<PAGE> 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 MARCH 31, 2000 OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________ to ________
Commission file number 001-15149
LENNOX INTERNATIONAL INC.
(Exact name of registrant as specified in its charter)
DELAWARE 42-0991521
(State or other jurisdiction (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, 2000, the number of shares outstanding of the registrant's common
stock, par value $.01 per share, was 57,433,490.
1
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LENNOX INTERNATIONAL INC.
INDEX
<TABLE>
<CAPTION>
Page No.
<S> <C>
Part I. Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets - March 31, 2000 (Unaudited)
and December 31, 1999 3
Consolidated Statements of Income (Unaudited) - Three Months
Ended March 31, 2000 and 1999 4
Consolidated Statements of Cash Flows (Unaudited) - Three Months
Ended March 31, 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 14
Part II. Other Information
Item 4. Submission of Matters to a Vote of Security Holders 15
Item 6. Exhibits and Reports on Form 8-K 15
</TABLE>
2
<PAGE> 3
PART I -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
LENNOX INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
As of March 31, 2000 and December 31, 1999
(In thousands, except share data)
ASSETS
<TABLE>
<CAPTION>
March 31, December 31,
2000 1999
----------- -----------
(unaudited)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 31,965 $ 29,174
Accounts and notes receivable, net 537,074 443,107
Inventories 409,464 345,424
Deferred income taxes 28,874 25,367
Other assets 52,708 44,526
----------- -----------
Total current assets 1,060,085 887,598
INVESTMENTS IN JOINT VENTURES 12,029 12,434
PROPERTY, PLANT AND EQUIPMENT, net 371,267 329,966
GOODWILL, net 638,561 394,252
OTHER ASSETS 56,161 59,423
----------- -----------
TOTAL ASSETS $ 2,138,103 $ 1,683,673
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Short-term debt $ 29,655 $ 22,219
Current maturities of long-term debt 30,141 34,554
Accounts payable 263,573 196,143
Accrued expenses 243,037 200,221
Income taxes payable 6,258 9,859
----------- -----------
Total current liabilities 572,664 462,996
LONG-TERM DEBT 726,733 520,276
DEFERRED INCOME TAXES 518 928
POSTRETIREMENT BENEFITS, OTHER THAN PENSIONS 14,980 15,125
OTHER LIABILITIES 71,816 72,377
----------- -----------
Total liabilities 1,386,711 1,071,702
MINORITY INTEREST 12,907 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,
59,456,566 shares and 46,161,607 shares issued
for 2000 and 1999, respectively 595 462
Additional paid-in capital 366,743 215,523
Retained earnings 410,138 409,851
Accumulated other comprehensive loss (21,665) (12,706)
Deferred compensation (4,843) (2,848)
Treasury stock, at cost, 1,182,975 and 1,172,200 shares
for 2000 and 1999, respectively (12,483) (12,386)
----------- -----------
Total stockholders' equity 738,485 597,896
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 2,138,103 $ 1,683,673
=========== ===========
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
3
<PAGE> 4
LENNOX INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
For the Three Months Ended March 31, 2000 and 1999
(Unaudited, in thousands, except per share data)
<TABLE>
<CAPTION>
For the
Three Months Ended
March 31,
------------------------
2000 1999
--------- ---------
<S> <C> <C>
NET SALES $ 716,324 $ 489,059
COST OF GOODS SOLD 487,561 337,481
--------- ---------
Gross Profit 228,763 151,578
OPERATING EXPENSES:
Selling, general and administrative 205,280 131,786
--------- ---------
Income from operations 23,483 19,792
INTEREST EXPENSE, net 12,750 6,558
OTHER 229 (211)
MINORITY INTEREST (546) (516)
--------- ---------
Income before income taxes 11,050 13,961
PROVISION FOR INCOME TAXES 5,310 7,331
--------- ---------
Net income $ 5,740 $ 6,630
========= =========
EARNINGS PER SHARE:
Basic $ 0.10 $ 0.19
Diluted $ 0.10 $ 0.18
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
4
<PAGE> 5
LENNOX INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Three Months Ended March 31, 2000 and 1999
(Unaudited, in thousands)
<TABLE>
<CAPTION>
For the
Three Months Ended
March 31,
------------------------
2000 1999
--------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 5,740 $ 6,630
Adjustments to reconcile net income to net cash provided by (used in) operating
activities -
Minority interest (546) (516)
Joint venture losses 329 1,088
Depreciation and amortization 20,892 13,502
Loss on disposal of equipment 1,788 18
Other 315 1,969
Changes in assets and liabilities, net of effects of acquisitions -
Accounts and notes receivable (26,828) (45,900)
Inventories (38,846) (38,763)
Other current assets (5,038) (2,660)
Accounts payable 42,931 22,004
Accrued expenses 3,577 (16,540)
Deferred income taxes (2,150) 1,145
Income taxes payable and receivable 2,587 7,048
Long-term warranty, deferred income and other liabilities 3,972 (6,269)
--------- ---------
Net cash provided by (used in) operating activities 8,723 (57,244)
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from the disposal of property, plant and equipment 86 35
Purchases of property, plant and equipment (17,470) (20,050)
Acquisitions, net of cash acquired (183,423) (51,145)
--------- ---------
Net cash used in investing activities (200,807) (71,160)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from revolving short-term debt 7,939 134,536
Proceeds from (usage of) revolving long-term debt 206,673 (701)
Repayment of long-term debt (13,640) --
Sales of common stock -- 249
Repurchases of common stock (97) (131)
Cash dividends paid (5,453) (3,038)
--------- ---------
Net cash provided by financing activities 195,422 130,915
INCREASE IN CASH AND CASH EQUIVALENTS 3,338 2,511
EFFECT OF EXCHANGE RATES ON CASH AND CASH EQUIVALENTS (547) (638)
--------- ---------
CASH AND CASH EQUIVALENTS, beginning of period 29,174 28,389
--------- ---------
CASH AND CASH EQUIVALENTS, end of period $ 31,965 $ 30,262
========= =========
Supplementary disclosures of cash flow information:
Cash paid during the period for:
Interest $ 8,816 $ 2,487
========= =========
Income taxes $ 2,403 $ 38
========= =========
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
5
<PAGE> 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 March 31, 2000,
and the consolidated statements of income and cash flows for the three months
ended March 31, 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):
<TABLE>
<CAPTION>
FOR THE
THREE MONTHS ENDED
MARCH 31,
------------------------
NET SALES 2000 1999
- --------- --------- ---------
<S> <C> <C>
North American residential $ 291,780 $ 271,474
North American retail 194,528 16,680
Commercial air conditioning 95,084 92,468
Commercial refrigeration 91,672 61,598
Heat transfer (1) 65,447 50,069
Eliminations (22,187) (3,230)
--------- ---------
$ 716,324 $ 489,059
========= =========
</TABLE>
(1) The Heat Transfer segment had intersegment sales of $5,113 and $6,587 for
the three months ended March 31, 2000 and 1999, respectively.
<TABLE>
<CAPTION>
FOR THE
THREE MONTHS ENDED
MARCH 31,
----------------------
INCOME (LOSS) FROM OPERATIONS 2000 1999
- ----------------------------- -------- --------
<S> <C> <C>
North American residential $ 20,765 $ 23,956
North American retail 5,426 901
Commercial air conditioning (3,053) (1,934)
Commercial refrigeration 7,050 2,306
Heat transfer 4,934 3,239
Corporate and other (9,905) (8,408)
Eliminations (1,734) (268)
-------- --------
$ 23,483 $ 19,792
======== ========
</TABLE>
6
<PAGE> 7
<TABLE>
<CAPTION>
AS OF MARCH 31, AS OF DECEMBER 31,
TOTAL ASSETS 2000 1999
- ------------ --------------- ------------------
<S> <C> <C>
North American residential $ 633,485 $ 596,895
North American retail 707,870 290,978
Commercial air conditioning 257,231 251,226
Commercial refrigeration 257,264 252,176
Heat transfer 183,938 179,615
Corporate and other 123,795 127,320
Eliminations (25,480) (14,537)
----------- -----------
$ 2,138,103 $ 1,683,673
=========== ===========
</TABLE>
3. INVENTORIES:
Components of inventories are as follows (in thousands):
<TABLE>
<CAPTION>
AS OF MARCH 31, AS OF DECEMBER 31,
2000 1999
--------------- ------------------
<S> <C> <C>
Finished goods $264,174 $219,303
Repair parts 47,561 36,153
Work in process 22,968 20,957
Raw materials 122,822 117,209
-------- --------
457,525 393,622
Reduction for last-in, first-out 48,061 48,198
-------- --------
$409,464 $345,424
======== ========
</TABLE>
4. LINES OF CREDIT:
The Company has bank lines of credit aggregating $688 million, of which
$535 million was outstanding at March 31, 2000 and the remaining $153 million
was available for future borrowings. As of March 31, 2000, $509 million of the
amount outstanding has been classified as long-term debt in the accompanying
Consolidated Balance Sheets. Included in the lines are two $300 million domestic
facilities governed by revolving credit facility agreements between the Company
and syndicates of banks. The facilities contain certain financial covenants and
bear interest, at the Company's option, at a rate equal to either (a) the
greater of the bank's prime rate or the federal fund's rate plus 0.5% or (b) the
London Interbank Offered Rate plus a margin equal to 0.5% to 1.25%, depending
upon the ratio of total funded debt to EBITDA. The Company pays a commitment fee
equal to 0.10% to 0.30% of the unused commitment, depending upon the ratio of
total funded debt to EBITDA. The agreements provide restrictions on the
Company's ability to incur additional indebtedness, encumber its assets, sell
its assets, or pay dividends.
7
<PAGE> 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 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 amounts):
<TABLE>
<CAPTION>
FOR THE
THREE MONTHS ENDED
MARCH 31,
-------------------
2000 1999
------- -------
<S> <C> <C>
Net income $ 5,740 $ 6,630
======= =======
Weighted average shares outstanding 54,480 35,541
Effect of diluted securities attributable to stock
options and performance share awards 307 825
------- -------
Weighted average shares outstanding, as adjusted 54,787 36,366
======= =======
Diluted earnings per share $ 0.10 $ 0.18
======= =======
</TABLE>
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 shares
of the Company's common stock were 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 wherein approximately $161.7 million was allocated to the fair value
of the assets acquired, approximately $78.9 million was allocated to the fair
value of liabilities assumed, and $224.1 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"). Through 1999, 93 such dealers had been
acquired. During the first three months of 2000, six additional Dealers in the
United States and one additional Dealer in Canada were purchased for a total
price of approximately $17.5 million. In addition, approximately $14.6 million
was paid in the first quarter of 2000 as additional payments on Dealers acquired
in 1999. Of this approximately $14.6 million, approximately $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 three 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 and $4.1 million was allocated to the fair value of liabilities
assumed. Approximately $29.1 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.
8
<PAGE> 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):
<TABLE>
<CAPTION>
FOR THE
THREE MONTHS ENDED
MARCH 31,
---------------------
2000 1999
----- ----
<S> <C> <C>
Net sales $ 745,405 $ 611,909
Net income 5,762 10,941
Basic earnings per share 0.10 0.23
Diluted earnings per share 0.10 0.22
</TABLE>
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 March 31, 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. 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 quarter of 2000.
8. COMPREHENSIVE INCOME:
Comprehensive income is computed as follows (in thousands):
<TABLE>
<CAPTION>
FOR THE
THREE MONTHS ENDED
MARCH 31,
--------------------
2000 1999
------- -------
<S> <C> <C>
Net income $ 5,740 $ 6,630
Cumulative foreign currency
translation adjustments (8,959) (5,912)
------- -------
Total comprehensive income (loss) $(3,219) $ 718
======= =======
</TABLE>
9. SUBSEQUENT EVENTS:
As of April 28, 2000, the Company had signed letters of intent to acquire
17 Dealers for an aggregate purchase price of approximately $73.3 million.
The Company had entered into an agreement to purchase the remaining 30%
interest in Ets. Brancher, the holding company owning the Company's interest in
companies located in France. The purchase was completed on April 5, 2000,
wherein the Company paid 101,800,000 French francs ($16.2 million) to acquire
the interest.
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.
9
<PAGE> 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 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.
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 March 31, 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 $580 million as of March 31, 2000. The Company
has signed letters of intent to acquire an additional 17 dealers in the U.S. for
an aggregate purchase price of approximately $73.3 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
<PAGE> 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 ended March 31, 2000 and 1999:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-----------------
2000 1999
----- -----
<S> <C> <C>
Net sales 100.0% 100.0%
Cost of goods sold 68.1 69.0
----- -----
Gross profit 31.9 31.0
Selling, general and administrative
expenses 28.6 27.0
----- -----
Income from operations 3.3 4.0
Interest expense, net 1.8 1.3
Other 0.1 (0.1)
Minority interest (0.1) (0.1)
----- -----
Income before income taxes 1.5 2.9
Provision for income taxes 0.7 1.5
----- -----
Net income 0.8% 1.4%
===== =====
</TABLE>
The following table sets forth net sales by business segment and geographic
market (dollars in millions):
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
-------------------------------------------
2000 1999
------------------ ------------------
AMOUNT % AMOUNT %
------ ------ ------ ------
<S> <C> <C> <C> <C>
BUSINESS SEGMENT:
North American
residential $291.8 40.7% $271.5 55.5%
North American retail 194.5 27.2 16.7 3.4
Commercial air
conditioning 95.1 13.3 92.5 18.9
Commercial refrigeration 91.7 12.8 61.6 12.6
Heat transfer 65.4 9.1 50.1 10.2
Eliminations (22.2) (3.1) (3.3) (0.6)
------ ------ ------ ------
Total net sales $716.3 100.0% $489.1 100.0%
====== ====== ====== ======
GEOGRAPHIC MARKET:
U.S. $554.9 77.5% 383.2 78.3%
International 161.4 22.5 105.9 21.7
------ ------ ------ ------
Total net sales $716.3 100.0% $489.1 100.0%
====== ====== ====== ======
</TABLE>
11
<PAGE> 12
THREE MONTHS ENDED MARCH 31, 2000 COMPARED TO THREE MONTHS ENDED MARCH 31, 1999
Net sales. Net sales increased $227.2 million, or 46.5%, to $716.3 million
for the quarter ended March 31, 2000 from $489.1 million for the quarter ended
March 31, 1999.
Net sales related to the North American residential segment were $291.8
million for the quarter ended March 31, 2000, an increase of $20.3 million, or
7.5%, from $271.5 million for the quarter ended March 31, 1999. Of the $20.3
million increase, $16.8 million was due to sales from acquired hearth products
companies and the acquisition of Ducane's HVAC product lines. The remaining $3.5
million growth in North American residential net sales is an increase of 1.3%
over the first quarter of 1999. However, sales in the first quarter of 1999 were
enhanced in anticipation of a work stoppage at Armstrong's operations in the
second quarter of 1999. Management estimates sales would have grown
approximately 4.3% without the impact of the Armstrong work stoppage.
Net sales in the North American retail segment were $194.5 million for the
quarter ended March 31, 2000, an increase of $177.8 million from the $16.7
million of net sales for the quarter ended March 31, 1999. This increase was due
to acquisitions.
Commercial air conditioning net sales increased $2.6 million, or 2.8%, to
$95.1 million for the quarter ended March 31, 2000 compared to the quarter ended
March 31, 1999. All of the $2.6 million increase in net sales came from
international operations, primarily due to the fact that 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 $91.7
million for the quarter ended March 31, 2000, an increase of $30.1 million, or
48.9%, from $61.6 million for the quarter ended March 31, 1999. Of this
increase, $18.7 million was due to the acquisition of James N. Kirby Pty. Ltd.
North American commercial refrigeration net sales increased $6.9 million as a
result of strong sales in the walk-in cooler segment and some large cold storage
projects that were completed. International net sales increased $4.5 million
primarily due to the expansion of supermarket rack business and the HK
Refrigeration brand, which is sold directly to contractors in Europe.
Heat transfer revenues increased $15.3 million, or 30.5 %, to $65.4 million
for the quarter ended March 31, 2000 compared to the quarter ended March 31,
1999. The acquisitions of James N. Kirby Pty. Ltd. and Livernois Engineering
Holding Company contributed $15.4 million to heat transfer revenues in the first
quarter of 2000. Net sales growth in the existing North America heat transfer
business increased $1.5 million. A decline in net sales of $1.6 million occurred
in the existing international heat transfer operations, largely due to the drop
in the exchange rate of the Euro to the U.S. dollar.
Gross profit. Gross profit was $228.8 million for the quarter ended March
31, 2000 compared to $151.6 million for the year ended March 31, 1999, an
increase of $77.2 million. Gross profit margin was 31.9% for the quarter ended
March 31, 2000 and 31.0% for the quarter ended March 31, 1999. The increase of
$77.2 million in gross profit was primarily attributable to increased sales in
the first quarter of 2000 compared to the first quarter of 1999. The gross
profit margins of Lennox's traditional businesses increased 0.8% for the first
quarter of 2000 compared to the first quarter of 1999 due to favorable
purchasing and overhead variation. Acquired businesses contributed 0.1% to the
increase in gross profit margins.
Selling, general and administrative expenses. Selling, general and
administrative expenses were $205.3 million for the quarter ended March 31,
2000, an increase of $73.5 million, or 55.8%, from $131.8 million for the
quarter ended March 31, 1999. Selling, general and administrative expenses
represented 28.6% and 27.0% of total revenues for the first quarter of 2000 and
1999, respectively. Of the $73.5 million increase, acquired companies were $66.6
million, or 90.6%, of the increase in selling, general and administrative
expenses. The majority of the remaining $6.9 million increase was due to
increased advertising and promotion, personnel and facility costs.
Interest expense, net. Interest expenses, net for the quarter ended March
31, 2000 increased to $12.8 million from $6.6 million for the quarter ended
March 31, 1999. Increased borrowings to fund acquisitions were responsible for
the increase in interest expense.
Provision for income taxes. The provision for income taxes was $5.3 million
for the quarter ended March 31, 2000 and $7.3 million for the quarter ended
March 31, 1999. The effective tax rate of 48.1% and 52.5% for the quarters
12
<PAGE> 13
ended March 31, 2000 and 1999, respectively, differs from the statutory federal
rate of 35.0% principally due to state and local taxes, non-deductible goodwill
expenses, and foreign operating losses for which no tax benefits have been
recognized.
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 operating activities was $8.7 million for the three
months ended March 31, 2000 compared to a usage of cash of $57.2 million for the
three months ended March 31, 1999. The increase in cash provided by operating
activities is primarily due to a decrease in cash used to finance receivables of
$19.l million, an increase in payables balances of $20.9 million and an increase
in accrued expenses of $20.1 million. Net cash used in investing activities
totaled $200.8 million and $71.2 million for the three months ended March 31,
2000 and 1999, respectively. The greater use of cash for investing relates
primarily to increased acquisition activity as $183.4 million and $51.1 million
was spent for acquisitions in the three months ended March 31, 2000 and 1999,
respectively. Net cash provided by financing activities was $195.4 million and
$130.9 million for the three months ended March 31, 2000 and 1999, respectively.
Net borrowing increased in the first three months of 2000 versus 1999 to finance
the acquisition of the HVAC dealers and Service Experts, Inc. 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 March 31, 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 of these dealers was approximately $580 million as
of March 31, 2000. The Company has signed letters of intent to acquire an
additional 17 dealers in the U.S. for an aggregate purchase price of
approximately $73.3 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 $17.5 million for the three months ended March
31, 2000. These expenditures primarily related to production equipment
(including tooling), training facilities, leasehold improvements and information
systems.
At March 31, 2000, Lennox had long-term debt obligations outstanding of
$756.9 million. Included as part of this long-term debt is $165 million borrowed
under a new $300 million facility agreement between the Company and a syndicate
of banks. The facility contains certain financial covenants and bears interest,
at the Company's option, at a rate equal to either (a) the greater of the bank's
prime rate or the federal fund's rate plus 0.5% or (b) the London Interbank
Offered Rate plus a margin equal to 0.5% to 1.25%, depending upon the ratio of
total funded debt to EBITDA. The Company pays a commitment fee equal to 0.10% to
0.30% of the unused commitment, depending upon the ratio of total funded debt to
EBITDA. The agreement provides 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.
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
<PAGE> 14
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 three months ended March 31,
2000 and 1999, net sales from outside the U.S. represented 22.5% and 21.7%,
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 March 31, 2000, Lennox had obligations to
deliver the equivalent of $34.1 million of various foreign currencies at various
dates through July 31, 2001, and contracts to take $2.2 million of various
foreign currencies through June 30, 2000 for which the counterparties to the
contracts will pay or receive fixed contract amounts.
Lennox has contracts with various suppliers to purchase copper and aluminum
for use in manufacturing processes. As of March 31, 2000, Lennox had contracts
to purchase 16.2 million pounds of copper over the next 12 months at fixed
prices that average $0.736 per pound ($12.0 million). The Company also had
contracts to purchase 4.0 million pounds of aluminum at prices that average
$0.7058 per pound ($2.8 million) over the next 12 months. Lennox is also
obligated to purchase 8.6 million pounds of aluminum fin stock at an average
price of $1.057 per pound ($9.1 million). The fair value of the copper and
aluminum purchase commitments was an asset of $1.4 million at March 31, 2000.
14
<PAGE> 15
PART II -- OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
At a Special Meeting of Stockholders held on January 21, 2000, the Lennox
stockholders voted on a proposal for the issuance of shares of Lennox common
stock in connection with the acquisition of Service Experts, Inc. With respect
to such proposal, 33,640,778 votes were cast for, 271,114 votes were cast
against, and 53,952 shares abstained.
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)).
27.1 -- Financial Data Schedule (filed herewith).
* Incorporated herein by reference as indicated.
Reports on Form 8-K
A report on Form 8-K dated February 3, 2000 was filed by the Company. The
report includes information under Items 2 and 7 concerning the Company's
acquisition of Service Experts, Inc.
A report on Form 8-K/A dated February 16, 2000 was filed by the Company.
The report includes information under Items 2 and 7 concerning the Company's
acquisition of Service Experts, Inc.
A report on Form 8-K dated February 28, 2000 was filed by the Company. The
report includes information under Items 5 and 7 concerning the Company's
financial results for the fourth quarter and year ended December 31, 1999.
15
<PAGE> 16
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, 2000
/s/ Clyde W. Wyant
----------------------------------------
Principal Financial Officer
and Duly Authorized Signatory
<PAGE> 17
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- -----------
<S> <C>
27.1 Financial Data Schedule
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AND CONSOLIDATED STATEMENT OF INCOME FILE AS PART OF
SUCH FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<CASH> 31,965
<SECURITIES> 0
<RECEIVABLES> 561,455
<ALLOWANCES> 24,381
<INVENTORY> 409,464
<CURRENT-ASSETS> 1,060,085
<PP&E> 777,767
<DEPRECIATION> 406,500
<TOTAL-ASSETS> 2,138,103
<CURRENT-LIABILITIES> 572,664
<BONDS> 0
0
0
<COMMON> 595
<OTHER-SE> 737,890
<TOTAL-LIABILITY-AND-EQUITY> 2,138,103
<SALES> 716,324
<TOTAL-REVENUES> 716,324
<CGS> 487,561
<TOTAL-COSTS> 487,561
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 12,750
<INCOME-PRETAX> 11,050
<INCOME-TAX> 5,310
<INCOME-CONTINUING> 5,740
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,740
<EPS-BASIC> 0.10
<EPS-DILUTED> 0.10
</TABLE>
