Lennox International Inc. (NYSE:LII) Q4 2023 Results Conference Call January 31, 2024 9:30 AM ET Company Participants Chelsey Pulcheon - IR Alok Maskara - CEO Michael Quenzer - CFO Joe Reitmeier - CFO Conference Call Participants Steve Tusa - JP Morgan Damian Karas - UBS Deane Dray - RBC Capital Markets Gautam Khanna - TD Cowen Jeff Hammond - KeyBanc Capital Markets Jeff Sprague - Vertical Research Joe Ritchie - Goldman Sachs Joe O'Dea - Wells Fargo Julian Mitchell - Barclays Nigel Coe - Wolfe Research Noah ...

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 2023 OR ☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _____to ______ UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D. C. 20549 _________________________________________________ FORM 10-Q _________________________________________________ Commission file number 001-15149 ________________ ...

{{{{ The statements in this presentation that are not historical statements, including statements regarding the 2023 full-year outlook and expected consolidated and segment financial results, as well as financial targets for future years, are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are based on information currently available as well as management's assumptions and beliefs today. These statements are subject to n ...

For the quarterly period ended June 30, 2023 OR ☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D. C. 20549 _________________________________________________ FORM 10-Q _________________________________________________ ☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _____to ______ Commission file number 001-15149 _____________________ ...

Lennox International Inc. (NYSE:LII) Q1 2023 Earnings Conference Call April 27, 2023 9:30 AM ET Company Participants Chelsey Pulcheon - Investor Relations Alok Maskara - Chief Executive Officer Joe Reitmeier - Chief Financial Officer Michael Quenzer - Vice President, Finance Conference Call Participants Joe O’Dea - Wells Fargo Nicole DeBlase - Deutsche Bank Tommy Moll - Stephens, Inc Jeff Hammond - KeyBanc Julian Mitchell - Barclays Jeff Sprague - Vertical Research Partners Josh Pokrzywinski - Morgan Stanle ...

FORWARD-LOOKING STATEMENTS Use of Non-GAAP Financial Measures INTEGRITY | RESPECT | EXCELLENCE LII LENNOX // Q1 2023 Earnings // EXECUTIVE SUMMARY Strong Start To 2023 │Maintaining FY Outlook All comparisons are relative to same period of prior year unless otherwise noted 3 Factors Key Indicators • Destocking has begun (AHRI units down) • New construction starts better than expected • Reiterate full year Commercial sales up HSD • Industry lead time remains extended • Component cost stable Inflation Share Ga ...

[Part I - Financial Information](index=3&type=section&id=Part%20I%20Financial%20Information) This section presents the company's unaudited consolidated financial statements, management's discussion, market risk, and controls [Item 1. Financial Statements](index=3&type=section&id=Item%201.%20Financial%20Statements) This section presents the unaudited consolidated financial statements for Lennox International Inc. and its subsidiaries, including balance sheets, statements of operations, comprehensive income, stockholders' deficit, and cash flows, along with detailed notes explaining the accounting policies and specific financial items [Consolidated Balance Sheets](index=3&type=section&id=Consolidated%20Balance%20Sheets) This statement presents the company's financial position, including assets, liabilities, and stockholders' deficit, at specific reporting dates | Metric | As of March 31, 2023 (Millions) | As of December 31, 2022 (Millions) | | :--- | :--- | :--- | | Total Assets | $2,770.4 | $2,567.6 | | Total Liabilities | $2,896.3 | $2,770.7 | | Total Stockholders' Deficit | $(125.9) | $(203.1) | | Current Assets | $1,671.6 | $1,496.5 | | Current Liabilities | $1,526.4 | $1,595.7 | [Consolidated Statements of Operations](index=4&type=section&id=Consolidated%20Statements%20of%20Operations) This statement details the company's revenues, costs, and net income over the reported three-month periods | Metric | For the Three Months Ended March 31, 2023 (Millions) | For the Three Months Ended March 31, 2022 (Millions) | YoY Change (%) | | :--- | :--- | :--- | :--- | | Net sales | $1,049.4 | $1,013.4 | 3.6% | | Gross profit | $306.6 | $268.2 | 14.3% | | Operating income | $139.5 | $111.9 | 24.7% | | Net income | $98.0 | $83.6 | 17.2% | | Earnings per share – Diluted | $2.75 | $2.29 | 20.1% | [Consolidated Statements of Comprehensive Income](index=5&type=section&id=Consolidated%20Statements%20of%20Comprehensive%20Income) This statement presents net income and other comprehensive income components, reflecting changes in equity from non-owner sources | Metric | For the Three Months Ended March 31, 2023 (Millions) | For the Three Months Ended March 31, 2022 (Millions) | | :--- | :--- | :--- | | Net income | $98.0 | $83.6 | | Other comprehensive income, net of tax | $12.0 | $7.6 | | Comprehensive income | $110.0 | $91.2 | - Foreign currency translation adjustments contributed **$6.8 million** to other comprehensive income in Q1 2023, a positive shift from a **$(1.2) million** loss in Q1 2022[14](index=14&type=chunk) [Consolidated Statements of Stockholders' Deficit](index=6&type=section&id=Consolidated%20Statements%20of%20Stockholders'%20Deficit) This statement outlines changes in the company's equity, including net income, dividends, and other equity transactions | Metric | As of March 31, 2023 (Millions) | As of December 31, 2022 (Millions) | | :--- | :--- | :--- | | Total Stockholders' Deficit | $(125.9) | $(203.1) | | Net income | $98.0 | N/A | | Dividends | $(37.7) | N/A | | Treasury stock purchases | $(2.0) | N/A | - The company's total stockholders' deficit improved from **$(203.1) million** at December 31, 2022, to **$(125.9) million** at March 31, 2023, primarily due to net income and positive foreign currency translation adjustments[17](index=17&type=chunk) [Consolidated Statements of Cash Flows](index=7&type=section&id=Consolidated%20Statements%20of%20Cash%20Flows) This statement reports cash inflows and outflows from operating, investing, and financing activities for the reported periods | Cash Flow Activity | For the Three Months Ended March 31, 2023 (Millions) | For the Three Months Ended March 31, 2022 (Millions) | | :--- | :--- | :--- | | Net cash used in operating activities | $(78.8) | $(97.9) | | Net cash used in investing activities | $(33.7) | $(25.7) | | Net cash provided by financing activities | $101.1 | $129.1 | | Cash and cash equivalents, end of period | $40.4 | $34.3 | - Capital expenditures (purchases of property, plant and equipment) increased to **$35.4 million** in Q1 2023 from **$25.8 million** in Q1 2022[20](index=20&type=chunk) - The company did not repurchase common stock in Q1 2023, compared to **$200.0 million** in repurchases in Q1 2022[20](index=20&type=chunk) [Notes to Consolidated Financial Statements](index=8&type=section&id=Notes%20to%20Consolidated%20Financial%20Statements) This section provides detailed explanations and disclosures for accounting policies and specific financial items in the statements [Note 1. General](index=8&type=section&id=Note%201.%20General) This note describes the basis of presentation for the unaudited interim financial statements and management's use of estimates - The unaudited consolidated financial statements are prepared in accordance with GAAP for interim financial information and Form 10-Q instructions[24](index=24&type=chunk) - The preparation of financial statements requires management to make estimates and assumptions about future events, which are evaluated on an ongoing basis[26](index=26&type=chunk)[27](index=27&type=chunk) [Note 2. Reportable Business Segments](index=9&type=section&id=Note%202.%20Reportable%20Business%20Segments) This note details the company's operating segments, their realignment, and segment-specific financial performance - Effective January 1, 2023, the company operates in two reportable segments: Residential and Commercial. The Heatcraft Worldwide Refrigeration business was consolidated into the Commercial segment, and the European portfolio is now presented with Corporate and Other[28](index=28&type=chunk) | Segment | Net Sales (Q1 2023, Millions) | Net Sales (Q1 2022, Millions) | Segment Profit (Q1 2023, Millions) | Segment Profit (Q1 2022, Millions) | | :--- | :--- | :--- | :--- | :--- | | Residential | $681.0 | $682.2 | $111.1 | $107.6 | | Commercial | $308.7 | $279.5 | $50.0 | $23.8 | | Corporate and other | $59.7 | $51.7 | $(19.4) | $(16.8) | | **Total** | **$1,049.4** | **$1,013.4** | **$141.7** | **$114.6** | [Note 3. Earnings Per Share](index=13&type=section&id=Note%203.%20Earnings%20Per%20Share) This note provides the calculation of basic and diluted earnings per share for the reported periods | Metric | For the Three Months Ended March 31, 2023 | For the Three Months Ended March 31, 2022 | | :--- | :--- | :--- | | Net income (Millions) | $98.0 | $83.6 | | Weighted-average shares outstanding – basic (Millions) | 35.5 | 36.3 | | Weighted-average shares outstanding – diluted (Millions) | 35.6 | 36.5 | | Earnings per share – Basic | $2.76 | $2.30 | | Earnings per share – Diluted | $2.75 | $2.29 | [Note 4. Commitments and Contingencies](index=13&type=section&id=Note%204.%20Commitments%20and%20Contingencies) This note outlines the company's operating lease obligations, warranty liabilities, and ongoing legal matters - Operating leases are recognized on the Consolidated Balance Sheets as Right-of-use assets and corresponding lease liabilities[39](index=39&type=chunk) Warranty Liability | Warranty Liability | As of March 31, 2023 (Millions) | As of December 31, 2022 (Millions) | | :--- | :--- | :--- | | Accrued expenses | $42.3 | $41.3 | | Other liabilities | $103.0 | $101.4 | | **Total warranty liability** | **$145.3** | **$142.7** | - Management believes that current claims and lawsuits will not have a material adverse effect on the company's financial condition, results of operations, or cash flows[47](index=47&type=chunk) [Note 5. Stock Repurchases](index=14&type=section&id=Note%205.%20Stock%20Repurchases) This note details the company's share repurchase activities and remaining authorization under its plans - As of March 31, 2023, **$546 million** was available for repurchase under the company's Share Repurchase Plans[48](index=48&type=chunk) - The company repurchased approximately **$2.0 million** of shares during Q1 2023, primarily to satisfy employee tax withholding obligations[49](index=49&type=chunk) [Note 6. Revenue Recognition](index=15&type=section&id=Note%206.%20Revenue%20Recognition) This note provides a breakdown of net sales by geographic market and segment, along with contract liabilities Primary Geographic Markets | Primary Geographic Markets | Residential (Millions) | Commercial (Millions) | Corporate and Other (Millions) | Consolidated (Millions) | | :--- | :--- | :--- | :--- | :--- | | **For the Three Months Ended March 31, 2023** | | | | | | United States | $639.3 | $294.6 | $— | $933.9 | | Canada | $41.7 | $14.1 | $— | $55.8 | | Other international | $— | $— | $59.7 | $59.7 | | **Total** | **$681.0** | **$308.7** | **$59.7** | **$1,049.4** | | **For the Three Months Ended March 31, 2022** | | | | | | United States | $629.7 | $268.6 | $— | $898.3 | | Canada | $52.5 | $10.4 | $— | $62.9 | | Other international | $— | $0.5 | $51.7 | $52.2 | | **Total** | **$682.2** | **$279.5** | **$51.7** | **$1,013.4** | - In Q1 2023, direct sales represented **70%** of Residential segment revenues, while equipment sales accounted for **85%** of Commercial segment revenues[52](index=52&type=chunk)[53](index=53&type=chunk) Contract Liabilities | Contract Liabilities | March 31, 2023 (Millions) | December 31, 2022 (Millions) | | :--- | :--- | :--- | | Current | $(12.5) | $(9.6) | | Noncurrent | $(6.7) | $(6.4) | | **Total** | **$(19.2)** | **$(16.0)** | [Note 7. Other Financial Statement Details](index=16&type=section&id=Note%207.%20Other%20Financial%20Statement%20Details) This note provides additional details on inventories, goodwill, derivative instruments, and stock-based compensation Inventories | Inventories (Millions) | As of March 31, 2023 | As of December 31, 2022 | | :--- | :--- | :--- | | Finished goods | $632.3 | $534.6 | | Work in process | $9.0 | $8.9 | | Raw materials and parts | $382.1 | $328.7 | | **Total inventories, net** | **$904.1** | **$753.0** | - Goodwill remained at **$186.3 million** as of March 31, 2023, with reallocations between segments due to the change in reporting structure[57](index=57&type=chunk)[58](index=58&type=chunk) - The company uses cash flow hedging programs for commodity price risk (metal futures contracts) and foreign currency risk (forward contracts)[59](index=59&type=chunk)[62](index=62&type=chunk) Stock-Based Compensation Expense | Stock-Based Compensation Expense (Millions) | For the Three Months Ended March 31, 2023 | For the Three Months Ended March 31, 2022 | | :--- | :--- | :--- | | Stock-based compensation expense | $6.1 | $4.7 | [Note 8. Pension Benefit Plans](index=18&type=section&id=Note%208.%20Pension%20Benefit%20Plans) This note details the net periodic benefit cost associated with the company's pension plans Net Periodic Benefit Cost | Net Periodic Benefit Cost (Millions) | For the Three Months Ended March 31, 2023 | For the Three Months Ended March 31, 2022 | | :--- | :--- | :--- | | Service cost | $0.6 | $1.1 | | Interest cost | $2.2 | $1.5 | | Expected return on plan assets | $(2.4) | $(2.3) | | Recognized actuarial loss | $0.2 | $1.5 | | Other | $(0.1) | $(0.1) | | Settlements and curtailments | $0.2 | $0.1 | | **Net periodic benefit cost** | **$0.7** | **$1.8** | [Note 9. Income Taxes](index=18&type=section&id=Note%209.%20Income%20Taxes) This note provides information on unrecognized tax benefits and the company's tax examination status - As of March 31, 2023, the company had approximately **$3.8 million** in total gross unrecognized tax benefits[67](index=67&type=chunk) - The company is subject to U.S. federal income tax examinations for 2021 and 2022, and other jurisdictions for years prior to 2016[68](index=68&type=chunk) [Note 10. Lines of Credit and Financing Arrangements](index=18&type=section&id=Note%2010.%20Lines%20of%20Credit%20and%20Financing%20Arrangements) This note details the company's debt obligations, credit facilities, and asset securitization program Debt Obligations | Debt Obligations (Millions) | As of March 31, 2023 | As of December 31, 2022 | | :--- | :--- | :--- | | Current maturities of long-term debt | $657.5 | $710.6 | | Long-term debt | $1,010.1 | $814.2 | | **Total debt** | **$1,667.6** | **$1,524.8** | - The Asset Securitization Program (ASP) was renewed in November 2021, extending its term to November 2023, with a maximum securitization amount ranging from **$300.0 million** to **$450.0 million**[72](index=72&type=chunk) - The Credit Agreement is a **$750.0 million** unsecured revolving credit facility, with **$388.0 million** outstanding borrowings and **$360.0 million** available for future borrowings as of March 31, 2023[75](index=75&type=chunk) - The weighted average borrowing rate on the credit facility increased to **6.06%** as of March 31, 2023, from **5.57%** as of December 31, 2022[76](index=76&type=chunk) [Note 11. Comprehensive Income (Loss)](index=21&type=section&id=Note%2011.%20Comprehensive%20Income%20(Loss)) This note provides details on reclassifications from accumulated other comprehensive loss to net income Reclassifications from AOCL to Net Income | Reclassifications from AOCL to Net Income (Millions) | For the Three Months Ended March 31, 2023 | For the Three Months Ended March 31, 2022 | | :--- | :--- | :--- | | (Losses) Gains on Cash Flow Hedges, net of tax | $(0.3) | $5.8 | | Defined Benefit Plan items, net of tax | $(0.3) | $(1.2) | | **Total reclassifications from AOCL** | **$(0.6)** | **$4.6** | - The balance of Accumulated Other Comprehensive Loss (AOCL) improved to **$(78.6) million** as of March 31, 2023, from **$(90.6) million** as of December 31, 2022[84](index=84&type=chunk) [Note 12. Fair Value Measurements](index=21&type=section&id=Note%2012.%20Fair%20Value%20Measurements) This note describes the fair value hierarchy and measurement techniques for the company's financial instruments - Derivatives are classified as **Level 2** in the fair value hierarchy and are primarily valued using estimated future cash flows based on observed prices from exchange-traded derivatives[86](index=86&type=chunk) - The carrying amounts of cash, short-term investments, accounts and notes receivable, accounts payable, and the Credit Agreement approximate fair value due to their short maturities or variable-rate characteristics[87](index=87&type=chunk) Senior Unsecured Notes Fair Value | Senior Unsecured Notes Fair Value (Millions) | As of March 31, 2023 | As of December 31, 2022 | | :--- | :--- | :--- | | Senior unsecured notes | $890.5 | $878.0 | [Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations](index=23&type=section&id=Item%202.%20Management's%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) This section provides management's perspective on the company's financial condition and results of operations for the three months ended March 31, 2023, compared to the same period in 2022. It covers business overview, consolidated financial highlights, segment-specific performance, and liquidity and capital resources [Business Overview](index=23&type=section&id=Business%20Overview) This section describes the company's industry, operations, segment realignment, demand drivers, and raw materials - The company operates in the Residential and Commercial segments of the HVACR industry, with demand influenced by weather, economic factors, and new construction[92](index=92&type=chunk)[94](index=94&type=chunk) - Effective January 1, 2023, the company realigned its segment reporting, consolidating Heatcraft Worldwide Refrigeration into the Commercial segment and presenting the European portfolio with Corporate and Other[96](index=96&type=chunk) - The principal raw materials are steel, copper, and aluminum, with price volatility mitigated through price increases, commodity contracts, and efficiency improvements[95](index=95&type=chunk) [Financial Overview](index=24&type=section&id=Financial%20Overview) This section highlights key consolidated financial performance metrics and their drivers for the reported periods | Metric | Q1 2023 (Millions) | Q1 2022 (Millions) | YoY Change (%) | | :--- | :--- | :--- | :--- | | Net sales | $1,049.4 | $1,013.4 | 3.6% | | Operating income | $139.5 | $111.9 | 24.7% | | Net income | $98.0 | $83.6 | 17.2% | | Diluted earnings per share | $2.75 | $2.29 | 20.1% | - Net sales increased by **$36 million**, driven by a **6%** favorable price and **5%** favorable product mix, partially offset by a **7%** lower sales volume[100](index=100&type=chunk) - Gross profit margins increased by **270 basis points** to **29.2%** in Q1 2023, primarily due to favorable price (**400 bps**), product mix (**290 bps**), and lower commodity costs (**90 bps**)[101](index=101&type=chunk) - Selling, general and administrative expenses increased by **$12 million** to **$167.5 million**, representing **16.0%** of net sales (up **70 bps**), mainly due to higher employee-related costs[102](index=102&type=chunk) - Interest expense, net, increased to **$14 million** in Q1 2023 from **$7 million** in Q1 2022 due to higher borrowing costs[106](index=106&type=chunk) [Results by Segment](index=26&type=section&id=Results%20by%20Segment) This section analyzes the financial performance of the Residential, Commercial, and Corporate and Other segments [Residential Segment](index=26&type=section&id=Residential) This section details the sales and profit performance of the Residential segment, including volume, price, and mix impacts | Metric | Q1 2023 (Millions) | Q1 2022 (Millions) | % Change | | :--- | :--- | :--- | :--- | | Net sales | $681.0 | $682.2 | (0.2)% | | Profit | $111.1 | $107.6 | 3.3% | - Residential net sales decreased slightly due to an **8%** decline in sales volume and **1%** unfavorable foreign currency, largely offset by **5%** favorable product mix and **4%** higher price[108](index=108&type=chunk) - Segment profit increased by **$3 million**, driven by higher price (**$25M**), favorable product mix (**$9M**), and lower commodity costs (**$6M**), partially offset by lower sales volume (**$12M**) and increased operating costs[109](index=109&type=chunk) [Commercial Segment](index=26&type=section&id=Commercial) This section details the sales and profit performance of the Commercial segment, including price, mix, and volume effects | Metric | Q1 2023 (Millions) | Q1 2022 (Millions) | % Change | | :--- | :--- | :--- | :--- | | Net sales | $308.7 | $279.5 | 10.4% | | Profit | $50.0 | $23.8 | 110.1% | - Commercial net sales increased by **10%** due to a **9%** price increase and **7%** improved product mix, partially offset by a **6%** decline in sales volume[111](index=111&type=chunk) - Segment profit increased by **$26 million**, primarily from favorable price (**$26M**), favorable product mix (**$16M**), and lower commodity prices (**$4M**)[112](index=112&type=chunk) [Corporate and Other Segment](index=27&type=section&id=Corporate%20and%20Other) This section details the sales and profit performance of the Corporate and Other segment, highlighting changes in profit | Metric | Q1 2023 (Millions) | Q1 2022 (Millions) | % Change | | :--- | :--- | :--- | :--- | | Net sales | $59.7 | $51.7 | 15.5% | | Profit | $(19.4) | $(16.8) | 15.5% | - Corporate and Other segment profit decreased by **$3 million**, primarily due to increased incentive compensation costs[115](index=115&type=chunk) [Liquidity and Capital Resources](index=27&type=section&id=Liquidity%20and%20Capital%20Resources) This section discusses the company's cash flow, debt, and ability to meet financial obligations and fund capital expenditures - Working capital and capital expenditure requirements are generally met through internally generated funds, bank lines of credit, and an asset securitization arrangement[116](index=116&type=chunk) Cash Flow Activity | Cash Flow Activity (Millions) | For the Three Months Ended March 31, 2023 | For the Three Months Ended March 31, 2022 | | :--- | :--- | :--- | | Net cash used in operating activities | $(78.8) | $(97.9) | | Net cash used in investing activities | $(33.7) | $(25.7) | | Net cash provided by financing activities | $101.1 | $129.1 | - Capital expenditures increased to **$35 million** in Q1 2023 (from **$26 million** in Q1 2022), primarily for the Commercial factory in Mexico, manufacturing capacity expansion, and system investments[118](index=118&type=chunk) - Net cash provided by financing activities decreased due to less net borrowings and no common stock repurchases in Q1 2023 (compared to **$200 million** in Q1 2022)[119](index=119&type=chunk) - The debt-to-total-capital ratio decreased to **108%** at March 31, 2023, from **115%** at December 31, 2022[126](index=126&type=chunk) - The company maintains investment-grade credit ratings (**Baa2 stable** by Moody's, **BBB stable** by S&P) and believes its liquidity sources are sufficient for foreseeable needs[127](index=127&type=chunk)[128](index=128&type=chunk) [Item 3. Quantitative and Qualitative Disclosures About Market Risk](index=29&type=section&id=Item%203.%20Quantitative%20and%20Qualitative%20Disclosures%20About%20Market%20Risk) This section refers to the company's Annual Report on Form 10-K for detailed disclosures on market risk, stating that there have been no material changes to its market risk exposure since December 31, 2022 - The company's exposure to market risk has not materially changed since December 31, 2022[132](index=132&type=chunk) [Item 4. Controls and Procedures](index=30&type=section&id=Item%204.%20Controls%20and%20Procedures) This section details the evaluation of the company's disclosure controls and procedures and reports on any changes in internal control over financial reporting [Disclosure Controls and Procedures](index=30&type=section&id=Disclosure%20Controls%20and%20Procedures) This section confirms the effectiveness of the company's disclosure controls and procedures as of March 31, 2023 - Management, including the CEO and CFO, concluded that the company's disclosure controls and procedures were effective as of March 31, 2023, providing reasonable assurance of timely and accurate information reporting[134](index=134&type=chunk) [Changes in Internal Control Over Financial Reporting](index=30&type=section&id=Changes%20in%20Internal%20Control%20Over%20Financial%20Reporting) This section reports no material changes to internal control over financial reporting during the first quarter of 2023 - There were no changes in internal control over financial reporting that materially affected, or are reasonably likely to materially affect, the company's internal control over financial reporting during the period[135](index=135&type=chunk) [Part II - Other Information](index=30&type=section&id=Part%20II%20Other%20Information) This section covers legal proceedings, risk factors, unregistered sales of equity securities, and a list of exhibits [Item 1. Legal Proceedings](index=30&type=section&id=Item%201.%20Legal%20Proceedings) This section states that the company is involved in various claims and lawsuits but management believes these will not have a material adverse effect on its financial position, results of operations, or cash flows - Management's opinion is that none of the current claims or lawsuits will have a material adverse effect, individually or in the aggregate, on the company's financial condition, results of operations, or cash flows[136](index=136&type=chunk) [Item 1A. Risk Factors](index=30&type=section&id=Item%201A.%20Risk%20Factors) This section refers to the risk factors discussed in the company's Annual Report on Form 10-K for the year ended December 31, 2022, and states that there have been no material changes to these risk factors - There have been no material changes to the risk factors disclosed in the Annual Report on Form 10-K for the year ended December 31, 2022[137](index=137&type=chunk) [Item 2. Unregistered Sales of Equity Securities and Use of Proceeds](index=30&type=section&id=Item%202.%20Unregistered%20Sales%20of%20Equity%20Securities%20and%20Use%20of%20Proceeds) This section details the common stock repurchases made during the first quarter of 2023, primarily to satisfy employee tax-withholding obligations Common Stock Repurchases | Period | Total Number of Shares Purchased | Average Price Paid per Share | | :--- | :--- | :--- | | January 1 through January 31 | 262 | $269.65 | | February 1 through February 28 | — | $— | | March 1 through March 31 | 8,010 | $240.94 | | **Total Q1 2023** | **8,272** | N/A | - The repurchases were made to satisfy employee tax-withholding obligations upon the vesting and exercise of stock-based compensation awards[138](index=138&type=chunk) - As of March 31, 2023, **$546.0 million** remained available for repurchase under the Share Repurchase Plans[138](index=138&type=chunk) [Item 6. Exhibits](index=31&type=section&id=Item%206.%20Exhibits) This section lists all exhibits filed as part of the Form 10-Q, including corporate governance documents, debt indentures, and certifications - Exhibits include the Restated Certificate of Incorporation, Amended and Restated Bylaws, various Supplemental Indentures for senior unsecured notes, a List of Guarantor Subsidiaries, and certifications from the principal executive and financial officers[139](index=139&type=chunk)

UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Form 10-K ☒ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2022 OR ☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _____to ______ Commission File Number 001-15149 Delaware 42-0991521 (State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification Number) 214 ...

Financial Performance and Key Metrics - Revenue for the quarter reached a record $1.1 billion, up 13% as reported and 14% at constant currency, driven by volume and price growth [2] - Total segment profit increased by $30 million or 30% YoY, with all three segments contributing to profit growth [2] - GAAP EPS of $2.65 was up 17%, while adjusted EPS rose 12% to $2.63 [2] - SG&A expenses were $155 million in Q4, or 14.2% of revenue, down from 15.7% in the prior year [2] - Full-year cash from operations was $302 million, down from $516 million in the prior year, primarily due to inventory cost inflation and supply chain investments [3] - Free cash flow for the year was $203 million, compared to $410 million in the prior year [3] Business Segment Performance Residential Segment - Residential revenue grew 13% to $703 million in Q4, with volume up 5% and price/mix up 9% [4] - Residential segment profit rose 8% to $119 million, but segment margin contracted 90 basis points to 16.9% due to supply chain disruptions and factory changeover costs [4] - Full-year Residential revenue was a record $3.2 billion, up 15%, with profit up 10% to $597 million [4] Commercial Segment - Commercial revenue was $241 million in Q4, up 19%, with price/mix up 17% and volume up 3% [5] - Commercial segment profit rose 79%, and segment margin expanded 390 basis points to 11.6% [5] - Full-year Commercial revenue was $901 million, up 4%, but segment profit declined 27% to $81 million [5] Refrigeration Segment - Refrigeration revenue was $150 million in Q4, up 5% as reported and 10% at constant currency [6] - Segment profit rose 42% to $19 million, with segment margin expanding 330 basis points to 12.5% [6] - Full-year Refrigeration revenue was $619 million, up 12%, with segment profit up 60% to $79 million [6] Market and Strategic Outlook - The company expects 2023 revenue growth of 0% to 4%, with EPS guidance of $14.25 to $15.25 [8] - Free cash flow for 2023 is targeted at $250 million to $350 million, with capital expenditures of $250 million, including investments for a second commercial factory and preparations for the 2025 refrigerant change [7][8] - The company is focused on gaining market share, particularly in the high-end Residential segment, with new products like the Dave Lennox Signature series heat pumps [11][51] - The Commercial segment is recovering, with staffing levels stable and factory output improving, though still 20% below normal levels [55] Management Commentary on Operating Environment and Future Prospects - The company successfully transitioned its product portfolio to meet the new minimum efficiency regulations effective January 1, 2023, positioning it well for market share gains [18] - Management expects a gradual slowdown in the market but remains confident in its dealer network's ability to drive replacement and new construction sales [19] - The company is managing SG&A tightly while investing in growth initiatives and productivity improvements [8] Other Important Information - The company paid $142 million in dividends and repurchased $300 million of its stock in 2022 [3] - Total debt at the end of Q4 was $1.5 billion, with a debt-to-EBITDA ratio of 2.1 [3] - The company has started the process of divesting its European assets, with the divestiture expected to close in 2023 [20] Q&A Session Summary Question: Recovery in High-End Residential Products - The company has replenished inventory levels and is well-positioned to capture market share in high-end products, particularly with new offerings like the Dave Lennox Signature series heat pumps [11] Question: Channel Destocking and Order Rates - The company expects some destocking in its two-step distribution businesses (Allied, ADP, Heatcraft) but believes its Lennox brand is in a strong position [14] - Q1 order rates are consistent with expectations, with no significant slowdown observed [14] Question: Commercial Business Recovery and Share Gains - The Commercial segment is recovering, with staffing levels stable and factory output improving, though still 20% below normal levels [55] - The company lost share earlier in the year but started recovering towards the end of 2022, with expectations for continued improvement in 2023 [55] Question: Inventory Build in Q4 - The inventory build in Q4 was planned to ensure sufficient stock of high-end products and new SEER-compliant products [35] Question: Market Dynamics and Lead Times in Commercial - The company has not observed any significant changes in replacement plans or capital spending among its larger customers, with lead times remaining extended [46] Question: Share Gain Momentum in Residential and Commercial - The company is positioned for share gains in Residential due to fully stocked warehouses and new product offerings [51] - In Commercial, the company is regaining share in the emergency replacement market as product availability improves [50] Question: Noncore Divestiture Update - The company has started the process of divesting its European assets, with teasers sent out to potential suitors and more updates expected in the Q1 call [67]

Financial Data and Key Metrics Changes - Company revenues increased by 17% year-over-year to a record $1.24 billion, with adjusted earnings growing by 21% to a record $4.10 per share [10][24]. - GAAP operating income reached a record $186 million, up 14%, while total segment profit rose 15% to a record $189 million [24]. - GAAP EPS increased by 17% to $3.99, and adjusted EPS rose by 21% to $4.10 [25]. Business Segment Data and Key Metrics Changes - Residential segment revenue grew 17% to $835 million, with volume up 7% and price up 10%. Segment profit rose 7% to $154 million, but segment margin contracted by 190 basis points to 18.4% due to component shortages [26]. - Commercial segment revenue was $253 million, up 20%, with segment profit increasing by 31% and segment margin expanding by 100 basis points to 11.7% [28]. - Refrigeration segment revenue was $157 million, up 14%, with profit rising 54% to $22 million and segment margin expanding by 370 basis points to 14.3% [29]. Market Data and Key Metrics Changes - North America saw over 20% revenue growth in refrigeration, while Europe experienced a 2% increase as reported and a 20% increase at constant currency [29]. - The company anticipates low single-digit shipment growth in North American residential markets and mid-single-digit growth in commercial unitary and refrigeration markets for the industry [30]. Company Strategy and Development Direction - The company is investing in a second commercial factory in Mexico, with expected capital requirements of $125 million to $150 million over the next two years to increase manufacturing capacity and enable margin expansion [13][21]. - The company is preparing for new minimum efficiency regulations effective January 1, 2023, expecting double-digit benefits from price and mix to offset higher costs [15][36]. Management's Comments on Operating Environment and Future Outlook - Management noted ongoing supply chain disruptions but indicated improvements are being made, with expectations that most inefficiencies will be resolved by mid-2023 [42][48]. - The company expects revenue, margin, and EPS growth in 2023 despite potential declines in residential unit shipments due to economic factors [38]. Other Important Information - The company revised its full-year EPS guidance to a range of $13.80 to $14.20, down from the previous range of $13.80 to $14.50 [30]. - Free cash flow is now expected to be approximately $300 million for the year, down from prior guidance of $400 million [33]. Q&A Session Summary Question: Supply chain improvements and allocation issues - Management confirmed that supply chain conditions are improving but acknowledged challenges remain, particularly with high-end residential products [42]. Question: Residential supply chain concerns - Management clarified that Q3 margins were impacted by decisions to expedite materials and that overall supply chains are improving [46][48]. Question: Pricing changes due to regulatory changes - Management expects a double-digit pricing benefit from new minimum efficiency products, confident that it will offset additional costs [50]. Question: Inventory dynamics - Management indicated that inventory levels are improving but remain short on higher-end products, with potential air pockets expected early next year [60][61]. Question: Fourth quarter expectations - Management anticipates flattish to slightly improved margins in Q4, with commercial business facing the most significant challenges [67]. Question: Free cash flow conversion outlook - Management expects free cash flow conversion to approximate net income, with adjustments for new manufacturing facility spending [71]. Question: New commercial plant capacity - Management stated that the new plant will be designed to meet customer demand over the next five to ten years, with production ramping up by the end of 2024 [75]. Question: Heat pump market opportunities - Management sees significant opportunities for increasing heat pump penetration, particularly with the support of the Inflation Reduction Act [106].