Lennox International Reports Record Quarterly Profit in Second Quarter

LENNOX INTERNATIONAL INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited, in millions, except per share data)

For the Three Months
Ended June 30,

For the Six Months
Ended June 30,

2013

2012

2013

2012

Net sales

$

913.1

$

840.4

$

1,581.5

$

1,454.8

Cost of goods sold

659.1

632.3

1,165.5

1,105.8

Gross profit

254.0

208.1

416.0

349.0

Operating Expenses:

Selling, general and administrative expenses

151.3

130.7

287.0

253.9

Losses and other expenses, net

2.1

1.4

3.2

—

Restructuring charges

2.4

0.1

2.9

2.7

Income from equity method investments

(4.2)

(3.9)

(7.4)

(6.3)

Operational income from continuing operations

102.4

79.8

130.3

98.7

Interest expense, net

3.6

4.3

7.0

9.0

Other expense (income), net

(0.2)

0.1

(0.1)

0.1

Income from continuing operations before income taxes

99.0

75.4

123.4

89.6

Provision for income taxes

34.7

25.9

43.3

30.8

Income from continuing operations

64.3

49.5

80.1

58.8

Discontinued Operations:

Loss from discontinued operations before income taxes

—

(9.2)

(13.4)

(32.7)

Benefit from income taxes

—

(4.4)

(5.6)

(12.5)

Loss from discontinued operations

—

(4.8)

(7.8)

(20.2)

Net income

$

64.3

$

44.7

$

72.3

$

38.6

Earnings per share – Basic:

Income from continuing operations

$

1.28

$

0.97

$

1.60

$

1.15

Loss from discontinued operations

—

(0.09)

(0.16)

(0.39)

Net income

$

1.28

$

0.88

$

1.44

$

0.76

Earnings per share – Diluted:

Income from continuing operations

$

1.26

$

0.96

$

1.57

$

1.14

Loss from discontinued operations

—

(0.09)

(0.15)

(0.39)

Net income

$

1.26

$

0.87

$

1.42

$

0.75

Average shares outstanding:

Basic

50.2

51.0

50.2

50.9

Diluted

50.9

51.6

51.0

51.5

Cash dividends declared per share

$

0.24

$

0.18

$

0.44

$

0.36

LENNOX INTERNATIONAL INC. AND SUBSIDIARIES

SEGMENT NET SALES AND PROFIT (LOSS)

(Unaudited, in millions)

For the Three Months
Ended June 30,

For the Six Months
Ended June 30,

2013

2012

2013

2012

Net Sales

Residential Heating & Cooling

$

476.2

$

411.9

$

790.7

$

684.5

Commercial Heating & Cooling

229.6

221.4

392.6

378.1

Refrigeration

207.3

207.1

398.2

392.2

$

913.1

$

840.4

$

1,581.5

$

1,454.8

Segment Profit (Loss)  (A)

Residential Heating & Cooling

$

66.2

$

42.0

$

86.7

$

53.0

Commercial Heating & Cooling

34.6

33.2

45.7

41.5

Refrigeration

25.8

21.2

42.5

35.5

Corporate and other

(20.9)

(15.4)

(39.6)

(29.4)

Subtotal that includes segment profit and eliminations

105.7

81.0

135.3

100.6

Reconciliation to Income from continuing operations before income taxes:

Special product quality adjustments

0.1

0.5

(0.1)

0.1

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

0.8

0.6

2.2

(0.9)

Restructuring charges

2.4

0.1

2.9

2.7

Interest expense, net

3.6

4.3

7.0

9.0

Other expense (income), net

(0.2)

0.1

(0.1)

0.1

Income from continuing operations before income taxes

$

99.0

$

75.4

$

123.4

$

89.6

(A) The Company defines segment profit and loss as a segment's Income or Loss from continuing operations before income taxes included in the accompanying Consolidated Statements of Operations, excluding:

•  Special product quality adjustments;

•  Items in Losses and other expenses, net that are noted in (B);

•  Restructuring charges;

•  Goodwill, long-lived assets and equity method investment impairments;

•  Interest expense, net;

•  Other expense (income), net.

(B) Items in Losses and other expenses, net that are excluded from segment profit or loss are asset impairments, net change in unrealized gains and/or losses on unsettled future contracts, special legal contingency charges and other items.

LENNOX INTERNATIONAL INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(In millions, except shares and par value)

As of June
30, 2013

As of December
31, 2012

(unaudited)

ASSETS

Current Assets:

Cash and cash equivalents

$

45.3

$

51.8

Accounts and notes receivable, net of allowances of $9.5 in 2013 and 2012

542.3

373.4

Inventories, net

469.2

374.8

Deferred income taxes, net

31.7

27.5

Other assets

41.4

61.0

Assets of discontinued operations

—

98.6

Total current assets

1,129.9

987.1

Property, plant and equipment, net of accumulated depreciation of $600.4 and $584.8 in 2013 and 2012, respectively

308.7

298.2

Goodwill

217.6

223.8

Deferred income taxes

113.9

102.8

Other assets, net

79.5

80.0

Total assets

$

1,849.6

$

1,691.9

LIABILITIES AND STOCKHOLDERS' EQUITY

Current Liabilities:

Short-term debt

$

125.9

$

34.9

Current maturities of long-term debt

0.4

0.7

Accounts payable

373.6

284.7

Accrued expenses

257.1

259.6

Income taxes payable

22.7

4.5

Liabilities of discontinued operations

—

55.2

Total current liabilities

779.7

639.6

Long-term debt

410.8

351.0

Post-retirement benefits, other than pensions

4.9

6.1

Pensions

137.5

134.4

Other liabilities

69.5

64.0

Total liabilities

1,402.4

1,195.1

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

914.9

898.3

Retained earnings

794.7

744.4

Accumulated other comprehensive loss

(103.1)

(22.3)

Treasury stock, at cost, 37,250,915 shares and 36,937,632 shares in 2013 and 2012, respectively

(1,160.2)

(1,124.5)

Total stockholders' equity

447.2

496.8

Total liabilities and stockholders' equity

$

1,849.6

$

1,691.9

LENNOX INTERNATIONAL INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

For the Six Months Ended June 30, 2013 and 2012

(Unaudited, in millions)

2013

2012

Cash flows from operating activities:

Net income

$

72.3

$

38.6

Net loss from discontinued operations

7.8

20.2

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

   Income from equity method investments

(7.4)

(6.3)

   Dividends from affiliates

1.7

2.0

   Restructuring expenses, net of cash paid

(0.5)

1.5

   Provision for bad debts

1.9

1.3

   Unrealized loss (gain) on derivative contracts

2.3

(0.3)

   Stock-based compensation expense

15.2

7.8

   Depreciation and amortization

28.5

27.4

   Deferred income taxes

(1.0)

3.9

   Other items, net

13.8

4.2

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

   Accounts and notes receivable

(177.1)

(119.9)

   Inventories

(118.3)

(113.4)

   Other current assets

(3.6)

—

   Accounts payable

80.0

100.4

   Accrued expenses

(13.3)

14.7

   Income taxes payable and receivable

12.9

7.7

   Other

8.5

1.9

Net cash used in discontinued operations

(12.0)

(2.3)

       Net cash used in operating activities

(88.3)

(10.6)

Cash flows from investing activities:

   Proceeds from the disposal of property, plant and equipment

—

0.1

   Purchases of property, plant and equipment

(23.4)

(16.4)

   Net proceeds from sale of businesses

4.8

7.2

   Acquisition of businesses

—

—

   Change in restricted cash

—

—

   Net cash used in discontinued operations

(0.1)

(0.4)

        Net cash used in investing activities

(18.7)

(9.5)

Cash flows from financing activities:

   Short-term borrowings, net

1.6

9.9

   Asset securitization borrowings

270.0

310.0

   Asset securitization payments

(180.0)

(310.0)

   Long-term debt payments

(0.5)

(0.6)

   Borrowings from revolving credit facility

700.5

526.0

   Payments on revolving credit facility

(640.5)

(471.5)

   Proceeds from employee stock purchases

1.0

0.2

   Repurchases of common stock

(33.0)

—

   Repurchases of common stock to satisfy employee withholding tax obligations

(5.8)

(2.6)

   Excess tax benefits related to share-based payments

3.4

1.2

   Cash dividends paid

(10.1)

(18.3)

        Net cash provided by financing activities

106.6

44.3

Increase (decrease) in cash and cash equivalents

(0.4)

24.2

Effect of exchange rates on cash and cash equivalents

(6.1)

(0.1)

Cash and cash equivalents, beginning of period

51.8

45.0

Cash and cash equivalents, end of period

$

45.3

$

69.1

Supplementary disclosures of cash flow information:

   Cash paid during the period for:

        Interest, net

$

7.7

$

9.5

        Income taxes (net of refunds)

$

22.3

$

8.0

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.  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 June 30,

For the Six Months
Ended June 30,

2013

2012

2013

2012

Income from continuing operations, a GAAP measure

$

64.3

$

49.5

$

80.1

$

58.8

Restructuring charges, after tax

1.6

0.1

1.9

1.8

Special product quality adjustments, after tax (b)

0.1

0.6

(0.1)

0.3

Special legal contingency charges, after tax (a)

—

—

0.2

—

Net change in unrealized losses (gains) on unsettled future contracts, after tax (a)

0.5

0.3

1.2

(0.8)

Other items, net, after tax (a)

—

0.1

0.2

0.3

Adjusted income from continuing operations, a non-GAAP measure

$

66.5

$

50.6

$

83.5

$

60.4

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

$

1.26

$

0.96

$

1.57

$

1.14

Restructuring charges, after tax

0.03

—

0.04

0.03

Special product quality adjustments, after tax (b)

—

0.01

—

0.01

Special legal contingency charges, after tax (a)

—

—

—

—

Net change in unrealized losses (gains) on unsettled future contracts, after tax (a)

0.01

0.01

0.02

(0.02)

Other items, net, after tax (a)

0.01

—

0.01

0.01

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

$

1.31

$

0.98

$

1.64

$

1.17

(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

For the Three Months
Ended June 30,

For the Six Months
Ended June 30,

2013

2012

2013

2012

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

Realized loss on settled future contracts (a)

$

0.4

$

0.7

$

0.4

$

1.0

Foreign currency exchange loss (gain) (a)

0.9

(0.1)

0.6

(0.3)

Loss on disposal of fixed assets (a)

—

0.2

—

0.2

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

0.7

0.5

1.8

(1.2)

Special legal contingency charge (b)

—

—

0.2

—

Other items, net (b)

0.1

0.1

0.2

0.3

Losses and other expenses, net (pre-tax)

$

2.1

$

1.4

$

3.2

$

—

(a) Included in segment profit (loss) and adjusted income from continuing operations

(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,

2013

ESTIMATED

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

$3.45 - $3.75

Restructuring charges and net change in unrealized losses on open future contracts

(0.07)

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

$3.38 - $3.68

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

For the Three Months Ended
June 30,

For the Six Months Ended
June 30,

2013

2012

2013

2012

Net cash provided by (used in) operating activities, a GAAP measure

$

49.0

$

23.7

$

(88.3)

$

(10.6)

Purchases of property, plant and equipment

(11.3)

(9.8)

(23.4)

(16.4)

Proceeds from the disposal of property, plant and equipment

—

—

—

0.1

Free cash flow, a Non-GAAP measure

$

37.7

$

13.9

$

(111.7)

$

(26.9)

Calculation of Debt to EBITDA Ratio:

Trailing

Twelve

Months to

June 30, 2013

EBIT (a)

$

258.9

Depreciation and amortization expense (b)

$

56.5

EBITDA (a + b)

$

315.4

Total debt at June 30, 2013 (c)

$

537.1

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

1.7

Reconciliation of EBIT, a Non-GAAP measure, to Income From Continuing Operations Before Income Taxes, a GAAP measure

Trailing

Twelve

Months to

June 30, 2013

EBIT per above, a Non-GAAP measure

$

258.9

Special product quality adjustments

0.9

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

2.9

Restructuring charges

4.4

Interest expense, net

15.1

Other expenses, net

0.1

Income from continuing operations before income taxes, a GAAP measure

$

235.5