Lennox International Reports Third Quarter Results

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,

2018

2017

2018

2017

Net sales

$

1,030.2

$

1,052.3

$

3,040.4

$

2,947.9

Cost of goods sold

728.3

738.6

2,153.8

2,082.4

Gross profit

301.9

313.7

886.6

865.5

Operating Expenses:

Selling, general and administrative expenses

149.4

158.7

466.1

479.6

Losses and other expenses, net

2.7

3.0

10.0

8.5

Restructuring charges

0.5

1.9

1.9

2.1

Loss (gain), net on sale of businesses and related property

6.2

—

25.8

—

Loss from natural disaster, net of insurance recoveries

0.3

—

0.3

—

Income from equity method investments

(2.4)

(4.5)

(10.8)

(15.5)

Operating income

145.2

154.6

393.3

390.8

Interest expense, net

10.3

7.6

28.5

23.3

Other expense (income), net

1.1

—

2.4

(0.2)

Income from continuing operations before income taxes

133.8

147.0

362.4

367.7

Provision for income taxes

25.8

43.0

77.3

103.8

Income from continuing operations

108.0

104.0

285.1

263.9

Discontinued Operations:

(Loss) income from discontinued operations before income taxes

—

(0.8)

0.4

(2.3)

Income tax (benefit) expense

—

(0.3)

2.1

(0.9)

Loss from discontinued operations

—

(0.5)

(1.7)

(1.4)

Net income

$

108.0

$

103.5

$

283.4

$

262.5

Earnings per share – Basic:

Income from continuing operations

$

2.68

$

2.48

$

6.98

$

6.23

Loss from discontinued operations

—

(0.01)

(0.04)

(0.03)

Net income

$

2.68

$

2.47

$

6.94

$

6.20

Earnings per share – Diluted:

Income from continuing operations

$

2.65

$

2.45

$

6.90

$

6.15

Loss from discontinued operations

—

(0.01)

(0.04)

(0.03)

Net income

$

2.65

$

2.44

$

6.86

$

6.12

Weighted Average Number of Shares Outstanding - Basic

40.3

41.9

40.8

42.3

Weighted Average Number of Shares Outstanding - Diluted

40.7

42.4

41.3

42.9

Cash dividends declared per share

$

0.64

$

0.51

$

1.79

$

1.45

LENNOX INTERNATIONAL INC. AND SUBSIDIARIES

Adjusted Segment Net Sales and Profit (Loss)

(Unaudited)

(Amounts in millions)

For the Three Months Ended
September 30,

For the Nine Months Ended
September 30,

2018

2017

2018

2017

Adjusted Net Sales

Residential Heating & Cooling

$

594.7

$

590.5

$

1,764.4

$

1,663.8

Commercial Heating & Cooling

275.8

269.4

773.5

723.5

Refrigeration ⁽¹⁾

152.8

147.0

431.5

425.2

$

1,023.3

$

1,006.9

$

2,969.4

$

2,812.5

Adjusted Segment Profit (Loss) ⁽²⁾

Residential Heating & Cooling

$

113.0

$

114.7

$

317.9

$

297.6

Commercial Heating & Cooling

46.7

50.0

118.9

113.8

Refrigeration ⁽¹⁾

23.6

19.8

55.2

52.3

Corporate and other

(28.1)

(23.7)

(61.8)

(58.5)

Total adjusted segment profit

155.2

160.8

430.2

405.2

Reconciliation to Operating Income:

Special inventory write down

—

—

0.2

—

Special product quality adjustment

—

0.5

—

5.7

Loss (gain), net on sale of businesses and related property

6.2

—

25.8

—

Loss from natural disaster, net of insurance recoveries

0.3

—

0.3

—

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

2.4

4.0

9.3

10.0

Restructuring charges

0.5

1.9

1.9

2.1

Operating loss (income) from non-core businesses

0.6

(0.2)

(0.6)

(3.4)

Operating income

$

145.2

$

154.6

$

393.3

$

390.8

⁽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,

 ◦ 

 Environmental liabilities,

 ◦ 

 Divestiture costs,

 ◦ 

 Other items, net,

 • 

 Special inventory write down,

 • 

 Loss (gain), net on sale of businesses and related property,

 • 

 Loss from natural disaster, net of insurance recoveries

 • 

 Special product quality adjustment,

 • 

 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 September 30,
2018

As of December 31,
2017

(unaudited)

ASSETS

Current Assets:

Cash and cash equivalents

$

46.1

$

68.2

Accounts and notes receivable, net of allowances of $6.1 and $5.9 in 2018 and 2017, respectively

580.9

506.5

Inventories, net

501.5

484.2

Other assets

58.7

78.4

Total current assets

1,187.2

1,137.3

Property, plant and equipment, net of accumulated depreciation of $772.9 and $774.2 in 2018 and 2017, respectively

374.4

397.8

Goodwill

186.9

200.5

Deferred income taxes

95.4

94.4

Other assets, net

66.9

61.5

Total assets

$

1,910.8

$

1,891.5

LIABILITIES AND STOCKHOLDERS' EQUITY

Current Liabilities:

Short-term debt

$

—

$

0.9

Current maturities of long-term debt

22.3

32.6

Accounts payable

371.6

348.6

Accrued expenses

292.5

270.3

Income taxes payable

4.1

2.1

Total current liabilities

690.5

654.5

Long-term debt

1,103.6

970.5

Post-retirement benefits, other than pensions

2.5

2.6

Pensions

70.7

84.5

Other liabilities

130.3

129.3

Total liabilities

1,997.6

1,841.4

Commitments and contingencies

Stockholders' (deficit) 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

1,075.5

1,061.5

Retained earnings

1,805.0

1,575.9

Accumulated other comprehensive loss

(175.6)

(157.4)

Treasury stock, at cost,  shares 46,891,591 and 45,361,145 shares as of September 30, 2018 and December 31, 2017, respectively

(2,792.6)

(2,430.8)

Total stockholders' (deficit) equity

50.1

Total liabilities and stockholders' equity

$

1,910.8

$

1,891.5

LENNOX INTERNATIONAL INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows

(Unaudited)

(Amounts in millions)

For the Nine Months Ended
September 30,

2018

2017

Cash flows from operating activities:

Net income

$

283.4

$

262.5

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

Gain on sale of real estate

(23.8)

—

Impairment/loss on the sale of Australia business

13.0

—

Impairment/loss on the sale of Brazil business

36.6

—

Income from equity method investments

(10.8)

(15.5)

Dividend from Affiliates

6.6

7.8

Restructuring charges, net of cash paid

0.5

1.0

Provision for bad debts

3.8

3.2

Unrealized losses (gains) on derivative contracts

1.4

(0.7)

Stock-based compensation expense

21.0

18.8

Depreciation and amortization

49.4

48.1

Deferred income taxes

(5.6)

(3.9)

Pension expense

6.5

4.1

Pension contributions

(20.3)

(1.4)

Other items, net

0.3

1.0

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

Accounts and notes receivable

(114.0)

(118.3)

Inventories

(73.7)

(102.6)

Other current assets

(8.6)

(7.3)

Accounts payable

46.9

31.0

Accrued expenses

35.6

7.6

Income taxes payable and receivable

(1.4)

(9.9)

Other

(15.5)

3.5

Net cash provided by operating activities

231.3

129.0

Cash flows from investing activities:

Proceeds from the disposal of property, plant and equipment

0.1

0.2

Purchases of property, plant and equipment

(60.9)

(60.5)

Net proceeds from sale of businesses and related property

115.9

—

 Insurance recoveries received for property damage incurred from natural disaster

4.2

—

Net cash provided by (used in) investing activities

59.3

(60.3)

Cash flows from financing activities:

Short-term borrowings, net

(1.5)

(1.4)

Asset securitization borrowings

155.0

275.0

Asset securitization payments

(53.7)

—

Long-term debt payments

(32.9)

(200.8)

Borrowings from credit facility

1,820.0

1,883.0

Payments on credit facility

(1,766.5)

(1,701.0)

Proceeds from employee stock purchases

2.5

2.3

Repurchases of common stock

(350.2)

(250.0)

Repurchases of common stock to satisfy employee withholding tax obligations

(21.1)

(16.0)

Cash dividends paid

(68.2)

(58.4)

Net cash used in financing activities

(316.6)

(67.3)

(Decrease) increase in cash and cash equivalents

(26.0)

1.4

Effect of exchange rates on cash and cash equivalents

3.9

9.1

Cash and cash equivalents, beginning of period

68.2

50.2

Cash and cash equivalents, end of period

$

46.1

$

60.7

Supplemental disclosures of cash flow information:

Interest paid

$

25.9

$

22.5

Income taxes paid (net of refunds)

$

87.2

$

115.5

Insurance recoveries received

$

45.0

$

—

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.  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 sale of our business in Australia and Asia and the related property was completed in the second quarter of 2018 and sale of our business in Brazil was completed in the third quarter of 2018. 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 September 30,

2018

2017

Pre-Tax

Tax Impact ^(e)

After Tax

Pre-Tax

Tax Impact ^(e)

After Tax

Income from continuing operations, a GAAP measure

$

133.8

$

(25.8)

$

108.0

$

147.0

$

(43.0)

$

104.0

Restructuring charges

0.5

(0.1)

0.4

1.9

(0.8)

1.1

Special product quality adjustments (b)

—

—

—

0.5

(0.2)

0.3

Special legal contingency charges (a)

0.1

—

0.1

1.5

(0.2)

1.3

Asbestos-related litigation (a)

1.4

(0.4)

1.0

1.5

(0.5)

1.0

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

0.2

(0.1)

0.1

0.2

(0.1)

0.1

Environmental liabilities (a)

0.2

—

0.2

0.5

(0.1)

0.4

Excess tax benefits from share-based compensation (c)

—

(1.7)

(1.7)

—

(1.5)

(1.5)

Other tax items, net (c)

—

(1.4)

(1.4)

—

—

Loss (gain), net on sale of businesses and related property

6.2

(3.8)

2.4

—

—

—

Loss from natural disaster, net of insurance recoveries ($49.4M charges net of $45.0M cash and $4.1M receivable)

0.3

(0.1)

0.2

—

—

—

Other items, net (a)

0.5

—

0.5

0.3

(0.1)

0.2

Non-core business results (f)

0.6

—

0.6

0.2

(0.1)

0.1

Adjusted income from continuing operations, a non-GAAP measure

$

143.8

$

(33.4)

$

110.4

$

153.6

$

(46.6)

$

107.0

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

$

2.65

$

2.45

Restructuring charges

0.01

0.03

Special product quality adjustments (b)

—

0.01

Special legal contingency charges (a)

—

0.03

Asbestos-related litigation (a)

0.02

0.02

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

—

—

Environmental liabilities (a)

0.01

0.01

Excess tax benefits from share-based compensation (c)

(0.04)

(0.03)

Other tax items, net (c)

(0.03)

—

Loss (gain), net on sale of businesses and related property

0.06

—

Loss from natural disaster, net of insurance recoveries

0.01

—

Other items, net (a)

0.01

0.01

Non-core business results (f)

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

$

2.72

$

2.53

 (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.

2018

2017

Pre-Tax

Tax Impact ^(e)

After Tax

Pre-Tax

Tax Impact ^(e)

After Tax

Income from continuing operations, a GAAP measure

$

362.4

$

(77.3)

$

285.1

$

367.7

$

(103.8)

$

263.9

Restructuring charges

1.9

(0.5)

1.4

2.1

(0.8)

1.3

Special product quality adjustments (b)

—

—

—

5.7

(2.0)

3.7

Special legal contingency charges (a)

1.8

(0.4)

1.4

3.6

(0.4)

3.2

Asbestos-related litigation (a)

3.3

(0.8)

2.5

3.9

(1.3)

2.6

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

1.4

(0.3)

1.1

1.0

(0.4)

0.6

Inventory write down (b)

0.2

—

0.2

—

—

—

Environmental liabilities (a)

1.4

(0.3)

1.1

1.2

(0.3)

0.9

Excess tax benefits from share-based compensation (c)

—

(6.6)

(6.6)

—

(9.6)

(9.6)

Other tax items, net (c)

—

(4.7)

(4.7)

—

—

—

Loss (gain), net on sale of businesses and related property

25.8

0.3

26.1

—

—

—

Loss from natural disaster, net of insurance recoveries ($49.4M charges net of $45.0M cash and $4.1M receivable)

0.3

(0.1)

0.2

—

—

—

Other items, net (a)

1.4

(0.7)

0.7

0.3

(0.1)

0.2

Non-core business results (f)

(0.4)

0.1

(0.3)

2.6

(0.9)

1.7

Adjusted income from continuing operations, a non-GAAP measure

$

399.5

$

(91.3)

$

308.2

$

388.1

$

(119.6)

$

268.5

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

$

6.90

$

6.15

Restructuring charges

0.03

0.03

Special product quality adjustments (b)

—

0.09

Special legal contingency charges (a)

0.03

0.07

Asbestos-related litigation (a)

0.06

0.06

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

0.03

0.01

Inventory write down (b)

—

—

Environmental liabilities (a)

0.03

0.02

Excess tax benefits from share-based compensation (c)

(0.16)

(0.22)

Other tax items, net (c)

(0.11)

—

Loss (gain), net on sale of businesses and related property

0.64

—

Loss from natural disaster, net of insurance recoveries

—

—

Other items, net (a)

0.02

—

Non-core business results (f)

(0.01)

0.05

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

0.03

0.02

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

$

7.49

$

6.28

(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
September 30,

For the Nine Months Ended
September 30,

2018

2017

2018

2017

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

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

$

0.2

$

(0.5)

$

(0.6)

$

(1.3)

Foreign currency exchange losses (gains) ^(a)

0.1

(0.6)

1.2

(0.3)

Loss on disposal of fixed assets ^(a)

—

0.1

0.1

0.1

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

0.2

0.2

1.4

1.0

Special legal contingency charges ^(b)

0.1

1.5

1.8

3.6

Asbestos-related litigation ^(b)

1.4

1.5

3.3

3.9

Environmental liabilities ^(b)

0.2

0.5

1.4

1.2

Other items, net ^(b)

0.5

0.3

1.4

0.3

Losses and other expenses, net (pre-tax)

$

2.7

$

3.0

$

10.0

$

8.5

(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, 2018
ESTIMATED

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

$8.11 - $8.51

Charges associated with the divestiture of the Australia, Asia and Brazil businesses and other items partially offset by gain on sale of property and excess tax benefits from share-based compensation

0.59

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

$8.70 - $9.10

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,

2018

2017

2018

2017

Average shares outstanding - diluted, a GAAP measure

40.7

42.4

41.3

42.9

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

(0.1)

(0.1)

(0.1)

(0.1)

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

40.6

42.3

41.2

42.8

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

Refrigeration
Segment

Consolidated

For the Three Months
Ended September 30,

For the Three Months
Ended September 30,

2018

2017

2018

2017

Net sales, a GAAP measure

$

159.7

$

192.4

$

1,030.2

$

1,052.3

Net sales from non-core businesses (a)

6.9

45.4

6.9

45.4

Adjusted net sales, a Non-GAAP measure

$

152.8

$

147.0

$

1,023.3

$

1,006.9

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

Refrigeration
Segment

Consolidated

For the Nine Months
Ended September 30,

For the Nine Months
Ended September 30,

2018

2017

2018

2017

Net sales, a GAAP measure

$

502.5

$

560.6

$

3,040.4

$

2,947.9

Net sales from non-core businesses (a)

71.0

135.4

71.0

135.4

Adjusted net sales, a Non-GAAP measure

$

431.5

$

425.2

$

2,969.4

$

2,812.5

_{(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 September 30,

For the Three Months
Ended September 30,

2018

2017

2018

2017

Gross profit, a GAAP measure

$

47.8

$

56.2

$

301.9

$

313.7

Non-GAAP adjustments to gross profit

—

—

—

(0.5)

Gross profit from non-core businesses (a)

1.0

12.7

1.0

12.7

Adjusted Gross profit, a Non-GAAP measure

$

46.8

$

43.5

$

300.9

$

301.5

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

Refrigeration
Segment

Consolidated

For the Nine Months
Ended September 30,

For the Nine Months
Ended September 30,

2018

2017

2018

2017

Gross profit, a GAAP measure

$

147.0

$

165.7

$

886.6

$

865.5

Non-GAAP adjustments to gross profit

(0.2)

—

(0.2)

(5.7)

Gross profit from non-core businesses (a)

19.0

40.1

19.0

40.1

Adjusted Gross profit, a Non-GAAP measure

$

128.2

$

125.6

$

867.8

$

831.1

_{(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 September 30,

For the Three Months
Ended September 30,

2018

2017

2018

2017

Segment profit, a GAAP measure

$

23.0

$

20.0

$

154.6

$

161.0

Gross (loss) profit from non-core businesses (a)

(0.6)

0.2

(0.6)

0.2

Adjusted Segment profit, a Non-GAAP measure

$

23.6

$

19.8

$

155.2

$

160.8

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

Refrigeration
Segment

Consolidated

For the Nine Months
Ended September 30,

For the Nine Months
Ended September 30,

2018

2017

2018

2017

Segment profit, a GAAP measure

$

55.8

$

55.7

$

430.8

$

408.6

Gross profit from non-core businesses (a)

0.6

3.4

0.6

3.4

Adjusted Segment profit, a Non-GAAP measure

$

55.2

$

52.3

$

430.2

$

405.2

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

Reconciliation of Selling, general and administrative expenses, a GAAP measure, to Adjusted Selling, general and administrative expenses, a Non-GAAP measure

For the Three Months
Ended September 30,

For the Nine Months
Ended September 30,

2018

2017

2018

2017

Selling, general and administrative expenses, a GAAP measure

$

149.4

$

158.7

$

466.1

$

479.6

Selling, general and administrative expenses from non-core businesses (a)

1.6