LENNOX INTERNATIONAL INC. This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, that are based on information currently available to management as well as management's assumptions and beliefs as of the date such statements were made. All statements, other than statements of historical fact, included in this Quarterly Report on Form 10-Q constitute forward-looking statements, including but not limited to statements identified by forward-looking terminology, such as the words "may," "will," "should," "plan," "anticipate," "believe," "intend," "estimate" and "expect" and similar expressions. Such statements reflect our current views with respect to future events, based on what we believe are reasonable assumptions; however, such statements are subject to certain risks and uncertainties. In addition to the specific uncertainties discussed elsewhere in this Quarterly Report on Form 10-Q, the risk factors set forth in Part I, "Item 1A. Risk Factors" in our Annual Report on Form 10-K for the year endedDecember 31, 2021 , and those set forth in Part II, "Item 1A. Risk Factors" of this report, if any, may affect our performance and results of operations. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may differ materially from those in the forward-looking statements. We disclaim any intention or obligation to update or review any forward-looking statements or information, whether as a result of new information, future events or otherwise, except as required by law.
Business Overview
We operate in three reportable business segments of the heating, ventilation,
air conditioning and refrigeration ("HVACR") industry. Our reportable segments
are Residential Heating & Cooling, Commercial Heating & Cooling, and
Refrigeration. For additional information regarding our reportable segments, see
Note 2 in the Notes to the Consolidated Financial Statements.
Our fiscal quarterly periods are comprised of approximately 13 weeks, but the
number of days per quarter may vary year-over-year. Our quarterly reporting
periods usually end on the Saturday closest to the last day of March, June and
September. Our fourth quarter and fiscal year ends on December 31 , regardless of
the day of the week on which December 31 falls. For convenience, throughout this
Management's Discussion and Analysis of Financial Condition and Results of
Operations, the 13-week periods comprising each fiscal quarter are denoted by
the last day of the respective calendar quarter.
We sell our products and services through a combination of direct sales,
distributors and company-owned parts and supplies stores. The demand for our
products and services is seasonal and significantly impacted by the weather.
Warmer than normal summer temperatures generate demand for replacement air
conditioning and refrigeration products and services, and colder than normal
winter temperatures have a similar effect on heating products and services.
Conversely, cooler than normal summers and warmer than normal winters depress
the demand for HVACR products and services. In addition to weather, demand for
our products and services is influenced by national and regional economic and
demographic factors, such as interest rates, the availability of financing,
regional population and employment trends, new construction, general economic
conditions, and consumer spending habits and confidence. A substantial portion
of the sales in each of our business segments is attributable to replacement
business, with the balance comprised of new construction business.
The principal elements of cost of goods sold are components, raw materials,
factory overhead, labor, estimated warranty costs, and freight and distribution
costs. The principal raw materials used in our manufacturing processes are
steel, copper and aluminum. In recent years, pricing volatility for these
commodities and related components, including the impact of imposed tariffs on
the import of certain of our raw materials and components, has impacted us and
the HVACR industry in general. We seek to mitigate the impact of volatility in
commodity prices through a combination of price increases, commodity contracts,
improved production efficiency and cost reduction initiatives. We also partially
mitigate volatility in the prices of these commodities by entering into futures
contracts and fixed forward contracts.
Impact of COVID-19 Pandemic
A novel strain of coronavirus ("COVID-19") has surfaced and spread around the
world. In March 2020 , the World Health Organization declared COVID-19 a
pandemic. The COVID-19 pandemic is creating supply chain disruptions and higher
employee absenteeism in our factories and distribution locations.
As the COVID-19 pandemic continues, health concern risks remain. We cannot
predict whether any of our manufacturing, operational or distribution facilities
will experience any future disruptions, or how long such disruptions would last.
It also remains unclear how various national, state, and local governments will
react if new variants of the virus become more
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dominant. If the COVID-19 pandemic worsens or the pandemic continues longer than
presently expected, COVID 19 could impact our results of operations, financial
position and cash flows.
Executive Leadership Transition
OnMarch 23, 2022 , the Board of Directors appointedAlok Maskara as CEO effectiveMay 9, 2022 .Mr. Maskara succeedsTodd Bluedorn ,who announced inJuly 2021 his plans to step down by mid-2022 as Chairman and CEO.Todd J. Teske was appointed Chairman of the Board and will serve as interim CEO untilMr. Maskara assumes the role as CEO. Financial Overview Results for the first quarter of 2022 were driven by overall year over year sales increases while operating income decreased. Net sales increased 13% and segment profit increased$11 million for the Residential Heating & Cooling segment. Net sales decreased 6% and segment profit decreased$21 million for the Commercial Heating & Cooling segment. Net sales increased 15% and segment profit increased$6 million for the Refrigeration segment.
Financial Highlights
•Net sales increased$83 million to$1,013 million in the first quarter of 2022 driven by favorable price and mix partially offset by lower sales volume. •Operating income in the first quarter of 2022 decreased$2 million to$112 million primarily driven by rising costs partially offset by higher net sales. •Net income for the first quarter of 2022 was$84 million . •Diluted earnings per share was$2.29 per share in the first quarter of 2022 compared to$2.20 per share in the first quarter of 2021. •For the three months endedMarch 31, 2022 , we returned$34 million to shareholders through dividend payments and repurchased$200 million of common stock through our share repurchase program.
Three Months Ended
The following table provides a summary of our financial results, including information presented as a percentage of net sales:
For the Three Months Ended March 31,
Dollars (in millions) Percent Percent of Sales
Change
2022 2021 Fav/(Unfav) 2022 2021
Net sales $ 1,013.4 $ 930.5 8.9 % 100.0 % 100.0 %
Cost of goods sold 745.2 674.0 (10.6) 73.5 72.4
Gross profit 268.2 256.5 4.6 26.5 27.6
Selling, general and administrative expenses 155.3 145.3 (6.9) 15.3 15.6
Losses (gains) and other expenses, net 0.4 0.3 (33.3) - -
Restructuring charges 0.5 0.1 (400.0) - -
Income from equity method investments 0.1 (3.3) (103.0) - (0.4)
Operating income $ 111.9 $ 114.1 (1.9) % 11.0 % 12.3 %
Net Sales
Net sales for the first quarter of 2022 compared to the first quarter of 2021 were impacted by favorable price of 9% and favorable mix of 2%, which was partially offset by lower sales volume of 2%.
Gross Profit
Gross profit margins in the first quarter of 2022 decreased 110 basis points
("bps") to 26.5% compared to 27.6% in the first quarter of 2021. Gross margin
decreased 300 bps from higher commodity costs, 190 bps from higher component
costs, 120 bps from higher freight and distribution costs, 100 bps from factory
inefficiencies, and 30 bps from increased warranty costs. Partially offsetting
these decreases were 600 bps from favorable price, 20 bps from favorable mix,
and 10 bps from lower tariff
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Selling, General and Administrative Expenses
Selling, general and administrative expenses ("SG&A") increased $10 million to
$155 million in the first quarter of 2022 compared to $145 million in the first
quarter of 2021 due to higher employee costs. As a percentage of net sales, SG&A
decreased 30 bps to 15.3%.
Losses (gains) and Other Expenses, Net
Losses (gains) losses and other expenses, net for the first quarter of 2022 and 2021 included the following (in millions):
For the Three Months Ended March
31,
2022 2021
Realized (gains) losses on settled futures contracts $ (0.3) $ (0.3)
Foreign currency exchange gains (0.3) (0.3)
Gain on disposal of fixed assets (0.9) (0.3)
Other operating income (0.3) (0.3)
Net change in unrealized losses (gains) on unsettled futures contracts
(0.7) (0.2)
Special legal contingency charges 0.3 0.2
Asbestos-related litigation 1.7 1.1
Environmental liabilities 0.1 0.6
Charges incurred related to COVID-19 pandemic 0.3 0.6
Other items, net 0.5 (0.8)
Losses (gains) and other expenses, net (pre-tax) $
0.4
The net change in unrealized (gains) losses on unsettled futures contracts was due to changes in commodity prices relative to the unsettled futures contract prices. For more information on our futures contracts, see Note 7 in the Notes to the Consolidated Financial Statements. For more information on asbestos-related litigation, see Note 4 in the Notes to the Consolidated Financial Statements. The environmental liabilities related to estimated remediation costs for contamination at some of our facilities.
Restructuring Charges
Restructuring charges were immaterial in the first quarter of 2022 and 2021. Restructuring charges related to ongoing cost reduction actions taken in prior periods.
Loss (Income) from Equity Method Investments
We participate in two joint ventures that are engaged in the manufacture and sale of compressors, unit coolers and condensing units. We exert significant influence over these affiliates based upon our ownership, but do not control them due to venture partner participation. Accordingly, these joint ventures have been accounted for under the equity method and their financial position and results of operations are not consolidated. We incurred a loss from equity method investments of$0.1 million in the first quarter of 2022 and generated income of$3.3 million in the first quarter of 2021. The change was due to rising costs at our equity method investments.
Interest Expense, net
Interest expense, net increased to
Income Taxes
Our effective tax rate was 19.9% for the first quarter of 2022 compared to 20.9%
for the first quarter of 2021. The rate decreased primarily due a favorable mix
of income in lower tax jurisdictions.
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--------------------------------------------------------------------------------We expect our annual effective tax rate in 2022 to be 18-20%, excluding the impact of excess tax benefits recorded under ASU No. 2016-09.
First Quarter of 2022 Compared to First Quarter of 2021 - Results by Segment
Residential Heating & Cooling
The following table presents our Residential Heating & Cooling segment's net
sales and profit for the first quarter of 2022 and 2021 (dollars in millions):
For the Three Months Ended March
31,
2022 2021 Difference % Change
Net sales $ 682.2 $ 606.3 $ 75.9 12.5 %
Profit $ 107.6 $ 96.4 $ 11.2 11.6 %
% of net sales 15.8 % 15.9 %
Net sales increased 13% in the first quarter of 2022 compared to 2021, as price
increased 11% and product mix increased 2%. Sales volume was flat during the
period.
Segment profit in the first quarter of 2022 compared to 2021 increased $11
million due to $68 million from higher price and $3 million from favorable
product mix. Partially offsetting these increases were $22 million from higher
commodity costs, $10 million from higher SG&A, $9 million from higher component
costs, $8 million from unfavorable freight and distribution costs, $4 million
from higher warranty costs, $4 million from factory inefficiencies, and $3
million from lower income from equity method investments.
Commercial Heating & Cooling
The following table presents our Commercial Heating & Cooling segment's net
sales and profit for the first quarter of 2022 and 2021 (dollars in millions):
For the Three Months Ended March
31,
2022 2021 Difference % Change
Net sales $ 187.7 $ 199.2 $ (11.5) (5.8) %
Profit $ 6.3 $ 27.4 $ (21.1) (77.0) %
% of net sales 3.4 % 13.8 %
Net sales decreased 6% in the first quarter of 2022 compared to the first quarter of 2021. Sales volume was 16% lower, which was partially offset by increased price of 7% and favorable mix of 3%.
Segment profit in the first quarter of 2022 compared to 2021 decreased$21 million due to$10 million from lower sales volume,$8 million from higher component costs,$6 million from higher factory inefficiencies,$2 million for higher SG&A,$3 million from higher freight and distribution costs,$2 million for higher other product costs, and$2 million from higher commodity costs. Partially offsetting these decreases were$6 million from improved product mix and$6 million from improved price. 22
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Refrigeration
The following table presents our Refrigeration segment's net sales and profit for the first quarter of 2022 and 2021 (dollars in millions):
For the Three Months Ended March
31,
2022 2021 Difference % Change
Net sales $ 143.5 $ 125.0 $ 18.5 14.8 %
Profit $ 14.1 $ 7.9 $ 6.2 78.5 %
% of net sales 9.8 % 6.3 %
Net sales increased 15% in the first quarter of 2022 compared to the first
quarter of 2021. Sales volume was 11% higher and price increased 8%. Partially
offsetting these increases were 3% from unfavorable foreign currency and 1% from
unfavorable mix.
Segment profit in the first quarter of 2022 compared to 2021 increased $6
million compared to 2021 due to $11 million from improved price, $5 million from
higher sales volume, $1 million from lower other product costs, and $1 million
from lower tariffs, which was partially offset by $5 million from higher
commodity costs, $3 million from higher component costs, $3 million from higher
SG&A, and $1 million from unfavorable mix.
Corporate and Other
Corporate and other expenses decreased$3 million in the first quarter of 2022 compared to 2021 primarily due to the timing of variable incentive compensation costs.
Liquidity and Capital Resources
Our working capital and capital expenditure requirements are generally met through internally generated funds, bank lines of credit and an asset securitization arrangement. Working capital needs are generally greater in the first and second quarters due to the seasonal nature of our business cycle.
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