Lennox International Reports Record 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,

2022

2021

2022

2021

Net sales

$ 1,244.9

$ 1,059.9

$ 3,624.6

$ 3,229.3

Cost of goods sold

910.7

764.7

2,625.1

2,294.5

Gross profit

334.2

295.2

999.5

934.8

Operating Expenses:

Selling, general and administrative expenses

147.3

134.2

472.2

447.4

Losses (gains) and other expenses, net

3.3

2.1

5.4

4.7

Restructuring charges

0.2

0.3

1.2

1.6

Income from equity method investments

(2.4)

(4.1)

(3.9)

(11.6)

Operating income

185.8

162.7

524.6

492.7

Pension settlements

—

0.3

0.3

1.1

Interest expense, net

10.5

6.5

26.1

18.8

Other expense (income), net

0.7

1.1

1.9

2.9

Income from continuing operations before income taxes

174.6

154.8

496.3

469.9

Provision for income taxes

32.7

28.5

93.6

89.4

Income from continuing operations

141.9

126.3

402.7

380.5

Discontinued Operations:

Loss from discontinued operations before income taxes

—

—

—

(0.1)

Income tax benefit

—

—

—

—

Loss from discontinued operations

—

—

—

(0.1)

Net income

$ 141.9

$ 126.3

$ 402.7

$ 380.4

Earnings per share – Basic:

Income from continuing operations

$ 4.00

$ 3.43

$ 11.25

$ 10.17

Loss from discontinued operations

—

—

—

—

Net income

$ 4.00

$ 3.43

$ 11.25

$ 10.17

Earnings per share – Diluted:

Income from continuing operations

$ 3.99

$ 3.41

$ 11.22

$ 10.10

Loss from discontinued operations

—

—

—

—

Net income

$ 3.99

$ 3.41

$ 11.22

$ 10.10

Weighted Average Number of Shares Outstanding - Basic

35.4

36.8

35.8

37.4

Weighted Average Number of Shares Outstanding - Diluted

35.5

37.0

35.9

37.7

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,

2022

2021

2022

2021

Net Sales

Residential Heating & Cooling

$ 835.3

$ 711.0

$ 2,494.9

$ 2,155.3

Commercial Heating & Cooling

252.9

211.5

660.2

663.4

Refrigeration

156.7

137.4

469.5

410.6

$ 1,244.9

$ 1,059.9

$ 3,624.6

$ 3,229.3

Segment Profit (Loss) (1)

Residential Heating & Cooling

$ 153.8

$ 144.0

$ 477.7

$ 430.1

Commercial Heating & Cooling

29.6

22.6

53.1

95.3

Refrigeration

22.4

14.5

60.0

35.8

Corporate and other

(16.5)

(16.3)

(57.1)

(59.2)

Total segment profit

189.3

164.8

533.7

502.0

Reconciliation to Operating Income:

Special product quality adjustments

—

(1.1)

—

(1.0)

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

3.3

2.9

7.9

8.7

Restructuring charges

0.2

0.3

1.2

1.6

Operating income

$ 185.8

$ 162.7

$ 524.6

$ 492.7

(1)

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,
• Environmental liabilities and special litigation charges,
• Charges incurred related to COVID-19 pandemic; and
• Other items, net,
• Special product quality adjustments; and
• Restructuring charges.

LENNOX INTERNATIONAL INC. AND SUBSIDIARIES

Consolidated Balance Sheets

(Amounts in millions, except shares and par values)

As of September 30, 2022

As of December 31, 2021

ASSETS

(Unaudited)

Current Assets:

Cash and cash equivalents

$ 40.7

$ 31.0

Short-term investments

7.5

5.5

Accounts and notes receivable, net of allowances of $13.2 and $10.7 in
2022 and 2021, respectively

708.4

508.3

Inventories, net

743.4

510.9

Other assets

94.1

119.7

Total current assets

1,594.1

1,175.4

Property, plant and equipment, net of accumulated depreciation of $905.7
and $888.8 in 2022 and 2021, respectively

520.4

515.1

Right-of-use assets from operating leases

200.5

196.1

Goodwill

185.9

186.6

Deferred income taxes

34.2

11.3

Other assets, net

90.7

87.4

Total assets

$ 2,625.8

$ 2,171.9

LIABILITIES AND STOCKHOLDERS' DEFICIT

Current Liabilities:

Current maturities of long-term debt

$ 11.1

$ 11.3

Current operating lease liabilities

61.3

54.8

Accounts payable

430.5

402.1

Accrued expenses

409.6

358.9

Income taxes payable

19.2

—

Total current liabilities

931.7

827.1

Long-term debt

1,593.4

1,226.5

Long-term operating lease liabilities

143.6

145.0

Pensions

86.5

83.3

Other liabilities

175.8

159.0

Total liabilities

2,931.0

2,440.9

Commitments and contingencies

Stockholders' deficit:

Preferred stock, $0.01 par value, 25,000,000 shares authorized, no
shares issued or outstanding

—

—

Common stock, $0.01 par value, 200,000,000 shares authorized,
87,170,197 shares issued

0.9

0.9

Additional paid-in capital

1,150.4

1,133.7

Retained earnings

3,013.9

2,719.3

Accumulated other comprehensive loss

(132.5)

(88.1)

Treasury stock, at cost, 51,735,764 shares and 50,536,125 shares for
2022 and 2021, respectively

(4,337.9)

(4,034.8)

Total stockholders' deficit

(305.2)

(269.0)

Total liabilities and stockholders' deficit

$ 2,625.8

$ 2,171.9

LENNOX INTERNATIONAL INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows

(Unaudited)

(Amounts in millions)

For the Nine Months Ended
September 30,

2022

2021

Cash flows from operating activities:

Net income

$ 402.7

$ 380.4

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

Income from equity method investments

(3.9)

(11.6)

Dividends from affiliates

1.2

9.1

Restructuring charges, net of cash paid

0.7

1.1

Provision for credit losses

4.3

4.3

Unrealized losses (gains), net on derivative contracts

0.8

(0.2)

Stock-based compensation expense

16.4

16.8

Depreciation and amortization

56.2

53.3

Deferred income taxes

(16.6)

(2.2)

Pension expense

5.1

8.4

Pension contributions

(0.7)

(1.1)

Other items, net

(1.4)

0.1

Changes in assets and liabilities:

Accounts and notes receivable

(214.9)

(139.5)

Inventories

(245.7)

(21.1)

Other current assets

(5.1)

(13.1)

Accounts payable

78.7

65.0

Accrued expenses

36.0

49.4

Income taxes payable and receivable, net

35.5

(10.3)

Leases, net

0.8

—

Other, net

20.0

7.5

Net cash provided by operating activities

170.1

396.3

Cash flows from investing activities:

Proceeds from the disposal of property, plant and equipment

1.2

0.7

Purchases of property, plant and equipment

(67.0)

(68.5)

(Purchases of) proceeds from short-term investments, net

(2.4)

0.2

Net cash used in investing activities

(68.2)

(67.6)

Cash flows from financing activities:

Asset securitization borrowings

382.0

504.0

Asset securitization payments

(232.0)

(214.0)

Long-term debt payments

(9.8)

(3.0)

Borrowings from credit facility

1,967.5

1,021.4

Payments on credit facility

(1,752.0)

(1,012.5)

Proceeds from employee stock purchases

2.7

2.5

Repurchases of common stock

(300.0)

(600.0)

Repurchases of common stock to satisfy employee withholding tax obligations

(5.5)

(16.1)

Cash dividends paid

(142.0)

(92.8)

Net cash used in financing activities

(89.1)

(410.5)

Increase (decrease) in cash and cash equivalents

12.8

(81.8)

Effect of exchange rates on cash and cash equivalents

(3.1)

(2.7)

Cash and cash equivalents, beginning of period

31.0

123.9

Cash and cash equivalents, end of period

$ 40.7

$ 39.4

Supplemental disclosures of cash flow information:

Interest paid

$ 23.2

$ 17.7

Income taxes paid (net of refunds)

$ 75.4

$ 101.6

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,

(Unaudited)

2022

2021

Pre-Tax

Tax Impact (d)

After Tax

Pre-Tax

Tax Impact (d)

After Tax

Income from continuing operations, a GAAP measure

$ 174.6

$ (32.7)

$ 141.9

$ 154.8

$ (28.5)

$ 126.3

Restructuring charges

0.2

—

0.2

0.3

(0.1)

0.2

Pension settlements

—

—

—

0.3

(0.1)

0.2

Special product quality adjustments (a)

—

—

—

(1.1)

0.2

(0.9)

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

3.3

(0.3)

3.0

2.9

(0.5)

2.4

Excess tax benefit from share-based compensation (c)

—

(0.2)

(0.2)

—

(2.7)

(2.7)

Other tax items, net (c)

—

0.7

0.7

—

0.3

0.3

Adjusted income from continuing operations, a non-GAAP measure

$ 178.1

$ (32.5)

$ 145.6

$ 157.2

$ (31.4)

$ 125.8

Earnings per share - diluted, a GAAP measure

$ 3.99

$ 3.41

Restructuring charges

—

0.01

Pension settlements

—

0.01

Special product quality adjustments (a)

—

(0.02)

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

0.09

0.06

Excess tax benefit from share-based
compensation (c)

—

(0.08)

Other tax items, net (c)

0.02

0.01

Adjusted earnings per share - diluted, a non-
GAAP measure

$ 4.10

$ 3.40

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

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

(c) Recorded in Provision for income taxes in the Consolidated Statements of Operations

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

For the Nine Months Ended September 30,

(Unaudited)

2022

2021

Pre-Tax

Tax Impact (e)

After Tax

Pre-Tax

Tax Impact (e)

After Tax

Income from continuing operations, a GAAP measure

$ 496.3

$ (93.6)

$ 402.7

$ 469.9

$ (89.4)

$ 380.5

Restructuring charges

1.2

(0.2)

1.0

1.6

(0.3)

1.3

Pension settlements

0.3

(0.1)

0.2

1.1

(0.2)

0.9

Special product quality adjustments (a)

—

—

—

(1.0)

0.2

(0.8)

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

7.9

(1.2)

6.7

8.7

(1.7)

7.0

Excess tax expense (benefit) from share-based
compensation (c)

—

0.3

0.3

—

(6.4)

(6.4)

Other tax items, net (c)

—

(0.8)

(0.8)

—

2.3

2.3

Adjusted income from continuing operations, a
non-GAAP measure

$ 505.7

$ (95.6)

$ 410.1

$ 480.3

$ (95.5)

$ 384.8

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

$ 11.22

$ 10.10

Restructuring charges

0.03

0.03

Pension settlements

0.01

0.02

Special product quality adjustments (a)

—

(0.02)

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

0.18

0.20

Excess tax expense (benefit) from share-based
compensation (c)

0.01

(0.17)

Other tax items, net (c)

(0.02)

0.06

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

—

0.01

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

$ 11.43

$ 10.23

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

(b) Recorded in Losses (gains) and other expenses, net 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 expense (benefit) from the change in share-based compensation also impacts the Company's diluted share counts. The reconciliation of average outstanding diluted shares on a GAAP and non-GAAP basis is included in this amount.

(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,

2022

2021

2022

2021

(Unaudited)

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

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

$ 0.3

$ (0.2)

$ (0.1)

$ (0.9)

Foreign currency exchange losses (gains) (a)

0.3

—

(0.5)

(1.6)

Gain on disposal of fixed assets (a)

(0.4)

(0.1)

(1.3)

(0.6)

Other operating income (a)

(0.2)

(0.5)

(0.6)

(0.9)

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

—

0.2

1.2

0.1

Environmental liabilities and special litigation charges (b)

3.1

2.2

6.2

7.3

Charges incurred related to COVID-19 pandemic (b)

0.2

0.8

0.8

1.9

Other items, net (b)

—

(0.3)

(0.3)

(0.6)

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

$ 3.3

$ 2.1

$ 5.4

$ 4.7

(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 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,

2022

2021

2022

2021

Average shares outstanding - diluted, a GAAP measure

35.5

37.0

35.9

37.7

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

—

—

—

(0.1)

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

35.5

37.0

35.9

37.6

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 September 30,

For the Nine Months
Ended September 30,

2022

2021

2022

2021

Net cash provided by operating activities

$ 170.9

$ 221.8

$ 170.1

$ 396.3

Purchases of property, plant and equipment

(20.3)

(23.0)

(67.0)

(68.5)

Proceeds from the disposal of property, plant and equipment

0.7

0.1

1.2

0.7

Free cash flow, a Non-GAAP measure

$ 151.3

$ 198.9

$ 104.3

$ 328.5

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

Trailing Twelve
Months to
September 30,
2022

Adjusted EBIT (a)

$ 635.6

Depreciation and amortization expense (b)

73.1

EBITDA (a + b)

$ 708.7

Total debt at September 30, 2022 (c)

$ 1,604.5

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

2.3

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

Trailing Twelve
Months to
September 30,
2022

Income from continuing operations before income taxes, a GAAP measure

586.5

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

13.4

Special product quality adjustments

(1.4)

Restructuring charges

1.4

Interest expense, net

32.3

Pension settlements

0.4

Other expense (income), net

3.0

Adjusted EBIT per above, a Non-GAAP measure

635.6