Lennox International Inc. 2022 Q2 Form 10-Q Summary
Business Context and Reporting Period
Lennox International Inc. designs, manufactures and sells heating, ventilation, air conditioning and refrigeration products through three segments: Residential Heating & Cooling, Commercial Heating & Cooling, and Refrigeration. This unaudited Form 10-Q covers the three and six months ended June 30, 2022, compared with the corresponding 2021 periods.
Demand is seasonal and influenced by weather, interest rates, construction activity, consumer spending, commodity prices and supply-chain conditions. Alok Maskara became chief executive officer on May 9, 2022, succeeding Todd Bluedorn.
Key Financial Metrics
| Metric | Three Months Ended June 30 | Six Months Ended June 30 |
|---|---|---|
| Net sales | $1,366.3 million, up 10.3% | $2,379.7 million, up 9.7% |
| Gross profit | $397.1 million; 29.1% margin | $665.3 million; 28.0% margin |
| Operating income | $226.9 million; 16.6% margin | $338.8 million; 14.2% margin |
| Net income | $177.2 million | $260.8 million |
| Diluted EPS | $4.96 | $7.23 |
| Operating cash flow | Not separately provided | $(0.8) million |
| Capital expenditures | Not separately provided | $46.7 million |
Second-quarter sales growth reflected an 11% favorable pricing impact, partly offset by 1% unfavorable foreign currency. Volume and mix were neutral overall. Gross margin declined 180 basis points due primarily to higher commodity, component, product and freight costs, unfavorable mix and factory inefficiencies. SG&A was $169.6 million, or 12.4% of sales, compared with 13.5% in the prior-year quarter.
The six-month effective tax rate was 18.9%, compared with 19.3% in 2021. Management expects a full-year 2022 effective tax rate of approximately 18% to 20%.
Segment Performance
| Segment | Q2 2022 Sales | Q2 Sales Change | Q2 Profit | Q2 Profit Change |
|---|---|---|---|---|
| Residential Heating & Cooling | $977.5 million | Up 16.6% | $216.3 million | Up 14.0% |
| Commercial Heating & Cooling | $219.6 million | Down 13.1% | $17.2 million | Down 62.0% |
| Refrigeration | $169.2 million | Up 14.2% | $23.4 million | Up 73.3% |
Residential performance benefited from pricing and volume, while profitability was constrained by commodity, component, freight and other product costs. Commercial results were materially affected by supply-chain constraints, with volume down 22% in the quarter. Refrigeration benefited from pricing and volume growth, partly offset by foreign currency and cost inflation.
Cash Flow, Debt and Liquidity
- Cash and cash equivalents were $57.4 million at June 30, 2022, compared with $31.0 million at December 31, 2021.
- Operating cash flow was $(0.8) million, compared with $174.5 million provided in the prior-year period, primarily because of unfavorable working-capital changes. Receivables increased by $281.6 million and inventories increased by $187.3 million.
- Net cash used in investing activities was $46.2 million, including $46.7 million of capital expenditures.
- Net cash provided by financing activities was $75.4 million. Financing included net borrowings, $300.0 million of share repurchases and $66.9 million of cash dividends.
- Total debt was $1.693 billion, including $400.0 million under the asset securitization program, $308.5 million under the revolving credit facility and $950.0 million of senior unsecured notes.
- The $750.0 million revolving credit facility had $439.5 million available, after outstanding borrowings and letters of credit. The asset securitization program had no remaining availability as of June 30, 2022.
- The debt-to-total-capital ratio was 131%, compared with 128% at year-end 2021. Management stated that all debt covenants were satisfied and that cash, operating cash generation and available borrowing capacity should fund foreseeable needs.
Material Changes, Outlook and Risks
- Pricing actions supported sales and partially offset significant input-cost inflation, but gross margins deteriorated year over year.
- Supply-chain constraints materially reduced Commercial Heating & Cooling volume and profit. COVID-19 continued to cause supply-chain disruption and employee absenteeism risks.
- Interest expense increased to $8.7 million in the quarter and $15.6 million year to date because of higher borrowing levels and borrowing costs. The company was not hedged against interest-rate risk as of June 30, 2022.
- Commodity and foreign-currency hedges generated volatility in accumulated other comprehensive loss. The company expected to reclassify approximately $9.1 million of derivative losses into earnings within the following 12 months, assuming market prices remained constant.
- The company repurchased $300.0 million of common stock during the first six months, including accelerated share repurchases completed in April and June. Approximately $546 million remained available under the authorized repurchase plans at June 30, 2022.
- Product warranty liabilities increased to $148.9 million from $134.2 million at December 31, 2021.
- Management reported no material changes to previously disclosed risk factors and no litigation expected to have a material adverse effect, while noting that litigation outcomes remain uncertain.
- Senior credit ratings were Baa2 with a stable outlook from Moody’s and BBB with a stable outlook from S&P.
Investor Verification Checklist
- Verify whether pricing actions can continue to offset commodity, component, freight, labor and other product-cost inflation.
- Monitor Commercial Heating & Cooling recovery, supply-chain constraints and segment-margin normalization.
- Assess working-capital needs, particularly the substantial increases in receivables and inventories and the deterioration in operating cash flow.
- Review debt maturities, variable-rate exposure, covenant compliance and the availability of the revolving credit and asset securitization facilities.
- Evaluate the sustainability of share repurchases and dividends given negative year-to-date operating cash flow and increased leverage.
- Track COVID-19 developments, foreign-currency movements, commodity prices, hedge settlements and warranty claims.
- Confirm the effect of the CEO transition and management’s future outlook in subsequent filings; the filing provides a tax-rate expectation but does not provide clear full-year sales or earnings guidance.