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Strategies & Market Trends : Value Investing -- Ignore unavailable to you. Want to Upgrade?

To: James Clarke who wrote (9439)	12/29/1999 1:13:00 AM
From: Ron Bower	Respond to of 78536

James, Made me look - hadn't paid that much attention to decline in cash flow. I paid more attention to debt structure and growth strategy. As I see it, operating cash flow corresponds to growth in inventory and A/R - a result of sales growth. Most all if the long term debt is fixed at 7.5%. I bought a medium sized position as a long term investment. I looked at the acquisitions and thought 'goodwill' to be reasonable - they bought some companies with asset values greatly depreciated. They are buying a large successful distributor that has been handling many brands of heating and air conditioning equipment. That distributor will now only handle Lennox brands. They needed more capacity, so they buy out a growing small competitor and get their modern plant facilities. I consider these to be good moves. They're gaining market share thru the acquisitions and doing well in international expansion. jmho, Ron

To: James Clarke who wrote (9439)	12/29/1999 10:30:00 PM
From: Q.	Read Replies (1) \| Respond to of 78536

Jim, re. LII's financial statements, you asked why the cash flow from operations has declined in consecutive years. You probably saw the table on page F-13 in the S-1. edgar-online.com I don't have a complete answer for you, but I can offer a couple of ideas. Their business model hasn't remained constant. They've been transitioning from being just a capital goods supplier to also owning the downstream retail channel. The latter is being accomplished by buying up the mom and pop heating/a.c shops around the country. As a result of this growth, their inventory and A/R have been growing, so that eats into their cash flow from operations. I don't know if that fully explains what you've observed, but I assume it must be a big part of the answer. I suppose it is also possible that there is some kind of disguised deterioration in the underlying capital goods business, as there has been in the retail chain that they are acquiring, although in reading the latest 424B3 prospectus I didn't notice any indication of such a thing. I am mindful that the unusual scheme for growing the business probably provides the company various opportunities to be creative with the financial reporting. I have no way of knowing whether they are doing that, but just to be safe, in buying the stock I didn't give much weight to the earnings numbers or the p/e. If you have other thoughts on this, I'd like to hear them.