Lennox International Reports First Quarter Results

(Amounts in millions, except per share data)

For the Three Months Ended
March 31,
(Unaudited)

2019

2018

Net sales

$

790.3

$

834.8

Cost of goods sold

588.7

611.6

Gross profit

201.6

223.2

Operating Expenses:

Selling, general and administrative expenses

145.8

155.2

Losses (gains) and other expenses, net

1.1

7.3

Restructuring charges

0.5

0.9

Loss on sale of business

8.5

—

Loss on assets held for sale

—

10.3

Insurance proceeds for lost profits

(39.5)

—

Gain from insurance recoveries, net of losses incurred

(6.9)

—

Income from equity method investments

(2.6)

(3.5)

Operating income

94.7

53.0

Interest expense, net

10.9

8.4

Other expense (income), net

0.8

0.6

Income from continuing operations before income taxes

83.0

44.0

Provision for income taxes

13.6

6.1

Income from continuing operations

69.4

37.9

Discontinued Operations:

Loss from discontinued operations before income taxes

(0.1)

—

Income tax benefit

—

—

Loss from discontinued operations

(0.1)

—

Net income

$

69.3

$

37.9

Earnings per share – Basic:

Income from continuing operations

$

1.75

$

0.91

Loss from discontinued operations

—

—

Net income

$

1.75

$

0.91

Earnings per share – Diluted:

Income from continuing operations

$

1.73

$

0.90

Loss from discontinued operations

—

—

Net income

$

1.73

$

0.90

Weighted Average Number of Shares Outstanding - Basic

39.7

41.5

Weighted Average Number of Shares Outstanding - Diluted

40.1

42.1

LENNOX INTERNATIONAL INC. AND SUBSIDIARIES

Adjusted Segment Net Sales and Profit (Loss)

(Amounts in millions)

For the Three Months Ended
March 31,
(Unaudited)

2019

2018

Adjusted Net Sales

Residential Heating & Cooling

$

465.6

$

453.7

Commercial Heating & Cooling

173.3

179.1

Refrigeration ⁽¹⁾

117.1

119.2

$

756.0

$

752.0

Adjusted Segment Profit (Loss) ⁽²⁾

Residential Heating & Cooling

$

86.7

$

51.3

Commercial Heating & Cooling

15.1

22.0

Refrigeration ⁽¹⁾

9.4

11.7

Corporate and other

(12.1)

(11.2)

Total adjusted segment profit

99.1

73.8

Reconciliation to Operating Income:

Special inventory write down

—

0.1

Loss on sale of businesses

8.5

—

Loss on assets held for sale

—

10.3

Gain from insurance recoveries, net of losses incurred

(6.9)

—

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

1.3

6.5

Restructuring charges

0.5

0.9

Operating loss (income) from non-core businesses

1.0

3.0

Operating income

$

94.7

$

53.0

⁽¹⁾ Excludes the non-core business results related to Kysor Warren, which was sold in March 2019 and our business operations in Australia, Asia and South America, which were sold in 2018.

⁽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 on sale of business,

• Loss on assets held for sale,

• Gain from insurance recoveries, net of losses incurred,

• Operating loss (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 March 31,
2019

As of December 31,
2018

 (Unaudited)

ASSETS

Current Assets:

Cash and cash equivalents

$

31.7

$

46.3

Accounts and notes receivable, net of allowances of $7.2 and $6.3 in 2019 and 2018, respectively

502.6

472.7

Inventories, net

600.1

509.8

Other assets

86.5

60.6

Total current assets

1,220.9

1,089.4

Property, plant and equipment, net of accumulated depreciation of $785.1 and $778.5 in 2019 and 2018, respectively

411.7

408.3

Right-of-use assets from operating leases

170.1

—

Goodwill

186.5

186.6

Deferred income taxes

48.5

67.0

Other assets, net

68.0

65.9

Total assets

$

2,105.7

$

1,817.2

LIABILITIES AND STOCKHOLDERS' DEFICIT

Current Liabilities:

Current maturities of long-term debt

237.6

300.8

Current operating lease liabilities

48.1

—

Accounts payable

411.9

433.3

Accrued expenses

219.8

272.3

Income taxes payable

—

2.1

Total current liabilities

917.4

1,008.5

Long-term debt

1,059.0

740.5

Long-term operating lease liabilities

122.6

—

Pensions

82.3

82.8

Other liabilities

129.2

135.0

Total liabilities

2,310.5

1,966.8

Commitments and contingencies

Stockholders' deficit:

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

1,079.4

1,078.8

Retained earnings

1,898.7

1,855.0

Accumulated other comprehensive loss

(180.2)

(188.8)

Treasury stock, at cost, shares 47,609,360 and 47,312,248 shares for 2019 and 2018, respectively

(3,003.6)

(2,895.5)

Total stockholders' deficit

(204.8)

(149.6)

Total liabilities and stockholders' deficit

$

2,105.7

$

1,817.2

LENNOX INTERNATIONAL INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows

(Unaudited)

(Amounts in millions)

For the Three Months
Ended March 31,

2019

2018

Cash flows from operating activities:

Net income

$

69.3

$

37.9

Adjustments to reconcile net income to net cash used in operating activities:

Loss on sale of business

8.5

—

Gain from insurance recoveries, net of losses incurred

(6.9)

—

Income from equity method investments

(2.6)

(3.5)

Loss on assets held for sale

—

10.3

Restructuring charges, net of cash paid

0.3

0.6

Provision for bad debts

1.6

1.9

Unrealized losses (gains) on derivative contracts

(0.6)

(0.1)

Stock-based compensation expense

5.2

4.8

Depreciation and amortization

18.2

16.6

Deferred income taxes

15.5

(2.1)

Pension expense

2.0

2.1

Pension contributions

(2.5)

(0.7)

Other items, net

0.2

0.1

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

Accounts and notes receivable

(62.7)

(44.5)

Inventories

(120.9)

(124.3)

Other current assets

4.5

(0.7)

Accounts payable

(1.7)

77.5

Accrued expenses

(35.0)

(35.2)

Income taxes payable and receivable

(34.1)

(22.3)

Other

0.7

(1.9)

Net cash used in operating activities

(141.0)

(83.5)

Cash flows from investing activities:

Proceeds from the disposal of property, plant and equipment

0.3

0.1

Purchases of property, plant and equipment

(37.2)

(22.7)

Net proceeds from sale of business

43.6

—

  Insurance recoveries received for property damage incurred from natural disaster

6.9

—

Net cash provided by (used in) investing activities

13.6

(22.6)

Cash flows from financing activities:

Short-term borrowings, net

—

(0.1)

Asset securitization payments

(43.5)

(51.0)

Long-term debt borrowings

3.3

—

Long-term debt payments

(31.7)

(10.2)

Borrowings from credit facility

844.5

790.0

Payments on credit facility

(525.5)

(444.1)

Proceeds from employee stock purchases

0.8

0.8

Repurchases of common stock

(100.0)

(150.0)

Repurchases of common stock to satisfy employee withholding tax obligations

(13.5)

(18.1)

Cash dividends paid

(25.5)

(21.3)

Net cash provided by financing activities

108.9

96.0

Decrease in cash and cash equivalents

(18.5)

(10.1)

Effect of exchange rates on cash and cash equivalents

3.9

(1.0)

Cash and cash equivalents, beginning of period

46.3

68.2

Cash and cash equivalents, end of period

$

31.7

$

57.1

Supplemental disclosures of cash flow information:

Interest paid

$

8.4

$

6.0

Income taxes paid (net of refunds)

$

32.0

$

32.7

Insurance recoveries received

$

76.0

$

—

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. During the first quarter of 2019, the Company completed the sale of its Kysor Warren business. In the first quarter of 2018, the Company announced the planned sales of its businesses in Australia, Asia, and South America. 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 South America was completed in the third quarter of 2018. The results from operations for these businesses have been shown in the tables below as "Non-core business results". 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 March 31,
(Unaudited)

2019

2018

Pre-Tax

Tax Impact
(e)

After Tax

Pre-Tax

Tax Impact
(e)

After Tax

Income from continuing operations, a GAAP measure

$

83.0

$

(13.6)

$

69.4

$

44.0

$

(6.1)

$

37.9

Restructuring charges

0.5

(0.1)

0.4

0.9

(0.3)

0.6

Loss on assets held for sale

—

—

—

10.3

—

10.3

Special legal contingency charges (a)

0.2

—

0.2

0.2

(0.1)

0.1

Asbestos-related litigation (a)

1.4

(0.3)

1.1

2.1

(0.6)

1.5

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

(0.4)

0.1

(0.3)

1.1

(0.2)

0.9

Inventory write down (b)

—

—

—

0.1

—

0.1

Environmental liabilities (a)

—

—

—

0.3

—

0.3

Excess tax benefits from share-based compensation (c)

—

(4.4)

(4.4)

—

(4.3)

(4.3)

Other tax items, net (c)

—

—

—

—

(0.9)

(0.9)

Loss on sale of business

8.5

(3.5)

5.0

—

—

—

Divestiture costs (a)

—

—

—

2.5

(0.6)

1.9

Gain from insurance recoveries, net of losses incurred

(6.9)

1.7

(5.2)

—

—

—

Other items, net (a)

0.1

(0.1)

—

0.3

(0.1)

0.2

Non-core business results (f)

1.3

(0.3)

1.0

3.4

(0.7)

2.7

Adjusted income from continuing operations, a non-GAAP measure

$

87.7

$

(20.5)

$

67.2

$

65.2

$

(13.9)

$

51.3

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

$

1.73

$

0.90

Restructuring charges

0.01

0.01

Loss on assets held for sale

—

0.25

Special legal contingency charges (a)

0.01

—

Asbestos-related litigation (a)

0.03

0.04

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

(0.01)

0.02

Inventory write down (b)

—

—

Environmental liabilities (a)

—

0.01

Excess tax benefits from share-based compensation (c)

(0.11)

(0.10)

Other tax items, net (c)

—

(0.02)

Loss on sale of business

0.13

—

Divestiture costs (a)

—

0.05

Gain from insurance recoveries, net of losses incurred

(0.13)

—

Other items, net (a)

—

—

Non-core business results (f)

0.02

0.06

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

—

—

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

$

1.68

$

1.22

 (a)

(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 and the Kysor Warren business, not included elsewhere in the reconciliation.

For the Three Months Ended
March 31,
(Unaudited)

2019

2018

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

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

$

0.1

$

(0.5)

Foreign currency exchange (gains) losses ^(a)

(0.5)

1.3

Loss on disposal of fixed assets ^(a)

0.2

—

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

(0.4)

1.1

Special legal contingency charges ^(b)

0.2

0.2

Asbestos-related litigation ^(b)

1.4

2.1

Environmental liabilities ^(b)

—

0.3

Divestiture costs ^(b)

—

2.5

Other items, net ^(b)

0.1

0.3

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

$

1.1

$

7.3

(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, 2019
ESTIMATED

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

$12.65 - $13.25

Insurance recovery, net of other non-core EBIT charges, from tornado impact to damaged property and second quarter non-cash pension settlement charge

0.65

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

$12.00 - $12.60

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 March 31,

2019

2018

Average shares outstanding - diluted, a GAAP measure

40.1

$

42.1

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

—

(0.2)

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

40.1

41.9

Reconciliation of Net Sales, a GAAP measure, to Adjusted Net Sales, a Non-GAAP measure (dollars in millions)

Refrigeration Segment

Consolidated

For the Three Months
Ended March 31,

For the Three Months
Ended March 31,

2019

2018

2019

2018

Net sales, a GAAP measure

$

151.4

$

202.0

$

790.3

$

834.8

Net sales from non-core businesses (a)

34.3

82.8

34.3

82.8

Adjusted net sales, a Non-GAAP measure

$

117.1

$

119.2

$

756.0

$

752.0

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

Reconciliation of Gross Profit, a GAAP measure, to Adjusted Gross Profit, a Non-GAAP measure (dollars in millions)

Refrigeration Segment

Consolidated

For the Three Months
Ended March 31,

For the Three Months
Ended March 31,

2019

2018

2019

2018

Gross profit, a GAAP measure

$

42.5

$

54.7

$

201.6

$

223.2

Non-GAAP adjustments to gross profit

—

(0.2)

—

(0.2)

Gross profit from non-core businesses (a)

3.6

14.5

3.6

14.5

Adjusted Gross profit, a Non-GAAP measure

$

38.9

$

40.4

$

198.0

$

208.9

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

Reconciliation of Segment Profit, a GAAP measure, to Adjusted Segment profit, a Non-GAAP measure (dollars in millions)

Refrigeration Segment

Consolidated

For the Three Months
Ended March 31,

For the Three Months
Ended March 31,

2019

2018

2019

2018

Segment profit, a GAAP measure

$

8.4

$

8.7

$

98.1

$

70.8

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

(1.0)

(3.0)

(1.0)

(3.0)

Adjusted Segment profit, a Non-GAAP measure

$

9.4

$

11.7

$

99.1

$

73.8

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

Reconciliation of Selling, general and administrative expenses, a GAAP measure, to Adjusted Selling, general and administrative expenses, a Non-GAAP measure (dollars in millions)

Refrigeration Segment

Consolidated

For the Three Months
Ended March 31,

For the Three Months
Ended March 31,

2019

2018

2019

2018

Selling, general and administrative expenses, a GAAP measure

$

36.4

$

49.2

$

145.8

$

155.2

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

4.8

18.3

4.8

18.3

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

$

31.6

$

30.9

$

141.0

$

136.9

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

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

2019

2018

Net cash used in operating activities, a GAAP measure

$

(141.0)

$

(83.5)

Purchases of property, plant and equipment

(37.2)

(22.7)

Proceeds from the disposal of property, plant and equipment

0.3

0.1

Insurance recoveries received for property damage incurred from natural disaster

6.9

—

Free cash flow, a Non-GAAP measure

(171.0)

(106.1)

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

Trailing
Twelve
Months to
March 31,
2019

Adjusted EBIT (b)(a)

$

568.5

Depreciation and amortization expense (c)

66.3

EBITDA (b + c)

$

634.8

Total debt at March 31, 2019 (d)

$

1,296.6

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

2.0

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

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
March 31,
2019

Income from continuing operations before income taxes, a GAAP measure

$

506.9

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

8.1

Restructuring charges

2.6

Interest expense, net

40.8

Pension settlement

0.4

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

23.4

Gain from insurance recoveries, net of losses incurred

(17.9)

Non-core business results ^(a)

0.7

Other expense (income), net

3.5

Adjusted EBIT per above, a Non-GAAP measure

$

568.5

^{(a) Non-core business results represent activity related to our business operations in Australia, Asia, South America and the Kysor Warren business, not included elsewhere in the reconciliation.}