UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

SCHEDULE 14A

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Exchange Act of 1934 (Amendment No. )

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Lennox International Inc.

 

(Name of Registrant as Specified In Its Charter)

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2140 Lake Park Blvd.

Richardson, Texas 75080

 

April 17, 2009

 

Dear Stockholders:

 

It is my pleasure to invite you to the 2009 Annual Meeting of Stockholders of Lennox International Inc. The meeting will be held at 1:00 p.m., local time, on Thursday, May 21, 2009, at the University of Texas at Dallas School of Management, southeast corner of Drive A and University Parkway, Richardson, Texas 75083.

 

The accompanying Notice of Annual Meeting of Stockholders and Proxy Statement describe the items of business that will be discussed and voted upon during the meeting. It is important that you vote your shares whether or not you plan to attend the meeting. To be sure your vote is counted, we urge you to carefully review the Proxy Statement and to vote as soon as possible. You have a choice of voting over the Internet, by telephone or by returning the enclosed Proxy Card by mail. You may also vote in person at the meeting. Please refer to the instructions in the enclosed materials. If you attend the meeting and wish to vote in person, the ballot you submit at the meeting will supersede your proxy.

 

I look forward to seeing you at the Annual Meeting of Stockholders. On behalf of management and our Board of Directors, I want to thank you for your continued support and confidence in 2009.

 

Sincerely,

 

Richard L. Thompson

Chairman of the Board

2140 Lake Park Blvd.

Richardson, Texas 75080

 

April 17, 2009

 

 

NOTICE OF ANNUAL MEETING OF STOCKHOLDERS

 

TO BE HELD ON MAY 21, 2009

 

 

To Our Stockholders:

 

Notice is hereby given that the 2009 Annual Meeting of Stockholders of Lennox International Inc. will be held on Thursday, May 21, 2009 at 1:00 p.m., local time, at the University of Texas at Dallas School of Management, southeast corner of Drive A and University Parkway, Richardson, Texas 75083 to:

 

 

A Proxy Statement, Proxy Card and Annual Report to Stockholders, which includes our Annual Report on Form 10-K for the fiscal year ended December 31, 2008, accompany this Notice.

 

The Board of Directors has determined that our stockholders of record at the close of business on March 27, 2009 are entitled to notice of, and to vote at, the Annual Meeting of Stockholders.

 

By Order of the Board of Directors,

 

John D. Torres

Corporate Secretary

 

IMPORTANT NOTICE REGARDING THE AVAILABILITY OF PROXY MATERIALS
FOR THE ANNUAL MEETING OF STOCKHOLDERS TO BE HELD ON MAY 21, 2009:

 

This Proxy Statement and the accompanying Annual Report to Stockholders are available at http://www.lennoxinternational.com/financials/financialreportproxy.htm

 

Your Vote Is Important

 

 

 

PROXY STATEMENT

 

TABLE OF CONTENTS

 

 

Meeting Date and Location

 

The 2009 Annual Meeting of Stockholders will be held on May 21, 2009 at 1:00 p.m., local time, at the University of Texas at Dallas School of Management, southeast corner of Drive A and University Parkway, Richardson, Texas 75083. We began mailing this Proxy Statement and the accompanying Notice of Annual Meeting of Stockholders, Proxy Card and Annual Report to Stockholders, which includes our Annual Report on Form 10-K, to our stockholders on or about April 17, 2009 for the purpose of soliciting proxies on behalf of our Board of Directors.

 

Matters to be Voted On

 

At the meeting, you will be asked to vote on two proposals:

 

 

Our Board of Directors recommends you vote “for” each of our Board nominees and “for” ratification of our independent registered public accounting firm for 2009.

 

Record Versus Beneficial Ownership of Shares

 

If your shares are registered directly in your name with our transfer agent, BNY Mellon Shareowner Services, you are considered, with respect to those shares, the “stockholder of record.” If you are a stockholder of record, we sent our Notice of Annual Meeting of Stockholders, Proxy Statement, Proxy Card and Annual Report to Stockholders directly to you.

 

If your shares are held in a stock brokerage account or by a bank, you are considered the “beneficial owner” of shares held in street name. In that case, our Notice of Annual Meeting of Stockholders, Proxy Statement, Proxy Card and Annual Report to Stockholders have been forwarded to you by your broker or bank, which is considered, with respect to those shares, the stockholder of record. Your broker or bank will also send you instructions on how to vote. If you have not heard from your broker or bank, please contact them as soon as possible.

 

Record Date and Number of Votes

 

The record date for the 2009 Annual Meeting of Stockholders is March 27, 2009. If you were a stockholder of record at the close of business on March 27, 2009, you may vote at the meeting. At the close of business on the record date, there were 55,376,859 shares of our common stock outstanding and entitled to vote and approximately 715 stockholders of record. Each stockholder is entitled to one vote per share.

 

Quorum and Vote Required

 

A quorum is required to transact business at the meeting. To achieve a quorum at the meeting, stockholders holding a majority of our outstanding shares entitled to vote must be present either in person or represented by proxy. Shares held by us in treasury will not count towards a quorum. In the event a quorum is not present at the meeting, we expect the meeting will be adjourned or postponed to solicit additional proxies.

 

To be elected, nominees for director must receive a plurality of the votes cast. This means that the director nominees with the most votes are elected, regardless of whether any nominee received a majority of the votes. Ratification of our independent registered public accounting firm and any other matters submitted

to you at the meeting will be decided by the affirmative vote of a majority of our common stock represented in person or by proxy at the meeting and entitled to vote.

 

Abstentions and Broker Non-Votes

 

If a broker or bank holds shares in street name and the beneficial owner does not provide the broker or bank with specific voting instructions, the broker or bank generally has discretion to vote on routine matters but does not have discretion to vote on non-routine matters. When a broker or bank does not vote on a proposal because it does not have discretionary voting power for that particular item and has not received instructions from the beneficial owner, the missing votes are referred to as “broker non-votes.” We understand that pursuant to New York Stock Exchange rules, Proposals 1 and 2 will be considered routine proposals for which your broker or bank may exercise voting discretion even if it does not receive voting instructions from you.

 

Abstentions and broker non-votes, if applicable, will be included in determining whether a quorum is present, but will not be counted as votes “for” or “against” either Proposal 1 or Proposal 2.

 

Voting Procedures

 

To be sure your shares are represented at the 2009 Annual Meeting of Stockholders, please vote as soon as possible by using one of the following methods:

 

 

If you are the beneficial owner of shares held in a stock brokerage account or by a bank, you will not be able to vote by calling the phone number or accessing the Internet address provided above. The availability of telephone and Internet voting for beneficial owners will depend on the voting procedures of your broker or bank. These procedures differ from the procedures provided by Broadridge for stockholders of record. Therefore, you should check the information forwarded to you by your broker or bank to find out which voting options are available to you.

 

If you vote by telephone or Internet and your proxy is not revoked, your shares will be voted in accordance with your voting instructions and you do not need to return your Proxy Card.

 

 

A representative of Broadridge will tabulate the votes and act as inspector of election at the meeting.

Changing Your Vote

 

You can change your vote on a proposal at any time before the meeting for any reason by revoking your proxy. Proxies may be revoked by filing a written notice of revocation, bearing a later date than your proxy, with our Corporate Secretary at or before the meeting. Proxies may also be revoked by:

 

 

In each case, the later submitted vote will be recorded and the earlier vote revoked. Any written notice of a revocation of a proxy should be sent to Lennox International Inc., 2140 Lake Park Blvd., Richardson, Texas 75080, Attention: Corporate Secretary. To be effective, the revocation must be received by our Corporate Secretary before the taking of the vote at the Annual Meeting of Stockholders.

 

Other Business; Adjournments

 

We are not aware of any other business to be acted upon at the 2009 Annual Meeting of Stockholders. However, if you have voted by proxy and other matters are properly presented at the Annual Meeting for consideration, the persons named in the accompanying Proxy Card will have discretion to act on those matters according to their best judgment. In the absence of a quorum, stockholders representing a majority of the votes present in person or by proxy at the meeting may adjourn the meeting.

 

ELECTION OF DIRECTORS

 

In accordance with our Bylaws, our Board of Directors may be composed of no less than three and no more than 15 members. The Board currently consists of 12 members, divided into three classes, with each class serving a three-year term.

 

Upon the recommendation of the Board Governance Committee, the Board has nominated four Class II directors for re-election to our Board of Directors to hold office for a three-year term expiring at the 2012 Annual Meeting of Stockholders. All Class III and Class I directors will continue in office, in accordance with their previous election, until the expiration of the terms of their classes at the 2010 or 2011 Annual Meeting of Stockholders.

 

If you do not wish your shares to be voted for any particular nominee, you may withhold your vote for that particular nominee. If any nominee for Class II director becomes unavailable, the persons named in the accompanying Proxy Card may vote for any alternate designated by the incumbent Board of Directors, upon the recommendation of the Board Governance Committee, or the number of directors constituting the Board may be reduced.

 

Our Board of Directors continues to evaluate the optimal size of the Board and, if it determines it is in our company’s best interest, will fill any vacancies in accordance with our Bylaws and our Corporate Governance Guidelines. Although the Board has less than 15 members, you may not vote for a greater number of directors than the number nominated.

 

Biographical information for each nominee for Class II director and for each current director in the classes continuing in office is provided below.

The Board has nominated the following individuals for re-election as Class II directors for a three-year term expiring at the 2012 Annual Meeting of Stockholders:

 

 

THE BOARD OF DIRECTORS RECOMMENDS A VOTE “FOR”
EACH OF THE ABOVE NOMINEES.

 

The following Class III directors’ terms will continue until the 2010 Annual Meeting of Stockholders:

 

The following Class I directors’ terms will continue until the 2011 Annual Meeting of Stockholders:

 

 

The following family relationships exist among certain members of our Board of Directors:

 

RATIFICATION OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

The Audit Committee of the Board of Directors has selected KPMG LLP to continue as our independent registered public accounting firm for the 2009 fiscal year. We are asking our stockholders to ratify the appointment of KPMG LLP as our independent registered public accounting firm. If our stockholders do not ratify the appointment, the Audit Committee will consider whether it should select a different firm, however, it is not required to do so. On the other hand, even if the appointment is ratified, the Audit Committee, in its discretion, may select a different independent registered public accounting firm at any time during the year if it determines that such a change would be in the best interests of our company and our stockholders.

 

A representative of KPMG LLP will be present at the 2009 Annual Meeting of Stockholders and will be available to respond to appropriate questions. The representative will also have an opportunity to make a statement at the meeting if he or she desires to do so.

 

THE BOARD OF DIRECTORS RECOMMENDS A VOTE “FOR” THE RATIFICATION OF KPMG LLP AS OUR INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM FOR THE 2009 FISCAL YEAR.

 

Independent Registered Public Accountants

 

Audit and Non-Audit Fees

 

The following table sets forth the aggregate fees billed to date for professional services rendered by KPMG LLP for each of the last two fiscal years (in thousands).

 

 

 

 

Audit Committee Approval of Audit and Non-Audit Services

 

The Audit Committee pre-approves all audit services provided by our independent registered public accountants. In addition, all non-audit services provided by KPMG LLP are pre-approved in accordance with our policy entitled “Use of External Audit Firm for Non-Attest Services.” The policy identifies services that are specifically prohibited by Securities and Exchange Commission rules and states that these services may not be performed by our independent registered public accountants. For permissible non-audit services, the Audit Committee has delegated pre-approval authority to the Audit Committee Chairperson. In addition, the Audit Committee has approved annual maximum amounts for tax advisory and tax return services. No

engagements are commenced until the Audit Committee Chairperson’s approval has been received. All approved services are reported to the full Audit Committee at each quarterly meeting.

 

In accordance with the foregoing, all services provided by KPMG LLP in 2008 were pre-approved by the Audit Committee.

 

Audit Committee Charter.  The Audit Committee of Lennox International Inc. acts pursuant to its written charter adopted by the Board of Directors. A copy of the Audit Committee charter is available on our website at http://www.lennoxinternational.com by following the links “About Us — Corporate Governance — Committee Charters.” The role of the Audit Committee is to assist the Board of Directors in fulfilling its oversight responsibilities by reviewing the company’s financial reporting process, the system of internal control, the audit process and the company’s process for monitoring compliance with laws and regulations and corporate policies. The Audit Committee maintains effective working relationships with the Board of Directors, management, the company’s internal auditors and the company’s independent registered public accounting firm (“Independent Accountants”). As set forth in the Audit Committee Charter, it is not the duty of the Audit Committee to plan or conduct audits or to determine that the company’s financial statements and disclosures are complete and accurate and in accordance with generally accepted accounting principles and applicable rules and regulations of the Securities and Exchange Commission and the New York Stock Exchange. The Independent Accountants are responsible for auditing the company’s financial statements and expressing an opinion as to their conformity with generally accepted accounting principles.

 

Auditor Independence.  The Audit Committee (i) reviewed and discussed the company’s quarterly and audited financial statements for the year ended December 31, 2008 with the company’s management and with the Independent Accountants; (ii) discussed with the Independent Accountants the matters required to be discussed by Statement on Auditing Standards No. 61, as amended, as adopted by the Public Company Accounting Oversight Board in Rule 3200T; and (iii) received the written disclosures and the letter from the Independent Accountants required by applicable requirements of the Public Company Accounting Oversight Board regarding the Independent Accountants’ communications with the Audit Committee concerning independence and discussed with Independent Accountants the Independent Accountants’ independence and considered whether the provision of non-audit services by the Independent Accountants to the company is compatible with maintaining the accountants’ independence.

 

Members of the Audit Committee rely, without independent verification, on the information provided to them and on the representations made by management and the Independent Accountants. Accordingly, the Audit Committee’s oversight does not provide an independent basis to determine that management has maintained appropriate accounting and financial reporting principles or appropriate internal controls and procedures designed to assure compliance with accounting standards and applicable laws and regulations. Furthermore, the Audit Committee’s considerations and discussions referred to above do not assure that the audits of the company’s financial statements have been carried out in accordance with generally accepted auditing standards, that the financial statements are presented in accordance with generally accepted accounting principles or that the company’s Independent Accountants are in fact “independent.”

 

Audit Committee Recommendation.  Based upon the reviews and discussions described above, and subject to the limitations on the role and responsibilities of the Audit Committee referred to in this report and in the Audit Committee Charter, the Audit Committee recommended to the Board of Directors that the audited financial statements be included in the company’s Annual Report on Form 10-K for the year ended December 31, 2008.

 

Submitted by the Audit Committee of the Board of Directors:

 

Paul W. Schmidt (Chairperson) C. L. (Jerry) Henry		Janet K. Cooper John E. Major

 

Director Independence

 

Our Corporate Governance Guidelines require a majority of our directors to be “independent.” Pursuant to New York Stock Exchange rules, our Board of Directors has adopted a formal definition of “independent” for the purpose of determining whether a particular director or nominee meets the independence standards of our company and the New York Stock Exchange. In accordance with this definition, a director must be determined to have no material relationship with our company other than as a director and must not receive any material benefit or suffer any material detriment as a member of our Board that is not shared with or suffered by other stockholders of our company so as to possibly influence any decisions of the director. The definition further requires that the director meet the independence tests promulgated by the New York Stock Exchange. The full text of our definition of an independent director can be found on our website at http://www.lennoxinternational.com by following the links “About Us — Corporate Governance — Definition of Independent Director.”

 

Applying these standards and the independence standards of the New York Stock Exchange, the Board has determined that a majority of our Board of Directors is independent (see table below). We believe we are in compliance with the corporate governance requirements of the New York Stock Exchange, the Securities and Exchange Commission and the Sarbanes-Oxley Act of 2002.

 

Board of Directors and Board Committees

 

The Board of Directors met six times in 2008. All directors attended in excess of 75% of the total number of meetings of the Board and committees of the Board on which they served. While the Board of Directors does not currently have a policy with regard to attendance of Board members at the Annual Meeting of Stockholders, 11 of our 12 directors attended our 2008 Annual Meeting of Stockholders.

 

The standing committees of the Board are as follows: Audit, Board Governance, Compensation and Human Resources, Technology and Acquisition, Pension and Risk Management and Public Policy. The Board has adopted charters for each of these committees which are available on our website at http://www.lennoxinternational.com by following the links “About Us — Corporate Governance — Committee Charters.” Stockholders may also receive a free copy of these documents by sending a written request to 2140 Lake Park Blvd., Richardson, Texas 75080, Attention: Investor Relations, or calling (972) 497-5000.

 

The following table provides current membership information for each of the Board committees and indicates which directors our Board has determined are independent.

 

 

 

 

Audit Committee

 

The Audit Committee met 13 times in 2008. The Audit Committee assists the Board in fulfilling its oversight responsibilities relating to the integrity of our financial statements and related systems of internal control, our compliance with legal and regulatory requirements, the independent registered public accounting firm’s qualifications, independence and performance and the performance of our internal audit function. The Audit Committee also has the direct responsibility for the appointment, compensation, retention and oversight of our independent registered public accountants. Each Audit Committee member is independent as independence for audit committee members is defined by the New York Stock Exchange and satisfies the New York Stock Exchange’s financial literacy requirements. The Board of Directors has determined that Mr. Schmidt, Chairperson of the Audit Committee, is an audit committee financial expert as defined by the Securities and Exchange Commission.

 

Board Governance Committee

 

The Board Governance Committee met two times in 2008. The Board Governance Committee assists the Board by identifying individuals qualified to become Board members, developing qualification criteria for Board membership, making recommendations to the Board regarding the appropriate size of the Board and appointment of members to the Board’s committees, developing and recommending to the Board the Corporate Governance Guidelines and codes of conduct applicable to our company and overseeing the evaluation of our Board of Directors. Each member of the Board Governance Committee is independent as independence for nominating committee members is defined by the New York Stock Exchange.

 

Compensation and Human Resources Committee

 

The Compensation and Human Resources Committee met five times in 2008. The Compensation and Human Resources Committee assists the Board in the discharge of its responsibilities relating to our compensation and benefits programs, oversight of our short- and long-term incentive plans, compensation of our non-employee directors, executive officers and other key employees and the development of executive succession and development plans. Each member of the Compensation and Human Resources Committee is independent as independence for compensation committee members is defined by the New York Stock Exchange.

 

The Compensation and Human Resources Committee oversees our executive compensation programs and the compensation program maintained for the non-employee members of our Board of Directors. In accordance with its charter, the Compensation and Human Resources Committee reports to the full Board of Directors on a regular basis and seeks Board approval for actions relating to Board compensation. The committee forms and delegates authority to subcommittees when appropriate. Our Chief Executive Officer makes recommendations to the Compensation and Human Resources Committee with respect to various elements of executive compensation. Pursuant to its charter, the Compensation and Human Resources Committee is authorized to obtain advice and assistance from internal or external legal, accounting or other advisors and to retain third-party compensation consultants. To that end, since 2005, the committee has engaged Mercer Human Resource Consulting, Inc. as its executive compensation consultant to provide objective analysis, advice and recommendations regarding the compensation of our executives and non-employee directors. See “Executive Compensation — Compensation Discussion and Analysis” for further information regarding executive compensation decisions and the scope of services provided by Mercer.

 

Technology and Acquisition Committee

 

The Technology and Acquisition Committee met four times in 2008. The Technology and Acquisition Committee is responsible for evaluating our technology strategies and making recommendations to the Board of Directors relating to potential acquisitions, divestitures and joint ventures.

Pension and Risk Management Committee

 

The Pension and Risk Management Committee met four times in 2008. The Pension and Risk Management Committee is responsible for overseeing the administration of our qualified defined benefit and defined contribution retirement plans and matters relating to our insurance coverage as well as reviewing significant legal matters, environmental issues and other matters relating to safety and risk management.

 

Public Policy Committee

 

The Public Policy Committee met once in 2008. The Public Policy Committee is responsible for developing education programs for new and continuing members of our Board and overseeing our position on corporate social responsibilities and public issues of significance that affect our stockholders.

 

Director Nomination Process and Nominee Criteria

 

The Board of Directors is responsible for approving candidates for Board membership. The Board has delegated the screening and recruitment process to the Board Governance Committee. In this capacity, the Board Governance Committee develops and periodically reviews the qualification criteria for Board membership, identifies new director candidates and makes recommendations to the Board regarding the appropriate size of the Board and appointment of members to the Board’s committees. The Board Governance Committee typically retains a third-party search firm to assist in identifying and evaluating potential new director candidates. Qualifications required of individuals for consideration for Board membership will vary according to the particular areas of expertise being sought as a compliment to the existing Board composition at the time of any vacancy. According to our qualification guidelines, criteria to be considered for Board membership include:

 

 

The full text of our qualification guidelines can be found on our website at http://www.lennoxinternational.com by following the links “About Us — Corporate Governance — Board of Directors — Board of Director Qualification Guidelines.”

 

When a vacancy occurs on the Board, the Board Governance Committee may recommend to the Board a nominee to fill the vacancy, or alternatively, may recommend that the vacancy remain. The Board Governance Committee also evaluates and recommends to the Board nominees for election to our Board of Directors at our Annual Meeting of Stockholders.

Stockholder Nominations for Director

 

The Board Governance Committee considers nominees for election to the Board of Directors recommended by stockholders. A stockholder wishing to nominate a candidate for election to the Board at a meeting of the stockholders is required to give written notice to our Corporate Secretary of his or her intention to make a nomination. We must receive the notice of nomination at least 60 days but no more than 90 days prior to the Annual Meeting of Stockholders, or if we give less than 70 days’ notice of the Annual Meeting of Stockholders date, the notice of nomination must be received within 10 days following the date on which notice of the date of the Annual Meeting of Stockholders was mailed or such public disclosure was made to our stockholders. In the case of a special meeting of stockholders for the election of directors, we must receive the notice of nomination within 10 days following the date on which notice of such meeting is first given to stockholders. Pursuant to our Bylaws, the notice of nomination is required to contain certain information about both the nominee and the stockholder making the nomination, including information sufficient to allow the Board Governance Committee to determine if the candidate meets our qualification criteria for Board membership. The Board Governance Committee may require that the proposed nominee furnish additional information in order to determine that person’s eligibility to serve as a director. A nomination that does not comply with the above procedure will be disregarded. Stockholder nominees whose nominations comply with the foregoing procedure and who meet the criteria described above under the heading “Director Nomination Process and Nominee Criteria” and in our Corporate Governance Guidelines will be evaluated by the Board Governance Committee in the same manner as the Board Governance Committee’s nominees.

 

Stockholder Communications with Directors

 

Stockholders may send written communications to the Board by:

 

 

Communications addressed to the Board will be received by our Investor Relations department and reviewed by the Corporate Secretary. The Corporate Secretary will:

 

 

Interested parties may communicate with non-management directors of the Board by sending written communications to the addresses listed above to the attention of the Chairman of the Board.

 

Other Corporate Governance Policies

 

Code of Conduct and Code of Ethical Conduct

 

We have adopted a Code of Conduct that applies to all our directors and employees, including our senior financial and principal executive officers. Amendments to and waivers, if any, from our Code of Conduct as it pertains to our executive officers, will be disclosed on our website. Our Code of Conduct is available on our website at http://www.lennoxinternational.com by following the links “About Us — Corporate Governance — Code of Conduct.” Stockholders may also receive a free copy of our Code of Conduct by sending a written request to 2140 Lake Park Blvd., Richardson, Texas 75080, Attention: Investor Relations, or calling (972) 497-5000.

Corporate Governance Guidelines

 

We have adopted Corporate Governance Guidelines that are available on our website at http://www.lennoxinternational.com by following the links “About Us — Corporate Governance — Corporate Governance Guidelines.” Stockholders may request a free copy of our Corporate Governance Guidelines from our Investor Relations department at the address and phone number set forth above under “Code of Conduct and Code of Ethical Conduct.”

 

Executive Session Meetings

 

In accordance with our Corporate Governance Guidelines, the independent members of our Board of Directors, all of whom are non-management directors, meet regularly in executive session without the presence of management. The Chairman of the Board chairs the executive session meetings of our independent directors.

 

Authority to Retain Independent Advisors

 

Our Board of Directors and each of the Audit, Compensation and Human Resources and Board Governance Committees has the authority to retain independent advisors and consultants, with all fees and expenses paid by our company.

 

Whistleblower Procedures

 

The Audit Committee has established procedures for the handling of complaints regarding accounting, internal accounting controls or auditing matters, including procedures for confidential and anonymous submission by our employees of concerns regarding such matters.

 

Disclosure Committee

 

We have established a Disclosure Committee composed of members of management to assist us in fulfilling our obligations to maintain disclosure controls and procedures and to coordinate and oversee the process of preparing the reports we file or submit to the Securities and Exchange Commission under the Securities Exchange Act of 1934.

 

Compensation Discussion and Analysis (“CD&A”)

 

Overview

 

Our executive compensation programs are established and administered by the Compensation and Human Resources Committee of the Board of Directors (the “Committee”). The Committee reviews, modifies and approves, as appropriate, our executive compensation philosophy, objectives and programs to ensure market-competitive, equitable and consistent administration of such programs for our executive officers and other key employees. The specific duties of the Committee are set forth in its charter, which can be found on our website at http://www.lennoxinternational.com by following the links “About Us — Corporate Governance — Committee Charters.”

 

The persons who served as our Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”) during 2008 and the other individuals named in the Summary Compensation Table are referred to as the named executive officers (“NEOs”) throughout this Proxy Statement, and include the following individuals:

 

 

Making Executive Compensation Decisions

 

The Committee

 

When determining executive compensation policies and programs, the Committee, with input from its executive compensation consultant and management, considers competitive practices, our business objectives, stockholder interests, regulatory requirements and other relevant factors. To promote our strategic objectives of retaining and rewarding top executive talent, the Committee believes it is important to keep each element of executive compensation market-competitive on a year-by-year basis. As part of its decision-making process, the Committee meets in executive session as needed. The Committee met five times in 2008.

 

Executive Officers

 

When making executive compensation decisions, the Committee typically receives input from management. The Chairman of the Board of Directors, the CEO, the CFO, the Chief Human Resources Officer and the Chief Legal Officer typically attend Committee meetings at the invitation of the Committee and provide input as requested. Customarily, the CEO makes recommendations to the Committee with respect to various elements of executive compensation for his direct reports and senior executives, including the other NEOs, but he is not involved in the deliberations or determinations regarding his own compensation.

 

Role of the Executive Compensation Consultant

 

Since 2005, the Committee has engaged Mercer Human Resource Consulting, Inc. (“Mercer”), an internationally recognized human resources consulting firm, as its executive compensation consultant to provide analysis, advice and recommendations.

 

At the Committee’s request, Mercer performed the following services for the Committee in 2008:

 

 

 

After reviewing our compensation practices, Mercer determined that they were reasonably designed to fulfill our executive compensation philosophy and achieve our key objectives.

 

The Committee, using data and analysis provided by Mercer and management, evaluated and administered our executive compensation programs throughout the year. The Committee analyzed the information provided by Mercer and management to determine the appropriate program design, level and mix of each compensation element for the NEOs.

 

Executive Compensation Philosophy and Key Objectives

 

We maintain a pay-for-performance compensation philosophy that seeks to align executive rewards with the execution of our business strategy and achievement of desired business results. Where financial results exceed expected performance, monetary rewards will reflect this performance. Where financial results are below expected performance, monetary awards will reflect the below-target performance results.

 

The strategic objectives of our executive compensation program are to:

 

 

The following table lists each element of executive compensation and how the Committee believes it correlates to our compensation objectives and philosophy.

 

 

Competitive Compensation

 

Market Analysis

 

To attract and retain leadership talent, we provide market-competitive compensation. Market analysis assists us in assessing the competitiveness of our executive compensation programs. We compare our NEO compensation to the practices of our Compensation Peer Group as well as published compensation data taken from Mercer’s compensation databases and other studies of compensation trends and practices (collectively referred to as the “Market”).

The Committee selected our Compensation Peer Group using the following criteria:

 

 

The Compensation Peer Group, as approved by the Committee, is composed of the following fifteen companies:

 

 

 

 

Genlyte Group Incorporated, Goodman Global, Inc., and Trane Inc. were removed because they were no longer publicly-traded companies. Masco Corporation and Tecumseh Products Company were removed because each of their revenues were outside the established revenue range.

 

Pay Positioning and Compensation Mix

 

For 2008, the Committee set base salary for our NEOs at the 50^th percentile of the Market. The Committee set short-term incentive opportunities and long-term incentive anticipated delivered value between the 50^th — 65^th percentiles of the Market and included stretch performance goals, allowing us to maintain a strong pay-for-performance link while attracting and retaining leadership talent.

 

The Committee has historically granted a majority of total compensation to our NEOs in the form of non-cash long-term incentive awards, as was the case in 2008. The graphs below illustrate the 2008 target compensation mix for the CEO and the average target compensation mix for the other NEOs.

 

 

We apply the same methodologies in setting compensation and determining the compensation mix for our CEO as we apply for our other NEOs. However, the CEO’s target compensation mix has a greater percentage of “at-risk” compensation than the target compensation mix of the other NEOs. The Committee believes this difference is justified, given the scope of responsibility of the CEO within our company.

Components and Analysis of 2008 Executive Compensation

 

Base Salary

 

The Committee considers salary data for the Market, our annual merit budget, achievement of performance objectives, internal equity and recommendations provided by the CEO for his direct reports when determining each NEO’s base salary. The following table provides detail regarding 2008 base salary increases for each NEO.

 

		2007				Increase %		2008
		Annualized				Effective		Annualized
NEO		Base Salary				January 1, 2008		Base Salary
Mr. Bluedorn		$	800,000			3.5%		$	828,000
Ms. Carter			454,287			4.0			472,458
Mr. Boxer			485,233			3.5			502,217
Mr. Young			355,008			10.0			390,509
Mr. Sessa			365,000			3.5			377,775

 

As discussed earlier, in setting NEO base salaries, the Committee used the 50^th percentile of the Market as a guideline. We believe that the base salary for each NEO for 2008 was market-competitive when compared to this guideline and commensurate with the experience and performance contributions of the respective individual.

 

Mr. Young’s base salary included an adjustment of 6.5% to align his compensation with the Market and reflect his responsibilities and duties as President of the company’s largest business segment, LII Residential. The 2008 base salary for each NEO is included in the Summary Compensation Table in the “Salary” column.

 

Short-Term Incentive Program

 

Our short-term incentive program is established under the Amended and Restated 1998 Incentive Plan of Lennox International Inc. (the “1998 Plan”) and is a cash-based incentive program that ties annual pay to the performance of our company, each business unit, and each individual. We accomplish this objective by requiring the achievement of specific goals for those individuals who most directly influence performance results and only rewarding those individuals when those goals are achieved. Each year, the CEO proposes to the Committee for review and approval the financial metrics and performance goals that must be achieved to result in a payout.

 

Financial Performance.  The following table summarizes the financial performance goals and payout opportunities under our 2008 short-term incentive program, along with the actual company performance for each metric.

 

2008 Short-Term Incentive Program Summary — Financial Performance
($ in millions)

 

 

Individual Performance.  The Committee added for 2008 an individual performance factor to supplement financial performance. The individual performance factor comprises 15% (at target) of an individual’s payout to better recognize personal achievements. The individual performance factor is measured against specific goals established for each NEO by the Committee or the CEO as part of the performance review process.

 

Targets and Payouts.  Under the short-term incentive program, target payout opportunities are expressed as a percentage of base salary. The target payout opportunities are based on publicly available Market data for equivalent executive officer positions using the 50^th — 65^th percentiles as a guideline.

 

Based on Mercer’s analysis of the Market data and internal equity considerations, the Committee set the following short-term incentive targets for 2008. Based on actual financial and individual performance, the Committee certified the corresponding 2008 payouts for each NEO.

 

2008 Short-Term Incentive Targets and Payouts
($ in thousands)

 

 

The Committee may, in its discretion, modify the short-term incentive program to account for unusual events or revised business objectives that occur during the performance period. The Committee did not make any such modifications in 2008.

 

The amounts earned in 2008, which were approved by the Committee and paid in March 2009, are included in the Summary Compensation Table in the “Non-Equity Incentive Plan Compensation” column.

Long-Term Incentive Program

 

Under the 1998 Plan, we have established a long-term incentive program, which offers equity awards to those employees who have principal responsibility for our long-term profitability. We believe participation in our long-term incentive program assists in aligning the interests of our NEOs with the interests of our stockholders.

 

In 2008, our long-term incentive program consisted of three equity vehicles: performance share units (“PSUs”), restricted stock units (“RSUs”) and stock appreciation rights (“SARs”). SARs and PSUs are performance-based, with performance measured on stock price growth and the achievement of financial objectives, respectively. RSUs, which require continued employment to vest, support our critical retention efforts directed at continuity of management.

 

For 2008, the long-term incentive allocations for our NEOs were as follows:

 

 

The Committee believes this design is appropriate because it aligns our long-term incentive program with the achievement of our company goals and supports retention of key talent.

 

The Committee determines the grant date for all long-term incentive awards. The Committee generally grants awards on an annual basis at its regularly scheduled December meeting although awards may be granted in special circumstances or upon hire for certain executives. The Committee does not coordinate the grant date for any award with the release of material non-public information. We set the exercise price of our SARs at 100% of fair market value, which we define as the average of the high and low trading prices of our common stock on the New York Stock Exchange on the date of grant.

 

The target delivered values under the long-term incentive program are based on publicly available Market data for equivalent executive officer positions using the 50^th — 65^th percentiles as a guideline. When determining award sizes and delivered values, the Committee also considers the number of shares available for grant under the 1998 Plan, internal equity, individual performance/potential and the financial impact on our company. In December 2008, the Committee agreed to hold the target delivered value flat, as it fell between the 50^th — 65^th percentiles of the Market. The Committee made this decision to (1) maintain a market-competitive long-term incentive program; (2) recognize strong NEO performance in the face of challenging and uncertain markets; and (3) support our retention goals. In setting the actual delivered value for each NEO other than the CEO, the Committee took into account the CEO’s recommendation with regard to individual performance and potential.

 

PSUs.   To maintain our strong focus on performance, 50% of the delivered value for the December 2008 award was granted in the form of PSUs. PSUs generally vest at the end of the three-year performance period. If at the end of the performance period at least the threshold performance level has been achieved, the PSUs, to the extent earned, are distributed in the form of company common stock. Based on our CEO’s recommendation, the Committee determines the measurement criteria annually and, in doing so, considers the financial metrics selected for the short-term incentive program as well as other metrics that enhance stockholder value. The Committee certifies the financial performance levels in February or March following the performance period and any earned shares are then distributed.

The following table summarizes the key attributes of the PSUs granted in December 2005, which vested on December 31, 2008, and sets out financial performance goals and payout opportunities versus actual performance.

 

December 2005 PSU Grant
(for the January 1, 2006 — December 31, 2008 Performance Period)

 

 

 

 

As shown above, in 2008, certain NEOs earned the maximum payout of 200% for PSUs granted in December 2005 by exceeding the maximum level of ROIC performance over the three-year period beginning January 1, 2006 and ending December 31, 2008, the value of which is included in the Fiscal 2008 Option Exercises and Stock Vested Table in the “Stock Awards — Value Realized on Vesting” column.

 

Similar to the December 2007 PSU grant, the Committee approved two metrics, ROIC and company core net income growth, for the December 2008 PSU award. The Committee established the ROIC performance goals based on its assessment of desired return relative to the cost of capital as well as historical and projected ROIC outcomes. Similarly, the Committee set the company core net income growth performance goals based on a detailed analysis of historical and projected outcomes relative to that measure.

 

The following table summarizes the key attributes of the PSUs granted in December 2008, for the performance period ending on December 31, 2011.

 

December 2008 PSU Grant
(for the January 1, 2009 — December 31, 2011 Performance Period)

 

 

 

 

The December 2008 PSU grants are included in the Fiscal 2008 Grants of Plan-Based Awards Table in the “Estimated Future Payouts Under Equity Incentive Plan Awards” column.

 

RSUs. To support our critical retention efforts directed at continuity of management, 30% of the delivered value for the December 2008 award was granted in the form of RSUs. RSUs generally vest and are distributed in shares of our common stock three years following the date of grant. The number of shares underlying RSUs granted to our NEOs in 2008 is included in the Fiscal 2008 Grants of Plan-Based Awards Table in the “All Other Stock Awards: Number of Shares of Stock or Units” column.

SARs. To incentivize participants to grow our business and deliver increased returns to our stockholders, 20% of the delivered value for the December 2008 award was granted in the form of SARs. SARs generally vest in one-third increments on each anniversary of the date of grant. Upon the exercise of vested SARs, the increase, if any, between the fair market value of our common stock on the date of grant and the fair market value on the date the right is exercised is paid in company common stock. SARs granted in 2008 expire seven years from the date of grant. The number of SARs granted to our NEOs in 2008 is included in the Fiscal 2008 Grants of Plan-Based Awards Table in the “All Other Option Awards: Number of Securities Underlying Options” column.

 

Perquisites

 

We believe reasonable perquisites should be provided to our NEOs as a market-competitive practice and to attract and retain top executive talent. Effective January 1, 2008, we simplified our perquisite program to replace most perquisites with a lump-sum cash stipend of $2,500 per month. However, we still offer the installation of company HVAC equipment at the executive’s home to promote our brand to both business and personal guests.

 

Benefit Programs

 

To attract and retain top executive talent and as a market-competitive practice, we provide certain benefit programs to our NEOs that are in addition to those provided to our general employee population. The following table summarizes such additional benefit programs in place during 2008 and the purpose of each program.

 

Additional Benefit Programs Offered to NEOs in 2008

 

 

Employment Agreements and Change in Control (“CIC”) Agreements

 

We have entered into employment agreements and CIC agreements with each NEO. We believe employment agreements are necessary to attract and retain top executive talent and for financial and business planning purposes. We believe CIC agreements are necessary to (1) retain key executives during periods of uncertainty; (2) enable executives to evaluate, negotiate and execute a CIC transaction more objectively; (3) encourage executives to remain focused on running the business rather than seeking other employment; and (4) preserve shareholder value by providing continuity of management during transition period.

 

Since compensation under our CIC agreements will only be paid if in fact a triggering event occurs, we evaluate compensation to be provided under these agreements in isolation from the rest of the executive’s compensation package. However, we do view these arrangements as a means to attract, motivate and retain highly talented executives.

In December 2008, the Committee approved several significant changes to our CIC agreements:

 

 

Our employment agreements and CIC agreements, and the potential costs associated with each, are discussed in detail under “Potential Payments Upon Termination or Change in Control.”

 

Tax and Accounting Implications

 

Section 162(m) Compliance

 

The income tax consequences to our company are an important consideration for the Committee when analyzing the design features and elements of our executive compensation programs. Section 162(m) of the Internal Revenue Code (“Section 162(m)”) limits a company’s ability to deduct compensation paid in excess of $1 million to certain NEOs, unless the compensation meets certain stockholder-approved performance requirements. As a result, the Committee has designed several elements of our executive compensation program to qualify for the “performance-based” exemption. For example, our short-term incentive program, PSUs and SARs are all considered performance-based and are therefore exempt from the limitations imposed by Section 162(m). However, where granting awards or providing other executive compensation elements is consistent with Market data, our compensation philosophy or our strategic business goals, the Committee reserves the right to provide executive compensation that is non-deductible. For example, RSUs meet our compensation objective of key talent retention, but do not meet the performance-based exemption. Although the company did not pay any non-deductible compensation in 2008, some compensation paid in future years may be non-deductible to our company because it is not considered performance-based under Section 162(m). The Committee believes this is appropriate given the benefits provided by such compensation.

 

Nonqualified Deferred Compensation

 

All deferred compensation programs have been amended to comply with Section 409A of the Internal Revenue Code.

 

Accounting for Stock-Based Awards

 

When setting and analyzing each aspect of NEO compensation, the Committee took into account the accounting consequences (in accordance with the requirements of Statement of Financial Accounting Standards No. 123R, Share-Based Payment (“SFAS No. 123R”)) of the program design and award levels. The Committee reviewed accounting cost models and structured our executive compensation program in a manner that considered the cost and benefits of the program.

 

Compensation and Human Resources Committee Report

 

The Committee has reviewed and discussed the foregoing CD&A with management. Based on our review and discussions with management, we have recommended to the Board that the CD&A be included in this Proxy Statement.

 

Submitted by the Compensation and Human Resources Committee of the Board of Directors:

 

Summary Compensation Table

 

The following table provides information regarding total compensation earned by our NEOs, which include our CEO, our CFO, our three other most highly compensated executive officers and, in accordance with the Securities and Exchange Commission’s rules, William F. Stoll, Jr., our former Executive Vice President, Chief Legal Officer and Corporate Secretary.

 

 

 

 

 

 

The values attributable to each item listed above are calculated as follows:

 

 

 

Fiscal 2008 Grants of Plan-Based Awards

 

The following table provides information regarding short-term incentive awards and long-term incentive awards (PSUs, RSUs and SARs) granted under the 1998 Plan to our NEOs in 2008.

 

 

 

 

Outstanding Equity Awards at Fiscal 2008 Year-End

 

The following table provides information regarding all outstanding equity awards held by our NEOs as of December 31, 2008.