Lennox International Reports Record Third-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 September 30,

For the Nine Months
Ended September 30,

2017

2016

2017

2016

Net sales

$

1,052.3

$

1,010.0

$

2,947.9

$

2,744.4

Cost of goods sold

738.6

699.7

2,082.4

1,935.5

Gross profit

313.7

310.3

865.5

808.9

Operating Expenses:

Selling, general and administrative expenses

158.7

156.5

479.6

456.2

Losses and other expenses, net

3.0

0.7

8.5

5.5

Restructuring charges

1.9

0.6

2.1

1.2

Income from equity method investments

(4.5)

(4.4)

(15.5)

(15.3)

Operating income

154.6

156.9

390.8

361.3

Interest expense, net

7.6

7.0

23.3

19.6

Other income, net

—

—

(0.2)

(0.2)

Income from continuing operations before income taxes

147.0

149.9

367.7

341.9

Provision for income taxes

43.0

48.2

103.8

104.0

Income from continuing operations

104.0

101.7

263.9

237.9

Discontinued Operations:

Loss from discontinued operations before income taxes

(0.8)

—

(2.3)

(0.9)

Benefit from income taxes

(0.3)

—

(0.9)

(0.3)

Loss from discontinued operations

(0.5)

—

(1.4)

(0.6)

Net income

$

103.5

$

101.7

$

262.5

$

237.3

Earnings per share – Basic:

Income from continuing operations

$

2.48

$

2.35

$

6.23

$

5.46

Loss from discontinued operations

(0.01)

—

(0.03)

(0.01)

Net income

$

2.47

$

2.35

$

6.20

$

5.45

Earnings per share – Diluted:

Income from continuing operations

$

2.45

$

2.33

$

6.15

$

5.39

Loss from discontinued operations

(0.01)

—

(0.03)

(0.01)

Net income

$

2.44

$

2.33

$

6.12

$

5.38

Weighted Average Number of Shares Outstanding - Basic

41.9

43.2

42.3

43.6

Weighted Average Number of Shares Outstanding - Diluted

42.4

43.7

42.9

44.2

Cash dividends declared per share

$

0.51

$

0.43

$

1.45

$

1.22

LENNOX INTERNATIONAL INC. AND SUBSIDIARIES

Segment Net Sales and Profit (Loss)

(Unaudited)

(Amounts in millions)

For the Three Months Ended
September 30,

For the Nine Months Ended
September 30,

2017

2016

2017

2016

Net sales

Residential Heating & Cooling

$

590.5

$

572.7

$

1,663.8

$

1,524.5

Commercial Heating & Cooling

269.4

251.4

723.5

674.7

Refrigeration

192.4

185.9

560.6

545.2

$

1,052.3

$

1,010.0

$

2,947.9

$

2,744.4

Segment Profit (Loss) ⁽¹⁾

Residential Heating & Cooling

$

114.7

$

112.7

$

297.6

$

266.9

Commercial Heating & Cooling

50.0

48.9

113.8

110.6

Refrigeration

20.0

22.9

55.7

53.2

Corporate and other

(23.7)

(27.3)

(58.5)

(65.7)

Total segment profit

161.0

157.2

408.6

365.0

Reconciliation to Operating income:

Special product quality adjustments

0.5

—

5.7

(0.4)

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

4.0

(0.3)

10.0

2.9

Restructuring charges

1.9

0.6

2.1

1.2

Operating income

$

154.6

$

156.9

$

390.8

$

361.3

⁽¹⁾

We define 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 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,

◦

Acquisition costs,

◦

Other items, net; and,

•

Restructuring charges.

LENNOX INTERNATIONAL INC. AND SUBSIDIARIES

Consolidated Balance Sheets

(Amounts in millions, except shares and par values)

As of September 30,
2017

As of December 31,
2016

(unaudited)

ASSETS

Current Assets:

Cash and cash equivalents

$

60.7

$

50.2

Accounts and notes receivable, net of allowances of $6.9 and $6.7 in 2017 and 2016, respectively

598.1

469.8

Inventories, net

530.9

418.5

Other assets

80.9

67.4

Total current assets

1,270.6

1,005.9

Property, plant and equipment, net of accumulated depreciation of $767.8 and $717.2 in 2017 and 2016, respectively

374.6

361.4

Goodwill

200.6

195.1

Deferred income taxes

143.3

136.7

Other assets, net

66.6

61.2

Total assets

$

2,055.7

$

1,760.3

LIABILITIES AND STOCKHOLDERS' EQUITY

Current Liabilities:

Short-term debt

$

326.0

$

52.4

Current maturities of long-term debt

22.4

200.1

Accounts payable

394.5

361.2

Accrued expenses

278.4

265.9

Income taxes payable

2.4

9.0

Total current liabilities

1,023.7

888.6

Long-term debt

775.7

615.7

Post-retirement benefits, other than pensions

1.9

2.8

Pensions

90.2

87.5

Other liabilities

131.7

127.7

Total liabilities

2,023.2

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

1,048.0

1,046.2

Retained earnings

1,554.4

1,353.0

Accumulated other comprehensive loss

(157.0)

(195.1)

Treasury stock, at cost, 45,401,841 shares and 44,195,250 shares as of September 30, 2017 and December 31, 2016, respectively

(2,414.2)

(2,167.4)

Noncontrolling interests

0.4

0.4

Total stockholders' equity

32.5

38.0

Total liabilities and stockholders' equity

$

2,055.7

$

1,760.3

LENNOX INTERNATIONAL INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows

(Unaudited)

(Amounts in millions)

For the Nine Months Ended
September 30,

2017

2016

Cash flows from operating activities:

Net income

$

262.5

$

237.3

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

Income from equity method investments

(15.5)

(15.3)

Dividends from affiliates

7.8

3.9

Restructuring charges (gains), net of cash paid

1.0

(0.8)

Provision for bad debts

3.2

3.4

Unrealized gains on derivative contracts

(0.7)

(2.2)

Stock-based compensation expense

18.8

24.8

Depreciation and amortization

48.1

43.4

Deferred income taxes

(3.9)

(2.6)

Pension expense

4.1

4.7

Pension contributions

(1.4)

(52.5)

Other items, net

1.0

0.4

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

Accounts and notes receivable

(118.3)

(146.2)

Inventories

(102.6)

(49.9)

Other current assets

(7.3)

(6.6)

Accounts payable

31.0

56.4

Accrued expenses

7.6

40.7

Income taxes payable and receivable

(9.9)

(15.0)

Other

3.5

3.0

Net cash provided by operating activities

129.0

126.9

Cash flows from investing activities:

Proceeds from the disposal of property, plant and equipment

0.2

—

Purchases of property, plant and equipment

(60.5)

(59.4)

Net cash used in investing activities

(60.3)

(59.4)

Cash flows from financing activities:

Short-term borrowings, net

(1.4)

(2.1)

Asset securitization borrowings

275.0

145.0

Asset securitization payments

—

(20.0)

Long-term debt payments

(200.8)

(30.9)

Borrowings from credit facility

1,883.0

1,715.0

Payments on credit facility

(1,701.0)

(1,493.0)

Payments of deferred financing costs

—

(0.9)

Proceeds from employee stock purchases

2.3

1.9

Repurchases of common stock

(250.0)

(300.0)

Repurchases of common stock to satisfy employee withholding tax obligations

(16.0)

(26.3)

Cash dividends paid

(58.4)

(50.5)

Net cash used in financing activities

(67.3)

(61.8)

Increase in cash and cash equivalents

1.4

5.7

Effect of exchange rates on cash and cash equivalents

9.1

3.2

Cash and cash equivalents, beginning of period

50.2

38.9

Cash and cash equivalents, end of period

$

60.7

$

47.8

Supplemental disclosures of cash flow information:

Interest paid

$

22.5

$

17.0

Income taxes paid (net of refunds)

$

115.5

$

120.9

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 September 30,

2017

2016

Pre-Tax

Tax Impact ^(e)

After Tax

Pre-Tax

Tax Impact ^(e)

After Tax

Income from continuing operations, a GAAP measure

$

147.0

$

(43.0)

$

104.0

$

149.9

$

(48.2)

$

101.7

Restructuring charges

1.9

(0.8)

1.1

0.6

(0.2)

0.4

Special product quality adjustments ^(b)

0.5

(0.2)

0.3

—

—

—

Special legal contingency charges ^(a)

1.5

(0.2)

1.3

0.5

(0.2)

0.3

Asbestos-related litigation ^(a)

1.5

(0.5)

1.0

0.4

(0.1)

0.3

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

0.2

(0.1)

0.1

(1.2)

0.5

(0.7)

Environmental liabilities^(a)

0.5

(0.1)

0.4

—

(0.1)

(0.1)

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

—

(1.5)

(1.5)

—

—

—

   Contractor tax payments ^(a)

—

—

—

—

—

—

Other items, net ^(a)

0.3

(0.1)

0.2

—

—

—

Adjusted income from continuing operations, a non-GAAP measure

$

153.4

$

(46.5)

$

106.9

$

150.2

$

(48.3)

$

101.9

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

$

2.45

$

2.33

Restructuring charges

0.03

0.01

Special product quality adjustments ^(b)

0.01

—

Special legal contingency charges^(a)

0.03

0.01

Asbestos-related litigation^(a)

0.02

0.01

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

—

(0.02)

Environmental liabilities ^(a)

0.01

(0.01)

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

(0.03)

—

Contractor tax payments ^(a)

—

—

Other items, net ^(a)

—

—

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

0.01

—

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

$

2.53

$

2.33

(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.

2017

2016

Pre-Tax

Tax Impact ^(e)

After Tax

Pre-Tax

Tax Impact ^(e)

After Tax

Income from continuing operations, a GAAP measure

$

367.7

$

(103.8)

$

263.9

$

341.9

$

(104.0)

$

237.9

Restructuring charges

2.1

(0.8)

1.3

1.2

(0.4)

0.8

Special product quality adjustments ^(b)

5.7

(2.0)

3.7

(0.4)

0.1

(0.3)

Special legal contingency charges ^(a)

3.6

(0.4)

3.2

0.5

(0.2)

0.3

Asbestos-related litigation ^(a)

3.9

(1.3)

2.6

2.3

(0.8)

1.5

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

1.0

(0.4)

0.6

(1.9)

0.7

(1.2)

Environmental liabilities ^(a)

1.2

(0.3)

0.9

1.1

(0.3)

0.8

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

—

(9.6)

(9.6)

—

—

—

Contractor tax payments ^(a)

—

—

—

0.5

(0.1)

0.4

Other items ^(a)

0.3

(0.1)

0.2

0.4

(0.2)

0.2

Adjusted income from continuing operations, a non-GAAP measure

$

385.5

$

(118.7)

$

266.8

$

345.6

$

(105.2)

$

240.4

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

$

6.15

$

5.39

Restructuring charges

0.03

0.02

Special product quality adjustments ^(b)

0.09

(0.01)

Special legal contingency charges ^(a)

0.07

0.01

Asbestos-related litigation ^(a)

0.06

0.03

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

0.01

(0.03)

Environmental liabilities ^(a)

0.02

0.02

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

(0.22)

—

   Contractor tax payments ^(a)

—

0.01

Other items, net ^(a)

—

—

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

0.02

—

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

$

6.23

$

5.44

(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.

For the Three Months
Ended September 30,

For the Nine Months
Ended September 30,

2017

2016

2017

2016

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

Realized (gains) losses on settled future contracts ^(a)

$

(0.5)

$

0.3

$

(1.3)

$

1.2

Foreign currency exchange (gains) losses ^(a)

(0.6)

0.5

(0.3)

1.1

Loss on disposal of fixed assets ^(a)

0.1

0.2

0.1

0.3

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

0.2

(1.2)

1.0

(1.9)

Special legal contingency charges ^(b)

1.5

0.5

3.6

0.5

Asbestos-related litigation ^(b)

1.5

0.4

3.9

2.3

Environmental liabilities ^(b)

0.5

—

1.2

1.1

Contractor tax payments ^(b)

—

—

—

0.5

Acquisition costs ^(b)

—

—

—

0.4

Other items, net ^(b)

0.3

—

0.3

—

Losses and other expenses, net (pre-tax)

$

3.0

$

0.7

$

8.5

$

5.5

   (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,
2017
ESTIMATED

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

$7.67 - $7.97

Special product quality adjustments and other items partially offset by excess tax benefits from share-based compensation

0.08

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

$7.75 - $8.05

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
September 30,

For the Nine Months Ended
September 30,

2017

2016

2017

2016

Average shares outstanding - diluted, a GAAP measure

42.4

43.7

42.9

44.2

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

(0.1)

—

(0.1)

—

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

42.3

43.7

42.8

44.2

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
September 30,

For the Nine Months Ended
September 30,

2017

2016

2017

2016

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

$

177.3

$

152.2

$

129.0

$

126.9

 Purchases of property, plant and equipment

(17.1)

(17.7)

(60.5)

(59.4)

 Proceeds from the disposal of property, plant and equipment

—

—

0.2

—

 Free cash flow, a Non-GAAP measure

$

160.2

$

134.5

$

68.7

$

67.5

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

Trailing
Twelve 
Months to 
September
30,2017

 Adjusted EBIT (a)

$

513.3

 Depreciation and amortization expense (b)

61.8

 EBITDA (a + b)

$

575.1

 Total debt at September 30, 2017 (c)

$

1,124.1

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

2.0

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 
September
30,2017

 Adjusted EBIT per above, a Non-GAAP measure

$

513.3

 Special product quality adjustments

5.7

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

14.5

 Restructuring charges

2.7

 Interest expense, net

30.7

 Pension Settlement

31.4

 Other expenses, net

(0.2)

 Income from continuing operations before income taxes, a GAAP measure

$

428.5