for the year ended
December 31, 2000 was an increase of $723. The increase is primarily the result
of increased foreign losses.
No provision has been made for income taxes which may become payable upon
distribution of the foreign subsidiaries' earnings since management considers
substantially all of these earnings permanently invested. As of December 31,
2000, the unrecorded deferred tax liability related to the undistributed
earnings of the Company's foreign subsidiaries was insignificant.
9. Current Accrued Expenses:
Significant components of current accrued expenses are as follows (in
thousands):
December 31,
-----------------
2000 1999
-------- --------
Accrued wages............................................. $ 65,209 $ 63,034
Accrued warranties........................................ 23,359 17,272
Other..................................................... 153,779 119,915
-------- --------
Total current accrued expenses.......................... $242,347 $200,221
======== ========
40
LENNOX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
For the Years Ended December 31, 2000, 1999 and 1998
10. Employee Benefit Plans:
Profit Sharing Plans
The Company maintains noncontributory profit sharing plans for its eligible
domestic salaried employees. These plans are discretionary as the Company's
contributions are determined annually by the Board of Directors. Provisions for
contributions to the plans amounted to $7.2 million, $15.0 million and $13.6
million in 2000, 1999 and 1998, respectively.
Employee Benefits Trust
The Company also has an Employee Benefits Trust (the "Trust") to provide
eligible employees of the Company, as defined, with certain medical benefits.
Trust contributions are made by the Company as defined by the Trust agreement.
Employee Stock Purchase Plan
The Company has an employee stock purchase plan for which 825,000 shares of
common stock have been reserved. The shares are offered for sale to employees
only, through payroll deductions, at prices equal to 85% of the lesser of the
fair market value of the Company's common stock on the first day of the
offering period or the last day of the offering period. Under the plan,
participating employees purchased 653,619 and 155,667 shares in 2000 and 1999,
respectively.
41
LENNOX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
For the Years Ended December 31, 2000, 1999 and 1998
Pension and Postretirement Benefit Plans
The Company has domestic and foreign pension plans covering substantially
all employees. The Company makes annual contributions to the plans equal to or
greater than the statutory required minimum. The Company also maintains an
unfunded postretirement benefit plan which provides certain medical and life
insurance benefits to eligible employees. The pension plans are accounted for
under provisions of SFAS No. 87, "Employers' Accounting for Pensions." The
postretirement benefit plan is accounted for under the provisions of SFAS No.
106, "Employers' Accounting for Postretirement Benefits Other than Pensions."
The following table sets forth amounts recognized in the Company's financial
statements and the plans' funded status (in thousands):
Pension Benefits Other Benefits
------------------ ------------------
2000 1999 2000 1999
-------- -------- -------- --------
Changes in benefit obligation:
Benefit obligation at beginning of
year............................... $140,520 $134,821 $ 17,377 $ 16,298
Service cost........................ 4,339 4,446 593 556
Interest cost....................... 10,238 9,596 1,125 1,125
Plan participants' contributions.... 128 133 1,579 1,469
Amendments.......................... 1,025 2,279 -- 1,412
Actuarial (gain)/loss............... 3,497 (1,849) 642 (424)
Exchange rate changes............... -- -- -- --
Benefits paid....................... (9,095) (8,906) (3,810) (3,059)
-------- -------- -------- --------
Benefit obligation at end of year... 150,652 140,520 17,506 17,377
-------- -------- -------- --------
Changes in plan assets:
Fair value of plan assets at
beginning of year.................. 163,987 144,869 -- --
Actual return on plan assets........ (4,073) 22,561 -- --
Employer contribution............... 4,488 3,285 2,231 1,590
Plan participants' contributions.... 128 133 1,579 1,469
Actuarial (loss)/gain............... (690) 1,359 -- --
Benefits paid....................... (8,354) (8,220) (3,810) (3,059)
-------- -------- -------- --------
Fair value of plan assets at end of
year............................... 155,486 163,987 -- --
-------- -------- -------- --------
Funded status......................... 4,834 23,467 (17,506) (17,377)
Unrecognized actuarial (gain)/loss.. (6,216) (28,362) 454 (431)
Unrecognized prior service cost..... 9,268 8,897 1,323 1,238
Unrecognized net obligation......... 500 556 -- --
-------- -------- -------- --------
Net amount recognized................. $ 8,386 $ 4,558 $(15,729) $(16,570)
======== ======== ======== ========
Amounts recognized in the consolidated
balance sheets consist of:
Prepaid benefit cost................ $ 20,783 $ 16,442 $ -- $ --
Accrued benefit liability........... (18,056) (13,813) (15,729) (16,570)
Intangible assets................... 2,501 281 -- --
Accumulated other comprehensive
loss............................... 3,158 1,648 -- --
-------- -------- -------- --------
Net amount recognized............... $ 8,386 $ 4,558 $(15,729) $(16,570)
======== ======== ======== ========
Weighted average assumptions as of
December 31:
Discount rate....................... 7.75% 7.75% 7.75% 7.75%
Expected return on plan assets...... 9.50 9.50 -- --
Rate of compensation increase....... 4.00 4.00 -- --
42
LENNOX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
For the Years Ended December 31, 2000, 1999 and 1998
For measurement purposes, a 7.1% annual rate of increase in the per capita
cost of covered health care benefits was assumed for 2000. The rate was assumed
to decrease gradually to 5.0% by 2003 and remain at that level thereafter.
Pension Benefits Other Benefits
---------------------------- ------------------------
2000 1999 1998 2000 1999 1998
-------- -------- -------- ------ ------- -------
(in thousands)
Components of net
periodic benefit cost:
Service cost.......... $ 4,339 $ 4,446 $ 3,875 $ 593 $ 556 $ 494
Interest cost......... 10,238 9,596 9,128 1,125 1,125 1,128
Expected return on
plan assets.......... (13,819) (12,344) (10,931) -- -- --
Amortization of prior
service cost......... 649 730 880 (173) (173) (173)
Recognized actuarial
(gain)/loss.......... (199) 100 -- (155) (1,304) (1,297)
Recognized transition
obligation........... 129 106 -- -- -- --
-------- -------- -------- ------ ------- -------
Net periodic benefit
cost................. $ 1,337 $ 2,634 $ 2,952 $1,390 $ 204 $ 152
======== ======== ======== ====== ======= =======
The benefit obligation and fair value of plan assets for the pension plans
with benefit obligations in excess of plan assets were approximately
$33,777,000 and $12,863,000, respectively, as of December 31, 2000, and
$22,835,000 and $8,332,000, respectively, as of December 31, 1999.
Assumed health care cost trend rates have a significant effect on the
amounts reported for the health care plan. A one-percentage-point change in
assumed health care cost trend rates would have the following effects (in
thousands):
1-Percentage- 1-Percentage-
Point Point
Increase Decrease
------------- -------------
Effect on total of service and interest cost
components................................... $ 247 $ (214)
Effect on the post-retirement benefit
obligation................................... 2,011 (1,811)
11. Stock-Based Compensation Plans:
Stock Option and Restricted Stock Plan
The Company has a Stock Option and Restricted Stock Plan, which was amended
in September 1998 (the "1998 Incentive Plan"). The 1998 Incentive Plan is
accounted for under APB Opinion No. 25, under which no compensation cost has
been recognized. If the 1998 Incentive Plan had been accounted for under the
provisions of SFAS No. 123, "Accounting for Stock-Based Compensation," the
Company's net income would have been adjusted to the following pro forma
amounts (in thousands, except per share data):
Years Ended December
31,
-----------------------
2000 1999 1998
------- ------- -------
Net income: As reported $59,058 $73,154 $52,525
Pro forma 56,252 71,864 52,525
Basic earnings per share: As reported $ 1.06 $ 1.85 $ 1.50
Pro forma 1.01 1.81 1.50
Diluted earnings per share: As reported $ 1.05 $ 1.81 $ 1.47
Pro forma 1.00 1.77 1.47
43
LENNOX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
For the Years Ended December 31, 2000, 1999 and 1998
Because the method of accounting under SFAS No. 123 has not been applied to
options granted prior to January 1, 1995, the resulting pro forma compensation
cost may not be representative of that to be expected in future years.
Under the 1998 Incentive Plan, the Company is authorized to issue options
for 11,154,706 shares of common stock. As of December 31, 2000, options for
11,370,094 shares of common stock have been granted and options for 982,977
shares have been cancelled or repurchased. Consequently, as of December 31,
2000, there are options for 767,589 shares available for grant. Under the 1998
Incentive Plan, the option exercise price equals the stock's fair value on the
date of grant. The 1998 Incentive Plan options granted prior to 1998 vest on
the date of grant. The 1998 Incentive Plan options granted in 2000, 1999 and
1998 vest over three years. The 1998 Incentive Plan options issued prior to
December 2000 expire after ten years, with options issued in December 2000
expiring after seven years.
The Company has, in connection with the acquisition of Service Experts Inc.,
assumed 416,059 outstanding stock options which are outstanding and fully
vested.
A summary of option activity follows (in thousands, except per share data):
Years Ended December 31,
--------------------------------------------------
2000 1999 1998
---------------- ---------------- ----------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
------ -------- ------ -------- ------ --------
Outstanding at beginning
of year................ 5,553 $12.47 3,798 $12.92 3,822 $10.13
Granted................. 2,356 8.22 1,915 11.27 1,071 18.87
Exercised............... (101) 7.84 (157) 8.40 (1,048) 9.04
Forfeited............... (156) 14.42 (3) 19.03 (47) 8.64
Additional shares
reserved............... 416 26.35 -- -- -- --
----- ------ ----- ------ ------ ------
Outstanding at end of
year................... 8,068 $11.97 5,553 $12.47 3,798 $12.92
===== ====== ===== ====== ====== ======
Exercisable at end of
year................... 4,216 $13.78 2,952 $11.77 2,737 $12.92
===== ====== ===== ====== ====== ======
Fair value of options
granted................ $ 1.21 $ 3.83 $ 5.83
====== ====== ======
The following table summarizes information about stock options outstanding
at December 31, 2000 (in thousands, except per share data):
Options Outstanding Options Exercisable
-------------------------------- ---------------------
Weighted Weighted
Average Average Weighted
Remaining Exercise Average
Contractual Price Exercise
Number Life per Number Price
Range of Exercise Prices Outstanding (Years) Share Exercisable per Share
------------------------ ----------- ----------- -------- ----------- ---------
$7.28-$7.88............. 1,306 5 $ 7.51 1,111 $ 7.45
$8.19................... 2,133 7 8.19 -- --
$9.50-$11.56............ 1,802 9 11.15 612 11.15
$13.21-$19.77........... 2,632 7 16.02 2,298 15.65
$24.91-$49.63........... 195 7 36.08 195 36.08
----- --- ------ ----- ------
Total................. 8,068 7 $11.97 4,216 $13.78
===== === ====== ===== ======
44
LENNOX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
For the Years Ended December 31, 2000, 1999 and 1998
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option pricing model with the following weighted average
assumptions:
December 31,
----------------
2000 1999 1998
---- ---- ----
Expected dividend yield.................................... 4.0% 4.0% 2.0%
Risk-free interest rate.................................... 5.35% 6.5% 6.0%
Expected volatility........................................ 46.6% 19.0% --
Expected life (in years)................................... 7 10 10
Long-Term Incentive Plan
Prior to 1999, the Company provided a long-term incentive plan, the Lennox
International Inc. Performance Share Plan (the "Performance Plan") to certain
employees. During 1998, the Company terminated the Performance Plan. Under the
Performance Plan, participants earned shares of the Company's common stock in
accordance with a discretionary formula established by the Board of Directors
based on the Company's performance over a three-year period. The value of the
shares earned was determined using an independent appraisal. During 1998,
358,974 shares were earned and issued in the same year. Compensation expense
recognized under the Performance Plan was $6,876,335 for the year ended
December 31, 1998, based on the fair value of the shares earned.
During 1999, the Company established a new performance share plan (the "New
Performance Share Plan"). Under the New Performance Share Plan, performance
shares are awarded (the "Fixed Performance Awards") to certain employees at the
discretion of the Board of Directors as of the beginning of each fiscal year.
After ten years of employment (the "Vesting Period"), the Fixed Performance
Awards are converted to an equal number of shares of the Company's common
stock. If certain pre-defined performance measures are met by the Company over
a three-year period, the Vesting Period is accelerated from ten years to three
years for 25% to 100% of the Fixed Performance Awards granted, depending on the
Company's performance. Compensation expense is measured based on the market
price of the stock at date of grant and is recognized on a straight-line basis
over the performance period. The weighted average grant-date fair values for
Fixed Performance Awards granted in 2000 were $8.52, and in 1999 were $18.75
per share. The 60,368,599 shares of common stock issued as of December 31,
2000, include 1,367,245 shares which represent Fixed Performance Awards that
have not yet vested and 159,115 shares which represent Fixed Performance Awards
which have vested but have not been converted to shares of the Company's common
stock.
Under the New Performance Share Plan, plan participants may also earn
additional shares of the Company's common stock (the "Variable Performance
Awards"). The number of additional shares can range from 0% to 100% of the
Fixed Performance Awards granted, depending on the Company's performance over a
three-year period. There are no additional vesting requirements once the
Variable Performance Awards have been earned. Compensation expense is measured
by applying the market price of the Company's stock at the end of the period to
the number of Variable Performance Awards that are expected to be earned. Such
expense is recognized over the performance period. As of December 31, 2000, no
Variable Performance Awards were expected to be earned in future periods.
45
LENNOX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
For the Years Ended December 31, 2000, 1999 and 1998
12. Commitments and Contingencies:
Operating Leases
The Company has various leases relating principally to the use of operating
facilities. Rent expense for 2000, 1999 and 1998 was approximately $67.3
million, $38.4 million and $28.2 million, respectively.
The approximate minimum commitments under all noncancelable leases at
December 31, 2000, are as follows (in thousands):
2001................................................................ $ 60,989
2002................................................................ 35,779
2003................................................................ 30,159
2004................................................................ 24,145
2005................................................................ 15,422
Thereafter.......................................................... 81,108
--------
$247,602
========
Litigation
The Company is involved in various claims and lawsuits incidental to its
business. In the opinion of management, these claims and suits in the aggregate
will not have a material adverse effect on the Company's business, financial
condition, liquidity or results of operations.
13. Earnings Per Share:
Basic earnings per share are computed by dividing net income by the weighted
average number of common shares outstanding during the period. Diluted earnings
per share are computed by dividing net income by the sum of the weighted
average number of shares and the number of equivalent shares assumed
outstanding, if dilutive, under the Company's stock-based compensation plans.
Diluted earnings per share are computed as follows (in thousands, except per
share data):
Years Ended December
31,
-----------------------
2000 1999 1998
------- ------- -------
Net income......................................... $59,058 $73,154 $52,525
======= ======= =======
Weighted average shares outstanding................ 55,941 39,615 34,914
Effect of diluted securities attributable to stock
options and performance share awards.............. 336 904 825
------- ------- -------
Weighted average shares outstanding, as adjusted... 56,277 40,519 35,739
------- ------- -------
Diluted earnings per share......................... $ 1.05 $ 1.81 $ 1.47
======= ======= =======
Options to purchase 5,061,136 shares of common stock at prices ranging from
$7.88 to $49.63 per share, 1,039,251 shares of common stock at $19.03 per share
and 1,037,850 shares of common stock at $19.03 per share were outstanding for
the years ended December 31, 2000, 1999 and 1998, respectively, but were not
included in the diluted earnings per share calculation because the assumed
exercise of such options would have been anti-dilutive.
46
LENNOX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
For the Years Ended December 31, 2000, 1999 and 1998
14. Quarterly Financial Information (unaudited):
Financial Results (in thousands)
Net Sales Gross Profit Net Income
--------------------- ------------------- ---------------
2000 1999 2000 1999 2000 1999
---------- ---------- ---------- -------- ------- -------
First Quarter..... $ 716,324 $ 489,059 $ 228,763 $151,578 $ 5,740 $ 6,630
Second Quarter.... 894,200 591,841 298,332 186,322 32,277 23,571
Third Quarter..... 857,618 669,053 274,005 212,442 12,386 27,284
Fourth Quarter.... 779,215 611,714 239,289 193,993 8,655 15,669
---------- ---------- ---------- -------- ------- -------
Fiscal Year..... $3,247,357 $2,361,667 $1,040,389 $744,335 $59,058 $73,154
========== ========== ========== ======== ======= =======
Diluted
Basic Earnings Dividends
Earnings per per Common per Common
Common Share Share Share
------------- ----------- -----------
2000 1999 2000 1999 2000 1999
------ ------ ----- ----- ----- -----
First Quarter.......................... $ .10 $ .19 $ .10 $ .18 $.095 $.085
Second Quarter......................... .56 .65 .56 .64 .095 .085
Third Quarter.......................... .22 .65 .22 .64 .095 .085
Fourth Quarter......................... .16 .36 .16 .35 .095 .095
------ ------ ----- ----- ----- -----
Fiscal Year.......................... $ 1.06 $ 1.85 $1.05 $1.81 $0.38 $0.35
====== ====== ===== ===== ===== =====
Stock Prices
Price Range per Common
Share
--------------------------
2000 1999
------------ -------------
High Low High Low
------ ----- ------ ------
First Quarter..................................... $10.63 $8.69 NA NA
Second Quarter.................................... $15.13 $7.88 NA NA
Third Quarter..................................... $15.00 $9.00 $19.88 $14.50
Fourth Quarter.................................... $ 9.50 $6.81 $15.88 $ 8.88
------ ----- ------ ------
Fiscal Year..................................... $15.13 $6.81 $19.88 $ 8.88
====== ===== ====== ======
15. Treasury Stock:
On November 1, 1999, the Company's Board of Directors authorized the
purchase of up to 5,000,000 shares of the issued and outstanding common stock.
As of December 31, 2000 the Company had purchased 3,587,300 of such shares at a
total cost of $37.7 million. There were no outstanding commitments as of
December 31, 2000 to repurchase the remaining 1,412,700 shares. When treasury
shares are reissued, any difference between the average acquisition cost of the
shares and the proceeds from reissuance is charged or credited to additional
paid-in capital.
47
LENNOX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
For the Years Ended December 31, 2000, 1999 and 1998
16. Recent Accounting Pronouncements:
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." This statement establishes accounting and
reporting standards for derivative instruments, including certain derivatives
embedded in other contracts (collectively referred to as derivatives) and for
hedging activities. This statement, for the Company, is effective with the
first quarter of 2001. The Company does not believe that the adoption of this
pronouncement will have a significant impact on the Company's financial
statements.
The Securities and Exchange Commission (SEC) issued Staff Accounting
Bulletin (SAB) 101, "Revenue Recognition in Financial Statements," in December
1999. This bulletin, for the Company, was effective with the fourth quarter of
2000. The SAB summarizes the SEC staff's views in applying generally accepted
accounting principles to revenue recognition in financial statements. The
Company's revenue recognition policies are consistent with SAB 101.
17. Related Party Transactions:
John W. Norris, Jr., Lennox' Chairman of the Board, David H. Anderson,
Richard W. Booth and David V. Brown, each a director of Lennox, as well as
other Lennox stockholders, who may be immediate family members of the foregoing
persons, are, individually or through trust arrangements, members of AOC Land
Investment, L.L.C. AOC Land Investment L.L.C. owns 70% of AOC Development II,
L.L.C., which owns substantially all of One Lake Park, L.L.C. Lennox is leasing
part of an office building owned by One Lake Park, L.L.C. for use as the Lennox
corporate headquarters. The lease has a term of 25 years and the lease payments
for 2000 totaled approximately $2.7 million. Lennox also leases a portion of
Lennox Center, a retail complex owned by AOC Development, L.L.C., for use as
offices. The Lennox Center lease has a term of three (3) years and the lease
payments for 2000 totaled approximately $119,200. AOC Land Investment, L.L.C.
also owns 70% of AOC Development, L.L.C. Lennox believes that the terms of its
leases with One Lake Park L.L.C. and AOC Development, L.L.C. are at least as
favorable as could be obtained from unaffiliated third parties.
18. Stock Rights:
On July 27, 2000, the Board of Directors of the Company declared a dividend
of one right ("Right") for each outstanding share of its common stock to
stockholders of record at the close of business on August 7, 2000. Each Right
entitles the registered holder to purchase from the Company a unit consisting
of one one-hundredth of a share (a "Fractional Share") of Series A Junior
Participating Preferred Stock, par value $.01 per share, at a purchase price of
$75.00 per Fractional Share, subject to adjustment.
19. Fair Value of Financial Instruments:
The carrying amounts of cash and cash equivalents, accounts and notes
receivable, net, accounts payable and other current liabilities approximate
fair value due to the short maturities of these instruments. The carrying
amount of long-term debt approximates fair value due to interest rates that
approximate current market rates for instruments of similar size and duration.
48
ITEM 9. Changes In and Disagreements With Accountants on Accounting and
Financial Disclosure
None.
PART III
ITEM 10. Directors and Executive Officers of the Registrant
Information contained under the captions "Proposal 1: Election of Directors"
and "Ownership of Lennox Common Stock" in the Company's definitive Proxy
Statement for the Company's Annual Meeting of Stockholders to be held April 27,
2001 (the "Proxy Statement") is incorporated herein by reference in response to
this item. See Item 1 above for information concerning executive officers.
ITEM 11. Executive Compensation
Information required by Item 11 is specifically incorporated herein by
reference to page 10, pages 12 through 22 and page 25 of the Proxy Statement.
Such incorporation by reference shall not be deemed to specifically incorporate
by reference the information referenced in Item 402(a)(8) of Regulation S-K and
specifically incorporated by reference into any other filings of the Company
under the Securities Act of 1933 or the Securities Exchange Act of 1934.
ITEM 12. Security Ownership of Certain Beneficial Owners and Management
Information contained under the captions "Proposal 1: Election of Directors"
and "Ownership of Lennox Common Stock" in the Proxy Statement is incorporated
herein by reference in response to this item.
ITEM 13. Certain Relationships and Related Transactions
Information contained under the caption "Certain Relationships and Related
Party Transactions" in the Proxy Statement is incorporated herein by reference
in response to this item.
PART IV
ITEM 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) Financial Statements, Financial Statement Schedules and Exhibits
(1) The following financial statements of Lennox International Inc. and
subsidiaries are included in Part II, Item 8 of this Form 10-K:
Report of Independent Public Accountants
Consolidated Balance Sheets as of December 31, 2000 and 1999
Consolidated Statements of Income for the Years ended December 31,
2000, 1999 and 1998
Consolidated Statements of Stockholders' Equity for the Years Ended
December 31, 2000, 1999 and 1998
Consolidated Statements of Cash Flows for the Years Ended December
31, 2000, 1999 and 1998
Notes to Consolidated Financial Statements for the Years Ended
December 31, 2000, 1999 and 1998
(2) The following financial statement schedule for Lennox International
Inc. and subsidiaries is included herein:
Report of Independent Public Accountants on Financial Statement
Schedule (page 53 of Form 10-K)
Schedule II -- Valuation and Qualifying Accounts and Reserves (page
54 of Form 10-K)
49
(3) Exhibits:
The exhibits listed in the accompanying Index to Exhibits on pages 55
through 57 of this Form 10-K are filed or incorporated by reference
as part of this Form 10-K.
(b) Reports on Form 8-K:
During the last quarter covered by this report, the Company did not file
any reports on Form 8-K.
50
SIGNATURES
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.
LENNOX INTERNATIONAL INC.
/s/ Robert E. Schjerven
By:__________________________________
Robert E. Schjerven
Chief Executive Officer
March 27, 2001
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant in the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/s/ Robert E. Schjerven Chief Executive Officer March 27, 2001
______________________________________ and Director (Principal
Robert E. Schjerven Executive Officer)
/s/ Richard A. Smith Executive Vice President March 27, 2001
______________________________________ and Chief Financial
Richard A. Smith Officer (Principal
Financial Officer)
/s/ John J. Hubbuch Vice President, Controller March 27, 2001
______________________________________ and Chief Accounting
John J. Hubbuch Officer (Principal
Accounting Officer)
/s/ John W. Norris, Jr. Chairman of the Board of March 27, 2001
______________________________________ Directors
John W. Norris, Jr.
/s/ Linda G. Alvarado Director March 27, 2001
______________________________________
Linda G. Alvarado
/s/ David H. Anderson Director March 27, 2001
______________________________________
David H. Anderson
/s/ Richard W. Booth Director March 27, 2001
______________________________________
Richard W. Booth
/s/ Thomas W. Booth Director March 27, 2001
______________________________________
Thomas W. Booth
/s/ David V. Brown Director March 27, 2001
______________________________________
David V. Brown
/s/ James J. Byrne Director March 27, 2001
______________________________________
James J. Byrne
51
Signature Title Date
--------- ----- ----
/s/ Janet K. Cooper Director March 27, 2001
______________________________________
Janet K. Cooper
/s/ C.L. (Jerry) Henry Director March 27, 2001
______________________________________
C.L. (Jerry) Henry
/s/ John E. Major Director March 27, 2001
______________________________________
John E. Major
/s/ Donald E. Miller Director March 27, 2001
______________________________________
Donald E. Miller
/s/ Terry D. Stinson Director March 27, 2001
______________________________________
Terry D. Stinson
/s/ William G. Roth Director March 27, 2001
______________________________________
William G. Roth
/s/ Richard L. Thompson Director March 27, 2001
______________________________________
Richard L. Thompson
52
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
ON FINANCIAL STATEMENT SCHEDULE
To the Stockholders and Board of Directors of Lennox International Inc.:
We have audited in accordance with auditing standards generally accepted in
the United States the consolidated financial statements of Lennox International
Inc. and subsidiaries included in this Annual Report on Form 10-K and have
issued our report thereon dated February 13, 2001. Our audits were made for the
purpose of forming an opinion on the basic consolidated financial statements
taken as a whole. Schedule II, Valuation and Qualifying Accounts and Reserves,
is the responsibility of the Company's management and is presented for purposes
of complying with the Securities and Exchange Commission's rules and is not
part of the basic consolidated financial statements. This schedule has been
subjected to the auditing procedures applied in the audits of the basic
consolidated financial statements and, in our opinion, fairly states in all
material respects the financial data required to be set forth therein in
relation to the basic consolidated statements taken as a whole.
ARTHUR ANDERSEN LLP
Dallas, Texas
February 13, 2001
53
LENNOX INTERNATIONAL INC.
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
For the Years Ended December 31, 1998, 1999 and 2000
Additions
Balance at Charged to Balance
beginning Cost and at end
of year expenses Deductions(1) of year
---------- ---------- ------------- -------
1998:
Allowance for doubtful accounts.... $16,948 $6,224 $(4,647) $18,525
1999:
Allowance for doubtful accounts.... $18,525 $6,979 $(4,329) $21,175
2000:
Allowance for doubtful accounts.... $21,175 $5,057 $(2,422) $23,810
- --------
(1) Uncollectible accounts charged off, net of recoveries.
54
INDEX TO EXHIBITS
Exhibit Number Description
-------------- -----------
3.1 --Restated Certificate of Incorporation of Lennox International
Inc. ("Lennox") (incorporated by reference to Exhibit 3.1 to
Lennox' Registration Statement on Form S-1 (Registration
No. 333-75725)).
3.2 --Amended and Restated Bylaws of Lennox (incorporated by
reference to Exhibit 3.2 to Lennox' Registration Statement on
Form S-1 (Registration No. 333-75725)).
4.1 --Specimen Stock Certificate for the Common Stock, par value
$.01 per share, of Lennox (incorporated by reference to
Exhibit 4.1 to Lennox' Registration Statement on Form S-1
(Registration No. 333-75725)).
4.2 --Rights Agreement dated as of July 27, 2000 between Lennox 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 (incorporated by reference
to Exhibit 4.1 to Lennox' Current Report on Form 8-K dated
July 27, 2000).
10.1 --Note Purchase Agreement, dated as of December 1, 1993,
between Lennox and identified Noteholders relating to Lennox'
6.73% Senior Promissory Notes due 2008 (incorporated by
reference to Exhibit 10.2 to Lennox' Registration Statement on
Form S-1 (Registration No. 333-75725)).
10.2 --Note Purchase Agreement, dated as of July 6, 1995, between
Lennox and Teachers Insurance and Annuity Association of
America relating to Lennox' 7.06% Senior Promissory Note due
2005 (incorporated by reference to Exhibit 10.3 to Lennox'
Registration Statement on Form S-1 (Registration No. 333-
75725)).
10.3 --Note Purchase Agreement, dated as of April 3, 1998, between
Lennox and identified Noteholders relating to Lennox' 6.56%
Senior Notes due 2005 and 6.75% Senior Notes due 2008
(incorporated by reference to Exhibit 10.4 to Lennox'
Registration Statement on Form S-1 (Registration No. 333-
75725)).
10.4 --Note Amendment Agreement, dated as of April 3, 1998, between
Lennox and identified Noteholders relating to Lennox' 7.06%
Senior Promissory Note due 2005 and 6.73% Senior Promissory
Notes due 2008 (incorporated by reference to Exhibit 10.5 to
Lennox' Registration Statement on Form S-1 (Registration No.
333-75725)).
10.5 --Note Amendment Agreement, dated as of February 28, 2000,
between Lennox and identified Noteholders relating to Lennox'
7.06% Senior Promissory Notes due 2005; 6.73% Senior
Promissory Notes due 2008; 6.56% Senior Notes due 2005; and
6.75% Senior Notes due 2008 (incorporated by reference to
Exhibit 10.6 to Lennox' Annual Report on Form 10-K for the
fiscal year ended December 31, 1999).
10.6 --Note Amendment Agreement, dated as of January 23, 2001,
between Lennox and identified Noteholders relating to Lennox'
7.06% Senior Promissory Notes due 2005; 6.73% Senior
Promissory Notes due 2008; 6.56% Senior Notes due 2005; and
6.75% Senior Notes due 2008 (filed herewith).
10.7 --Revolving Credit Facility Agreement, dated as of July 29,
1999, among Lennox, The Chase Manhattan Bank, as successor to
Chase Bank of Texas, National Association ("Chase"), as
administrative agent, Wachovia Bank, N.A., as syndication
agent, The Bank of Nova Scotia, as documentation agent, and
the other lenders named therein (incorporated by reference to
Exhibit 10.25 to Lennox' Registration Statement on Form S-1
(Registration No. 333-75725)).
55
Exhibit Number Description
-------------- -----------
10.8 --Second Amendment, dated as of January 25, 2000, to the
Revolving Credit Facility Agreement dated as of July 29, 1999,
among Lennox, Chase, as administrative agent, Wachovia Bank,
N.A., as syndication agent, The Bank of Nova Scotia, as
documentation agent, and the other lenders named therein
(incorporated by reference to Exhibit 10.8 to Lennox' Annual
Report on Form 10-K for the fiscal year ended December 31,
1999).
10.9 --Third Amendment, dated as of January 22, 2001, to the
Revolving Credit Facility Agreement dated as of July 29, 1999,
among Lennox, Chase, as administrative agent, Wachovia Bank,
N.A., as syndication agent, The Bank of Nova Scotia, as
documentation agent, and the other lenders named therein
(filed herewith).
10.10 --364 Day Revolving Credit Facility Agreement, dated as of
January 25, 2000, among Lennox, Chase, as administrative
agent, Wachovia Bank, N.A., as syndication agent, The Bank of
Nova Scotia, as documentation agent, and the other lenders
named therein (incorporated by reference to Exhibit 10.9 to
Lennox' Annual Report on Form 10-K for the fiscal year ended
December 31, 1999).
10.11 --First Amendment, dated as of January 22, 2001, to the 364 Day
Revolving Credit Facility Agreement, dated as of January 25,
2000, among Lennox, Chase, as administrative agent, Wachovia
Bank, N.A., as syndication agent, The Bank of Nova Scotia, as
documentation agent, and the other lenders named therein
(filed herewith).
10.12 --Master Shelf Agreement, dated as of October 15, 1999, between
Lennox and The Prudential Insurance Company of America
relating to Senior Notes to be issued in a maximum principal
amount of $100,000,000 (incorporated by reference to Exhibit
10.1 to Lennox' Quarterly Report on Form 10-Q for the
quarterly period ended September 30, 1999).
10.13 --Letter Amendment No. 1, dated as of February 28, 2000, to
Master Shelf Agreement, dated as of October 15, 1999, between
Lennox and The Prudential Insurance Company of America
(incorporated by reference to Exhibit 10.11 to Lennox' Annual
Report on Form 10-K for the fiscal year ended December 31,
1999).
10.14 --Letter Amendment No. 2, dated as of January 23, 2001, to
Master Shelf Agreement, dated as of October 15, 1999, between
Lennox and The Prudential Insurance Company of America (filed
herewith).
10.15 --Receivables Purchase Agreement, dated as of June 19, 2000,
among LPAC Corp., Blue Ridge Asset Funding Corporation,
Wachovia Bank, N.A., and Lennox Industries Inc. (incorporated
by reference to Exhibit 10.1 to Lennox' Quarterly Report on
Form 10-Q for the quarterly period ended June 30, 2000).
10.16 --Purchase and Sale Agreement, dated as of June 19, 2000, among
Lennox Industries Inc., Heatcraft Inc. and LPAC Corp.
(incorporated by reference to Exhibit 10.2 to Lennox'
Quarterly Report on Form 10-Q for the quarterly period ended
June 30, 2000).
10.17* --1998 Incentive Plan of Lennox International Inc.
(incorporated by reference to Exhibit 10.8 to Lennox'
Registration Statement on Form S-1 (Registration No. 333-
75725)).
10.18* --Amendment, dated as of December 15, 2000 to 1998 Incentive
Plan of Lennox International Inc. (filed herewith).
10.19* --Lennox International Inc. Profit Sharing Restoration Plan
(incorporated by reference to Exhibit 10.9 to Lennox'
Registration Statement on Form S-1 (Registration No. 333-
75725)).
10.20* --Lennox International Inc. Supplemental Executive Retirement
Plan (incorporated by reference to Exhibit 10.10 to Lennox'
Registration Statement on Form S-1 (Registration No. 333-
75725)).
56
Exhibit Number Description
-------------- -----------
10.21* --Form of Indemnification Agreement entered into between Lennox
and certain executive officers and directors (includes a
schedule identifying the various parties to such agreement and
the applicable dates of execution) (incorporated by reference
to Exhibit 10.15 to Lennox' Registration Statement on Form S-1
(Registration No. 333-75725)).
10.22* --Form of revised Employment Agreement entered into between
Lennox and certain executive officers (incorporated by
reference to Exhibit 10.1 to Lennox' Quarterly Report on Form
10-Q for the quarterly period ended September 30, 2000).
10.23* --Form of revised Change of Control Employment Agreement
entered into between Lennox and certain executive officers
(incorporated by reference to Exhibit 10.2 to Lennox'
Quarterly Report on Form 10-Q for the quarterly period ended
September 30, 2000).
21.1 --Subsidiaries of Lennox (filed herewith).
23.1 --Consent of Arthur Andersen LLP (filed herewith).
- --------
* Management compensatory plan or arrangement required to be filed as an
exhibit pursuant to Item 601(b)(10)(iii)(a) of Regulation S-K.
57