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Operator
Ladies and gentlemen, thank you for standing by. Welcome to the Lennox International third quarter 2005 earnings conference call.
[Operator Instructions].
I would now like to turn the conference over to Bill Moltner, Vice President of Investor Relations. Please go ahead.
Bill Moltner - VP IR
Thank you, Janine. Good morning and thank you for joining us for this report on Lennox International's financial performance in the third quarter of 2005. We're broadcasting today's call on the Internet, and have placed a direct link to the live webcast on our corporate website at www.lennoxinternational.com. This call will be archived on our website and available for replay.
Bob Schjerven, our Chief Executive Officer, and Sue Carter, the Chief Financial Officer of Lennox International, are on the call this morning. In a moment, Bob will give his perspective on our company's progress and performance in Q3, and provide management's outlook for the remainder of 2005. Sue will follow with commentary on business segment operating performance, as well as address key income statement and balance sheet items. We'll wrap up the call with a Q&A session.
In the earnings release we issued earlier this morning, which you'll find posted on our website, we've included several tables providing description and financial detail and reconciliation to the financial metrics that Bob and Sue will discuss to U.S. generally accepted accounting principles, or GAAP measures.
Before we begin, I'd like to remind everyone that in the course of this call, to give you a better understanding of our operations, we will be making certain forward-looking statements. These forward-looking statements are subject to risks and uncertainties. A list of these risks and uncertainties is included in our publicly available filings with the SEC, and includes the impact of higher raw material prices; our ability to implement price increases for our products and services; the impact of unfavorable weather on the demand for our products and services; and the potential impact on operations related to the implementation of new NAECA efficiency standards. These risks and uncertainties could cause our actual results to differ materially from those that we express to you today.
I'd now like to turn the call over to Bob Schjerven.
Bob Schjerven - CEO
Good morning. Q3 turned out to be a terrific quarter for Lennox International. We achieved record sales and record net income. Our revenue grew 20% to $928 million, with foreign exchange contributing but 1 percentage point of that growth. Our net income of $49 million was up substantially from $19 million in the prior year. And this year's Q3 earnings per share of $0.68, compares quite favorably with the $0.29 EPS in last year's third quarter. Now, adjusting last year's third quarter results for a $9 million loss from discontinued operations in 2004, income for that year from continuing operations was $28 million, or $0.42 a share.
Improvement in our performance was broad-based, with all of our business segments realizing increased revenue and increased segment profit. No doubt our strong results were aided by a favorable market environment. The hot weather that we saw in June continued throughout the summer, providing strong demand for residential cooling equipment and service. Domestic demand for commercial equipment also continued to improve.
The price increases that we've implemented on our equipment businesses are sticking. In the third quarter, our manufacturing businesses realized price improvement of approximately 5%. Now, this increase allowed us to fully offset approximately $15 million in the headwind that was created by the higher cost for steel, copper, aluminum and other related components.
Our activities for compliance with the new 13 SEER minimum efficiency standard for residential air conditioning are on track. Now, while there's still some uncertainty surrounding price points and also the impact throughout the industry of some pre-buy of 10 SEER units, we believe that the movement to 13 SEER will be a net positive for our company and also the industry. And we'll be ready with a competitive range of both entry level and fully featured products, when that regulation takes effect on the 23rd of January next year.
Favorable cooling season weather also supported continued improvement at Service Experts. The improvement in this segment continues to meet our expectations, and we are on track to achieve a low single digit segment profit as a percent of sales for the full year of 2005. Today, Lennox International is a very different company than it was just a few years ago. We have exited non-strategic businesses that were a drain on our resources, and we are improving the profitability of the businesses that have been a drag on the company's financial performance.
We've paid down the debt that we assumed when we grew the company in the latter part of the 1990s and 2000, and we've built a very strong balance sheet with cash on hand to give us appropriate operating flexibility. Our total debt of $236 million at the end of the third quarter was $83 million lower than it was same time last year. This reduction, includes $41 million in convertible notes that were converted to common shares of LII stock prior to the end of the quarter. In addition, subsequent to the end of the quarter, the remaining balance of our convertible notes were converted to stock, which reduced our company's debt by an additional $103 million.
Our prospects for continued strength and cash flow generation are very good, and we are pleased to say that debt reduction is no longer a priority. On September 19th, we announced that our Board of Directors authorized the company to repurchase up to 10 million shares of our stock. Due to the proximity of this announcement with the end of the quarter, we have not yet been able to initiate this program.
Perhaps most importantly, we believe that there are many strategic opportunities to profitably grow our core businesses. Our Board is confident that we can simultaneously capitalize on these opportunities, and repurchase shares to build long-term shareholder value. We are truly at a new and a very exciting point for our company.
LII clearly performed very well in the first three quarters of this year. And before I turn the call over to Sue Carter, let me comment on our expectations for the balance of 2005. We expect that the momentum that we have will continue and we are raising our full year earnings per share guidance from a range of $1.60 to $1.70 per share to a new range of $1.75 to $1.80. This earnings per share range, represents a 26 to 29% improvement over the $1.39 earnings per share from continuing operations before goodwill impairment that we posted in 2004.
As we indicated in our last earnings call, our 2005 guidance range conforms with GAAP and it includes gains, losses and other expenses, restructuring charges, tax items and any loss on discontinued operations which, taken together, are expected to contribute $0.04 to our full year 2005 earnings per share. In addition, consistent with our EPS outlook, we now expect LII's revenue growth in 2005 to be approximately 10%, up slightly from our most recent guidance of high single digit top line growth.
Sue Carter will now provide some additional commentary on our business segment performance and balance sheet improvement. Sue?
Sue Carter - CFO
Thank you, Bob. Good morning and thank you for joining us on the call today. Our Residential Heating & Cooling business couldn't have asked for better weather in Q3. According to NOAA, the National Oceanic and Atmospheric Association, cooling degree days in the third quarter were 22% above normal and 26% above last year. Preliminary ARI estimates indicate that industry shipments of unitary equipment in the U.S. grew over 30% in the third quarter as favorable weather and continued buoyancy in residential new construction created strong demand for home comfort equipment.
Our Residential Heating & Cooling revenue increased 28% in the quarter, to $465 million with foreign exchange contributing 1 percentage point of this growth. Segment profit increased 50% to $67 million, driven by higher volume and improved pricing. Segment profit margins expanded 200 basis points to 14.4%.
Commercial Heating & Cooling continues to make impressive progress. Revenue was up 16%, with no meaningful foreign exchange impact, to $192 million. Strong sales increases to domestic national accounts, as well as contractor sales for our commercial and sales districts, easily offset lower sales in Europe where the market remains stagnant. Segment profit grew 34% to $27 million, again due to higher volumes and improved pricing. Segment profit margins expanded to 14.0% from 12.1% last year.
Service Experts sales increased 14% to $172 million, a 12% increase when adjusted for currency fluctuations. Segment profit of $8 million, or 4.6% of sales, compares very favorably with a $1 million segment loss in last year's third quarter. Improved revenue was the primary driver in the profit improvement. Also, you might recall that last year the quarter was negatively impacted by an increase in reserves for obsolete and slow-moving inventory by close to $2 million.
For those comparing Service Experts' sequential performance, revenue in Q3 of this year was up slightly over Q2, while segment profit was modestly lower. Higher fuel costs explain much of the difference between the two quarters. Service Experts performed well in Q3 and we're very pleased with the progress that they're making.
In our Refrigeration segment, revenue rose 7%, or up 3% in constant currency. Segment profit increased 6% to $12 million, with the improvement coming from our domestic operations. Our international sales on a foreign exchange adjusted basis were flat, with increases in South America offsetting declines in Asia Pacific. The segment profit from our international operations was also relatively flat. Segment profit margins declined by 10 basis points to 10.0%.
Corporate expense in Q3 was $28 million, up $2 million from last year. Short-term and long-term incentive programs, driven by improved company performance and a higher stock price, plus expansion of our centralized global procurement initiative offset somewhat lower SOX compliance costs.
In the third quarter we recorded a cumulative effect of accounting change of $0.2 million income net of tax, reflecting Lennox International's early adoption of FAS 123-R share-based payments. This addresses the accounting for stock-based compensation. Early adoption of FAS 123-R makes sense for us as it reduces the volatility from the appreciation in our stock price, when compared with the variable accounting treatments that we were using. We expect the impact of adopting 123-R on our full year 2005 results will be in line with our expectations when we first gave 2005 guidance.
We also reported other expense of $3 million in Q3. This line item was negatively impacted by currency translation related to intercompany financing activity. Turning to the balance sheet, at September 30th we had reduced our total debt by $83 million from year-ago levels to $236 million. The $2 million reduction in our interest expense for the quarter reflects this lower debt balance as well as interest earned on cash that was invested. The balance in our asset securitization program was zero at the end of Q3, compared with a balance of $130 million in this program the same time last year. This amounts to an effective reduction of $213 million in the economic debt of our company year over year.
As Bob mentioned, all of the 144 million in convertible notes that were outstanding have now been converted to common stock; 41 million of the conversion occurred before the end of the quarter and is reflected in the lower total debt balance at that point. At the end of Q3, our debt to capital ratio was 27%, down dramatically from 42% at the same point last year. Improved profitability and our focus on working capital continue to pay off in our cash flow performance. In the third quarter, our cash flow from operations was $89 million.
During the quarter we invested $15 million in capital expenditures, resulting in a very robust free cash flow of $74 million for the quarter. Our inventories at the end of the quarter were down $25 million, or 9% year over year. Our operational working capital ratio as a percentage of trailing 12 month sales at 17.5% is as low as it's ever been, demonstrating our diligence in working capital management.
Year to date our capital expenditures are $42 million. We do expect some additional capital expenditures related to the 13 SEER conversion. However, the timing of these capital expenditures, none of which threaten our ability to be ready for the January 23rd deadline, is such that they could fall into either 2005 or 2006. Therefore, we expect our total CapEx for the spending for this year will be below our previous guidance of approximately $80 million. And we'll provide an updated outlook for 2006 CapEx, along with our initial 2006 guidance, when we report our fourth quarter results.
That concludes our prepared remarks. And at this point, we would be pleased to address any questions that you may have.
Operator
Thank you.
[Operator Instructions].
And we'll go first to the line of Curt Woodworth with JP Morgan. Please go ahead.
Curt Woodworth - Analyst
Thanks. Good morning.
Bob Schjerven - CEO
Good morning, Curt.
Sue Carter - CFO
Good morning.
Curt Woodworth - Analyst
Question on the comments regarding 13 SEER. Specifically, I just am curious for -- what's the basis for the statement that you think this is a net positive for the company? If you can just provide any color around that. And do you think that there is going to be a negative impact to the consumer of some of these higher price points, in terms of the fixed versus replaced dynamic in the industry?
Bob Schjerven - CEO
This is Bob, Curt. There's a couple of things. First of all, I would like to preface my remarks with the fact that with a lot of communication going on between not just myself but others in the industry and -- down the supply chain, there is a certain amount of speculation. So, don't necessarily take everything I tell you to the bank.
But first of all, closer to home, with respect to our corporation, we have -- as we've mentioned in previous guidance, we design entire platforms at the same time that we're going to 13 SEER. And we have a very complete offering that is going out to the field and it includes not just what's required to get to 13 SEER, but also more fully featured units that are targeted on very important homeowner cues (ph), such as noise, such as air quality inside the home, as well as efficiency.
We also see that as a result of a combination of moving to 13 SEER with units that are intrinsically more expensive and have more material content, plus the increases that have gone in as for pricing for raw materials, it appears to me, as I look across the industry, that the likelihood of pricing going out into the industry, into the market, I should say, that is favorable for all the manufacturers, pretty much ought to be a likelihood. And so, on the downside I guess we do know that certainly some people probably will have some difficulty getting everything done in time. But that's sort of natural when you look at the magnitude of this change.
Now, as far as the consumer is concerned, there's no question they're going to have to pay higher prices for products because of the higher costs. And I think when you look at the increasing energy costs that confront all of us, what that does do is it prevents -- or presents to the consumer a slightly more favorable return on investment picture than heretofore might have been suspected maybe four or five, six months ago.
Still in all, the higher efficiency for cooling equipment will be more easily and more quickly recouped by consumers who are in the southern part of the country, versus those folks who are in the northern part of the country or Canada.
Curt Woodworth - Analyst
Okay. And in terms of the initial price expectation for the new 13 SEER product line, can you provide us maybe a point estimate for what those prices will be relative to your current 10 SEER product line? American Standard on their conference call was talking about a 35 to 40% price differential. Would you see something similar to that?
Bob Schjerven - CEO
Golly, I've heard all kinds of numbers that are in the industry. I think the number or the quantification that comes up most frequent, is the speculation that the pricing for the new product will probably fall in the range of the old -- or highly featured 12 SEER product, plus some uplift, probably in the mid to high single digits. And that's the best that I've got for you at this time.
Curt Woodworth - Analyst
Okay. And what was that -- the old price premium on the 12, just so I can do the math on that?
Bob Schjerven - CEO
That would be versus the 10?
Curt Woodworth - Analyst
Yes.
Bob Schjerven - CEO
I don't know that I've got that number for you right now. We can sure try to get that offline for you. But I don't want to speculate. I've got a number at the back of my mind, but I wouldn't want to mislead anybody.
Curt Woodworth - Analyst
Okay, fair enough.
Bob Schjerven - CEO
And quite often -- here's a complexity. Quite often what you're looking at is you're looking at the difference in price between an entry level parting (ph) brand, low featured 10 SEER product versus a 12 SEER product that in almost every case is fairly fully featured, simply because under -- the old structure represented an uplift, not just in efficiency, but generally speaking, also in features for the consumer.
Curt Woodworth - Analyst
Great. And one final question in terms of the balance sheet improvement and your ability to pursue some of these strategic opportunities you mentioned which seem likely, can you talk about the strategy around that? What areas are attractive to you, would it be indoor air quality, leveraging the commercial business more, just give us a sense for where you think the opportunities lie in the market now? Thank you.
Bob Schjerven - CEO
I think the most safe answer I can give to you is, yes.
Curt Woodworth - Analyst
All the above, huh?
Bob Schjerven - CEO
Yes, I just -- a little humor doesn't hurt sometimes. Quite frankly, we and our Board are looking at a number of strategic opportunities and that's really been our focus this year. But we're not ready to announce those, as we normally do not do in advance of anything concrete coming together. It just wouldn't be good business from our perspective.
Curt Woodworth - Analyst
Okay. Thanks, and congratulations on a good quarter.
Bob Schjerven - CEO
Thanks so much, Curt.
Operator
Thank you. Our next question comes from the line of Jeff Hammond with KeyBanc Capital Markets. Please go ahead.
Jeff Hammond - Analyst
Hi, good morning everybody.
Bob Schjerven - CEO
Good morning, Jeff.
Sue Carter - CFO
Good morning, Jeff.
Jeff Hammond - Analyst
I guess first to go back on the 13 SEER transition, I guess first, did you see on your non-Lennox or distributed product, did you see any evidence of pre-buy of 10 SEER units? And then secondly on that same point, I mean, as you look at your own -- your company owned distribution, what's kind of your view or strategy on 10 SEER units? Do you intend to hold some units to sell next year or not?
Bob Schjerven - CEO
Those are good questions. I think just from your questions you've hit the nail on the head, and that is we do frankly, see in the distributed business, or the two-step business, some indication of pre-buy. When we talk with our distributors, and in fact, just this last week we had a distributor's meeting that we all attended -- so a lot of conversations -- there was no real consensus amongst them in terms of the strategies, they (ph) certainly appeal to them. We're doing some level of pre-buy, but it was not my sense that it was a large amount.
The thing that sort of masks some of that at this point is that we will continue to have very favorable cooling weather quite late in the year. So, it's a little bit hard to separate those two things. Going to the distinction that you made between the distributed business and our one-step or Lennox business, you're quite right. There is a difference. We have, all in all, maintained the posture that it made the most sense from our perspective for the dealers, any dealer, really to focus heavily on the 13 SEER product that was coming in. This is the new life.
These products, frankly, are very exciting and they've got a lot of benefits to offer the consumer, and we felt that the quicker that the dealer got focused on carrying new products, the quicker they were going to have a jump on the competition by being ready and more able I think, and more confidently to inform the consumer about the changes that have occurred and what it means for them. So that said, in terms of our internal gains or what we've done on the Lennox industry side, we have not gone at this thing with the notion that we wanted to put a lot of 10 SEER product. I think probably there is just a little bit of product in the there, but it would be a very minimal amount.
Jeff Hammond - Analyst
Okay, and then just as a follow-up to -- as a prioritization of cash, it sounds like you haven't been in the market on share repurchases. Is it fair to say once that quiet period or blocked-out period, you'd be active in the marketplace with share repurchase?
Bob Schjerven - CEO
I wouldn't want to comment on that to be honest with you, but you are quite correct in the fact that we have, of course, been in a quiet period of sorts -- there's been no action to this point.
Jeff Hammond - Analyst
Okay, and then as you look at your external opportunities. I mean, if you look over the past four or five years, the majority of your acquisitions have been in refrigeration and service experts which you seem to be pretty internally focused. I guess back to commercial heating and cooling and residential, where you haven't been as active, do you see consolidation opportunities within those businesses?
Bob Schjerven - CEO
I guess I wouldn't want to get too deeply in our strategy. I think if we just look at the industry broadly, though, this would not be original thinking on my part, because a lot of pundits have watched it, and concede the fact that there's likely some further consolidation in the next couple -- several years just because of the structure of ownership and -- amongst the various players that are out there.
Jeff Hammond - Analyst
Okay, and then as a follow-on to that, what's your comfort level, I mean, given your new balance sheet structure, what you're generating and free cash flow, what's kind of order of magnitude that the size of acquisitions that you're comfortable with doing?
Bob Schjerven - CEO
Sorry, Jeff, I don't think it would be appropriate for me to go ahead and comment on that. That's sort of a -- well in the first place, that would be a premature question. I appreciate your interest.
Jeff Hammond - Analyst
Okay, and then finally, I guess, given that the energy concerns, particularly moving into this heating season, can you just comment on any type of indications that you're getting with respect to your hearth business or furnace business that maybe you have some incremental demand, just given the energy concerns out there?
Bob Schjerven - CEO
The thing that the entire industry has seen out there, the entire hearth industry, that there definitely has been pretty strong effects on products, not just wood burning stoves, but wood burning fireplaces, but a particular focus on pilot stoves -- they're fairly efficient and burn quite clean and are a good answer in some parts of the region, some parts of the country.
Jeff Hammond - Analyst
Okay, great, thanks guys.
Bob Schjerven - CEO
Sure, thank you, Jeff.
Operator
Our next question comes from the line of Michael Coleman with Southwest Securities. Please go ahead.
Michael Coleman - Analyst
Good morning, and congratulations.
Bob Schjerven - CEO
Thank you, Michael.
Michael Coleman - Analyst
Just taking the strategic opportunity question and turning it around a little. Do you see any, in terms of additional streamlining in your businesses, not to be nit picking, but Europe seems to have a couple of quarter shares. It hasn't really performed well, and do you see any additional streamlining of your businesses?
Bob Schjerven - CEO
Well --
Michael Coleman - Analyst
...Or opportunities to streamline?
Bob Schjerven - CEO
I think there's probably always some level of opportunity to do that. We've got a very intense focus on all of our operations, and that fact is that we constantly evaluate that. Certain changes such as improvements in systems and things that eliminate a certain redundancy in the business is one thing.
Another thing that we have seen a market increase in, which is very healthy, is the collaboration for these businesses and when we talk about product technology and manufacturing technology across all of the businesses that we have, not just those in Europe, but also including the very good things that are being done in some of our operations in Asia Pacific and also what we've done in -- throughout the Americas. So, that kind of collaboration always leads, I think, to the kind of improvement that we both want to see.
Bill Moltner - VP IR
Michael, if I could just add-on as well, an important thing to remember is that demand in Europe unlike in our North American markets really has not been very supportive of the market. They are flat, maybe even a little bit down, so there's not the demand underlying that we're seeing in the domestic markets.
Michael Coleman - Analyst
Okay, thanks. Secondly, to hit the share buyback again, I just kind of -- given what the current market prices are, would you be comfortable, I guess a question for Sue, would you be comfortable at current prices to take a meaningful (audio break) share (ph) buyback?
Sue Carter - CFO
I think what we look at, Michael, is we look at opportunistic places within the market to buy those shares and the real evaluation, and there's a lot of variables, so there isn't a finite point that you can put on this. But we're looking to do the open market purchases in areas where it's accretive to our earnings. So, you have to balance all of those different things, and unfortunately there's just not a true finite answer. But, the stock price at the time that we approved the share buyback on average was right around $25, and so we're aware of the spot.
Michael Coleman - Analyst
Okay, thank you. And just one more question. Your inventory was down 9% year over year, what kind of inventory target or on a year over year basis percent wise, do you see the trend continuing over the fourth quarter, or are you --?
Bob Schjerven - CEO
This is Bob again. We look at all aspects of working capital, and we constantly have programs moving to reduce that. But what we do in to average it is -- a metric that we use a lot is the metric of comparing your working capital to an annualized sales fixing. And that working capital ratio as we call it has steadily gotten better, and in fact the conclusion of the third quarter we are at a new low, 17.5% I think it was. And all of those programs which affect the various parts of the working capital have a continuous improvement philosophy in back of them, and task force that continually work on what we're doing.
So, I would say you can continue to, over a longer period of time, it would be probably good to expect us to continue to manage that and continue to work to manage it down. I will tell you conversely that this has been, for everybody in the industry, a very robust period, with a large amount of throughput of product. And of course, when you have those conditions that tends to favor a better utilization of inventory, not just finished goods, but also works and processes as well. So, the short answer to your question is that in the long-term we all are looking for continuous improvement on that metric, and in the short-term we've had a very good period of time because of the throughput.
Sue Carter - CFO
Right, Michael, I wanted to add one thing to that as we look at this. The other thing that we will be working with as we go through the next several months is what the impact of the new 13 SEER product has on what that true inventory balance is that's showing from a mathematical perspective on the balance sheet. So, that will also come into play as we look at what those targets are.
Michael Coleman - Analyst
Thank you, and congratulations again.
Bob Schjerven - CEO
Thank you, very much.
Sue Carter - CFO
Thank you.
Operator
Our next question comes from the line of Brian Rayle with FTN Midwest Research. Please go ahead.
Brian Rayle - Analyst
Good morning.
Bob Schjerven - CEO
Good morning, Brian.
Brian Rayle - Analyst
A question about energy efficiency. Obviously, it's becoming a greater and greater topic here with where petroleum products are heading, and a lot of commentary about people wanting to replace. I can kind of see the path on the commercial side where you have a return on investment, especially like -- something like a national account. Do you see any potential for that on the residential side, meaning that anybody really replacing on the residential side before the useful life of their air conditioner is essentially over based on the increased energy prices?
Bob Schjerven - CEO
I think that's probably a possibility, and for those consumers that think deeply about that, you probably would see a larger or higher frequency of that decision making occurring in the southern part of the U.S. simply (ph) because of the pay back calculation. I think that one other trend that the industry may see this year perhaps, and maybe for a couple years, would be some tendency for consumers confronted with a somewhat higher cost for the new equipment to endeavor to perhaps repair rather than replace in the short-term. And of course, that works well for us with respect to the service experts business segment that we have in our business.
Brian Rayle - Analyst
Great. And then on the commercial side do you see -- have you seen any sort of national accounts or any sort of I guess mid-sized commercial players in the market trying to inquire about improving the efficiency of the retail footprint?
Bob Schjerven - CEO
That's actually an ongoing aspect of many of the folks at our national accounts, because if you look -- sort of peel back a little bit and you look at those accounts, you find that quite often they have a very professional facilities engineering department or whatever they call it in different companies, and these people are very concerned with the life cycle costs of the equipment that they purchase. And for that reason that -- the Lennox equipment, particularly the L Series, for the last several years has been the preferred choice for many of these folks simply because it delivers the lowest possible life cycle cost.
Brian Rayle - Analyst
I guess, then, have you seen an increase in that activity in the last couple of months?
Bob Schjerven - CEO
I can't say that we have. That's not to denigrate what's happened in the last couple months -- it's another way to put maybe a broader frame on the fact that these folks are more concerned, and have been concerned about this for quite a few years.
Brian Rayle - Analyst
Great. Thank you, and congratulations on a great quarter.
Bob Schjerven - CEO
Thank you, Brian.
Operator
And next we'll go to the line of Curt Woodworth with J.P. Morgan. Please go ahead.
Curt Woodworth - Analyst
I just want to ask you a question on the refrigeration business. The -- year to date, the operating income is flat. I just wondered if you can talk about that and what the expectations are going forward.
Bob Schjerven - CEO
First of all, going back to a previous conversation we had a quarter ago pretty broadly described the situation that we have in Australia, particularly the weather, and of course, you know their weather is 180 degrees out of synch with ours, but their past summer was sort of like the summers we had several years ago in that it did not drive the amount of business, the wholesaling business and so forth that we would have hoped to have had. And that would be one of the reasons why they had not brought in the traditional amount of improvement that we would have expected. So that's a flag (ph).
But if you look at the business to the Americas, which of course was the original flagship part of the business, it continues to be quite robust, not just in terms of the relationships with customers and what that's doing to the top line through the Americas, but also the efficiency and the operational improvements that we continue to see throughout the Americas are very heartening.
Curt Woodworth - Analyst
Okay, and then question on service experts margins, which have been improving nicely this year. In your view, how much is left to go? It seems like a lot of the blocking and tackling has been done and the systems are in place in terms of the accounting and IT. Is there a lot of room to run here, at least to talk about your expectations for service experts going forward?
Bob Schjerven - CEO
First of all, we're sort of careful about talking about the end game in any of our businesses. But when we looked at all that we had learned -- and you roll the clock back some14,15 months ago, and looked at all that we had learned about that business in the time that we had owned those businesses, and made the decision around the refocusing of those operations, and knew that we would take time to bite the bullet, and infiltrate throughout all of those businesses the very sound practices that are part of the compendium of practices that these folks have put together, is best practices for that industry, we recognize the people component.
Not just the importance of the expertise and the business competency and the general managers, but also throughout those businesses, and the fact that it takes time for practices to really take root and become the standard practice. So, we've been very measured about the internal expectations that we've had and realize it's a multi-year process, and we certainly, at this point, don't think that we have had a lot of improvement.
Rather, we're still on that continuous improvement path and quite satisfied with what these folks are doing. It's a people business, first and foremost and last, and wherever you have many people involved, training and time is a lot more present than in some manufacturing situations where you have a lot of mechanical things and equipment and the operational tooling and design that impact the overall learning curve.
Curt Woodworth - Analyst
Great, thank you.
Bob Schjerven - CEO
Sure, thank you Curt.
Operator
[Operator Instructions].
And we'll go next to the line of Jeff Hammond with KeyBanc Capital Markets. Please go ahead.
Jeff Hammond - Analyst
Hi, just a couple of follow-ups. I guess, in the second quarter, you had some operational challenges, kind of ramping up production in the commercial business. I mean, I guess that was clearly not evident this quarter. Just wanted to make sure those issues are behind you guys, or do you see that continuing?
Bob Schjerven - CEO
No -- exactly as we had predicted in the second quarter, that ramp-up was a very normal thing, a very predictable thing, and those folks have done very nicely at integrating, those people getting fully-trained. So, your observation is quite accurate.
Jeff Hammond - Analyst
Okay, good, and then on the working capital, Sue, I think maybe a little finer question to the fourth quarter, do you see working capital being a size use or, I think it's generally a source of cash in the fourth quarter, just give -- as you think about where you want to be on inventories around the 13 SEER transition?
Sue Carter - CFO
As we look at what we're doing, I mean, our cash performance has been a result of a lot of different pieces, which has a lot to do with process improvement and with all of those things. So as we move into the fourth quarter, to your question, I think we're going to continue to work the process hard and the individual pieces will just play out as we go through that quarter and see what happens.
And I think one of the things that impacts being able to just put a finite point on that is, as Bob pointed out earlier, the October has still provided some opportunity for cooling equipment, and therefore it's really difficult at this point in time to say what is going to happen to that because there is more things than just going into the 13 SEER changeover.
Jeff Hammond - Analyst
Perfect. And then I guess back to service experts, can you give us a sense, Bob, as you think of all the changes you made and the focus. You say it's on track, but maybe give us a sense of what's working particularly well in terms of your productivity, initiatives, and actions, what is maybe lagging behind as an offset?
Bob Schjerven - CEO
Well, that's a deep question. That probably requires more time than I'm willing to take here. But if you look at the parts of the process that are in the interface between the consumer and the folks that are making the calls, the technicians and the corporate specialists, for example, those people this year have done an excellent job. And that's reflected, of course, in all aspects of the top line including growth percentages.
If you look at other parts of the business, which we've talked about before, such as the work controlling inventory, using a very professional inventory management approach to what parts and components you stock on trucks, and how you get that done, and the resulting attention to inventory velocity through the centers and taking quick action on surplus and obsolete and so forth. We have a lot of internal metrics around that, and people who work at it on the business side have done very well at embracing that and producing results.
So as you know, this whole process, from the first contact with the consumer through -- to the final check to be sure that all the equipment has been installed is really a very complex overall system of individual processes that are best practices. If you look at the work that we've done with respect to the training of general managers and putting those people in place, which of course is a very crucial component to particularly long-term improvement, that process stays very well on track. So, it would be hard for me to single out any one thing I was really super elated about over the rest of them or discouraged because it's all moving very well together.
One thing that we have seen is the cost of fuel, for example, has been an issue for everybody in this business, and so that's a component that has changed a little bit of course, we'll be taking appropriate action on that. But, it's a very complex business. It's a lot more complex than one might think from the outside. But, from where I sit, I'm quite pleased with the progress and the rate of progress that I see.
Jeff Hammond - Analyst
Great, thanks guys.
Bob Schjerven - CEO
Sure, thank you.
Operator
At this time, I'm showing no additional questions. I would like to turn the call back to Bob Schjerven.
Bob Schjerven - CEO
Well, the third quarter was truly outstanding for Lennox International with all of the business segments registering increased top line and operating profits. And we are optimistic, and we expect that the momentum that we've got will continue in the fourth quarter. And so in conclusion, we are raising our full year 2005 earnings per share guidance to a range of $1.75 to $1.80 per share. Thank you so much for taking the time to be with us this morning. Goodbye.
Operator
Ladies and gentlemen, that does conclude our conference for today. Thank you for your participation, and for using AT&T's Executive Teleconference Service. You may now disconnect.