Lennox International Inc. — Form 10-Q Summary
Reporting period: Three and nine months ended September 30, 2012. The filing covers Lennox International and subsidiaries and presents unaudited interim GAAP financial statements. The company operates in Residential Heating & Cooling, Commercial Heating & Cooling, and Refrigeration.
Key Financial Metrics
| Metric | Q3 2012 | Q3 2011 | 9M 2012 | 9M 2011 |
|---|---|---|---|---|
| Net sales | $809.7 million | $801.2 million | $2,264.5 million | $2,192.4 million |
| Gross profit | $204.9 million | $186.6 million | $553.9 million | $516.5 million |
| Gross margin | 25.3% | 23.3% | 24.5% | 23.6% |
| Operational income from continuing operations | $80.9 million | $56.6 million | $179.6 million | $137.7 million |
| Income from continuing operations | $49.7 million | $34.9 million | $108.5 million | $82.7 million |
| Net income | $29.4 million | $33.8 million | $68.0 million | $71.6 million |
| Diluted EPS from continuing operations | $0.97 | $0.66 | $2.11 | $1.53 |
| Diluted net EPS | $0.57 | $0.64 | $1.32 | $1.33 |
| Cash provided by operating activities | Not separately provided | Not separately provided | $64.4 million | $(2.2) million |
- Balance sheet: Cash and cash equivalents were $48.8 million at September 30, 2012, compared with $45.0 million at December 31, 2011. Total assets were $1.7935 billion and stockholders’ equity was $509.4 million.
- Debt: Total debt was $481.0 million, including $233.0 million outstanding under the domestic revolving credit facility, $200.0 million of senior unsecured notes, $25.0 million under the asset securitization program, and $16.6 million of capital lease obligations.
- Liquidity: The company reported $367.1 million of availability under its revolving credit facility and $125.0 million remaining under the asset securitization program. Including cash, total stated liquidity was approximately $540.9 million, before other restrictions and letters of credit.
- Leverage: Debt-to-total-capital was 48.6% at September 30, 2012, compared with 49.9% at year-end 2011. The company was in compliance with its debt covenants.
- Cash deployment: Nine-month capital expenditures were $28.0 million, share repurchases were $38.4 million, and cash dividends paid were $27.5 million.
Material Changes Versus Prior Comparable Period
- Third-quarter sales increased 1.1%; excluding a 2% unfavorable foreign-currency effect, sales increased approximately 3%.
- Nine-month sales increased 3.3%; excluding a 2% unfavorable foreign-currency effect, sales increased approximately 5%.
- Q3 gross margin expanded 200 basis points, primarily from material cost savings and other product-cost savings, partly offset by higher freight and distribution costs.
- Q3 operational income increased 42.9% to $80.9 million. Management attributed the improvement to higher volume, material-cost savings, improved margins, and lower restructuring charges.
- Q3 net income declined despite stronger continuing operations because discontinued operations recorded a $20.3 million after-tax loss, compared with a $1.1 million loss in the prior-year quarter.
- Nine-month operating cash flow improved from an outflow of $2.2 million to inflow of $64.4 million, although working capital used $123 million of cash, principally because of the timing of accounts-payable payments.
- Restructuring charges declined to $0.4 million in Q3 and $3.1 million for nine months, compared with $8.0 million and $11.3 million, respectively, in the prior-year periods.
Segment Performance
| Segment | Q3 2012 Sales | Year-over-year Sales | Q3 2012 Profit | Year-over-year Profit |
|---|---|---|---|---|
| Residential Heating & Cooling | $386.3 million | Up 9.2% | $37.7 million | Up 20.4% |
| Commercial Heating & Cooling | $219.7 million | Down 1.7% | $32.5 million | Up 4.5% |
| Refrigeration | $203.7 million | Down 9.0% | $25.1 million | Up 22.4% |
Residential performance benefited from higher replacement and new-construction volume. Commercial sales were approximately 1% higher excluding currency effects. Refrigeration sales declined because of lower volume and currency effects, but profitability improved through pricing, mix, and material-cost savings.
Outlook, Commentary, Risks, and Unusual Items
- The filing does not provide a clear numerical full-year earnings or revenue guidance range.
- Management expected approximately $37.5 million of dividend payments and planned at least $50 million of share repurchases during 2012. The repurchase authorization had approximately $86.3 million remaining at September 30, 2012.
- Management stated that cash, available borrowings, and expected operating cash flow were sufficient to fund operations, capital expenditures, contractual obligations, dividends, and planned repurchases in the foreseeable future.
- In September 2012, the company announced plans to sell Service Experts. The business was classified as discontinued operations and generated a $20.5 million goodwill impairment charge in Q3. Management stated that the impairment estimate would be finalized after completing its strategic-alternatives analysis, so additional adjustments were possible.
- The Hearth business was sold in Q2 2012 for $10.1 million of net proceeds. The Q3 results included a $2.9 million working-capital adjustment and a $0.9 million total net loss on the sale.
- Product-quality matters related to vendor-supplied materials resulted in $1.0 million of expense during Q3. Accrued liabilities for these matters were $7.1 million at September 30, 2012, and additional charges could occur.
- Total estimated product-warranty liabilities were $70.6 million. The company also maintained $64.0 million of self-insurance liabilities.
- Key operating risks include seasonal and weather-dependent demand, economic conditions and consumer financing, commodity prices, foreign-currency movements, regulatory and environmental changes, tax incentives, competition, product liability, warranty and quality claims, and potential litigation.
- The company’s $100 million interest-rate swap expired October 12, 2012. Variable-rate debt, commodity prices, and foreign exchange remain sources of market risk.
- The company reported no material change in market risk exposure, no material adverse litigation matter, and effective disclosure controls as of September 30, 2012.
Investor Verification Checklist
- Verify the final valuation and any subsequent impairment or sale outcome for Service Experts.
- Reconcile continuing-operations earnings with consolidated net income after discontinued operations and divestiture-related items.
- Monitor working-capital conversion, inventory growth, accounts receivable, and operating cash flow.
- Review debt maturities, revolving-credit availability, asset-securitization renewal terms, covenant compliance, and variable-rate exposure.
- Assess whether material-cost savings, pricing, and mix improvements offset freight, distribution, warranty, and incentive-compensation costs.
- Track product-quality claims and warranty accruals for potential future charges.
- Evaluate demand sensitivity to weather, housing and commercial construction, foreign exchange, commodity prices, regulation, and tax incentives.