Lennox International Reports Strong Fourth Quarter to Cap Year of Record Profit and Cash Flow

LENNOX INTERNATIONAL INC. AND SUBSIDIARIES

Consolidated Statements of Operations

(Amounts in millions, except per share data)

For the Three Months Ended
December 31,

For the Years Ended
December 31,

2016

2015

2016

2015

Net sales

$

897.3

$

834.1

$

3,641.6

$

3,467.4

Cost of goods sold

629.7

606.5

2,565.1

2,520.0

Gross profit

267.6

227.6

1,076.5

947.4

Operating Expenses:

Selling, general and administrative expenses

164.9

150.6

621.0

580.5

Losses and other expenses, net

5.8

6.8

11.3

21.7

Restructuring charges

0.7

1.4

1.8

3.2

Goodwill impairment

—

5.5

—

5.5

Asset impairment

—

44.5

—

44.5

Pension settlement

31.4

—

31.4

—

Income from equity method investments

(3.2)

(1.6)

(18.4)

(13.4)

Operating income

68.0

20.4

429.4

305.4

Interest expense, net

7.4

5.8

27.0

23.6

Other income, net

(0.1)

(0.1)

(0.3)

(0.8)

Income from continuing operations before income taxes

60.7

14.7

402.7

282.6

Provision for income taxes

20.0

3.5

124.1

95.4

Income from continuing operations

40.7

11.2

278.6

187.2

Discontinued Operations:

Loss from discontinued operations before income taxes

(0.5)

—

(1.3)

(1.0)

Benefit from income taxes

(0.2)

—

(0.5)

(0.4)

Loss from discontinued operations

(0.3)

—

(0.8)

(0.6)

Net income

$

40.4

$

11.2

$

277.8

$

186.6

Earnings per share – Basic:

Income from continuing operations

$

0.95

$

0.25

$

6.41

$

4.17

Loss from discontinued operations

(0.01)

—

(0.02)

(0.01)

Net income

$

0.94

$

0.25

$

6.39

$

4.16

Earnings per share – Diluted:

Income from continuing operations

$

0.94

$

0.25

$

6.34

$

4.11

Loss from discontinued operations

(0.01)

—

(0.02)

(0.02)

Net income

$

0.93

$

0.25

$

6.32

$

4.09

Weighted Average Number of Shares Outstanding - Basic

42.9

44.9

43.4

44.9

Weighted Average Number of Shares Outstanding - Diluted

43.4

45.5

44.0

45.6

Cash dividends declared per share

$

0.43

$

0.36

$

1.65

$

1.38

LENNOX INTERNATIONAL INC. AND SUBSIDIARIES

Segment Net Sales and Profit (Loss)

(Amounts in millions)

For the Three Months Ended
December 31,

For the Years Ended
December 31,

2016

2015

2016

2015

Net Sales

Residential Heating & Cooling

$

476.3

$

431.2

$

2,000.8

$

1,866.9

Commercial Heating & Cooling

243.3

226.9

917.9

887.2

Refrigeration

177.7

176.0

722.9

713.3

$

897.3

$

834.1

$

3,641.6

$

3,467.4

Segment Profit (Loss) ⁽¹⁾

Residential Heating & Cooling

$

81.9

$

57.1

$

348.8

$

278.4

Commercial Heating & Cooling

38.7

34.8

149.3

130.4

Refrigeration

15.6

15.4

68.9

52.9

Corporate and other

(31.6)

(26.5)

(97.4)

(84.1)

Total segment profit

104.6

80.8

469.6

377.6

Reconciliation to Operating income:

Special product quality adjustments

—

(1.5)

(0.4)

(2.2)

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

4.5

4.9

7.4

15.6

Restructuring charges

0.7

1.4

1.8

3.2

Pension settlement

31.4

—

31.4

—

Goodwill impairment

—

5.5

—

5.5

Asset impairment

—

44.5

—

44.5

One time inventory write down

—

5.6

—

5.6

Operating income

$

68.0

$

20.4

$

429.4

$

305.4

⁽¹⁾  The Company defines segment profit and loss as a segment's operating income included in the accompanying Consolidated Statements of Operations, excluding:

• Special product quality adjustments;
• The following items in 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 costs, and
  • Other items, net;
• Restructuring charges;
• Goodwill and asset impairments;
• Pension settlement; and
• One time inventory write down.

LENNOX INTERNATIONAL INC. AND SUBSIDIARIES

Consolidated Balance Sheets

(Amounts in millions, except shares and par values)

As of December 31,
2016

As of December 31,
2015

ASSETS

Current assets:

Cash and cash equivalents

$

50.2

$

38.9

Accounts and notes receivable, net of allowances of $6.7 and $6.3 in 2016 and 2015, respectively

469.8

422.8

Inventories, net

418.5

418.8

Other assets

67.4

57.7

Total current assets

1,005.9

938.2

Property, plant and equipment, net of accumulated depreciation of $717.2 and $682.9 in 2016 and 2015, respectively

361.4

339.6

Goodwill

195.1

195.1

Deferred income taxes

136.7

145.7

Other assets, net

61.2

58.8

Total assets

$

1,760.3

$

1,677.4

LIABILITIES AND STOCKHOLDERS' EQUITY

Current Liabilities:

Short-term debt

$

52.4

$

204.1

Current maturities of long-term debt

200.1

31.0

Accounts payable

361.2

320.1

Accrued expenses

265.9

242.6

Income taxes payable

9.0

26.0

Total current liabilities

888.6

823.8

Long-term debt

615.7

506.0

Post-retirement benefits, other than pensions

2.8

4.1

Pensions

87.5

120.8

Other liabilities

127.7

121.1

Total liabilities

1,722.3

1,575.8

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

1,046.2

1,002.4

Retained earnings

1,353.0

1,146.7

Accumulated other comprehensive loss

(195.1)

(204.7)

Treasury stock, at cost, 44,195,250 shares and 42,491,910 shares for 2016 and 2015, respectively

(2,167.4)

(1,844.1)

Noncontrolling interests

0.4

0.4

Total stockholders' equity

38.0

101.6

Total liabilities and stockholders' equity

$

1,760.3

$

1,677.4

LENNOX INTERNATIONAL INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flow

(Amounts in millions)

For the Years Ended December 31,

2016

2015

Cash flows from operating activities:

Net income

$

277.8

$

186.6

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

 Income from equity method investments

(18.4)

(13.4)

 Dividends from affiliates

14.9

11.0

 Restructuring expenses, net of cash paid

(0.8)

—

 Goodwill impairment

—

5.5

 Impairment of assets

—

44.5

 Provision for bad debts

2.4

2.8

 Unrealized (gains) losses on derivative contracts

(0.7)

0.8

 Stock-based compensation expense

31.7

26.6

 Depreciation and amortization

58.1

62.8

 Deferred income taxes

(4.0)

(21.3)

 Pension expense

37.7

10.6

 Pension contributions

(53.9)

(3.9)

 Other items, net

0.9

1.0

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

 Accounts and notes receivable

(50.6)

(23.5)

 Inventories

0.3

28.8

 Other current assets

0.1

(1.6)

 Accounts payable

40.1

(2.9)

 Accrued expenses

36.2

4.2

 Income taxes payable and receivable

(19.5)

10.9

 Other, net

2.2

1.7

Net cash provided by operating activities

354.5

331.2

Cash flows from investing activities:

Proceeds from the disposal of property, plant and equipment

0.2

0.1

Purchases of property, plant and equipment

(84.3)

(69.9)

Net cash used in investing activities

(84.1)

(69.8)

Cash flows from financing activities:

Short-term borrowings, net

(2.4)

(1.7)

Asset securitization borrowings

70.0

40.0

Asset securitization payments

(220.0)

(60.0)

Term loan borrowings from credit facility

350.0

—

Long-term debt payments

(58.8)

(24.0)

Borrowings from credit facility

2,336.5

1,671.0

Payments on credit facility

(2,346.0)

(1,807.5)

Payments of deferred financing costs

(4.2)

—

Proceeds from employee stock purchases

2.6

2.4

Repurchases of common stock

(300.0)

—

Repurchases of common stock to satisfy employee withholding tax obligations

(33.3)

(32.0)

Excess tax benefits related to share-based payments

19.4

22.4

Cash dividends paid

(69.0)

(59.3)

Net cash used in financing activities

(255.2)

(248.7)

Increase in cash and cash equivalents

15.2

12.7

Effect of exchange rates on cash and cash equivalents

(3.9)

(11.3)

Cash and cash equivalents, beginning of year

38.9

37.5

Cash and cash equivalents, end of year

$

50.2

$

38.9

Supplementary disclosures of cash flow information:

Cash paid during the year for:

Interest, net

$

26.3

$

23.7

Income taxes (net of refunds)

$

127.4

$

83.2

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,

2016

2015

Pre-Tax

Tax
Impact ^(c)

After Tax

Pre-Tax

Tax
Impact ^(c)

After Tax

Income from continuing operations, a GAAP measure

60.7

(20.0)

40.7

$

14.7

$

(3.5)

$

11.2

Restructuring charges, after tax

0.7

(0.2)

0.5

1.4

(0.4)

1.0

Asset impairment, after tax

—

—

—

44.5

(15.5)

29.0

Goodwill impairment, after tax

—

—

—

5.5

(1.9)

3.6

Special product quality adjustments, after tax (b)

—

—

—

(1.5)

0.6

(0.9)

Special legal contingency charges, after tax (a)

1.4

—

1.4

1.9

(1.3)

0.6

Asbestos-related litigation, after tax (a)

4.0

(1.4)

2.6

2.0

(0.7)

1.3

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

(1.7)

0.6

(1.1)

(0.2)

—

(0.2)

Inventory write down, after tax (b)

—

—

—

5.6

(1.8)

3.8

Environmental liabilities, after tax (a)

0.8

(0.2)

0.6

0.3

—

0.3

Contractor tax payments, after tax (a)

—

—

—

0.2

—

0.2

Pension settlement charges

31.4

(10.9)

20.5

—

—

—

Other items, net, after tax (a)

—

—

—

0.7

(0.3)

0.4

Adjusted income from continuing operations, a non-GAAP measure

$

97.3

$

(32.1)

$

65.2

$

75.1

$

(24.8)

$

50.3

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

$

0.94

$

0.25

Restructuring charges, after tax

0.01

0.02

Asset impairment, after tax

—

0.64

Goodwill impairment, after tax

—

0.08

Special product quality adjustments, after tax (b)

—

(0.02)

Special legal contingency charges, after tax (a)

0.03

0.01

Asbestos-related litigation, after tax (a)

0.06

0.03

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

(0.02)

—

Inventory write down, after tax (b)

—

0.08

Environmental liabilities, after tax (a)

0.01

0.01

Contractor tax payments, after tax (a)

—

—

Pension settlement charges

0.47

—

Other items, net, after tax (a)

—

0.01

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

$

1.50

$

1.11

(a) Recorded in Losses (gains) and other expenses, net in the Consolidated Statements of Operations

(b) Recorded in Cost of goods sold in the Consolidated Statements of Operations

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

For the Years Ended December 31,

2016

2015

Pre-Tax

Tax
Impact^(c)

After Tax

Pre-Tax

Tax
Impact^(c)

After Tax

Income from continuing operations, a GAAP measure

$

402.7

$

(124.1)

$

278.6

$

282.6

$

(95.4)

$

187.2

Restructuring charges, after tax

1.8

(0.6)

1.2

3.2

(0.9)

2.3

Asset impairment, after tax

—

—

—

44.5

(15.5)

29.0

Goodwill impairment, after tax

—

—

—

5.5

(1.9)

3.6

Special product quality adjustments, after tax (b)

(0.4)

0.1

(0.3)

(2.1)

0.8

(1.3)

Special legal contingency charges, after tax (a)

1.9

(0.1)

1.8

7.4

(3.4)

4.0

Asbestos-related litigation, after tax (a)

6.3

(2.2)

4.1

3.0

(1.1)

1.9

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

(3.6)

1.3

(2.3)

0.6

(0.2)

0.4

Inventory write down, after tax (b)

—

—

—

5.6

(1.8)

3.8

Environmental liabilities, after tax (a)

1.9

(0.5)

1.4

1.0

—

1.0

Contractor tax payments, after tax (a)

0.6

(0.2)

0.4

2.6

(0.9)

1.7

Pension settlement charges

31.4

(10.9)

20.5

—

—

—

Other items, net, after tax (a)

$

0.4

$

(0.2)

$

0.2

0.9

(0.3)

0.6

Adjusted income from continuing operations, a non-GAAP measure

$

443.0

$

(137.4)

$

305.6

$

354.8

$

(120.6)

$

234.2

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

$

6.34

$

4.11

Restructuring charges, after tax

0.03

0.05

Asset impairment, after tax

—

0.64

Goodwill impairment, after tax

—

0.08

Special product quality adjustments, after tax (b)

(0.01)

(0.03)

Special legal contingency charges, after tax (a)

0.04

0.09

Asbestos-related litigation, after tax (a)

0.09

0.04

Net change in unrealized losses (gains) on unsettled futures contracts and other items, net, after tax (a)

(0.05)

0.01

Inventory write down (b)

—

0.08

Environmental liabilities, after tax (a)

0.03

0.02

Contractor tax payments, after tax (a)

0.01

0.04

Pension settlement charges

0.47

—

Other items, net, after tax (a)

—

0.01

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

$

6.95

$

5.14

(a) Recorded in Losses (gains) and other expenses, net in the Consolidated Statements of Operations

(b) Recorded in Cost of goods sold in the Consolidated Statements of Operations

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

For the Three Months Ended
December 31,

2016

2015

2016

2015

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

Realized losses on settled future contracts ^(a)

$

(0.2)

$

0.6

$

1.1

$

1.9

Foreign currency exchange losses ^(a)

1.2

0.8

2.2

3.6

Losses on disposal of fixed assets ^(a)

0.3

0.5

0.5

0.6

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

(1.7)

(0.2)

(3.6)

0.6

Special legal contingency charges ^(b)

1.4

1.9

1.9

7.4

Asbestos-related litigation ^(b)

4.0

2.0

6.3

3.0

Environmental liabilities ^(b)

0.8

0.3

1.9

1.0

Contractor tax payments ^(b)

—

0.2

0.6

2.6

Acquisition costs ^(b)

—

0.7

0.4

1.0

Other items, net ^(b)

—

—

—

—

Losses and other expenses, net (pre-tax)

$

5.8

$

6.8

$

11.3

$

21.7

   (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,
2017
ESTIMATED

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

$7.55-$8.15

 Restructuring and other items

0.00

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

$7.55-$8.15

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,

2016

2015

2016

2015

Net cash provided by operating activities, a GAAP measure

$

247.6

$

224.3

$

354.5

$

331.2

 Purchases of property, plant and equipment

(24.9)

(22.9)

(84.3)

(69.9)

 Proceeds from the disposal of property, plant and equipment

0.2

0.1

0.2

0.1

 Free cash flow, a Non-GAAP measure

$

222.9

$

201.5

$

270.4

$

261.4

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

Trailing
Twelve 
Months to 
December 31,
2016

 Adjusted EBIT (a)

$

469.6

 Depreciation and amortization expense (b)

58.1

 EBITDA (a + b)

$

527.7

 Total debt at December 31, 2016 (c)

$

868.2

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

1.6

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,
2016

 Adjusted EBIT per above, a Non-GAAP measure

$

469.6

 Special product quality adjustments

(0.4)

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

7.4

 Restructuring charges

1.8

 Interest expense, net

27.0

Pension settlement charges

31.4

 Other expenses, net

(0.3)

 Income from continuing operations before income taxes, a GAAP measure

$

402.7