UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
(MARK ONE)
þ
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY
PERIOD ENDED MARCH 31, 2005
OR
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission file number 001-15149
LENNOX INTERNATIONAL INC.
Internal Revenue Service Employer Identification No. 42-0991521
2140 LAKE PARK BLVD.
RICHARDSON, TEXAS
75080
(972-497-5000)
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 March 31, 2005, the number of shares outstanding of the registrant’s common stock, par value $.01 per share, was 61,914,053.
LENNOX INTERNATIONAL INC.
FORM 10-Q
For the Three Months Ended March 31, 2005
INDEX
2
PART I — FINANCIAL INFORMATION
Item 1. Financial Statements.
LENNOX INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
As of March 31, 2005 and December 31, 2004
(In millions, except share data)
| March 31, | December 31, | |||||||
| 2005 | 2004 | |||||||
| (unaudited) | ||||||||
ASSETS |
||||||||
CURRENT ASSETS: |
||||||||
Cash and cash equivalents |
$ | 84.2 | $ | 60.9 | ||||
Accounts and notes receivable, net |
450.2 | 472.5 | ||||||
Inventories |
275.8 | 247.2 | ||||||
Deferred income taxes |
13.1 | 13.1 | ||||||
Other assets |
42.4 | 45.9 | ||||||
Assets held for sale |
1.2 | 5.1 | ||||||
Total current assets |
866.9 | 844.7 | ||||||
PROPERTY, PLANT AND EQUIPMENT, net |
236.3 | 234.0 | ||||||
GOODWILL, net |
222.5 | 225.4 | ||||||
DEFERRED INCOME TAXES |
82.1 | 82.8 | ||||||
OTHER ASSETS |
137.3 | 131.7 | ||||||
TOTAL ASSETS |
$ | 1,545.1 | $ | 1,518.6 | ||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY |
||||||||
CURRENT LIABILITIES: |
||||||||
Short-term debt |
$ | 3.8 | $ | 6.0 | ||||
Current maturities of long-term debt |
36.3 | 36.4 | ||||||
Accounts payable |
281.6 | 237.0 | ||||||
Accrued expenses |
259.9 | 286.3 | ||||||
Income taxes payable |
16.7 | 14.6 | ||||||
Liabilities held for sale |
2.4 | 3.7 | ||||||
Total current liabilities |
600.7 | 584.0 | ||||||
LONG-TERM DEBT |
269.1 | 268.1 | ||||||
POSTRETIREMENT BENEFITS, OTHER THAN PENSIONS |
14.7 | 14.2 | ||||||
PENSIONS |
105.1 | 105.5 | ||||||
OTHER LIABILITIES |
78.6 | 73.9 | ||||||
Total liabilities |
1,068.2 | 1,045.7 | ||||||
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,
67,005,959 shares and 66,367,987 shares issued for 2005 and 2004
respectively |
0.7 | 0.7 | ||||||
Additional paid-in capital |
465.1 | 454.1 | ||||||
Retained earnings |
66.9 | 66.8 | ||||||
Accumulated other comprehensive (loss) income |
(7.4 | ) | 0.7 | |||||
Deferred compensation |
(16.0 | ) | (18.2 | ) | ||||
Treasury stock, at cost, 3,106,822 shares and 3,044,286 for 2005 and
2004, respectively |
(32.4 | ) | (31.2 | ) | ||||
Total stockholders’ equity |
476.9 | 472.9 | ||||||
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY |
$ | 1,545.1 | $ | 1,518.6 | ||||
The accompanying notes are an integral part of these consolidated financial statements.
3
LENNOX INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Three Months Ended March 31, 2005 and 2004
(Unaudited, in millions, except per share data)
| For the | ||||||||
| Three Months Ended | ||||||||
| March 31, | ||||||||
| 2005 | 2004 | |||||||
NET SALES |
$ | 700.3 | $ | 664.0 | ||||
COST OF GOODS SOLD |
478.5 | 438.4 | ||||||
Gross Profit |
221.8 | 225.6 | ||||||
OPERATING EXPENSES: |
||||||||
Selling, general and administrative expense |
204.3 | 206.3 | ||||||
Goodwill impairment |
— | 208.3 | ||||||
Operational income (loss) from continuing operations |
17.5 | (189.0 | ) | |||||
INTEREST EXPENSE, net |
5.5 | 7.5 | ||||||
OTHER EXPENSE |
0.1 | 0.3 | ||||||
Income (loss) from continuing operations before income taxes |
11.9 | (196.8 | ) | |||||
PROVISION FOR (BENEFITS FROM) INCOME TAXES |
4.4 | (19.1 | ) | |||||
Income (loss) from continuing operations |
7.5 | (177.7 | ) | |||||
DISCONTINUED OPERATIONS (NOTE 9): |
||||||||
Loss from operations of discontinued operations |
1.6 | 20.1 | ||||||
Income tax benefit |
(0.4 | ) | (3.7 | ) | ||||
Loss on disposal of discontinued operations |
0.1 | — | ||||||
Income tax benefit |
(0.2 | ) | — | |||||
Loss from discontinued operations |
1.1 | 16.4 | ||||||
Net income (loss) |
$ | 6.4 | $ | (194.1 | ) | |||
INCOME (LOSS) PER SHARE FROM CONTINUING OPERATIONS: |
||||||||
Basic |
$ | 0.12 | $ | (2.98 | ) | |||
Diluted |
$ | 0.12 | $ | (2.98 | ) | |||
LOSS PER SHARE FROM DISCONTINUED OPERATIONS: |
||||||||
Basic |
$ | (0.02 | ) | $ | (0.28 | ) | ||
Diluted |
$ | (0.02 | ) | $ | (0.28 | ) | ||
NET INCOME (LOSS) PER SHARE: |
||||||||
Basic |
$ | 0.10 | $ | (3.26 | ) | |||
Diluted |
$ | 0.10 | $ | (3.26 | ) | |||
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, 2005 and 2004
(Unaudited, in millions)
| For the | ||||||||
| Three Months Ended | ||||||||
| March 31, | ||||||||
| 2005 | 2004 | |||||||
CASH FLOWS FROM OPERATING ACTIVITIES: |
||||||||
Net income (loss) |
$ | 6.4 | $ | (194.1 | ) | |||
Adjustments to reconcile net income (loss) to net cash provided by (used in)
operating activities: |
||||||||
Minority interest and equity in unconsolidated affiliates |
(4.6 | ) | (2.6 | ) | ||||
Non-cash impairment of long-lived assets and goodwill |
— | 224.7 | ||||||
Depreciation and amortization |
9.6 | 11.5 | ||||||
Deferred income taxes |
0.4 | (23.9 | ) | |||||
Loss from discontinued operations, other than non-cash impairments |
1.1 | — | ||||||
Other losses and expenses |
2.2 | 5.4 | ||||||
Changes in assets and liabilities, net of effects of divestitures: |
||||||||
Accounts and notes receivable |
15.2 | 49.2 | ||||||
Inventories |
(31.3 | ) | (64.0 | ) | ||||
Other current assets |
3.0 | 2.3 | ||||||
Accounts payable |
47.2 | 9.5 | ||||||
Accrued expenses |
(24.9 | ) | (18.6 | ) | ||||
Income taxes payable and receivable |
4.3 | (5.3 | ) | |||||
Long-term warranty, deferred income and other liabilities |
9.4 | 4.4 | ||||||
Net cash (used in) provided by operating activities from discontinued operations |
(2.0 | ) | 8.1 | |||||
Net cash provided by operating activities |
36.0 | 6.6 | ||||||
CASH FLOWS FROM INVESTING ACTIVITIES: |
||||||||
Proceeds from the disposal of property, plant and equipment |
0.1 | 0.1 | ||||||
Purchases of property, plant and equipment |
(13.6 | ) | (6.4 | ) | ||||
Additional investment in affiliates |
— | (2.1 | ) | |||||
Proceeds from disposal of businesses and investments |
1.8 | — | ||||||
Net cash used in investing activities |
(11.7 | ) | (8.4 | ) | ||||
CASH FLOWS FROM FINANCING ACTIVITIES: |
||||||||
Short-term borrowings |
(1.8 | ) | (1.6 | ) | ||||
Repayments of long-term debt |
— | (0.1 | ) | |||||
Revolving long-term borrowings |
1.0 | 5.0 | ||||||
Sales of common stock |
7.9 | 10.8 | ||||||
Payments of deferred financing costs |
— | (0.2 | ) | |||||
Repurchases of common stock |
(1.2 | ) | — | |||||
Cash dividends paid |
(6.2 | ) | (5.6 | ) | ||||
Net cash (used in) provided by financing activities |
(0.3 | ) | 8.3 | |||||
INCREASE IN CASH AND CASH EQUIVALENTS |
24.0 | 6.5 | ||||||
EFFECT OF EXCHANGE RATES ON CASH AND CASH EQUIVALENTS |
(0.7 | ) | 1.8 | |||||
CASH AND CASH EQUIVALENTS, beginning of period |
60.9 | 76.1 | ||||||
CASH AND CASH EQUIVALENTS, end of period |
$ | 84.2 | $ | 84.4 | ||||
Supplementary disclosures of cash flow information: |
||||||||
Cash paid during the period for: |
||||||||
Interest |
$ | 1.0 | $ | 2.1 | ||||
Income taxes (net of refunds) |
$ | (2.0 | ) | $ | 7.0 | |||
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 unaudited consolidated balance sheet as of March 31, 2005, and the accompanying unaudited consolidated statements of operations and cash flows for the three months ended March 31, 2005 and 2004 should be read in conjunction with Lennox International Inc.’s (the “Company” or “LII”) audited consolidated financial statements and footnotes as of December 31, 2004 and 2003 and for each of the three years in the period ended December 31, 2004. 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.
Certain prior-period balances in the accompanying condensed consolidated financial statements have been reclassified to conform to the current period’s presentation of financial information.
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. Stock-Based Compensations:
The Company accounts for its stock-based compensation under the recognition and measurement principles of Accounting Principles Board 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, “Accounting for Stock-Based Compensation,” as amended (“SFAS No. 123”). 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. Had the Company used the fair value based accounting method for stock compensation expense described by SFAS No. 123, the Company’s diluted net income per common and equivalent share are shown in the pro-forma amounts below (in millions, except per share data):
| For the | ||||||||
| Three Months Ended | ||||||||
| March 31, | ||||||||
| 2005 | 2004 | |||||||
Net income (loss), as reported |
$ | 6.4 | $ | (194.1 | ) | |||
Add: Reported stock-based compensation
expense, net of taxes |
4.1 | 1.7 | ||||||
Deduct: Fair value based compensation
expense, net of taxes |
(4.6 | ) | (2.5 | ) | ||||
Net income (loss), pro-forma |
$ | 5.9 | $ | (194.9 | ) | |||
Earnings per share: |
||||||||
Basic, as reported |
$ | 0.10 | $ | (3.26 | ) | |||
Basic, pro-forma |
$ | 0.10 | $ | (3.28 | ) | |||
Diluted, as reported |
$ | 0.10 | $ | (3.26 | ) | |||
Diluted, pro-forma |
$ | 0.09 | $ | (3.28 | ) | |||
6
3. Reportable Business Segments:
Financial information about the Company’s reportable business segments is as follows (in millions):
| For the | ||||||||
| Three Months Ended | ||||||||
| March 31, | ||||||||
| 2005 | 2004 | |||||||
Net Sales |
||||||||
Residential |
$ | 342.7 | $ | 324.3 | ||||
Commercial |
126.2 | 108.9 | ||||||
Heating and Cooling |
468.9 | 433.2 | ||||||
Service Experts |
135.9 | 138.9 | ||||||
Refrigeration |
111.9 | 109.2 | ||||||
Eliminations |
(16.4 | ) | (17.3 | ) | ||||
| $ | 700.3 | $ | 664.0 | |||||
Segment Profit (Loss) |
||||||||
Residential |
$ | 29.6 | $ | 32.6 | ||||
Commercial |
4.7 | 1.4 | ||||||
Heating and Cooling |
34.3 | 34.0 | ||||||
Service Experts |
(6.3 | ) | (7.7 | ) | ||||
Refrigeration |
8.9 | 10.6 | ||||||
Corporate and other |
(19.3 | ) | (16.4 | ) | ||||
Eliminations |
(0.1 | ) | (1.2 | ) | ||||
Segment Profit |
17.5 | 19.3 | ||||||
Reconciliation to income (loss) from continuing
operations before income taxes: |
||||||||
Goodwill impairment |
— | 208.3 | ||||||
Interest expense, net |
5.5 | 7.5 | ||||||
Other expense |
0.1 | 0.3 | ||||||
| $ | 11.9 | $ | (196.8 | ) | ||||
| As of March 31, | As of December 31, | |||||||
| 2005 | 2004 | |||||||
Total Assets |
||||||||
Residential |
$ | 543.4 | $ | 512.0 | ||||
Commercial |
233.8 | 244.0 | ||||||
Heating and Cooling |
777.2 | 756.0 | ||||||
Service Experts |
182.6 | 187.8 | ||||||
Refrigeration |
315.2 | 323.9 | ||||||
Corporate and other |
281.5 | 258.2 | ||||||
Eliminations |
(12.6 | ) | (12.4 | ) | ||||
Segment Assets |
1,543.9 | 1,513.5 | ||||||
Discontinued Operations (Note 9) |
1.2 | 5.1 | ||||||
| $ | 1,545.1 | $ | 1,518.6 | |||||
4. Inventories:
Components of inventories are as follows (in millions):
| As of March 31, | As of December 31, | |||||||
| 2005 | 2004 | |||||||
Finished goods |
$ | 200.8 | $ | 174.1 | ||||
Repair parts |
39.5 | 38.5 | ||||||
Work in process |
10.6 | 9.2 | ||||||
Raw materials |
82.3 | 71.4 | ||||||
| 333.2 | 293.2 | |||||||
Excess of current cost over last-in, first-out cost |
(57.4 | ) | (46.0 | ) | ||||
| $ | 275.8 | $ | 247.2 | |||||
7
5. Shipping and Handling:
Shipping and handling costs related to post-production activities are included as part of selling, general and administrative expense in the accompanying Consolidated Statements of Operations in the following amounts (in millions):
| For the Three Months Ended March 31 | |||||
| 2005 | 2004 | ||||
| $ | 33.9 | $ | 32.7 | ||
6. Warranties:
The changes in the carrying amount of the Company’s total warranty liabilities for the three months ended March 31, 2005 are as follows (in millions):
Total warranty liability at December 31, 2004 |
$ | 71.0 | ||
Payments made in 2005 |
(6.6 | ) | ||
Changes resulting from issuance of new warranties |
5.9 | |||
Changes in estimates associated with pre-existing warranties |
1.3 | |||
Total warranty liability at March 31, 2005 |
$ | 71.6 | ||
The change in warranty liability that results from changes in estimates of warranties issued prior to 2005 was primarily due to revaluing warranty reserves based on higher material input costs.
7. Cash, Lines of Credit and Financing Arrangements:
The Company has bank lines of credit aggregating $258.6 million, of which $9.8 million was borrowed and outstanding and $95.7 million was committed to standby letters of credit at March 31, 2005. Of the remaining $153.1 million, the entire amount was available for future borrowings after consideration of covenant limitations. Included in the lines of credit are several regional facilities and a multi-currency facility in the amount of $225 million governed by agreements between the Company and a syndicate of banks. The facility includes restrictive covenants that limit the Company’s ability to incur additional indebtedness, encumber its assets, sell its assets, or pay dividends. There are no required payments prior to the expiration of the facility. The Company’s facility and promissory notes are secured by the stock of the Company’s major subsidiaries. The facility requires that LII deliver annual and quarterly financial statements, as well as compliance certificates, to the banks within a specified period of time. LII believes that cash flow from operations, as well as available borrowings under its revolving credit facility, will be sufficient to fund its operations for the foreseeable future. The Company has included in cash and cash equivalents in the accompanying unaudited Consolidated Balance Sheet as of March 31, 2005, $24.1 million of restricted cash primarily related to letters of credit issued with respect to the operations of its captive insurance subsidiary ending December 30, 2005.
8. Accounts and Notes Receivable:
Accounts and Notes Receivable have been shown net of allowance for doubtful accounts of $17.5 million and $18.5 million, and net of accounts receivable sold under an ongoing asset securitization arrangement of $5.0 million and zero as of March 31, 2005 and December 31, 2004, respectively. In addition, approximately $210 million of accounts receivable as reported in the accompanying Consolidated Balance Sheets at March 31, 2005 represent retained interests in securitized receivables that have restricted disposition rights per the terms of the asset securitization agreement and would not be available to satisfy obligations to creditors. The Company has no significant concentration of credit risk within its accounts and notes receivable.
9. Divestitures:
In the first fiscal quarter of 2004, the Company’s Board of Directors approved a turnaround plan designed to improve the performance of its Service Experts business segment. The plan realigns Service Experts’ dealer service centers to focus on service and replacement opportunities in the residential and light commercial markets. The Company identified 130 dealer service centers, whose primary business is residential and light commercial service and replacement, which comprise the ongoing Service Experts business segment. As of December 31, 2004, the Company divested the remaining 48 centers, in addition to the previously announced closure of four centers. The 48
8
centers that are no longer a part of Service Experts have been classified as a Discontinued Operation in the accompanying Statements of Operations. The related assets and liabilities for these centers are classified as “Assets Held For Sale” and “Liabilities Held For Sale” in the accompanying Consolidated Balance Sheets.
A summary of net trade sales, pre-tax operating results and pre-tax loss of disposal of assets for the three months ended March 31, 2005 and 2004, and the major classes of assets and liabilities presented as held for sale at March 31, 2005 and 2004, are detailed below (in millions):
| Discontinued | ||||||||
| Operations for the | ||||||||
| Three Months Ended | ||||||||
| March 31, | ||||||||
| 2005 | 2004 | |||||||
Net trade sales |
$ | 0.2 | $ | 70.7 | ||||
Pre-tax loss operating results |
(1.6 | ) | (20.1 | ) | ||||
Pre-tax loss on disposal of centers |
(0.1 | ) | — | |||||
Current assets |
$ | 1.2 | $ | 66.2 | ||||
Non-current assets |
— | 2.1 | ||||||
Total assets |
$ | 1.2 | $ | 68.3 | ||||
Current liabilities |
$ | 2.4 | $ | 34.9 | ||||
The following table details the Company’s pre-tax loss from discontinued operations for the three months ended March 31, 2005 and 2004, and the cumulative amount incurred through March 31, 2005 (in millions):
| Cumulative | ||||||||||||
| Three Months | Three Months | Incurred | ||||||||||
| Ended | Ended | through | ||||||||||
| March 31, | March 31, | March 31, | ||||||||||
| 2005 | 2004 | 2005 | ||||||||||
Goodwill impairment |
$ | — | $ | 13.3 | $ | 14.8 | ||||||
Impairment of property,
plant and equipment |
— | 3.1 | 3.1 | |||||||||
Operating loss |
— | 3.7 | 14.9 | |||||||||
Other divestiture costs |
1.6 | — | 7.7 | |||||||||
Subtotal |
1.6 | 20.1 | 40.5 | |||||||||
Loss on disposal of centers |
0.1 | — | 15.0 | |||||||||
Total loss from
discontinued
operations |
$ | 1.7 | $ | 20.1 | $ | 55.5 | ||||||
Any future additional expenses are not expected to be material.
The income tax benefit on discontinued operations was $0.6 million for the three months ended March 31, 2005 and $3.7 million for the three months ended March 31, 2004. The $3.7 million includes a $1.5 million tax benefit related to the goodwill impairment. Through March 31, 2005, proceeds from the sale of these centers totaled $25.8 million.
10. 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, adjusted for the interest expense and amortization of deferred financing costs associated with the Company’s convertible notes, 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 and convertible notes. Emerging Issues Task Force Issue 04-8, “The Effect of Contingently Convertible Debt on Diluted Earnings per Share” requires that contingently convertible debt securities with a market price trigger be included in diluted earnings per share, regardless of whether the market price trigger has been met. The number of shares attributable to convertible notes is 7,947,478. As of March 31, 2005, the Company had 65,020,875 shares outstanding of which 3,106,822 were held as treasury shares. Diluted earnings per share are computed as follows (in millions, except per share data):
9
| For the | ||||||||
| Three Month | ||||||||