LENNOX INTERNATIONAL INC - 10-Q Quarterly Report

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY
PERIOD ENDED SEPTEMBER 30, 2003

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

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.

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act.)

As of November 6, 2003, the number of shares outstanding of the registrant’s common stock, par value $.01 per share, was 58,820,867.


			Page No
Part I. Financial Information
	Item 1. Financial Statements
		Consolidated Balance Sheets — September 30, 2003 (Unaudited) and December 31, 2002		3
		Consolidated Statements of Operations (Unaudited) — Three Months and Nine Months Ended September 30, 2003 and 2002		4
		Consolidated Statements of Cash Flows (Unaudited) — Nine Months Ended September 30, 2003 and 2002		5
		Notes to Consolidated Financial Statements (Unaudited)		6
	Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			12
	Item 3. Quantitative and Qualitative Disclosures About Market Risk			20
	Item 4. Controls and Procedures			20
Part II. Other Information
	Item 6. Exhibits and Reports on Form 8-K			21

CONSOLIDATED BALANCE SHEETS
As of September 30, 2003 and December 31, 2002
(In millions)


			September 30,			December 31,
			2003			2002

			(unaudited)
CURRENT ASSETS:
	Cash and cash equivalents		$	64.4		$	76.4
	Accounts and notes receivable, net			451.0			307.3
	Inventories			242.8			219.7
	Deferred income taxes			33.6			33.3
	Other assets			55.6			38.4

		Total current assets		847.4			675.1
PROPERTY, PLANT AND EQUIPMENT, net				221.7			231.0
GOODWILL, net				439.9			420.8
DEFERRED INCOME TAXES				78.4			82.7
OTHER ASSETS				133.9			112.1

		TOTAL ASSETS	$	1,721.3		$	1,521.7

LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES:
	Short-term debt		$	4.0		$	9.3
	Current maturities of long-term debt			11.4			13.9
	Accounts payable			237.8			247.6
	Accrued expenses			303.9			253.9
	Income taxes payable			56.2			12.8

		Total current liabilities		613.3			537.5
LONG-TERM DEBT				357.4			356.7
POSTRETIREMENT BENEFITS, OTHER THAN PENSIONS				14.7			13.5
PENSIONS				89.6			85.4
OTHER LIABILITIES				85.3			75.8

		Total liabilities		1,160.3			1,068.9

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, 63,829,034 shares and 63,039,254 shares issued for 2003 and 2002, respectively			0.6			0.6
	Additional paid-in capital			413.9			404.7
	Retained earnings			215.2			171.3
	Accumulated other comprehensive loss			(27.1	)		(79.6	)
	Deferred compensation			(10.5	)		(13.5	)
	Treasury stock, at cost, 3,043,916 and 3,009,656 shares for 2003 and 2002, respectively			(31.1	)		(30.7	)

		Total stockholders’ equity		561.0			452.8

		TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	1,721.3		$	1,521.7

The accompanying notes are an integral part of these consolidated financial statements.

CONSOLIDATED STATEMENTS OF OPERATIONS
For the Three Months and Nine Months Ended September 30, 2003 and 2002
(Unaudited, in millions, except per share data)


				For the					For the
				Three Months Ended					Nine Months Ended
				September 30,					September 30,

				2003		2002			2003			2002

NET SALES				$	839.1	$	818.8		$	2,308.1		$	2,321.4
COST OF GOODS SOLD					561.4		562.7			1,539.6			1,590.6

			Gross profit		277.7		256.1			768.5			730.8
OPERATING EXPENSES:
	Selling, general and administrative expense				223.8		205.7			646.8			618.3
	(Gains) losses and other expenses				1.0		(8.9	)		1.9			(8.9	)
	Restructurings				—		6.7			—			8.6

			Income from operations		52.9		52.6			119.8			112.8
INTEREST EXPENSE, net					6.9		8.9			21.8			25.0
OTHER EXPENSE (INCOME)					0.6		(0.2	)		(1.2	)		(0.6	)

			Income before income taxes and cumulative effect of accounting change		45.4		43.9			99.2			88.4
PROVISION FOR INCOME TAXES					17.7		16.3			38.7			34.6

			Income before cumulative effect of accounting change		27.7		27.6			60.5			53.8

CUMULATIVE EFFECT OF ACCOUNTING CHANGE					—		—			—			(249.2	)

			Net income (loss)	$	27.7	$	27.6		$	60.5		$	(195.4	)

INCOME PER SHARE BEFORE CUMULATIVE EFFECT OF ACCOUNTING CHANGE:
		Basic		$	0.47	$	0.48		$	1.04		$	0.94
		Diluted		$	0.46	$	0.46		$	1.01		$	0.91

CUMULATIVE EFFECT OF ACCOUNTING CHANGE PER SHARE:
		Basic		$	—	$	—		$	—		$	(4.36	)
		Diluted		$	—	$	—		$	—		$	(4.24	)

NET INCOME (LOSS) PER SHARE:
		Basic		$	0.47	$	0.48		$	1.04		$	(3.42	)
		Diluted		$	0.46	$	0.46		$	1.01		$	(3.32	)

The accompanying notes are an integral part of these consolidated financial statements.

CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Nine Months Ended September 30, 2003 and 2002
(Unaudited, in millions)


					For the
					Nine Months Ended
					September 30,

					2003			2002

CASH FLOWS FROM OPERATING ACTIVITIES:
	Net income (loss)				$	60.5		$	(195.4	)
			Adjustments to reconcile net income (loss) to net cash used in operating activities:
				Minority interest and equity in unconsolidated affiliates		(2.3	)		(3.3	)
				Non-cash cumulative effect of accounting change		—			249.2
				Depreciation and amortization		35.7			45.7
				Non-cash restructuring charge		—			1.5
				Deferred income taxes		1.9			3.7
				Other (gains) losses and expenses		5.9			0.5
			Changes in assets and liabilities, net of effects of divestitures-
				Accounts and notes receivable		(133.2	)		(103.7	)
				Inventories		(15.0	)		16.3
				Other current assets		(15.5	)		0.5
				Accounts payable		(13.6	)		41.4
				Accrued expenses		42.4			27.1
				Income taxes payable and receivable		42.9			25.3
				Long-term warranty, deferred income and other liabilities		8.2			8.5

				Net cash provided by operating activities		17.9			117.3

CASH FLOWS FROM INVESTING ACTIVITIES:
	Proceeds from the disposal of property, plant and equipment					10.2			2.9
	Purchases of property, plant and equipment					(22.2	)		(19.9	)
	Proceeds from disposal of businesses and investments					8.7			55.5
	Acquisitions, net of cash acquired					—			(3.6	)

				Net cash provided by (used in) investing activities		(3.3	)		34.9

CASH FLOWS FROM FINANCING ACTIVITIES:
	Short-term borrowings					(6.0	)		—
	Repayments of long-term debt					(4.1	)		(41.8	)
	Revolving long-term borrowings					2.0			(212.7	)
	Proceeds from issuance of long-term debt					—			143.8
	Sales of common stock					9.2			9.9
	Repurchases of common stock					(0.4	)		(0.3	)
	Payment of deferred finance costs					(1.8	)		(5.3	)
	Cash dividends paid					(22.1	)		(21.7	)

				Net cash used in financing activities		(23.2	)		(128.1	)

(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS						(8.6	)		24.1
EFFECT OF EXCHANGE RATES ON CASH AND CASH EQUIVALENTS						(3.4	)		(2.6	)

CASH AND CASH EQUIVALENTS, beginning of period						76.4			34.4

CASH AND CASH EQUIVALENTS, end of period					$	64.4		$	55.9

Supplementary disclosures of cash flow information:
		Net cash paid (received) during the period for:
				Interest	$	17.8		$	18.6

				Income taxes	$	(4.1	)	$	6.4

The accompanying notes are an integral part of these consolidated financial statements.

The unaudited consolidated balance sheet as of September 30, 2003, and the accompanying unaudited consolidated statements of operations and cash flows for the three months and nine months ended September 30, 2003 and 2002 should be read in conjunction with Lennox International Inc.’s (the “Company” or “LII”) audited consolidated financial statements and the footnotes as of December 31, 2002 and 2001 and for each of the three years in the period ended December 31, 2002. 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. See Note 3 (a) for a discussion of the impact of the Outokumpu Oyj joint venture transactions in 2002 on comparability.

The Company’s fiscal year ends on December 31 of each year, and the Company’s interim 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.

The Company accounts for its stock-based compensation under the recognition and measurement principles of Accounting Principles Board “APB” Opinion No. 25, “Accounting for Stock Issued to Employees,” and related interpretations (“APB 25”) and has adopted the disclosure-only provisions of Statement of Financial Accounting Standards No. 123 (“SFAS No. 123”), “Accounting for Stock-Based Compensation,” as amended. Under APB 25, no stock-based compensation cost is reflected in net income for grants of stock options to employees because the Company grants stock options with an exercise price equal to the market value of the stock on the date of grant.

The following table illustrates the pro-forma effect on net income and earnings per share as if the Company had used the fair-value-based accounting method for stock compensation expense described by SFAS No. 123 (in millions, except per share data):


		For the						For the
		Three Months Ended						Nine Months Ended
		September 30,						September 30,

		2003			2002			2003			2002

Net income (loss), as reported		$	27.7		$	27.6		$	60.5		$	(195.4	)
Add: Reported stock-based compensation expense, net of taxes			1.1			0.9			3.2			1.0
Deduct: Fair value based compensation expense, net of taxes			(2.2	)		(1.5	)		(5.9	)		(2.1	)

Net income (loss), pro-forma		$	26.6		$	27.0		$	57.8		$	(196.5	)

Earnings per share:
	Basic, as reported	$	0.47		$	0.48		$	1.04		$	(3.42	)
	Basic, pro-forma	$	0.45		$	0.47		$	0.99		$	(3.44	)

	Diluted, as reported	$	0.46		$	0.46		$	1.01		$	(3.32	)
	Diluted, pro-forma	$	0.44		$	0.45		$	0.96		$	(3.34	)

Financial information about the Company’s reportable business segments is as follows (in millions):


INDEX
PART I — FINANCIAL INFORMATION
	Item 1. Financial Statements.
		CONSOLIDATED BALANCE SHEETS
		CONSOLIDATED STATEMENTS OF OPERATIONS
		CONSOLIDATED STATEMENTS OF CASH FLOWS
		NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
	Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
	Item 3. Quantitative and Qualitative Disclosures About Market Risk.
	Item 4. Controls and Procedures
PART II — OTHER INFORMATION
	Item 6. Exhibits and Reports on Form 8-K.
SIGNATURE
EX-10.1 Amended Revolving Credit Agreement
EX-10.2 Amended Receivables Purchase Agreement
EX-10.3 Amended Receivables Sale Agreement
EX-12.1 Ratio of Earnings to Fixed Charges
EX-31.1 Certification-Principal Executive Officer
EX-31.2 Certification-Principal Financial Officer
EX-32.1 Certification Pursuant to 18 USC Sec. 1350

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