Lennox International(LII) - 2023 Q1 - Quarterly Report

Part I - Financial Information This section presents the company's unaudited consolidated financial statements, management's discussion, market risk, and controls Item 1. Financial Statements 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 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 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 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] Consolidated Statements of Stockholders' Deficit 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] Consolidated Statements of Cash Flows 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] - The company did not repurchase common stock in Q1 2023, compared to $200.0 million in repurchases in Q1 2022[20] Notes to Consolidated Financial Statements This section provides detailed explanations and disclosures for accounting policies and specific financial items in the statements Note 1. General 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] - The preparation of financial statements requires management to make estimates and assumptions about future events, which are evaluated on an ongoing basis[26][27] Note 2. Reportable Business Segments 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] | 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 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 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] 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] Note 5. Stock Repurchases 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] - The company repurchased approximately $2.0 million of shares during Q1 2023, primarily to satisfy employee tax withholding obligations[49] Note 6. Revenue Recognition 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][53] 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 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][58] - The company uses cash flow hedging programs for commodity price risk (metal futures contracts) and foreign currency risk (forward contracts)[59][62] 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 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 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] - The company is subject to U.S. federal income tax examinations for 2021 and 2022, and other jurisdictions for years prior to 2016[68] Note 10. Lines of Credit and Financing Arrangements 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] - 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] - 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] Note 11. Comprehensive Income (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] Note 12. Fair Value Measurements 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] - 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] 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 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 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][94] - 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] - The principal raw materials are steel, copper, and aluminum, with price volatility mitigated through price increases, commodity contracts, and efficiency improvements[95] Financial Overview 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] - 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] - 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] - Interest expense, net, increased to $14 million in Q1 2023 from $7 million in Q1 2022 due to higher borrowing costs[106] Results by Segment This section analyzes the financial performance of the Residential, Commercial, and Corporate and Other segments Residential Segment 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] - 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] Commercial Segment 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] - Segment profit increased by $26 million, primarily from favorable price ($26M), favorable product mix ($16M), and lower commodity prices ($4M)[112] Corporate and Other Segment 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] Liquidity and Capital Resources 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] 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] - 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] - The debt-to-total-capital ratio decreased to 108% at March 31, 2023, from 115% at December 31, 2022[126] - 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][128] Item 3. Quantitative and Qualitative Disclosures About Market Risk 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] Item 4. Controls and Procedures 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 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] Changes in Internal Control Over Financial Reporting 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] Part II - Other Information This section covers legal proceedings, risk factors, unregistered sales of equity securities, and a list of exhibits Item 1. Legal Proceedings 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] Item 1A. Risk Factors 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] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 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] - As of March 31, 2023, $546.0 million remained available for repurchase under the Share Repurchase Plans[138] Item 6. Exhibits 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]