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LENNOX INTERNATIONAL : Management's Discussion and Analysis of Financial Condition and Results of Operations (form 10-K)

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02/21/2017 | 06:26pm CET

The following discussion should be read in conjunction with the other sections of this report, including the consolidated financial statements and related notes contained in Item 8 of this Annual Report on Form 10-K.

Business Overview


We operate in three reportable business segments of the heating, ventilation,
air conditioning and refrigeration ("HVACR") industry. Our reportable segments
are Residential Heating & Cooling, Commercial Heating & Cooling, and
Refrigeration. For more detailed information regarding our reportable segments,
see Note 18 in the Notes to the Consolidated Financial Statements.

We sell our products and services through a combination of direct sales,
distributors and company-owned parts and supplies stores. The demand for our
products and services is seasonal and significantly impacted by the weather.
Warmer than normal summer temperatures generate demand for replacement air
conditioning and refrigeration products and services, and colder than normal
winter temperatures have a similar effect on heating products and services.
Conversely, cooler than normal summers and warmer than normal winters depress
the demand for HVACR products and services. In addition to weather, demand for
our 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 spending habits and confidence. A substantial portion of
the sales in each of our business segments is attributable to replacement
business, with the balance comprised of new construction business.

The principal elements of cost of goods sold are components, raw materials,
factory overhead, labor, estimated costs of warranty expense and freight and
distribution costs. The principal raw materials used in our manufacturing
processes are steel, copper and aluminum. In recent years, pricing volatility
for these commodities and related components has impacted us and the HVACR
industry in general. We seek to mitigate the impact of commodity price
volatility through a combination of pricing actions, commodity contracts,
improved production efficiency and cost reduction initiatives. We also partially
mitigate volatility in the prices of these commodities by entering into futures
contracts and fixed forward contracts.

Financial Highlights

• Net sales increased $174.2 million, or 5%, to $3,642 million in 2016 from

$3,467 million in 2015.

• Operational income from continuing operations in 2016 was $429 million

       compared to $305 million in 2015. The increase was primarily due to
       increased sales and reductions in our commodities and material costs in
       2016 as well as the goodwill and asset impairment charges in 2015.

• Net income in 2016 increased to $278 million from $187 million in 2015.

• Diluted earnings per share from continuing operations were $6.34 per share

in 2016 compared to $4.11 per share in 2015, including non-cash impairment

charges in our refrigerated display case business in 2015.

• We generated $355 million of cash flow from operating activities in 2016

compared to $331 million in 2015.

• In 2016, we returned $69 million through dividend payments.

Overview of Results


The Residential Heating & Cooling segment led our overall financial performance
in 2016, with a 7.2% increase in net sales and a $70 million increase in segment
profit compared to 2015. This segment's results benefited from industry growth
in the replacement and new construction markets as well as market share gains.
Our Commercial Heating & Cooling segment also performed well in 2016 with a 3.5%
increase in net sales and a $19 million increase in segment profit compared to
2015. This segment's results benefited from market growth in North America and
material cost savings. Sales in our Refrigeration segment were up 1.3% and
segment profit increased $16 million compared to 2015. This segment's results
benefited from industry growth and market share gains.

On a consolidated basis, our gross profit margins increased to 29.6% in 2016 due
primarily to favorable price and material cost savings across our business.
These improvements were partially offset by unfavorable foreign exchange rates,
unfavorable mix, and continued investment in distribution expansion in our
Residential Heating & Cooling segment.


                                       18


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Results of Operations

The following table provides a summary of our financial results, including information presented as a percentage of net sales (dollars in millions):

                                                          For the Years Ended December 31,
                                               2016                     2015                     2014
                                        Dollars     Percent      Dollars     Percent      Dollars     Percent
Net sales                             $ 3,641.6     100.0  %   $ 3,467.4     100.0  %   $ 3,367.4     100.0  %
Cost of goods sold                      2,565.1      70.4  %     2,520.0      72.7  %     2,464.1      73.2  %
Gross profit                            1,076.5      29.6  %       947.4      27.3  %       903.3      26.8  %
Selling, general and administrative
expenses                                  621.0      17.1  %       580.5      16.7  %       573.7      17.0  %
Losses and other expenses, net             11.3       0.3  %        21.7       0.6  %         6.8       0.2  %
Restructuring charges                       1.8         -  %         3.2       0.1  %         1.9       0.1  %
Goodwill impairment                           -         -  %         5.5       0.2  %           -         -  %
Impairment of assets                          -         -  %        44.5       1.3  %           -         -  %
Pension settlement                         31.4       0.9  %           -         -  %           -         -  %

Income from equity method investments (18.4 ) (0.5 )% (13.4 )

   (0.4 )%       (13.8 )    (0.4 )%
Operating income                      $   429.4      11.8  %   $   305.4       8.8  %   $   334.7       9.9  %
Loss from discontinued operations          (0.8 )       -  %        (0.6 )       -  %        (2.3 )    (0.1 )%
Net income                            $   277.8       7.6  %   $   186.6       5.4  %   $   205.8       6.1  %



The following table provides net sales by geographic market (dollars in
millions):
                                                          For the Years Ended December 31,
                                               2016                     2015                     2014
                                        Dollars     Percent      Dollars     Percent      Dollars     Percent
Net Sales by Geographic Market:
U.S.                                  $ 2,966.8       81.5 %   $ 2,793.4       80.6 %   $ 2,576.4       76.5 %
Canada                                    218.8        6.0         217.7        6.3         236.3        7.0
International                             456.0       12.5         456.3       13.1         554.7       16.5
Total net sales                       $ 3,641.6      100.0 %   $ 3,467.4      100.0 %   $ 3,367.4      100.0 %


Year Ended December 31, 2016 Compared to Year Ended December 31, 2015 - Consolidated Results

Net Sales

Net sales increased 5% in 2016 compared to 2015, with sales volume up approximately 5%. The increase in volume was driven by all our business segments. The effects of both changes in foreign currency exchange rates and the effects of price and mix were neutral to net sales.

Gross Profit


Gross profit margins for 2016 increased 230 basis points ("bps") to 29.6%
compared to 27.3% in 2015. Lower material costs increased our profit margin by
260 bps, increased factory productivity increased our profit margin by 30 bps,
and other items contributed 10 bps. Offsetting these increases were decreases of
20 bps from unfavorable mix, 20 bps from unfavorable foreign currency
adjustments, 20 bps for investments in distribution and other growth
initiatives, and increased product warranty costs decreased our profit margin by
10 bps.


                                       19

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Selling, General and Administrative Expenses


SG&A expenses increased by $41 million in 2016 compared to 2015. As a percentage
of net sales, SG&A expenses increased 40 bps from 16.7% to 17.1% in the same
periods. The dollar increase in SG&A expenses was principally due to increased
incentive compensation and general wage inflation.

Losses and Other Expenses, Net


Losses and other expenses, net for 2016 and 2015 included the following (in
millions):
                                                                    For the Years Ended December 31,
                                                                       2016                   2015
Realized losses on settled futures contracts                    $           1.1         $           1.9
Foreign currency exchange losses                                            2.2                     3.6
Losses on disposal of fixed assets                                          0.5                     0.6
Net change in unrealized (gains) losses on unsettled futures
contracts                                                                  (3.6 )                   0.6
Asbestos-related litigation                                                 6.3                     3.0
Acquisition expenses                                                        0.4                     1.0
Special legal contingency charge                                            1.9                     7.4
Environmental liabilities                                                   1.9                     1.0
Contractor tax payments                                                     0.6                     2.6
Other items, net                                                              -                       -
Losses and other expenses, net                                  $          

11.3 $ 21.7




The decrease in realized losses on settled futures contracts in 2016 was
attributable to changes in commodity prices relative to our settled futures
contract prices, as commodity prices have increased in 2016 relative to 2015.
Additionally, the change in unrealized gains and losses on unsettled futures
contracts was primarily due to higher commodity prices relative to the unsettled
futures contract prices creating unrealized gains on unsettled future contracts.
For more information on our derivatives, see Note 8 in the Notes to the
Consolidated Financial Statements.

Foreign currency exchange losses decreased in 2016 primarily due to
stabilization in foreign exchange rates in our primary markets. The special
legal contingency charges primarily decreased as we settled an attempted class
action lawsuit in 2015. The asbestos-related litigation relates to known and
estimated future asbestos matters and the increase is a result of higher
estimated future claims and decreasing insurance reserves related to these
claims. The environmental liabilities relate to estimated remediation costs for
contamination at some of our facilities. The contractor tax payments relate to a
charge for underpaid contractor taxes at one of our non-U.S. subsidiaries. Refer
to Note 10 in the Notes to the Consolidated Financial Statements for more
information on litigation, including the asbestos-related litigation, and the
environmental liabilities.

Restructuring Charges

Restructuring charges were $2 million in 2016 compared to $3 million in 2015.
The charges in 2016 and 2015 were primarily for projects to realign resources
and enhance distribution capabilities in our Refrigeration segment. For more
information on our restructuring activities, see Note 16 in the Notes to the
Consolidated Financial Statements.

Goodwill


We performed a qualitative impairment analysis and noted no indicators of
goodwill impairment through December 31, 2016. However in 2015 based on the
results of the quantitative impairment test, we recorded goodwill impairment of
$5.5 million related to our refrigerated display case business. Refer to Note 4
in the Notes to the Consolidated Financial Statements for more information on
goodwill.


                                       20

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Asset Impairment


We did not have any impairments of assets related to continuing operations in
2016. During the fourth quarter of 2015 we completed a strategic review of our
refrigerated display case business. As a result, we performed an impairment
analysis using a market approach and determined that intangible and certain
long-lived assets relating to that business were impaired and we recorded a
charge of $45 million in "Asset Impairment" in the Consolidated Statement of
Operations.

Pension Settlement

In 2016 our unfunded pension liability declined by $33 million to $89 million as
the favorable impact of our $50 million discretionary contribution was partially
offset by lower discount rates across all plans. In addition, as part of our
ongoing strategy to de-risk our pension plan obligations, we completed a
one-time, lump sum pension buyout in the fourth quarter of 2016 for certain
vested participants. As a result of the pension buy-out, we recorded a pension
settlement charge of $31 million in the fourth quarter.

Income from Equity Method Investments


Investments over which we do not exercise control but have significant influence
are accounted for using the equity method of accounting. Income from equity
method investments increased to $18 million in 2016 compared to $13 million in
2015 due to increases in earnings from our joint ventures.

Interest Expense, net

Net interest expense of $27 million in 2016 increased from $24 million in 2015 primarily due to an increase in our average borrowings.

Income Taxes


The income tax provision was $124 million in 2016 compared to $95 million in
2015, and the effective tax rate was 30.8% in 2016 compared to 33.8% in 2015.
Our effective tax rate declined in 2016 due to the benefit from a repatriation
of earnings recognized in the second quarter. We expect our effective tax rate
to be approximately 32% in future years due to sustainable benefits from
reorganization of our international subsidiaries that will enable us to utilize
foreign tax credits and other benefits.

Loss from Discontinued Operations


The $1 million of pre-tax losses incurred in 2016 primarily relates to changes
in retained product liabilities and general liabilities for the Service Experts
business sold in 2013 and the Hearth business sold in 2012. In 2015, there were
$1 million of pre-tax losses incurred primarily related to changes in retained
product liabilities and general liabilities for Service Experts and Hearth.

Year Ended December 31, 2016 Compared to Year Ended December 31, 2015 - Results by Segment


Residential Heating & Cooling

The following table presents our Residential Heating & Cooling segment's net sales and profit for 2016 and 2015 (dollars in millions):

                  For the Years Ended December 31,
                      2016                 2015           Difference     % Change
Net sales      $       2,000.8       $       1,866.9     $      133.9        7.2 %
Profit         $         348.8       $         278.4     $       70.4       25.3 %
% of net sales            17.4 %                14.9 %



Residential Heating & Cooling net sales increased 7% in 2016 compared to 2015.
Sales volume increased net sales by 6% due to industry growth and market share
gains and the benefits of favorable price and mix contributed 1%.

Segment profit in 2016 increased $70 million due to $51 million in lower
commodities and material costs, $33 million from higher sales volume and $12
million from favorable factory productivity which includes the addition of a
second factory in Mexico,

                                       21

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and $5 million in other product costs. Partially offsetting these increases was
$6 million from unfavorable price and mix combined, $4 million of unfavorable
foreign currency exchange rates, $11 million in distribution investments, and
$10 million of SG&A expenses to support wage inflation and investments in
information technology and research and development.

Commercial Heating & Cooling

The following table presents our Commercial Heating & Cooling segment's net sales and profit for 2016 and 2015 (dollars in millions):

                   For the Years Ended December 31,
                      2016                   2015           Difference    % Change
Net sales      $         917.9         $         887.2     $      30.7        3.5 %
Profit         $         149.3         $         130.4     $      18.9       14.5 %
% of net sales            16.3 %                  14.7 %



Commercial Heating & Cooling net sales increased 3% in 2016 compared to 2015.
Sales volume increased net sales by 3%, price and mix increased net sales by 1%
and changes in foreign currency exchange rates unfavorably impacted net sales by
1%.

Segment profit in 2016 increased $19 million compared to 2015. The benefits of
$9 million from incremental volume, $18 million from lower commodities and
material costs, $4 million from combined price and mix and $1 million from lower
freight expenses were partially offset by $6 million in other product costs and
unfavorable factory productivity, $6 million of higher SG&A expenses, and $1
million for investments in infrastructure for our North American Service
business.

Refrigeration

The following table presents our Refrigeration segment's net sales and profit for 2016 and 2015 (dollars in millions):

                   For the Years Ended December 31,
                      2016                   2015           Difference    % Change
Net sales      $         722.9         $         713.3     $       9.6        1.3 %
Profit         $          68.9         $          52.9     $      16.0       30.2 %
% of net sales             9.5 %                   7.4 %


Refrigeration net sales increased 1% in 2016 compared to 2015 primarily due to 3% volume growth which was partially offset by a 1% impact from unfavorable foreign exchange rates and a 1% impact from mix and price reductions.


Segment profit in 2016 compared to 2015 increased $16 million compared to 2015
primarily due to $7 million from increased sales volume, $21 million in lower
commodities and material costs, $6 million from lower depreciation and
amortization due to the impairment of our refrigerated display case business
recorded in 2015. Partially offsetting these increases were $8 million from
unfavorable price and mix combined, $8 million from higher SG&A expenses, $1
million from other product costs, and $1 million from changes in foreign
currency exchange rates.

Corporate and Other


Corporate and other expenses increased $13 million in 2016 as compared to 2015
due primarily to higher incentive compensation, general wage inflation, and
consulting fees. Partially offsetting these increases were decreases in health
care costs.

Year Ended December 31, 2015 Compared to Year Ended December 31, 2014 - Consolidated Results

Net Sales


Net sales increased 3% in 2015 compared to 2014, with sales volume up
approximately 6% and price and mix up approximately 1%. The increase in volume
was driven by our Residential Heating & Cooling, Commercial Heating & Cooling
and Refrigeration segments. The benefit of price and mix was a combination of
price increases across all segments and favorable product mix

                                       22


--------------------------------------------------------------------------------

predominantly in our Residential Heating & Cooling segment. Partially offsetting these increases was a 4% decrease from foreign currency exchange rates.

Gross Profit


Gross profit margins for 2015 increased 50 basis points ("bps") to 27.3%
compared to 26.8% in 2014. Lower material costs increased our profit margin by
200 bps, increased factory productivity increased our profit margin by 20 bps
and reduced product warranty costs increased our profit margin by 10 bps.
Offsetting these increases were decreases of 70 bps from unfavorable mix, 50 bps
from unfavorable foreign currency adjustments, 20 bps from lower refrigerant
pricing on our Australia wholesale business when compared to the prior year, 30
bps for investments in distribution and other growth initiatives, and 10 bps
from one-time inventory write down costs.

Selling, General and Administrative Expenses


SG&A expenses increased by $7 million in 2015 compared to 2014. As a percentage
of net sales, SG&A expenses decreased 30 bps from 17.0% to 16.7% in the same
periods. The dollar increase in SG&A expenses was principally due to increased
incentive compensation, general wage inflation, and health care costs.

Losses and Other Expenses, Net


Losses and other expenses, net for 2015 and 2014 included the following (in
millions):
                                                                   For the Years Ended
                                                                      December 31,
                                                                    2015          2014
Realized losses on settled futures contracts                    $      1.9     $    0.8
Foreign currency exchange losses                                       3.6  

1.6

(Gain) loss on disposal of fixed assets                                0.6         (0.3 )
Net change in unrealized losses (gains) on unsettled futures
contracts                                                              0.6          0.6
Asbestos charge                                                        3.0          0.9
Acquisition expenses                                                   1.0            -
Special legal contingency charge                                       7.4          0.9
Environmental liabilities                                              1.0          2.0
Contractor tax payments                                                2.6            -
Other items, net                                                         -          0.3
Losses and other expenses, net                                  $     21.7  

$ 6.8




The increase in realized losses on settled futures contracts in 2015 was
attributable to decreases in commodity prices relative to our settled futures
contract prices. Additionally, the change in unrealized losses on unsettled
futures contracts was primarily due to lower commodity prices relative to the
unsettled futures contract prices. For more information on our derivatives, see
Note 8 in the Notes to the Consolidated Financial Statements.

Foreign currency exchange losses increased in 2015 primarily due to the Canadian
dollar exchange rates. The special legal contingency charges primarily increased
for our estimate of costs expected to be incurred for an attempted class action
lawsuit. The asbestos-related litigation relates to known and estimated future
asbestos matters. The environmental liabilities relate to estimated remediation
costs for contamination at some of our facilities. The contractor tax payments
relate to a charge for underpaid contractor taxes at one of our non-U.S.
subsidiaries. Refer to Note 10 in the Notes to the Consolidated Financial
Statements for more information on litigation, including the asbestos charges,
and the environmental liabilities.

Restructuring Charges


Restructuring charges were $3 million in 2015 compared to $2 million in 2014.
The charges in 2015 and 2014 charges were primarily for projects to realign
resources and enhance distribution capabilities in our Refrigeration segment.
For more information on our restructuring activities, see Note 16 in the Notes
to the Consolidated Financial Statements.


                                       23


--------------------------------------------------------------------------------

Goodwill


During the fourth quarter we completed a strategic review of our North American
supermarket display cases and systems business. As a result, we performed a
quantitative impairment analysis for this business unit using the market
approach. Based on the results of the quantitative impairment test, we recorded
goodwill impairment of $5.5 million. No other indicators of goodwill impairment
were identified through December 31, 2015. Also, we did not record any goodwill
impairments related to continuing operations in 2014. Refer to Note 4 in the
Notes to the Consolidated Financial Statements for more information on goodwill.

Income from Equity Method Investments


Investments over which we do not exercise control but have significant influence
are accounted for using the equity method of accounting. Income from equity
method investments decreased to $13 million in 2015 compared to $14 million in
2014 due to decreases in earnings from our joint ventures.

Asset Impairment


During the fourth quarter we completed a strategic review of our North American
supermarket display cases and systems business. As a result, we performed an
impairment analysis using a market approach and determined that intangible and
certain long-lived assets relating to our North American supermarket business
were impaired and we recorded a charge of $45 million in "Asset Impairment" in
the Consolidated Statement of Operations. We did not have any impairments of
intangible assets related to continuing operations in 2014.

Interest Expense, net

Net interest expense of $24 million in 2015 increased from $17 million in 2014 primarily due to an increase in our average borrowings.

Income Taxes


The income tax provision was $95 million in 2015 compared to $110 million in
2014, and the effective tax rate was 33.8% in 2015 compared to 34.5% in 2014.
Our effective tax rates differ from the statutory federal rate of 35% for
certain items, including tax credits, state and local taxes, non-deductible
expenses, foreign taxes at rates other than 35% and other permanent tax
differences.

Loss from Discontinued Operations


The Loss from discontinued operations related to the Service Experts business
sold in March 2013 and the Hearth business sold in April 2012. The $1 million of
pre-tax losses incurred in 2015 primarily relate to changes in retained product
liabilities and general liabilities for Service Experts and Hearth. In 2014,
there were $4 million of pre-tax losses incurred primarily related to changes in
retained product liabilities and general liabilities for Service Experts and
Hearth.

Year Ended December 31, 2015 Compared to Year Ended December 31, 2014 - Results by Segment


Residential Heating & Cooling

The following table presents our Residential Heating & Cooling segment's net sales and profit for 2015 and 2014 (dollars in millions):

                  For the Years Ended December 31,
                      2015                 2014           Difference     % Change
Net sales      $       1,866.9       $       1,736.5     $      130.4        7.5 %
Profit         $         278.4       $         235.8     $       42.6       18.1 %
% of net sales            14.9 %                13.6 %



Residential Heating & Cooling net sales increased 8% in 2015 compared to 2014
driven by strong volume increases and favorable price and mix. Sales volume
increases contributed 7% and were attributable to industry growth in new
construction and replacement markets and market share gains. Benefits of price
increases and favorable product mix contributed 2%. Changes in foreign currency
exchange rates unfavorably impacted net sales by 1%.

                                       24


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Segment profit in 2015 increased $43 million due to $39 million from material
cost savings, $29 million from higher sales volume, and $10 million from
favorable price and mix. Partially offsetting these increases were $12 million
of unfavorable foreign exchange rates, $10 million in higher distribution
expenses related to continued investment in distribution expansion, $10 million
of SG&A inflation, and $3 million due to lower factory absorption and higher
warranty expenses.

Commercial Heating & Cooling

The following table presents our Commercial Heating & Cooling segment's net sales and profit for 2015 and 2014 (dollars in millions):

                   For the Years Ended December 31,
                      2015                   2014           Difference     % Change
Net sales      $         887.2         $         878.5     $        8.7       1.0 %
Profit         $         130.4         $         124.0     $        6.4       5.2 %
% of net sales            14.7 %                  14.1 %



Commercial Heating & Cooling net sales increased 1% in 2015 compared to 2014
driven by higher volume. Net sales increased by 6% due to higher volume while
changes in foreign currency exchange rates unfavorably impacted net sales by 5%.

Segment profit in 2015 increased $6 million compared to 2014. The benefits of
$15 million from incremental volume, $14 million from lower material costs and
$2 million from higher prices were partially offset by $9 million in unfavorable
mix, $4 million for information technology and distribution investments and
start-up costs to enter the VRF market, $6 million for unfavorable foreign
exchange rates, $5 million of higher SG&A expenses and $1 million from increases
in other product costs.

Refrigeration

The following table presents our Refrigeration segment's net sales and profit for 2015 and 2014 (dollars in millions):

                   For the Years Ended December 31,
                      2015                   2014           Difference     % Change
Net sales      $         713.3         $         752.4     $     (39.1 )     (5.2 )%
Profit         $          52.9         $          55.4     $      (2.5 )     (4.5 )%
% of net sales             7.4 %                   7.4 %



Refrigeration net sales declined 5% in 2015 compared to 2014 primarily due to an
8% impact from unfavorable foreign exchange rates and a 2% impact from the
Australian carbon levy repeal that was effective July 1, 2014. These decreases
were partially offset by 4% volume growth, led by our North American supermarket
businesses, and price and mix combined contributed 1%.

Segment profit in 2015 compared to 2014 decreased $3 million compared to 2014
primarily due to $14 million from unfavorable mix, predominantly in the North
American supermarket business, $9 million lower profitability in our Australia
refrigerant business, $1 million of costs related to investments for future
growth, $5 million from unfavorable foreign currency exchange rates, and $3
million for higher SG&A expenses. Partially offsetting these decreases were $14
million from material cost savings, $2 million from higher sales volume, and $13
million from improved factory productivity and lower warranty and other product
costs.

Corporate and Other

Corporate and other expenses increased $10 million in 2015 to $84 million from
$74 million in 2014 due primarily to higher incentive compensation, general wage
inflation, health care costs and currency losses.


                                       25


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Accounting for Futures Contracts


Realized gains and losses on settled futures contracts are a component of
segment profit (loss). Unrealized gains and losses on unsettled futures
contracts are excluded from segment profit (loss) as they are subject to changes
in fair value until their settlement date. Both realized and unrealized gains
and losses on futures contracts are a component of Losses and other expenses,
net in the accompanying Consolidated Statements of Operations. See Note 8 of the
Notes to Consolidated Financial Statements for more information on our
derivatives and Note 18 of the Notes to the Consolidated Financial Statements
for more information on our segments and for a reconciliation of segment profit
to income from continuing operations before income taxes.

Liquidity and Capital Resources

Our working capital and capital expenditure requirements are generally met through internally generated funds, bank lines of credit and an asset securitization arrangement. Working capital needs are generally greater in the first and second quarters due to the seasonal nature of our business cycle.

Statement of Cash Flows

The following table summarizes our cash flow activity for the years ended December 31, 2016, 2015 and 2014 (in millions):

                                            2016        2015        2014

Net cash provided by operating activities $ 354.5 $ 331.2 $ 184.8 Net cash used in investing activities (84.1 ) (69.8 ) (87.3 ) Net cash used in financing activities (255.2 ) (248.7 ) (89.5 )

Net Cash Provided by Operating Activities - Net cash provided by operating activities increased $23 million to $355 million in 2016 compared to $331 million in 2015. This increase was primarily attributable to the increase in net income, partially offset by pension contributions.


Net Cash Used in Investing Activities - Capital expenditures were $84 million,
$70 million and $88 million in 2016, 2015 and 2014, respectively. Capital
expenditures in 2016 were primarily related to an expansion of manufacturing
capacity in our Residential Heating & Cooling and Commercial Heating & Cooling
segments, investments in our research and test facilities and other investments
in systems and software to support the overall enterprise.

Net Cash Used in Financing Activities - Net cash used in financing activities
increased to $255 million in 2016 from $249 million in 2015 primarily due to
debt repayments and increased dividend payments and increased share repurchases,
partially offset by an increase in net borrowings. Net borrowings increased in
2016 as we issued $350.0 million of senior unsecured notes in November 2016
through a public offering that was partially used to pay down existing debt. We
also used $300.0 million in 2016 to purchase 2.2 million shares of stock under
our share repurchase plans.


                                       26

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Debt Position

The following table details our lines of credit and financing arrangements as of December 31, 2016 (in millions):


                                             Outstanding Borrowings
Short-term debt:
Foreign Obligations                        $                 2.4
Asset Securitization Program (1)                            50.0
Total short-term debt                      $                52.4
Current maturities of long-term debt:
Capital lease obligations                                    0.8
Domestic credit facility (2)                                   -
Senior unsecured notes                                     200.0
Debt issuance costs                                         (0.7 )
Total current maturities of long-term debt $               200.1
Long-term debt:
Capital lease obligations                                   15.0
Domestic credit facility (2)                               256.0
Senior unsecured notes                                     350.0
Debt issuance costs                                         (5.3 )
Total long-term debt                                       615.7
Total debt                                 $               868.2


(1) The maximum securitization amount ranges from $200.0 million to $325.0

million, depending on the period, after consideration of the July 5, 2016

    amendment. The maximum capacity of the ASP is the lesser of the maximum
    securitization amount or 100% of the net pool balance less reserves, as
    defined under the ASP.

(2) The available future borrowings on our domestic credit facility are $609.6

million after being reduced by the outstanding borrowings and $4.4 million in

outstanding standby letters of credit. We also had $38.3 million in

outstanding standby letters of credit outside of the domestic credit facility

    as of December 31, 2016.



Financial Leverage

We periodically review our capital structure, including our primary bank
facility, to ensure the appropriate levels of liquidity and leverage and to take
advantage of favorable interest rate environments or other market conditions. We
consider various other financing alternatives and may, from time to time, access
the capital markets.

As of December 31, 2016, our senior credit ratings were Baa3 with a stable
outlook, and BBB with a stable outlook, by Moody's Investors Service, Inc.
("Moody's") and Standard & Poor's Rating Group ("S&P"), respectively. The
security ratings are not a recommendation to buy, sell or hold securities and
may be subject to revision or withdrawal at any time by the assigning rating
agency. Each rating should be evaluated independently of any other rating. Our
goal is to maintain investment grade ratings from Moody's and S&P to help ensure
the capital markets remain available to us.

Our debt-to-total-capital ratio increased to 95.8% at December 31, 2016 compared
to 88.9% at December 31, 2015. The increase in the ratio in 2016 is primarily
due to the increase in our net borrowings. We evaluate our debt-to-EBITDA ratio
in order to determine the appropriate targets for share repurchases under our
share repurchase programs.

Liquidity

We believe our cash and cash equivalents of $50 million, future cash generated
from operations and available future borrowings are sufficient to fund our
operations, planned capital expenditures, future contractual obligations, share
repurchases, anticipated dividends and other needs in the foreseeable future.
Included in our cash and cash equivalents of $50 million as of December 31, 2016
was $32 million of cash held in foreign locations. Our cash held in foreign
locations is used for investing and operating activities in those locations, and
we generally do not have the need or intent to repatriate those funds to the
United States. If we

                                       27

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were to repatriate foreign earnings, we would be required to accrue and to pay
taxes in the United States, less foreign tax credits, for the amounts that were
repatriated. However, an additional benefit of the tax reorganization discussed
previously is our ability to repatriate cash generated in prior periods in a tax
efficient manner. We repatriated $42 million in cash from foreign subsidiaries
and made a discretionary contribution of $50 million to our qualified pension
plans in the third quarter of 2016.

No contributions are required to be made to our U.S. defined benefit plans in 2017. We made $53.9 million in total contributions to pension plans in 2016.


On May 11, 2016, our Board of Directors approved a 20% increase in our quarterly
dividend on common stock from $0.36 to $0.43 per share effective with the May
2016 dividend payment. Dividend payments were $69 million in 2016 compared to
$59 million in 2015, with the increase due primarily to the increase in
dividends approved by the Board of Directors.

We also continued to increase shareholder value through our share repurchase
programs. In 2016, we returned $300.0 million to our investors through share
repurchases. An additional $646 million of repurchases are still available under
the programs.

Financial Covenants related to our Debt


Our domestic credit facility is guaranteed by certain of our subsidiaries and
contains financial covenants relating to leverage and interest coverage. Other
covenants contained in the domestic credit facility restrict, among other
things, certain mergers, asset dispositions, guarantees, debt, liens, and
affiliate transactions. The financial covenants require us to maintain a defined
Consolidated Indebtedness to Adjusted EBITDA Ratio and a Cash Flow (defined as
EBITDA minus capital expenditures) to Net Interest Expense Ratio. The required
ratios under our domestic credit facility are detailed below:
Consolidated Indebtedness to Adjusted EBITDA Ratio no greater than 3.5 : 1.0
Cash Flow to Net Interest Expense Ratio no less than               3.0 : 

1.0




Our domestic credit facility contains customary events of default. These events
of default include nonpayment of principal or other amounts, material inaccuracy
of representations and warranties, breach of covenants, default on certain other
indebtedness or receivables securitizations (cross default), certain voluntary
and involuntary bankruptcy events and the occurrence of a change in control. A
cross default under our credit facility could occur if:

• We fail to pay any principal or interest when due on any other indebtedness

or receivables securitization of at least $75.0 million; or

• We are in default in the performance of, or compliance with any term of any

other indebtedness or receivables securitization in an aggregate principal

amount of at least $75.0 million, or any other condition exists which would

give the holders the right to declare such indebtedness due and payable

prior to its stated maturity.




Each of our major debt agreements contains provisions by which a default under
one agreement causes a default in the others (a cross default). If a cross
default under the Domestic Credit Facility, our senior unsecured notes, the Lake
Park Renewal (as described below), or our ASP were to occur, it could have a
wider impact on our liquidity than might otherwise occur from a default of a
single debt instrument or lease commitment.

If any event of default occurs and is continuing, lenders with a majority of the
aggregate commitments may require the administrative agent to terminate our
right to borrow under our domestic credit facility and accelerate amounts due
under our domestic credit facility (except for a bankruptcy event of default, in
which case such amounts will automatically become due and payable and the
lenders' commitments will automatically terminate).

In the event of a credit rating downgrade below investment grade resulting from
a change of control, holders of our senior unsecured notes will have the right
to require us to repurchase all or a portion of the senior unsecured notes at a
repurchase price equal to 101% of the principal amount of the notes, plus
accrued and unpaid interest, if any. The notes are guaranteed, on a senior
unsecured basis, by each of our domestic subsidiaries that guarantee payment by
us of any indebtedness under our domestic credit facility. The indenture
governing the notes contains covenants that, among other things, limit our
ability and the ability of the subsidiary guarantors to: create or incur certain
liens; enter into certain sale and leaseback transactions; enter into certain
mergers, consolidations and transfers of substantially all of our assets; and
transfer certain properties. The indenture also contains a cross default
provision which is triggered if we default on other debt of at least $75 million
in principal which is then accelerated, and such acceleration is not rescinded
within 30 days of the notice date.


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As of December 31, 2016, we believe we were in compliance with all covenant
requirements. Delaware law limits the ability to pay dividends to surplus or, if
there is no surplus, out of net profits for the fiscal year in which the
dividend is declared and/or the preceding fiscal year. In addition, stock
repurchases can only be made out of surplus and only if our capital would not be
impaired.

Leasing Commitments

On March 22, 2013, we entered into an agreement with a financial institution to
renew the lease of our corporate headquarters in Richardson, Texas for a term of
approximately six years through March 1, 2019 (the "Lake Park Renewal"). The
agreement contains customary lease covenants and events of default as well as
financial covenants consistent with our credit agreement and we were in
compliance with those covenants as of December 31, 2016.

In 2008, we expanded our Tifton, Georgia manufacturing facility using the
proceeds from Industrial Development Bonds ("IDBs"). We entered into a lease
agreement with the owner of the property and the issuer of the IDBs, and through
our lease payments fund the interest payments to investors in the IDBs. We also
guaranteed the repayment of the IDBs and have oustanding letters of credit
totaling $14.3 million to fund a potential repurchase of the IDBs in the event
investors exercised their right to tender the IDBs to the Trustee. As of
December 31, 2016 and 2015, we had a long-term capital lease obligation of $14.3
million related to these transactions.

Refer to Note 10 in the Notes to the Consolidated Financial Statements for more details on our leasing commitments.

Off Balance Sheet Arrangements


In addition to the credit facilities, promissory notes and leasing commitments
described above, we also lease real estate and machinery and equipment pursuant
to operating leases that are not capitalized on the balance sheet, including
high-turnover equipment such as autos and service vehicles and short-lived
equipment such as personal computers. Rent expense for these leases was $58
million, $54 million, and $51 million in 2016, 2015, and 2014, respectively.
Refer to Notes 10 and 22 of the Notes to the Consolidated Financial Statements
for more information on our lease commitments and rent expense, respectively.

Contractual Obligations


Summarized below are our contractual obligations as of December 31, 2016 and
their expected impact on our liquidity and cash flows in future periods (in
millions):
                                                                   Payments Due by Period
                                                        1 Year or                                        More than 5
                                            Total         Less         1 - 3 Years       3 - 5 Years        Years
Total long-term debt obligations (1)     $   874.2     $   253.2     $        63.3     $       196.0     $   361.7
Estimated interest payments on debt
obligations                                   96.4          20.9              28.5              25.6          21.4
Operating leases                             158.8          48.3              65.6              26.7          18.2
Uncertain tax positions (2)                    2.3           2.3                 -                 -             -
Purchase obligations (3)                      35.4          35.4                 -                 -             -
Total contractual obligations            $ 1,167.1     $   360.1     $      

157.4 $ 248.3 $ 401.3




(1) Contractual obligations related to capital leases are included as part of
long-term debt.
(2) The liability for uncertain tax positions includes interest and penalties.
(3) Purchase obligations consist of inventory that is part of our third party
logistics programs.

The table above does not include pension, post-retirement benefit and warranty
liabilities because it is not certain when these liabilities will be funded. For
additional information regarding our contractual obligations, see Notes 10 and
11 of the Notes to the Consolidated Financial Statements. See Note 12 of the
Notes to the Consolidated Financial Statements for more information on our
pension and post-retirement benefits obligations.


                                       29


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Fair Value Measurements


Fair value is the price that would be received to sell an asset or paid to
transfer a liability in an orderly transaction between market participants at
the measurement date. Fair value is based upon the transparency of inputs to the
valuation of an asset or liability as of the measurement date and requires
consideration of our creditworthiness when valuing certain liabilities. Our
framework for measuring fair value is based on a three-level hierarchy for fair
value measurements.

The three-level fair value hierarchy for disclosure of fair value measurements is defined as follows:

Level 1 - Quoted prices for identical instruments in active markets at the measurement date.

Level 2 -    Quoted prices for similar instruments in active markets; quoted
             prices for identical or similar instruments in markets that are not
             active; and model-derived valuations in which all significant inputs
             and significant value drivers are observable in active markets at
             the measurement date and for the anticipated term of the

instrument.



Level 3 -    Valuations derived from valuation techniques in which one or more
             significant inputs or significant value drivers are

unobservable

             inputs that reflect the reporting entity's own assumptions about the
             assumptions market participants would use in pricing the asset or
             liability developed based on the best information available in the
             circumstances.



Where available, the fair values were based upon quoted prices in active
markets. However, if quoted prices were not available, then the fair values were
based upon quoted prices for similar assets or liabilities or independently
sourced market parameters, such as credit default swap spreads, yield curves,
reported trades, broker/dealer quotes, interest rates and benchmark securities.
For assets and liabilities without observable market activity, if any, the fair
values were based upon discounted cash flow methodologies incorporating
assumptions that, in our judgment, reflect the assumptions a marketplace
participant would use. Valuation adjustments to reflect either party's
creditworthiness and ability to pay were incorporated into our valuations, where
appropriate, as of December 31, 2016 and 2015, the measurement dates.

See Note 19 of the Notes to the Consolidated Financial Statements for more information on the assets and liabilities measured at fair value.

Market Risk

Commodity Price Risk


We enter into commodity futures contracts to stabilize prices expected 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. Fluctuations in metal commodity prices impact
the value of the futures contracts that we hold. When metal commodity prices
rise, the fair value of our futures contracts increases. Conversely, when
commodity prices fall, the fair value of our futures contracts decreases.
Information about our exposure to metal commodity price market risks and a
sensitivity analysis related to our metal commodity hedges is presented below
(in millions):

Notional amount (pounds of aluminum and copper) 35.4 Carrying amount and fair value of net liability $ 11.5 Change in fair value from 10% change in forward prices $ 8.5

Refer to Note 8 of the Notes to the Consolidated Financial Statements for additional information regarding our commodity futures contracts.

Interest Rate Risk


Our results of operations can be affected by changes in interest rates due to
variable rates of interest on our debt facilities, cash, cash equivalents and
short-term investments. A 10% adverse movement in the levels of interest rates
across the entire yield curve would have resulted in an increase to pre-tax
interest expense of approximately $2.0 million and $2.1 million for the years
ended December 31, 2016 and 2015, respectively.


                                       30


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From time to time, we may use an interest rate swap hedging strategy to
eliminate the variability of cash flows in a portion of our interest payments.
This strategy, when employed, allows us to fix a portion of our interest
payments while also taking advantage of historically low interest rates. As of
December 31, 2016 and 2015, no interest rate swaps were in effect.

Foreign Currency Exchange Rate Risk


Our results of operations are affected by changes in foreign currency exchange
rates. Net sales and expenses in foreign currencies are translated into U.S.
dollars for financial reporting purposes based on the average exchange rate for
the period. During 2016, 2015 and 2014, net sales from outside the U.S.
represented 18.5%, 19.4% and 23.5% , respectively, of our total net sales. For
the years ended December 31, 2016 and 2015, foreign currency transaction gains
and losses did not have a material impact to our results of operations. A 10%
change in foreign exchange rates would have had an estimated $4.0 million and
$2.5 million impact to net income for the years ended December 31, 2016 and
2015, respectively.

We seek to mitigate the impact of currency exchange rate movements on certain
short-term transactions by periodically entering into foreign currency forward
contracts. By entering into forward contracts, we lock in exchange rates that
would otherwise cause losses should the U.S. dollar appreciate and gains should
the U.S. dollar depreciate. Refer to Note 8 of the Notes to the Consolidated
Financial Statements for additional information regarding our foreign currency
forward contracts.

Critical Accounting Estimates


A critical accounting estimate is one that requires difficult, subjective or
complex estimates and assessments and is fundamental to our results of
operations and financial condition. The following are our critical accounting
estimates and describe how we develop our judgments, assumptions and estimates
about future events and how such policies can impact our financial statements:

• Product warranties and product-related contingencies;


• Self-insurance expense;


• Pension benefits;

• Derivative accounting; and

Goodwill and intangible assets.

This discussion and analysis should be read in conjunction with our Consolidated Financial Statements and related Notes in "Item 8. Financial Statements and Supplementary Data."

Product Warranties and Product-Related Contingencies


The estimate of our liability for future warranty costs requires us to make
assumptions about the amount, timing and nature of future product-related costs.
Some of the warranties we issue extend 10 years or more in duration and a
relatively small adjustment to an assumption may have a significant impact on
our overall liability. We may also incur costs related to our products that may
not be covered under our warranties and are not covered by insurance, and, from
time to time, we may repair or replace installed products experiencing quality
issues in order to satisfy our customers and protect our brand.

We periodically review the assumptions used to determine the liabilities for
product warranties and product-related contingencies and we adjust our
assumptions based upon factors such as actual failure rates and cost experience.
Numerous factors could affect actual failure rates and cost experience,
including the amount and timing of new product introductions, changes in
manufacturing techniques or locations, components or suppliers used. Should
actual costs differ from our estimates, we may be required to adjust the
liabilities and to record expense in future periods. See Note 10 in the Notes to
the Consolidated Financial Statements for more information on our product
warranties and product-related contingencies.

Self-Insurance Expense


We use a combination of third-party insurance and self-insurance plans to
provide protection against claims relating to workers' compensation/employers'
liability, general liability, product liability, auto liability, auto physical
damage and other exposures. Many of these plans have large deductibles and may
also include per occurrence and annual aggregate limits. As a result, we expect
to incur costs related to these types of claims in future periods.

The estimates for self-insurance expense and liabilities involve assumptions
about the amount, timing and nature of future claim costs. We estimate these
amounts actuarially based primarily on our historical claims information and
industry factors and trends. The amounts and timing of payments for future
claims may vary depending on numerous factors, including the development and
ultimate settlement of reported and unreported claims. To the extent actuarial
assumptions change and claims experience

                                       31


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differ from historical rates, our liabilities may change. The self-insurance
liabilities as of December 31, 2016 represent the best estimate of the future
payments to be made on reported and unreported losses. See Note 10 in the Notes
to the Consolidated Financial Statements for additional information on our
self-insurance expense and liabilities.

Pension Benefits


Over the past several years, we have frozen many of our defined benefit pension
and profit sharing plans and replaced them with defined contribution plans. We
have a liability for the benefits earned under these inactive plans prior to the
date the benefits were frozen. Our defined contribution plans generally include
both company and employee contributions based on predetermined percentages of
compensation earned by the employee. We also have several active defined benefit
plans that provide benefits based on years of service. In the years ended
December 31, 2016 and December 31, 2015, we contributed $53.9 million and $3.9
million to our pension plans, respectively.

We make several assumptions to calculate our liability and the expense for these
benefit plans, including the discount rate and expected return on assets. We
used an assumed discount rate of 4.17% for pension benefits of our U.S.-based
plans as of December 31, 2016. Our discount rates were selected using the yield
curve for high-quality corporate bonds, which is dependent upon risk-free
interest rates and current credit market conditions. In 2016 and 2015, we
utilized an assumed long-term rate of return on assets of 7.50% in both years.
These are long-term estimates of equity values and are not dependent on
short-term variations of the equity markets. Differences between actual
experience and our assumptions are quantified as actuarial gains and losses.
These actuarial gains and losses do not immediately impact our earnings as they
are deferred in accumulated other comprehensive income ("AOCI") and are
amortized into net periodic benefit cost over the estimated service period.
During 2015, we adopted the new mortality tables, MP-2015, from the Society of
Actuaries, which reflects increasing life expectancies in the United States. In
2016, we adopted the additional revisions to the mortality tables included in
MP-2016.

The assumed long-term rate of return on assets and the discount rate have
significant effects on the amounts reported for our defined benefit plans. A 25
bps decrease in the long-term rate of return on assets or discount rate would
have the following effects (in millions):
                                                       25 Basis Point
                                                         Decrease in       25 Basis Point
                                                      Long-Term Rate of     Decrease in
                                                           Return          Discount Rate
Increase to net periodic benefit cost for U.S.
pension plans                                         $           0.6     $ 

1.1

Increase to the pension benefit obligations for U.S.
pension plans                                                     n/a               11.1



Should actual results differ from our estimates and assumptions, revisions to
the benefit plan liabilities and the related expenses would be required. Refer
to Note 12 in the Notes to the Consolidated Financial Statements for more
information on our pension benefits.

Derivative Accounting


We use futures contracts and fixed forward contracts to mitigate our exposure to
volatility in metal commodity prices in the ordinary course of business.
Fluctuations in metal commodity prices impact the value of the derivative
instruments that we hold. When metal commodity prices rise, the fair value of
our futures contracts increases and conversely, when commodity prices fall, the
fair value of our futures contracts decreases. We are required to prepare and
maintain contemporaneous documentation for futures contracts that are formally
designated as cash flow hedges. Our failure to comply with the strict
documentation requirements could result in the de-designation of cash flow
hedges, which may significantly impact our consolidated financial statements.
Refer to "Market Risk" above and to Note 8 in the Notes to the Consolidated
Financial Statements for more information on our derivatives.

Goodwill and Intangible Assets


Goodwill is calculated as the excess of cost over fair value of assets from
acquired businesses. Goodwill is not amortized, but is reviewed for impairment
annually in the fourth quarter and whenever events or changes in circumstances
indicate the asset may be impaired. We assign goodwill to the reporting units
that benefit from the synergies of our acquisitions. If we reorganize our
management structure, the related goodwill is allocated to the affected
reporting units based upon the relative fair values of those reporting units.
Assets and liabilities, including deferred income taxes, are generally directly
assigned to the reporting units. However, certain assets and liabilities,
including intellectual property assets, information technology assets and
pension, self-insurance and environmental liabilities, are centrally managed and
are not allocated to the segments in the normal course of our

                                       32


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financial reporting process, and therefore must be assigned to the reporting
units based upon appropriate methods. Reporting units that we test are generally
equivalent to our business segments, or in some cases one level below.
Components that are determined to be reporting units are aggregated when those
reporting units share similar economic characteristics. We review our reporting
unit structure each year as part of our annual goodwill impairment testing.

The provisions of the accounting standard for goodwill allow us to first assess
qualitative factors to determine whether it is necessary to perform a two-step
quantitative goodwill impairment test. As part of our qualitative assessment, we
monitor economic, legal, regulatory and other factors, industry trends, our
market capitalization, recent and forecasted financial performance of our
reporting units and the timing and nature of our restructuring activities for
LII as a whole and for each reporting unit.

For those reporting units which require the two-step quantitative goodwill
impairment test, we estimate reporting unit fair values using the discounted
cash flow approach or the market approach. The discounted cash flows used to
estimate fair value are based on assumptions regarding each reporting unit's
estimated projected future cash flows and the estimated weighted-average cost of
capital that a market participant would use in evaluating the reporting unit in
a purchase transaction. The estimated weighted-average cost of capital is based
on the risk-free interest rate and other factors such as equity risk premiums
and the ratio of total debt to equity capital. In performing these impairment
tests, we take steps to ensure that appropriate and reasonable cash flow
projections and assumptions are used. We reconcile our estimated enterprise
value to our market capitalization and determine the reasonableness of the cost
of capital used by comparing to market data. We also perform sensitivity
analyses on the key assumptions used, such as the weighted-average cost of
capital and terminal growth rates. If the market approach is used, it is based
on objective evidence of market values. Refer to Note 4 of the Notes to the
Consolidated Financial Statements for further details.

We review our indefinite-lived intangible assets for impairment annually in the
fourth quarter and whenever events or changes in circumstances indicate the
asset may be impaired. The provisions of the accounting standard for
indefinite-lived intangible assets allow us to first assess qualitative factors
to determine whether it is necessary to perform a two-step quantitative
impairment test. As part of our qualitative assessment, we monitor economic,
legal, regulatory and other factors, industry trends, recent and forecasted
financial performance of our reporting units and the timing and nature of our
restructuring activities for LII as a whole and as they relate to the fair value
of the assets.

We also periodically review intangible assets with estimable useful lives for
impairment as events or changes in circumstances indicate that the carrying
amount of such assets might not be recoverable. We assess recoverability by
comparing the estimated expected undiscounted future cash flows identified with
each intangible asset or related asset group to the carrying amount of such
assets. If the expected future cash flows do not exceed the carrying value of
the asset or assets being reviewed, an impairment loss is recognized based on
the excess of the carrying amount of the impaired assets over their fair value.
In assessing the fair value of these intangible assets, we must make assumptions
that a market participant would make regarding estimated future cash flows and
other factors to determine the fair value of the respective assets.

Refer to Note 4 of the Notes to the Consolidated Financial Statements for more information on our goodwill and intangible assets.

Recent Accounting Pronouncements


On May 28, 2014, the Financial Accounting Standard Board ("FASB") issued ASU No.
2014-09, Revenue from Contracts with Customers, which requires an entity to
recognize the amount of revenue to which it expects to be entitled for the
transfer of promised goods or services to customers. The ASU will replace most
existing revenue recognition guidance in U.S. GAAP when it becomes effective.
The new standard is effective for us on January 1, 2018. Early application is
not permitted. We substantially completed our evaluation of the effect that ASU
2014-09 will have on our Consolidated Financial Statements and related
disclosures. We do not expect the ASU to have a material impact on the amount
and timing of revenue recognition. We will adopt the new standard using the
modified retrospective approach.
In November 2015, the FASB issued ASU No. 2015-17, Balance Sheet Classification
of Deferred Taxes (Topic 740) that simplifies the presentation of deferred taxes
by requiring deferred tax assets and liabilities be classified as noncurrent on
the balance sheet. ASU 2015-17 is effective for public companies for annual
reporting periods beginning after December 15, 2016, and interim periods within
those fiscal years. We adopted this standard retrospectively as of December 31,
2015.
On February 25, 2016, the FASB issued ASU No. 2016-02, Leases (ASC 842). Lessees
will need to recognize almost all leases on their balance sheet as a
right-of-use asset and a lease liability. It will be critical to identify leases
embedded in a contract to avoid misstating the lessee's balance sheet. For
income statement purposes, the FASB retained a dual model, requiring leases to
be classified as either operating or finance. Classification will be based on
criteria that are largely similar to those applied in current lease accounting,
but without explicit bright lines. ASU 2016-02 is effective for public companies
for annual reporting periods beginning after December 15, 2018, and interim
periods within those fiscal years. We have not yet selected a transition method

                                       33

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nor have we determined the effect of the standard on our ongoing financial
reporting. As a result of the new standard, all of our leases greater than one
year in duration will be recognized on our Consolidated Balance Sheets as both
operating lease liabilities and right-of-use assets upon adoption of the
standard.
On March 30, 2016, the FASB issued ASU No. 2016-09, Compensation-Stock
Compensation (Topic 718): Improvements to Employee Share-Based Payment
Accounting. The ASU includes multiple provisions intended to simplify various
aspects of the accounting for share-based payments. Excess tax benefits for
share-based payments will be recorded as a reduction of income taxes and
reflected in operating cash flows upon the adoption of this ASU. Excess tax
benefits are currently recorded in equity and as financing activity under the
current rules. This guidance is effective for annual and interim reporting
periods of public entities beginning after December 15, 2016 and is expected to
have a favorable impact on earnings in 2016.
In August 2016, the FASB issued ASU 2016-15, Classification of Certain Cash
Receipts and Cash Payments. The amendments in this ASU clarify the
classification for eight different types of activities, including debt
prepayment and extinguishment costs, proceeds from insurance claims and
distributions from equity method investees. For public business entities, the
standard is effective for financial statements issued for fiscal years beginning
after December 15, 2017. This standard is not expected to have a material impact
on our consolidated financial statements.
On October 24, 2016, the FASB issued ASU 2016-16, Accounting for Income Taxes:
Intra-Entity Asset Transfers of Assets Other than Inventory. The new ASU
eliminates the existing exception from recognition of the tax consequences of
intercompany sales of assets other than inventory. Under the new standard, when
an asset (other than inventory) is sold from one consolidated entity to another,
the tax consequences to the seller will be recognized currently as a component
of the current tax provision. The new guidance will be effective for public
business entities in fiscal years beginning after December 15, 2017, including
interim periods within those years. Early adoption is permitted in fiscal years
beginning after December 15, 2016. We plan to early adopt this standard in 2017.
In accordance with the ASU, our previously deferred tax costs and unrecognized
deferred tax assets related to intra-entity asset transfers will need be
recognized at the date of transition through a cumulative effect adjustment to
opening retained earnings upon adoption of the standard.

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

The information required by this item is included under the caption "Market Risk" in Item 7 above.


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Financials ($)
Sales 2017 3 808 M
EBIT 2017 527 M
Net income 2017 337 M
Debt 2017 848 M
Yield 2017 1,13%
P/E ratio 2017 21,00
P/E ratio 2018 18,64
EV / Sales 2017 2,10x
EV / Sales 2018 1,99x
Capitalization 7 132 M
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Chart LENNOX INTERNATIONAL INC.
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Lennox International Inc. Technical Analysis Chart | LII | US5261071071 | 4-Traders
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Technical analysis trends LENNOX INTERNATIO...
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TrendsBullishBullishBullish
Technical analysis
Income Statement Evolution
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Consensus
Sell
Buy
Mean consensus HOLD
Number of Analysts 16
Average target price 166 $
Spread / Average Target 0,29%
Consensus details
EPS Revisions
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Managers
NameTitle
Todd M. Bluedorn Chairman & Chief Executive Officer
David W. Moon President, Co-COO & EVP-Worldwide Refrigeration
Douglas L. Young President, Co-COO & EVP-Residential Heating
Terry L. Johnston President, Co-COO & EVP-Commercial Heating
Joseph William Reitmeier Chief Financial Officer & Executive Vice President
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Sector and Competitors
1st jan.Capitalization (M$)
LENNOX INTERNATIONAL I..8.34%7 132
WATSCO INC1.45%5 348
NIBE INDUSTRIER AB0.97%3 567
BEIJING SHOUHANG RESOU..--.--%2 533
FUJITSU GENERAL LIMITE..-10.26%2 164
JIANGSU LEIKE DEFENSE ..--.--%2 011
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