Lennox International Reports Record First-Quarter Revenue and Profit

LENNOX INTERNATIONAL INC. AND SUBSIDIARIES

Consolidated Statements of Operations

(Unaudited)

(Amounts in millions, except per share data)

For the Three Months Ended
March 31,

2018

2017

Net sales

$

834.8

$

793.4

Cost of goods sold

611.6

582.5

Gross profit

223.2

210.9

Operating Expenses:

Selling, general and administrative expenses

155.2

152.4

Losses and other expenses, net

7.3

3.1

Restructuring charges

0.9

0.1

Loss on assets held for sale

10.3

—

Income from equity method investments

(3.5)

(5.5)

Operating income

53.0

60.8

Interest expense, net

8.4

7.4

Other expense, net

0.6

—

Income from continuing operations before income taxes

44.0

53.4

Provision for income taxes

6.1

9.9

Income from continuing operations

37.9

43.5

Discontinued Operations:

Loss from discontinued operations before income taxes

—

—

Benefit from income taxes

—

—

Loss from discontinued operations

—

—

Net income

$

37.9

$

43.5

Earnings per share – Basic:

Income from continuing operations

$

0.91

$

1.02

Loss from discontinued operations

—

—

Net income

$

0.91

$

1.02

Earnings per share – Diluted:

Income from continuing operations

$

0.90

$

1.00

Loss from discontinued operations

—

—

Net income

$

0.90

$

1.00

Weighted Average Number of Shares Outstanding - Basic

41.5

42.8

Weighted Average Number of Shares Outstanding - Diluted

42.1

43.5

Cash dividends declared per share

$

0.51

$

0.43

LENNOX INTERNATIONAL INC. AND SUBSIDIARIES

Adjusted Segment Net Sales and Profit (Loss)

(Unaudited)

(Amounts in millions)

For the Three Months Ended
March 31,

2018

2017

Adjusted Net Sales

Residential Heating & Cooling

$

453.7

$

419.8

Commercial Heating & Cooling

205.5

195.5

Refrigeration ⁽¹⁾

128.6

131.0

$

787.8

$

746.3

Adjusted Segment Profit (Loss) ⁽²⁾

Residential Heating & Cooling

$

51.3

$

42.5

Commercial Heating & Cooling

19.5

19.1

Refrigeration ⁽¹⁾

9.5

11.0

Corporate and other

(11.2)

(11.0)

Total adjusted segment profit

69.1

61.6

Reconciliation to Operating Income:

One time inventory write down

0.1

—

Loss on assets held for sale

10.3

—

Items in Losses (Gains) and other expenses, net that are excluded from segment profit (loss) ⁽²⁾

6.5

3.8

Restructuring charges

0.9

0.1

Operating income from non-core businesses

(1.7)

(3.1)

Operating income

$

53.0

$

60.8

⁽¹⁾

Excludes the non-core business results related to our business operations in Australia, Asia, and South America for 2018 and 2017.

⁽²⁾

We define segment profit (loss) as a segment's operating income included in the accompanying Consolidated Statements of Operations, excluding:

•

The following items in Losses (gains) and other expenses, net:

◦

Net change in unrealized losses (gains) on unsettled futures contracts,

◦

 Special legal contingency charges,

◦

Asbestos-related litigation,

◦

Contractor tax payments,

◦

Environmental liabilities,

◦

Divestiture costs,

◦

Other items, net,

•

One time inventory write down,

•

Loss on assets held for sale,

•

Operating income from non-core businesses; and,

•

Restructuring charges.

LENNOX INTERNATIONAL INC. AND SUBSIDIARIES

Consolidated Balance Sheets

(Amounts in millions, except shares and par values)

As of March 31,
2018

As of December 31,
2017

(unaudited)

ASSETS

Current Assets:

Cash and cash equivalents

$

57.1

$

68.2

Accounts and notes receivable, net of allowances of $6.0 and $5.9 in 2018 and 2017, respectively

528.5

506.5

Inventories, net

561.5

484.2

Assets held for sale

93.3

—

Other assets

106.4

78.4

Total current assets

1,346.8

1,137.3

Property, plant and equipment, net of accumulated depreciation of $763.9 and $774.2 in 2018 and 2017, respectively

390.1

397.8

Goodwill

190.3

200.5

Deferred income taxes

94.0

94.4

Other assets, net

64.9

61.5

Total assets

$

2,086.1

$

1,891.5

LIABILITIES AND STOCKHOLDERS' EQUITY

Current Liabilities:

Short-term debt

$

0.9

$

0.9

Current maturities of long-term debt

29.9

32.6

Accounts payable

405.6

348.6

Accrued expenses

226.0

270.3

Liabilities held for sale

28.7

—

Income taxes payable

21.7

2.1

Total current liabilities

712.8

654.5

Long-term debt

1,258.3

970.5

Post-retirement benefits, other than pensions

2.5

2.6

Pensions

85.9

84.5

Other liabilities

129.2

129.3

Total liabilities

2,188.7

1,841.4

Commitments and contingencies

Stockholders' equity:

Preferred stock, $.01 par value, 25,000,000 shares authorized, no shares issued or outstanding

—

—

Common stock, $.01 par value, 200,000,000 shares authorized, 87,170,197 shares issued

0.9

0.9

Additional paid-in capital

1,036.7

1,061.5

Retained earnings

1,609.6

1,575.9

Accumulated other comprehensive loss

(181.3)

(157.4)

Treasury stock, at cost, 45,852,186 shares and 45,361,145 shares as of March 31, 2018 and December 31, 2017, respectively

(2,568.5)

(2,430.8)

Total stockholders' equity

50.1

Total liabilities and stockholders' equity

$

2,086.1

$

1,891.5

LENNOX INTERNATIONAL INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows

(Unaudited)

(Amounts in millions)

For the Three Months Ended
March 31,

2018

2017

Cash flows from operating activities:

Net income

$

37.9

$

43.5

Adjustments to reconcile net income to net cash used in operating activities:

Income from equity method investments

(3.5)

(5.5)

Loss on assets held for sale

10.3

—

Restructuring charges, net of cash paid

0.6

—

Provision for bad debts

1.9

1.1

Unrealized gains on derivative contracts

(0.1)

(0.5)

Stock-based compensation expense

4.8

4.9

Depreciation and amortization

16.6

15.7

Deferred income taxes

(2.1)

(1.1)

Pension expense

2.1

1.9

Pension contributions

(0.7)

(1.1)

Other items, net

0.1

0.1

Changes in assets and liabilities, net of effects of divestitures:

Accounts and notes receivable

(44.5)

(40.9)

Inventories

(124.3)

(101.2)

Other current assets

(0.7)

(4.3)

Accounts payable

77.5

47.3

Accrued expenses

(35.2)

(41.7)

Income taxes payable and receivable

(22.3)

(28.0)

Other

(1.9)

2.2

Net cash used in operating activities

(83.5)

(107.6)

Cash flows from investing activities:

Proceeds from the disposal of property, plant and equipment

0.1

0.1

Purchases of property, plant and equipment

(22.7)

(24.9)

Net cash used in investing activities

(22.6)

(24.8)

Cash flows from financing activities:

Short-term borrowings, net

(0.1)

(0.8)

Asset securitization borrowings

—

150.0

Asset securitization payments

(51.0)

—

Long-term debt payments

(10.2)

(0.2)

Borrowings from credit facility

790.0

583.0

Payments on credit facility

(444.1)

(497.5)

Proceeds from employee stock purchases

0.8

0.7

Repurchases of common stock

(150.0)

(75.0)

Repurchases of common stock to satisfy employee withholding tax obligations

(18.1)

(13.3)

Cash dividends paid

(21.3)

(18.5)

Net cash provided by financing activities

96.0

128.4

Increase in cash and cash equivalents

(10.1)

(4.0)

Effect of exchange rates on cash and cash equivalents

(1.0)

2.6

Cash and cash equivalents, beginning of period

68.2

50.2

Cash and cash equivalents, end of period

$

57.1

$

48.8

Supplemental disclosures of cash flow information:

Interest paid

$

6.0

$

2.4

Income taxes paid (net of refunds)

$

32.7

$

36.7

LENNOX INTERNATIONAL INC. AND SUBSIDIARIES

Reconciliation to U.S. GAAP (Generally Accepted Accounting Principles) Measures

(Unaudited, in millions, except per share and ratio data)

Use of Non-GAAP Financial Measures

To supplement the Company's consolidated financial statements and segment net sales and profit presented in accordance with U.S. GAAP, additional non-GAAP financial measures are provided and reconciled in the following tables.  In addition to these non-GAAP measures, the Company also provides rates of revenue change at constant currency on a consolidated and segment basis if different than the reported  measures. The Company believes that these non-GAAP financial measures, when considered together with the GAAP financial measures, provide information that is useful to investors in understanding period-over-period operating results.  The Company believes that these non-GAAP financial measures enhance the ability of investors to analyze the Company's business trends and operating performance. In the first quarter of 2018, the Company announced the planned sales of its businesses in Australia, Asia, and South America.  The results from operations for these businesses have been shown in the tables below as "Non-core business results".  The prior period results have been updated to provide period-over-period comparability.

Reconciliation of Income from Continuing Operations, a GAAP measure, to Adjusted Income from Continuing Operations, a Non-GAAP measure

For the Three Months Ended March 31,

2018

2017

Pre-Tax

Tax Impact ^(e)

After Tax

Pre-Tax

Tax Impact ^(e)

After Tax

Income from continuing operations, a GAAP measure

$

44.0

$

(6.1)

$

37.9

$

53.4

$

(9.9)

$

43.5

Restructuring charges

0.9

(0.3)

0.6

0.1

—

0.1

Loss on assets held for sale

10.3

—

10.3

—

—

—

Special legal contingency charges ^(a)

0.2

(0.1)

0.1

0.9

—

0.9

Asbestos-related litigation ^(a)

2.1

(0.6)

1.5

1.7

(0.6)

1.1

Net change in unrealized losses (gains) on unsettled future contracts ^(a)

1.1

(0.2)

0.9

0.7

(0.3)

0.4

Inventory write down,^(b)

0.1

—

0.1

—

—

—

Environmental liabilities^(a)

0.3

—

0.3

0.5

(0.2)

0.3

Excess tax benefits from share-based compensation ^(c)

—

(4.3)

(4.3)

—

(7.4)

(7.4)

Other tax items, net^(c)

—

(0.9)

(0.9)

—

—

—

Divestiture costs ^(a)

2.5

(0.6)

1.9

—

—

—

Other items, net ^(a)

0.3

(0.1)

0.2

—

—

—

  Non-core business results^(f)

(1.7)

0.4

(1.3)

(2.8)

0.7

(2.1)

Adjusted income from continuing operations, a non-GAAP measure

$

60.1

$

(12.8)

$

47.3

$

54.5

$

(17.7)

$

36.8

Earnings per share from continuing operations - diluted, a GAAP measure

$

0.90

$

1.00

Restructuring charges

0.01

—

Loss on assets held for sale

0.25

—

Special legal contingency charges^(a)

—

0.02

Asbestos-related litigation^(a)

0.04

0.03

Net change in unrealized losses (gains) on unsettled future contracts ^(a)

0.02

0.01

Inventory write down^(b)

—

—

Environmental liabilities ^(a)

0.01

0.01

Excess tax benefits from share-based compensation ^(c)

(0.10)

(0.17)

Other tax items, net^(c)

(0.02)

—

Divestiture costs ^(a)

0.05

—

Other items, net ^(a)

—

—

  Non-core business results^(f)

(0.03)

(0.05)

Change in share counts from share-based compensation ^(d)

—

—

Adjusted earnings per share from continuing operations - diluted, a non-GAAP measure

$

1.13

$

0.85

(a)

Recorded in Losses and other expenses, net in the Consolidated Statements of Operations

(b)

Recorded in Cost of goods sold in the Consolidated Statements of Operations

(c)

Recorded in Provision for income taxes in the Consolidated Statements of Operations

(d)

The impact of excess tax benefits from the change in share-based compensation also impacts our diluted share counts. The reconciliation of average outstanding diluted shares on a GAAP and non-GAAP basis is included in this document.

(e)

Tax impact based on the applicable tax rate relevant to the location and nature of the adjustment.

(f)

Non-core business results represent activity related to our business operations in Australia, Asia, and South America, not included elsewhere in the reconciliation.

For the Three Months Ended
March 31,

2018

2017

Components of (Gains) Losses and other expenses, net (pre-tax):

Realized gains on settled future contracts ^(a)

$

(0.5)

$

(0.4)

Foreign currency exchange losses (gains) ^(a)

1.3

(0.2)

Loss on disposal of fixed assets ^(a)

—

(0.1)

Net change in unrealized losses on unsettled futures contracts ^(b)

1.1

0.7

Special legal contingency charges ^(b)

0.2

0.9

Asbestos-related litigation ^(b)

2.1

1.7

Environmental liabilities ^(b)

0.3

0.5

Divestiture costs ^(b)

2.5

—

Other items, net ^(b)

0.3

—

Losses and other expenses, net (pre-tax)

$

7.3

$

3.1

(a)

Included in both segment profit (loss) and Adjusted income from continuing operations

(b)

Excluded from both segment profit (loss) and Adjusted income from continuing operations

Reconciliation of Earnings per Share from Continuing Operations - Diluted, a GAAP measure, to Estimated Adjusted Earnings per Share from Continuing Operations - Diluted, a Non-GAAP measure

For the Year Ended
December 31, 2018
ESTIMATED

Earnings per share from continuing operations - diluted, a GAAP measure

$8.79 - $9.39

Loss on assets held for sale, charges associated with the divestiture of the South American business and other items partially offset by excess tax benefits from share-based compensation

0.96

Adjusted Earnings per share from continuing operations - diluted, a Non-GAAP measure

$9.75 - $10.35

Reconciliation of Average Shares Outstanding - Diluted, a GAAP measure, to Adjusted Average Shares Outstanding - Diluted, a Non-GAAP measure (shares in millions):

For the Three Months
Ended March 31,

2018

2017

Average shares outstanding - diluted, a GAAP measure

42.1

43.5

Impact on diluted shares from excess tax benefits from share-based compensation

(0.2)

(0.2)

Adjusted average shares outstanding - diluted, a Non- GAAP measure

41.9

43.3

Reconciliation of Net Sales, a GAAP measure, to Adjusted Net Sales, a Non-GAAP measure

Refrigeration
Segment

Consolidated

For the Three Months
Ended March 31,

For the Three Months
Ended March 31,

2018

2017

2018

2017

Net sales, a GAAP measure

$

175.6

$

178.1

$

834.8

$

793.4

Net sales from non-core businesses (a)

47.0

47.1

47.0

47.1

Adjusted net sales, a Non- GAAP measure

$

128.6

$

131.0

$

787.8

$

746.3

(a) Non-Core business represent our business operations in Australia, Asia, and South America.

Reconciliation of Gross Profit, a GAAP measure, to Adjusted Gross Profit, a Non-GAAP measure

Refrigeration
Segment

Consolidated

For the Three Months
Ended March 31,

For the Three Months
Ended March 31,

2018

2017

2018

2017

Gross profit, a GAAP measure

$

48.3

$

51.8

$

223.2

$

210.9

Gross profit from non-core businesses (a)

13.5

14.9

13.5

14.9

Adjusted Gross profit, a Non- GAAP measure

$

34.8

$

36.9

$

209.7

$

196.0

(a) Non-Core business represent our business operations in Australia, Asia, and South America.

Reconciliation of Segment Profit, a GAAP measure, to Adjusted Segment profit, a Non-GAAP measure

Refrigeration
Segment

Consolidated

For the Three Months
Ended March 31,

For the Three Months
Ended March 31,

2018

2017

2018

2017

Segment profit, a GAAP measure

$

11.2

$

14.1

$

70.8

$

64.7

Gross profit from non-core businesses (a)

1.7

3.1

1.7

3.1

Adjusted Segment profit, a Non- GAAP measure

$

9.5

$

11.0

$

69.1

$

61.6

(a) Non-Core business represent our business operations in Australia, Asia, and South America.

Reconciliation of Net Cash Used in Operating Activities, a GAAP measure, to Free Cash Flow, a Non-GAAP measure (dollars in millions)

For the Three Months
Ended March 31,

2018

2017

Net cash used in operating activities, a GAAP measure

$

(83.5)

$

(107.6)

 Purchases of property, plant and equipment

(22.7)

(24.9)

 Proceeds from the disposal of property, plant and equipment

0.1

0.1

 Free cash flow, a Non-GAAP measure

(106.1)

(132.4)

(a) Non-Core business represent our business operations in Australia, Asia, and South America.

Calculation of Debt to EBITDA Ratio (dollars in millions):

Trailing
Twelve 
Months to
March
31, 2018

 Adjusted EBIT^(a) (a)

$

515.7

 Depreciation and amortization expense (b)

65.6

 EBITDA (a + b)

$

581.3

 Total debt at March 31, 2018 (c)

$

1,289.1

 Total Debt to EBITDA ratio ((c / (a + b))

2.2

(a) Adjusted EBIT excludes the non-core business results related to our business operations in Australia, Asia, and South America.

Reconciliation of Adjusted EBIT, a Non-GAAP measure, to Income From Continuing Operations Before Income Taxes, a GAAP measure (dollars in millions)

Trailing
Twelve
Months to
March
31, 2018

 Adjusted EBIT per above, a Non-GAAP measure

$

515.7

Special product quality adjustments

5.4

Items in Losses and other expenses, net that are excluded from segment profit

14.3

Inventory write down

0.2

Restructuring charges

4.0

Interest expense, net

31.5

Loss on assets held for sale

10.3

Non-core business results ^(a)

(5.1)

Other expenses, net

0.5

 Income from continuing operations before income taxes, a GAAP measure

$

454.6

(a) Non-core business results represent activity related to our business operations in Australia, Asia, and South America, not included elsewhere in the reconciliation.