Lennox International(LII) - 2020 Q1 - Quarterly Report

Part I - Financial Information This part presents the company's unaudited interim financial statements and management's analysis of performance Item 1. Financial Statements This section contains the unaudited consolidated financial statements and accompanying notes for the period Consolidated Balance Sheets Details the company's assets, liabilities, and stockholders' deficit at the end of the reporting period Balance Sheet Summary | Metric | March 31, 2020 (Millions) | December 31, 2019 (Millions) | Change (Millions) | | :-------------------------------- | :-------------------------- | :--------------------------- | :---------------- | | Total Assets | $2,128.4 | $2,034.9 | $93.5 | | Total Liabilities | $2,446.7 | $2,205.1 | $241.6 | | Total Stockholders' Deficit | $(318.3) | $(170.2) | $(148.1) | | Cash and cash equivalents | $39.1 | $37.3 | $1.8 | | Total current assets | $1,225.1 | $1,120.9 | $104.2 | | Total current liabilities | $894.6 | $1,002.7 | $(108.1) | | Long-term debt | $1,189.9 | $849.3 | $340.6 | Consolidated Statements of Operations Summarizes revenues, costs, and expenses to present the company's net income and earnings per share Quarterly Performance | Metric | 3 Months Ended March 31, 2020 (Millions) | 3 Months Ended March 31, 2019 (Millions) | Change (Millions) | % Change | | :----------------------------------- | :--------------------------------------- | :--------------------------------------- | :---------------- | :------- | | Net sales | $723.8 | $790.3 | $(66.5) | (8.4)% | | Cost of goods sold | $558.1 | $588.7 | $(30.6) | (5.2)% | | Gross profit | $165.7 | $201.6 | $(35.9) | (17.8)% | | Operating income | $36.4 | $94.7 | $(58.3) | (61.6)% | | Net income | $12.9 | $69.3 | $(56.4) | (81.4)% | | Diluted EPS | $0.33 | $1.73 | $(1.40) | (80.9)% | Consolidated Statements of Comprehensive Income Reports changes in equity from non-owner sources, including net income and other comprehensive income items Comprehensive Income Summary | Metric | 3 Months Ended March 31, 2020 (Millions) | 3 Months Ended March 31, 2019 (Millions) | Change (Millions) | | :------------------------------------ | :--------------------------------------- | :--------------------------------------- | :---------------- | | Net income | $12.9 | $69.3 | $(56.4) | | Foreign currency translation adjustments | $(20.3) | $0.5 | $(20.8) | | Net change in fair value of cash flow hedges | $(14.6) | $6.2 | $(20.8) | | Other comprehensive (loss) income, net of tax | $(29.3) | $8.6 | $(37.9) | | Comprehensive (loss) income | $(16.4) | $77.9 | $(94.3) | Consolidated Statements of Stockholders' Deficit Reconciles the beginning and ending balances of the stockholders' deficit accounts for the period Stockholders' Deficit Reconciliation | Metric | As of March 31, 2020 (Millions) | As of December 31, 2019 (Millions) | Change (Millions) | | :-------------------------------- | :------------------------------ | :------------------------------- | :---------------- | | Total Stockholders' Deficit | $(318.3) | $(170.2) | $(148.1) | | Net income (3 months) | $12.9 | N/A | N/A | | Dividends (3 months) | $(29.4) | N/A | N/A | | Foreign currency translation adjustments (3 months) | $(20.3) | N/A | N/A | | Treasury stock purchases (3 months) | $(105.5) | N/A | N/A | Consolidated Statements of Cash Flows Details the cash inflows and outflows from operating, investing, and financing activities during the period Cash Flow Summary | Metric | 3 Months Ended March 31, 2020 (Millions) | 3 Months Ended March 31, 2019 (Millions) | Change (Millions) | | :------------------------------------ | :--------------------------------------- | :--------------------------------------- | :---------------- | | Net cash used in operating activities | $(98.8) | $(141.0) | $42.2 | | Net cash (used in) provided by investing activities | $(25.7) | $13.6 | $(39.3) | | Net cash provided by financing activities | $133.0 | $108.9 | $24.1 | | Increase (decrease) in cash and cash equivalents | $8.5 | $(18.5) | $27.0 | | Cash and cash equivalents, end of period | $39.1 | $31.7 | $7.4 | Note 1. General Outlines the basis of preparation for the financial statements and discusses the impact of COVID-19 - The unaudited interim financial statements are prepared in accordance with GAAP for interim financial information and Form 10-Q instructions[21] - The COVID-19 pandemic has disrupted business operations, caused a significant unfavorable impact, and may lead to supply chain disruptions, higher employee absenteeism, and short-term manufacturing suspensions, potentially having a material adverse effect on 2020 results[25][26][27] - Adopted ASU 2016-13 (Credit Losses) on January 1, 2020, resulting in a $1.3 million net decrease to retained earnings[28] - Adoption of ASU 2017-04 (Goodwill Impairment) and ASU 2018-15 (Cloud Computing Arrangements) did not have a material impact[29][30] Note 2. Reportable Business Segments Provides a breakdown of financial performance across the company's three primary business segments - The company operates in three reportable business segments: Residential Heating & Cooling, Commercial Heating & Cooling, and Refrigeration[31] - Segment profit is defined as income or loss from continuing operations before income taxes, excluding certain items like loss on sale of business, natural disaster gains/losses, and restructuring charges[31][35] Segment Performance | Segment | Net Sales 2020 (Millions) | Net Sales 2019 (Millions) | % Change Net Sales | Segment Profit 2020 (Millions) | Segment Profit 2019 (Millions) | % Change Segment Profit | | :-------------------------- | :------------------------ | :------------------------ | :----------------- | :----------------------------- | :----------------------------- | :------------------------ | | Residential Heating & Cooling | $442.1 | $465.6 | (5.0)% | $32.5 | $86.7 | (62.5)% | | Commercial Heating & Cooling | $178.4 | $173.3 | 2.9% | $18.7 | $15.1 | 23.8% | | Refrigeration | $103.3 | $151.4 | (31.8)% | $0.7 | $8.4 | (91.7)% | | Total Consolidated Net Sales | $723.8 | $790.3 | (8.4)% | N/A | N/A | N/A | Note 3. Earnings Per Share Presents the calculation of basic and diluted earnings per share from continuing operations and net income Earnings Per Share Calculation | Metric | 3 Months Ended March 31, 2020 | 3 Months Ended March 31, 2019 | Change | | :-------------------------------- | :---------------------------- | :---------------------------- | :----- | | Diluted EPS from continuing operations | $0.32 | $1.73 | $(1.41) | | Net income per diluted share | $0.33 | $1.73 | $(1.40) | | Weighted Average Shares Outstanding - Diluted | 38.7 million | 40.1 million | (1.4) million | Note 4. Commitments and Contingencies Discloses information on warranty liabilities, litigation, and other potential financial obligations - A final settlement of $367.5 million with insurance carriers for the Marshalltown tornado losses was reached in December 2019, with all recoveries received in 2018 and 2019[49][50] Warranty Liability | Metric | As of March 31, 2020 (Millions) | As of December 31, 2019 (Millions) | | :------------------------ | :------------------------------ | :------------------------------- | | Total warranty liability | $114.1 | $112.8 | Asbestos-Related Litigation | Metric | 3 Months Ended March 31, 2020 (Millions) | 3 Months Ended March 31, 2019 (Millions) | | :------------------------------------ | :--------------------------------------- | :--------------------------------------- | | (Gain) expense for asbestos-related litigation, net | $(1.7) | $1.4 | Note 5. Stock Repurchases Details the company's share repurchase activities, including authorizations and transactions during the period - The Board of Directors authorized $3 billion for share repurchases, with $446 million remaining as of March 31, 2020[51] - The company entered into a Fixed Dollar Accelerated Share Repurchase Transaction (ASR Agreement) in February 2020, paying $100.0 million and repurchasing 0.4 million shares[53] - An additional $5.5 million in shares were repurchased in Q1 2020 to satisfy employee tax withholding obligations[54] Note 6. Divestitures Provides information on the sale of business units and their financial impact on the company - The sale of the Kysor Warren business was completed on March 29, 2019, resulting in a net loss of $10.6 million in 2019[55][56] Note 7. Restructuring Charges Outlines the costs incurred from restructuring activities aimed at improving operational efficiency - Restructuring charges for Q1 2020 were primarily related to activities initiated in 2019 in the Commercial Heating & Cooling ($0.3 million) and Residential Heating & Cooling ($0.2 million) segments[58] Restructuring Charges by Category | Category | Incurred in 2020 (Millions) | | :-------------------------------- | :-------------------------- | | Severance and related expense | $0.1 | | Asset write-offs and accelerated depreciation | $0.1 | | Other | $0.3 | | Total restructuring charges | $0.5 | Note 8. Revenue Recognition Explains the company's policies for recognizing revenue and provides a breakdown by geography and segment - Revenue for equipment sales is recognized at a point in time when control transfers to the customer, generally at shipment[62][63][64] Net Sales by Geographic Area (Q1 2020) | Segment | United States (Millions) | Canada (Millions) | Other International (Millions) | Total (Millions) | | :-------------------------- | :----------------------- | :-------------------- | :----------------------------- | :--------------- | | Residential Heating & Cooling | $412.4 | $29.7 | — | $442.1 | | Commercial Heating & Cooling | $161.1 | $17.1 | $0.2 | $178.4 | | Refrigeration | $59.5 | — | $43.8 | $103.3 | | Consolidated Total | $633.0 | $46.8 | $44.0 | $723.8 | Contract Liabilities | Metric | March 31, 2020 (Millions) | December 31, 2019 (Millions) | | :-------------------------- | :-------------------------- | :--------------------------- | | Contract liabilities - current | $(8.5) | $(8.4) | | Contract liabilities - noncurrent | $(5.8) | $(5.9) | | Total contract liabilities | $(14.3) | $(14.3) | Note 9. Other Financial Statement Details Provides supplementary details on various financial statement line items, including inventories and goodwill - Goodwill carrying amount remained at $186.5 million as of March 31, 2020, with no changes in foreign currency translation rates[72] - The company uses cash flow hedging programs for commodity price and foreign currency risk, with unrealized losses on unsettled hedges of $13.7 million as of March 31, 2020[73][75][76] Inventory Components | Inventory Component | March 31, 2020 (Millions) | December 31, 2019 (Millions) | | :-------------------- | :-------------------------- | :--------------------------- | | Finished goods | $462.1 | $402.9 | | Work in process | $5.7 | $6.0 | | Raw materials and parts | $207.6 | $198.8 | | Total inventories, net | $611.8 | $544.1 | Note 10. Pension Benefit Plan Discloses the components of net periodic benefit cost for the company's defined benefit pension plans Net Periodic Benefit Cost | Component | 3 Months Ended March 31, 2020 (Millions) | 3 Months Ended March 31, 2019 (Millions) | | :------------------------ | :--------------------------------------- | :--------------------------------------- | | Service cost | $1.4 | $1.2 | | Interest cost | $1.8 | $3.5 | | Expected return on plan assets | $(2.2) | $(4.7) | | Recognized actuarial loss | $1.5 | $2.0 | | Net periodic benefit cost | $2.5 | $2.0 | Note 11. Income Taxes Details the company's income tax provisions, unrecognized tax benefits, and valuation allowances - As of March 31, 2020, total gross unrecognized tax benefits were approximately $3.1 million[79] - A $7.6 million valuation allowance was recorded on certain foreign deferred tax assets in Q1 2020 due to the adverse impact of the COVID-19 pandemic[81] Note 12. Lines of Credit and Financing Arrangements Describes the company's debt structure, credit facilities, and compliance with debt covenants - The Asset Securitization Program (ASP) was renewed, increasing the maximum amount to a range of $250.0 million to $400.0 million[85] - The Domestic Credit Facility consists of a $1,000.0 million unsecured revolving credit facility and a $160.0 million unsecured term loan[89] - The company issued $350.0 million of senior unsecured notes in November 2016, maturing on November 15, 2023, with a 3.00% interest rate[94] - The company believes it was in compliance with all covenant requirements under its debt agreements as of March 31, 2020[88][91][94] Total Debt | Debt Category | March 31, 2020 (Millions) | December 31, 2019 (Millions) | | :-------------------------------- | :-------------------------- | :--------------------------- | | Current maturities of long-term debt | $252.3 | $321.9 | | Long-term debt | $1,189.9 | $849.3 | | Total debt | $1,442.2 | $1,171.2 | Note 13. Comprehensive Income Provides details on the changes in accumulated other comprehensive loss (AOCL) during the period Changes in Accumulated Other Comprehensive Loss (AOCL) | Component | Balance Dec 31, 2019 (Millions) | Net Other Comprehensive (Loss) Income (Millions) | Balance Mar 31, 2020 (Millions) | | :-------------------------------- | :------------------------------ | :--------------------------------------- | :------------------------------ | | Gains (Losses) on Cash Flow Hedges | $0.0 | $(9.6) | $(9.6) | | Defined Benefit Pension Plan Items | $(81.5) | $0.6 | $(80.9) | | Foreign Currency Translation Adjustments | $(22.3) | $(20.3) | $(42.6) | | Total AOCL | $(103.8) | $(29.3) | $(133.1) | Reclassifications from AOCL | Metric | 3 Months Ended March 31, 2020 (Millions) | 3 Months Ended March 31, 2019 (Millions) | | :-------------------------- | :--------------------------------------- | :--------------------------------------- | | Total reclassifications from AOCL | $(2.1) | $(5.4) | Note 14. Fair Value Measurements Discloses the methodologies and inputs used to measure the fair value of financial assets and liabilities - Derivatives are classified as Level 2 and valued using estimated future cash flows based on observed prices from exchange-traded derivatives[97] - The fair value of senior unsecured notes was $356.8 million as of March 31, 2020, and December 31, 2019, classified as Level 2[99] - Carrying amounts of cash, receivables, payables, and the domestic credit facility approximate fair value[98] Note 15. Subsequent Event Reports on material events that occurred after the balance sheet date but before the financial statements were issued - In April 2020, the company implemented cost reduction actions due to the COVID-19 pandemic, expecting to incur approximately $10 million in pre-tax charges in Q2 2020[100] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Provides management's perspective on financial performance, condition, and outlook, focusing on COVID-19 impacts Business Overview Describes the company's operations, business segments, market factors, and cost structure - The company operates in three reportable business segments within the HVACR industry: Residential Heating & Cooling, Commercial Heating & Cooling, and Refrigeration[104] - Demand for products and services is seasonal and influenced by weather, economic factors, and new construction[106] - Principal elements of cost of goods sold include components, raw materials (steel, copper, aluminum), factory overhead, labor, warranty costs, and freight[107] Impact of COVID-19 Pandemic and the Resulting Changes to our 2020 Financial Outlook Details the operational and financial impacts of the COVID-19 pandemic and the revised 2020 guidance - The COVID-19 pandemic has disrupted business operations, causing supply chain disruptions, higher employee absenteeism, and short-term manufacturing facility suspensions[109][110] - In Q1 2020, the company incurred $2 million in factory inefficiencies and recorded an $8 million valuation allowance on foreign deferred tax assets due to the pandemic's impact[111] - Revised 2020 financial outlook: North America unitary HVAC and refrigeration market expected to be negatively impacted by ~20%[113] Revised 2020 Outlook | Metric | Revised 2020 Outlook | | :------------------------------------ | :------------------- | | Revenue | Down 11%-17% | | Diluted EPS from continuing operations | $7.07 to $8.07 | | SG&A Savings (implemented April 2020) | $115 million | | Expected Q2 2020 Pre-tax Charges | ~$10 million | | Projected Cash Flows from Operations | ~$460 million | | Capital Expenditure Plans | Reduced to $120 million | | Share Repurchases (Q1 2020) | $100 million | | Share Repurchases (Q2 2020) | On hold | Financial Overview Summarizes the key financial results and segment performance for the first quarter of 2020 - Q1 2020 results were driven by year-over-year sales and profit declines in the Residential Heating & Cooling and Refrigeration segments[115] - Residential Heating & Cooling net sales decreased 5%, with segment profit down $54 million, including a $40 million decline related to non-recurring insurance recoveries in 2019[115] - Commercial Heating & Cooling net sales increased 3%, with segment profit up $4 million due to favorable mix and cost reductions[115] - Refrigeration net sales declined 32%, with segment profit down $6 million, primarily due to the Kysor Warren business sale in 2019 and lower volumes[115] First Quarter of 2020 Compared to First Quarter of 2019 - Consolidated Results Provides a detailed analysis of the consolidated results of operations for the first quarter - Net sales decreased $67 million (8.4%) to $724 million, with half of the decline related to the Kysor Warren divestiture[117][119] - Gross profit margin decreased 260 basis points to 22.9%, primarily due to lower volumes, factory inefficiencies, and higher product costs[120] - Operating income decreased $58 million (61.6%) to $36 million, mainly due to lower volumes and non-recurring insurance recoveries in 2019[117][118] - Net income decreased $56 million to $13 million, and diluted EPS from continuing operations was $0.32 compared to $1.73 in Q1 2019[117] - Selling, general and administrative (SG&A) expenses declined $15 million to $131 million, driven by the Kysor Warren divestiture and lower incentive compensation costs[121] - The effective tax rate increased to 52.8% from 16.4% in Q1 2019, primarily due to lower excess tax benefits and an $8 million valuation allowance[131] First Quarter of 2020 Compared to First Quarter of 2019 - Results by Segment Analyzes the financial performance of each of the company's reportable business segments - Residential Heating & Cooling net sales decreased 5.0% to $442.1 million, and profit declined 62.5% to $32.5 million, primarily due to $40 million of non-recurring insurance proceeds in 2019[133][134] - Commercial Heating & Cooling net sales increased 2.9% to $178.4 million, and profit increased 23.8% to $18.7 million, driven by favorable mix and cost reductions[135][136] - Refrigeration net sales decreased 31.8% to $103.3 million, and profit declined 91.7% to $0.7 million, mainly due to the divested Kysor Warren business[138][139] - Corporate and other expenses increased $2 million due to higher information technology investments and unfavorable foreign currency exchange rates[140] Liquidity and Capital Resources Discusses the company's sources of liquidity, cash flows, debt, and capital allocation strategy - Working capital and capital expenditure requirements are generally met through internally generated funds, bank lines of credit, and an asset securitization arrangement[141] - Net cash used in operating activities decreased to $(98.8) million in Q1 2020 from $(141.0) million in Q1 2019, due to the timing of working capital payments[142] - Net cash provided by financing activities increased to $133 million in Q1 2020 from $109 million in Q1 2019, driven by higher net borrowings[144] - Total debt increased to $1,442.2 million, leading to a debt-to-total-capital ratio increase to 128.3% from 117.0%[146][148] - The company maintains investment-grade credit ratings (Baa3 by Moody's, BBB by S&P) and believes its liquidity is sufficient to fund foreseeable needs[149][150] Item 3. Quantitative and Qualitative Disclosures About Market Risk Refers to the Annual Report for market risk details, noting no material changes since year-end - The company's exposure to market risk has not changed materially since December 31, 2019[153] Item 4. Controls and Procedures Confirms the effectiveness of disclosure controls and reports no material changes in internal controls - Disclosure controls and procedures were effective as of March 31, 2020, providing reasonable assurance that required information is reported timely[154] - There were no material changes in internal control over financial reporting during the first quarter of 2020[155] Part II - Other Information Contains disclosures on legal proceedings, risk factors, stock repurchases, and other required information Item 1. Legal Proceedings States that ongoing legal matters are not expected to have a material adverse effect on the company - The company is involved in various claims and lawsuits, but management believes they will not have a material adverse effect on financial condition, results of operations, or cash flows[156] Item 1A. Risk Factors Highlights the COVID-19 pandemic as a significant additional risk factor impacting the business - The COVID-19 pandemic is an additional risk factor, with an unpredictable magnitude of impact on business operations, financial condition, and liquidity[157] - Government decrees in response to COVID-19 have caused supply chain disruptions, higher absenteeism, and short-term manufacturing facility suspensions[158][159] - There have been no other material changes to the risk factors disclosed in the Annual Report on Form 10-K for the year ended December 31, 2019[160] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds Details common stock repurchases during the quarter and the remaining authorization for buybacks - Total shares purchased include 25,598 shares surrendered by employees to satisfy tax-withholding obligations[161] Share Repurchase Activity (Q1 2020) | Period | Total Shares Purchased | Average Price Paid per Share | Shares Purchased As Part of Publicly Announced Plans | Approximate Dollar Value of Shares that may yet be Purchased (in millions) | | :-------------------------- | :--------------------- | :--------------------------- | :------------------------------------------------- | :----------------------------------------------------------------------- | | January 1 through February 1 | 190 | $245.45 | — | $546.0 | | February 1 through February 23 | 353,346 | $242.5 | 351,763 | $446.0 | | February 23 through March 31 | 84,507 | $233.9 | 60,682 | $446.0 | | Total | 438,043 | N/A | 412,445 | N/A | Item 6. Exhibits Lists all exhibits filed with the Form 10-Q, including corporate documents and officer certifications - Exhibits include the Restated Certificate of Incorporation, Amended and Restated Bylaws, Specimen Stock Certificate, various Indentures, and Certifications (31.1, 31.2, 32.1)[163] - XBRL-related documents (Instance Document, Schema, Calculation Linkbase, Label Linkbase, Presentation Linkbase, Definition Linkbase) are also filed[163] SIGNATURE Contains the formal signature block for the Quarterly Report on Form 10-Q, executed by the CFO - The report was signed by Joseph W. Reitmeier, Chief Financial Officer, on April 20, 2020[166]