Lennox International Reports Record Fourth Quarter Margin and Profit to Cap Record Year and Raises 2018 EPS Guidance for U.S. Tax Legislation

LENNOX INTERNATIONAL INC. AND SUBSIDIARIES

Consolidated Statements of Operations

(Amounts in millions, except per share data)

For the Three Months Ended
December 31,

(Unaudited)

For the Years Ended
December 31,

2017

2016

2017

2016

Net sales

$

891.8

$

897.3

$

3,839.6

$

3,641.6

Cost of goods sold

632.0

629.7

2,714.4

2,565.1

Gross profit

259.8

267.6

1,125.2

1,076.5

Operating Expenses:

Selling, general and administrative expenses

158.2

164.9

637.7

621.0

(Gains) Losses and other expenses, net

(0.4)

5.8

8.2

11.3

Restructuring charges

1.2

0.7

3.2

1.8

Pension settlement

—

31.4

—

31.4

Income from equity method investments

(2.9)

(3.2)

(18.4)

(18.4)

Operating income

103.7

68.0

494.5

429.4

Interest expense, net

7.3

7.4

30.6

27.0

Other income, net

—

(0.1)

(0.1)

(0.3)

Income from continuing operations before income taxes

96.4

60.7

464.0

402.7

Provision for income taxes

53.3

20.0

156.9

124.1

Income from continuing operations

43.1

40.7

307.1

278.6

Discontinued Operations:

Income (Loss) from discontinued operations before income taxes

0.1

(0.5)

(2.2)

(1.3)

Provision for (Benefit from) income taxes

0.1

(0.2)

(0.8)

(0.5)

Loss from discontinued operations

—

(0.3)

(1.4)

(0.8)

Net income

$

43.1

$

40.4

$

305.7

$

277.8

Earnings per share – Basic:

Income from continuing operations

$

1.03

$

0.95

$

7.28

$

6.41

Loss from discontinued operations

—

(0.01)

(0.03)

(0.02)

Net income

$

1.03

$

0.94

$

7.25

$

6.39

Earnings per share – Diluted:

Income from continuing operations

$

1.02

$

0.94

$

7.17

$

6.34

Loss from discontinued operations

—

(0.01)

(0.03)

(0.02)

Net income

$

1.02

$

0.93

$

7.14

$

6.32

Weighted Average Number of Shares Outstanding - Basic

41.8

42.9

42.2

43.4

Weighted Average Number of Shares Outstanding - Diluted

42.5

43.4

42.8

44.0

Cash dividends declared per share

$

0.51

$

0.43

$

1.96

$

1.65

LENNOX INTERNATIONAL INC. AND SUBSIDIARIES

Segment Net Sales and Profit (Loss)

(Amounts in millions)

For the Three Months Ended
December 31, 
(Unaudited)

For the Years Ended
December 31,

2017

2016

2017

2016

Net Sales

Residential Heating & Cooling

$

476.6

$

476.3

$

2,140.4

$

2,000.8

Commercial Heating & Cooling

250.3

243.3

973.8

917.9

Refrigeration

164.9

177.7

725.4

722.9

$

891.8

$

897.3

$

3,839.6

$

3,641.6

Segment Profit (Loss) ⁽¹⁾

Residential Heating & Cooling

$

76.2

$

81.9

$

373.9

$

348.8

Commercial Heating & Cooling

43.5

38.7

157.3

149.3

Refrigeration

16.9

15.6

72.6

68.9

Corporate and other

(30.6)

(31.6)

(89.2)

(97.4)

Total segment profit

106.0

104.6

514.6

469.6

Reconciliation to Operating income:

Special product quality adjustments

(0.3)

—

5.4

(0.4)

Items in (Gains) Losses and other expenses, net that are excluded from segment profit (loss) ⁽¹⁾

1.4

4.5

11.5

7.4

Restructuring charges

1.2

0.7

3.2

1.8

Pension settlement

—

31.4

—

31.4

Operating income

$

103.7

$

68.0

$

494.5

$

429.4

⁽¹⁾

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

•

Special product quality adjustments;

•

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

◦

Net change in unrealized gains and/or losses on unsettled futures contracts,

◦

Special legal contingency charges,

◦

Asbestos-related litigation,

◦

Environmental liabilities,

◦

Contractor tax payments,

◦

Acquisition/disposition costs, and

◦

Other items, net;

•

Restructuring charges; and

•

Pension settlement.

LENNOX INTERNATIONAL INC. AND SUBSIDIARIES

Consolidated Balance Sheets

(Amounts in millions, except shares and par values)

As of December 31,
2017

As of December 31,
2016

ASSETS

Current assets:

Cash and cash equivalents

$

68.2

$

50.2

Accounts and notes receivable, net of allowances of $5.9 and $6.7 in 2017 and 2016, respectively

506.5

469.8

Inventories, net

484.2

418.5

Other assets

78.4

67.4

Total current assets

1,137.3

1,005.9

Property, plant and equipment, net of accumulated depreciation of $774.2 and $717.2 in 2017 and 2016, respectively

397.8

361.4

Goodwill

200.5

195.1

Deferred income taxes

94.4

136.7

Other assets, net

61.5

61.2

Total assets

$

1,891.5

$

1,760.3

LIABILITIES AND STOCKHOLDERS' EQUITY

Current Liabilities:

Short-term debt

$

0.9

$

52.4

Current maturities of long-term debt

32.6

200.1

Accounts payable

348.6

361.2

Accrued expenses

270.3

265.9

Income taxes payable

2.1

9.0

Total current liabilities

654.5

888.6

Long-term debt

970.5

615.7

Post-retirement benefits, other than pensions

2.6

2.8

Pensions

84.5

87.5

Other liabilities

129.3

127.7

Total liabilities

1,841.4

1,722.3

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

1,061.5

1,046.2

Retained earnings

1,575.9

1,353.0

Accumulated other comprehensive loss

(157.4)

(195.1)

Treasury stock, at cost, 45,361,145 shares and 44,195,250 shares for 2017 and 2016, respectively

(2,430.8)

(2,167.4)

Noncontrolling interests

—

0.4

Total stockholders' equity

50.1

38.0

Total liabilities and stockholders' equity

$

1,891.5

$

1,760.3

LENNOX INTERNATIONAL INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flow

(Amounts in millions)

For the Years Ended December 31,

2017

2016

Cash flows from operating activities:

Net income

$

305.7

$

277.8

Adjustments to reconcile net income to net cash provided by operating activities:

   Income from equity method investments

(18.4)

(18.4)

   Dividends from affiliates

14.7

14.9

   Restructuring expenses, net of cash paid

0.8

(0.8)

   Provision for bad debts

3.9

2.4

   Unrealized gains, net on derivative contracts

(2.0)

(0.7)

   Stock-based compensation expense

24.9

31.7

   Depreciation and amortization

64.6

58.1

   Deferred income taxes

43.3

(4.0)

   Pension expense

5.3

37.7

   Pension contributions

(3.5)

(53.9)

   Other items, net

1.3

0.9

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

   Accounts and notes receivable

(28.4)

(50.6)

   Inventories

(56.4)

0.3

   Other current assets

(6.1)

0.1

   Accounts payable

(18.5)

40.1

   Accrued expenses

0.3

36.2

   Income taxes payable and receivable

(6.7)

(0.1)

   Other, net

0.3

2.2

Net cash provided by operating activities

325.1

373.9

Cash flows from investing activities:

Proceeds from the disposal of property, plant and equipment

0.2

0.2

Purchases of property, plant and equipment

(98.3)

(84.3)

Net cash used in investing activities

(98.1)

(84.1)

Cash flows from financing activities:

Short-term borrowings, net

(1.5)

(2.4)

Asset securitization borrowings

315.0

145.0

Asset securitization payments

(89.0)

(295.0)

Long-term debt borrowings

—

350.0

Long-term debt payments

(200.9)

(58.8)

Borrowings from credit facility

2,376.5

2,336.5

Payments on credit facility

(2,265.5)

(2,346.0)

Payments of deferred financing costs

(0.2)

(4.2)

Proceeds from employee stock purchases

3.1

2.6

Repurchases of common stock

(250.0)

(300.0)

Repurchases of common stock to satisfy employee withholding tax obligations

(26.1)

(33.3)

Cash dividends paid

(79.7)

(69.0)

Net cash used in financing activities

(218.3)

(274.6)

Increase in cash and cash equivalents

8.7

15.2

Effect of exchange rates on cash and cash equivalents

9.3

(3.9)

Cash and cash equivalents, beginning of year

50.2

38.9

Cash and cash equivalents, end of year

$

68.2

$

50.2

Supplementary disclosures of cash flow information:

Cash paid during the year for:

Interest, net

$

32.4

$

26.3

Income taxes (net of refunds)

$

119.3

$

127.4

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.

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

For the Three Months Ended December 31,

2017

2016

Pre-Tax

Tax Impact ^(e)

After Tax

Pre-Tax

Tax Impact ^(e)

After Tax

Income from continuing operations, a GAAP measure

96.4

(53.3)

43.1

$

60.7

$

(20.0)

$

40.7

Restructuring charges

1.2

(0.5)

0.7

0.7

(0.2)

0.5

Special product quality adjustments ^(b)

(0.3)

0.1

(0.2)

—

—

—

Special legal contingency charges ^(a)

—

—

—

1.4

—

1.4

Asbestos-related litigation ^(a)

(0.3)

0.1

(0.2)

4.0

(1.4)

2.6

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

(0.1)

0.1

—

(1.7)

0.6

(1.1)

Environmental liabilities ^(a)

0.9

(0.2)

0.7

0.8

(0.2)

0.6

Contractor tax payments ^(a)

0.1

—

0.1

—

—

—

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

—

(14.0)

(14.0)

—

—

—

Tax legislation impact ^(c)

—

40.2

40.2

—

—

—

Pension settlement charges

—

—

—

31.4

(10.9)

20.5

Other items, net ^(a)

0.8

(0.2)

0.6

—

—

—

Adjusted income from continuing operations, a non-GAAP measure

$

98.7

$

(27.7)

$

71.0

$

97.3

$

(32.1)

$

65.2

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

$

1.02

$

0.94

Restructuring charges

0.02

0.01

Special product quality adjustments ^(b)

—

—

Special legal contingency charges ^(a)

—

0.03

Asbestos-related litigation ^(a)

—

0.06

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

—

(0.02)

Environmental liabilities ^(a)

0.02

0.01

Contractor tax payments ^(a)

—

—

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

(0.33)

—

Tax legislation impact ^(c)

0.95

—

Pension settlement charges

—

0.47

Other items, net ^(a)

0.01

—

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

(0.01)

—

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

$

1.68

$

1.50

 (a)

 Recorded in (Gains) 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.

For the Years Ended December 31,

2017

2016

Pre-Tax

Tax Impact ^(e)

After Tax

Pre-Tax

Tax Impact ^(e)

After Tax

Income from continuing operations, a GAAP measure

$

464.0

$

(156.9)

$

307.1

$

402.7

$

(124.1)

$

278.6

Restructuring charges

3.2

(1.1)

2.1

1.8

(0.6)

1.2

Special product quality adjustments ^(b)

5.4

(1.9)

3.5

(0.4)

0.1

(0.3)

Special legal contingency charges ^(a)

3.7

(0.4)

3.3

1.9

(0.1)

1.8

Asbestos-related litigation ^(a)

3.5

(1.2)

2.3

6.3

(2.2)

4.1

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

0.9

(0.3)

0.6

(3.6)

1.3

(2.3)

Environmental liabilities ^(a)

2.2

(0.6)

1.6

1.9

(0.5)

1.4

Contractor tax payments ^(a)

0.1

—

0.1

0.6

(0.2)

0.4

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

—

(23.6)

(23.6)

—

—

—

Tax legislation impact ^(c)

—

40.2

40.2

—

—

—

Pension settlement charges

—

—

—

31.4

(10.9)

20.5

Other items, net ^(a)

$

1.1

$

(0.4)

$

0.7

0.4

(0.2)

0.2

Adjusted income from continuing operations, a non-GAAP measure

$

484.1

$

(146.2)

$

337.9

$

443.0

$

(137.4)

$

305.6

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

$

7.17

$

6.34

Restructuring charges

0.05

0.03

Special product quality adjustments ^(b)

0.08

(0.01)

Special legal contingency charges ^(a)

0.08

0.04

Asbestos-related litigation ^(a)

0.05

0.09

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

0.01

(0.05)

Environmental liabilities ^(a)

0.04

0.03

Contractor tax payments ^(a)

—

0.01

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

(0.55)

—

Tax legislation impact ^(c)

0.94

—

Pension settlement charges

—

0.47

Other items, net ^(a)

0.02

—

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

0.03

—

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

$

7.92

$

6.95

 (a)

 Recorded in (Gains) 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.

For the Three Months Ended
December 31,
(Unaudited)

For the Years Ended

December 31,

2017

2016

2017

2016

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

Realized losses on settled future contracts ^(a)

$

(0.5)

$

(0.2)

$

(1.7)

$

1.1

Foreign currency exchange losses ^(a)

(1.4)

1.2

(1.8)

2.2

Losses on disposal of fixed assets ^(a)

0.1

0.3

0.2

0.5

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

(0.1)

(1.7)

0.9

(3.6)

Special legal contingency charges ^(b)

—

1.4

3.7

1.9

Asbestos-related litigation ^(b)

(0.3)

4.0

3.5

6.3

Environmental liabilities ^(b)

0.9

0.8

2.2

1.9

Contractor tax payments ^(b)

0.1

—

0.1

0.6

Acquisition/disposition expenses ^(b)

1.1

—

1.1

0.4

Other items, net ^(b)

(0.3)

—

—

—

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

$

(0.4)

$

5.8

$

8.2

$

11.3

   ^(b)

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

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

For the Year
Ended
December 31,
2018
ESTIMATED

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

$9.75-$10.35

Reconciling items

0.00

 Adjusted income 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 December 31,

For the Twelve Months
Ended December 31,

2017

2016

2017

2016

Average shares outstanding - diluted, a GAAP measure

42.5

43.4

42.8

44.0

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

42.3

43.4

42.6

44.0

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

For the Three Months
Ended December 31,

For the Years
Ended December 31,

2017

2016

2017

2016

Net cash provided by operating activities, a GAAP measure

$

196.1

$

247.0

$

325.1

$

373.9

 Purchases of property, plant and equipment

(37.8)

(24.9)

(98.3)

(84.3)

 Proceeds from the disposal of property, plant and equipment

—

0.2

0.2

0.2

 Free cash flow, a Non-GAAP measure

$

158.3

$

222.3

$

227.0

$

289.8

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

Trailing
Twelve 
Months to 
December 31,
2017

 Adjusted EBIT (a)

$

514.6

 Depreciation and amortization expense (b)

63.5

 EBITDA (a + b)

$

578.1

 Total debt at December 31, 2017 (c)

$

1,004.0

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

1.7

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 
December 31,
2017

 Adjusted EBIT per above, a Non-GAAP measure

$

514.6

 Special product quality adjustments

5.4

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

11.5

 Restructuring charges

3.2

 Interest expense, net

30.6

 Other expenses, net

(0.1)

 Income from continuing operations before income taxes, a GAAP measure

$

464.0