Lennox International Inc. — Form 10-Q Summary
Reporting period: Three and six months ended June 30, 2021. The interim financial statements are unaudited and should be read with the company’s 2020 Form 10-K. Lennox operates in Residential Heating & Cooling, Commercial Heating & Cooling, and Refrigeration.
Financial performance and position
| Metric | Q2 2021 | Q2 2020 | Change |
|---|
| Net sales | $1,239.0 million | $941.3 million | +31.6% |
| Gross profit | $383.2 million | $275.7 million | +39.0% |
| Gross margin | 30.9% | 29.3% | +160 bps |
| Operating income | $216.0 million | $136.0 million | +58.8% |
| Operating margin | 17.4% | 14.4% | +300 bps |
| Net income | $170.0 million | $100.0 million | +$70.0 million |
| Diluted EPS from continuing operations | $4.51 | $2.62 | +$1.89 |
| Metric | Six months 2021 | Six months 2020 | Change |
|---|
| Net sales | $2,169.4 million | $1,665.1 million | +30.3% |
| Gross profit | $639.7 million | $441.4 million | +44.9% |
| Gross margin | 29.5% | 26.5% | +300 bps |
| Operating income | $330.0 million | $172.3 million | +91.5% |
| Net income | $254.2 million | $112.9 million | +125.1% |
| Diluted EPS from continuing operations | $6.70 | $2.93 | +$3.77 |
- Segment performance in Q2: Residential sales increased 30.0% to $838.0 million and segment profit increased 49.0% to $189.7 million. Commercial sales increased 34.3% to $252.8 million and profit increased 27.2% to $45.3 million. Refrigeration sales increased 37.0% to $148.2 million and profit increased 51.7% to $13.5 million.
- Sales drivers: Q2 sales growth reflected a 27% volume increase, 3% favorable price and mix, and 2% favorable foreign currency. Year-to-date growth reflected 26% higher volume, 3% favorable price and mix, and 1% favorable foreign currency.
- Expenses: Q2 SG&A increased $38 million to $167.8 million, primarily from higher incentive compensation and employee costs, but declined to 13.5% of sales from 13.8%. Restructuring charges fell to $1.2 million from $10.0 million.
- Cash flow: Six-month operating cash flow was $174.5 million versus $6.5 million in the prior-year period. Capital expenditures were $45.5 million versus $43.5 million.
- Shareholder returns: The company paid $58.6 million of dividends and repurchased $400.0 million of common stock during the first six months. The board authorized an additional $1.0 billion of repurchases in July 2021.
- Liquidity: Cash and cash equivalents were $44.5 million at June 30, 2021, including approximately $20 million held outside the United States. Management stated that operating cash generation and available borrowing capacity should be sufficient for foreseeable needs.
- Debt: Total debt was $1,243.3 million, including $255.0 million under the asset securitization program, $950.0 million of senior unsecured notes, and $4.5 million drawn on the domestic credit facility. The company reported $743.3 million of remaining capacity on the prior $750 million revolving facility, after borrowings and letters of credit.
- Capital structure: Stockholders’ deficit increased to $213.3 million from $17.1 million at December 31, 2020, primarily reflecting treasury-stock repurchases. Debt-to-total-capital was reported at 121%, versus 102% at year-end 2020.
Material changes versus the prior comparable period
- Results improved substantially across all three segments, with higher volume, favorable pricing and mix, productivity gains, and lower restructuring costs.
- Gross margins benefited from pricing, mix, and factory productivity, partly offset by higher commodity, product, warranty, tariff, freight, and distribution costs.
- Operating cash flow improved by $168.0 million year over year, while financing cash flow shifted from a $52.3 million inflow to a $210.8 million outflow, primarily because of increased share repurchases.
- Interest expense declined to $6.4 million in Q2 and $12.3 million year to date, compared with $6.9 million and $15.6 million, respectively, in the prior-year periods.
- The effective tax rate declined to 18.6% in Q2 from 21.4% and to 19.3% year to date from 26.8%, primarily due to higher excess tax benefits from stock-based compensation and the prior-year valuation allowance on certain foreign deferred tax assets.
Guidance, outlook, risks, and unusual items
- Management expected the 2021 annual effective tax rate to be approximately 20%, excluding excess tax benefits recorded under the applicable accounting standard. The filing does not provide clear full-year revenue or earnings guidance.
- COVID-19 continued to create supply-chain disruptions and higher employee absenteeism. Management warned that worsening conditions, slower vaccine distribution, or new variants could affect operations, financial position, and cash flow.
- Commodity prices, tariffs, freight, supply availability, factory efficiency, weather, interest rates, construction activity, consumer spending, and foreign currency movements remain significant operating sensitivities.
- Warranty liabilities increased to $131.8 million from $119.8 million at December 31, 2020. Management also recorded $2.8 million of asbestos-related litigation expense and $1.5 million of environmental liabilities during the first six months.
- The company maintained cash-flow hedges for commodity and foreign-currency exposures. It expected to reclassify approximately $12.8 million of derivative gains into earnings within the following 12 months, assuming market prices and exchange rates remained constant.
- In July 2021, Lennox replaced its prior revolving credit facility with a new $750 million facility maturing in July 2026, subject to two potential one-year extensions. The facility includes a maximum total net leverage ratio of 3.50 to 1.00, or 4.00 to 1.00 on up to two occasions after a material acquisition.
- On July 8, 2021, Chairman and Chief Executive Officer Todd M. Bluedorn announced plans to resign as CEO and as chairman and a director in mid-2022. The board began a CEO search.
- Management reported no material changes to previously disclosed risk factors, no material effect from litigation on financial condition, and no material off-balance-sheet arrangements.
Investor verification points
- Verify whether pricing actions and volume growth can offset continuing commodity, tariff, labor, supply-chain, warranty, and freight pressures.
- Monitor working-capital requirements, particularly the large increase in accounts receivable and reliance on the asset securitization program.
- Assess leverage, debt maturities, covenant compliance, and the effect of continued share repurchases on liquidity and stockholders’ deficit.
- Evaluate the sustainability of the unusually strong year-over-year margin and earnings growth against the COVID-affected 2020 comparison period.
- Follow the CEO succession process and any effect on strategy, capital allocation, and operating execution.
- Review developments in asbestos, environmental, warranty, legal, tax, and COVID-19 contingencies, including potential exposures not yet quantified clearly in the filing.
