Lennox International 10-Q 2024-06-30

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549

FORM 10-Q

For the quarterly period ended June 30, 2024

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 July 15, 2024, the number of shares outstanding of the registrant’s common stock, par value $0.01 per share, was 35,634,095.

LENNOX INTERNATIONAL INC.

FORM 10-Q

For the three and six months ended June 30, 2024

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)

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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, 2023, 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 HVACR industry, Home Comfort Solutions and Building Climate Solutions. In addition to the two major business segments, Corporate and Other is also reported as a segment. For more detailed 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 stores. The demand for our products and services is seasonal and can be 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 costs of warranty expense, and freight and distribution costs. The principal raw materials used in our manufacturing processes are steel, aluminum and copper. In recent years, pricing volatility for these commodities and related components has impacted us and the HVACR industry in general. We seek to mitigate the impact of certain commodity price volatility through a combination of pricing actions, vendor 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.

Financial Overview

Results for the second quarter of 2024 were driven by overall year-over-year sales and profit increases. Net sales increased 5% and segment profit increased $26 million for our Home Comfort Solutions segment. Net sales increased 15% and segment profit increased $11 million for our Building Climate Solutions segment. Net sales decreased $68 million and segment loss increased $2 million for our Corporate and Other segment. Our European businesses were sold in the fourth quarter of 2023 and generated $68 million in net sales with segment profit of $2 million in the second quarter of 2023.

Financial Highlights

• Net sales of $1,451 million in the second quarter of 2024 reflected a 3% increase as compared to the same period in 2023.

• Operating income in the second quarter of 2024 increased $41 million to $320 million primarily driven by favorable price and higher sales volumes.

• Net income for the second quarter of 2024 was $246 million.

• Diluted earnings per share was $6.87 per share in the second quarter of 2024 as compared to $6.10 per share in the same period in 2023.

• For the six months ended June 30, 2024, we returned $78 million to shareholders through dividend payments.

Three Months Ended June 30, 2024 Compared to Three Months Ended June 30, 2023 - 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 second quarter of 2024 increased 3% as compared to the same period in 2023. This was primarily due to favorable price of 3%, higher sales volumes of 3%, and an increase in sales volumes of 2% from our AES acquisition, which were partially offset by a 5% reduction in sales due to the fourth quarter 2023 sale of our European businesses.

Gross Profit

Gross profit margins in the second quarter of 2024 increased 120 basis points ("bps") to 33.6% as compared to 32.4% in the same period in 2023. Gross margins increased 240 bps from favorable price and 10 bps from miscellaneous other items, which were partially offset by 70 bps from higher freight and distribution costs and 60 bps from higher material and product costs.

Selling, General and Administrative Expenses

Selling, general and administrative expenses ("SG&A") decreased $12 million to $169 million in the second quarter of 2024 as compared to $181 million in the same period in 2023 primarily due to a $16 million reduction in SG&A expenses from our fourth quarter of 2023 divestiture of our European businesses, which was partially offset by higher employee-related costs including increased incentive compensation. As a percentage of net sales, SG&A decreased 120 bps to 11.6%.

Losses (gains) and Other Expenses, Net

Losses (gains) and other expenses, net for the second quarter of 2024 and 2023 included the following (in millions):

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 are 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 $3 million in the second quarter of 2024 and in the second quarter of 2023.

Interest Expense, net

Interest expense, net decreased to $13 million in the second quarter of 2024 from $15 million in the same period in 2023 due to lower borrowings.

Income Taxes

Our effective tax rate was 19.9% for the second quarter of 2024 as compared to 17.6% in the same period in 2023. The increase in rate was primarily due to income allocated to high-tax jurisdictions partially offset by a favorable adjustment for excess tax benefits.

Second Quarter of 2024 Compared to Second Quarter of 2023 - Results by Segment

Home Comfort Solutions

The following table presents our Home Comfort Solutions segment's net sales and profit for the second quarter of 2024 and 2023 (dollars in millions):

Net sales increased 5% in the second quarter of 2024 as compared to the same period in 2023 primarily due to favorable price of 4% and higher sales volumes of 1%.

Segment profit in the second quarter of 2024 increased by $26 million as compared to the same period in 2023, primarily due to $42 million from favorable price and mix and $2 million from higher sales volumes. Partially offsetting these increases were $10 million from higher freight and distribution costs, $3 million from higher SG&A costs, and $5 million from miscellaneous other items.

Building Climate Solutions

The following table presents our Building Climate Solutions segment's net sales and profit for the second quarter of 2024 and 2023 (dollars in millions):

Net sales increased 15% in the second quarter of 2024 as compared to the same period in 2023 primarily due to higher sales volumes of 9%, favorable price of 2%, and a 6% increase in sales volumes from our AES acquisition which were partially offset by unfavorable product mix of 2%.

Segment profit in the second quarter of 2024 increased $11 million as compared to the same period in 2023 primarily due to $12 million from higher sales volumes, $6 million from favorable price, and $5 million from our acquisition of AES. Partially offsetting these increases was $6 million in higher factory inefficiencies, which includes costs related to the ramp up of our new factory in Mexico, $4 million in unfavorable product mix, and $2 million from miscellaneous other items.

Corporate and Other

The following table presents our Corporate and Other segment's net sales and loss for the second quarter of 2024 and 2023 (dollars in millions):

Net sales decreased $68 million and segment loss increased $2 million in the second quarter of 2024 as compared to the same period in 2023. Our European businesses, which were sold in the fourth quarter of 2023, generated $68 million in net sales and $2 million in segment profit in the second quarter of 2023. Excluding our European businesses, Corporate and Other costs decreased $1 million in the second quarter of 2024 as compared to the same period in 2023 primarily due to lower incentive compensation costs which were partially offset by higher legal, professional, and other costs.

Year-to-Date through June 30, 2024 Compared to Year-to-Date through June 30, 2023 - 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 increased 2% for the six months ended June 30, 2024 as compared to the same period in 2023. This was primarily due to favorable price of 3%, higher sales volumes of 2% and an increase in sales volumes of 2% from our AES acquisition which were partially offset by a 5% reduction in sales due to the fourth quarter 2023 sale of our European businesses.

Gross Profit

Gross profit margins for the six months ended June 30, 2024 increased 210 bps to 33.2% as compared to 31.1% in the same period in 2023. Gross margins increased 260 bps from higher price and 40 bps from miscellaneous other items, which were partially offset by 60 bps from higher freight and distribution costs, and 30 bps from higher material and product costs.

Selling, General and Administrative Expenses

SG&A decreased $10 million to $339 million for the six months ended June 30, 2024 as compared to $349 million in the same period in 2023 primarily due to a $32 million reduction in SG&A expenses from our fourth quarter of 2023 divestiture of our European businesses, which was partially offset by higher employee-related costs including increased incentive compensation. As a percentage of net sales, SG&A decreased 60 bps to 13.6% from 14.2%.

Losses (gains) and Other Expenses, Net

Losses (gains) and other expenses, net for the six months ended June 30, 2024 and 2023 included the following (in millions):

Income from Equity Method Investments

Income from equity method investments remained consistent at $4 million for the six months ended June 30, 2024 as compared to $4 million in the same period in 2023.

Interest Expense, net

Interest expense, net decreased $5 million for the six months ended June 30, 2024 to $24 million as compared to $29 million in the same period in 2023 primarily due to lower borrowings.

Income Taxes

Our effective tax rate was 19.7% for the six months ended June 30, 2024 as compared to 19.0% in the same period in 2023. The increase in rate was primarily due to income allocated to high-tax jurisdictions partially offset by a favorable adjustment for excess tax benefits.

Year-to-Date through June 30, 2024 Compared to Year-to-Date through June 30, 2023 - Results by Segment

Home Comfort Solutions

The following table presents our Home Comfort Solutions segment's net sales and profit for the six months ended June 30, 2024 and 2023 (dollars in millions):

Net sales increased 2% for the six months ended June 30, 2024 as compared to the same period in 2023. This was primarily due to favorable price of 4%, which was partially offset by lower sales volumes of 1% and unfavorable mix of 1%.

Segment profit for the first six months of 2024 increased $27 million as compared to the same period in 2023 primarily due to $61 million from favorable price, which was partially offset by $15 million from higher SG&A costs, $15 million from higher freight and distribution costs, and $4 million from miscellaneous other items.

Building Climate Solutions

The following table presents our Building Climate Solutions segment's net sales and profit for the six months ended June 30, 2024 and 2023 (dollars in millions):

Net sales increased 17% for the six months ended June 30, 2024 as compared to the same period in 2023. This was primarily due to higher sales volumes of 8%, favorable price of 3%, and a 6% increase in sales volumes from our AES acquisition.

Segment profit for the first six months of 2024 increased $39 million as compared to the same period in 2023 primarily due to $25 million from higher price, $20 million from higher sales volumes and $10 million from our acquisition of AES, which were partially offset by $8 million from higher factory inefficiencies, which includes costs related to the ramp up of our new facility in Mexico, $4 million from higher SG&A costs, and $4 million from miscellaneous other items.

Corporate and Other

The following table presents our Corporate and Other segment's net sales and loss for the six months ended June 30, 2024 and 2023 (dollars in millions):

Net sales decreased $127 million and segment loss increased $6 million during the six months ended June 30, 2024 as compared to the same period in 2023. Our European businesses, which were sold in the fourth quarter of 2023, generated net sales of $127 million and a profit of $2 million in the six months ended June 30, 2023. Excluding our European businesses,

Corporate and Other costs increased $4 million in the first six months of 2024 as compared to the same period in 2023 primarily due to higher incentive compensation costs and wage inflation.

Liquidity and Capital Resources

Our working capital and capital expenditure requirements are generally met through internally generated funds, bank lines of credit and a commercial paper program (as described below). 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 six months ended June 30, 2024 and 2023 (in millions):

Net Cash Provided By Operating Activities - The change in net cash provided by operating activities for the six months ended June 30, 2024 compared to the net cash provided by operating activities for the same period in 2023 reflects changes in working capital and an increase in net income.

Net Cash Used In Investing Activities - Capital expenditures were $62 million for the six months ended June 30, 2024 compared to $85 million in the same period of 2023. Capital expenditures in 2024 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 Used In Financing Activities - Net cash used in financing activities for the six months ended June 30, 2024 increased to $118 million as compared to $34 million in the same period of 2023. The change was primarily due to changes in net borrowings and repayments of long-term debt. We returned $78 million to shareholders through dividend payments for the six months ended June 30, 2024 and $75 million in the same period of 2023.

Debt Position

The following table details our lines of credit and financing arrangements as of June 30, 2024 (in millions):

Commercial Paper Program

On October 25, 2023, we established a commercial paper program, as a replacement to our Asset Securitization Program which expired in November 2023, pursuant to which we may issue short-term, unsecured commercial paper notes under the exemption from registration contained in Section 4(a)(2) of the Securities Act of 1933, as amended. Amounts available under the Program may be borrowed, repaid, and re-borrowed from time to time, with the aggregate face or principal amount of the CP Notes outstanding under the Program at any time not to exceed $500.0 million. The CP Notes have maturities of up to 397 days from the date of issue and rank pari passu with all of our other unsecured and unsubordinated indebtedness. The net proceeds from issuances of the CP Notes are typically used for general corporate purposes. Our revolving credit facility serves as a liquidity backstop for the repayment of CP Notes outstanding under the Program. CP Notes currently outstanding under the Program totaled $147.0 million as of June 30, 2024.

Credit Agreement

We have an existing $1.1 billion unsecured revolving credit facility dated as of July 14, 2021 (as amended, the "Credit Agreement"), with JPMorgan Chase Bank, N.A., as administrative agent, and the other lenders party thereto. We had 0 outstanding borrowings and $1.7 million committed to standby letters of credit as of June 30, 2024. Subject to covenant limitations, $951.3 million was available for future borrowings after taking into consideration outstanding borrowings under our Program. The Credit Agreement includes a subfacility for swingline loans up to $65.0 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.

Senior Unsecured Notes

In September 2023, we issued $500.0 million of senior unsecured notes, which will mature in September 2028 (the "2028 Notes") with interest being paid semi-annually in March and September at 5.50%. We issued two series of senior unsecured notes on July 30, 2020 for $300.0 million each, which will mature on August 1, 2025 (the "2025 Notes") and August 1, 2027 (the "2027 Notes," and collectively with the 2025 Notes and the 2028 Notes, the "Notes") with interest being paid semi-annually in February and August at 1.35% and 1.70% respectively, per annum.

In the event of a credit rating downgrade below investment grade resulting from a change of control, holders of our senior unsecured notes will have the right to require us to repurchase all or a portion of the senior unsecured notes at a repurchase price equal to 101% of the principal amount of the notes, plus accrued and unpaid interest, if any. All the Notes are guaranteed, on a senior unsecured basis, by the Guarantor Subsidiaries. The indenture governing the Notes contains covenants that, among other things, limit our ability and the ability of the Guarantor Subsidiaries to: create or incur certain liens; enter into certain sale and leaseback transactions; and enter into certain mergers, consolidations and transfers of substantially all of our assets. The indenture also contains a cross default provision which is triggered if we default on other debt of at least $75.0 million in principal which is then accelerated, and such acceleration is not rescinded within 30 days of the notice date. As of June 30, 2024, 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 69% as of June 30, 2024 from 82% as of December 31, 2023.

As of June 30, 2024, 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 $47.6 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 $47.6 million as of June 30, 2024 was $20 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. ("Parent") and are unconditionally guaranteed by the Guarantor Subsidiaries. The Guarantor Subsidiaries are 100% owned and consolidated, all guarantees are full and unconditional, and all guarantees are joint and several.

The following combined Parent and Guarantor Subsidiaries financial information is presented as of June 30, 2024 and December 31, 2023 and for the three and six months ended June 30, 2024 (in millions):

Off Balance Sheet Arrangements

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, 2023. Our exposure to market risk has not changed materially since December 31, 2023.

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 June 30, 2024, 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 incidental to the operation of our businesses. Where appropriate, 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, 2023, 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, 2023.

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

We did not repurchase any shares of our common stock in the second quarter of 2024. For additional information on our share repurchase program, refer to Note 5 in the Notes to the Consolidated Financial Statements.

Rule 10b5-1 Plan Elections

During the quarter ended June 30, 2024, none of our directors or officers adopted, modified, or terminated any Rule 10b5-1 trading arrangement or non-Rule 10b5-1 trading arrangement, as such terms are defined in Item 408(a) of Regulation S-K.

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/ Michael P. Quenzer

Michael P. Quenzer

Chief Financial Officer

(on behalf of registrant and as principal financial officer)

Date: July 24, 2024