UNITED STATES


SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549

FORM 10-Q

(MARK ONE)

þQUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2005
þOR
oTRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY
PERIOD ENDED MARCH 31, 2005

OR

oTRANSITION 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.
Incorporated pursuant to the Laws of the State of DELAWARE

Internal Revenue Service Employer Identification No. 42-0991521

2140 LAKE PARK BLVD.
RICHARDSON, TEXAS
75080
(972-497-5000)

     Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yesþ Noo

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

Yesþ Noo

     As of March 31,July 29, 2005, the number of shares outstanding of the registrant’s common stock, par value $.01 per share, was 61,914,053.62,419,542.
 
 

 

LENNOX INTERNATIONAL INC.

FORM 10-Q
For the Three Months and Six Months Ended March 31,June 30, 2005

INDEX
       
      Page
Part I.Financial Information  
      
Item 1. Financial Statements
       
    Item 1.
Financial Statements
Consolidated Balance Sheets – March 31,— June 30, 2005 (Unaudited) and December 31, 2004
 3
Consolidated Statements of Operations (Unaudited) — Three Months and Six Months Ended June 30, 2005 and 2004
4
Consolidated Statements of Cash Flows (Unaudited) — Six Months Ended June 30, 2005 and 2004
5
Notes to Consolidated Financial Statements (Unaudited)
6
       
    Consolidated Statements of Operations (Unaudited) – Three Months Ended March 31, 2005 and 2004Item 2. 4
Management’s Discussion and Analysis of Financial Condition and Results of Operations
14
       
    Consolidated Statements of Cash Flows (Unaudited) – Three Months Ended March 31, 2005 and 2004Item 3. 5
Quantitative and Qualitative Disclosures About Market Risk
26
       
    Notes to Consolidated Financial Statements (Unaudited)Item 4. 6
Controls and Procedures
26
Part II.Other Information
       
  Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations4. 13
Submission of Matters to a Vote of Security Holders
27
       
  Item 3. Quantitative and Qualitative Disclosures About Market Risk5. 21
Other Information
27
       
  Item 4. Controls and Procedures21
Part II. Other Information
Item 1. Legal Proceedings22
  Item 6. Exhibits 22
Exhibits
28
 Amended & Restated 1998 Incentive Plan
Subsidiaries Computation of Ratio of Earnings to Fixed Charges
 Certification of the Principal Executive Officer
 Certification of the Principal Financial Officer
 Certification of Principal Executive Officer & Principal Financial OfficerPursuant to U.S.C. Section 1350

2

PART I — FINANCIAL INFORMATION

Item 1. Financial Statements.

LENNOX INTERNATIONAL INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
As of March 31,June 30, 2005 and December 31, 2004
(In millions, except share and per share data)
         
  March 31,  December 31, 
  2005  2004 
  (unaudited)     
ASSETS        
CURRENT ASSETS:        
Cash and cash equivalents $84.2  $60.9 
Accounts and notes receivable, net  450.2   472.5 
Inventories  275.8   247.2 
Deferred income taxes  13.1   13.1 
Other assets  42.4   45.9 
Assets held for sale  1.2   5.1 
       
Total current assets  866.9   844.7 
PROPERTY, PLANT AND EQUIPMENT, net  236.3   234.0 
GOODWILL, net  222.5   225.4 
DEFERRED INCOME TAXES  82.1   82.8 
OTHER ASSETS  137.3   131.7 
       
TOTAL ASSETS $1,545.1  $1,518.6 
       
         
LIABILITIES AND STOCKHOLDERS’ EQUITY
         
CURRENT LIABILITIES:        
Short-term debt $3.8  $6.0 
Current maturities of long-term debt  36.3   36.4 
Accounts payable  281.6   237.0 
Accrued expenses  259.9   286.3 
Income taxes payable  16.7   14.6 
Liabilities held for sale  2.4   3.7 
       
Total current liabilities  600.7   584.0 
LONG-TERM DEBT  269.1   268.1 
POSTRETIREMENT BENEFITS, OTHER THAN PENSIONS  14.7   14.2 
PENSIONS  105.1   105.5 
OTHER LIABILITIES  78.6   73.9 
       
Total liabilities  1,068.2   1,045.7 
       
         
COMMITMENTS AND CONTINGENCIES        
STOCKHOLDERS’ EQUITY:        
Preferred stock, $.01 par value, 25,000,000 shares authorized, no shares issued or outstanding  —   — 
Common stock, $.01 par value, 200,000,000 shares authorized, 67,005,959 shares and 66,367,987 shares issued for 2005 and 2004 respectively  0.7   0.7 
Additional paid-in capital  465.1   454.1 
Retained earnings  66.9   66.8 
Accumulated other comprehensive (loss) income  (7.4)  0.7 
Deferred compensation  (16.0)  (18.2)
Treasury stock, at cost, 3,106,822 shares and 3,044,286 for 2005 and 2004, respectively  (32.4)  (31.2)
       
Total stockholders’ equity  476.9   472.9 
       
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY $1,545.1  $1,518.6 
       
ASSETS

         
  June 30,  December 31, 
  2005  2004 
  (unaudited)     
CURRENT ASSETS:        
Cash and cash equivalents $93.6  $60.9 
Accounts and notes receivable, net  541.9   472.5 
Inventories  257.5   247.2 
Deferred income taxes  16.0   13.1 
Other assets  41.7   45.9 
Assets held for sale  0.1   5.1 
       
Total current assets  950.8   844.7 
PROPERTY, PLANT AND EQUIPMENT, net  238.1   234.0 
GOODWILL  219.1   225.4 
DEFERRED INCOME TAXES  80.4   82.8 
OTHER ASSETS  111.8   131.7 
       
TOTAL ASSETS $1,600.2  $1,518.6 
       
         
LIABILITIES AND STOCKHOLDERS’ EQUITY
         
CURRENT LIABILITIES:        
Short-term debt $1.0  $6.0 
Current maturities of long-term debt  11.3   36.4 
Accounts payable  294.7   237.0 
Accrued expenses  282.7   286.3 
Income taxes payable  38.9   14.6 
Liabilities held for sale  0.9   3.7 
       
Total current liabilities  629.5   584.0 
LONG-TERM DEBT  263.0   268.1 
POSTRETIREMENT BENEFITS, OTHER THAN PENSIONS  15.1   14.2 
PENSIONS  105.6   105.5 
OTHER LIABILITIES  85.7   73.9 
       
Total liabilities  1,098.9   1,045.7 
       
         
COMMITMENTS AND CONTINGENCIES        
STOCKHOLDERS’ EQUITY:        
Preferred stock, $.01 par value, 25,000,000 shares authorized, no shares issued or outstanding  —   — 
Common stock, $.01 par value, 200,000,000 shares authorized, 66,948,331 shares and 66,367,987 shares issued for 2005 and 2004 respectively  0.7   0.7 
Additional paid-in capital  463.9   454.1 
Retained earnings  105.6   66.8 
Accumulated other comprehensive (loss) income  (23.5)  0.7 
Deferred compensation  (13.0)  (18.2)
Treasury stock, at cost, 3,107,074 shares and 3,044,286 shares for 2005 and 2004 respectively  (32.4)  (31.2)
       
Total stockholders’ equity  501.3   472.9 
       
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY $1,600.2  $1,518.6 
       
The accompanying notes are an integral part of these consolidated financial statements.

3

LENNOX INTERNATIONAL INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS
For the Three Months and Six Months Ended March 31,June 30, 2005 and 2004
(Unaudited, in millions, except per share data)
                        
 For the  For the For the 
 Three Months Ended  Three Months Ended Six Months Ended 
 March 31,  June 30, June 30, 
 2005 2004  2005 2004 2005 2004 
NET SALES $700.3 $664.0  $867.8 $805.4 $1,568.1 $1,469.4 
COST OF GOODS SOLD 478.5 438.4  573.8 530.1 1,052.3 968.5 
              
Gross Profit 221.8 225.6  294.0 275.3 515.8 500.9 
OPERATING EXPENSES:  
Selling, general and administrative expense 204.3 206.3  224.9 209.1 429.2 415.4 
(Gains), losses and other expenses, net  (8.7) —  (8.7) — 
Restructuring charge 2.2 — 2.2 — 
Goodwill impairment — 208.3  — — — 208.3 
              
Operational income (loss) from continuing operations 17.5  (189.0) 75.6 66.2 93.1  (122.8)
INTEREST EXPENSE, net 5.5 7.5  4.6 8.9 10.1 16.4 
OTHER EXPENSE 0.1 0.3 
OTHER INCOME  (0.6)  (0.7)  (0.5)  (0.4)
              
Income (loss) from continuing operations before income taxes 11.9  (196.8) 71.6 58.0 83.5  (138.8)
PROVISION FOR (BENEFITS FROM) INCOME TAXES 4.4  (19.1)
PROVISION FOR INCOME TAXES 26.6 21.8 31.0 2.7 
              
Income (loss) from continuing operations 7.5  (177.7) 45.0 36.2 52.5  (141.5)
              
DISCONTINUED OPERATIONS (NOTE 9):  
Loss from operations of discontinued operations 1.6 20.1  0.2 3.0 1.8 23.1 
Income tax benefit  (0.4)  (3.7) —  (0.9)  (0.4)  (4.6)
Loss on disposal of discontinued operations 0.1 —  — 0.6 0.1 0.6 
Income tax benefit  (0.2) —  —  (0.2)  (0.2)  (0.2)
              
Loss from discontinued operations 1.1 16.4  0.2 2.5 1.3 18.9 
              
Net income (loss) $6.4 $(194.1) $44.8 $33.7 $51.2 $(160.4)
              
  
INCOME (LOSS) PER SHARE FROM CONTINUING OPERATIONS:  
Basic $0.12 $(2.98) $0.73 $0.60 $0.85 $(2.37)
Diluted $0.12 $(2.98) $0.64 $0.54 $0.77 $(2.37)
  
LOSS PER SHARE FROM DISCONTINUED OPERATIONS:  
Basic $(0.02) $(0.28) $(0.01) $(0.04) $(0.02) $(0.31)
Diluted $(0.02) $(0.28) $— $(0.04) $(0.02) $(0.31)
  
NET INCOME (LOSS) PER SHARE:  
Basic $0.10 $(3.26) $0.72 $0.56 $0.83 $(2.68)
Diluted $0.10 $(3.26) $0.64 $0.50 $0.75 $(2.68)
 
AVERAGE SHARES OUTSTANDING: 
Basic 62.0 60.1 61.7 59.8 
Diluted 72.8 70.4 72.5 59.8 
 
CASH DIVIDENDS DECLARED PER SHARE: $0.10 $0.095 $0.20 $0.19 

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

4

LENNOX INTERNATIONAL INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
For the ThreeSix Months Ended March 31,June 30, 2005 and 2004
(Unaudited, in millions)
                
 For the  For the 
 Three Months Ended  Six Months Ended 
 March 31,  June 30, 
 2005 2004  2005 2004 
CASH FLOWS FROM OPERATING ACTIVITIES:  
Net income (loss) $6.4 $(194.1) $51.2 $(160.4)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: 
Adjustments to reconcile net income (loss) to net cash provided by operating activities: 
Minority interest and equity in unconsolidated affiliates  (4.6)  (2.6)  (8.1)  (6.4)
Non-cash restructuring expenses 1.4 — 
Non-cash impairment of long-lived assets and goodwill — 224.7  — 224.7 
Depreciation and amortization 9.6 11.5  18.9 22.6 
Deferred income taxes 0.4  (23.9)  (1.1)  (25.5)
Loss from discontinued operations, other than non-cash impairments 1.1 —  1.3 2.5 
Other losses and expenses 2.2 5.4   (3.6) 10.6 
Changes in assets and liabilities, net of effects of divestitures:  
Accounts and notes receivable 15.2 49.2   (87.8) 16.8 
Inventories  (31.3)  (64.0)  (16.1)  (79.1)
Other current assets 3.0 2.3  3.4 2.4 
Accounts payable 47.2 9.5  70.2 45.9 
Accrued expenses  (24.9)  (18.6)  (0.3)  (10.7)
Income taxes payable and receivable 4.3  (5.3) 27.1 13.4 
Long-term warranty, deferred income and other liabilities 9.4 4.4  12.6 5.3 
Net cash (used in) provided by operating activities from discontinued operations  (2.0) 8.1 
Net cash used in operating activities from discontinued operations  (3.1)  (6.8)
          
Net cash provided by operating activities 36.0 6.6  66.0 55.3 
          
  
CASH FLOWS FROM INVESTING ACTIVITIES:  
Proceeds from the disposal of property, plant and equipment 0.1 0.1  0.3 0.4 
Purchases of property, plant and equipment  (13.6)  (6.4)  (27.5)  (14.6)
Additional investment in affiliates —  (2.1) —  (2.1)
Proceeds from disposal of businesses and investments 1.8 —  41.7 5.7 
          
Net cash used in investing activities  (11.7)  (8.4)
Net cash provided by (used in) investing activities 14.5  (10.6)
          
  
CASH FLOWS FROM FINANCING ACTIVITIES:  
Short-term borrowings  (1.8)  (1.6)  (4.6) 3.0 
Repayments of long-term debt —  (0.1)  (25.0)  (45.1)
Revolving long-term borrowings 1.0 5.0   (5.0)  (3.0)
Sales of common stock 7.9 10.8  9.5 10.9 
Payments of deferred financing costs —  (0.2) —  (0.2)
Repurchases of common stock  (1.2) —   (1.3) — 
Cash dividends paid  (6.2)  (5.6)  (18.5)  (17.0)
          
Net cash (used in) provided by financing activities  (0.3) 8.3 
Net cash used in financing activities  (44.9)  (51.4)
          
  
INCREASE IN CASH AND CASH EQUIVALENTS 24.0 6.5 
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 35.6  (6.7)
EFFECT OF EXCHANGE RATES ON CASH AND CASH EQUIVALENTS  (0.7) 1.8   (2.9) 3.0 
          
CASH AND CASH EQUIVALENTS, beginning of period 60.9 76.1  60.9 76.1 
          
CASH AND CASH EQUIVALENTS, end of period $84.2 $84.4  $93.6 $72.4 
          
  
Supplementary disclosures of cash flow information:  
Cash paid during the period for:  
Interest $1.0 $2.1  $10.6 $17.1 
          
Income taxes (net of refunds) $(2.0) $7.0  $1.4 $9.8 
          

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

5

LENNOX INTERNATIONAL INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

1. Basis of Presentation and other Accounting Information:

     The accompanying unaudited consolidated balance sheetConsolidated Balance Sheet as of March 31,June 30, 2005, the accompanying unaudited Consolidated Statements of Operations for the three months and six months ended June 30, 2005 and 2004 and the accompanying unaudited consolidated statementsConsolidated Statements of operations and cash flowsCash Flows for the threesix months ended March 31,June 30, 2005 and 2004 should be read in conjunction with Lennox International Inc.’s (the “Company” or “LII”) audited consolidated financial statements and footnotes as of December 31, 2004 and 2003 and for each of the three years in the period ended December 31, 2004. The accompanying unaudited consolidated financial statements of LII have been prepared in accordance with generally accepted accounting principles for interim financial information and in accordance with the instructions to Form 10-Q and Article 10 of Regulation S-X. 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 tothat may be expected for a full year.

     Certain prior-period balances in the accompanying condensed consolidated financial statements have been reclassified to conform to the current period’s presentation of financial information.

     The Company’s fiscal year ends on December 31 of each year, and the Company’s quarters are each comprised of 13 weeks. For convenience, throughout these financial statements, the 13 weeks comprising each three-month period are denoted by the last day of the respective calendar quarter.

2. Stock-Based Compensations:

Compensation:

     The Company accounts for its stock-based compensation under the recognition and measurement principles of Accounting Principles Board No. 25, “Accounting for Stock Issued to Employees,” and related interpretations (“APB 25”) and has adopted the disclosure-only provisions of Statement of Financial Accounting Standards No. 123, “Accounting for Stock-Based Compensation,” as amended (“SFAS No. 123”). Under APB 25, no stock-based compensation costexpense is reflected in net income for grants of stock options to employees because the Company grants stock options with an exercise price equal to the market value of the stock on the date of grant. Had the Company used the fair value based accounting method for stock compensation expense described byin SFAS No. 123, the Company’s pro forma diluted net income (loss) per common and equivalent share are shown in the pro-forma amounts belowwould be as follows (in millions, except per share data):
                        
 For the  For the For the 
 Three Months Ended  Three Months Ended Six Months Ended 
 March 31,  June 30, June 30, 
 2005 2004  2005 2004 2005 2004 
Net income (loss), as reported $6.4 $(194.1) $44.8 $33.7 $51.2 $(160.4)
  
Add: Reported stock-based compensation expense, net of taxes 4.1 1.7  2.0 1.4 6.1 3.2 
  
Deduct: Fair value based compensation expense, net of taxes  (4.6)  (2.5)  (2.5)  (2.1)  (7.1)  (4.6)
              
  
Net income (loss), pro-forma $5.9 $(194.9) $44.3 $33.0 $50.2 $(161.8)
              
  
Earnings per share:  
Basic, as reported $0.10 $(3.26) $0.72 $0.56 $0.83 $(2.68)
Basic, pro-forma $0.10 $(3.28) $0.72 $0.55 $0.81 $(2.70)
  
Diluted, as reported $0.10 $(3.26) $0.64 $0.50 $0.75 $(2.68)
Diluted, pro-forma $0.09 $(3.28) $0.63 $0.49 $0.73 $(2.70)

6

     For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the options’ vesting periods. The pro forma information presented above is not necessarily indicative of the effects on reported or pro forma net earnings for future years.
3. Reportable Business Segments:

     Financial information about the Company’s

     The Company operates in four reportable business segments isof the heating, ventilation, air conditioning and refrigeration (“HVACR”) markets: Residential Heating & Cooling, Commercial Heating & Cooling, Service Experts and Refrigeration. The Company’s management uses segment profit (loss) as followsthe primary measure of profitability to evaluate operating performance and to allocate capital resources. The Company defines segment profit (loss) as a segment’s net earnings before interest expense, income taxes and other expense.
     Net sales and segment profit (loss) by business segment, along with a reconciliation of segment profit (loss) to net earnings (loss) for the three months and six months ended June 30, 2005 and 2004 are shown below (in millions):
         
  For the 
  Three Months Ended 
  March 31, 
  2005  2004 
Net Sales        
Residential $342.7  $324.3 
Commercial  126.2   108.9 
       
Heating and Cooling  468.9   433.2 
Service Experts  135.9   138.9 
Refrigeration  111.9   109.2 
Eliminations  (16.4)  (17.3)
       
  $700.3  $664.0 
       
         
Segment Profit (Loss)        
Residential $29.6  $32.6 
Commercial  4.7   1.4 
       
Heating and Cooling  34.3   34.0 
Service Experts  (6.3)  (7.7)
Refrigeration  8.9   10.6 
Corporate and other  (19.3)  (16.4)
Eliminations  (0.1)  (1.2)
       
Segment Profit  17.5   19.3 
Reconciliation to income (loss) from continuing operations before income taxes:        
Goodwill impairment  —   208.3 
Interest expense, net  5.5   7.5 
Other expense  0.1   0.3 
       
  $11.9  $(196.8)
       
                        
 As of March 31, As of December 31,  For the For the 
 2005 2004  Three Months Ended Six Months Ended 
Total Assets 
 June 30, June 30, 
 2005 2004 2005 2004 
Net Sales 
Residential $434.7 $400.6 $777.4 $724.9 
Commercial 171.2 150.9 297.4 259.8 
         
Heating and Cooling 605.9 551.5 1,074.8 984.7 
Service Experts 167.8 167.6 303.7 306.5 
Refrigeration 116.9 108.0 228.8 217.2 
Eliminations  (22.8)  (21.7)  (39.2)  (39.0)
         
 $867.8 $805.4 $1,568.1 $1,469.4 
         
 
Segment Profit (Loss) 
Residential $543.4 $512.0  $57.3 $55.1 $86.9 $87.7 
Commercial 233.8 244.0  15.3 16.7 20.0 18.1 
              
Heating and Cooling 777.2 756.0  72.6 71.8 106.9 105.8 
Service Experts 182.6 187.8  9.2 5.7 2.9  (2.0)
Refrigeration 315.2 323.9  10.1 9.7 19.0 20.3 
Corporate and other 281.5 258.2   (22.9)  (21.4)  (42.2)  (37.8)
Eliminations  (12.6)  (12.4) 0.1 0.4 —  (0.8)
              
Segment Assets 1,543.9 1,513.5 
Discontinued Operations (Note 9) 1.2 5.1 
Segment Profit 69.1 66.2 86.6 85.5 
Reconciliation to income (loss) from continuing operations before income taxes: 
(Gains), losses and other expenses, net  (8.7) —  (8.7) — 
Restructuring charge 2.2 — 2.2 — 
Goodwill impairment — — — 208.3 
Interest expense, net 4.6 8.9 10.1 16.4 
Other income  (0.6)  (0.7)  (0.5)  (0.4)
              
 $1,545.1 $1,518.6  $71.6 $58.0 $83.5 $(138.8)
              
     Total assets by business segment as of June 30, 2005 and December 31, 2004 are shown below (in millions):
         
  As of June 30,  As of December 31, 
  2005  2004 
Total Assets        
Residential $599.5  $512.0 
Commercial  259.5   244.0 
       
Heating and Cooling  859.0   756.0 
Service Experts  187.8   187.8 
Refrigeration  310.4   323.9 
Corporate and other  258.4   258.2 
Eliminations  (15.5)  (12.4)
       
Segment Assets  1,600.1   1,513.5 
Discontinued Operations (Note 9)  0.1   5.1 
       
  $1,600.2  $1,518.6 
       

7

4. Inventories:

     Components of inventories are as follows (in millions):
                
 As of March 31, As of December 31,  As of June 30, As of December 31, 
 2005 2004  2005 2004 
Finished goods $200.8 $174.1  $189.5 $174.1 
Repair parts 39.5 38.5  37.4 38.5 
Work in process 10.6 9.2  10.1 9.2 
Raw materials 82.3 71.4  77.9 71.4 
          
 333.2 293.2  314.9 293.2 
Excess of current cost over last-in, first-out cost  (57.4)  (46.0)  (57.4)  (46.0)
          
 $275.8 $247.2  $257.5 $247.2 
          

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5. Shipping and Handling:

     Shipping and handling costs related to post-production activities are included as part of selling, generalSelling, General and administrative expenseAdministrative Expense in the accompanying Consolidated Statements of Operations in the following amounts (in millions):
      
For the Three Months Ended March 31 
2005 2004 
$33.9 $32.7 
       
For the For the
Three Months Ended Six Months Ended
June 30, June 30,
2005 2004 2005 2004
$38.7 $36.1 $72.6 $68.8

6. Warranties:

     The changes in the carrying amount of the Company’s total warranty liabilities for the threesix months ended March 31,June 30, 2005 are as follows (in millions):
        
Total warranty liability at December 31, 2004 $71.0  $71.0 
Payments made in 2005  (6.6)  (12.8)
Changes resulting from issuance of new warranties 5.9  12.4 
Changes in estimates associated with pre-existing warranties 1.3  1.0 
      
Total warranty liability at March 31, 2005 $71.6 
Total warranty liability at June 30, 2005 $71.6 
      

     The change in warranty liability that resultsresulted from changes in estimates of warranties issued prior to 2005 was primarily due to revaluing warranty reserves based on higher material input costs.

7. Cash, Lines of Credit and Financing Arrangements:

     The Company has bank lines of credit aggregating $258.6$257.5 million, of which $9.8$1.0 million was borrowed and outstanding and $95.7$94.9 million was committed to standby letters of credit at March 31,June 30, 2005. Of the remaining $153.1$161.6 million, the entire amount was available for future borrowings after consideration of covenant limitations. Included in the lines of credit are several regional facilities and a multi-currency facility in the amount of $225 million governed by agreements between the Company and a syndicate of banks. The facility includes restrictive covenants that limit the Company’s ability to incur additional indebtedness, encumber its assets, sell its assets or pay dividends. There are no required payments prior to the expiration of the facility. The Company’s facility and promissory notes are secured by the stock of the Company’s major subsidiaries. The facility requires that LII deliver annual and quarterly financial statements, as well as compliance certificates, to the banks within a specified period of time.time periods. LII believes that cash flow from operations, as well as available borrowings under its revolving credit facility, will be sufficient to fund its operations for the foreseeable future. The Company has included in cashCash and cash equivalentsCash Equivalents in the accompanying unaudited Consolidated Balance Sheet as of March 31,June 30, 2005, $24.1$28.3 million of restricted cash primarily related to routine lockbox collections and letters of credit issued with respect to the operations of its captive insurance subsidiary, endingwhich expire on December 30, 2005. In July 2005, the Company amended and restated its credit facility. See Note 17 — Subsequent Event.

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8. Accounts and Notes Receivable:

     Accounts and Notes Receivable have been shown in the accompanying Consolidated Balance Sheets, net of allowance for doubtful accounts of $17.5$19.5 million and $18.5 million and net of accounts receivable sold under an ongoing asset securitization arrangement of $5.0 million and zero as of March 31,June 30, 2005 and December 31, 2004, respectively. In addition, approximately $210$269 million of accounts receivable, as reported in the accompanying unaudited Consolidated Balance Sheets at March 31,Sheet as of June 30, 2005, represent retained interests in securitized receivables that have restricted disposition rights per the terms of the asset securitization agreement and wouldmay not be available to satisfy obligations to creditors. The Company has no significant concentration of credit risk within its accounts and notes receivable.

9. Divestitures:

Outokumpu Joint Venture Sale
     On June 7, 2005, the Company completed the previously announced sale of its 45% interest in its heat transfer joint venture to Outokumpu Copper Products OY of Finland (Outokumpu) for $39.3 million and the Company recorded a pre-tax gain of $9.3 million which is included in (Gains), Losses and Other Expenses, Net in the accompanying Consolidated Statements of Operations. In connection with the sale, the Company entered into an agreement with Outokumpu related to joint remediation of certain existing environmental matters. In conjunction with the new agreement, the Company updated its estimate of its portion of the on-going remediation costs and recorded expenses of $2.2 million for the three months ended June 30, 2005.
Service Experts
     In the first fiscal quarter of 2004, the Company’s Board of Directors approved a turnaround plan designed to improve the performance of its Service Experts business segment. The plan realigns Service Experts’ dealer service centers to focus on service and replacement opportunities in the residential and light commercial markets. The Company identified approximately 130 dealer service centers, whose primary business is residential and light commercial service and replacement, whichreplacement. These centers comprise the ongoing Service Experts business segment. As of December 31, 2004, the Company had divested the remaining 48 centers, in addition to the previously announced closure of four centers. The operating results of the 48

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centers that are no longer a part of Service Experts have beenare classified as a Discontinued Operation in the accompanying Consolidated Statements of Operations. The related assets and liabilities for these centers are classified as “AssetsAssets Held for Sale and Liabilities Held For Sale” and “Liabilities Held For Sale”Sale in the accompanying Consolidated Balance Sheets.

     A summary of net trade sales, pre-tax operating results and pre-tax loss ofon disposal of assets for the three months and six months ended March 31,June 30, 2005 and 2004, and the major classes of assets and liabilities presented as held for sale at March 31,June 30, 2005 and December 31, 2004, are detailed below (in millions):
         
  Discontinued 
  Operations for the 
  Three Months Ended 
  March 31, 
  2005  2004 
Net trade sales $0.2  $70.7 
Pre-tax loss operating results  (1.6)  (20.1)
Pre-tax loss on disposal of centers  (0.1)  — 
         
Current assets $1.2  $66.2 
Non-current assets  —   2.1 
       
Total assets $1.2  $68.3 
       
Current liabilities $2.4  $34.9 
       
                 
  Discontinued  Discontinued 
  Operations for the  Operations for the 
  Three Months Ended  Six Months Ended 
  June 30,  June 30, 
  2005  2004  2005  2004 
Net trade sales $—  $69.3  $0.2  $140.0 
Pre-tax loss operating results  (0.2)  (3.0)  (1.8)  (23.1)
Pre-tax loss on disposal of centers  —   (0.6)  (0.1)  (0.6)

         
  June 30,2005  December 31,2004 
Current assets $0.1  $5.1 
Non-current assets  —   — 
       
Total assets $0.1  $5.1 
       
Current liabilities $0.9  $3.7 
       
     The following table details the Company’s pre-tax loss from discontinued operations for the three months and six months ended March 31,June 30, 2005 and 2004, and the cumulative amount incurred through March 31,June 30, 2005 (in millions):
            
 Cumulative             
 Three Months Three Months Incurred  Cumulative 
 Ended Ended through  Incurred 
 March 31, March 31, March 31,  Three Months Ended Three Months Ended through 
 2005 2004 2005  June 30, 2005 June 30, 2004 June 30, 2005 
Goodwill impairment $— $13.3 $14.8  $— $— $14.8 
Impairment of property, plant and equipment — 3.1 3.1  — — 3.1 
Operating loss — 3.7 14.9  — 1.8 14.9 
Other divestiture costs 1.6 — 7.7  0.2 1.2 7.9 
              
Subtotal 1.6 20.1 40.5  0.2 3.0 40.7 
Loss on disposal of centers 0.1 — 15.0  — 0.6 15.0 
              
Total loss from discontinued operations $1.7 $20.1 $55.5  $0.2 $3.6 $55.7 
              

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     Any future additional expenses are not expected to be material.

         
  Six Months Ended  Six Months Ended 
  June 30, 2005  June 30, 2004 
Goodwill impairment $—  $13.3 
Impairment of property, plant and equipment  —   3.1 
Operating loss  —   5.5 
Other divestiture costs  1.8   1.2 
       
Subtotal  1.8   23.1 
Loss on disposal of centers  0.1   0.6 
       
Total loss from discontinued operations $1.9  $23.7 
       
     The income tax benefit on discontinued operations was zero and $1.1 million for the three months ended June 30, 2005 and June 30, 2004, respectively. The income tax benefit on discontinued operations was $0.6 million for the three months ended March 31, 2005 and $3.7$4.8 million for the threesix months ended March 31, 2004.June 30, 2005 and 2004, respectively. The $3.7income tax benefit on discontinued operations for the six months ended June 30, 2004 of $4.8 million includes a $1.5 million tax benefit related to the goodwill impairment. Through March 31,June 30, 2005, proceeds from the sale of these centers totaled $25.8$25.9 million.

10. Earnings per Share:

     Basic earnings per share are computed by dividing net income by the weighted average number of common shares outstanding during the period. Diluted earnings per share are computed by dividing net income, adjusted for the interest expense and amortization of deferred financing costs associated with the Company’s convertible notes, by the sum of the weighted average number of shares and the number of equivalent shares assumed outstanding, if dilutive, under the Company’s stock-based compensation plans and convertible notes. Emerging Issues Task Force Issue 04-8, “The Effect of Contingently Convertible Debt on Diluted Earnings per Share” requires that contingently convertible debt securities with a market price trigger be included in diluted earnings per share, if they are dilutive, regardless of whether the market price trigger has been met. TheAs of June 30, 2005, the number of shares attributable to convertible notes iswas 7,947,478. As of March 31,June 30, 2005, the Company had 65,020,87565,171,639 shares outstanding of which 3,106,8223,107,074 were held as treasury shares. Diluted earnings per share are computed as follows (in millions, except per share data):

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  For the  For the 
  Three Months Ended  Six Months Ended 
  June 30,  June 30, 
  2005  2004  2005  2004 
Net income (loss) $44.8  $33.7  $51.2  $(160.4)
             
Add: after-tax interest expense and amortization of deferred financing costs on convertible notes  1.5   1.6   3.1   — 
             
Net income (loss) as adjusted $46.3  $35.3  $54.3  $(160.4)
             
Weighted average shares outstanding  62.0   60.1   61.7   59.8 
Effect of diluted securities attributable to stock options and performance share awards  2.9   2.4   2.9   — 
Effect of diluted securities attributable to convertible notes  7.9   7.9   7.9   — 
             
Weighted average shares outstanding, as adjusted  72.8   70.4   72.5   59.8 
             
Diluted earnings (loss) per share $0.64  $0.50  $0.75  $(2.68)
             
         
  For the 
  Three Months Ended 
  March 31, 
  2005  2004 
Net income (loss) $6.4  $(194.1)
       
Weighted average shares outstanding  61.5   59.5 
Effect of diluted securities attributable to stock options and performance share awards  2.9   — 
Effect of diluted securities attributable to convertible notes  —   — 
       
Weighted average shares outstanding, as adjusted  64.4   59.5 
       
Diluted earnings (loss) per share $0.10  $(3.26)
       

     Options     Additionally, options to purchase 142,816140,959 shares of common stock at prices ranging from $24.91 to $49.63 per share and 1,101,479 shares of common stock at prices ranging from $17.82 to $49.63 per share were outstanding for the three monthsperiods ended March 31,June 30, 2005 and the 7,947,478 shares attributable to convertible notes2004, respectively, but were not included in the diluted earnings per share calculation because the assumed exercise of such options would have been anti-dilutive. AllSimilarly, for the six months ended June 30, 2004, all potentially dilutive securities, including 7,947,478 shares attributable to convertible notes, were excluded because their effects were anti-dilutive for the three months ended March 31, 2004.that period.

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11. Comprehensive Loss:

Income (Loss):

     Comprehensive lossincome (loss) is computed as follows (in millions):
                        
 For the  For the For the 
 Three Months Ended  Three Months Ended Six Months Ended 
 March 31,  June 30, June 30, 
 2005 2004  2005 2004 2005 2004 
Net income (loss) $6.4 $(194.1) $44.8 $33.7 $51.2 $(160.4)
Foreign currency translation adjustments  (8.8)  (2.6)  (13.0)  (7.1)  (21.8)  (9.8)
Cash flow hedges  (0.3) 1.5   (3.4)  (1.9)  (3.7)  (0.4)
Minimum pension liability 1.0 0.2  0.3 — 1.3 0.2 
Unrealized gain on investments —  (2.6) —  (1.3)
              
Total comprehensive loss $(1.7) $(195.0)
Total comprehensive income (loss) $28.7 $22.1 $27.0 $(171.7)
              

12. Goodwill:

     The Company evaluates the impairment of goodwill under the guidance of Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets” (“SFAS No. 142”) for each of its reporting units. As a result of the annual impairment tests required by SFAS No. 142, the Company recorded an impairment charge in the first quarter of 2004 associated with its Service Experts segment. This impairment charge reflected the segment’s performance below management’s expectations and management’s decision to divest of 48 centers that no longer matched the realigned Service Experts business model (seemodel. See Note 9).9 — Divestitures. The impairment test requires a two-step process. The first step compares the fair value of the units with goodwill against their aggregate carrying values, including goodwill. The Company estimated the fair value of its Service Experts segment using the income method of valuation, which includes the use of estimated discounted cash flows. Based on the comparison, the carrying value of Service Experts exceeded its fair value. Accordingly, the Company performed the second step of the test, comparing the implied fair value of Service Experts goodwill with the carrying amount of that goodwill. Based on this assessment, the Company recorded a non-cash impairment charge of $208.3 million ($185.1 million, net of tax), which is included as a component of operating income in the accompanying Consolidated Statements of Operations. The Company also recognized a $13.3 million ($11.8 million, net of tax) goodwill impairment charge arising from goodwill allocated to centers held for sale. This amount is included as a part of loss from discontinued operations in the accompanying Consolidated Statements of Operations. During the first quarter of 2005, the Company performed its annual goodwill impairment test and determined that no further impairment charge was required.

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     The changes in the carrying amount of goodwill related to continuing operations for the threesix months ended March 31,June 30, 2005, in total and by segment, are as follows (in millions):

                                
 Balance Balance  Balance Balance 
 December 31, Goodwill Foreign Currency March 31,  December 31, Goodwill Foreign Currency June 30, 
Segment 2004 Impairment Translation & Other 2005  2004 Impairment Translation & Other 2005 
Residential $26.1 $— $— $26.1  $26.1 $— $— $26.1 
Commercial 30.7 —  (0.9) 29.8  30.7 —  (2.3) 28.4 
                  
Heating and Cooling 56.8 —  (0.9) 55.9  56.8 —  (2.3) 54.5 
Service Experts 95.7 —  (1.2) 94.5  95.7 —  (2.8) 92.9 
Refrigeration 72.9 —  (0.8) 72.1  72.9 —  (1.2) 71.7 
                  
Total $225.4 $— $(2.9) $222.5  $225.4 $— $(6.3) $219.1 
                  

13. Pension and Postretirement Benefit Plan:

     Effective December 31, 2003, the Company adopted Statement of Financial Accounting Standards No. 132 (revised 2003), “Employers’ Disclosures about Pensions and Other Postretirement Benefits.” This standard requires the disclosure of the components of net periodic benefit cost recognized during interim periods. The 2005 pension benefit information provided in the table below includes the Company’s foreign operations whereasoperations; however, the 2004 information does not. The netnot include the periodic pension benefit costs for the foreign operations of $1.2 million for the full year 2004 was $1.2 million.fiscal year.
                                
Three months ended March 31 Pension Benefits Other Benefits 
Three months ended June 30 Pension Benefits Other Benefits 
(in millions) 2005 2004 2005 2004  2005 2004 2005 2004 
Service cost $2.2 $1.4 $0.3 $0.3  $1.5 $1.6 $0.3 $0.2 
Interest cost 4.6 3.0 0.4 0.4  2.4 3.0 0.4 0.4 
Expected return on plan assets  (5.2)  (3.1) — —   (2.0)  (3.5) — — 
Amortization of prior service cost 0.3 0.3  (0.1)  (0.1) 0.2 0.3  (0.1)  (0.1)
Amortization of net loss 1.0 0.5 0.3 0.2  0.6 0.7 0.2 0.2 
                  
Net periodic benefit cost $2.9 $2.1 $0.9 $0.8  $2.7 $2.1 $0.8 $0.7 
                  

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Six months ended June 30 Pension Benefits  Other Benefits 
(in millions) 2005  2004  2005  2004 
Service cost $3.5  $3.0  $0.6  $0.5 
Interest cost  6.6   6.0   0.8   0.8 
Expected return on plan assets  (6.7)  (6.6)  —   — 
Amortization of prior service cost  0.5   0.6   (0.3)  (0.2)
Amortization of net loss  1.7   1.2   0.5   0.4 
             
Net periodic benefit cost $5.6  $4.2  $1.6  $1.5 
             
     In December 2003, the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (“the Act”) was signed into law. The Act introduces a prescription drug benefit under Medicare (Medicare Part D) as well as a federal subsidy to sponsors of retiree health care benefit plans that provide a benefit that is at least actuarially equivalent to Medicare Part D. In January 2004, Financial Accounting Standards Board Staff Position No. FAS 106-1, “Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003” (“SFAS 106”) was issued and itwhich permits a sponsor of a postretirement health care plan that provides a prescription drug benefit to make a one-time election to defer accounting for the effects of the Act. The Company has elected not to reflect the changes in the Act as the effects of the Act are not a significant event that calls for remeasurement under FASSFAS 106. Therefore, the accumulated postretirement benefit obligation and net postretirement benefit costs in the accompanying consolidated financial statements and above disclosure do not reflect the effects of the Act on the Company’s plans.

14. Investments in Affiliates:

     For theits investments in four joint ventures, with Outokumpu Oyj and LII’s other joint venture investments, the Company records its equity in the earnings of the joint ventures as a component of selling, generalSelling, General and administrative expenseAdministrative Expense in the accompanying Consolidated Statements of Operations. The Company recorded $4.6$8.2 million and $3.1$6.9 million of equity in the earnings of its affiliates for the threesix months ended March 31,June 30, 2005 and 2004, respectively.
     The Company owns a 20% common stock ownership interest in Kulthorn Kirby Public Company Limited, a Thailand company engaged in the manufacture of compressors for refrigeration applications. The Company previously accounted for its investment in Kulthorn Kirby Public Company Limited as a marketable equity security investment. In October 2004, the Company purchased an additional 1.3% common stock interest for $1.5 million. The Company has adjusted prior years’ information to reflect the change to equity accounting. The change increased earnings of affiliates by $0.5 million and $1.3 million for the three months and the six months ended June 30, 2004, respectively.
     The carrying amount of investments in affiliates as of March 31,June 30, 2005 and December 31, 2004 is $67.4was $40.4 million and $63.0 million, respectively, and is included in long-term Other Assets in the accompanying Consolidated Balance Sheets.

The decrease in the investment in affiliates from December 31, 2004 to June 30, 2005 was primarily due to the sale of the Company’s 45% interest in its heat transfer joint venture to Outokumpu Copper Products OY of Finland. See Note 9 — Divestitures.

15. Contingencies:

     The Company is involved in various claims and lawsuits incidental to its business. In addition, the Company and its subsidiary Heatcraft Inc. have been named in four lawsuits in connection with its former heat transfer operations. The lawsuits allege personal injury resulting from alleged emissions of trichloroethylene, dichloroethylene and vinyl chloride and other unspecified emissions from the South Plant in Grenada, Mississippi, previously owned by Heatcraft Inc. It is not possible to predict with certainty the outcome of these matters; however, based on present knowledge, management believes that it is unlikely that resolution of these matters will result in a material liability for the Company. As of March 31,June 30, 2005, no accrual has been made for these matters. The Company anticipates the future legal fees in defense of these matters could be significant.

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     The Company has issued guarantees to third parties in conjunction with the debt of one of the Company’s affiliates. The liability recognized at March 31, 2005 related to these guarantees is approximately $0.2 million. The maximum obligation under these guarantees is approximately $4.2 million. No assets are held as collateral.

16. Subsequent Events:

Outokumpu Joint Venture Sale

     On April 5, 2005, the Company announced that Outokumpu Copper Products OY of Finland had exercised its option to purchase the Company’s 45 percent interest in their heat transfer joint venture for approximately $39 million. The transaction is conditioned on the sale of Outokumpu Copper Products OY to Nordic Capital. The financial impact of this transaction is not expected to significantly impact the Company’s 2005 financial performance, excluding an anticipated gain on the sale, which will be quantified when the transaction is completed. The Company expects the transaction to be completed in the second quarter of 2005.

Lennox Hearth Products –— Burlington Plant ClosureClosure:

     On

     Due to competitive cost pressures, on April 4, 2005, Lennox Hearth Products Inc., a subsidiary of Lennox International Inc.,the Company, commenced plans to relocate its Whitfield pellet stove and Lennox cast iron stove product lines from Burlington, Washington to a third party production facility in Juarez, Mexico, discontinue its existing steel wood stove line

12

manufactured in Burlington, and close the facility due to competitive cost pressures.Burlington facility. These actions were substantially complete as of June 30, 2005. In connection with the plant closure, the Company recorded pre-tax restructuring-related charges of $2.2 million, which are scheduled to be completedincluded in Restructuring Charge in the accompanying Consolidated Statements of Operations. As of June 2005.30, 2005, the Company had $1.4 million in restructuring reserves, which are included in Accrued Expenses in the accompanying unaudited June 30, 2005 Consolidated Balance Sheet. The Company expects that these actions will reduce costs and enhance profitability.

17. Subsequent Event:
     In conjunction with these actions,July 2005, the Company expectsamended and restated its revolving credit facility to, among other things, increase the borrowing capacity from $225 million to $400 million and extend the maturity date from September 2006 to July 2010. The facility contains certain financial covenants and bears interest at a rate equal to, at the Company’s option, 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 0.475% to 1.20%, depending upon the ratio of total funded debt-to-adjusted earnings before interest, taxes, depreciation and amortization (“Adjusted EBITDA”), as defined in the facility. The Company pays a facility fee, depending upon the ratio of total funded debt to Adjusted EBITDA, equal to 0.15% to 0.30% of the capacity. The facility includes restrictive covenants that limit the Company’s ability to incur restructuring-related chargesadditional indebtedness, encumber its assets, sell its assets and make certain payments, including amounts for share repurchases and dividends. The Company’s facility is secured by the stock of approximately $3.5 million with short-term cash outlays of approximately $2.2 million.

the Company’s major subsidiaries. The facility requires that LII annually and quarterly deliver financial statements, as well as compliance certificates, to the banks within specified time periods.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Overview

     LII participates in four reportable business segments of the heating, ventilation, air conditioning and refrigeration (“HVACR”) industry. The first reportable segment is Residential Heating & Cooling, in which LII 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 reportable segment is Commercial Heating & Cooling, in which LII manufactures and sells primarily rooftop products and related equipment for light commercial applications. Combined, the Residential Heating & Cooling and Commercial Heating & Cooling segments form LII’s Heating and Cooling business. The third reportable segment is Service Experts, which includes sales and installation of, and maintenance and repair services for, HVAC equipment. The fourth reportable segment is Refrigeration, in which LII manufactures and sells unit coolers, condensing units and other commercial refrigeration products.

     Improving the performance of the Service Experts business segment remains a top priority of LII’s management. In the first fiscal quarter of 2004, LII’s Board of Directors approved a turnaround plan designed to improve the performance of its Service Experts business segment. The plan realigns Service Experts’ dealer service centers to focus on service and replacement opportunities in the residential and light commercial markets. LII identified approximately 130 dealer service centers, whose primary business is residential and light commercial service and replacement, whichreplacement. These centers comprise the ongoing Service Experts business segment. As of the end ofDecember 31, 2004, LII hashad divested the remaining 48 centers. The operating results of the 48 centers that are no longer a part of Service Experts are classified as a discontinued operation.Discontinued Operation. See “Results of Operations –— Three Months Ended March 31,June 30, 2005 Compared to Three Months Ended March 31,June 30, 2004 –— Loss from Discontinued Operations” and “ — Six Months Ended June 30, 2005 Compared to Six Months Ended June 30, 2004 — Loss from Discontinued Operations” for more detail regarding Service Experts’ discontinued operations.

     In addition to the realignment of dealer service centers discussed above, the Service Experts business segment continues to implement the rollout of a program focused on the sharing of best practices across all residential service and replacement service centers. This rollout began mid-year in 2003 and was completed at most of the U. S.U.S. service centers in the third quarter of 2004. Rollout of the program to the Service Experts Canadian service centers is currently underway.underway and is expected to be completed during the third quarter of 2005. Other initiatives in 2005 include raising visibilityincreasing focus on revenue generating activities and continuing to strengthen the leadership at Service Experts through its general manager development program. This general manager development program graduated its first class in the latter part of 2004 and its second class during the first quarter of 2005. These general managers have assumed leadership positions at dealer service centers.

A third class is scheduled to commence during the third quarter of 2005.

     During the first quarter of 2004, LII evaluated the impairment of goodwill under the guidance of Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets” (“SFAS No. 142”), and determined that the carrying value of Service Experts’ goodwill exceeded its fair value. As a result, LII recorded a pre-tax, non-cash charge of $208.3 million for the threesix months ended March 31,June 30, 2004 in the Company’s Service Experts business segment. The impairment charge was driven primarily by lower than expected operating results as well as the turnaround plan discussed above. The tax benefit of this charge was $23.2 million. The $208.3 million pre-tax goodwill impairment charge is included in LII’s operating lossLoss from continuing operationsContinuing Operations for the threesix months ended March 31,June 30, 2004. Subsequent to the recognition of the $208.3 million goodwill impairment under SFAS No. 142 and as part of the realignment of service centers discussed above, LII also recognized $13.3 million in pre-tax goodwill impairment included in its $20.1$23.1 million pre-tax loss on discontinued operations under Statement of Financial Accounting Standards No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets” (“SFAS No. 144”), resulting in a total pre-tax goodwill impairment charge of $221.6 million for the threesix months ended March 31,June 30, 2004. During the first quarter of 2005, LII performed its annual goodwill impairment test and determined that no further goodwill impairment was necessary.

     On

     Due to competitive cost pressures, on April 4, 2005, Lennox Hearth Products Inc., a subsidiary of the Company, commenced plans to relocate its Whitfield pellet stove and Lennox cast iron stove product lines from Burlington, Washington to a third party production facility in Juarez, Mexico, discontinue its existing steel wood stove line manufactured in Burlington and close the facility dueBurlington facility. Although these actions were substantially complete as of June 30, 2005, the Company anticipates additional expenses will be recorded during the second half of 2005; however, the total of such expenses is not expected to competitive cost pressures.be material. In connection with the plant closure, the Company recorded pre-tax restructuring-related charges of $2.2 million for the six months ended June 30, 2005 which are included in Restructuring Charge in the accompanying Consolidated Statements of Operations. The tax benefit of this charge was $0.8 million.

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     On April 5,June 2, 2005, the Company announced that Harry J. Ashenhurst, the Company’s Chief Administrative Officer, would assume the additional responsibility of President and Chief Operating Officer of LII’s Refrigeration business segment while the Company conducts an internal and external search for a permanent replacement.
     On June 7, 2005, the Company completed the previously announced sale of its 45% interest in its heat transfer joint venture to Outokumpu Copper Products OY of Finland had exercised its option to purchase(Outokumpu) for $39.3 million and the Company’s 45 percent interestCompany recorded a pre-tax gain of $9.3 million for the six months ended June 30, 2005, which is included in their heat transfer joint venture for approximately $39 million. For more information on these two events, see Note 16 titled “Subsequent Events”(Gains), Losses and Other Expenses, Net in the Notesaccompanying Consolidated Statements of Operations. The income tax provision on this gain was $2.3 million. In connection with the sale, the Company entered into an agreement with Outokumpu related to Consolidated Financial Statements.

joint remediation of certain existing environmental matters. In conjunction with the new agreement, the Company updated its estimate of its portion of the on-going remediation costs and recorded pre-tax expenses of $2.2 million for the six months ended June 30, 2005. The income tax benefit of the remediation expenses was $0.8 million.

     On April 2, 2004 the Department of Energy announced that it will enforce a 13 seasonal energy efficiency rating or “SEER” standard for residential central air conditioners. This standard, which will apply to central air conditioners manufactured after January 23, 2006, increases by 30 percent the SEER standard that applies to models produced currently. Although this new standard creates several engineering, manufacturing and marketing challenges for the Company, the Company anticipates it will meet the new regulation by January 23, 2006. The

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Company is also using the new standard as an opportunity to redesign its entire line of cooling products to standardize product platforms across its brands and to integrate other improvements in its products. The Company projects total expenditures for property, plant and equipment in 2005 to be approximately $80.0$80 million, driven largely by increased expenditures in connection with this redesign effort.

     LII’s customers include distributors, installing dealers, property owners, national accounts and original equipment manufacturers. LII recognizes sales revenue when products are shipped or when services are rendered. The demand for LII’s products and services is influenced by national and regional economic and demographic factors, such as interest rates, the availability of financing, regional population and employment trends, new construction, general economic conditions and consumer confidence. In addition to economic cycles, demand for LII’s products and services is seasonal and dependent on the weather. Hotter than normal summers generate strong demand for replacement air conditioning, refrigeration products and services and colder than normal winters have the same effect on heating products and services. Conversely, cooler than normal summers and warmer than normal winters depress HVACR sales and services.

     The principal components of cost of goods sold in LII’s manufacturing operations are component costs, raw materials, factory overhead, labor and estimated costs of warranty expense. In LII’s Service Experts segment, the principal components of cost of goods sold are equipment, parts and supplies and labor. The principal raw materials used in LII’s manufacturing processes are steel, copper and aluminum. Higher prices for these commodities and related components continue to present a challenge to LII. Commodity prices and related component costs in LII’s manufacturing businesses increased by approximately $21$39 million for the threesix months ended March 31,June 30, 2005 compared to the same period in 2004. LII is partially mitigating the impact of higher commodity prices in 2005 through a combination of price increases, improved production efficiency and cost reduction initiatives and hedging programs.initiatives. Warranty expense is estimated based on historical trends and other factors.

     LII’s fiscal year ends on December 31 of each year and its interim 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.

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Results of Operations

     The following table sets forth, as a percentage of net sales, LII’s statements of operations data for the three months and six months ended March 31,June 30, 2005 and 2004:
                        
 Three Months Ended  Three Months Ended Six Months Ended 
 March 31,  June 30, June 30, 
 2005 2004  2005 2004 2005 2004 
Net sales  100.0%  100.0%  100.0%  100.0%  100.0%  100.0%
Cost of goods sold 68.3 66.0  66.1 65.8 67.1 65.9 
              
Gross profit 31.7 34.0  33.9 34.2 32.9 34.1 
Selling, general and administrative expense 29.2 31.1  25.9 26.0 27.4 28.3 
(Gains), losses and other expenses, net  (1.0) —  (0.6) — 
Restructuring charge 0.3 — 0.2 — 
Goodwill impairment — 31.4  — — — 14.2 
              
Operational income (loss) from continuing operations 2.5  (28.5) 8.7 8.2 5.9  (8.4)
Interest expense, net 0.8 1.1  0.5 1.1 0.6 1.0 
Other expense — — 
Other income  (0.1)  (0.1) — — 
              
Income (loss) from continuing operations before income taxes 1.7  (29.6) 8.3 7.2 5.3  (9.4)
Provision for (benefit from) income taxes 0.6  (2.8)
Provision for income taxes 3.1 2.7 2.0 0.2 
              
Income (loss) from continuing operations 1.1  (26.8) 5.2 4.5 3.3  (9.6)
              
Discontinued operations:  
Loss from operations of discontinued operations 0.2 3.0  — 0.4 — 1.6 
Income tax benefit —  (0.6) —  (0.1) —  (0.3)
Loss on disposal of discontinued operations — —  — — — — 
Income tax benefit — —  — — — — 
              
Loss from discontinued operations 0.2 2.4  — 0.3 — 1.3 
              
Net income (loss)  0.9%  (29.2)%  5.2%  4.2%  3.3%  (10.9)%
              

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     The following table sets forth net sales by business segment and geographic market (dollars in millions):

                                                
 Three Months Ended March 31,  Three Months Ended June 30, Six Months Ended June 30, 
 2005 2004  2005 2004 2005 2004 
 Amount % Amount %  Amount % Amount % Amount % Amount % 
Business Segment:
  
Residential $342.7  48.9% $324.3  48.8% $434.7  50.1% $400.6  49.7% $777.4  49.5% $724.9  49.3%
Commercial 126.2 18.0 108.9 16.4  171.2 19.7 150.9 18.8 297.4 19.0 259.8 17.7 
                          
Heating & Cooling 468.9 66.9 433.2 65.2 
Heating and Cooling 605.9 69.8 551.5 68.5 1,074.8 68.5 984.7 67.0 
Service Experts 135.9 19.4 138.9 20.9  167.8 19.3 167.6 20.8 303.7 19.4 306.5 20.9 
Refrigeration 111.9 16.0 109.2 16.4  116.9 13.5 108.0 13.4 228.8 14.6 217.2 14.8 
Eliminations  (16.4)  (2.3)  (17.3)  (2.5)  (22.8)  (2.6)  (21.7)  (2.7)  (39.2)  (2.5)  (39.0)  (2.7)
                          
Total net sales $700.3  100.0% $664.0  100.0% $867.8  100.0% $805.4  100.0% $1,568.1  100.0% $1,469.4  100.0%
                          
  
Geographic Market:
 $530.4  75.7% $500.0  75.3% 
U.S 169.9 24.3 164.0 24.7 
         
U.S. $679.6  78.3% $630.9  78.3% $1,210.1  77.2% $1,130.9  77.0%
International $700.3  100.0% $664.0  100.0% 188.2 21.7 174.5 21.7 358.0 22.8 338.5 23.0 
                          
Total net sales  $867.8  100.0% $805.4  100.0% $1,568.1  100.0% $1,469.4  100.0%
                 

Three Months Ended March 31,June 30, 2005 Compared to Three Months Ended March 31,June 30, 2004

Net Sales

     Net sales increased $36.3$62.4 million, or 5.5%7.7%, to $700.3$867.8 million for the three months ended March 31,June 30, 2005 from $664.0$805.4 million for the comparable period in 2004. Adjusted forExcluding the favorable impact of foreign currency translation, net sales increased $27.9$49.8 million, or 4.2%6.2%, compared to the same period in 2004. NetAs discussed below, net sales were significantly higher in the Company’s Residential Heating & Cooling business segment, significantly higher in the Company’sand Commercial Heating & Cooling business segment, lowersegments, flat in the Company’s Service Experts business segment and marginally higher in the Company’s Refrigeration business segment for the three months ended March 31,June 30, 2005, compared to the three months ended March 31,June 30, 2004.

     Net sales in the Residential Heating & Cooling business segment increased $18.4$34.1 million, or 5.7%8.5%, to $342.7$434.7 million for the three months ended March 31,June 30, 2005 from $324.3$400.6 million for the three months ended March 31,June 30, 2004. Adjusted forExcluding the favorable impact of foreign currency translation, net sales increased 4.8%,$30.3 million, or $15.7 million,7.6%, compared to the three months ended March 31,June 30, 2004. Net sales of the Company’s Lennox brand of heating cooling and hearthcooling products were particularly strong due in large part to price increases in response to higher commodity prices.

prices, market share improvement and favorable weather in June. LII’s Residential Heating & Cooling businesses benefited from favorable weather in June in the central, northeast and Great Lakes regions of the U.S. According to the National Oceanic and Atmospheric Administration’s Climate Prediction Center, total U.S. cooling degree days, on a population-weighted basis, were 24% higher in the month of June 2005 compared to the month of June 2004.

     Net sales in the Commercial Heating & Cooling business segment increased $17.3$20.3 million, or 15.9%13.5%, to $126.2$171.2 million for the three months ended March 31,June 30, 2005, compared to the three months ended March 31,June 30, 2004. After adjusting forexcluding the favorable impact of foreign currency translation, net sales increased $15.4$18.2 million, or 14.1%12.1%, compared to the three months ended March 31,June 30, 2004. The increase in net sales was due primarily to strong domestic sales growth driven by an increase in sales to national accounts and to commercial mechanical contractors, and price increases in response to higher commodity prices. When adjusted for foreign currency translation,Although net sales in the Company’s European operations for the three months ended March 31,June 30, 2005 were slightly higher compared to the same period last year, althoughgeneral market conditions in Europe remain depressed.depressed, particularly demand for chillers.

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     Net sales in the Service Experts business segment declined $3.0 million, or 2.2%, to $135.9 million from $138.9were relatively flat at $167.8 million for the three months ended March 31,June 30, 2005, compared to $167.6 million for the three months ended March 31,June 30, 2004. Net sales declined $4.7$2.1 million, or 3.4%1.3%, after adjusting forexcluding the favorable impact of foreign currency translation. The decline in net sales was due primarily to lower net sales in Service Experts’ residentialcommercial new construction activity as a result of the increased focus on service and replacement business.

opportunities in the residential and light commercial markets.

     Refrigeration business segment net sales increased $2.7$8.9 million, or 2.5%8.2%, to $111.9$116.9 million for the three months ended March 31,June 30, 2005, compared to $108.0 million for the three months ended March 31,June 30, 2004. After adjusting forexcluding the favorable impact of foreign currency translation, net sales were essentially flat forincreased $3.9 million, or 3.6%, compared to the three months ended March 31, 2005 compared toJune 30, 2004. Net sales were higher in the same period in 2004. The Americas had higher net salesCompany’s North and South American operations due in partprimarily to growth in original equipment manufacturer sales that service the supermarket, and walk-in refrigeration and cold storage market segments, as well as price increases in response to higher commodity prices. This growth was partially offset byNet sales were lower, net sales in Europe driven by depressed market conditions and lower net salesafter adjusting for the impact of foreign currency translation, in the Company’s Asia PacificEuropean operations driven by weatherdue to depressed market conditions.

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Gross Profit

     Gross profit was $221.8$294.0 million for the three months ended March 31,June 30, 2005 compared to $225.6$275.3 million for the three months ended March 31,June 30, 2004, a decreasean increase of $3.8$18.7 million. Gross profit margin declined 2.3%0.3 percentage points from 34.0%34.2% for the three months ended March 31,June 30, 2004 to 31.7%33.9% for the three months ended March 31,June 30, 2005. Gross profit margin declined in the Company’s Commercial Heating & Cooling business segment and increased in all of LII’sother business segments due primarily to highersegments. Higher commodity prices as well as geographic and end-market mix differences. Commodity prices incontinue to challenge LII’s manufacturing businesses as commodity prices increased by approximately $21$19 million for the three months ended March 31,June 30, 2005, compared to the same period in 2004. LII was able to offset the large majority ofhigher commodity prices through price increases; however, overall, the commodity price increases through a combination of price increases, however, the geographic and end-market mix differences contributed todid not sufficiently cover the gross profit margin erosion.

on the incremental revenue and other cost increases.

     In the Company’s Residential Heating & Cooling business segment, gross profit margins declined 2.9%improved 0.4 percentage points for the three months ended March 31,June 30, 2005, compared to the same period in 2004 due primarily to price increases and increased factory productivity more than offsetting the higher commodity prices and geographic and end-market mix differences (primarily in the Company’s Lennox brand) partially offset by price increases. Mild temperatures in the Midwest and Northeast regions of the U.S. resulted in a net sales skew to more price competitive Southern markets, and the mix between new construction and replacement shifted away from more profitable replacement business. In addition, warranty and product liability costs were $1.9 million higher for the three months ended March 31, 2005 compared to the same period in 2004 due primarily to revaluing warranty reserves based on higher material costs. Gross profit margins declined 2.4%1.1 percentage points in the Company’s Commercial Heating & Cooling business segment over the same period due primarily to higher commodity prices as well as less favorable factory efficiency as production was ramped up to meet domestic demand. These factors were partially offset by price increases and higher volumes and price increases.volumes. In the Company’s Service Experts business segment, gross profit margin declined 1.0%improved 0.2 percentage points over the same period due primarily to margin erosion resulting from unfavorable end-market mix as new construction markets wereprices increases more buoyant than replacement markets. Although this business segment is realizing price increases onoffsetting the higher costs of heating and cooling equipment it sells, price improvement on related parts and supplies has been insufficient.to higher commodity prices as well as other cost increases. In the Company’s Refrigeration business segment, gross profit margin declined 0.7%improved 0.2 percentage points over the same period due primarily to weaker performance inprice increases, favorable product mix and the Company’s Asia Pacific and European operations.

favorable impact of foreign currency fluctuations more than offsetting the commodity price increases.

     LIFO (last in, first out) inventory liquidations did not have a material impact on gross profit margins. The Company’s gross profit margin may not be comparable to the gross profit margin of other entities, sincebecause some entities include all of the costs related to their distribution network in cost of goods sold, whereas the Company excludes a portion of such costs from gross profit margin, including such costs instead in the selling, generalSelling, General and administrative expenseAdministrative Expense (“SG&A”) line item.item instead. For more information, see Note 5 titled “Shipping— Shipping and Handling”Handling in the Notes to Consolidated Financial Statements.

Selling, General and Administrative Expense

     SG&A expenses were $204.3$224.9 million for the three months ended March 31,June 30, 2005, a decreasean increase of $2.0$15.8 million, or 1.0%7.6%, from $206.3$209.1 million for the three months ended March 31,June 30, 2004. The $2.0$15.8 million decreaseincrease in SG&A expenses was due primarily to higher distribution, selling and marketing expenses of $11.6 million driven by the absencehigher sales volumes and $3.1 million of unfavorable foreign currency translation (part of which is included in the higher distribution, selling and marketing expenses) and expenses associated with personnel changes. SG&A for the three months ended June 30, 2004 included approximately $2.1$4 million of investigation costs related to the Service Experts operations as well as the absence of approximately $2.8 million of costs in connection with personnel reductions in the Company’s European operations, all of which were incurred during the first quarter of 2004. Partially offsetting the absence of these costs was unfavorable foreign currency translation of approximately $2.4 million.operations. As a percentage of total net sales, SG&A expenses of 29.2%25.9% for the three months ended March 31,June 30, 2005 were down slightly from 31.1% compared to26.0% in the same period in 2004. The Company has no significant concentration of credit risk among its diversified customer base.

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(Gains), Losses and Other Expenses, Net
     (Gains), losses and other expenses, net were a pre-tax gain of $8.7 million for the three months ended June 30, 2005 which included a $9.3 million pre-tax gain on the sale of the Company’s 45% interest in its heat transfer joint venture to Outokumpu, $2.2 million of pre-tax expenses representing the Company’s updated estimate of its portion of the on-going remediation costs in conjuction with the joint remediation agreement the Company entered into with Outokumpu and other items primarily related to the Company’s former Heat Transfer business segment. The total income tax provision on these items was $1.7 million.
Restructuring Charge
     Due to the competitive cost pressures, on April 4, 2005, Lennox Hearth Products Inc., a subsidiary of the Company, commenced plans to relocate its Whitfield pellet stove and Lennox cast iron stove product lines from Burlington, Washington to a third party production facility in Juarez, Mexico, discontinue its existing steel wood stove line manufactured in Burlington and close the Burlington facility. Although these actions were substantially complete as of June 30, 2005, the Company anticipates additional expenses will be recorded during the second half of 2005; however, the total of such expenses is not expected to be material. In connection with the plant closure, the Company recorded a pre-tax restructuring-related charge of $2.2 million for the three months ended June 30, 2005. The tax benefit of this charge was $0.8 million.
Interest Expense, Net
     Interest expense, net, decreased $4.3 million from $8.9 million for the three months ended June 30, 2004 to $4.6 million for the three months ended June 30, 2005. The lower interest expense was due primarily to lower average debt levels and the absence of $1.9 million of make-whole expenses for the three months ended June 30, 2004 related to the Company’s $35 million pre-payment of its long-term debt in June 2004, which was scheduled to be repaid in the third quarter of 2005. As of June 30, 2005, total debt of $275.2 million was $41.8 million lower than total debt as of June 30, 2004.
Other Income
     Other income was $0.6 million for the three months ended June 30, 2005 and $0.7 million for the three months ended June 30, 2004. Other income includes foreign currency exchange gains or losses, which relate principally to the Company’s operations in Canada, Australia and Europe, and expenses related to minority interest holders.
Provision for (Benefit from) Income Taxes
     The provision for income taxes on continuing operations was $26.6 million for the three months ended June 30, 2005, compared to $21.8 million for the three months ended June 30, 2004. The effective tax rate on continuing operations was 37.2% and 37.6% for the three months ended June 30, 2005 and June 30, 2004, respectively. These effective rates differ from the statutory federal rate of 35% principally due to state and local taxes, non-deductible expenses, foreign operating losses for which no tax benefits have been recognized and foreign taxes at rates other than 35%.
     On June 30, 2005, Ohio enacted legislation changing its tax system. As a result of this legislation and in accordance with Statement of Financial Accounting Standards No. 109, “Accounting for Income Taxes” (“SFAS No. 109”), a provision for income taxes of $1.6 million was recorded for the three months ended June 30, 2005.
     The American Jobs Creation Act of 2004 (P.L. 108-357, the “AJCA”) was signed into law on October 22, 2004. The AJCA provides an opportunity to repatriate foreign earnings and claim an 85% dividend received deduction against the repatriated amount. The Company is evaluating the effects of the repatriation provision and expects to make a decision on implementation later in 2005. As a result, the related range of income tax effects of such repatriation cannot be reasonably estimated at the time of issuance of the accompanying consolidated financial statements, and, as provided for in Financial Accounting Standards Board Staff Position No. 109-2 “Accounting and Disclosure Guidance for the Foreign Earnings Repatriation Provision within the American Jobs Creation Act of 2004” (“FSP No. 109-2”), no income tax expense related to the possible repatriation has been recorded as of June 30, 2005.
Loss from Discontinued Operations
     In the first fiscal quarter of 2004, the Company’s Board of Directors approved a turnaround plan designed to improve the performance of its Service Experts business segment. The plan realigns Service Experts’ dealer service centers to focus on service and replacement opportunities in the residential and light commercial markets. LII

18

identified approximately 130 centers, whose primary business is residential and light commercial service and replacement. These centers comprise the ongoing Service Experts business segment. As of December 31, 2004, the remaining 48 centers were sold and are classified as a Discontinued Operation.
     Under SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets”, the operating results of the 48 centers that are no longer a part of the Service Experts business segment for all periods presented are reported as discontinued operations in LII’s Consolidated Statements of Operations. The following table details the Company’s pre-tax loss from discontinued operations for the three months ended June 30, 2005 and 2004, as well as the cumulative pre-tax loss incurred through June 30, 2005 (in millions):
             
          Cumulative 
          Incurred 
  Three Months Ended  Three Months Ended  through 
  June 30, 2005  June 30, 2004  June 30, 2005 
Goodwill impairment $—  $—  $14.8 
Impairment of property, plant and equipment  —   —   3.1 
Operating loss  —   1.8   14.9 
Other divestiture costs  0.2   1.2   7.9 
          
Subtotal  0.2   3.0   40.7 
Loss on disposal of centers  —   0.6   15.0 
          
Total loss from discontinued operations $0.2  $3.6  $55.7 
          
     Any future additional expenses are not expected to be material. The income tax benefit on discontinued operations was zero and $1.1 million for the three months ended June 30, 2005 and June 30, 2004, respectively. Through June 30, 2005, cumulative proceeds from the sale of the 48 centers totaled $25.9 million.
Six Months Ended June 30, 2005 Compared to Six Months Ended June 30, 2004
Net Sales
     Net sales increased $98.7 million, or 6.7%, to $1,568.1 million for the six months ended June 30, 2005 from $1,469.4 million for the same period in 2004. Excluding the favorable impact of foreign currency translation, net sales increased $77.8 million, or 5.3%, compared to the same period in 2004. Except for the Service Experts business segment, net sales were higher in all of the Company’s business segments for the six months ended June 30, 2005, compared to the six months ended June 30, 2004.
     Net sales in the Residential Heating & Cooling business segment increased $52.5 million, or 7.2%, to $777.4 million for the six months ended June 30, 2005 from $724.9 million for the six months ended June 30, 2004. Excluding the favorable impact of foreign currency translation, net sales increased $46.0 million, or 6.3%, compared to the six months ended June 30, 2004. Net sales increases were achieved by all of the Company’s major home comfort brands. Net sales of the Company’s Lennox brand of heating, cooling and hearth products were particularly strong due in large part to price increases in response to higher commodity prices. Also, as discussed previously, LII’s Residential Heating & Cooling businesses benefited from favorable weather in June 2005. Overall, LII’s Residential Heating & Cooling business segment outperformed the market. According to the Air-Conditioning and Refrigeration Institute, U.S. factory shipments of unitary air conditioners and heat pumps were down 4% January through June 2005, compared to the same period in 2004.
     Net sales in the Commercial Heating & Cooling business segment increased $37.6 million, or 14.5%, to $297.4 million for the six months ended June 30, 2005, compared to the six months ended June 30, 2004. After excluding the favorable impact of foreign currency translation, net sales increased $33.6 million, or 12.9%, compared to the six months ended June 30, 2005. The increase in net sales was due primarily to strong domestic sales growth, particularly in sales to national accounts, as well as an increase in sales to commercial mechanical contractors and price increases in response to higher commodity prices. Net sales in the Company’s European operations for the six months ended June 30, 2005 were also higher compared to the same period in 2004 although general market conditions remain difficult, particularly demand for chillers.
     Net sales in the Service Experts business segment declined $2.8 million, or 0.9%, to $303.7 million for the six months ended June 30, 2005 from $306.5 million for the six months ended June 30, 2004. Net sales declined $6.8 million, or 2.2%, after excluding the favorable impact of foreign currency translation. The decrease in net sales was due primarily to the sales shortfall in the first quarter of 2005.

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     Refrigeration business segment net sales increased $11.6 million, or 5.3%, to $228.8 million for the six months ended June 30, 2005, compared to $217.2 million for the six months ended June 30, 2004. After excluding the impact of foreign currency translation, net sales increased $4.3 million, or 2.0%, for the six months ended June 30, 2005, compared to the same period in 2004. The Americas had higher net sales due primarily to growth in original equipment manufacturer sales that service the supermarket, walk-in refrigeration and cold storage market segments, as well as price increases in response to higher commodity prices. Net sales were lower, after excluding the favorable impact of foreign currency translation, in the Company’s European and Asia Pacific operations due to depressed market conditions.
Gross Profit
     Gross profit was $515.8 million for the six months ended June 30, 2005, compared to $500.9 million for the six months ended June 30, 2004, an increase of $14.9 million. Gross profit margin declined to 32.9% for the six months ended June 30, 2005 from 34.1% in the same period in 2004. Gross profit margin declined in all of LII’s business segments over the same period with much of the decline occurring during the first quarter of 2005. Higher commodity prices continue to challenge LII’s manufacturing businesses as commodity prices increased by approximately $39 million for the six months ended June 30, 2005, compared to the same period in 2004. LII was able to offset the higher commodity prices through price increases; however, overall, the price increases did not sufficiently cover the gross profit margin on the incremental revenue and other cost increases.
     LIFO (last in, first out) inventory liquidations did not have a material impact on gross profit margins. The Company’s gross profit margin may not be comparable to the gross profit margin of other entities, because some entities include all of the costs related to their distribution network in cost of goods sold, whereas the Company excludes a portion of such costs from gross profit margin, including such costs in the SG&A line item instead. For more information, see Note 5 — Shipping and Handling in the Notes to Consolidated Financial Statements.
Selling, General and Administrative Expense
     SG&A expenses were $429.2 million for the six months ended June 30, 2005, an increase of $13.8 million, or 3.3%, from $415.4 million for the six months ended June 30, 2004. The $13.8 million increase in SG&A expenses was due primarily to higher distribution, selling and marketing expenses of $14.6 million driven by the higher sales volumes and $5.5 million of unfavorable foreign currency translation (part of which is included in the higher distribution, selling and marketing expenses) and expenses associated with personnel changes. SG&A for the six months ended June 30, 2004 included approximately $6 million of investigation costs related to the Service Experts operations. As a percentage of total net sales, SG&A expenses declined to 27.4% for the six months ended June 30, 2005 from 28.3% for the six months ended June 30, 2004. The Company has no significant concentration of credit risk among its diversified customer base.
(Gains), Losses and Other Expenses, Net
     (Gains), losses and other expenses, net were a pre-tax gain of $8.7 million for the six months ended June 30, 2005 which included a $9.3 million pre-tax gain on the sale of the Company’s 45% interest in its heat transfer joint venture to Outokumpu, $2.2 million of pre-tax expenses representing the Company’s updated estimate of its portion of the on-going remediation costs in conjunction with the joint remediation agreement the Company entered into with Outokumpu and other items primarily related to the Company’s former Heat Transfer business segment. The total income tax provision on these items was $1.7 million.
Restructuring Charge
     Due to competitive cost pressures, on April 4, 2005, Lennox Hearth Products Inc., a subsidiary of the Company, commenced plans to relocate its Whitfield pellet stove and Lennox cast iron stove product lines from Burlington, Washington to a third party production facility in Juarez, Mexico, discontinue its existing steel wood stove line manufactured in Burlington and close the Burlington facility. Although these actions were substantially complete as of June 30, 2005, the Company anticipates additional expenses will be recorded during the second half of 2005; however, the total of such expenses is not expected to be material. In connection with the plant closure, the Company recorded a pre-tax restructuring-related charge of $2.2 million for the six months ended June 30, 2005. The tax benefit of this charge was $0.8 million.

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Goodwill Impairment

     Goodwill impairment represents a pre-tax, non-cash, charge of $208.3 million for the threesix months ended March 31,June 30, 2004 in the Company’s Service Experts business segment, where lower than expected operating results occurred. The tax benefit of this charge was $23.2 million. During the first quarter of 2004, the Company conducted fair-value-based tests, which are required at least annually by SFAS No. 142, and determined that the carrying value of Service Experts’ goodwill exceeded its fair value. These fair-value-based tests were applied to all Service Experts service centers before consideration of the divestitures announced as part of the Company’s Service Experts turnaround plan. An additional $13.3 million of pre-tax goodwill impairment is included in the $20.1$23.1 million pre-tax Loss onfrom Operations of Discontinued Operations discussed below resulting in a total pre-tax goodwill impairment charge of $221.6 million for the threesix months ended March 31,June 30, 2004. During the first quarter of 2005, LII performed its annual goodwill impairment test and determined that no further goodwill impairment was necessary.

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Interest Expense, Net

     Interest expense, net, for the three months ended March 31, 2005 decreased $2.0$6.3 million from $7.5$16.4 million for the threesix months ended March 31, 2004.June 30, 2004 to $10.1 million for the six months ended June 30, 2005. The lower interest expense was due primarily to lower average debt levels.levels and the absence of $1.9 million of make-whole expenses for the six months ended June 30, 2004 related to the Company’s $35 million pre-payment of its long-term debt in June 2004, which was scheduled to be repaid in the third quarter of 2005. As of March 31,June 30, 2005, total debt of $309.2$275.2 million was $56.2$41.8 million lower than total debt as of March 31,June 30, 2004.

Other ExpenseIncome

     Other expenseincome was $0.1$0.5 million for the threesix months ended March 31,June 30, 2005, and $0.3compared to $0.4 million for the three months ended March 31,same period in 2004. Other expenseincome includes foreign currency exchange gains, or losses, which relate principally to the Company’s operations in Canada, Australia and Europe, and expenses related to minority interest holders.

Provision for (Benefit from) Income Taxes

     The provision for income taxes on continuing operations was $4.4$31.0 million for the threesix months ended March 31,June 30, 2005, compared to a benefit fromprovision for income taxes on continuing operations of $19.1$2.7 million for the threesix months ended March 31,June 30, 2004. The effective tax rate on continuing operations was 37.0%37.1% and 9.7%(1.9%) for the threesix months ended March 31,June 30, 2005 and March 31,June 30, 2004, respectively. Excluding the tax benefit of $23.2 million from goodwill impairment, the provision for income taxes on continuing operations would have been $4.1$25.9 million for the threesix months ended March 31, 2004. TheJune 30, 2004 and the effective tax rate on continuing operations excluding the goodwill impairment charge, would have been 35.7%37.3% for the threesix months ended March 31,June 30, 2004. These effective rates differ from the statutory federal rate of 35% principally due to state and local taxes, non-deductible expenses, foreign operating losses for which no tax benefits have been recognized and foreign taxes at rates other than 35%.

     On June 30, 2005, Ohio enacted legislation changing its tax system. As a result of this legislation and in accordance with SFAS No. 109, a provision for income taxes of $1.6 million was recorded for the six months ended June 30, 2005.
     The American Jobs Creation Act of 2004 (P.L. 108-357)AJCA was signed into law on October 22, 2004. The ActAJCA provides an opportunity to repatriate foreign earnings and claim an 85% dividend received deduction against the repatriated amount. The Company is evaluating the effects of the repatriation provision and expects to make a decision on implementation later in 2005. As a result, the related range of income tax effects of such repatriation cannot be reasonably estimated at the time of issuance of ourthe accompanying consolidated financial statements, and, as provided for in Financial Accounting Standards Board Staff PositionFSP No. 109-2, “Accounting and Disclosure Guidance for the Foreign Earnings Repatriation Provision within the American Jobs Creation Act of 2004,” no income tax expense related to ourthe possible repatriation has been recorded as of March 31,June 30, 2005.

Loss from Discontinued Operations

     In the first fiscal quarter of 2004, the Company’s Board of Directors approved a turnaround plan designed to improve the performance of its Service Experts business segment. The plan realigns Service Experts’ dealer service centers to focus on service and replacement opportunities in the residential and light commercial markets. LII identified approximately 130 dealer service centers, whose primary business is residential and light commercial service and replacement, whichreplacement. These centers comprise the ongoing Service Experts business segment. As of the end ofDecember 31, 2004, the remaining 48 centers identified for divestiture were sold and are classified as a discontinued operation.Discontinued Operation.

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     Under SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets”, the operating results of the 48 centers that are no longer a part of the Service Experts business segment for all periods presented are reported as discontinued operations in LII’s Consolidated Statements of Operations. The following table details the Company’s pre-tax loss from discontinued operations for the threesix months ended March 31,June 30, 2005 and 2004, as well as the cumulative pre-tax loss incurred through March 31, 2005:June 30, 2005 (in millions):
            
 Cumulative             
 Three Months Three Months Incurred  Cumulative 
 Ended Ended through  Six Months Six Months Incurred 
 March 31, March 31, March 31,  Ended Ended through 
 2005 2004 2005  June 30, 2005 June 30, 2004 June 30, 2005 
Goodwill impairment $— $13.3 $14.8  $— $13.3 $14.8 
Impairment of property, plant and equipment — 3.1 3.1  — 3.1 3.1 
Operating loss — 3.7 14.9  — 5.5 14.9 
Other divestiture costs 1.6 — 7.7  1.8 1.2 7.9 
              
Subtotal 1.6 20.1 40.5  1.8 23.1 40.7 
Loss on disposal of centers 0.1 — 15.0  0.1 0.6 15.0 
              
Total loss from discontinued operations $1.7 $20.1 $55.5  $1.9 $23.7 $55.7 
              

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     The pre-tax loss of $1.7$1.9 million from discontinued operations for the threesix months March 31,ended June 30, 2005 was primarily related to salary, severance, legal and other related expenses. Any future additional expenses are not expected to be material.

The income tax benefit on discontinued operations was $0.6 million for the three months ended March 31, 2005 and $3.7$4.8 million for the threesix months ended March 31, 2004.June 30, 2005 and 2004, respectively. The $3.7income tax benefit on discontinued operations for the six months ended June 30, 2004 of $4.8 million includes a $1.5 million tax benefit related to the goodwill impairment. Through March 31,June 30, 2005, cumulative proceeds from the sale of thesethe 48 centers totaled $25.8$25.9 million.

Liquidity and Capital Resources

     LII’s working capital and capital expenditure requirements are generally met through internally generated funds and bank lines of credit.

     During the first threesix months of 2005, cash provided by operating activities was $36.0$66.0 million, compared to $6.6$55.3 million provided by operating activities in the same period in 2004. If the effects of the Company’s asset securitization program were excluded, the comparison would have been $31.0$66.0 million cash provided by operating activities in the first six months of 2005 and a usage of $58.4$79.7 million in the same period in 2004. The change is a reflection of better management of working capital. Net cash provided by investing activitiesIn June 2005, the Company sold its 45% interest in 2005 includes the additional proceeds from the saleits heat transfer joint venture to Outokumpu Copper Products OY of the discontinued service centers of Service Experts.

Finland for $39.3 million.

     Capital expenditures of $13.6$27.5 million and $6.4$14.6 million in the first threesix months of 2005 and 2004, respectively, were primarily for production equipment in the North American residential and refrigeration products manufacturing plants.

     The

     During the three months ended June 30, 2005, the Company hasused $25 million for the repayments of long-term debt.
     As of June 30, 2005, the Company had bank lines of credit aggregating $258.6$257.5 million, of which $9.8$1.0 million was borrowed and outstanding and $95.7$94.9 million was committed to standby letters of credit at March 31, 2005.credit. Of the remaining $153.1$161.6 million, the entire amount was available for future borrowings after consideration of covenant limitations.limitations as of June 30, 2005. Included in the lines of credit arewere several regional facilities and a multi-currency revolving credit facility in the amount of $225 million governed by agreements between the Company and a syndicate of banks. In July 2005, the Company amended and restated its revolving credit facility to, among other things, increase the borrowing capacity from $225 million to $400 million and extend the maturity date from September 2006 to July 2010. The facility contains certain financial covenants and bears interest at a rate equal to, at the Company’s option 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 0.475% to 1.20%, depending upon the ratio of total funded debt-to-adjusted earnings before interest, taxes, depreciation and amortization (“Adjusted EBITDA”), as defined in the facility. The Company pays a facility fee, depending upon the ratio of total funded debt to Adjusted EBITDA, equal to 0.15% to 0.30% of the capacity. The facility includes restrictive covenants that limit the Company’s ability to incur additional indebtedness, encumber its assets, sell its assets or payand make certain payments, including amounts for share repurchases and dividends. There are no required payments prior to the expiration of the facility. The Company’s facility and promissory notes areis secured by the stock of the Company’s major subsidiaries. The facility requires that LII annually and quarterly deliver financial statements, as well as compliance certificates, to the banks within a specified period of time.

time periods.

     LII believes that cash flow from operations, as well as available borrowings under its revolving credit facility, will be sufficient to fund its operations for the foreseeable future. LII periodically reviews it’sits capital structure, including it’sits primary bank facility to ensure that adequate liquidity exists .exists.

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     The Company has included in cash and cash equivalents in the accompanying unaudited Consolidated Balance Sheet as of March 31,June 30, 2005, $24.1$28.3 million of restricted cash primarily related to routine lockbox collections and letters of credit issued with respect to the operations of its captive insurance subsidiary, endingwhich expire on December 30, 2005.

     Under a revolving asset securitization arrangement,program, the Company had sold, at March 31,June 30, 2005 and 2004, respectively, $5.0 millionzero and $65.0$135.0 million of receivables on a non-recourse basis. The receivables are sold at a discount from face value and this discountwhich aggregated $0.3$0.9 million and $0.4$1.0 million through the first threesix months of 2005 and 2004, respectively. The discount expense is shown as a component of selling, generalSelling, General and administrative expenseAdministrative Expense in the Consolidated Statements of Operations. The Company has no significant concentration of credit risk among its diversified customer base.

Recent Accounting Pronouncement

     In November 2004, the FASBFinancial Accounting Standards Board (the “FASB”) issued SFASStatement of Financial Accounting Standards No. 151, “Inventory Cost –— an amendment of ARB No. 43, Chapter 4,”4” (“SFAS 151”). SFAS 151 clarifies the accounting for abnormal amounts of idle facility expenses, freight, handling costs, and spoilage. It also requires that allocation of fixed production overheads to inventory be based on the normal capacity of production facilities. SFAS 151 is effective for inventory costs incurred during fiscal years beginning after June 15, 2005. The Company is evaluating the provisions of this standard to determine the effects, if any, on the Company’s consolidated financial statements.

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     In March 2005, the FASB issued Interpretation No. 47, “Accounting for Conditional Asset Retirement Obligations, an Interpretation of FASB Statement 143” (“FIN 47”). FIN 47 clarifies that an entity is required to recognize a liability for the fair value of a conditional asset retirement obligation when incurred if the fair value of the liability can be reasonably estimated. Also, if there is any uncertainty as to the amount and/or the timing of future settlement, it should be factored into the measurement of the liability when sufficient information exists. FIN 47 is required to be applied no later than the end of fiscal years ending after December 15, 2005, although early adoption is encouraged. The Company is evaluating the provisions of this standard to determine the effects, if any, on the Company’s consolidated financial statements.

     In December 2004, the FASB issued SFASStatement of Financial Accounting Standards No. 123 (revised 2004), “Share Based Payment” (“SFAS 123R”), which revises SFASStatement of Financial Accounting Standards No. 123, “Accounting for Stock-Based Compensation,” SFAS 123R also supersedes APBAccounting Principles Board 25, “Accounting for Stock Issued to Employees,” (“APB 25”) and amends SFASStatement of Financial Accounting Standards No. 95, “Statement of Cash Flow.” SFAS 123R requires fair value of all share-based payments to employees, including the fair value of grants of employee stock options, be recognized in the income statement, generally over the option vesting period. On April 14, 2005, the Securities and Exchange Commission (“SEC”) amended the compliance dates for SFAS 123R. The SEC amendment allows companies to implement SFAS 123R at the beginning of their next fiscal year. Early adoption is permitted.

     SFAS 123R permits adoption of its requirements using one of two transition methods:

 1. A modified prospective transition method in which compensation cost is recognized beginning with the effective date (a) for all share-based payments granted after the effective date, and (b) for all awards granted to employees prior to the effective date that remain unvested on the effective date, (or)date; or
 
 2. A modified retrospective transition method which includes the requirements of the method described above, but also permits restatement of financial statements based on the amounts previously disclosed under SFAS 123’s pro forma disclosure requirements either for (a) all prior periods presented, or (b) prior interim periods of the year of adoption.

     The Company is currently evaluating the timing and manner in which it will adopt SFAS 123R.

Forward-Looking Information

     Various sections of this Quarterly Report on Form 10-Q (“Form 10-Q”), including Management’s Discussion and Analysis of Financial Condition and Results of Operations, contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, that are based upon management’s beliefs, as well as assumptions made by and information currently

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available to management. All statements other than statements of historical fact included in this Form 10-Q 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 the current views of LII with respect to future events, based on what it believes are reasonable assumptions; however, such statements are subject to certain risks, uncertainties and assumptions. In addition to the specific uncertainties discussed elsewhere in this Form 10-Q, the following risks and uncertainties may affect the Company’s performance and results of operations:

 • the Company’s business is affected by economic factors including the level of economic activity in the markets in which the Company operates, and a decline in this activity typically results in a decline in new construction and replacement purchases, which could decrease LII’s sales and profitability;
 
 • the demand for the Company’s products and services is strongly affected by the weather, and cooler than normal summers depress the Company’s sales of replacement air conditioning and refrigeration products and warmer than normal winters have the same effect on the Company’s heating products;
 
 • implementation of the new minimum efficiency standard for residential air conditioners mandated by the National Appliance Energy Conservation Act (“NAECA”) could adversely impact the Company’s results of operations, including increased costs of production and distribution, potential margin pressures and higher levels of working capital;
 
 • increases in the prices or required quantities of raw materials or components, or problems in their availability, whether related to the implementation of the new NAECA standard or otherwise, could increase the costs of itsthe Company’s products and/or depress the Company’s sales;
 
 • the Company may not be able to realize the price increases required to offset the impactincreases in cost of higher raw materials, components or distribution costs,goods sold, whether related to the implementation of the new NAECA standard or otherwise;
 
 • the development, manufacture, sale and use of the Company’s products involve a risk of warranty and product liability claims, and such claims could be material and have an adverse effect on its future

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profitability;
 
 • the Company incurs the risk of liability claims for the installation and service of heating and cooling products with its Company-owned dealer service centers, and if these claims exceed the limits of the Company’s product liability insurance policies, it may result in material costs that could have an adverse effect on future profitability;
 
 • the success of the Company will dependdepends in part on its ability to integrate and operate acquired businesses profitably and to identify and implement opportunities for cost savings;
•any future determination that a significant impairment of the value of the Company’s intangible assets has occurred could have a material adverse effect on its results of operations;
 
 • as of March 31,June 30, 2005, the Company had $309.2$275.3 million of consolidated debt outstanding and the Company’s level of indebtednesswhich may have important consequences for its operations, including that itoperations. For example, LII may have to use a large portion of its cash flow to pay principal and interest on its indebtedness and itindebtedness. In addition, the Company’s debt could affect the Company’s ability to borrow additional money in the future for working capital, capital expenditures, acquisitions or other purposes;
 
 • the Company operates in very competitive markets with competitors that may have greater financial and marketing resources, and competitive factors could cause the Company to reduce its prices or lose market share and negatively affect its cash flow;
 
 • the Company’s future success will dependdepends upon its continued investment in research and new product development and its ability to commercialize new technological advances in the HVACR industries;
 
 •the Company faces a risk of work stoppage and other labor relations matters because a significant percentage of itsthe Company’s workforce is unionized, and the results of future negotiations with the unions, including the effect of any production interruptions or labor stoppages, could have an adverse effect on the Company’s future financial results; and
•  the Company is subject to extensive and changing federal, state and local laws and regulations designed to protect the environment, and these laws and regulations could impose liability for remediation costs and civil or criminal penalties for non-compliance.

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the Company is subject to extensive and changing federal, state and local laws and regulations designed to protect the environment, and these laws and regulations could impose liability for remediation costs and civil or criminal penalties for non-compliance.
     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. The Company 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.

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Item 3. Quantitative and Qualitative Disclosures About Market Risk.

     LII’s results of operations can be affected by changes in exchange rates. Net sales and expenses in currencies other than the United States dollar are translated into United States dollars for financial reporting purposes based on the average exchange rate for the period. Net sales from outside the United States represented 24.3%22.8% and 24.7%23.0% of total net sales for the threesix months ended March 31,June 30, 2005 and 2004, respectively. Historically, foreign currency transaction gains (losses) have not had a material effect on LII’s overall operations. The impact of a 10% change in exchange rates on income from operations is estimated to be approximately $4.2$3.7 million on an annual basis.

     The Company’s results of operations can be affected by changes in interest rates due to variable rates of interest on the revolving credit facilities. A 10% change in interest rates would not be material to the Company’s results of operations.
     The Company enters into commodity futures contracts to stabilize prices to be paid for raw materials and parts containing high copper and aluminum content. These contracts are for quantities equal to, or less than, quantities expected to be consumed in future production. As of March 31,June 30, 2005, the Company had metal futures contracts maturing at various dates through AprilDecember 2006 with a fair value as an asset of $9.9$2.7 million. The impact of a 10% change in commodity prices on the Company’s results from operations is estimated to be approximately $28.9$28.3 million for the entire year, absent any other contravening actions.

Item 4. Controls and Procedures.

Disclosure Controls and Procedures

     The Company carried out an evaluation, under the supervision and with the participation of the Company’s current management, including its Chief Executive Officer and Chief Financial Officer (the Company’s principal executive officer and principal financial officer, respectively) of the effectiveness of its disclosure controls and procedures as of the end of the period covered by this report. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that the Company’s disclosure controls and procedures are effective as of March 31,June 30, 2005 to provide reasonable assurance that information required to be disclosed by the Company in the reports filed or submitted by the Company under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’sSEC’s rules and forms.

Changes in Internal Control Over Financial Reporting

     During the quarter ended March 31,June 30, 2005, there were no changes in the Company’s internal controls over financial reporting that have materially affected, or are reasonably likely to materially affect, the Company’s internal controls over financial reporting.

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PART II — OTHER INFORMATION

Item 1. Legal Proceedings

     As previously disclosed,4. Submission of Matters to a Vote of Security Holders.

     The Company’s 2005 Annual Meeting of Stockholders (“Annual Meeting”) was held on April 15, 2005. At the Annual Meeting, the Company’s stockholders elected five directors with terms expiring at the Company’s Annual Meeting of Stockholders in 2008. In addition, the stockholders approved amendments to the Company’s 1998 Incentive Plan to, among other things, increase the maximum number of shares of common stock available for issuance under the plan by 6,000,000 shares. A more detailed description of the amendments to the Company’s 1998 Incentive Plan are described in Item 5 below.
(a)The following sets forth the results of voting at the Annual Meeting for the election of directors:
         
Directors For Withheld
         
John W. Norris, Jr.  56,715,764   1,778,493 
         
John W. Norris, III  53,147,123   5,347,134 
         
James J. Byrne  53,620,995   4,873,262 
         
Thomas W. Booth  56,715,237   1,779,020 
         
Paul W. Schmidt  57,715,237   1,391,566 
     Following the Annual Meeting, Linda G. Alvarado, Steven R. Booth, David V. Brown, John E. Major and Walden W. O’Dell, having terms expiring in 2006, and Janet K. Cooper, C.L. (Jerry) Henry, Robert E. Schjerven, Terry D. Stinson and Richard L. Thompson, having terms expiring in 2007, continued in office.
(b)The votes for, against and abstaining in connection with the approval of the Amended and Restated 1998 Incentive Plan were as follows:
     
For Against Abstentions
     
27,043,379 23,463,831 702,834
Item 5. Other Information.
     Effective April 15, 2005, the Company amended and restated its subsidiary Heatcraft Inc. have been named1998 Incentive Plan. Subject to stockholder approval, the Company’s Board of Directors approved the amended and restated plan on February 25, 2005. The Company’s stockholders approved the amended and restated plan at the Annual Meeting held on April 15, 2005.
          The 1998 Incentive Plan was amended and restated to, among other things:
          (a) increase the number of shares available for awards to employees from 17,094,706 to 22,094,706 (an increase of 5,000,000 shares) and increase the shares available for awards to nonemployee Directors from 1,160,000 to 2,160,000 shares (an increase of 1,000,000 shares), for an aggregate increase of 6,000,000 shares;
          (b) provide for annual management incentive awards, which are payable in four lawsuitscash (previously such incentive awards were made under the Company’s short term incentive plans);
          (c) provide that stock options, stock appreciation rights, stock awards and cash awards may be granted in connection withthe form of performance awards, which may or may not qualify as “qualified performance-based compensation” under section 162(m) of the Internal Revenue Code of 1986, as amended;
          (d) allow nonemployee Directors and independent contractors to receive stock options, stock appreciation rights, stock awards, restricted stock and stock units, cash awards and performance awards under the Plan (previously such Directors were eligible to receive stock options only); and
          (e) allow awards to participants outside the United States, subject to applicable laws and terms and conditions to be determined by the Company’s Compensation Committee.

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     All employees of the Company or any of its former heat transfer operations. The lawsuits, which were filed in various counties in Mississippi, allege personal injury resulting from alleged emissionssubsidiaries, nonemployee members of trichloroethylene, dichloroethylene,the Company’s Board of Directors, and vinyl chloride and other unspecified emissions from the South Plant in Grenada, Mississippi, previously owned by Heatcraft Inc. Heatcraft and the other defendants filed motionsindependent contractors that provide services to, have the cases all moved to Grenada County. The cases have been stayed pending a decision on these motions. Plaintiffs have recently withdrawn their oppositionor who will provide services to, the motionsCompany or any of its subsidiaries are eligible to receive awards under the Company’s 1998 Incentive Plan, as amended and as a result, the Company expects the cases to be transferred to Grenada County in the near future. If this occurs, the stay will be lifted and the cases will proceed. It is not possible to predict with certainty the outcome of these matters or an estimate of any potential loss; however, based on present knowledge, management believes that it is unlikely that any final resolution of these matters will result in a material liability for the Company. As of March 31, 2005, no accrual has been made for these matters. The Company anticipates the future legal fees in defense of these matters could be significant.restated.

Item 6. ExhibitsExhibits.
     
*3.1 — Restated Certificate of Incorporation of Lennox (Incorporated(incorporated herein by reference to Exhibit 3.1 to Lennox’sLII’s Registration Statement on Form S-1 (Registration No. 333-75725)).
     
*3.2 — Amended and Restated Bylaws of Lennox (filed(incorporated herein by reference to as Exhibit 3.2 to LII’s Form 8-K dated February 28, 2005).
     
*4.1 — Specimen stock certificate for the Common Stock, par value $.01 per share, of Lennox (Incorporated(incorporated herein by reference to Exhibit 4.1 to Lennox’LII’s Registration Statement on Form S-1 (Registration No. 333-75725)).
     
*10.1 — Amended and Restated 1998 Incentive Plan of Lennox International, Inc. (filed herewith)(incorporated herein by reference to Exhibit 10.1 to LII’s Form 10-Q for the Three Months Ended March 31, 2005).
     
12.1 — Lennox International Inc. and Subsidiaries Computation of Ratio of Earnings to Fixed Charges (Unaudited) For the ThreeSix Months Ended March 31,June 30, 2005 (filed herewith).
     
31.1 — Certification of the principal executive officer (filed herewith).
     
31.2 — Certification of the principal financial officer (filed herewith).
     
32.1 — Certification of the principal executive officer and the principal financial officer of the Company pursuant to 18 U.S.C. Section 1350 (filed herewith).

*Incorporated herein by reference as indicated.

* Incorporated herein by reference as indicated.

2228

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: MayAugust 9, 2005LENNOX INTERNATIONAL INC.
 
/s/  Susan K. Carter  
Susan K. Carter 
Chief Financial Officer 

29

Index to Exhibits
     
/s/Susan K. Carter
Exhibit
No.		  
Susan K. Carter
Chief Financial Officer

23

Exhibit Index

Description
*3.1 — Restated Certificate of Incorporation of Lennox (Incorporated(incorporated herein by reference to Exhibit 3.1 to Lennox’sLII’s Registration Statement on Form S-1 (Registration No. 333-75725)).
     
*3.2 — Amended and Restated Bylaws of Lennox (filed(incorporated herein by reference to as Exhibit 3.2 to LII’s Form 8-K dated February 28, 2005).
     
*4.1 — Specimen stock certificate for the Common Stock, par value $.01 per share, of Lennox (Incorporated(incorporated herein by reference to Exhibit 4.1 to Lennox’LII’s Registration Statement on Form S-1 (Registration No. 333-75725)).
     
*10.1 — Amended and Restated 1998 Incentive Plan of Lennox International, Inc. (filed herewith)(incorporated herein by reference to Exhibit 10.1 to LII’s Form 10-Q for the Three Months Ended March 31, 2005).
     
12.1 — Lennox International Inc. and Subsidiaries Computation of Ratio of Earnings to Fixed Charges (Unaudited) For the ThreeSix Months Ended March 31,June 30, 2005 (filed herewith).
     
31.1 — Certification of the principal executive officer (filed herewith).
     
31.2 — Certification of the principal financial officer (filed herewith).
     
32.1 — Certification of the principal executive officer and the principal financial officer of the Company pursuant to 18 U.S.C. Section 1350 (filed herewith).

*
*Incorporated herein by reference as indicated.