Lennox International Inc. — FY2015 Form 10-K Summary
Business Context and Reporting Period
Lennox International Inc. designs, manufactures, markets and services HVACR products through three reportable segments: Residential Heating & Cooling, Commercial Heating & Cooling, and Refrigeration. The filing covers the fiscal year ended December 31, 2015, with comparisons to 2014 and 2013. The business is seasonal, weather-sensitive and exposed to construction activity, commodity prices, foreign exchange and regulatory changes.
| Segment | 2015 Net Sales | 2015 Segment Profit | 2015 Margin |
|---|---|---|---|
| Residential Heating & Cooling | $1,866.9 million | $278.4 million | 14.9% |
| Commercial Heating & Cooling | $887.2 million | $130.4 million | 14.7% |
| Refrigeration | $713.3 million | $52.9 million | 7.4% |
| Total | $3,467.4 million |
Financial Performance and Key Metrics
- Net sales increased 3.0% to $3,467.4 million from $3,367.4 million. Reported volume increased approximately 6%, price and mix increased approximately 1%, and foreign exchange reduced sales by approximately 4%.
- Gross profit was $947.4 million, with gross margin improving to 27.3% from 26.8%, primarily from lower material costs, productivity gains and lower warranty costs.
- Operational income from continuing operations declined to $305.4 million from $334.7 million, and operating margin declined to 8.8% from 9.9%, primarily because of $5.5 million of goodwill impairment and $44.5 million of asset impairment charges.
- Income from continuing operations was $187.2 million versus $208.1 million. Net income was $186.6 million versus $205.8 million.
- Diluted EPS from continuing operations was $4.11 versus $4.28; diluted net EPS was $4.09 versus $4.23.
- Net cash provided by operating activities increased to $331.2 million from $184.8 million, principally from lower working-capital requirements and lower income-tax payments. Capital expenditures were $69.9 million versus $88.4 million.
- Cash and cash equivalents were $38.9 million at year-end, including approximately $31 million held outside the United States.
- Total debt declined to $743.9 million from $925.6 million. Debt included $204.1 million of short-term debt, $508.6 million of long-term debt and $200 million of senior unsecured notes. Available borrowings under the domestic credit facility were $600.1 million, subject to covenants.
- Stockholders’ equity increased to $101.6 million from $9.0 million, while the debt-to-total-capital ratio improved to 88.0% from 99.0%.
- Cash dividends declared increased to $1.38 per share from $1.14. The company paid $59.3 million of dividends during 2015 and had $396.2 million remaining under share-repurchase authorizations at year-end.
Material Changes Versus the Prior Comparable Period
- Residential Heating & Cooling sales rose 7.5% and segment profit rose 18.1%, supported by replacement and new-construction growth, market-share gains, material savings and favorable price and mix.
- Commercial Heating & Cooling sales increased 1.0% and segment profit increased 5.2%, despite unfavorable foreign exchange, higher investment costs and unfavorable mix.
- Refrigeration sales decreased 5.2% and segment profit decreased 4.5%, primarily because of foreign exchange, unfavorable mix and reduced Australian refrigerant profitability following repeal of the carbon tax.
- International sales declined to $456.3 million, or 13.1% of total sales, from $554.7 million, or 16.5%, largely reflecting currency effects. Sales outside the United States represented 19.4% of 2015 sales.
- Losses and other expenses increased to $21.7 million from $6.8 million, including $7.4 million of special legal contingency charges, $3.0 million of asbestos-related charges, $2.6 million of contractor tax payments, $3.6 million of foreign-exchange losses and $1.0 million of environmental liabilities.
- Fourth-quarter results included $5.5 million of goodwill impairment and $44.5 million of asset impairment related to the North American supermarket display-case business. The asset impairment included charges related to intangible assets and property, plant and equipment.
- Net interest expense increased to $23.6 million from $17.2 million because of higher average borrowings.
Outlook, Commentary, Risks and Unusual Items
Management’s strategy is to expand premium-market positions through innovation, acquisitions, geographic and distribution expansion, manufacturing and sourcing improvements, and expense reduction. The filing does not provide a clear numerical 2016 revenue, earnings or cash-flow guidance figure.
- Demand and profitability may be affected by abnormal summer or winter weather, construction activity, consumer spending, financing availability and general economic conditions.
- Key operating exposures include competition, commodity and component price volatility, supply interruptions, reliance on certain suppliers and single-location production facilities, foreign currency movements, and international political and regulatory conditions.
- Energy-efficiency rules and potential phase-downs of HFC refrigerants may require product changes and could affect development costs, margins and demand.
- Extended product warranties, product-quality claims, asbestos litigation, legal contingencies, environmental remediation, self-insurance and pension obligations may produce costs above current estimates. Warranty liabilities were $92.3 million at year-end.
- The company had $120.8 million of pension liabilities and a pension plan funded-status deficit of $122.4 million. No U.S. defined-benefit plan contribution was required in 2016 according to management.
- The domestic credit facility requires a consolidated indebtedness-to-adjusted-EBITDA ratio no greater than 3.5:1 and a cash-flow-to-net-interest-expense ratio no less than 3.0:1. The company stated that it was in compliance with all debt covenants at December 31, 2015.
- Goodwill was $195.1 million at year-end and remains subject to impairment risk. The company’s Moody’s rating was Baa3 with a negative outlook, while S&P rated it BBB with a stable outlook.
- On February 10, 2016, after year-end, the company entered into a $200 million accelerated share-repurchase transaction and expected to receive approximately 1.3 million shares initially.
Most Important Facts for Investors to Verify
- Whether the 2015 earnings decline was primarily non-cash and unusual, or reflects a sustainable deterioration in underlying operating performance.
- The sustainability of Residential and Commercial segment growth and whether Refrigeration can recover from currency, mix and Australian-market pressures.
- The valuation assumptions supporting the North American supermarket display-case impairment and the potential for additional impairment charges.
- Debt maturities, refinancing requirements, covenant headroom and the availability of the domestic credit facility and asset-securitization program.
- Whether operating cash flow remains strong after normalizing for working-capital timing and whether it adequately covers capital expenditures, dividends and share repurchases.
- Future exposure from warranty claims, supplier-quality issues, legal contingencies, asbestos matters, environmental obligations and pension funding.
- The effect of foreign exchange, commodity hedges, energy-efficiency requirements and refrigerant regulations on future margins.
- The final share count and capital-allocation impact of the February 2016 accelerated share repurchase.