Lennox International(LII) - 2025 Q2 - Quarterly Report

Part I Financial Information Item 1. Financial Statements This section presents unaudited consolidated financial statements, including balance sheets, income, equity, and cash flows, with detailed notes Consolidated Balance Sheets Consolidated Balance Sheet Highlights (Amounts in millions) | Metric | June 30, 2025 | December 31, 2024 | | :-------------------------------- | :------------ | :------------------ | | Total assets | $3,652.7 | $3,471.8 | | Total liabilities | $2,752.2 | $2,621.6 | | Total stockholders' equity | $900.5 | $850.2 | Consolidated Statements of Operations Consolidated Statements of Operations Highlights (Amounts in millions, except per share data) | Metric | Three Months Ended June 30, 2025 | Three Months Ended June 30, 2024 | Six Months Ended June 30, 2025 | Six Months Ended June 30, 2024 | | :------------------------ | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Net sales | $1,500.9 | $1,451.1 | $2,573.5 | $2,498.2 | | Gross profit | $522.5 | $488.2 | $851.0 | $828.2 | | Operating income | $354.0 | $320.1 | $509.6 | $486.9 | | Net income | $277.6 | $245.9 | $397.9 | $370.2 | | Earnings per share – Basic | $7.86 | $6.91 | $11.24 | $10.40 | | Earnings per share – Diluted | $7.82 | $6.87 | $11.18 | $10.34 | Consolidated Statements of Comprehensive Income Consolidated Statements of Comprehensive Income Highlights (Amounts in millions) | Metric | Three Months Ended June 30, 2025 | Three Months Ended June 30, 2024 | Six Months Ended June 30, 2025 | Six Months Ended June 30, 2024 | | :------------------------ | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Net income | $277.6 | $245.9 | $397.9 | $370.2 | | Other comprehensive income (loss), net of tax | $19.2 | $(2.9) | $32.3 | $(3.9) | | Comprehensive income | $296.8 | $243.0 | $430.2 | $366.3 | Consolidated Statements of Stockholders' Equity Changes in Stockholders' Equity (Amounts in millions) | Metric | Three Months Ended June 30, 2025 | Six Months Ended June 30, 2025 | | :------------------------------------- | :------------------------------- | :----------------------------- | | Balance as of March 31, 2025 | $852.5 | N/A | | Net income | $277.6 | $397.9 | | Dividends paid | $(45.8) | $(86.6) | | Treasury stock purchases | $(212.7) | $(310.4) | | Balance as of June 30, 2025 | $900.5 | $900.5 | Consolidated Statements of Cash Flows Consolidated Statements of Cash Flows Highlights (Amounts in millions) | Cash Flow Activity | Six Months Ended June 30, 2025 | Six Months Ended June 30, 2024 | | :----------------------------- | :----------------------------- | :----------------------------- | | Net cash provided by operating activities | $51.0 | $161.2 | | Net cash used in investing activities | $(51.6) | $(57.2) | | Net cash used in financing activities | $(368.2) | $(118.3) | | Cash and cash equivalents, end of period | $49.2 | $47.6 | Notes to Consolidated Financial Statements 1. General - The unaudited consolidated financial statements are prepared in accordance with GAAP for interim financial information and include all material adjustments for a fair presentation[26] - The preparation of financial statements requires management to make estimates and assumptions about future events, which are evaluated on an ongoing basis and may differ significantly from actual results[28][29] 2. Reportable Business Segments - The company operates in two reportable business segments: Home Comfort Solutions (residential HVACR) and Building Climate Solutions (commercial HVACR and refrigeration systems), primarily serving the United States and Canada[30] Segment Net Sales and Profit (Amounts in millions) | Segment | Three Months Ended June 30, 2025 | Three Months Ended June 30, 2024 | Six Months Ended June 30, 2025 | Six Months Ended June 30, 2024 | | :------------------------ | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Home Comfort Solutions Net Sales | $1,009.3 | $982.3 | $1,730.7 | $1,656.9 | | Home Comfort Solutions Profit | $255.2 | $228.5 | $372.0 | $340.6 | | Building Climate Solutions Net Sales | $491.6 | $468.8 | $842.8 | $841.3 | | Building Climate Solutions Profit | $122.5 | $114.0 | $176.0 | $192.2 | Total Assets by Segment (Amounts in millions) | Segment | June 30, 2025 | December 31, 2024 | | :------------------------ | :------------ | :---------------- | | Home Comfort Solutions | $1,989.3 | $1,626.0 | | Building Climate Solutions | $1,249.1 | $1,052.6 | | Corporate and Other | $414.3 | $793.2 | | Total assets | $3,652.7 | $3,471.8 | 3. Earnings Per Share Earnings Per Share (Amounts in millions, except per share data) | Metric | Three Months Ended June 30, 2025 | Three Months Ended June 30, 2024 | Six Months Ended June 30, 2025 | Six Months Ended June 30, 2024 | | :------------------------ | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Earnings per share – Basic | $7.86 | $6.91 | $11.24 | $10.40 | | Earnings per share – Diluted | $7.82 | $6.87 | $11.18 | $10.34 | 4. Commitments and Contingencies Total Warranty Liability (Amounts in millions) | Metric | June 30, 2025 | December 31, 2024 | | :------------------------ | :------------ | :---------------- | | Total warranty liability | $164.1 | $158.4 | - The company is involved in various claims and lawsuits, but management believes none will have a material adverse effect on financial condition, results of operations, or cash flows[49][50] 5. Stock Repurchases - The Board of Directors has authorized a total of $5.0 billion for share repurchases under the Share Repurchase Plans, including a $1.0 billion authorization in May 2025[51] Common Stock Repurchases (Amounts in millions, except shares) | Period | Shares Repurchased | Aggregate Cost | | :------------------------ | :----------------- | :------------- | | Three months ended June 30, 2025 | 371,133 | $209.6 | | Six months ended June 30, 2025 | 515,665 | $295.4 | - As of June 30, 2025, $1,196.5 million was available for repurchase under the Share Repurchase Plans[51] 6. Revenue Recognition Consolidated Net Sales by Primary Geographic Markets (Amounts in millions) | Geographic Market | Three Months Ended June 30, 2025 | Three Months Ended June 30, 2024 | Six Months Ended June 30, 2025 | Six Months Ended June 30, 2024 | | :---------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | United States | $1,396.6 | $1,368.5 | $2,397.2 | $2,351.9 | | Canada | $104.3 | $82.6 | $176.3 | $146.3 | | Total | $1,500.9 | $1,451.1 | $2,573.5 | $2,498.2 | - For Home Comfort Solutions, direct sales represented 74% of revenues for the three and six months ended June 30, 2025[55] - For Building Climate Solutions, equipment sales represented 81% and 80% of revenues for the three and six months ended June 30, 2025, respectively, with the remainder from service business[56] 7. Other Financial Statement Details Inventories, Net (Amounts in millions) | Component | June 30, 2025 | December 31, 2024 | | :---------------------- | :------------ | :---------------- | | Finished goods | $692.5 | $422.6 | | Work in process | $13.3 | $11.0 | | Raw materials and parts | $445.7 | $410.7 | | Total inventories, net | $1,001.9 | $704.8 | - Goodwill remained stable at $220.0 million as of June 30, 2025, with no impairment recorded for the periods presented[59] - The company uses cash flow hedges for commodity price risk (futures contracts) and foreign currency risk (forward contracts), but is not currently hedged against interest rate risk[60][61][62] 8. Pension Benefit Plans Net Periodic Benefit Cost for Pension Benefits (Amounts in millions) | Component | Three Months Ended June 30, 2025 | Three Months Ended June 30, 2024 | Six Months Ended June 30, 2025 | Six Months Ended June 30, 2024 | | :------------------------ | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Net periodic benefit cost | $1.0 | $1.2 | $2.1 | $2.0 | 9. Income Taxes - The effective tax rate decreased to 19.5% for Q2 2025 (from 19.9% in Q2 2024) and to 19.4% for YTD June 30, 2025 (from 19.7% in YTD June 30, 2024), primarily due to higher income in low tax jurisdictions[66][102][115] - As of June 30, 2025, the company had $4.9 million in total gross unrecognized tax benefits[66] 10. Lines of Credit and Financing Arrangements Outstanding Debt Obligations (Amounts in millions) | Debt Type | June 30, 2025 | December 31, 2024 | | :------------------------ | :------------ | :---------------- | | Commercial paper | $29.0 | $— | | Current maturities of long-term debt | $316.4 | $314.5 | | Long-term debt | $835.7 | $833.1 | | Total debt | $1,181.1 | $1,147.6 | - The commercial paper program has a limit of $500.0 million, with $29.0 million outstanding as of June 30, 2025[69] - The Amended Credit Agreement, entered into on May 9, 2025, decreased revolving commitments to $1.0 billion and extended the maturity to May 2030, with $969.3 million available for future borrowings[71] - The company has senior unsecured notes maturing in August 2025 ($300.0 million), August 2027 ($300.0 million), and September 2028 ($500.0 million)[78] - The company is currently in compliance with all covenant requirements under its debt agreements[77][79] 11. Comprehensive Income (Loss) Reclassifications from AOCL to Net Income (Amounts in millions) | Item | Three Months Ended June 30, 2025 | Six Months Ended June 30, 2025 | | :------------------------------------ | :------------------------------- | :----------------------------- | | Net of tax (Cash Flow Hedges) | $2.6 | $4.6 | | Net of tax (Defined Benefit Plan items) | $(0.3) | $(0.7) | | Total reclassifications from AOCL | $2.3 | $3.9 | Changes in AOCL by Component (Net of Tax) for Six Months Ended June 30, 2025 (Amounts in millions) | Component | Balance as of Dec 31, 2024 | Net other comprehensive income | Balance as of June 30, 2025 | | :-------------------------------------- | :------------------------- | :----------------------------- | :-------------------------- | | Gains (Losses) on Cash Flow Hedges | $(1.5) | $12.2 | $10.7 | | Defined Benefit Pension Plan Items | $(45.7) | $0.0 | $(45.7) | | Foreign Currency Translation Adjustments | $(46.9) | $20.1 | $(26.8) | | Total AOCL | $(93.7) | $32.3 | $(61.4) | 12. Fair Value Measurements - Derivatives are classified as Level 2 and valued using estimated future cash flows based on observed prices from exchange-traded derivatives, considering counterparty and company creditworthiness[82] Fair Value of Senior Unsecured Notes (Amounts in millions) | Metric | June 30, 2025 | December 31, 2024 | | :------------------------ | :------------ | :---------------- | | Senior unsecured notes | $1,111.6 | $1,093.4 | Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management analyzes financial condition and results for Q2 and YTD 2025 vs 2024, covering business, segment performance, and liquidity Business Overview - The company operates in two HVACR segments: Home Comfort Solutions and Building Climate Solutions, with demand influenced by weather, economic factors, and new construction[88][90] - Cost of goods sold is primarily driven by components, raw materials (steel, aluminum, copper), factory overhead, labor, and freight; the company mitigates commodity price volatility through pricing actions, vendor contracts, efficiency, and hedging[91] Financial Overview - Second quarter 2025 results were driven by year-over-year net sales and profit increases in both Home Comfort Solutions (net sales +3%, segment profit +$27M) and Building Climate Solutions (net sales +5%, segment profit +$9M)[92] - For 2025, the company expects additional pricing gains to offset tariffs and potential volume declines while preserving profit margins[94] Recent Developments - The 'One Big Beautiful Bill Act' was signed into law on July 4, 2025, and the company is evaluating its potential effects on financial position, results of operations, and cash flows[95] Three Months Ended June 30, 2025 Compared to Three Months Ended June 30, 2024 - Consolidated Results Consolidated Financial Results (Three Months Ended June 30, 2025 vs 2024) (Amounts in millions) | Metric | 2025 | 2024 | Change (%) | | :-------------------------------------- | :-------- | :-------- | :--------- | | Net sales | $1,500.9 | $1,451.1 | 3.4% | | Gross profit | $522.5 | $488.2 | 7.0% | | Operating income | $354.0 | $320.1 | 10.6% | | Net income | $277.6 | $245.9 | 12.9% | | Diluted earnings per share | $7.82 | $6.87 | 13.8% | - Net sales increased 3% due to an 11% increase in mix and price, partially offset by an 8% decrease in sales volumes[97] - Gross profit margins increased 120 basis points to 34.8%, driven by favorable mix and price (350 bps), partially offset by higher freight and distribution costs (130 bps) and higher product costs (100 bps)[98] - Selling, general and administrative expenses increased $4 million to $173 million, primarily due to higher employee-related costs[99] - Interest expense, net decreased to $8 million from $13 million, primarily due to lower borrowings[101] Second Quarter of 2025 Compared to Second Quarter of 2024 - Results by Segment Segment Performance (Three Months Ended June 30, 2025 vs 2024) (Amounts in millions) | Segment | Net Sales 2025 | Net Sales 2024 | Net Sales % Change | Profit 2025 | Profit 2024 | Profit % Change | | :------------------------ | :------------- | :------------- | :----------------- | :---------- | :---------- | :-------------- | | Home Comfort Solutions | $1,009.3 | $982.3 | 3% | $255.2 | $228.5 | 12% | | Building Climate Solutions | $491.6 | $468.8 | 5% | $122.5 | $114.0 | 7% | | Corporate and Other | $— | $— | —% | $(23.7) | $(24.0) | 1% | - Home Comfort Solutions' net sales increased 3% due to a 12% increase in mix and price, partially offset by a 9% decrease in sales volumes; Profit increased 12% due to favorable mix/price and factory efficiencies, partially offset by decreased sales volumes, higher product costs, and freight/distribution costs[103][104][105] - Building Climate Solutions' net sales increased 5% due to an 8% increase in mix and price, partially offset by a 3% decrease in sales volumes; Profit increased 7% due to favorable mix/price and factory efficiencies, partially offset by higher product costs, distribution/selling expenses, and decreased sales volumes[106][107] Year-to-Date through June 30, 2025 Compared to Year-to-Date through June 30, 2024 - Consolidated Results Consolidated Financial Results (Six Months Ended June 30, 2025 vs 2024) (Amounts in millions) | Metric | 2025 | 2024 | Change (%) | | :-------------------------------------- | :-------- | :-------- | :--------- | | Net sales | $2,573.5 | $2,498.2 | 3.0% | | Gross profit | $851.0 | $828.2 | 2.8% | | Operating income | $509.6 | $486.9 | 4.7% | - Net sales increased 3% due to a 9% increase in mix and price, partially offset by a 6% decrease in sales volumes[110] - Gross profit margins decreased 10 basis points to 33.1%, primarily due to higher product costs (170 bps) and freight/distribution costs (120 bps), partially offset by favorable mix and price (280 bps)[110] - Selling, general and administrative expenses increased $5 million to $345 million, but decreased 20 basis points as a percentage of net sales to 13.4%[111] - Interest expense, net decreased $10 million to $14 million, primarily due to lower borrowings[114] Year-to-Date through June 30, 2025 Compared to Year-to-Date through June 30, 2024 - Results by Segment Segment Performance (Six Months Ended June 30, 2025 vs 2024) (Amounts in millions) | Segment | Net Sales 2025 | Net Sales 2024 | Net Sales % Change | Profit 2025 | Profit 2024 | Profit % Change | | :------------------------ | :------------- | :------------- | :----------------- | :---------- | :---------- | :-------------- | | Home Comfort Solutions | $1,730.7 | $1,656.9 | 4% | $372.0 | $340.6 | 9% | | Building Climate Solutions | $842.8 | $841.3 | —% | $176.0 | $192.2 | (8)% | | Corporate and Other | $— | $— | —% | $(38.4) | $(47.5) | 19% | - Home Comfort Solutions' net sales increased 4% due to a 10% increase in mix and price, partially offset by a 6% decrease in sales volumes; Profit increased 9% due to favorable mix/price and factory efficiencies, partially offset by higher product costs, decreased sales volumes, and higher freight/distribution costs[116][117] - Building Climate Solutions' net sales remained flat due to a 6% increase in mix and price offset by a 6% decrease in sales volumes; Profit decreased 8% due to decreased sales volumes, higher product costs, and increased distribution/selling expenses, partially offset by favorable mix and price[118][119] - Corporate and Other segment loss decreased $9 million, primarily due to higher employee-related costs and miscellaneous items[120] Liquidity and Capital Resources Cash Flow Activity (Six Months Ended June 30, 2025 vs 2024) (Amounts in millions) | Cash Flow Activity | 2025 | 2024 | | :----------------------------- | :-------- | :-------- | | Net cash provided by operating activities | $51.0 | $161.2 | | Net cash used in investing activities | $(51.6) | $(57.2) | | Net cash used in financing activities | $(368.2) | $(118.3) | - Net cash provided by operating activities decreased primarily due to less favorable changes in working capital[122] - Net cash used in financing activities increased significantly to $368 million (from $118 million provided in 2024), primarily due to changes in net borrowings/repayments of long-term debt and $295.4 million in common stock repurchases[124] - The company's debt-to-total-capital ratio remained unchanged at 57% as of June 30, 2025, and it maintains investment grade credit ratings from Moody's (Baa2 POS outlook) and S&P (BBB stable outlook)[131][132] - Management believes current cash, future operating cash flows, and available borrowing capacity are sufficient to fund operations, capital expenditures, contractual obligations, share repurchases, dividends, and the upcoming $300.0 million senior unsecured notes maturity in August 2025[133] Item 3. Quantitative and Qualitative Disclosures About Market Risk This section refers to the Annual Report on Form 10-K for market risk disclosures, noting no material changes since December 31, 2024 - There have been no material changes to the company's exposure to market risk since December 31, 2024[137] Item 4. Controls and Procedures This section evaluates disclosure controls and procedures, reporting on any changes in internal control over financial reporting - As of June 30, 2025, the Chief Executive Officer and Chief Financial Officer concluded that the company's disclosure controls and procedures were effective to provide reasonable assurance of timely and accurate information disclosure[138] - 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[139] Part II Other Information Item 1. Legal Proceedings This section reviews ongoing legal claims and lawsuits, assessing their potential financial impact on the company - Management believes that none of the current claims or lawsuits will have a material adverse effect, individually or in the aggregate, on the company's financial position, results of operations, or cash flows[140] Item 1A. Risk Factors This section refers to the Annual Report on Form 10-K for comprehensive risk factors, with no material changes reported - 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, 2024[141] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds This section details common stock repurchase activities during Q2 2025 under publicly announced share repurchase plans Common Stock Repurchases (Second Quarter 2025) | Period | Total Number of Shares Purchased | Average Price Paid per Share | | :------------------------ | :------------------------------- | :--------------------------- | | April 1 through April 30 | 52,000 | $539.55 | | May 1 through May 31 | 300,157 | $569.81 | | June 1 through June 30 | 18,976 | $554.85 | | Total | 371,133 | N/A | - As of June 30, 2025, approximately $1,196.5 million remained available for repurchase under the company's share repurchase plans, which have no expiration date[142] Item 5. Other Information This section reports on Rule 10b5-1 trading arrangements involving the company's directors and officers - During the quarter ended June 30, 2025, none of the company's directors or officers adopted, modified, or terminated any Rule 10b5-1 trading arrangement or non-Rule 10b5-1 trading arrangement[143] Item 6. Exhibits This section lists all exhibits filed with the Form 10-Q, including corporate documents, debt agreements, and certifications - Exhibits include the Restated Certificate of Incorporation, Amended and Restated Bylaws, various Indentures and Supplemental Indentures related to senior unsecured notes, the Amended and Restated Credit Agreement, and certifications by executive officers[147]