2140 Lake Park Blvd.
Richardson, Texas 75080

 

April 15, 2008

 

Dear Stockholders:

 

It is my pleasure to invite you to the 2008 Annual Meeting of Stockholders of Lennox International Inc. The meeting will be held at 1:00 p.m., local time, on Thursday, May 15, 2008, 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 2008.

 

Sincerely,

 

Richard L. Thompson

Chairman of the Board

2140 Lake Park Blvd.

Richardson, Texas 75080

 

April 15, 2008

 

 

NOTICE OF ANNUAL MEETING OF STOCKHOLDERS

 

TO BE HELD ON MAY 15, 2008

 

 

To Our Stockholders:

 

Notice is hereby given that the 2008 Annual Meeting of Stockholders of Lennox International Inc. will be held on Thursday, May 15, 2008 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, 2007, accompany this Notice.

 

The Board of Directors has determined that our stockholders of record at the close of business on March 26, 2008 are entitled to notice of, and to vote at, the Annual Meeting of Stockholders.

 

By Order of the Board of Directors,

 

William F. Stoll, Jr.

Corporate Secretary

 

IMPORTANT NOTICE REGARDING THE AVAILABILITY OF PROXY MATERIALS

FOR THE ANNUAL MEETING OF STOCKHOLDERS TO BE HELD ON MAY 15, 2008:

 

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 2008 Annual Meeting of Stockholders will be held on May 15, 2008 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 15, 2008 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 2008.

 

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 2008 Annual Meeting of Stockholders is March 26, 2008. If you were a stockholder of record at the close of business on March 26, 2008, you may vote at the meeting. At the close of business on the record date, there were 58,860,687 shares of our common stock outstanding and entitled to vote and 777 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 2008 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 our transfer agent 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 our transfer agent 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 2008 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.

 

Our Board of Directors is currently composed of 13 members, with two vacancies. In accordance with our Bylaws, the Board is divided into three classes, with each class serving a three-year term.

 

Upon the recommendation of the Board Governance Committee, the Board has nominated three Class I directors for re-election to our Board of Directors to hold office for a three-year term expiring at the 2011 Annual Meeting of Stockholders. Thomas W. Booth, a Class I director, has determined not to run for re-election but will continue to serve as Vice President of Operations Services for Service Experts Inc., one of our subsidiaries. We would like to acknowledge with gratitude his dedicated service to our Board. All Class II and Class III directors will continue in office, in accordance with their previous election, until the expiration of the terms of their classes at the 2009 or 2010 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 I 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.

 

Following the Annual Meeting, there will be three vacancies on our Board of Directors. 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 these vacancies in accordance with our Bylaws and our Corporate Governance Guidelines. Despite the current vacancies on the Board, you may not vote for a greater number of directors than the number nominated.

Biographical information for each nominee for Class I 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 I directors for a three-year term expiring at the 2011 Annual Meeting of Stockholders:

 

 

THE BOARD OF DIRECTORS RECOMMENDS A VOTE “FOR”

EACH OF THE ABOVE NOMINEES.

The following Class II directors’ terms will continue until the 2009 Annual Meeting of Stockholders:

 

 

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

 

 

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

 

 

The Audit Committee of the Board of Directors has selected KPMG LLP to continue as our independent registered public accounting firm for the 2008 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 2008 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 2008 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 2007 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. 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 has reviewed and discussed the quarterly and audited financial statements, including the quality of accounting principles, with management and the Independent Accountants. The Audit Committee has also discussed with the Independent Accountants the matters required to be discussed by Statement on Auditing Standards No. 61, Communication with Audit Committees, as amended, and as adopted by the Public Company Accounting Oversight Board in Rule 3200T. Finally, the Audit Committee has received the written disclosures and the letter from the Independent Accountants required by Independence Standards Board Standard No. 1, Independence Discussions with Audit Committees, as currently in effect, and has discussed with the 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, 2007.

 

Submitted by the Audit Committee of the Board of Directors:

 

Paul W. Schmidt (Chairperson)		Janet K. Cooper
C. L. (Jerry) Henry		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 seven times in 2007. 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, 12 of our 13 directors attended our 2007 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 16 times in 2007. 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 four times in 2007. 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 six times in 2007. 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 approves all aspects of our executive compensation program and is responsible for reviewing the design of 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 six times in 2007. The Technology and Acquisition Committee is responsible for evaluating and making recommendations to the Board of Directors relating to our technology strategies and potential acquisitions, divestitures and joint ventures.

 

Pension and Risk Management Committee

 

The Pension and Risk Management Committee met two times in 2007. The Pension and Risk Management Committee is responsible for overseeing the administration of our funded defined benefit and defined contribution plans, assessing and managing areas of risk to our company, overseeing matters relating to our insurance coverage and reviewing significant legal liability matters, environmental issues and other matters relating to safety and risk management.

 

Public Policy Committee

 

The Public Policy Committee met once in 2007. 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 recommends to the Board a nominee to fill the vacancy. 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, executive officers and employees. We have also adopted a Code of Ethical Conduct applicable to our senior financial and principal executive officers. Amendments to and waivers, if any, from our Codes of Conduct and Ethical Conduct will be disclosed on our website. Our Codes of Conduct and Ethical Conduct are available on our website at http://www.lennoxinternational.com by following the links “About Us — Corporate Governance — Code of Conduct and — Code of Conduct for Senior Financial Officers.” 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.

 

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 of Executive Compensation Program

 

Our executive compensation program is administered by the Compensation and Human Resources Committee of the Board of Directors (the “Committee”). The Committee reviews, approves and modifies, as appropriate, our executive compensation and benefits philosophies, objectives and programs to ensure market-competitive, fair 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 2007 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:

 

 

When discussing general information relating to the compensation of our NEOs, such discussion does not include Mr. Schjerven or Dr. Ashenhurst. The compensation received by (1) Mr. Schjerven during 2007 and upon his retirement, and (2) Dr. Ashenhurst during 2007 and pursuant to a negotiated settlement with respect to our obligations under his employment agreement, as amended in March 2006, is included in the tables that follow this CD&A.

 

2007 — A Year of Transition

 

A number of significant non-recurring events relating to our NEOs occurred during 2007:

 

 

In addition, during 2007, the Committee modified several executive compensation policies and programs to further focus executive compensation on company-specific and individual performance and drive the achievement of our short-term and long-term company objectives. Specifically, the Committee:

 

 

The remainder of our CD&A is intended to provide perspective on the data included in the compensation tables and narrative information that accompanies them.

 

Oversight of Executive Compensation Program and Role of Executive Officers in Compensation Decisions

 

The Committee approves all aspects of our executive compensation program and reports to the full Board of Directors on a regular basis. The Committee coordinates with its external executive compensation consultant and management to obtain marketplace data and program recommendations to assist in making executive compensation decisions. As discussed throughout this CD&A, our CEO makes recommendations to the Committee with respect to various elements of executive compensation of the senior executives, including the other NEOs. The CEO is not involved in deliberations or determinations regarding his own compensation. The Chairman of the Board of Directors, the CEO, the CFO, the Chief Human Resources Officer and the Chief Legal Officer frequently attend Committee meetings, and the Committee meets in executive session as needed.

 

Executive Compensation Philosophy and Key Objectives

 

We believe our ability to execute our business strategy and achieve desired results is dependent on our executives demonstrating the behaviors needed to achieve our goals. To that end, we maintain a pay-for-performance compensation philosophy. Where financial results exceed expected performance, monetary rewards will reflect this performance. Where financial results are below expected performance, pay levels will reflect the below-target performance results. During 2007, individual performance was not measured in our annual short-term incentive programs; rather, we focused these annual programs solely on objective company performance results. However, individual performance, measured by achievement of individual performance objectives, such as contribution toward company performance results and growth, execution of business strategies or implementation of strategic priorities, was considered for base salary administration, promotional opportunities and long-term incentive awards.

 

The strategic objectives of our executive compensation program include:

 

 

For 2007, the Committee administered base salary for our NEOs with the 50th percentile of the marketplace as the guideline in order to attract and retain key executive talent. The Committee administered short-term incentive opportunities and long-term incentive delivered value with the 65th percentile of the marketplace as the guideline and included appropriate stretch performance goals, allowing us to maintain a strong pay-for-performance link and attract and retain leadership talent. While the Committee has not established a formal policy for allocating between cash (base salary and short-term incentives) and non-cash (long-term incentives) compensation, the Committee has historically granted a majority of total compensation to our NEOs in the form of long-term incentive awards, as was the case in 2007. The graphs below illustrate the 2007 targeted mix of compensation for the CEO and the average target compensation mix for the other NEOs.

 

 

Making Executive Compensation Decisions

 

Generally

 

When determining executive compensation policies and programs and making decisions regarding compensation design and administration, the Committee, with input from its executive compensation consultant and management, considers competitive marketplace practices, our business objectives and performance, stockholder interests, legislative and government requirements and other relevant factors. While the Committee reviews the total compensation paid to our NEOs in previous years, it does not consider the value realized from prior equity awards or the NEO’s current stock holdings when making executive compensation decisions. Rather, 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. 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 objective analysis, advice and recommendations in connection with the Committee’s decision making process. Mercer reports to the Committee and, at the Committee’s request, performed the following services in 2007:

 

 

The Committee, along with Mercer, evaluates our executive compensation program annually, typically at its September meeting, by reviewing either an in-depth study of each compensation element prepared by

Mercer or Mercer’s analysis regarding general executive compensation trends. The Committee uses the information provided by Mercer to determine the appropriate level and mix of each compensation element and then, each year at its regularly scheduled December meeting, grants long-term incentive awards to our NEOs and determines the NEOs’ base salaries and certain elements of the short-term incentive programs for the following year. When making executive compensation decisions regarding the CEO’s direct reports, the Committee also considers input and recommendations provided by the CEO.

 

At the Committee’s request, in September 2006, Mercer reported to the Committee on general trends in executive compensation as part of the process for setting 2007 base salaries and short-term incentive target opportunities. Then, in 2007, Mercer performed a detailed review of executive compensation program design elements, including a detailed analysis of new hire CEO compensation as part of the process for recruiting a new CEO. Because almost two years had elapsed since our compensation peer group had last been formally reviewed, the Committee also directed Mercer to review (and revise as necessary) the peer group as part of this process.

 

The revised peer group (the “Compensation Peer Group”), as approved by the Committee, included the following eighteen companies:

 

 

 

 

Based on Mercer’s recommendation, the Committee selected the foregoing companies using the following criteria:

 

 

Mercer also provided additional industry specific and general industry published compensation survey data, based on the appropriate revenue scope for each position (generally $500 million to $4 billion), to supplement the Compensation Peer Group data for each NEO. The published compensation data was taken from Mercer’s study of compensation trends and market practices conducted for The Wall Street Journal, which analyzed 350 large U.S. public companies, as well as Mercer’s benchmark database (collectively referred to as the “Market”).

 

We apply the same methodologies in setting compensation for our CEO as we apply for our other NEOs. Because compensation levels for base salary, target short-term incentives and target long-term delivered value for the CEO position are substantially higher than for other executive positions, our CEO’s target total compensation is greater than the target total compensation of the other NEOs. The Committee believes this difference is justified, given the scope of responsibility of the CEO within our company.

 

CEO New Hire Compensation

 

As discussed previously, Mercer assisted the Committee in developing a new hire compensation package for our CEO, Mr. Bluedorn, and made recommendations for each element of compensation through the use of Compensation Peer Group data. The Committee used the 50^th percentile as a guideline for base salary and the 65^th percentile as a guideline for the short-term incentive target opportunity. In determining the appropriate

long-term incentive delivered value for Mr. Bluedorn, the Committee considered the value of the unvested equity Mr. Bluedorn forfeited from his prior employer upon joining our company. Thus, the Committee approved the following new hire compensation package for Mr. Bluedorn:

 

 

The Committee designed the compensation package to be consistent with our objectives of rewarding short-term and long-term company performance and attracting and retaining top executive talent to support organizational growth and expansion. In an effort to align Mr. Bluedorn’s pay package with the goals and objectives of the other senior executives, including the other NEOs, Mr. Bluedorn’s sign-on long-term incentive awards were granted with vesting and performance conditions that correspond with the executives’ December 2006 awards.

 

Components and Analysis of 2007 Executive Compensation

 

In 2007, our executive compensation program included multiple elements of compensation. The following table lists each element and its correlation to our compensation philosophy.

 

 

Base Salary

 

The Committee considers salary data for our Compensation Peer Group and 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 2007 base salary increases for each NEO.

 

		2006				Increase%		2007
		Annualized				Effective		Annualized
NEO		Base Salary				January 1, 2007		Base Salary
Mr. Bluedorn		$	N/A			N/A%		$	800,000
Ms. Carter			436,814			4.0			454,287
Mr. Boxer			462,127			5.0			485,233
Mr. Stoll			382,213			4.0			397,501
Ms. Goodspeed			365,827			5.0			384,119

 

As discussed earlier, in approving NEO base salaries, the Committee used the 50^th percentile as a guideline. We believe that the base salary for each NEO for 2007 was market-competitive when compared to

this guideline and commensurate with the experience and performance contributions of the respective individual. The 2007 base salary for each NEO is included in the Summary Compensation Table in the “Salary” column.

 

Short-Term Incentive Programs

 

Our short-term incentive programs are administered under the Amended and Restated 1998 Incentive Plan of Lennox International Inc. (the “1998 Plan”) and are cash-based incentive programs designed to tie annual pay to the performance of our company and each business unit. We accomplish this objective by requiring the achievement of specific company financial goals for those individuals who most directly influence performance results and rewarding those individuals when our goals are achieved. Each year, the CEO proposes to the Committee for review and approval the financial metrics and goals that must be achieved to generate a payout. In 2007, our NEOs participated in two short-term incentive programs: the management short-term incentive program and the broad-based short-term incentive program, each of which is described below.

 

Management Short-Term Incentive Program.  Under the management short-term incentive program, target payout opportunities are expressed as a percentage of base salary, with threshold, target, maximum and above maximum payout opportunities expressed as a percentage of the target award. The targeted payout opportunities are based on publicly available data for our Compensation Peer Group and other Market data for equivalent executive officer positions with the 65^th percentile as a guideline. Based on Mercer’s analysis of our Compensation Peer Group and Market data and internal equity considerations, for 2007, the Committee approved the following short-term incentive target payout opportunities and, based on actual performance, certified the corresponding payouts for each NEO.

 

2007 Short-Term Incentive Targets and Payouts as a% of Base Salary

 

NEO		2007 Target				Payout for 2007
Mr. Bluedorn			100	%			127.0	%
Ms. Carter			70				88.9
Mr. Boxer			70				123.2
Mr. Stoll			70				88.9
Ms. Goodspeed			70				88.9

 

The following table summarizes the 2007 management short-term incentive program and illustrates financial performance goals and payout opportunities versus actual performance and payouts.

 

2007 Management Short-Term Incentive Program Summary
($ in millions)

 

 

 

 

The Committee may, in its discretion, modify the management short-term incentive program to account for unusual events or revised business objectives that occur throughout the performance period. The Committee did not make any modifications in 2007.

 

The amounts earned in 2007, which were approved by the Committee and paid in March 2008, are included in the Summary Compensation Table in the “Non-Equity Incentive Plan Compensation” column. As previously discussed, for 2008, the Committee redesigned our management short-term incentive program to supplement company performance measures with an individual performance measure, which will comprise, at target, 15% of an individual’s payout.

 

Broad-Based Short-Term Incentive Program.   In 2007, our NEOs also participated in our broad-based short-term incentive program, which is extended to eligible employees throughout our company. To align this program with the management short-term incentive program, the performance metrics for the broad-based short-term incentive program were the same as the profitability performance metrics for the management short-term incentive program described previously. For 2007, the Committee approved threshold, target and maximum payout opportunities equal to 1%, 2% and 5%, respectively, of base salary. The following table summarizes the 2007 broad-based short-term incentive program and illustrates financial performance goals and payout opportunities versus actual performance and payouts.

 

2007 Broad-Based Short-Term Incentive Program Summary
($ in millions)

 

 

 

 

The amounts earned in 2007, which were approved by the Committee and paid in March 2008, are included in the Summary Compensation Table in the “Non-Equity Incentive Plan Compensation” column. As previously discussed, for 2008, the Committee revised our broad-based short-term incentive program to exclude participation by executives, including the NEOs, as the Committee determined such participation was unnecessary in light of the management short-term incentive program.

 

Long-Term Incentive Program

 

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

In 2007, 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), which aligns our executive reward program with the achievement of long-term company goals. RSUs, which require continued employment to vest, support our critical retention efforts to ensure continuity of management.

 

For 2007, the long-term incentive allocation of delivered value for our NEOs was as follows:

 

 

The Committee believes the above allocation is appropriate because it effectively addresses the objectives of retaining key talent and incentivizing for long-term company performance.

 

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, upon approval by the Committee, awards may be granted on the last business day of any fiscal quarter in special circumstances or upon hire for certain executives, such as our CEO during 2007. The Committee does not coordinate the grant date for any award with the release of material non-public information. We value shares underlying long-term incentive awards 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 the grant.

 

The targeted delivered values under the long-term incentive program are based on publicly available data for our Compensation Peer Group and other Market data for equivalent executive officer positions with the 65th percentile as a guideline. When determining appropriate award sizes and delivered values, the Committee also considers the number of shares available for grant under the 1998 Plan, internal equity, individual performance and the financial impact on our company. In September 2007, the Committee approved the targeted delivered value for all NEOs. Then, as part of the new process for 2007, the Committee took into account the CEO’s recommendation with regard to individual performance for his direct reports in setting their actual delivered value. Individual performance was measured by achievement of individual performance objectives that included items such as contribution toward company performance results and growth, execution of business strategies and implementation of strategic priorities.

 

PSUs.  To maintain our strong focus on performance, 50% of the delivered value for the 2007 long-term incentive program was granted in the form of PSUs. PSUs are generally granted in December of each year for a three-year performance period beginning the following January 1. Assuming continued employment, if, at the end of the performance period, at least the threshold performance level has been achieved, the PSUs vest and, 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 programs as well as metrics that correlate to increased stockholder value to ensure the most critical financial measurements are represented in the long-term incentive program. The Committee certifies the financial performance levels in February or March following the performance period and the earned shares are then distributed.

The following table summarizes the key attributes of the PSUs granted in December 2004, which vested on December 31, 2007, and illustrates financial performance goals and payout opportunities versus actual performance and payouts.

 

December 2004 PSU Grant
(for 2005 — 2007 Performance Period)

 

 

 

 

As shown above, in 2007, our NEOs earned the maximum payout of 200% for PSUs granted in December 2004 by exceeding the maximum level of ROIC performance over the three-year period beginning January 1, 2005 and ending December 31, 2007, the value of which is included in the Option Exercises and Stock Vested Table in the “Stock Awards — Value Realized on Vesting” column.

 

Prior to December 2007, we used one performance measure, ROIC, for the PSU program. As part of the 2007 review of the long-term incentive program, the CEO recommended to the Committee the inclusion of a second metric for the December 2007 PSU grant. The Committee reviewed this recommendation in conjunction with a detailed analysis of our Compensation Peer Group and other Market practices and approved ROIC and company net income growth as the metrics for the December 2007 PSU grant. The Committee determined 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 determined the company 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 2007, which will vest on December 31, 2010.

 

December 2007 PSU Grant
(for 2008 — 2010 Performance Period)

 

 

 

 

The December 2007 PSU grants are included in the Grants of Plan Based Awards Table in the “Estimated Future Payouts Under Equity Incentive Plan Awards” column.

 

RSUs.  To support our critical retention efforts to ensure continuity of management, 30% of the delivered value for the 2007 long-term incentive program 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, provided the recipient remains an employee during the vesting period. The number of shares underlying RSUs granted to our NEOs in 2007 is included in the 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 2007 long-term incentive program was granted in the form of SARs. SARs generally vest in one-third increments on each anniversary of the date of grant, provided the recipient remains an employee during the vesting period. The exercise price is based on the average of the high and low trading prices of our common stock on the New York Stock Exchange on the date of the 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 2007 expire seven years from the date of grant. The number of SARs granted to our NEOs in 2007 is included in the 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 in order to attract and retain top executive talent.

 

During 2007, we provided the following perquisites to our NEOs:

 

 

We also offer an employee matching charitable contribution program to promote our community values, pursuant to which we match the charitable contributions of all employees in an amount up to $1,000 per year.

 

As previously discussed, during 2007, the Committee modified our perquisite program to replace most company-sponsored perquisites with a lump-sum cash stipend effective January 1, 2008.

Benefit Programs

 

In order 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 2007 and the purpose of each program.

 

Additional Benefit Programs Offered to NEOs in 2007

 

 

Employment Agreements and Change of Control Employment Agreements

 

We have entered into employment agreements and change of control employment agreements with each NEO. We believe employment agreements are necessary to attract top executive talent and for financial and business planning purposes. To encourage continuity, stability and retention when considering the potential disruptive impact of an actual or potential corporate transaction, our change of control employment agreements are intended to incentivize our NEOs to remain with our company in the event of a change of control or potential change of control. Since the triggering event for our change of control employment agreements may never occur, we do not consider these agreements as additional elements of executive compensation. However, we do view these arrangements as a means to attract, motivate and retain highly talented executives.

 

Our employment agreements and change of control employment agreements and the potential costs associated with each are discussed in detail under “Potential Payments Upon Termination or Change of 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 programs, 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 our Compensation Peer Group or other 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. For fiscal 2007, we paid an immaterial amount of non-deductible

compensation to our NEOs. It is expected that additional compensation paid in future years will also be non-deductible to our company. The Committee believes this is appropriate given the benefits provided by the non-performance based compensation.

 

Nonqualified Deferred Compensation

 

During 2007, the Committee amended our Supplemental Retirement Plan, Profit Sharing Restoration Plan, Directors’ Retirement Plan and our employment agreements and change of control employment agreements to comply with the deferred compensation regulations and implications of Section 409A of the Internal Revenue Code.

 

Accounting for Stock-Based Awards

 

When setting and analyzing each aspect of our NEOs’ 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 detailed accounting cost models and structured our executive compensation program in a manner that properly blended 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 for Fiscal 2006 and 2007

 

The following table provides information regarding total compensation earned in 2006 and 2007 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, Robert E. Schjerven, our former CEO and Harry J. Ashenhurst, Ph.D., our former Executive Vice President and Chief Administrative Officer.

 

 

 

 

 

 

The values attributable to each “perquisite” and item of “other compensation” listed above are calculated as follows:

 

 

 

 

 

 

 

Fiscal 2007 Grants of Plan-Based Awards

 

The following table provides information regarding short-term incentive awards under our short-term incentive programs and PSUs, RSUs and SARs granted under the 1998 Plan to our NEOs in 2007.