Lennox International(LII) - 2022 Q3 - Quarterly Report

Part I - Financial Information This section presents the company's unaudited consolidated financial statements and management's analysis of its financial condition and results of operations Item 1. Financial Statements This section presents the unaudited consolidated financial statements, including balance sheets, statements of operations, comprehensive income, stockholders' deficit, and cash flows, along with detailed notes explaining accounting policies, segment information, and other financial details for the periods ended September 30, 2022 and 2021 Consolidated Balance Sheets The Consolidated Balance Sheets show increased total assets, liabilities, and stockholders' deficit as of September 30, 2022, compared to December 31, 2021 Consolidated Balance Sheets Highlights | Metric | Sep 30, 2022 (Millions) | Dec 31, 2021 (Millions) | Change (YoY) | | :------------------------------------ | :---------------------- | :---------------------- | :------------- | | Total Assets | $2,625.8 | $2,171.9 | +$453.9 | | Total Liabilities | $2,931.0 | $2,440.9 | +$490.1 | | Total Stockholders' Deficit | $(305.2) | $(269.0) | -$(36.2) | | Accounts and notes receivable, net | $708.4 | $508.3 | +$200.1 | | Inventories, net | $743.4 | $510.9 | +$232.5 | | Long-term debt | $1,593.4 | $1,226.5 | +$366.9 | Consolidated Statements of Operations The Consolidated Statements of Operations reflect strong year-over-year growth in net sales, gross profit, operating income, and net income Consolidated Statements of Operations Highlights For the Three Months Ended September 30: | Metric | 2022 (Millions) | 2021 (Millions) | Change (YoY) | | :----------------------------- | :-------------- | :-------------- | :------------- | | Net sales | $1,244.9 | $1,059.9 | +17.5% | | Gross profit | $334.2 | $295.2 | +13.2% | | Operating income | $185.8 | $162.7 | +14.2% | | Net income | $141.9 | $126.3 | +12.4% | | Diluted EPS | $3.99 | $3.41 | +17.0% | For the Nine Months Ended September 30: | Metric | 2022 (Millions) | 2021 (Millions) | Change (YoY) | | :----------------------------- | :-------------- | :-------------- | :------------- | | Net sales | $3,624.6 | $3,229.3 | +12.2% | | Gross profit | $999.5 | $934.8 | +6.9% | | Operating income | $524.6 | $492.7 | +6.5% | | Net income | $402.7 | $380.4 | +5.9% | | Diluted EPS | $11.22 | $10.10 | +11.1% | Consolidated Statements of Comprehensive Income Total comprehensive income decreased for the nine months ended September 30, 2022, driven by foreign currency translation and cash flow hedge losses Consolidated Statements of Comprehensive Income Highlights For the Three Months Ended September 30: | Metric | 2022 (Millions) | 2021 (Millions) | | :------------------------------------ | :-------------- | :-------------- | | Net income | $141.9 | $126.3 | | Other comprehensive loss, net of tax | $(14.6) | $(8.3) | | Comprehensive income | $127.3 | $118.0 | For the Nine Months Ended September 30: | Metric | 2022 (Millions) | 2021 (Millions) | | :------------------------------------ | :-------------- | :-------------- | | Net income | $402.7 | $380.4 | | Other comprehensive loss, net of tax | $(44.4) | $(4.2) | | Comprehensive income | $358.3 | $376.2 | - Foreign currency translation adjustments resulted in a loss of $(20.7) million for the nine months ended September 30, 2022, compared to a loss of $(5.1) million in 2021[13] - Net change in fair value of cash flow hedges resulted in a loss of $(19.7) million for the nine months ended September 30, 2022, compared to a gain of $26.9 million in 2021[13] Consolidated Statements of Stockholders' Deficit Stockholders' deficit increased from December 31, 2021, to September 30, 2022, primarily due to treasury stock repurchases and other comprehensive losses Changes in Stockholders' Deficit (Nine Months Ended Sep 30, 2022) | Item | Amount (Millions) | | :------------------------------------ | :---------------- | | Balance as of December 31, 2021 | $(269.0) | | Net income | $402.7 | | Dividends paid | $(108.1) | | Foreign currency translation adjustments | $(20.7) | | Change in cash flow hedges, net of tax | $(24.9) | | Treasury stock purchases | $(305.5) | | Balance as of September 30, 2022 | $(305.2) | Consolidated Statements of Cash Flows Operating cash flow significantly decreased, while net cash used in financing activities also decreased due to increased borrowings and fewer share repurchases Cash Flow Activity (Nine Months Ended September 30) | Cash Flow Activity | 2022 (Millions) | 2021 (Millions) | Change (YoY) | | :------------------------------------ | :-------------- | :-------------- | :------------- | | Net cash provided by operating activities | $170.1 | $396.3 | $(226.2) | | Net cash used in investing activities | $(68.2) | $(67.6) | $(0.6) | | Net cash used in financing activities | $(89.1) | $(410.5) | +$321.4 | | Repurchases of common stock | $(300.0) | $(600.0) | +$300.0 | | Cash dividends paid | $(142.0) | $(92.8) | $(49.2) | | Borrowings from credit facility | $1,967.5 | $1,021.4 | +$946.1 | Notes to Consolidated Financial Statements These notes detail accounting policies, segment reporting, EPS, commitments, stock repurchases, revenue, inventory, derivatives, pensions, income taxes, and debt obligations - The unaudited interim financial statements are prepared in accordance with GAAP for interim financial information and with Form 10-Q and Article 10 of Regulation S-X[26] - The company operates in three reportable business segments: Residential Heating & Cooling, Commercial Heating & Cooling, and Refrigeration[32] Product Warranty Liabilities | Metric | Sep 30, 2022 (Millions) | Dec 31, 2021 (Millions) | | :----------------------- | :---------------------- | :---------------------- | | Total warranty liability | $150.2 | $134.2 | - As of September 30, 2022, $546 million was available for repurchase under the Share Repurchase Plans. The company repurchased $300 million of common stock during the nine months ended September 30, 2022[48][138] Revenue Disaggregation by Segment and Geography (Nine Months Ended September 30, 2022) | Segment | United States (Millions) | Canada (Millions) | Other International (Millions) | Total (Millions) | | :-------------------------- | :----------------------- | :---------------- | :----------------------------- | :--------------- | | Residential Heating & Cooling | $2,311.2 | $183.7 | — | $2,494.9 | | Commercial Heating & Cooling | $616.4 | $43.2 | $0.6 | $660.2 | | Refrigeration | $299.0 | — | $170.5 | $469.5 | | Consolidated Total | $3,226.6 | $226.9 | $171.1 | $3,624.6 | Total Debt Obligations (as of September 30, 2022) | Debt Type | Amount (Millions) | | :-------------------------- | :---------------- | | Asset securitization program | $400.0 | | Credit agreement | $222.0 | | Senior unsecured notes | $950.0 | | Total debt | $1,604.5 | - The company utilizes cash flow hedges for commodity price risk and foreign currency risk. Unrealized losses on unsettled contracts were $18.7 million (net of tax $14.2 million) as of September 30, 2022[61][63][65] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses financial performance, condition, and outlook, covering business operations, consolidated results, segment performance, liquidity, and capital resources Business Overview The company operates in HVACR, facing seasonal demand, commodity volatility, and supply chain issues, with a new CEO appointed in May 2022 - The company operates in three reportable business segments: Residential Heating & Cooling, Commercial Heating & Cooling, and Refrigeration[94] - Demand for products and services is seasonal and significantly impacted by weather, as well as national and regional economic and demographic factors[96] - The principal raw materials are steel, copper, and aluminum, with price volatility mitigated through price increases, commodity contracts, and efficiency improvements[97] - The COVID-19 pandemic continues to create supply chain disruptions and higher employee absenteeism[98] - Alok Maskara was appointed Chief Executive Officer effective May 9, 2022[99] Financial Overview (Consolidated Results) Consolidated results show increased net sales and operating income, driven by pricing and volume, despite decreased gross profit margins due to higher costs Consolidated Financial Highlights (Three Months Ended September 30) | Metric | 2022 (Millions) | 2021 (Millions) | % Change | | :----------------------------- | :-------------- | :-------------- | :------- | | Net sales | $1,244.9 | $1,059.9 | 17.5 % | | Operating income | $185.8 | $162.7 | 14.2 % | | Net income | $141.9 | $126.3 | 12.4 % | | Diluted earnings per share | $3.99 | $3.41 | 17.0 % | - Net sales for Q3 2022 increased by 17.5% due to 11% favorable price, 5% sales volume increase, and 2% favorable product mix, partially offset by 1% unfavorable foreign currency[103] - Gross profit margins in Q3 2022 decreased by 110 basis points to 26.8% (from 27.9% in Q3 2021), primarily due to higher commodity, product, component, and freight costs, and factory inefficiencies, partially offset by favorable pricing[104] - Selling, general and administrative expenses increased by $13 million to $147 million in Q3 2022 but decreased as a percentage of net sales to 11.8% (from 12.7%)[105] - For the nine months ended September 30, 2022, net sales increased 12.2% and operating income increased 6.5%. Gross profit margins decreased 130 bps to 27.6%[118][119] Results by Segment Residential and Refrigeration segments show strong growth, while Commercial Heating & Cooling experienced a profit decline due to lower volume Residential Heating & Cooling Segment Performance (Three Months Ended September 30) | Metric | 2022 (Millions) | 2021 (Millions) | % Change | | :------- | :-------------- | :-------------- | :------- | | Net sales | $835.3 | $711.0 | 17.5 % | | Profit | $153.8 | $144.0 | 6.8 % | Commercial Heating & Cooling Segment Performance (Three Months Ended September 30) | Metric | 2022 (Millions) | 2021 (Millions) | % Change | | :------- | :-------------- | :-------------- | :------- | | Net sales | $252.9 | $211.5 | 19.6 % | | Profit | $29.6 | $22.6 | 31.0 % | Refrigeration Segment Performance (Three Months Ended September 30) | Metric | 2022 (Millions) | 2021 (Millions) | % Change | | :------- | :-------------- | :-------------- | :------- | | Net sales | $156.7 | $137.4 | 14.0 % | | Profit | $22.4 | $14.5 | 54.5 % | Residential Heating & Cooling Segment Performance (Nine Months Ended September 30) | Metric | 2022 (Millions) | 2021 (Millions) | % Change | | :------- | :-------------- | :-------------- | :------- | | Net sales | $2,494.9 | $2,155.3 | 15.8 % | | Profit | $477.7 | $430.1 | 11.1 % | Commercial Heating & Cooling Segment Performance (Nine Months Ended September 30) | Metric | 2022 (Millions) | 2021 (Millions) | % Change | | :------- | :-------------- | :-------------- | :------- | | Net sales | $660.2 | $663.4 | (0.5)% | | Profit | $53.1 | $95.3 | (44.3)% | Refrigeration Segment Performance (Nine Months Ended September 30) | Metric | 2022 (Millions) | 2021 (Millions) | % Change | | :------- | :-------------- | :-------------- | :------- | | Net sales | $469.5 | $410.6 | 14.3 % | | Profit | $60.0 | $35.8 | 67.6 % | - Commercial Heating & Cooling segment profit for the first nine months of 2022 decreased $42 million, primarily due to lower sales volume (supply chain constraints), factory inefficiencies, and higher component, product, SG&A, commodity, and freight costs[130] Liquidity and Capital Resources Operations are funded by internal cash, credit, and securitization; operating cash decreased, while financing cash use decreased due to borrowings - Working capital and capital expenditure requirements are generally met through internally generated funds, bank lines of credit, and an asset securitization arrangement[135] Cash Flow Activity (Nine Months Ended September 30) | Cash Flow Activity | 2022 (Millions) | 2021 (Millions) | | :------------------------------------ | :-------------- | :-------------- | | Net cash provided by operating activities | $170.1 | $396.3 | | Net cash used in financing activities | $(89.1) | $(410.5) | - Net cash used in financing activities decreased due to increased net borrowings and fewer share repurchases ($300 million in 2022 vs. $600 million in 2021)[138] Outstanding Debt Obligations (as of September 30, 2022) | Debt Type | Amount (Millions) | | :-------------------------- | :---------------- | | Asset Securitization Program | $400.0 | | Credit agreement | $222.0 | | Senior unsecured notes | $950.0 | | Total debt | $1,604.5 | - The company's $750 million unsecured revolving credit facility has $526 million available for future borrowings as of September 30, 2022[142] - The debt-to-total-capital ratio was 123% at September 30, 2022, compared to 128% at December 31, 2021[145] - The company maintains investment-grade credit ratings of Baa2 (Moody's) and BBB (S&P), both with stable outlooks[146] Item 3. Quantitative and Qualitative Disclosures About Market Risk Market risk disclosures refer to the 2021 Form 10-K, with no material changes to market risk exposure since that filing - The company's exposure to market risk has not materially changed since December 31, 2021[151] - Quantitative and qualitative disclosures about market risk are consistent with those in Item 7A of Part II of the Annual Report on Form 10-K for the fiscal year ended December 31, 2021[151] Item 4. Controls and Procedures Disclosure controls and procedures were effective as of September 30, 2022, with no material changes to internal control over financial reporting - Disclosure controls and procedures were evaluated and deemed effective as of September 30, 2022, providing reasonable assurance of timely and accurate information disclosure[152] - There were no material changes in internal control over financial reporting that affected, or are reasonably likely to materially affect, internal control over financial reporting[153] Part II - Other Information This section covers legal proceedings, risk factors, equity security sales, and a list of exhibits filed with the report Item 1. Legal Proceedings The company is involved in various legal claims, which management believes will not materially affect financial condition or results - The company is involved in a number of claims and lawsuits incident to the operation of its businesses[154] - Management believes none of these claims or lawsuits will have a material adverse effect on the company's financial condition, results of operations, or cash flows[154] Item 1A. Risk Factors Risk factors refer to the 2021 Form 10-K, with no material changes to the company's risk factors since that filing - Readers should consider the risk factors discussed in Part I, 'Item 1A. Risk Factors' in the Annual Report on Form 10-K for the year ended December 31, 2021[155] - There have been no material changes to the company's risk factors from those disclosed in its Annual Report on Form 10-K for the year ended December 31, 2021[155] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds Common stock repurchases in Q3 2022 primarily satisfied employee tax obligations, with $546 million remaining available for repurchase Common Stock Repurchases (Third Quarter 2022) | Period | Total Number of Shares Purchased (1) | Average Price Paid per Share (including fees) | | :------------------------ | :----------------------------------- | :------------------------------------------ | | July 1 through July 31 | 3 | $214.00 | | August 1 through August 31 | 1,587 | $244.15 | | September 1 through Sep 30 | 153 | $257.62 | | Total | 1,743 | | - As of September 30, 2022, approximately $546.0 million was available for repurchase under the company's Share Repurchase Plans[156] - The repurchased shares primarily satisfied employee tax-withholding obligations upon the vesting and exercise of stock-based compensation awards[156] Item 6. Exhibits This section lists all exhibits filed, including corporate governance, debt instruments, executive certifications, and XBRL data files - Exhibits include the Restated Certificate of Incorporation and Amended and Restated Bylaws[157] - Various indentures and forms of senior unsecured notes (2023, 2025, 2027 Notes) are filed as exhibits[157] - Certifications of the principal executive officer and principal financial officer are included[157] - Interactive Data Files (XBRL) are provided as exhibits[157]