LENNOX INTERNATIONAL INC - 10-Q Quarterly Report

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549

FORM 10-Q

(MARK ONE)

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY
PERIOD ENDED MARCH 31, 2003

OR

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______________ to ________________

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Commission file number 001-15149

LENNOX INTERNATIONAL INC.
Incorporated pursuant to the Laws of the State of DELAWARE

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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.

Yes [X] No [ ]

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

Yes [X] No [ ]

As of May 9, 2003, the number of shares outstanding of the registrant's common
stock, par value $.01 per share, was 58,213,294.

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LENNOX INTERNATIONAL INC.

INDEX

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PART I -- FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS.

LENNOX INTERNATIONAL INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
As of March 31, 2003 and December 31, 2002
(In thousands, except share data)

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

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LENNOX INTERNATIONAL INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS
For the Three Months Ended March 31, 2003 and 2002
(Unaudited, in thousands, except per share data)

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

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LENNOX INTERNATIONAL INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Three Months Ended March 31, 2003 and 2002
(Unaudited, in thousands)

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

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LENNOX INTERNATIONAL INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

1. BASIS OF PRESENTATION AND OTHER ACCOUNTING INFORMATION:

The unaudited consolidated balance sheet as of March 31, 2003, and the
accompanying unaudited consolidated statements of operations and cash flows for
the three months ended March 31, 2003 and 2002 should be read in conjunction
with Lennox International Inc.'s (the "Company" or "LII") audited consolidated
financial statements and the footnotes as of December 31, 2002 and 2001 and for
each of the three years in the period ended December 31, 2002. In the opinion of
management, the accompanying consolidated financial statements contain all
material adjustments, consisting principally of normal recurring adjustments,
necessary for a fair presentation of the Company's financial position, results
of operations, and cash flows. Certain information and footnote disclosures
normally included in financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted pursuant to
applicable rules and regulations, although the Company believes that the
disclosures herein are adequate to make the information presented not
misleading. The operating results for the interim periods are not necessarily
indicative of the results to be expected for a full year. See Note 3 (a) for a
discussion of the impact of the Outokumpu Oyj joint venture transactions in 2002
on comparability.

The Company's fiscal year ends on December 31 of each year, and the
Company's 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 COMPENSATIONS:

The Company accounts for its stock based compensation under the recognition
and measurement principles of APB 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 ("SFAS
No. 123"). Under APB 25, no stock-based compensation cost is reflected in net
income for grants of stock options to employees because the Company grants stock
options with an exercise price equal to the market value of the stock on the
date of grant. Had the Company used the fair value based accounting method for
stock compensation expense described by Statement of Financial Accounting
Standards ("SFAS No. 123"), the Company's diluted net income per common and
equivalent share are shown in the pro-forma amounts below (in thousands, except
per share data):

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3. REPORTABLE BUSINESS SEGMENTS:

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

(a) In the third quarter of 2002, the Company formed joint ventures with
Outokumpu Oyj by selling to Outokumpu Oyj a 55 % interest in the Company's
heat transfer business segment for approximately $55 million in cash and
notes. The Company accounts for its remaining 45 % interest using the
equity method of accounting and includes such amounts in the Corporate and
other segment. The historical net sales, results of operations and total
assets of the Corporate and other segment have been restated to include the
portions of the heat transfer business segment that was sold to Outokumpu
Oyj. The results of operations of the heat transfer business segment now
presented in the Corporate and other segment were $(0.9) million for the
three months ended March 31, 2003. The historical net sales and results of
operations for the three months ended March 31, 2002 were $45.9 million and
$(0.8) million.

4. INVENTORIES:

Components of inventories are as follows (in thousands):

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5. SHIPPING AND HANDLING:

Shipping and handling costs are included as part of selling, general and
administrative expense in the accompanying Consolidated Statements of Operations
in the following amounts (in thousands):

6. WARRANTIES:

The changes in the carrying amount of the Company's total warranty
liabilities for the three months ended March 31, 2003 are as follows (in
thousands):

Total warranty liability at December 31, 2002 ............. $ 63,358
Payments made in 2003 ..................................... (4,734)
Changes resulting from issuance of new warranties ......... 5,703
------------
Total warranty liability at March 31, 2003 ................ $ 64,327
============

The change in warranty liability that results from changes in estimates of
warranties issued prior to 2003 is not material.

7. CASH, LINES OF CREDIT AND FINANCING ARRANGEMENTS:

The Company has bank lines of credit aggregating $326 million, of which $18
million was borrowed and outstanding, and $42 million was committed to standby
letters of credit at March 31, 2003. Of the remaining $266 million,
approximately $137 million was available for future borrowings after
consideration of covenant limitations. Included in the lines of credit is a
domestic facility in the amount of $270 million governed by agreements between
the Company and a syndicate of banks. The facility contains certain financial
covenants and bears interest, at the Company's option, at a rate equal to either
(a) the greater of the bank's prime rate or the federal funds rate plus 0.5% or
(b) the London Interbank Offered Rate plus a margin equal to 0.5% to 2.25%,
depending upon the ratio of total funded debt to earnings before interest,
taxes, depreciation and amortization ("EBITDA"). The Company pays a commitment
fee, depending upon the ratio of total funded debt to EBITDA, equal to 0.15% to
0.50% of the unused commitment. The agreements place restrictions on the
Company's ability to incur additional indebtedness, encumber its assets, sell
its assets, or pay dividends. As of March 31, 2003, LII was in compliance with
all covenant requirements and LII believes that cash flow from operations, as
well as available borrowings under its revolving credit facility, will be
sufficient to fund its operations for the foreseeable future. The Company has
included in cash and cash equivalents in the accompanying consolidated balance
sheet $32.9 million of restricted cash related to letters of credit.

8. ACCOUNTS AND NOTES RECEIVABLE:

Accounts and Notes Receivable have been shown net of allowance for doubtful
accounts of $22.8 million and $23.1 million, and net of accounts receivable sold
under an ongoing asset securitization arrangement of $115.1 million and $99.0
million as of March 31, 2003 and December 31, 2002, respectively. In addition,
approximately $54.3 million and $106.2 million of accounts receivable as
reported in the accompanying consolidated balance sheets at March 31, 2003 and
December 31, 2002, respectively, represent retained interests in securitized
receivables that have restricted disposition rights per the terms of the asset
securitization agreement and would not be available to satisfy obligations to
creditors. The Company has no significant concentration of credit risk within
its accounts and notes receivable.

9. DIVESTITURES:

In March 2003, the Company sold the net assets of a heating, ventilation
and air conditioning ("HVAC") distributor included in the residential heating
and cooling segment for $4.6 million in cash and notes. The sale resulted in a
pre-tax loss of approximately $0.8 million. The revenues and results of
operations of the distributor were immaterial for all prior periods.

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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 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. As
of March 31, 2003, the Company had 61,220,466 shares outstanding of which
3,043,828 were held as treasury shares. Diluted earnings per share are computed
as follows (in thousands, except per share data):

Options to purchase 5,512,539 shares of common stock at prices ranging from
$13.21 to $49.63 per share and 3,876,828 shares of common stock at prices
ranging from $11.22 to $49.63 per share were outstanding for the three months
ended March 31, 2003 and 2002, respectively, but were not included in the
diluted earnings per share calculation because the assumed exercise of such
options would have been anti-dilutive. The Company's convertible notes were not
considered in the diluted earnings per share calculation because the required
trading prices of either the Company's common stock or the convertible bonds had
not been met as of the reporting period. The notes are convertible into
approximately 8 million shares.

11. COMPREHENSIVE INCOME (LOSS):

Comprehensive income (loss) is computed as follows (in thousands):

12. RESTRUCTURING CHARGES:

Retail Restructuring Program. A summary of other exit costs associated with
the Retail Restructuring Program is as follows (in millions):

The $3.1 million in other exit costs existing at March 31, 2003 represents
lease payments and other exit costs which are expected to be fully paid during
2003.

Manufacturing and Distribution Restructuring Program. A summary of the
severance and other exit costs associated with the Manufacturing and
Distribution Restructuring Program is included in the following table (in
millions):

The severance and benefit obligations will be paid through November 2003.
The other exit costs consist of lease payments and other exit costs that will be
settled in cash payments through 2004.

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Engineered Machine Tool Business Restructuring Program. A summary of the
severance and other exit costs associated with the Engineered Machine Tool
Business Restructuring Program is included in the following table (in millions):

The other exit costs consist of contractual lease and contract takeover
obligations that will be settled in cash payments through November 2005.

13. GOODWILL:

On January 1, 2002, the Company adopted SFAS No. 142 and recorded a $285.7
million impairment of goodwill ($249.2 million, net of tax). The changes in the
carrying amount of goodwill for the three months ended March 31, 2003, in total
and by segment, are as follows (in thousands):

The change in the residential segment includes $(0.8) million allocated to
the disposal of the HVAC distributor included in Note 9.

14. INVESTMENTS IN AFFILIATES:

For the 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, general and administrative expense in the
accompanying Consolidated Statements of Operations.

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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

OVERVIEW

The Company participates in four reportable business segments of the
heating, ventilation, air conditioning and refrigeration ("HVACR") industry. The
first reportable segment is residential heating and 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
and cooling, in which LII manufactures and sells primarily rooftop products and
related equipment for commercial applications. Combined, the residential and
commercial heating and 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 by
approximately 190 LII-owned service centers in the United States and Canada. The
fourth reportable segment is refrigeration, which consists of unit coolers,
condensing units and other commercial refrigeration products.

During August 2002, LII formed joint ventures with Outokumpu Oyj of Finland
("Outokumpu"). Outokumpu purchased a 55 percent interest in the Company's former
heat transfer business segment in the U.S. and Europe for $55 million in cash
and notes, with LII retaining 45 percent ownership. The net after-tax gain on
the sale and the related expenses and charges was $6.4 million. LII accounts for
its remaining 45 percent ownership interest using the equity method of
accounting. The Company currently reports the historical results of operations
of its former heat transfer business segment in the "Corporate and other"
business segment.

LII's customers include distributors, installing dealers, property owners,
national accounts and original equipment manufacturers. 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 and
refrigeration products and colder than normal winters have the same effect on
heating products. Conversely, cooler than normal summers and warmer than normal
winters depress sales of HVACR products.

The principal components of cost of goods sold 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
copper, aluminum and steel. In instances where LII is unable to pass on to its
customers increases in the costs of copper and aluminum, LII enters into forward
contracts for the purchase of those materials. LII attempts to minimize the risk
of price fluctuations in key components by entering into contracts, typically at
the beginning of the year, which generally provide for fixed prices for its
needs throughout the year. These hedging strategies enable LII to establish
product prices for the entire model year while minimizing the impact of price
increases of components and raw materials on its margins. Warranty expense is
estimated based on historical trends and other factors.

On January 1, 2002, LII adopted Statement of Financial Accounting Standards
No. 142 "Goodwill and Other Intangible Assets" ("SFAS No. 142"), and recorded a
$285.7 million impairment of goodwill ($249.2 million, net of taxes). The
impairment charge relates primarily to the 1998 to 2000 acquisitions of LII's
Service Experts and hearth products operations, where lower than expected
operating results occurred.

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, income data
for the three months ended March 31, 2003 and 2002:

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

THREE MONTHS ENDED MARCH 31, 2003 COMPARED TO THREE MONTHS ENDED MARCH 31, 2002

Net Sales

Net sales decreased $24.5 million, or 3.6%, to $649.8 million for the three
months ended March 31, 2003 from $674.3 million for the comparable period a year
ago. Adjusted for the favorable impact of foreign currency translation, net
sales declined 5.9% compared to the same period last year. The net sales decline
was attributable to the absence of net sales from the Company's former heat
transfer business segment, 55 percent of which was sold to Outokumpu during the
third quarter of 2002, lower net sales in the Company's Service Experts business
segment and the wind-down of the Company's engineered machine tool business. The
Company currently reports the historical results of operations of its former
heat transfer business segment in the "Corporate and other" business segment.
Adjusting for the loss of $45.9 million of net sales from the Company's former
heat transfer business segment and $15.5 million favorable impact of foreign
currency translation, net sales increased $5.9 million, or 0.9%, for the three
months ended March 31, 2003 compared to the three months ended March 31, 2002 as
shown in the following table (dollars in millions):

Net sales in the residential heating and cooling business segment increased
$20.4 million, or 7.4%, to $294.3 million for the three months ended March 31,
2003 from $273.9 million for three months ended March 31, 2002. Adjusted for the
impact of foreign currency translation, net sales increased 6.8%, or $18.7
million, compared to the three months ended March 31, 2002. Net sales increases
were achieved by all of the Company's home comfort equipment brands,

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including hearth products, for the three months ended March 31, 2003 compared to
the same period last year. According to the Air Conditioning and Refrigeration
Institute, U.S. factory shipments of unitary air conditioners and heat pumps
were up 2% for the first three months of 2003 compared to the same period a year
ago. However, distributor shipments for the first three months of 2003 were down
5% from the same period last year indicating signs of end-market softness.

Net sales in the commercial heating and cooling business segment increased
$6.0 million, or 6.9%, to $92.8 million for the three months ended March 31,
2003 compared to the three months ended March 31, 2002. However, after adjusting
for the impact of foreign currency exchange, net sales were essentially flat for
the three months ended March 31, 2003 compared to the same period last year. Net
sales for the three months ended March 31, 2002 include $1.7 million of net
sales from the Company's Australian commercial air conditioning operations,
which were exited during the second quarter of 2002.

Net sales in the Service Experts business segment were $197.1 million for
the three months ended March 31, 2003, a decrease of $7.9 million, or 3.9%, from
$205.0 million for the same period a year ago. The sales decline was 5.0% after
adjusting for the impact of foreign currency exchange. The sales decline was
entirely in the commercial new construction sector due in part to severe weather
in key sales areas. The Company believes a significant portion of the sales
decline is represented by work that has been pushed back to later in 2003.

Refrigeration business segment net sales increased $2.3 million, or 2.6%,
to $90.2 million for the three months ended March 31, 2003 compared to the three
months ended March 31, 2002. However, after adjusting for the impact of foreign
currency exchange, net sales decreased $3.9 million, or 4.4%, for the three
months ended March 31, 2003 compared to the same period last year. The sales
decline, after adjusting for the impact of foreign currency exchange, was due
primarily to a drop in demand for commercial refrigeration equipment for
supermarket and cold-storage application both domestically and abroad, and also
market softness in the domestic fast food sector. However, the Company believes
it is maintaining its market share and strong position with major accounts in
this business segment.

Gross Profit

Gross profit was $212.6 million for the three months ended March 31, 2003
compared to $206.5 million for the three months ended March 31, 2002, an
increase of $6.1 million. Gross profit margin improved 2.1% to 32.7% for the
three months ended March 31, 2003 from 30.6% for the comparable period in the
prior year. Gross profit margin improved in all of the Company's business
segments although the gross profit margin improvement in the commercial heating
and cooling business segment was minimal.

In the Company's residential heating and cooling business segment, gross
profit margins improved 1.4% for the three months ended March 31, 2003 compared
to the same period last year due primarily to product pricing improvement in the
Company's replacement business, favorable product mix and improved margins and
volume combined with lower overhead costs in the Company's hearth products
operations. In the Company's Service Experts business segment, gross profit
margin improved 0.7% over the same period due primarily to efficiencies in
direct labor utilization and purchasing savings. In the Company's refrigeration
business segment, gross profit margin improved 1.4% over the same period due to
purchasing savings and lower overhead in the Company's domestic operations and
purchasing savings in the Company's Asia Pacific operations partially offset by
pricing related margin pressure in Europe. The absence of lower margin business
from the Company's former heat transfer business segment also contributed to the
gross profit margin improvement for the three months ended March 31, 2003
compared to the same period last year. LIFO (last in, first out) inventory
liquidations did not have a material impact on gross profit margins.

Selling, General and Administrative Expense

Selling, general and administrative ("SG&A") expenses were $202.0 million
for the three months ended March 31, 2003, an increase of $5.0 million, or 2.5%,
from $197.0 million for the three months ended March 31, 2002. As a percentage
of total net sales, SG&A expenses increased to 31.1% for the three months ended
March 31, 2003 from 29.2% compared to the same period a year ago. As a
percentage of total net sales, the increase in SG&A expenses was due primarily
to the absence of the Company's former heat transfer business segment and higher
insurance costs. SG&A expenses, as a percentage of total net sales, increased
1.1% for the three months ended March 31, 2003 due to the revenue decline caused
by the sale of the former heat transfer business segment.

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Restructurings

Pre-tax restructuring charges of $0.7 million for the three months ended
March 31, 2002 principally included personnel termination charges in the
Company's residential heating and cooling business segment. These restructuring
charges resulted from the Company's decision to sell or abandon certain
manufacturing and distribution operations in the fourth quarter of 2001.

Interest Expense, Net

Interest expense, net, for the three months ended March 31, 2003 decreased
$0.9 million, or 11.4%, from $7.9 million for the three months ended March 31,
2002. The lower interest expense resulted from lower debt levels. As of March
31, 2003, total debt of $388.7 million was $135.2 million lower than total debt
as of March 31, 2002.

Other Income

Other income was $0.6 million for the three months ended March 31, 2003
compared to $0.1 million for the same period last year. Other income is
comprised of foreign currency exchange gains or losses, which relate principally
to the Company's operations in Canada, Australia and Europe. Appreciation of
Australia's, Europe's and Canada's currencies was primarily responsible for the
overall change when comparing the three months ended March 31, 2003 to the same
period a year ago.

Provision for Income Taxes

The provision for income taxes was $1.6 million for the three months ended
March 31, 2003 compared to $0.4 million for the three months ended March 31,
2002. The effective tax rate was 39.0% and 41.3% for the three months ended
March 31, 2003 and 2002, respectively. The lower effective tax rate was
primarily due to the Company utilizing its foreign net operating loss
carry-forwards in 2003 by generating foreign income.

Cumulative Effect of Accounting Change

The cumulative effect of accounting change represents an after-tax,
non-cash, goodwill impairment charge of $249.2 million for the three months
ended March 31, 2002. This charge resulted from the adoption of SFAS No. 142
which became effective January 1, 2002 and requires that goodwill and other
intangible assets with an indefinite useful life no longer be amortized as
expenses of operations but rather be tested for impairment upon adoption and at
least annually by applying a fair-value-based test. During the first quarter of
2002, LII conducted such fair-value-based tests and recorded a pre-tax goodwill
impairment charge of $285.7 million. The charge primarily relates to the
Company's Service Experts and residential heating and cooling business segments.
The tax benefit of this charge was $36.5 million. During the first quarter of
2003, LII again conducted such fair-value-based tests and determined that no
further goodwill impairment charge was necessary.

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 three months of 2003, cash used in operating activities
was $26.2 million compared to $6.4 in 2002. The change is primarily due to
pre-season cooling inventory buildup driven by low field inventory levels and
the introduction of new products. Net cash provided by investing activities in
2003 includes the proceeds from the sale of the net assets of a distributor in
the residential segment.

Capital expenditures of $5.2 million and $4.7 million in the first three
months of 2003 and 2002, respectively, were primarily for production equipment
in the North American residential and international refrigeration products
manufacturing plants in 2003 and for the North American residential and heat
transfer products manufacturing plants in 2002.

The Company has bank lines of credit aggregating $326 million, of which $18
million was borrowed and outstanding, and $42 million was committed to standby
letters of credit at March 31, 2003. Of the remaining $266 million,
approximately $137 million was available for future borrowings after
consideration of covenant limitations. Included in the lines of credit is a
domestic facility in the amount of $270 million governed by agreements between
the Company and a syndicate of banks. The facility contains certain financial
covenants and bears interest, at the Company's option, at a rate equal to either
(a) the greater of the bank's prime rate or the federal funds rate plus 0.5% or

14

(b) the London Interbank Offered Rate plus a margin equal to 0.5% to 2.25%,
depending upon the ratio of total funded debt to earnings before interest,
taxes, depreciation and amortization ("EBITDA"). The Company pays a commitment
fee, depending upon the ratio of total funded debt to EBITDA, equal to 0.15% to
0.50% of the unused commitment. The agreements place restrictions on the
Company's ability to incur additional indebtedness, encumber its assets, sell
its assets, or pay dividends. The Company has included in cash and cash
equivalents in the accompanying consolidated balance sheet $32.9 million of
restricted cash related to letters of credit.

Under an on-going asset securitization arrangement, the Company had sold,
at March 31, 2003, $115.1 million of receivables on a non-recourse basis. The
receivables are sold at a discount from face value and this discount aggregated
$0.9 million through three months of 2003. The discount expense is shown as a
component of selling, general and administrative expense in the Consolidated
Statements of Operations. The Company has no significant concentration of credit
risk among its diversified customer base.

LII's domestic revolving and term loans contain certain financial covenant
restrictions. As of March 31, 2003, LII was in compliance with all covenant
requirements and LII believes that cash flow from operations, as well as
available borrowings under its revolving credit facility and other sources of
funding, will be sufficient to fund its operations for the foreseeable future.

RECENT ACCOUNTING PRONOUNCEMENTS

In January 2003, the Financial Accounting Standards Board issued
Interpretation No. 46, "Consolidation of Variable Interest Entities, an
interpretation of ARB No. 51." This interpretation addresses the consolidation
by business enterprises of variable interest entities, as defined in the
interpretation, when the reporting enterprise is the primary beneficiary of the
variable interest entities. The interpretation applies immediately to variable
interests in variable interest entities created after January 31, 2003, and as
of July 1, 2003, to variable interests in variable interest entities created
before February 1, 2003. The application of this interpretation is not expected
to have a material effect on the Company's financial statements.

FORWARD LOOKING INFORMATION

This Report contains forward-looking statements and information that are
based on the beliefs of LII's management as well as assumptions made by and
information currently available to management. All statements other than
statements of historical fact included in this Report constitute forward-looking
statements within the meaning of the Private Securities Litigation Reform Act of
1995, including but not limited to statements identified by the words "may,"
"will," "should," "plan," "predict," "anticipate," "believe," "intend,"
"estimate" and "expect" and similar expressions. Such statements reflect
Lennox's current views with respect to future events, based on what it believes
are reasonable assumptions; however, such statements are subject to certain
risks, uncertainties and assumptions. These include, but are not limited to,
warranty and product liability claims; ability to successfully complete and
integrate acquisitions; ability to manage new lines of business; the
consolidation trend in the HVACR industry; adverse reaction from customers to
the Company's acquisitions or other activities; the impact of the weather on
business; competition in the HVACR business; increases in the prices of
components and raw materials; general economic conditions in the U.S. and
abroad; labor relations problems; operating risks and environmental risks.
Should one or more of these risks or uncertainties materialize, or should
underlying assumptions prove incorrect, actual results may differ materially
from those in the forward-looking statements. LII disclaims any intention or
obligation to update or review any forward-looking statements or information,
whether as a result of new information, future events or otherwise.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

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 23.6% and 21.1% of total net sales for the three months ended
March 31, 2003 and 2002, respectively. Historically, foreign currency
transaction gains (losses) have not had a material effect on LII's overall
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, 2003, the Company had metal
futures contracts maturing at various dates through December 31, 2003 with a
fair value as an asset of $0.9 million.

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ITEM 4. CONTROLS AND PROCEDURES

The Company's management, including the Chief Executive Officer and Chief
Financial Officer, have conducted an evaluation of the effectiveness of the
Company's disclosure controls and procedures within 90 days of the filing of
this report. Based on that evaluation, the Chief Executive Officer and Chief
Financial Officer have concluded that the Company's current disclosure controls
and procedures are effective for the purpose of ensuring that information
required to be disclosed by the Company in this report has been processed,
summarized and reported in a timely manner. There have been no significant
changes in internal controls, or in factors that could significantly affect
internal controls, subsequent to the date the Chief Executive Officer and Chief
Financial Officer completed their evaluation.

16

PART II -- OTHER INFORMATION

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.

*3.1 -- Restated Certificate of Incorporation of Lennox
(Incorporated herein by reference to Exhibit 3.1 to Lennox's
Registration Statement on Form S-1 (Registration No.
333-75725)).

*3.2 -- Amended and Restated Bylaws of Lennox (Incorporated herein
by reference to Exhibit 3.2 to Lennox' Registration
Statement on Form S-1 (Registration No. 333-75725)).

*4.1 -- Specimen stock certificate for the Common Stock, par value
$.01 per share, of Lennox (Incorporated herein by reference
to Exhibit 4.1 to Lennox' Registration Statement on Form S-1
(Registration No. 333-75725)).

12.1 -- Lennox International Inc. and Subsidiaries Computation of
Ratio of Earnings to Fixed Charges (Unaudited) For the Three
Months Ended March 31, 2003.

99.1 -- Certification of Chief Executive Officer Pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.

99.2 -- Certification of Chief Financial Officer Pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.

Reports on Form 8-K

During the three-month period ending March 31, 2003, the Company filed or
furnished one Current Report on Form 8-K dated February 5, 2003 and filed
February 7, 2003 reporting under Item 9 - Regulation FD Disclosure a press
release reporting the Company's financial results for the quarter and year ended
December 31, 2002.

SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.

LENNOX INTERNATIONAL INC.

Date: May 13, 2003
/s/ Richard A. Smith
----------------------------------
Principal Financial Officer
and Duly Authorized Signatory

17

CERTIFICATION

I, Richard A. Smith, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Lennox International
Inc.;

2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;

3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;

4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;

b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing of this
quarterly report (the "Evaluation Date");

c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;

5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function);

a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and

b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and

6. The registrant's other certifying and I have indicated in this quarterly
report whether or not there were significant changes in internal controls
or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.

Date: May 13, 2003
/s/ Richard A. Smith
--------------------
Principal Financial Officer
and Duly Authorized Signatory

18

CERTIFICATION

I, Robert E. Schjerven, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Lennox International
Inc.;

2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;

3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;

4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;

b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing of this
quarterly report (the "Evaluation Date");

c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;

5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function);

a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and

b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and

6. The registrant's other certifying and I have indicated in this quarterly
report whether or not there were significant changes in internal controls
or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.

Date: May 13, 2003
/s/ Robert E. Schjerven
-----------------------
Chief Executive Officer

19