UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY
PERIOD ENDED MARCH 31, 2001
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.
DELAWARE 42-0991521
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
2140 LAKE PARK BLVD.
RICHARDSON, TEXAS
75080
(Address of principal executive offices)
(Zip Code)
(972) 497-5000
(Registrant's telephone number, including area code)
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 past 90 days.
YES X NO ____
As of May 9, 2001, the number of shares outstanding of the registrant's common
stock, par value $.01 per share, was 56,152,987.
i
LENNOX INTERNATIONAL INC.
INDEX
Page No
Part I. Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets - March 31, 2001
(Unaudited)and December 31, 2000.................................. 3
Consolidated Statements of Income (Unaudited) -
Three Months Ended March 31, 2001 and 2000........................ 4
Consolidated Statements of Cash Flows (Unaudited) -
Three Months Ended March 31, 2001 and 2000........................ 5
Notes to Consolidated Financial Statements ....................... 6
(Unaudited)
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations............................ 10
Item 3. Quantitative and Qualitative Disclosures About Market Risk... 14
Part II. Other Information
Item 4. Exhibits and Reports on Form 8-K......................... 15
ii
PART I -- FINANCIAL INFORMATION
Item 1. Financial Statements.
LENNOX INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
As of March 31, 2001 and December 31, 2000
(In thousands, except share data)
ASSETS
March 31, December 31,
2001 2000
---- ----
(unaudited)
CURRENT ASSETS:
Cash and cash equivalents.......................... $ 25,489 $ 40,633
Accounts and notes receivable, net................. 360,822 399,136
Inventories........................................ 374,156 359,531
Deferred income taxes.............................. 48,113 47,063
Other assets....................................... 62,020 54,847
----------- ----------
Total current assets........................ 870,600 901,210
PROPERTY, PLANT AND EQUIPMENT, net.................. 335,888 354,172
GOODWILL, net....................................... 726,269 739,468
OTHER ASSETS........................................ 57,769 60,181
---------- ----------
TOTAL ASSETS................................$1,990,526 $2,055,031
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Short-term debt.................................... $ 31,404 $ 31,467
Current maturities of long-term debt............... 29,336 31,450
Accounts payable................................... 257,408 260,208
Accrued expenses................................... 251,206 242,347
Income taxes payable............................... 13,486 24,448
---------- ----------
Total current liabilities................... 582,840 589,920
LONG-TERM DEBT...................................... 610,162 627,550
DEFERRED INCOME TAXES............................... 1,058 941
POSTRETIREMENT BENEFITS, OTHER THAN PENSIONS........ 14,265 14,284
OTHER LIABILITIES................................... 77,241 77,221
---------- ----------
Total liabilities........................... 1,285,566 1,309,916
MINORITY INTEREST................................... 1,965 2,058
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, 60,524,220 shares and 60,368,599
shares issued for 2001 and 2000, respectively... 605 604
Additional paid-in capital......................... 372,585 372,690
Retained earnings.................................. 431,796 447,377
Accumulated other comprehensive loss............... (65,659) (37,074)
Deferred compensation.............................. (5,910) (6,457)
Treasury stock, at cost, 2,980,846 and 3,332,784
shares for 2001 and 2000, respectively........... (30,422) (34,083)
---------- -----------
Total stockholders' equity.................. 702,995 743,057
---------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY..$1,990,526 $2,055,031
========== ==========
The accompanying notes are an integral part of these consolidated financial
statements.
3
LENNOX INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
For the Three Months Ended March 31, 2001 and 2000
(Unaudited, in thousands, except per share data)
FOR THE
THREE MONTHS ENDED
MARCH 31,
-------------------------
2001 2000
---- ----
NET SALES...........................................$ 715,966 $ 716,324
COST OF GOODS SOLD.................................. 502,381 487,561
---------- ----------
Gross Profit................................ 213,585 228,763
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE......... 217,556 205,280
---------- ----------
(Loss) income from operations............... (3,971) 23,483
INTEREST EXPENSE, net............................... 12,777 12,750
OTHER............................................... 663 229
MINORITY INTEREST................................... 107 (546)
---------- ----------
(Loss) income before income taxes........... (17,518) 11,050
(BENEFIT) PROVISION FOR INCOME TAXES................ (7,270) 5,310
---------- ----------
Net (loss) income.......................$ (10,248) $ 5,740
========== ==========
REPORTED (LOSS) EARNINGS PER SHARE
Basic.............................................$ (0.18) $ 0.10
Diluted...........................................$ (0.18) $ 0.10
The accompanying notes are an integral part of these consolidated financial
statements.
4
LENNOX INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Three Months Ended March 31, 2001 and 2000
(Unaudited, in thousands)
FOR THE
THREE MONTHS ENDED
MARCH 31,
------------------
2001 2000
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income................................................. $ (10,248) $ 5,740
Adjustments to reconcile net (loss) income to
net cash provided by (used in) operating activities:
Minority interest............................................. 107 (546)
Joint venture (profit) loss................................... (41) 329
Depreciation and amortization................................. 21,741 20,892
Loss on disposal of equipment................................. 113 1,788
Other......................................................... 983 315
Changes in assets and liabilities, net effects of acquisitions:
Accounts and notes receivable................................. 27,121 (26,828)
Inventories................................................... (23,814) (38,846)
Other current assets.......................................... (8,841) (5,038)
Accounts payable.............................................. 2,686 42,931
Accrued expenses.............................................. 14,813 3,577
Deferred income taxes......................................... (150) (2,150)
Income taxes payable and receivable........................... (12,287) 2,587
Long-term warranty, deferred income and other liabilities..... (4,033) 3,972
--------- ---------
Net cash provided by operating activities.................. 8,150 8,723
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from the disposal of property, plant and equipment....... 769 86
Purchases of property, plant and equipment........................ (5,036) (17,470)
Acquisitions, net of cash acquired................................ (1,413) (183,423)
--------- ---------
Net cash used in investing activities...................... (5,680) (200,807)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from revolving short-term debt........................... 1,997 7,939
(Repayments of) proceeds from revolving long-term debt............ (14,558) 206,673
Repayment of long-term debt....................................... -- (13,640)
Sales of common stock............................................. 1,036 --
Repurchases of common stock....................................... (214) (97)
Cash dividends paid............................................... (5,274) (5,453)
--------- ---------
Net cash (used in) provided by financing activities........ (17,013) 195,422
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS................... (14,543) 3,338
EFFECT OF EXCHANGE RATES ON CASH AND CASH EQUIVALENTS.............. (601) (547)
--------- ---------
CASH AND CASH EQUIVALENTS, beginning of period..................... 40,633 29,174
--------- ---------
CASH AND CASH EQUIVALENTS, end of period........................... $ 25,489 $ 31,965
========= =========
Supplementary disclosures of cash flow information:
Cash paid during the period for:
Interest................................................... $ 11,612 $ 8,816
========= =========
Income taxes ...............................................$ 2,380 $ 2,403
========= =========
The accompanying notes are an integral part of these consolidated financial
statements.
5
LENNOX INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. BASIS OF PRESENTATION AND OTHER ACCOUNTING INFORMATION:
The accompanying unaudited consolidated balance sheet as of March 31, 2001,
and the consolidated statements of income and cash flows for the three months
ended March 31, 2001 and 2000 should be read in conjunction with Lennox
International Inc.'s (the "Company") consolidated financial statements and the
accompanying footnotes as of December 31, 2000 and 1999 and for each of the
three years in the period ended December 31, 2000. In the opinion of management,
the accompanying consolidated financial statements contain all material
adjustments, consisting principally of normal recurring adjustments, necessary
for a fair presentation of the Company's financial position, results of
operations, and cash flows. Certain information and footnote disclosures
normally included in financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted pursuant to
applicable rules and regulations, although the Company believes that the
disclosures herein are adequate to make the information presented not
misleading. The operating results for the interim periods are not necessarily
indicative of the results to be expected for a full year.
The Company's fiscal year ends on December 31 of each year, and the
Company's quarters are each comprised of 13 weeks. For convenience, throughout
these financial statements, the 13 weeks comprising each three month period are
denoted by the last day of the respective calendar quarter.
2. 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
THREE MONTHS ENDED
MARCH 31,
-----------------------
NET SALES 2001 2000
--------- ---- ----
North American residential................ $ 282,025 $ 291,780
North American retail..................... 222,424 194,528
Commercial air conditioning............... 93,378 95,084
Commercial refrigeration.................. 85,089 91,672
Heat transfer (1)......................... 58,275 65,447
Eliminations.............................. (25,225) (22,187)
--------- ---------
$ 715,966 $ 716,324
========= =========
(1) The Heat Transfer segment had intersegment sales of $7,036 and $5,113 for
the three months ended March 31, 2001 and 2000, respectively.
FOR THE
THREE MONTHS ENDED
MARCH 31,
-------------------------
2001 2000
---- ----
(LOSS) INCOME FROM OPERATIONS
-----------------------------
North American residential................ $ 12,306 $ 20,765
North American retail..................... (9,973) 5,426
Commercial air conditioning............... (1,817) (3,053)
Commercial refrigeration.................. 6,221 7,050
Heat transfer............................. 1,788 4,934
Corporate and other....................... (11,003) (9,905)
Eliminations.............................. (1,493) (1,734)
--------- ---------
$ (3,971) $ 23,483
========= =========
6
AS OF AS OF
MARCH 31, DECEMBER 31,
TOTAL ASSETS 2001 2000
------------ ---- ----
North American residential................ $ 514,336 $ 529,492
North American retail..................... 785,144 800,719
Commercial air conditioning............... 214,459 215,656
Commercial refrigeration.................. 225,892 239,783
Heat transfer............................. 146,505 149,813
Corporate and other....................... 127,521 144,547
Eliminations.............................. (23,331) (24,979)
--------- ---------
$1,990,526 $2,055,031
========== ==========
3. INVENTORIES:
Components of inventories are as follows (in thousands):
AS OF AS OF
MARCH 31, DECEMBER 31,
2001 2000
---- ----
Finished goods........................... $ 240,870 $ 216,547
Repair parts............................. 42,309 35,024
Work in process.......................... 22,214 23,606
Raw materials............................ 117,710 132,298
--------- ---------
423,103 407,475
Reduction for last-in, first-out......... 48,947 47,944
--------- ---------
$ 374,156 $ 359,531
========= =========
4. 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
Three Months Ended
March 31,
------------------
2001 2000
---- ----
$30,955 $30,122
5. LINES OF CREDIT AND FINANCING ARRANGEMENTS:
The Company has bank lines of credit aggregating $552 million, of which
$391 million was outstanding at March 31, 2001 with the remaining $161 million
available for future borrowings, subject to covenant limitations. Included in
the lines of credit are a $300 million domestic facility and a $163 million
domestic facility, each governed by 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 funds 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 EBITDA. The agreements provide restrictions on the Company's
ability to incur additional indebtedness, encumber its assets, sell its assets,
or pay dividends.
7
6. 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):
FOR THE
THREE MONTHS ENDED
MARCH 31,
----------------------
2001 2000
---- ----
Net (loss) income $(10,248) $ 5,740
======== ========
Weighted average shares outstanding................. 55,775 54,480
Effect of diluted securities attributable to stock
options and performance share awards............... -- 307
-------- --------
Weighted average shares outstanding, as adjusted.... 55,775 54,787
======== ========
Diluted (loss) earnings per share................... $ (0.18) $ 0.10
========= ========
7. DERIVATIVES:
Effective January 1, 2001, the Company adopted Statement of Financial
Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging
Activities" ("SFAS No. 133"). SFAS No. 133 requires that all derivative
financial instruments be recognized as either assets or liabilities in the
balance sheet and carried at fair value. Changes in fair value of these
instruments are to be recognized periodically in earnings or stockholders'
equity depending on the intended use of the instrument. Gains or losses on
derivatives designated as fair value hedges are recognized in earnings in the
period of change. Gains or losses on derivatives designated as cash flow hedges
are initially reported as a component of other comprehensive income and later
classified into earnings in the period in which the hedged item also affects
earnings. The Company hedges its exposure to the fluctuation on the prices paid
for copper and aluminum metals by purchasing futures contracts on these metals.
Gains or losses recognized on the closing of these contracts negate the losses
or gains realized through physical deliveries of these metals. Quantities
covered by these commodity futures contracts are for less than expected actual
quantities to be purchased. As of March 31, 2001, the Company had metals futures
contracts maturing at various dates to December 31, 2002 with a fair value as an
asset of $0.2 million and as a liability of $3.7 million. These are hedges of
forecasted transactions, and under SFAS No. 133, such contracts are to be
considered cash flow hedges. Accordingly, the Company recorded an after-tax
charge to other comprehensive income (loss), a direct component of owner's
equity, of $2.0 million. The charge to other comprehensive income will be
reclassified into earnings when the related inventory is sold, generally within
three to six months.
The Company also hedges its exposure to fluctuations in foreign currency
exchange rates incurred by its Australian subsidiary. This subsidiary
manufactures sophisticated machine tools, which generally require long
manufacturing and installation times and which generally are sold at prices
denominated in the local currency of the purchasing entity. This exposure to the
fluctuations in foreign currency exchange rates is hedged through the sale of
futures contracts for the various currencies. Since the customers are not
invoiced and payments are not received until the equipment has been installed
and operating satisfactorily, the currency futures contracts are deemed to be
cash flow hedges and as such are recorded at fair value with an offset to other
comprehensive income (loss) until realized. Gains or losses on the currency
futures are transferred from other comprehensive income to the income statement
when the related equipment is sold, generally within three to six months. As of
March 31, 2001, the Company had currency futures contracts maturing at various
dates through December 31, 2001, for which the fair value was a liability of
$4.2 million. Accordingly, $3.0 million, net of applicable income tax, was
charged to other comprehensive income (loss).
8
8. COMPREHENSIVE LOSS:
Comprehensive loss is computed as follows (in thousands):
FOR THE
THREE MONTHS ENDED
MARCH 31,
----------------------
2001 2000
---- ----
Net (loss) income............................. $(10,248) $ 5,740
Foreign currency
translation adjustments...................... (23,558) (8,959)
Derivatives................................... (5,027) --
-------- --------
Total comprehensive (loss).................... $(38,833) $ (3,219)
======== ========
9. SUBSEQUENT EVENT:
The Company completed a restructuring plan for its North American retail
segment under which a number of under-performing service centers will be sold or
closed and a number of service centers will be merged with other existing
service centers. As a result, the Company has announced it intends to record a
pretax charge of approximately $38 million in the second quarter of 2001.
9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
The Company participates in five reportable business segments of the
heating, ventilation, air conditioning and refrigeration ("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's 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's 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's manufacturing 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.
On January 21, 2000, Lennox completed the acquisition of Service Experts,
Inc., an HVAC company comprised of 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. As these centers have
been integrated into the retail operation with the 104 centers acquired by
Lennox since September 1, 1998, operating performance has not reached expected
levels. To improve profitability, the retail company will be restructured in the
second quarter of 2001. Ten centers will be closed or sold and 28 centers will
be merged together, merged into other company-owned service centers or
repositioned. These actions will reduce the total number of centers, which
currently total 224, by 26. This restructuring will result in a $38 million
charge in the second quarter of 2001.
Lennox's fiscal year ends on December 31 of each year, and its fiscal
quarters are each comprised of 13 weeks. For convenience, throughout this
Management's Discussion and Analysis of Financial Condition and Results of
Operations, the 13 week periods comprising each fiscal quarter are denoted by
the last day of the calendar quarter.
10
RESULTS OF OPERATIONS
The following table sets forth, as a percentage of net sales, income data
for the three months ended March 31, 2001 and 2000:
FOR THE
THREE MONTHS ENDED
MARCH 31,
-------------------
2001 2000
---- ----
Net sales...................................... 100.0% 100.0%
Cost of goods sold............................. 70.2 68.1
------ ------
Gross profit................................ 29.8 31.9
Selling, general and administrative expenses... 30.4 28.6
------ ------
(Loss) income from operations............... (0.6) 3.3
Interest expense, net.......................... 1.8 1.8
Other.......................................... 0.0 0.1
Minority interest.............................. 0.0 (0.1)
------ ------
(Loss) income before income taxes........... (2.4) 1.5
(Benefit) provision for income taxes........... (1.0) 0.7
------ ------
Net (loss) income........................... (1.4)% 0.8%
====== ======
The following table sets forth net sales by business segment and geographic
market (dollars in millions):
THREE MONTHS ENDED MARCH 31,
----------------------------------------
2001 2000
------------------ ------------------
Amount % Amount %
Business Segment:
North American residential.............$ 282.0 39.4% $ 291.8 40.7%
North American retail................... 222.4 31.1 194.5 27.2
Commercial air conditioning............. 93.4 13.0 95.1 13.3
Commercial refrigeration................ 85.1 11.9 91.7 12.8
Heat transfer........................... 58.3 8.1 65.4 9.1
Eliminations............................ (25.2) (3.5) (22.2) (3.1)
-------- ----- -------- -----
Total net sales $ 716.0 100.0% $ 716.3 100.0%
======== ===== ====== =====
Geographic Market:
U.S. .................................. $ 562.4 78.5% $ 554.9 77.5%
International.......................... 153.6 21.5 161.4 22.5
-------- ----- -------- -----
Total net sales................ $ 716.0 100.0% $ 716.3 100.0%
======== ===== ====== =====
11
THREE MONTHS ENDED MARCH 31, 2001 COMPARED TO THREE MONTHS ENDED MARCH 31, 2000
NET SALES. Net sales decreased $0.3 million, or 0.04%, to $716.0 million
for the three months ended March 31, 2001 from $716.3 million for the three
months ended March 31, 2000. Adjusted for the impact of currency translation,
net sales increased 2% compared to the first three months of 2000.
Net sales in the North American residential segment were $282.0 million for
the three months ended March 31, 2001, a decrease of $9.8 million, or 3.4%, from
$291.8 million for the three months ended March 31, 2000. The Air Conditioning
and Refrigeration Institute reported factory shipments of unitary air
conditioners and heat pumps were down 13% for the first two months of this year.
This decrease in industry shipments was a major factor in the Company's decline
in net sales for the quarter, as market share gains were realized by Lennox in
the core residential HVAC segment for this time period. The Company's Hearth
Products business was particularly impacted by the decline in housing starts and
the weakness in manufactured housing sales.
Net sales in the North American retail segment were $222.4 million for the
three months ended March 31, 2001, an increase of $27.9 million, or 14.3%, from
$194.5 million for the three months ended March 31, 2000. This growth was
achieved primarily by our acquisition of Service Experts Inc. in January of
2000.
Commercial air conditioning segment net sales decreased $1.7 million, or
1.8%, to $93.4 million for the three months ended March 31, 2001 compared to the
three months ended March 31, 2000. Adjusted for the impact of currency
translation, net sales increased 0.7% compared to the first three months of
2000. Although the commercial construction market has tightened somewhat in
North America, the effect on sales was minimized in the quarter as a result of
the introduction of the cost-effective Value Series product and by strengthened
sales in Europe. Adjusted for the impact of currency translation, European
commercial air conditioning sales grew 8.8%.
Net sales in the commercial refrigeration segment were $85.1 million for
the three months ended March 31, 2001, a decrease of $6.6 million, or 7.2%, from
$91.7 million for the three months ended March 31, 2000. Adjusted for the impact
of currency translation, net sales were equal to the prior year. Offsetting the
North American market slowdown in supermarket, convenience store, food service
and cold storage sectors were strong sales in our Australian refrigeration
business. Adjusting for the impact of currency translation, net trade sales in
Australia grew 9.0%.
Heat transfer segment revenues decreased $7.1 million, or 11.0%, to $58.3
million for the three months ended March 31, 2001 compared to the three months
ended March 31, 2000. Adjusted for the impact of currency translation, net trade
sales decreased 7.8% compared to the first three months of 2000. The sales
decline is attributable to a decrease in OEM customer orders as a result of the
general economic slowdown in the United States.
GROSS PROFIT. Gross profit was $213.6 million for the three months ended
March 31, 2001, compared to $228.8 million for the three months ended March 31,
2000, a decrease of $15.2 million. Gross profit margin was 29.8% for the three
months ended March 31, 2001, and 31.9% for the three months ended March 31,
2000. The primary cause of the decrease in gross profit margin was
under-utilization of labor at the retail service centers. Residential
replacement centers' sales volume was down and as a result service technicians
were not fully utilized. Several of the centers identified for closure were
struggling to efficiently utilize their labor. To a lesser extent, center
margins were negatively impacted by a shift in sales mix to lower margin
commercial and new construction business.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses were $217.6 million for the three months ended March 31,
2001, an increase of $12.3 million, or 6.0%, from $205.3 million for the three
months ended March 31, 2000. Selling, general and administrative expenses
represented 30.4% and 28.6% of total revenues for the three months ended 2001
and 2000, respectively. The increase in selling, general and administrative
expense is entirely due to acquisitions in the retail business segment.
INTEREST EXPENSE, NET. Interest expense, net, for the three months ended
March 31, 2001 was unchanged from the three months ended March 31, 2000 at $12.8
million.
OTHER. Other expense was $0.7 million for the three months ended March 31,
2001 and $0.2 million for the three months ended March 31, 2000. Other expense
is primarily comprised of currency exchange gains or losses, which relate
principally to the Company's operations in Canada, Australia and Europe.
MINORITY INTEREST. Minority interest was $0.1 million for the three months
ended March 31, 2001 and ($0.5) million for the three months ended March 31,
2000. The change is primarily a result of Lennox acquiring the remaining 30% of
its European operations in April 2000.
12
PROVISION FOR INCOME TAXES. The (benefit) provision for income taxes was
($7.3) million for the three months ended March 31, 2001 and $5.3 million for
the three months ended March 31, 2000. The effective tax rate of 41.5% and 48.1%
for the three months ended March 31, 2001 and 2000, 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
Lennox's working capital and capital expenditure requirements are generally
met through internally generated funds and bank lines of credit.
During the first three months of 2001, cash provided by operating
activities was $8.2 million compared to $8.7 million for the comparable period
in 2000. The 2001 amount includes $30 million received from the sale of accounts
receivable. If the sale of the accounts receivable were excluded, cash from
operating activities would have been a usage of $21.8 million in 2001. This
reduction relates primarily to the net, after tax, loss incurred in 2001. Net
cash used in investing activities was $195 million less than during the
comparable period in 2000 due to reduced capital expenditures and retail segment
acquisitions. Cash (used in) provided by financing activities was $212 million
less than the comparable 2000 period, reflecting reduced capital and acquisition
expenditures.
Capital expenditures in 2001 and 2000 were primarily for production
equipment at the Orangeburg, South Carolina and Marshalltown, Iowa manufacturing
plants.
Lennox has bank lines of credit aggregating $552 million, of which $391
million was outstanding at March 31, 2001 with the remaining $161 million
available for future borrowings, subject to covenant limitations. Included in
the lines of credit are a $300 million domestic facility and a $163 million
domestic facility, each governed by agreements between Lennox and syndicates of
banks. The facilities contain certain financial covenants and bear interest, at
Lennox's option, at a rate equal to either (a) the greater of the bank's prime
rate or the federal funds rate plus 0.5% or (b) the London Interbank Offered
Rate plus a margin equal to 0.5% to 1.25%, depending upon the ratio of total
funded debt to EBITDA. Lennox pays a commitment fee equal to 0.10% to 0.30% of
the unused commitment, depending upon the ratio of total funded debt to EBITDA.
The agreements provide restrictions on Lennox's ability to incur additional
indebtedness, encumber its assets, sell its assets, or pay dividends.
In June, 1999, James N. Kirby Pty. Ltd. was acquired for approximately $65
million. In addition, approximately $20.5 million of Kirby's debt was assumed.
The purchase price consisted of approximately $16 million in cash, $33 million
in deferred payments and 650,430 shares of common stock. If Lennox's common
stock does not trade at a price greater than $29.09 per share for five
consecutive days from the period of 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 common stock (approximately $10.7 million as of March 31, 2001).
On April 24, 2001, Lennox announced it had completed a restructuring plan
for its North American retail segment under which a number of service centers
will be sold, closed or merged with other existing service centers. The net cash
cost of this restructuring is estimated to be approximately $7.0 million, most
of which is expected to be paid in the second quarter of 2001.
Lennox believes that cash flow from operations, as well as available
borrowings under its credit facilities, will be sufficient to fund operations
for the foreseeable future.
13
RECENT ACCOUNTING PRONOUNCEMENTS
None.
FORWARD LOOKING INFORMATION
This Report contains forward-looking statements and information that are
based on the beliefs of Lennox's management as well as assumptions made by and
information currently available to management. All statements other than
statements of historical fact included in this Report constitute forward-looking
statements within the meaning of the Private Securities Litigation Reform Act of
1995, including but not limited to statements identified by the words "may,"
"will," "should," "plan," "predict," "anticipate," "believe," "intend,"
"estimate" and "expect" and similar expressions. Such statements reflect
Lennox's current views 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; ability to successfully complete and
integrate acquisitions; ability to manage new lines of business; the
consolidation trend in the HVACR industry; adverse reaction from customers to
the Company's acquisitions or other activities; the impact of the weather on
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. Lennox 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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Lennox's 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. Net sales from outside the United
States represented 21.5% and 22.5% of total net sales for the three months ended
March 31, 2001 and 2000, respectively. Historically, foreign currency
transaction gains (losses) have not had a material effect on Lennox's 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 March 31, 2001, the Company had obligations to deliver
$24.0 million of various currencies over the next 12 months and to take
possession of $8.0 million of various currencies over the next nine months. The
fair value of the various contracts was a liability of $4.2 million as of March
31, 2001.
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 March 31, 2001, the Company was
committed for 32.0 million pounds of aluminum and 42.5 million pounds of copper
under such arrangements. The fair value of these commodity contracts was a net
liability of $3.5 million as of March 31, 2001.
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 March 31, 2001, 10.2 million pounds
of such aluminum content was so committed. The fair value of this commitment was
insignificant at March 31, 2001.
14
PART II -- OTHER INFORMATION
ITEM 4. EXHIBITS AND REPORTS ON FORM 8-K.
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
*3.1 -- Restated Certificate of Incorporation of Lennox (Incorporated herein by
reference to Exhibit 3.1 to Lennox's Registration Statement on Form S-1
(Registration No. 333-75725)).
*3.2 -- Amended and Restated Bylaws of Lennox (Incorporated herein by
reference to Exhibit 3.2 to Lennox's 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 herein by reference to Exhibit 4.1 to
Lennox's Registration Statement on Form S-1 (Registration No.
333-75725)).
10.1 -- Amended and Restated Receivables Purchase Agreement, dated as of March
23, 2001, among LPAC Corp., Lennox Industries Inc., Blue Ridge Asset
Funding Corporation and Wachovia Bank, N.A. (filed herewith).
- ----------
* Incorporated herein by reference as indicated.
SIGNATURE
Pursuant to the requirements 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.
Date: May 11, 2001 /s/ Richard A. Smith
--------------------
Principal Financial Officer
and Duly Authorized Signatory