Lennox International Reports Fourth Quarter and Full Year 2015 Results

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,

2015

2014

2015

2014

Net sales

$

834.1

$

812.8

$

3,467.4

$

3,367.4

Cost of goods sold

606.5

587.4

2,520.0

2,464.1

Gross profit

227.6

225.4

947.4

903.3

Operating Expenses:

Selling, general and administrative expenses

150.6

148.2

580.5

573.7

Losses and other expenses, net

6.8

3.3

21.7

6.8

Restructuring charges

1.4

0.6

3.2

1.9

Goodwill impairment

5.5

—

5.5

—

Asset impairment

44.5

—

44.5

—

Income from equity method investments

(1.6)

(1.8)

(13.4)

(13.8)

Operational income from continuing operations

20.4

75.1

305.4

334.7

Interest expense, net

5.8

6.2

23.6

17.2

Other expense (income), net

(0.1)

(0.1)

(0.8)

(0.1)

Income from continuing operations before income taxes

14.7

69.0

282.6

317.6

Provision for income taxes

3.5

22.9

95.4

109.5

Income from continuing operations

11.2

46.1

187.2

208.1

Discontinued Operations:

Income (loss) from discontinued operations before income taxes

—

(2.4)

(1.0)

(3.7)

Provision for (benefit from) income taxes

—

(0.9)

(0.4)

(1.4)

Income (loss) from discontinued operations

—

(1.5)

(0.6)

(2.3)

Net income

$

11.2

$

44.6

$

186.6

$

205.8

Earnings per share – Basic:

Income from continuing operations

$

0.25

$

1.01

$

4.17

$

4.35

Income (loss) from discontinued operations

—

(0.03)

(0.01)

(0.05)

Net income

$

0.25

$

0.98

$

4.16

$

4.30

Earnings per share – Diluted:

Income from continuing operations

$

0.25

$

1.00

$

4.11

$

4.28

Income (loss) from discontinued operations

—

(0.04)

(0.02)

(0.05)

Net income

$

0.25

$

0.96

$

4.09

$

4.23

Weighted Average Number of Shares Outstanding - Basic

44.9

45.5

44.9

47.9

Weighted Average Number of Shares Outstanding - Diluted

45.5

46.2

45.6

48.6

Cash dividends declared per share

$

0.36

$

0.30

$

1.38

$

1.14

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,

2015

2014

2015

2014

Net Sales

Residential Heating & Cooling

$

431.2

$

404.0

$

1,866.9

$

1,736.5

Commercial Heating & Cooling

226.9

222.9

887.2

878.5

Refrigeration

176.0

185.9

713.3

752.4

$

834.1

$

812.8

$

3,467.4

$

3,367.4

Segment Profit (Loss) ⁽¹⁾

Residential Heating & Cooling

$

57.1

$

57.0

$

278.4

$

235.8

Commercial Heating & Cooling

34.8

32.6

130.4

124.0

Refrigeration

15.4

13.1

52.9

55.4

Corporate and other

(26.5)

(26.4)

(84.1)

(74.3)

Subtotal that includes segment profit and eliminations

80.8

76.3

377.6

340.9

Reconciliation to income from continuing operations before income taxes:

Special product quality adjustments

(1.5)

(1.4)

(2.2)

(1.4)

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

4.9

2.0

15.6

4.7

Restructuring charges

1.4

0.6

3.2

1.9

Interest expense, net

5.8

6.2

23.6

17.2

Goodwill impairment

5.5

—

5.5

—

Asset impairment

44.5

—

44.5

—

One time inventory write down

5.6

—

5.6

1.0

Other expense (income), net

(0.1)

(0.1)

(0.8)

(0.1)

Income from continuing operations before income taxes

$

14.7

$

69.0

$

282.6

$

317.6

The Company defines segment profit and loss as a segment's income or loss from continuing operations before income taxes 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, and

-

Other items, net;

•

Restructuring charges;

•

Goodwill, long-lived asset, and equity method investment impairments;

•

Interest expense, net;

•

One time inventory write down; and

•

Other expense, net.

LENNOX INTERNATIONAL INC. AND SUBSIDIARIES

Consolidated Balance Sheets

(Amounts in millions, except shares and par values)

As of December 31,

2015

As of December 31,

2014

ASSETS

Current assets:

Cash and cash equivalents

$

38.9

$

37.5

Accounts and notes receivable, net of allowances of $6.3 and $7.9 in 2015 and 2014, respectively

422.8

421.4

Inventories, net

418.8

463.3

Other assets

57.7

59.3

Total current assets

938.2

981.5

Property, plant and equipment, net

339.6

358.6

Goodwill

195.1

209.4

Deferred income taxes

145.7

130.0

Other assets, net

61.6

84.8

Total assets

$

1,680.2

$

1,764.3

LIABILITIES AND STOCKHOLDERS' EQUITY

Current Liabilities:

Short-term debt

$

204.1

$

226.6

Current maturities of long-term debt

31.2

24.0

Accounts payable

320.1

324.3

Accrued expenses

242.6

239.0

Income taxes payable

26.0

13.4

Total current liabilities

824.0

827.3

Long-term debt

508.6

675.0

Post-retirement benefits, other than pensions

4.1

4.5

Pensions

120.8

129.9

Other liabilities

121.1

118.6

Total liabilities

1,578.6

1,755.3

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

1,002.4

824.9

Retained earnings

1,146.7

1,022.1

Accumulated other comprehensive loss

(204.7)

(153.5)

Treasury stock, at cost, 42,491,910 shares and 42,535,126 shares for 2015 and 2014, respectively

(1,844.1)

(1,686.0)

Noncontrolling interests

0.4

0.6

Total stockholders' equity

101.6

9.0

Total liabilities and stockholders' equity

$

1,680.2

$

1,764.3

LENNOX INTERNATIONAL INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flow

(Amounts in millions)

For the Years Ended December 31,

2015

2014

Cash flows from operating activities:

Net income

$

186.6

$

205.8

Net loss from discontinued operations

0.6

2.3

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

Income from equity method investments

(13.4)

(13.8)

Dividends from affiliates

11.0

9.1

Restructuring expenses, net of cash paid

—

0.2

Goodwill impairment

5.5

—

Impairment of assets

44.5

—

Provision for bad debts

2.8

2.6

Unrealized losses on derivative contracts

0.8

0.3

Stock-based compensation expense

26.6

23.3

Depreciation and amortization

62.8

60.8

Deferred income taxes

(21.3)

6.1

Pension costs in excess of (less than) contributions

6.7

(8.0)

Other items, net

1.0

0.1

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

Accounts and notes receivable

(23.5)

(32.6)

Inventories

28.8

(96.7)

Other current assets

(1.6)

(8.3)

Accounts payable

(2.9)

46.1

Accrued expenses

4.2

6.7

Income taxes payable and receivable

10.9

(15.9)

Other, net

1.7

(1.0)

Net cash used in discontinued operations

(0.6)

(2.3)

Net cash provided by operating activities

331.2

184.8

Cash flows from investing activities:

Proceeds from the disposal of property, plant and equipment

0.1

1.1

Purchases of property, plant and equipment

(69.9)

(88.4)

Net proceeds from sale of businesses

—

—

Net cash used in investing activities

(69.8)

(87.3)

Cash flows from financing activities:

Short-term borrowings, net

(1.7)

1.5

Asset securitization borrowings

40.0

100.0

Asset securitization payments

(60.0)

(40.0)

Term loan borrowings from credit facility

—

300.0

Long-term debt payments

(24.0)

(2.3)

Borrowings from credit facility

1,671.0

2,073.5

Payments on credit facility

(1,807.5)

(1,908.5)

Payments of deferred financing costs

—

(2.2)

Additional investment in subsidiary

—

—

Proceeds from employee stock purchases

2.4

2.0

Repurchases of common stock

—

(550.3)

Repurchases of common stock to satisfy employee withholding tax obligations

(32.0)

(22.4)

Excess tax benefits related to share-based payments

22.4

11.8

Cash dividends paid

(59.3)

(52.6)

Net cash used in financing activities

(248.7)

(89.5)

Increase (decrease) in cash and cash equivalents

12.7

8.0

Effect of exchange rates on cash and cash equivalents

(11.3)

(8.5)

Cash and cash equivalents, beginning of year

37.5

38.0

Cash and cash equivalents, end of year

$

38.9

$

37.5

Supplementary disclosures of cash flow information:

Cash paid during the year for:

Interest, net

$

23.7

$

17.6

Income taxes (net of refunds)

$

83.2

$

105.3

LENNOX INTERNATIONAL INC. AND SUBSIDIARIES

Reconciliation to U.S. GAAP (Generally Accepted Accounting Principles) Measures

(Unaudited, in millions, except per share and ratio data)

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. 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,

For the Years

Ended December 31,

2015

2014

2015

2014

Income from continuing operations, a GAAP measure

$

11.2

$

46.1

$

187.2

$

208.1

Restructuring charges, after tax

1.0

0.4

2.3

1.8

Asset impairment, after tax

29.0

—

29.0

—

Goodwill impairment, after tax

3.6

—

3.6

—

Special product quality adjustments, after tax ^(b)

(0.9)

(0.8)

(1.3)

(0.9)

Special legal contingency charges, after tax ^(a)

0.6

0.2

4.0

0.6

Asbestos-related litigation, after tax ^(a)

1.3

—

1.9

0.6

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

(0.2)

0.3

0.4

0.4

One time inventory write down, after tax ^(b)

3.8

—

3.8

0.8

Environmental liabilities, after tax ^(a)

0.3

0.7

1.0

1.2

Contractor tax payments, after tax ^(a)

0.2

—

1.7

—

Other items, net, after tax ^(a)

0.4

—

0.6

0.5

Adjusted income from continuing operations, a non-GAAP measure

$

50.3

$

46.9

$

234.2

$

213.1

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

$

0.25

$

1.00

$

4.11

$

4.28

Restructuring charges, after tax

0.02

0.01

0.05

0.03

Asset impairment, after tax

0.64

—

0.64

—

Goodwill impairment, after tax

0.08

—

0.08

—

Special product quality adjustments, after tax ^(b)

(0.02)

(0.02)

(0.03)

(0.02)

Special legal contingency charges, after tax ^(a)

0.01

—

0.09

0.01

Asbestos-related litigation, after tax ^(a)

0.03

—

0.04

0.01

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

—

0.01

0.01

0.01

One time inventory write down, after tax ^(b)

0.08

—

0.08

0.02

Environmental liabilities, after tax ^(a)

0.01

0.02

0.02

0.03

Contractor tax payments, after tax ^(a)

—

—

0.04

—

Other items, net, after tax ^(a)

0.01

—

0.01

0.01

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

$

1.11

$

1.02

$

5.14

$

4.38

^{(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}

For the Three Months

Ended December 31,

For the Years

Ended December 31,

2015

2014

2015

2014

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

Realized losses on settled future contracts ^(a)

$

0.6

$

0.1

$

1.9

$

0.8

Foreign currency exchange losses ^(a)

0.8

1.5

3.6

1.6

Gain on disposal of fixed assets ^(a)

0.5

(0.3)

0.6

(0.3)

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

(0.2)

0.5

0.6

0.6

Special legal contingency charges ^(b)

1.9

0.3

7.4

0.9

Asbestos-related litigation ^(b)

2.0

—

3.0

0.9

Environmental liabilities ^(b)

0.3

1.2

1.0

2.0

Contractor tax payments ^(b)

0.2

—

2.6

—

Acquisition costs ^(b)

0.7

—

1.0

—

Other items, net ^(b)

—

—

—

0.3

Losses and other expenses, net (pre-tax)

$

6.8

$

3.3

$

21.7

$

6.8

   ^{(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,

2016

ESTIMATED

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

$6.10-$6.60

Restructuring and other items

0.00

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

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,

2015

2014

2015

2014

Net cash provided by operating activities, a GAAP measure

$

224.3

$

161.3

$

331.2

$

184.8

 Purchases of property, plant and equipment

(22.9)

(28.5)

(69.9)

(88.4)

 Proceeds from the disposal of property, plant and equipment

0.1

0.9

0.1

1.1

 Free cash flow, a Non-GAAP measure

$

201.5

$

133.7

$

261.4

$

97.5

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

Trailing

Twelve Months to 

December 31,

2015

 Adjusted EBIT (a)

$

377.6

 Depreciation and amortization expense (b)

62.8

 EBITDA (a + b)

$

440.4

 Total debt at December 31, 2015 (c)

$

743.9

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

1.7

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,

2015

 Adjusted EBIT per above, a Non-GAAP measure

$

377.6

 Special product quality adjustments

(2.2)

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

15.6

 Restructuring charges

3.2

 Interest expense, net

23.6

 One time inventory write down

5.6

Goodwill impairment

5.5

Asset impairment

44.5

 Other expenses, net

(0.8)

 Income from continuing operations before income taxes, a GAAP measure

$

282.6