LENNOX INTERNATIONAL INC annual report, FY2020

Lennox International Inc. 2020 Form 10-K Summary

Business context and reporting period

Lennox International Inc. is a global HVACR manufacturer and service provider operating through Residential Heating & Cooling, Commercial Heating & Cooling, and Refrigeration segments. The filing covers the fiscal year ended December 31, 2020, including fourth-quarter results. The company had approximately 10,300 employees and generated 13.0% of 2020 sales outside the United States.

Segment	2020 sales	2020 segment profit	Sales change vs. 2019
Residential Heating & Cooling	$2,361.5 million	$428.5 million	3%
Commercial Heating & Cooling	$800.9 million	$136.9 million	(15%)
Refrigeration	$471.7 million	$32.8 million	(17%)

Financial performance and liquidity

Net sales: $3,634.1 million, down 5% from $3,807.2 million in 2019.
Gross profit: $1,040.1 million; gross margin was 28.6%, up from 28.4%.
Operating income: $478.5 million, down from $656.9 million. The 2019 figure benefited from a $178.8 million net natural-disaster insurance gain, including $99.2 million of lost-profit proceeds.
Net income: $356.3 million, down from $408.7 million. Diluted continuing-operations EPS was $9.26 versus $10.38.
Fourth quarter: Sales were $914.0 million, gross profit was $275.3 million, net income was $111.7 million, and diluted EPS was $2.89, compared with 2019 fourth-quarter sales of $885.0 million, gross profit of $247.8 million, net income of $114.0 million, and diluted EPS of $2.93.
Cash flow: Operating cash flow was $612.4 million, compared with $396.1 million in 2019, primarily reflecting lower working capital requirements. Capital expenditures were $78.5 million.
Cash and debt: Cash and cash equivalents were $123.9 million. Total debt was $980.6 million, down from $1,171.2 million, including $950.0 million of senior unsecured notes and $29.3 million of finance lease obligations.
Liquidity: The $750.0 million revolving credit facility had approximately $747.8 million available, subject to covenants and other limitations. The asset securitization program had $279.1 million of remaining availability and no outstanding borrowings.
Shareholder returns: The company paid $118.1 million in dividends and repurchased $100.0 million of shares in 2020. The remaining share-repurchase authorization was $446 million at year-end.
Balance sheet: Total assets were $2,032.5 million and stockholders’ deficit was $17.1 million. Goodwill was $186.9 million and no goodwill impairment was recorded.

Material changes versus the prior comparable period

COVID-19 reduced demand, particularly in Commercial Heating & Cooling and Refrigeration, and caused supply-chain disruption, absenteeism, temporary facility suspensions, and higher operating costs.
Residential sales increased 3%, but segment profit declined 8% because 2019 included $99 million of Marshalltown tornado insurance proceeds for lost profits. Residential profit was also affected by higher warranty, tariff, and product costs.
Commercial sales declined 15% and profit declined 17%, primarily because of lower volume and unfavorable mix.
Refrigeration sales declined 17% and profit declined 46%, reflecting lower volume, the absence of sales from the divested Kysor Warren business, factory inefficiency, and higher warranty and product costs.
Gross margin improved by 20 basis points due to sourcing and engineering savings, lower commodity costs, and lower freight costs, partly offset by unfavorable price and mix, higher warranties, and other product costs.
Interest expense declined to $28.3 million from $47.5 million, primarily because of lower borrowings and borrowing costs.
The company issued $600 million of senior unsecured notes in July 2020 and fully repaid its previously outstanding unsecured term loan in September 2020.
Restructuring charges were $10.8 million, primarily for COVID-19-related employee reductions, facility closures, and canceled sales and marketing activities.

Guidance, outlook, commentary, risks, and unusual items

Management stated that cash, operating cash generation, and available borrowing capacity should be sufficient for operations, planned capital expenditures, contractual obligations, dividends, and anticipated share repurchases.
The company expected approximately $135 million of capital expenditures and $400 million of share repurchases in 2021.
Management did not provide a clear consolidated 2021 revenue or earnings outlook in the supplied filing text. The company had previously reduced its outlook because of COVID-19 uncertainty.
Key ongoing risks include COVID-19 recurrence, weather-driven seasonality, construction-cycle exposure, competition, commodity and component price volatility, supply interruptions, tariffs and trade policy, energy-efficiency and refrigerant regulation, foreign-currency movements, labor disruptions, cybersecurity, pension funding, product liability, warranty costs, asbestos and environmental claims, and access to capital markets.
Product warranty liabilities were $119.8 million at December 31, 2020. Warranty estimates depend on long-term failure rates and repair or replacement costs and were identified as a critical audit matter.
Asbestos-related liabilities included $10.1 million for known cases and $27.9 million for estimated future cases before probable insurance recoveries. Management did not expect litigation to have a material adverse effect, but acknowledged that outcomes remain uncertain.
The August 2020 Marshalltown derecho resulted in approximately $6.7 million of losses and expenses, offset by a $6.6 million insurance receivable collected in January 2021.
The company was in compliance with its debt covenants at year-end. Its ratings were Baa3 with a stable outlook from Moody’s and BBB with a stable outlook from S&P.
KPMG issued unqualified opinions on the consolidated financial statements and internal control over financial reporting. Management reported effective disclosure controls and internal controls.

Most important facts for investors to verify

Whether commercial and refrigeration demand recovered after the COVID-19-related volume declines and whether residential strength continued.
The sustainability of the 28.6% gross margin after commodity costs, freight, tariffs, mix, and warranty costs normalize.
Debt maturities, refinancing requirements, interest-rate exposure, and compliance with the 3.5-to-1.0 leverage and 3.0-to-1.0 interest-coverage covenants.
Whether planned 2021 capital expenditures and $400 million of share repurchases remain appropriate given leverage, liquidity, and operating conditions.
Changes in the $119.8 million warranty liability and any product-quality costs not covered by insurance or supplier warranties.
Potential effects of refrigerant, energy-efficiency, environmental, tariff, and trade-policy changes on product costs and demand.
The ultimate cost and insurance recovery associated with asbestos, environmental, product-liability, and other legal contingencies.
Whether the filing’s statement that liquidity is sufficient remains valid if COVID-19, supply-chain, weather, or macroeconomic conditions worsen.