Lennox International 10-Q 2023-03-31

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549

FORM 10-Q

For the quarterly period ended March 31, 2023

OR

For the transition period from _____to ______

Commission file number 001-15149

LENNOX INTERNATIONAL INC**.**

Incorporated pursuant to the laws of the State of Delaware

Internal Revenue Service Employer Identification No. 42-0991521

2140 LAKE PARK BLVD., RICHARDSON, Texas, 75080

(972) 497-5000

Securities registered pursuant to Section 12(b) of the Act:

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company" in Rule 12b-2 of the Exchange Act.

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

As of April 17, 2023, the number of shares outstanding of the registrant’s common stock, par value $0.01 per share, was 35,501,548.

LENNOX INTERNATIONAL INC.

FORM 10-Q

For the three months March 31, 2023

INDEX

i

Part I - Financial Information

LENNOX INTERNATIONAL INC. AND SUBSIDIARIES

Consolidated Balance Sheets

The accompanying notes are an integral part of these consolidated financial statements.

LENNOX INTERNATIONAL INC. AND SUBSIDIARIES

Consolidated Statements of Operations

(Unaudited)

The accompanying notes are an integral part of these consolidated financial statements.

LENNOX INTERNATIONAL INC. AND SUBSIDIARIES

Consolidated Statements of Comprehensive Income

(Unaudited)

| | | | | | |

Showing the first 8K of 88K characters. Open the full section

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, that are based on information currently available to management as well as management’s assumptions and beliefs as of the date such statements were made. All statements, other than statements of historical fact, included in this Quarterly Report on Form 10-Q constitute forward-looking statements, including but not limited to statements identified by forward-looking terminology, such as the words “may,” “will,” “should,” “plan,” “anticipate,” “believe,” “intend,” “estimate” and “expect” and similar expressions. Such statements reflect our current views with respect to future events, based on what we believe are reasonable assumptions; however, such statements are subject to certain risks and uncertainties.

In addition to the specific uncertainties discussed elsewhere in this Quarterly Report on Form 10-Q, the risk factors set forth in Part I, “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2022, and those set forth in Part II, “Item 1A. Risk Factors” of this report, if any, may affect our performance and results of operations. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may differ materially from those in the forward-looking statements. We disclaim any intention or obligation to update or review any forward-looking statements or information, whether as a result of new information, future events or otherwise, except as required by law.

Business Overview

We operate in two reportable business segments of the heating, ventilation, air conditioning and refrigeration (“HVACR”) industry. Our reportable segments are Residential and Commercial. For additional information regarding our reportable segments, see Note 2 in the Notes to the Consolidated Financial Statements.

Our fiscal quarterly periods are comprised of approximately 13 weeks, but the number of days per quarter may vary year-over-year. Our quarterly reporting periods usually end on the Saturday closest to the last day of March, June and September. Our fourth quarter and fiscal year ends on December 31, regardless of the day of the week on which December 31 falls. For convenience, throughout this Management’s Discussion and Analysis of Financial Condition and Results of Operations, the 13-week periods comprising each fiscal quarter are denoted by the last day of the respective calendar quarter.

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

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

Change in Segment Reporting

Prior to January 1, 2023, we operated in three reportable business segments. In November 2022, we announced the decision to explore strategic alternatives for our European commercial HVAC and refrigeration businesses. We will continue to operate and invest in our Heatcraft Worldwide Refrigeration business which became part of the Commercial segment effective on January 1, 2023, while the European portfolio will be presented with Corporate and Other until disposition. The consolidation of our Heatcraft business within the Commercial segment provides the opportunity to leverage synergies and create long-term growth opportunities by integrating entities with similar products, end consumers and financial performance metrics under the same management. The change in segment reporting better aligns with how the businesses are managed and evaluated given the change in portfolio. All amounts discussed in this Management's Discussion and Analysis of Financial Condition and Results of Operations reflect the revised segment presentation. See "Recast Segment Results" in Note 2 for both the previously presented segment results as well as the recast financial information to reflect the change in segment presentation.

Financial Overview

Results for the first quarter of 2023 were driven by overall year-over-year sales and profit increases. Net sales decreased less than 1% and segment profit increased $3 million for the Residential segment. Net sales increased 10% and segment profit increased $26 million for the Commercial segment. Net sales increased 15% and segment loss increased $3 million for the Corporate & Other segment.

Financial Highlights

• Net sales increased $36 million to $1,049 million in the first quarter of 2023 driven by favorable price and mix partially offset by lower sales volume and unfavorable foreign currency.

• Operating income in the first quarter of 2023 increased $28 million to $139.5 million primarily driven by higher net sales partially offset by rising costs.

• Net income for the first quarter of 2023 was $98 million.

• Diluted earnings per share was $2.75 per share in the first quarter of 2023 compared to $2.29 per share in the first quarter of 2022.

• For the three months ended March 31, 2023, we returned $38 million to shareholders through dividend payments.

Three Months Ended March 31, 2023 Compared to Three Months Ended March 31, 2022 - Consolidated Results

The following table provides a summary of our financial results, including information presented as a percentage of net sales:

Net Sales

Net sales for the first quarter of 2023 compared to the first quarter of 2022 increased as a result of favorable price of 6% and favorable product mix of 5% which was partially offset by lower sales volume of 7% due to general lower residential industry volumes.

Gross Profit

Gross profit margins in the first quarter of 2023 increased 270 basis points ("bps") to 29.2% compared to 26.5% in the first quarter of 2022. Gross margins increased 400 bps from favorable price, 290 bps from favorable product mix and 90 bps from favorable commodity costs. Partially offsetting these increases were 180 bps from lower volume, 120 bps from higher other product costs, 100 bps from higher component costs, 60 bps from factory inefficiencies, 40 bps from higher freight and distribution costs, and 10 bps from miscellaneous other items.

Selling, General and Administrative Expenses

Selling, general and administrative expenses ("SG&A") increased $12 million to $167.5 million in the first quarter of 2023 compared to $155.3 million in the first quarter of 2022 due to higher employee related costs. As a percentage of net sales, SG&A increased 70 bps to 16.0%.

Losses (gains) and Other Expenses, Net

Losses (gains) and other expenses, net for the first quarter of 2023 and 2022 included the following (in millions):

Restructuring Charges

Restructuring charges were immaterial in the first quarter of 2023 and 2022. Restructuring charges related to ongoing cost reduction actions taken in prior periods.

Income from Equity Method Investments

We participate in two joint ventures that are engaged in the manufacture and sale of compressors, unit coolers and condensing units. We exert significant influence over these affiliates based upon our ownership, but do not control them due to venture partner participation. Accordingly, these joint ventures have been accounted for under the equity method and their financial position and results of operations are not consolidated. We recognized income from equity method investments of $1 million in the first quarter of 2023 and a loss of $0.1 million in the first quarter of 2022.

Interest Expense, net

Interest expense, net increased to $14 million in the first quarter of 2023 from $7 million in the first quarter of 2022 due to higher borrowings costs during the period.

Income Taxes

Our effective tax rate was 21.7% for the first quarter of 2023 compared to 19.9% for the first quarter of 2022. The rate increased primarily due to a shift in earnings between jurisdictions.

We expect our annual effective tax rate to be 19-21%, excluding the impacts of excess tax benefits recorded as a reduction of income taxes under ASU No. 2016-09.

First Quarter of 2023 Compared to First Quarter of 2022 - Results by Segment

Residential

The following table presents our Residential segment's net sales and profit for the first quarter of 2023 and 2022 (dollars in millions):

Net sales decreased 0.2% in the first quarter of 2023 compared to 2022, as sales volume declined 8% and foreign currency and other was 1% unfavorable. Offsetting these declines were favorable product mix of 5% and higher price of 4%.

Segment profit in the first quarter of 2023 compared to 2022 increased by $3 million, driven by $25 million from higher price, $9 million from favorable product mix, $6 million from lower commodity costs and $5 million from lower product warranty costs. Partially offsetting these increases were $12 million from lower sales volume, $6 million from higher component costs, $6 million from higher distribution and freight charges, $6 million from higher SG&A costs, $5 million from factory inefficiencies, $4 million from miscellaneous other costs, and $3 million from higher other product costs.

Commercial

The following table presents our Commercial segment's net sales and profit for the first quarter of 2023 and 2022 (dollars in millions):

(1) 2022 amounts have been recast to reflect the changes in segment reporting. Please see Note 2 in the Notes to the Consolidated Financial Statements for further detail.

Net sales increased 10% in the first quarter of 2023 compared to 2022 as price increased 9% and improved product mix was 7% favorable. Partially offsetting these increases was a decline in sales volume of 6%.

Segment profit in the first quarter of 2023 compared to 2022 increased $26 million due to $26 million from favorable price,$16 million from favorable product mix, $4 million from lower commodity prices, $2 million from favorable freight and distribution costs, and $1 million from favorable factory productivity. Partially offsetting these increases was $9 million from higher other product costs, $5 million from lower sales volume, $3 million from higher component costs, $3 million from higher SG&A costs, $2 million from higher product warranty costs, and $1 million from higher miscellaneous other costs.

Corporate and Other

The following table presents our Corporate and Other segment's net sales and profit for the first quarter of 2023 and 2022 (dollars in millions):

(1) 2022 amounts have been recast to reflect the changes in segment reporting. Please see Note 2 in the Notes to the Consolidated Financial Statements for further detail.

Net sales increased $8 million and segment profit decreased $3 million in the first quarter of 2023 compared to 2022. Corporate and Other profit excluding the results of Europe decreased $6 million to $19 million in the first quarter of 2023 compared to 2022, primarily due to increased incentive compensation costs.

Liquidity and Capital Resources

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

Statement of Cash Flows

The following table summarizes our cash flow activity for the three months ended March 31, 2023 and 2022 (in millions):

Net Cash Used In Operating Activities - The change in net cash used in operating activities for the three months ended March 31, 2023 compared to the net cash used in operating activities for the same period in 2022 reflects changes in working capital and an increase in net income.

Net Cash Used In Investing Activities - Capital expenditures were $35 million for the three months ended March 31, 2023 compared to $26 million in the same period of 2022. Capital expenditures in 2023 were related to our Commercial factory in Mexico, the general expansion of manufacturing capacity and equipment, and investments in systems and software to support the overall enterprise.

Net Cash Provided By Financing Activities - Net cash provided by financing activities for the three months ended March 31, 2023 decreased to $101 million compared to $129 million used in the same period of 2022. The change was primarily due to less net borrowings partially offset by less spent on share repurchases. We did not repurchase any shares for the three months ended March 31, 2023 and $200 million in the same period of 2022. We returned $38 million to shareholders through dividend payments for the three months ended March 31, 2023 and $34 million in the same period of 2022. For additional information on share repurchases, refer to Note 5 in the Notes to the Consolidated Financial Statements.

Debt Position

The following table details our lines of credit and financing arrangements as of March 31, 2023 (in millions):

(1) The available future borrowings on our Credit Agreement (as defined below) are $360.0 million, after being reduced by the outstanding borrowings and $2.0 million in outstanding standby letters of credit. Refer to Note 10 in the Notes to the Consolidated Financial Statements for more information.

(2) The maximum securitization amount ranges from $300.0 million to $450.0 million, depending on the period. The maximum capacity of the ASP is the lesser of the maximum securitization amount or 100% of the net pool balance less reserves, as defined under the ASP. Refer to Note 10 in the Notes to the Consolidated Financial Statements for more information.

Both our Asset Securitization Program as well as our $350.0 million 2023 Notes will mature during the year. We are currently evaluating our options related to these obligations including refinancing and other alternatives. We do not believe that our options or alternatives will have any material impact on our results of operations or liquidity.

Credit Agreement

In July 2021, we entered into a new Credit agreement (the “Credit Agreement”) with JPMorgan Chase Bank, N.A., as administrative agent, and the other lenders party thereto, which refinanced and replaced the Seventh Amended and Restated Credit Facility.

The Credit Agreement provides for revolving credit commitments of $750 million with sublimits for swingline loans of up to $65 million, letters of credit up to $100 million and revolving loans in certain non-U.S. currencies up to the U.S. dollar equivalent of $40 million. The Credit Agreement will expire and outstanding loans will be required to be repaid in July 2026, unless maturity is extended by the lenders pursuant to two one-year extension options that we may request under the Credit Agreement. At our request and subject to certain conditions, the revolving credit commitments under the Credit Agreement may be increased by up to a total of $350 million to the extent that existing or new lenders agree to provide additional commitments.

The Credit Agreement is guaranteed by certain of our subsidiaries and contains customary covenants applicable to us and our subsidiaries including limitations on indebtedness, liens, dividends, stock repurchases, mergers and sales of all or substantially all of our assets. In addition, the Credit Agreement contains a financial covenant requiring us to maintain, as of the last day of each fiscal quarter for the four prior fiscal quarters, a Total Net Leverage Ratio of no more than 3.50 to 1.00 (or, at our election, on up to two occasions following a material acquisition, 4.00 to 1.00). The Credit Agreement is subject to customary events of default, including non-payment of principal or other amounts under the Credit Agreement, material inaccuracy of representations and warranties, breach of covenants, cross-default to other indebtedness in excess of $75 million, judgements in excess of $75 million, certain voluntary and involuntary bankruptcy events, and the occurrence of a change of control. As of March 31, 2023, we believe we were in compliance with all covenant requirements.

Financial Leverage

We periodically review our capital structure to ensure the appropriate levels of leverage and liquidity. We may access the capital markets, as necessary, based on business needs and to take advantage of favorable interest rate environments or other market conditions. We also evaluate our debt-to-capital and debt-to-EBITDA ratios to determine, among other considerations,

the appropriate targets for capital expenditures and share repurchases under our share repurchase programs. Our debt-to-total-capital ratio decreased to 108% at March 31, 2023 from 115% at December 31, 2022.

As of March 31, 2023, our senior credit ratings were Baa2 with a stable outlook, and BBB with a stable outlook, by Moody's Investors Service, Inc. ("Moody's") and Standard & Poor's Rating Group ("S&P"), respectively. The security ratings are not a recommendation to buy, sell or hold securities and may be subject to revision or withdrawal at any time by the assigning rating agency. Each rating should be evaluated independently of any other rating. Our goal is to maintain investment grade ratings from Moody's and S&P to help ensure the capital markets remain available to us.

Liquidity

We believe our cash and cash equivalents of $40 million, future cash generated from operations and available borrowing capacity are sufficient to fund operations, planned capital expenditures, future contractual obligations, potential share repurchases and dividends and other needs in the foreseeable future. Included in our cash and cash equivalents of $40 million as of March 31, 2023 was $22 million of cash held in foreign locations. Our cash held in foreign locations is used for investing and operating activities in those locations, and we generally do not have the need or intent to repatriate those funds to the United States. An actual repatriation in the future from our non-U.S. subsidiaries could be subject to foreign withholding taxes and U.S. state taxes.

Guarantees related to our Debt Obligations

Our senior unsecured notes were issued by Lennox International Inc. and are unconditionally guaranteed by certain of our subsidiaries (the "Guarantor Subsidiaries"). The Guarantor Subsidiaries are 100% owned and consolidated, all guarantees are full and unconditional, and all guarantees are joint and several.

Off Balance Sheet Arrangements

An off-balance sheet arrangement is any transaction, agreement or other contractual arrangement involving an unconsolidated entity under which the company has: (1) made guarantees, (2) a retained or a contingent interest in transferred assets, (3) an obligation under derivative instruments classified as equity or (4) any obligation arising out of a material variable interest in an unconsolidated entity that provides financing, liquidity, market risk or credit risk support to us, or that engages in leasing, hedging or research and development arrangements with us. We have no off-balance sheet arrangements that we believe may have a material current or future effect on our financial condition, liquidity or results of operations.

Commitments, Contingencies and Guarantees

For information regarding our commitments, contingencies and guarantees, see Note 4 in the Notes to the Consolidated Financial Statements.

Recent Accounting Pronouncements

There were no recent accounting pronouncements that are expected to have a material impact on our financial statements and disclosures.

For quantitative and qualitative disclosures about market risk affecting LII, see "Quantitative and Qualitative Disclosures About Market Risk" in Item 7A of Part II of our Annual Report on Form 10-K for the fiscal year ended December 31, 2022. Our exposure to market risk has not changed materially since December 31, 2022.

Disclosure Controls and Procedures

As required by Rule 13a-15 under the Exchange Act, we carried out an evaluation, under the supervision and with the participation of our current management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report. There are inherent limitations to the effectiveness of any system of disclosure controls and procedures, including the possibility of human error and circumvention or overriding of the controls and procedures. Accordingly, even effective disclosure controls and procedures can only provide reasonable assurance of achieving their control objectives. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that, as of March 31, 2023, our disclosure controls and procedures were effective to provide reasonable assurance that information required to be disclosed by us in the reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the applicable rules and forms, and that such information is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure.

Changes in Internal Control Over Financial Reporting

There were no changes in our internal control over financial reporting that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Part II - Other Information

Item 1. Legal Proceedings

We are involved in a number of claims and lawsuits incident to the operation of our businesses. Insurance coverages are maintained and estimated costs are recorded for such claims and lawsuits. It is management's opinion that none of these claims or lawsuits will have a material adverse effect, individually or in the aggregate, on our financial position, results of operations or cash flows.

In addition to the other information set forth in this Quarterly Report on Form 10-Q, you should carefully consider the risk factors discussed in Part I, “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2022, which could materially affect our business, financial condition or results of operations. There have been no material changes to our risk factors from those disclosed in our Annual Report on Form 10-K for the year ended December 31, 2022.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

In the first quarter of 2023, we purchased shares of our common stock as follows:

(1) Represents shares of common stock we repurchased in January, February and March of 2023 to satisfy employee tax-withholding obligations in connection with the exercise of long-term incentive awards.

SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

LENNOX INTERNATIONAL INC.

By: /s/ Joseph W. Reitmeier

Joseph W. Reitmeier

Chief Financial Officer

(on behalf of registrant and as principal financial officer)

Date: April 27, 2023