Lennox International Inc. 2013 Form 10-K Summary
Business context and reporting period
Lennox International Inc. designs, manufactures and markets heating, ventilation, air conditioning and refrigeration products and services. The filing covers the fiscal year ended December 31, 2013; fourth-quarter 2013 results are also disclosed. Reportable segments were Residential Heating & Cooling, Commercial Heating & Cooling, and Refrigeration.
2013 net sales were $3,199.1 million, including Residential Heating & Cooling of $1,583.2 million, Commercial Heating & Cooling of $844.4 million, and Refrigeration of $771.5 million. The company sold its Service Experts business on March 22, 2013, and presents that business in discontinued operations.
Key financial metrics
| Metric | 2013 | 2012 | Change |
|---|---|---|---|
| Net sales | $3,199.1 million | $2,949.4 million | Up 8% |
| Gross profit | $861.2 million | $722.3 million | Up 19% |
| Gross margin | 26.9% | 24.5% | Up 240 basis points |
| Operational income from continuing operations | $289.0 million | $219.1 million | Up 32% |
| Income from continuing operations | $179.9 million | $135.0 million | Up 33% |
| Net income | $171.8 million | $90.0 million | Up 91% |
| Diluted EPS from continuing operations | $3.55 | $2.63 | Up 35% |
| Operating cash flow | $210.3 million | $221.4 million | Down $11.1 million |
| Capital expenditures | $78.3 million | $50.2 million | Up $28.1 million |
Fourth-quarter 2013 net sales were $749.5 million, gross profit was $207.7 million, net income was $35.2 million, and diluted EPS was $0.70. Fourth-quarter 2013 included $6.3 million of asbestos-related litigation expense and $1.8 million of restructuring charges.
Liquidity, debt and capital allocation
- Cash and cash equivalents were $38.0 million at December 31, 2013, including $26.0 million held outside the United States.
- Total debt was $400.4 million, compared with $386.6 million at year-end 2012. Debt-to-total-capital increased to 45.2% from 43.7%.
- The $650.0 million domestic revolving credit facility had $17.0 million outstanding and $599.5 million available, after standby letters of credit.
- The asset securitization program had $160.0 million outstanding and no remaining availability based on eligible receivables at year-end. Its term was extended to November 14, 2014, with maximum capacity ranging from $160.0 million to $220.0 million depending on the period.
- The company was in compliance with all debt and lease financial covenants at December 31, 2013. Senior credit ratings were Baa3 and BBB-, both with stable outlooks.
- The company repurchased $125.0 million of common stock in 2013 and paid $34.0 million of dividends. The annual dividend declared per share increased to $0.92 from $0.76, including a 20% quarterly dividend increase to $0.24.
- Management planned approximately $150.0 million of share repurchases in 2014 and expected approximately $10.0 million of U.S. defined-benefit pension contributions.
Material changes versus the prior comparable period
- Sales growth was driven primarily by higher volumes, market share gains, and growth in residential replacement and new construction markets. Price and mix contributed approximately 1%.
- Residential Heating & Cooling sales increased 15% and segment profit increased 75% to $180.1 million; margin improved to 11.4% from 7.5%.
- Commercial Heating & Cooling sales increased 8% and segment profit increased 19% to $118.1 million; margin improved to 14.0% from 12.7%.
- Refrigeration sales declined 2%, primarily from lower volumes in North American grocery markets and unfavorable currency effects, while segment profit increased 10% to $90.2 million.
- Gross margin benefited from volume, favorable pricing and mix, and lower commodity and other material costs. Higher distribution, warranty, employee compensation and restructuring costs partially offset these benefits.
- Operating cash flow declined despite higher earnings because of increased working-capital needs, including higher receivables and inventory and lower accounts payable. Pension contributions declined to $10.0 million from $29.0 million.
- Discontinued-operations losses declined to $8.1 million from $45.0 million. The 2012 loss included a $20.5 million goodwill impairment related to Service Experts and significant Hearth-related charges.
Guidance, outlook, commentary, risks and unusual items
The filing does not provide a clear consolidated earnings or sales guidance range for 2014. Management stated that available cash, operating cash flow and borrowing capacity were expected to fund operations, planned capital expenditures, contractual obligations, dividends and share repurchases in the foreseeable future.
- Management’s strategy emphasizes premium-market positioning, innovation, manufacturing and sourcing efficiency, distribution expansion, geographic growth and expense reduction.
- Demand is seasonal and highly sensitive to weather, with stronger sales generally in the second and third quarters. Construction activity, interest rates, financing availability and consumer confidence also affect demand.
- Key exposures include competition, commodity and component prices, supply interruptions, foreign currency movements, international operations, regulatory changes affecting efficiency standards and refrigerants, and dependence on certain facilities and suppliers.
- Warranty liabilities increased to $81.6 million from $71.9 million. Certain product warranties extend from one to 20 years, with limited lifetime warranties for some products.
- The company recorded $6.3 million of asbestos-related litigation expense, $1.2 million of special legal contingency charges related primarily to patent litigation, and $5.0 million of restructuring charges in 2013.
- Goodwill was $216.8 million at year-end. No continuing-operations goodwill or intangible-asset impairment was recorded in 2013.
- Pension liabilities remained material: the funded status of pension plans was a net liability of $71.8 million, although improved from $137.1 million in 2012.
- Management stated that pending litigation, environmental matters and known contamination were not expected to have a material adverse effect, but acknowledged that litigation outcomes and future remediation costs remain uncertain.
Most important facts for investors to verify
- Whether residential and commercial volume growth and market-share gains continue after the strong 2013 performance.
- The sustainability of the 26.9% gross margin given commodity, freight, warranty, labor and distribution-cost pressures.
- Liquidity availability under the asset securitization program, including the quality and eligibility of receivables and its November 2014 maturity.
- Debt maturities, covenant headroom and the effect of planned share repurchases on leverage and liquidity.
- Potential future asbestos, patent, product-quality and warranty costs beyond recorded reserves.
- Exposure to weather, construction cycles, foreign currency movements and regulatory changes involving energy efficiency and refrigerants.
- Execution of manufacturing relocations, distribution-network initiatives and other restructuring actions.
- The filing reports effective disclosure controls and internal control over financial reporting, with an unqualified KPMG audit opinion; investors should still review the detailed notes and subsequent filings for developments after February 13, 2014.