10-Q 1 e10-q.txt FORM 10-Q FOR QUARTER ENDED JUNE 30, 2000 1 -------------------------------------------------------------------------------- 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 JUNE 30, 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 (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 August 4, 2000, the number of shares outstanding of the registrant's common stock, par value $.01 per share, was 56,175,000. 1 2 INDEX
Page No. -------- Part I. Financial Information Item 1. Financial Statements Consolidated Balance Sheets - June 30, 2000 (Unaudited) and December 31, 1999 3 Consolidated Statements of Income (Unaudited) - Three Months and Six Months Ended June 30, 2000 and 1999 4 Consolidated Statements of Cash Flows (Unaudited) - Six Months Ended June 30, 2000 and 1999 5 Notes to Consolidated Financial Statements (Unaudited) 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 10 Item 3. Quantitative and Qualitative Disclosures About Market Risk 16 Part II. Other Information Item 4. Submission of Matters to a Vote of Security Holders 17 Item 6. Exhibits and Reports on Form 8-K 17
2 3 PART I -- FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS. LENNOX INTERNATIONAL INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS As of June 30, 2000 and December 31, 1999 (In thousands, except share data) ASSETS
June 30, December 31, 2000 1999 ----------- ------------ (unaudited) CURRENT ASSETS: Cash and cash equivalents $ 47,323 $ 29,174 Accounts and notes receivable, net 505,998 443,107 Inventories 395,056 345,424 Deferred income taxes 36,192 25,367 Other assets 51,617 44,526 ----------- ----------- Total current assets 1,036,186 887,598 INVESTMENTS IN JOINT VENTURES 11,610 12,434 PROPERTY, PLANT AND EQUIPMENT, net 369,965 329,966 GOODWILL, net 653,015 394,252 OTHER ASSETS 52,292 59,423 ----------- ----------- TOTAL ASSETS $ 2,123,068 $ 1,683,673 =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Short-term debt $ 31,662 $ 22,219 Current maturities of long-term debt 30,815 34,554 Accounts payable 270,728 196,143 Accrued expenses 228,389 200,221 Income taxes payable 32,970 9,859 ----------- ----------- Total current liabilities 594,564 462,996 LONG-TERM DEBT 676,344 520,276 DEFERRED INCOME TAXES 879 928 POSTRETIREMENT BENEFITS, OTHER THAN PENSIONS 14,802 15,125 OTHER LIABILITIES 75,541 72,377 ----------- ----------- Total liabilities 1,362,130 1,071,702 MINORITY INTEREST 2,055 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, 59,481,140 shares and 46,161,607 shares issued for 2000 and 1999, respectively 595 462 Additional paid-in capital 366,841 215,523 Retained earnings 436,962 409,851 Accumulated other comprehensive loss (29,187) (12,706) Deferred compensation (4,127) (2,848) Treasury stock, at cost, 1,156,221 and 1,172,200 shares for 2000 and 1999, respectively (12,201) (12,386) ----------- ----------- Total stockholders' equity 758,883 597,896 ----------- ----------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 2,123,068 $ 1,683,673 =========== ===========
The accompanying notes are an integral part of these consolidated financial statements. 3 4 LENNOX INTERNATIONAL INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME For the Three Months and Six Months Ended June 30, 2000 and 1999 (Unaudited, in thousands, except per share data)
For the For the Three Months Ended Six Months Ended June 30, June 30, --------------------------- ---------------------------- 2000 1999 2000 1999 ----------- ----------- ----------- ----------- NET SALES $ 894,200 $ 591,841 $ 1,610,524 $ 1,080,900 COST OF GOODS SOLD 595,868 405,519 1,083,429 743,000 ----------- ----------- ----------- ----------- Gross Profit 298,332 186,322 527,095 337,900 OPERATING EXPENSES: Selling, general and administrative 228,608 139,416 433,888 271,202 ----------- ----------- ----------- ----------- Income from operations 69,724 46,906 93,207 66,698 INTEREST EXPENSE, net 15,242 8,542 27,992 15,100 OTHER 517 (570) 746 (781) MINORITY INTEREST 31 (104) (515) (620) ----------- ----------- ----------- ----------- Income before income taxes 53,934 39,038 64,984 52,999 PROVISION FOR INCOME TAXES 21,657 15,467 26,967 22,798 ----------- ----------- ----------- ----------- Net income $ 32,277 $ 23,571 $ 38,017 $ 30,201 =========== =========== =========== =========== EARNINGS PER SHARE: Basic $ 0.56 $ 0.65 $ 0.68 $ 0.84 Diluted $ 0.56 $ 0.64 $ 0.68 $ 0.82
The accompanying notes are an integral part of these consolidated financial statements. 4 5 LENNOX INTERNATIONAL INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS For the Six Months Ended June 30, 2000 and 1999 (Unaudited, in thousands)
For the Six Months Ended June 30, ------------------- 2000 1999 ---- ---- CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 38,017 $ 30,201 Adjustments to reconcile net income to net cash provided by (used in) operating activities - Minority interest (515) (620) Joint venture losses 605 1,845 Depreciation and amortization 42,345 26,877 Loss on disposal of equipment 1,797 642 Other 206 (364) Changes in assets and liabilities, net of effects of acquisitions - Accounts and notes receivable 2,147 (98,772) Inventories (25,304) (28,069) Other current assets (6,309) 1,875 Accounts payable 41,020 16,766 Accrued expenses (9,874) (8,263) Deferred income taxes (2,039) (950) Income taxes payable and receivable 25,868 14,553 Long-term warranty, deferred income and other liabilities 6,839 (4,827) --------- --------- Net cash used in operating activities 114,803 (49,106) CASH FLOWS FROM INVESTING ACTIVITIES: Proceeds from the disposal of property, plant and equipment 497 393 Purchases of property, plant and equipment (33,149) (37,887) Acquisitions, net of cash acquired (206,824) (128,284) --------- --------- Net cash used in investing activities (239,476) (165,778) CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from revolving short-term debt 11,065 187,957 Proceeds from revolving long-term debt 124,000 41,524 Proceeds from new long-term debt 35,000 -- Repayment of long-term debt (15,540) (2,170) Proceeds from issuance of common stock 73 688 Repurchases of common stock (97) (152) Cash dividends paid (10,910) (6,107) --------- --------- Net cash provided by financing activities 143,591 221,740 INCREASE IN CASH AND CASH EQUIVALENTS 18,918 6,856 EFFECT OF EXCHANGE RATES ON CASH AND CASH EQUIVALENTS (769) (864) --------- --------- CASH AND CASH EQUIVALENTS, beginning of period 29,174 28,389 --------- --------- CASH AND CASH EQUIVALENTS, end of period $ 47,323 $ 34,381 ========= ========= Supplementary disclosures of cash flow information: Cash paid during the period for: Interest $ 27,530 $ 14,902 ========= ========= Income taxes $ 8,249 $ 10,878 ========= =========
The accompanying notes are an integral part of these consolidated financial statements. 5 6 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 June 30, 2000, and the consolidated statements of income for the three months and six months ended June 30, 2000 and 1999 and the consolidated statements of cash flows for the six months ended June 30, 2000 and 1999 should be read in conjunction with Lennox International Inc.'s (the "Company") consolidated financial statements and the accompanying footnotes as of December 31, 1999 and 1998 and for each of the three years in the period ended December 31, 1999. 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. Operations for the North American retail segment include primarily the retail sale and service of heating and air conditioning products that have historically been included in the North American residential segment. As a result of the growth in operations of this segment, retail segment results have now been stated separately on a comparative basis. Therefore, the Company's business operations are organized within the following five reportable business segments (in thousands):
For the For the Three Months Ended Six Months Ended June 30, June 30, -------------------------- -------------------------- NET SALES 2000 1999 2000 1999 --------- ----------- ----------- ----------- ----------- North American residential $ 353,890 $ 317,610 $ 645,670 $ 589,084 North American retail 288,938 27,041 483,466 43,721 Commercial air conditioning 122,938 117,595 218,022 210,063 Commercial refrigeration 93,508 82,577 185,180 144,175 Heat transfer (1) 64,334 53,290 129,781 103,359 Eliminations (29,408) (6,272) (51,595) (9,502) ----------- ----------- ----------- ----------- $ 894,200 $ 591,841 $ 1,610,524 $ 1,080,900 =========== =========== =========== ===========
(1) The Heat Transfer segment had intersegment sales of $7,285 and $5,387 for the three months ended June 30, 2000 and 1999, respectively, and $12,398 and $11,974 for the six months ended June 30, 2000 and 1999, respectively.
For the For the Three Months Ended Six Months Ended June 30, June 30, ------------------------- -------------------------- INCOME (LOSS) FROM OPERATIONS 2000 1999 2000 1999 ----------------------------- -------- -------- -------- -------- North American residential $ 42,203 $ 39,032 $ 62,968 $ 62,988 North American retail 19,234 1,575 24,660 2,476 Commercial air conditioning 4,733 3,081 1,680 1,147 Commercial refrigeration 8,445 6,864 15,495 9,170 Heat transfer 4,333 4,218 9,267 7,457 Corporate and other (8,035) (7,319) (17,940) (15,727) Eliminations (1,189) (545) (2,923) (813) -------- -------- -------- -------- $ 69,724 $ 46,906 $ 93,207 $ 66,698 ======== ======== ======== ========
6 7
As of June 30, As of December 31, TOTAL ASSETS 2000 1999 ------------ ------------- ------------------ North American residential $ 611,679 $ 596,895 North American retail 741,362 290,978 Commercial air conditioning 250,127 251,226 Commercial refrigeration 240,858 252,176 Heat transfer 163,642 179,615 Corporate and other 146,364 127,320 Eliminations (30,964) (14,537) ----------- ----------- $ 2,123,068 $ 1,683,673 =========== ===========
3. INVENTORIES: Components of inventories are as follows (in thousands):
As of June 30, As of December 31, 2000 1999 -------------- ------------------ Finished goods $263,545 $219,303 Repair parts 53,514 36,153 Work in process 21,853 20,957 Raw materials 103,932 117,209 -------- -------- 442,844 393,622 Reduction for last-in, first-out 47,788 48,198 -------- -------- $395,056 $345,424 ======== ========
4. LINES OF CREDIT AND FINANCING ARRANGEMENTS: The Company has bank lines of credit aggregating $688 million, of which $454 million was outstanding at June 30, 2000 and the remaining $234 million was available for future borrowings. 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 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. On April 3, 2000, the Company borrowed $35.0 million under a shelf agreement with The Prudential Insurance Company of America. Terms of the borrowing include an interest rate of 8%, interest to be paid semi-annually and an ultimate maturity date of June 1, 2010. Terms and conditions of the borrowing are similar to those of the existing revolving credit agreements. During the second quarter of 2000, the Company entered into a one year asset securitization arrangement. Pursuant to the arrangement, $130.0 million of domestic trade receivables were sold on a non-recourse basis for cash of $129.3 million. The accounts receivable that were sold are shown as a reduction of Accounts and Notes Receivable, Net in the accompanying Consolidated Balance Sheets. The loss on the sale of such receivables of $0.7 million is included as part of Operating Expenses in the accompanying Consolidated Statements of Income. 7 8 5. 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 outstanding and the number of equivalent shares assumed outstanding, if dilutive, under the Company's stock-based compensation plans and from convertible securities. Diluted earnings per share are computed as follows (in thousands, except per share amounts):
For the For the Three Months Ended Six Months Ended June 30, June 30, 2000 1999 2000 1999 ------------------- ------------------- Net income $32,277 $23,571 $38,017 $30,201 ======= ======= ======= ======= Weighted average shares outstanding 57,433 36,036 55,948 35,805 Effect of diluted securities attributable to stock options and performance share awards 380 924 341 891 ------- ------- ------- ------- Weighted average shares outstanding, as adjusted 57,813 36,960 56,289 36,696 ======= ------- ======= ======= Diluted earnings per share $ 0.56 $ 0.64 $ 0.68 $ 0.82 ======= ======= ======= =======
6. INVESTMENTS IN SUBSIDIARIES: 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 $140.1 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 $306.9 million. The acquisition was accounted for under the purchase method of accounting. Based on current estimates, which may be revised at a later date, approximately $171.6 million was allocated to the fair value of the assets acquired, approximately $96.5 million was allocated to the fair value of liabilities assumed, and $231.8 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. DEALERS In September of 1998, the Company initiated a program to acquire high quality heating and air conditioning dealers in metropolitan areas of the United States and Canada (the "Dealers"). During the first six months of 2000, six Dealers in the United States and one Dealer in Canada were purchased for a total price of approximately $17.5 million. In addition, approximately $21.2 million was paid in the first six months of 2000 as additional payments on Dealers acquired in 1999. Of this $21.2 million, $5.6 million was in the form of 491,285 shares of the Company's common stock. The purchase of the Dealers in the first six months of 2000 and the additional payments on Dealers acquired in 1999 were accounted for under the purchase method of accounting wherein approximately $7.1 million was allocated to the fair value of assets acquired, $4.9 million was allocated to the fair value of liabilities assumed and $36.5 million was allocated to goodwill which is being amortized on a straight-line basis over 40 years. The results of the acquired Dealers 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 101,800,000 French francs ($16.2 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 $4.2 million. 8 9 The following table presents the pro forma results as if the above companies had been acquired on January 1, 1999 (in thousands, except per share data):
For the For the Three Months Ended Six Months Ended June 30, June 30, --------------------------- ------------------------------- 2000 1999 2000 1999 ----------- ----------- ------------- ------------- Net sales $ 894,200 $ 785,119 $ 1,639,605 $ 1,443,058 Net income 32,277 29,533 37,465 41,158 Basic earnings per share 0.56 0.61 0.67 0.85 Diluted earnings per share 0.56 0.59 0.67 0.83
7. 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 June 30, 2000, 1,172,200 of such shares had been purchased at a total cost of $12.4 million. On March 6, 2000, the Company entered into forward purchase contracts to purchase 1,557,100 shares of its common stock. On May 5, 2000, the Company entered into forward purchase contracts to purchase an additional 858,000 shares of its common stock. In accordance with the terms of these contracts, settlement is permitted on either a net cash settlement, net share settlement, or a physical settlement basis. Therefore, the shares so contracted remain issued and outstanding until such time as the contracts are settled. The Company expects to settle the contracts in the third and fourth quarters of 2000. (See Subsequent Events for further information.) 8. COMPREHENSIVE INCOME: Comprehensive income is computed as follows (in thousands):
For the For the Three Months Ended Six Months Ended June 30, June 30, ---------------------- ---------------------- 2000 1999 2000 1999 -------- -------- -------- -------- Net income $ 32,277 $ 23,571 $ 38,017 $ 30,201 Cumulative foreign currency translation adjustments (7,522) (524) (16,481) (6,436) -------- -------- -------- -------- Total comprehensive income $ 24,755 $ 23,047 $ 21,536 $ 23,765 ======== ======== ======== ========
9. SUBSEQUENT EVENTS: As of July 31, 2000, the Company had signed letters of intent to acquire 10 Dealers for an aggregate purchase price of approximately $31 million. The Company settled the first of the forward contracts to acquire shares of its common stock. On July 7, 2000, 1,557,100 shares were purchased for a net cash settlement of $15.4 million. 9 10 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW Lennox 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 dealers 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 and services to numerous types of customers, including distributors, installing dealers, homeowners, 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 may enter 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 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. Lennox acquired James N. Kirby Pty. Ltd., 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, through its Excel Comfort Systems subsidiary, purchased the heating, ventilation and air conditioning ("HVAC") related assets of The Ducane Company, Inc. in October 1999 for approximately $53 million in cash. This purchase adds 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 enables Lennox to extend its distribution directly to the consumer and permits it 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 comprised of over 30,000 dealers. In addition, Lennox believes that the heating and air conditioning service business is somewhat less seasonal than the business of manufacturing and selling heating and air conditioning products. As of June 30, 2000, Lennox had acquired 225 dealers in the U.S. and Canada, including the dealers acquired through the acquisition of Service Experts, Inc. The aggregate purchase price of these dealers was approximately $587 million as of June 30, 2000. The Company has signed letters of intent to acquire an additional 10 dealers in the U.S. for an aggregate purchase price of approximately $31 million. 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 12.2 million shares of Lennox common stock and the assumption of approximately $163 million of debt, which was concurrently repaid. The success of the Service 10 11 Experts acquisition, along with Lennox's other acquisitions, will depend on Lennox's ability to integrate these businesses into its business without substantial costs, delays or other operational or financial difficulties. The acquisition added over 120 dealers to the U.S. retail network. 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. RESULTS OF OPERATIONS The following table sets forth, as a percentage of net sales, income data for the three months and six months ended June 30, 2000 and 1999:
Three Months Six Months Ended June 30, Ended June 30, ---------------- ---------------- 2000 1999 2000 1999 ---------------- ---------------- Net sales 100.0% 100.0% 100.0% 100.0% Cost of goods sold 66.6 68.5 67.3 68.7 ----- ----- ----- ----- Gross profit 33.4 31.5 32.7 31.3 Selling, general and administrative expenses 25.6 23.6 26.9 25.1 ----- ----- ----- ----- Income from operations 7.8 7.9 5.8 6.2 Interest expense, net 1.7 1.4 1.7 1.4 Other 0.1 (0.1) 0.1 (0.1) ----- ----- ----- ----- Income before income taxes 6.0 6.6 4.0 4.9 Provision for income taxes 2.4 2.6 1.6 2.1 ----- ----- ----- ----- Net income 3.6% 4.0% 2.4% 2.8% ===== ===== ===== =====
The following table sets forth net sales by business segment and geographic market (dollars in millions):
Three Months Six Months Ended June 30, Ended June 30, 2000 1999 2000 1999 ------------------- ---------------------- ---------------------- --------------------- AMOUNT % AMOUNT % AMOUNT % AMOUNT % -------- ---- --------- ---- ----------- ---- ---------- ---- BUSINESS SEGMENT: North American residential $ 353.9 39.6% $ 317.6 53.7% $ 645.7 40.1% $ 589.1 54.5% North American retail 289.0 32.3 27.0 4.6 483.4 30.0 43.7 4.0 Commercial air conditioning 122.9 13.7 117.6 19.9 218.0 13.5 210.1 19.5 Commercial refrigeration 93.5 10.5 82.6 13.9 185.2 11.5 144.2 13.3 Heat transfer 64.3 7.2 53.3 9.0 129.8 8.1 103.3 9.6 Eliminations (29.4) (3.3) (6.3) (1.1) (51.6) (3.2) (9.5) (0.9) -------- ----- -------- ----- ---------- ----- ---------- ----- Total net sales $ 894.2 100.0% $ 591.8 100.0% $ 1,610.5 100.0% $ 1,080.9 100.0% ======== ===== ======== ===== ========== ===== ========== ===== GEOGRAPHIC MARKET: U.S $ 712.6 79.7% $ 442.7 74.8% $ 1,267.5 78.7% $ 825.8 76.4% International 181.6 20.3 149.1 25.2 343.0 21.3 255.1 23.6 -------- ----- -------- ----- ---------- ----- ---------- ----- Total net sales $ 894.2 100.0% $ 591.8 100.0% $ 1,610.5 100.0% $ 1,080.9 100.0% ======== ===== ======== ===== ========== ===== ========== =====
11 12 THREE MONTHS ENDED JUNE 30, 2000 COMPARED TO THREE MONTHS ENDED JUNE 30, 1999 Net sales. Net sales increased $302.4 million, or 51.1%, to $894.2 million for the quarter ended June 30, 2000 from $591.8 million for the quarter ended June 30, 1999. Net sales related to the North American residential segment were $353.9 million for the quarter ended June 30, 2000, an increase of $36.3 million, or 11.4%, from $317.6 million for the quarter ended June 30, 1999. Of the $36.3 million increase, $14.6 million was due to sales from the recently acquired Ducane operations. The remaining $21.7 million growth in North American residential net sales is due to a 6.8% increase in sales of our existing businesses over the second quarter of 1999, which was primarily attributable to an increase in unit sales. Net sales in the North American retail segment were $289.0 million for the quarter ended June 30, 2000, an increase of $262.0 million from the $27.0 million of net sales for the quarter ended June 30, 1999. This increase was due to acquisitions. Commercial air conditioning net sales increased $5.3 million, or 4.5%, to $122.9 million for the quarter ended June 30, 2000 compared to the quarter ended June 30, 1999. North American sales were particularly strong, achieving growth of 10.1% for the quarter. The addition of two new commercial districts early in the year and the phase-in of the Company's cost-effective Value line contributed to the growth. The increase domestically was offset by a decrease in net sales internationally, primarily due to the impact of exchange rates. International sales growth was 4.9%, after adjusting for the impact of currency exchange rate movements. Net sales related to the commercial refrigeration segment were $93.5 million for the quarter ended June 30, 2000, an increase of $10.9 million, or 13.2%, from $82.6 million for the quarter ended June 30, 1999. Of this increase, $8.8 million was due to the acquisition of James N. Kirby Pty. Ltd. North American commercial refrigeration net sales increased 10.9% due to strength in all served segments, with the telecommunications sector being particularly strong. 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, international sales growth for the second quarter of 2000 was 1.6%. Heat transfer revenues increased $11.0 million, or 20.6 %, to $64.3 million for the quarter ended June 30, 2000 compared to the quarter ended June 30, 1999. The acquisition of James N. Kirby Pty. Ltd. contributed $6.6 million to heat transfer revenues in the second quarter of 2000. Net sales in the North America heat transfer business increased $2.1 million. International heat transfer operations increased net sales $2.3 million despite the large drop in the U.S. exchange rate of the Euro and the Australian dollar. Europe heat transfer sales benefited from increased production capacity at the Czech Republic plant. Gross profit. Gross profit was $298.3 million for the quarter ended June 30, 2000 compared to $186.3 million for the quarter ended June 30, 1999, an increase of $112.0 million. Gross profit margin was 33.4% for the quarter ended June 30, 2000 and 31.5% for the quarter ended June 30, 1999. Acquisitions account for the majority of the increase of $112.0 million in gross profit. The gross profit margins of Lennox's traditional businesses increased 1.2% for the second quarter of 2000 compared to the second quarter of 1999 primarily due to manufacturing efficiencies, product mix and selected price increases. Acquired businesses contributed 0.7% to the increase in gross profit margins. Selling, general and administrative expenses. Selling, general and administrative expenses were $228.6 million for the quarter ended June 30, 2000, an increase of $89.2 million, or 64.0%, from $139.4 million for the quarter ended June 30, 1999. Selling, general and administrative expenses represented 25.6% and 23.6% of total revenues for the second quarter of 2000 and 1999, respectively. Of the $89.2 million increase, acquired companies represented $82.1 million, or 92.0%, of the increase in selling, general and administrative expenses. Acquired companies' selling, general and administrative expenses were 28.1% of sales. The majority of the remaining $7.1 million increase was due to increased advertising and promotion, personnel and facility costs. Interest expense, net. Interest expenses, net for the quarter ended June 30, 2000, increased to $15.2 million from $8.5 million for the quarter ended June 30, 1999. Increased borrowings to fund acquisitions were responsible for the increase in interest expense. Provision for income taxes. The provision for income taxes was $21.7 million for the quarter ended June 30, 2000 and $15.5 million for the quarter ended June 30, 1999. The effective tax rate of 40.2% and 39.6% for the quarters ended June 30, 2000 and 1999, respectively, differs from the statutory federal rate of 35.0% principally due to state and 12 13 local taxes, non-deductible goodwill expenses, and foreign operating losses for which no tax benefits have been recognized. SIX MONTHS ENDED JUNE 30, 2000 COMPARED TO SIX MONTHS ENDED JUNE 30, 1999 Net sales. Net sales increased $529.6 million, or 49.0%, to $1,610.5 million for the six months ended June 30, 2000 from $1,080.9 million for the six months ended June 30, 1999. Net sales related to the North American residential segment were $645.7 million for the six months ended June 30, 2000, an increase of $56.6 million, or 9.6%, from $589.1 million for the six months ended June 30, 1999. Of the $56.6 million increase, $31.4 million was due to sales from acquired hearth products companies and the acquisition of Ducane's HVAC product lines. The remaining $25.2 million growth in North American residential net sales is due to a 4.3% increase in sales of our existing businesses over the first six months of 1999, which is primarily due to an increase in unit sales. Net sales in the North American retail segment were $483.4 million for the six months ended June 30, 2000, an increase of $439.7 million from the $43.7 million of net sales for the six months ended June 30, 1999. This increase was due to acquisitions. Commercial air conditioning net sales increased $7.9 million, or 3.8%, to $218.0 million for the six months ended June 30, 2000 compared to the six months ended June 30, 1999. North American commercial air conditioning sales increased 5.6% for the first six months of 2000 compared to the first six months of 1999. The increase domestically was offset by a much smaller increase in net sales internationally, primarily due to the impact of exchange rates. International sales growth was 10.3%, after adjusting for the impact of currency exchange rate movements. The increase in international sales is primarily due to the fact the company has rationalized its European products and they are being marketed throughout Europe rather than just within the country of manufacture. Net sales related to the commercial refrigeration segment were $185.2 million for the six months ended June 30, 2000, an increase of $41.0 million, or 28.4%, from $144.2 million for the six months ended June 30, 1999. Of this increase, $27.5 million was due to the acquisition of James N. Kirby Pty. Ltd. North American commercial refrigeration net sales increased 15.4% as a result of strong sales in the walk-in cooler and telecommunications segments and the completion of some large cold storage projects. The increase domestically was offset by a much smaller increase in net sales internationally, primarily due to the impact of exchange rates. International net sales increased 10.4%, after adjusting for the impact of currency exchange rate movements. International sales volume growth was primarily a result of the Company's increased participation in two areas of the European refrigeration market - sales of supermarket rack systems and direct sales to contractors through the Company's H K Refrigeration brand. Heat transfer revenues increased $26.5 million, or 25.5%, to $129.8 million for the six months ended June 30, 2000 compared to the six months ended June 30, 1999. The acquisitions of James N. Kirby Pty. Ltd. and Livernois Engineering Holding Company contributed $22.0 million to heat transfer revenues in the first six months of 2000. Net sales growth in the North American heat transfer business increased 4.2%. The increase domestically was offset by a much smaller increase in net sales internationally, primarily due to the impact of exchange rates. International net sales increased 14.4%, after adjusting for the impact of currency exchange rate movements. European heat transfer sales benefited from increased production capacity at the Czech Republic plant. Gross profit. Gross profit was $527.1 million for the six months ended June 30, 2000 compared to $337.9 million for the six months ended June 30, 1999, an increase of $189.2 million. Gross profit margin was 32.7% for the six months ended June 30, 2000 and 31.3% for the six months ended June 30, 1999. Acquisitions account for the majority of the increase of $189.2 million in gross profit. The gross profit margins of Lennox's traditional businesses increased 1.1% for the first six months of 2000 compared to the first six months of 1999 primarily due to manufacturing efficiencies, product mix and selected price increases. Acquired businesses contributed 0.3% to the increase in gross profit margins. Selling, general and administrative expenses. Selling, general and administrative expenses were $433.9 million for the six months ended June 30, 2000, an increase of $162.7 million, or 60.0%, from $271.2 million for the six months ended June 30, 1999. Selling, general and administrative expenses represented 26.9% and 25.1% of total revenues for the first six months of 2000 and 1999, respectively. Of the $162.7 million increase, acquired companies represented $148.7 million, or 91.4%, of the increase in selling, general and administrative expenses. Acquired companies' selling, 13 14 general and administrative expenses were 28.6% of sales. The majority of the remaining $14.0 million increase was due to increased advertising and promotion, personnel and facility costs. Interest expense, net. Interest expenses, net for the six months ended June 30, 2000 increased to $28.0 million from $15.1 million for the six months ended June 30, 1999. Increased borrowings to fund acquisitions were responsible for the increase in interest expense. Provision for income taxes. The provision for income taxes was $27.0 million for the six months ended June 30, 2000 and $22.8 million for the six months ended June 30, 1999. The effective tax rates of 41.5% and 43.0% for the six months ended June 30, 2000 and 1999, respectively, differ 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 recent capital requirements have related principally to acquisitions, the expansion of production capacity and increased working capital needs that have accompanied sales growth. Net cash provided by (used in) operating activities was $114.8 million and ($49.1) million for the six months ended June 30, 2000 and 1999, respectively. The increase in cash provided by operations is primarily due to the increase in net income before depreciation and amortization of $23.3 million and the proceeds from the sale of $130 million in accounts receivables. Net cash used in investing activities totaled $239.5 million and $165.8 million for the six months ended June 30, 2000 and 1999, respectively. The greater use of cash for investing relates primarily to increased acquisition activity as $206.8 million and $128.3 million were spent for acquisitions in the six months ended June 30, 2000 and 1999, respectively. Net cash provided by financing activities was $143.6 million and $221.7 million for the six months ended June 30, 2000 and 1999, respectively. Net borrowing needs decreased $72.8 million in the first six months of 2000 versus the same period in 1999 primarily due to the cash received by Lennox from the sale of receivables. Due to the seasonality of the air conditioning and refrigeration businesses, Lennox typically uses cash in the first six months of the year and generates cash during the latter half of the year. In the past, Lennox has used a combination of internally generated funds, external borrowings and common stock to make acquisitions. Lennox intends to acquire additional heating and air conditioning dealers in the U.S. and Canada, and plans to finance these acquisitions with a combination of cash, stock and debt. As of June 30, 2000, Lennox had acquired 225 Dealers in the U.S. and Canada, including Dealers acquired through the acquisition of Service Experts, Inc. The aggregate purchase price of these Dealers was approximately $587 million as of June 30, 2000. The Company has signed letters of intent to acquire an additional 10 Dealers for an aggregate purchase price of approximately $31 million. On April 5, 2000 Lennox purchased the remaining 30% of Ets. Brancher not already owned for 101,800,000 French francs ($16.2 million). 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 the Company 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. Capital expenditures were $33.1 million for the six months ended June 30, 2000. These expenditures primarily related to production equipment (including tooling), training facilities, leasehold improvements and information systems. The Company has bank lines of credit aggregating $688 million, of which $454 million was outstanding at June 30, 2000 and the remaining $234 million was available for future borrowings. 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 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. 14 15 On April 3, 2000, the Company borrowed $35.0 million under a shelf agreement with The Prudential Insurance Company of America. Terms of the borrowing include an interest rate of 8%, interest to be paid semi-annually and an ultimate maturity date of June 1, 2010. Terms and conditions of the borrowing are similar to those of the existing revolving credit agreements. Lennox believes its shares of stock are undervalued and has initiated programs to repurchase shares. Lennox's Board of Directors has authorized the purchase of up to 5,000,000 shares. Through December 1999, 1,172,000 shares had been repurchased at a total cost of $12.4 million. To continue the repurchase program while maintaining available debt capacity, Lennox, on March 6, 2000, entered into forward purchase contracts for 1,557,100 shares that were settled on July 7, 2000 for a cash payment of $15.4 million. On May 5, 2000 Lennox entered into additional forward purchase contracts for 858,000 shares. Under the terms of the forward purchase contracts, settlement is permitted on a net cash basis, net share basis or physical basis. 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. 15 16 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 beginning with the first quarter of 2001. Management does not believe that the adoption of this pronouncement will have a significant impact on the Company's financial statements. 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 U.S. dollar are translated into U.S. dollars for financial reporting purposes based on the average exchange rate for the period. During the six months ended June 30, 2000 and 1999, net sales from outside the U.S. represented 21.3% and 23.6%, respectively, of total net sales. Historically, foreign currency transaction gains (losses) have not had a material effect on operations. From time to time Lennox enters into foreign currency 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 receivables being hedged. As of June 30, 2000, Lennox had obligations to deliver the equivalent of $29.2 million of various foreign currencies at various dates through July 31, 2001, and contracts to buy $3.2 million of various foreign currencies through December 29, 2000 for which the counterparties to the contracts will pay or receive fixed contract amounts. The net fair value of the currency contracts was a liability of $2.1 million at June 30, 2000. As of June 30, 2000, Lennox had contracts to purchase copper, aluminum sheet stock and aluminum fin stock aggregating $19.4 million over the next 12 months. The fair value of these contracts was a net liability of $0.3 million at June 30, 2000. 16 17 PART II -- OTHER INFORMATION ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. The Company's 2000 Annual Meeting of stockholders ("Annual Meeting") was held on April 28, 2000. At the Annual Meeting, the Company's stockholders elected five directors with terms expiring at the Company's Annual Meeting of Stockholders in 2003. The following sets forth the results of voting at the Annual Meeting for the election of directors *:
Directors For Withheld Abstentions --------- --- -------- ----------- Linda G. Alvarado 45,596,048 704,263 * Richard W. Booth 45,136,498 1,163,813 * David V. Brown 45,590,936 709,375 * John E. Major 45,583,332 716,979 * William G. Roth 45,594,554 705,757 *
*With respect to the election of Directors, the form of proxy permitted stockholders to check boxes indicating votes either "For" or "Withhold Authority,," or to vote "Exceptions" and to name exceptions. Votes relating to directors designated above as "Withheld" include votes cast as "Withhold Authority" and for named exceptions. Following the Annual Meeting, Janet K. Cooper, Terry D. Stinson and Richard L. Thompson, having terms expiring in 2001, and David H. Anderson, Thomas W. Booth, James J. Byrne, Donald E. Miller and John W. Norris, Jr., having terms expiring in 2002, continued in office. ITEM 6. 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 the Company's Registration Statement on Form S-1 (Registration No. 333-75725)). 10.1-- 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. (filed herewith). 10.2-- Purchase and Sale Agreement, dated as of June 19, 2000, among Lennox Industries Inc., Heatcraft Inc. and LPAC Corp. (filed herewith). 27.1-- Financial Data Schedule (filed herewith). * Incorporated herein by reference as indicated. Reports on Form 8-K (None) 17 18 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: August 10, 2000 /s/ Clyde W. Wyant ----------------------------- Principal Financial Officer and Duly Authorized Signatory 18 19 INDEX TO EXHIBITS
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 the Company's Registration Statement on Form S-1 (Registration No. 333-75725)). 10.1-- 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. (filed herewith). 10.2-- Purchase and Sale Agreement, dated as of June 19, 2000, among Lennox Industries Inc., Heatcraft Inc. and LPAC Corp. (filed herewith). 27.1-- Financial Data Schedule (filed herewith).
* Incorporated herein by reference as indicated.