Lennox International(LII) - 2022 Q2 - Quarterly Report

Part I Financial Information Item 1. Financial Statements This section presents Lennox International Inc.'s unaudited consolidated financial statements, highlighting increased revenue and net income, but a significant decrease in operating cash flow due to working capital changes Consolidated Balance Sheets Total assets increased to $2,659.0 million by June 30, 2022, driven by receivables and inventories, while liabilities also rose, leading to an increased stockholders' deficit Consolidated Balance Sheet Highlights (in millions) | Account | June 30, 2022 (Unaudited) | Dec 31, 2021 | | :--- | :--- | :--- | | Total Current Assets | $1,629.1 | $1,175.4 | | Accounts and notes receivable, net | $782.6 | $508.3 | | Inventories, net | $692.8 | $510.9 | | Total Assets | $2,659.0 | $2,171.9 | | Total Current Liabilities | $967.7 | $827.1 | | Long-term debt | $1,681.5 | $1,226.5 | | Total Liabilities | $3,060.3 | $2,440.9 | | Total Stockholders' Deficit | ($401.3) | ($269.0) | Consolidated Statements of Operations For Q2 2022, net sales increased to $1,366.3 million and net income rose to $177.2 million, or $4.96 per diluted share, compared to the prior-year period Statement of Operations Summary (in millions, except per share data) | Metric | Q2 2022 | Q2 2021 | YTD 2022 | YTD 2021 | | :--- | :--- | :--- | :--- | :--- | | Net Sales | $1,366.3 | $1,239.0 | $2,379.7 | $2,169.4 | | Gross Profit | $397.1 | $383.2 | $665.3 | $639.7 | | Operating Income | $226.9 | $216.0 | $338.8 | $330.0 | | Net Income | $177.2 | $170.0 | $260.8 | $254.2 | | Diluted EPS | $4.96 | $4.51 | $7.23 | $6.70 | Consolidated Statements of Cash Flows Net cash used in operating activities was $0.8 million for H1 2022, a sharp decline from the prior year, mainly due to unfavorable working capital changes Cash Flow Summary - Six Months Ended June 30 (in millions) | Cash Flow Activity | 2022 | 2021 | | :--- | :--- | :--- | | Net cash (used in) provided by operating activities | $(0.8) | $174.5 | | Net cash used in investing activities | $(46.2) | $(42.6) | | Net cash provided by (used in) financing activities | $75.4 | $(210.8) | | Increase (decrease) in cash | $28.4 | $(78.9) | Notes to Consolidated Financial Statements The notes detail segment performance, revenue recognition, stock repurchases, and debt structure, with Residential segment driving growth and increased total debt Segment Performance - Six Months Ended June 30 (in millions) | Segment | Net Sales 2022 | Net Sales 2021 | Segment Profit 2022 | Segment Profit 2021 | | :--- | :--- | :--- | :--- | :--- | | Residential Heating & Cooling | $1,659.6 | $1,444.2 | $324.0 | $286.1 | | Commercial Heating & Cooling | $407.3 | $452.0 | $23.5 | $72.6 | | Refrigeration | $312.8 | $273.2 | $37.5 | $21.4 | - In H1 2022, the company executed two accelerated share repurchase (ASR) transactions: a $200.0 million ASR with Wells Fargo completed in April and a $100.0 million ASR with Bank of America completed in June[49][50] Total Debt Summary (in millions) | Debt Category | June 30, 2022 | Dec 31, 2021 | | :--- | :--- | :--- | | Asset securitization program | $400.0 | $250.0 | | Credit Agreement | $308.5 | $6.5 | | Senior unsecured notes | $950.0 | $950.0 | | Total Debt | $1,693.3 | $1,237.8 | Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses Q2 and H1 2022 financial results, noting a 10.3% net sales increase driven by pricing, but a 180 bps gross margin decline due to cost inflation Consolidated Results of Operations Q2 2022 net sales rose 10.3% to $1,366.3 million due to pricing, but gross profit margin contracted 180 basis points to 29.1% from rising costs Q2 2022 vs Q2 2021 Consolidated Results (in millions) | Metric | 2022 | 2021 | % Change | | :--- | :--- | :--- | :--- | | Net Sales | $1,366.3 | $1,239.0 | 10.3% | | Gross Profit | $397.1 | $383.2 | 3.6% | | Gross Margin | 29.1% | 30.9% | -180 bps | | Operating Income | $226.9 | $216.0 | 5.0% | - The decrease in Q2 gross margin was primarily caused by higher costs across commodities (-250 bps), other product costs (-200 bps), components (-150 bps), and freight (-100 bps), which were only partially offset by favorable pricing (+710 bps)[101] Results by Segment Q2 2022 saw Residential sales grow 16.6%, Commercial sales fall 13.1% due to supply constraints, and Refrigeration sales increase 14.2% with surging profit Q2 2022 Segment Performance (in millions) | Segment | Net Sales | % Change YoY | Profit | % Change YoY | | :--- | :--- | :--- | :--- | :--- | | Residential Heating & Cooling | $977.5 | 16.6% | $216.3 | 14.0% | | Commercial Heating & Cooling | $219.6 | (13.1)% | $17.2 | (62.0)% | | Refrigeration | $169.2 | 14.2% | $23.4 | 73.3% | - The Commercial segment's profit decline was attributed to lower sales volume from supply chain constraints, higher product and component costs, and unfavorable factory productivity[110] Liquidity and Capital Resources H1 2022 operating cash flow turned negative, total debt increased to $1,693.3 million, and $367 million was returned to shareholders through repurchases and dividends - Net cash used in operating activities was $(0.8) million for H1 2022, compared to $174.5 million provided in H1 2021, reflecting less favorable changes in working capital[132] - In the first six months of 2022, the company returned a total of $367 million to shareholders through $300 million in stock repurchases and $67 million in dividend payments[98][134] - The company's debt-to-total-capital ratio increased to 131% at June 30, 2022, from 128% at December 31, 2021[139] Item 3. Quantitative and Qualitative Disclosures About Market Risk The company reports no material changes to its market risk exposure since the end of fiscal year 2021 - There have been no material changes in the company's market risk exposure since December 31, 2021[145] Item 4. Controls and Procedures As of June 30, 2022, disclosure controls were effective, with no material changes in internal control over financial reporting during the quarter - Management concluded that as of June 30, 2022, the company's disclosure controls and procedures were effective at a reasonable assurance level[147] - No changes in internal control over financial reporting occurred during the quarter that materially affected, or are reasonably likely to materially affect, internal controls[148] Part II Other Information Item 1. Legal Proceedings The company is involved in various claims and lawsuits, but management expects no material adverse effect on its financial position or results - Management is of the opinion that ongoing claims and lawsuits will not have a material adverse effect on the company's financial condition or results of operations[149] Item 1A. Risk Factors No material changes to the company's risk factors have occurred since those disclosed in the 2021 Form 10-K - No material changes to the company's risk factors have occurred since those disclosed in the 2021 Form 10-K[150] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds During Q2 2022, 622,881 shares were repurchased, leaving $546.0 million available for future repurchases under the authorized plan Share Repurchases in Q2 2022 | Period | Total Shares Purchased | Average Price Paid per Share | | :--- | :--- | :--- | | April 2022 | 136,728 | $260.17 | | May 2022 | 394,940 | $206.13 | | June 2022 | 91,213 | $206.10 | | Total Q2 | 622,881 | - | - As of the end of June 2022, approximately $546.0 million remained available for repurchase under the company's share repurchase plans[151] Item 6. Exhibits This section lists all exhibits filed with the Form 10-Q, including corporate governance documents, debt indentures, and officer certifications - The report includes key exhibits such as corporate governance documents, debt indentures, a list of guarantor subsidiaries, and certifications from the principal executive and financial officers[152]