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. The COVID-19 pandemic is creating supply chain disruptions and higher
employee absenteeism in our factories and distribution locations. As the
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 spread. If the pandemic worsens or continues longer than
presently expected, COVID-19 could impact our results of operations, financial
position and cash flows.
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--------------------------------------------------------------------------------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 served as interim CEO untilMr. Maskara assumed the role as CEO onMay 9, 2022 .
Financial Overview
Results for the second quarter of 2022 were driven by overall year-over-year sales and profit increases. Net sales increased 17% and segment profit increased$27 million for the Residential Heating & Cooling segment. Net sales decreased 13% and segment profit decreased$28 million for the Commercial Heating & Cooling segment. Net sales increased 14% and segment profit increased$10 million for the Refrigeration segment.
Financial Highlights
•Net sales increased$127 million to$1,366 million in the second quarter of 2022 driven by favorable price partially offset by unfavorable foreign currency. •Operating income in the second quarter of 2022 increased$11 million to$227 million primarily driven by higher net sales partially offset by rising costs. •Net income for the second quarter of 2022 was$177 million . •Diluted earnings per share was$4.96 per share in the second quarter of 2022 compared to$4.51 per share in the second quarter of 2021. •For the six months endedJune 30, 2022 , we returned$67 million to shareholders through dividend payments and repurchased$300 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
Dollars (in millions) Percent Percent of Sales
Change
2022 2021 Fav/(Unfav) 2022 2021
Net sales $ 1,366.3 $ 1,239.0 10.3 % 100.0 % 100.0 %
Cost of goods sold 969.2 855.8 (13.3) 70.9 69.1
Gross profit 397.1 383.2 3.6 29.1 30.9
Selling, general and administrative expenses 169.6 167.8 (1.1) 12.4 13.5
Losses (gains) and other expenses, net 1.6 2.3 30.4 0.1 0.2
Restructuring charges 0.5 1.2 58.3 - 0.1
Income from equity method investments (1.5) (4.1) (63.4) (0.1) (0.3)
Operating income $ 226.9 $ 216.0 5.0 % 16.6 % 17.4 %
Net Sales
Net sales for the second quarter of 2022 compared to the second quarter of 2021
were impacted by favorable price of 11% which was partially offset by
unfavorable foreign currency of 1%. Sales volume and product mix were neutral
for the quarter.
Gross Profit
Gross profit margins in the second quarter of 2022 decreased 180 basis points
("bps") to 29.1% compared to 30.9% in the second quarter of 2021. Gross margins
decreased 250 bps from higher commodity costs, 200 bps from other product costs,
150 bps from higher component costs, 130 bps from unfavorable product mix, 100
bps from higher freight and distribution costs, and 80 bps from factory
inefficiencies. Partially offsetting these decreases were 710 bps from favorable
price and 20 bps from lower product warranty costs.
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--------------------------------------------------------------------------------Selling, General and Administrative Expenses
Selling, general and administrative expenses ("SG&A") increased $2 million to
$170 million in the second quarter of 2022 compared to $168 million in the
second quarter of 2021 due to higher employee costs. As a percentage of net
sales, SG&A decreased 110 bps to 12.4%.
Losses (gains) and Other Expenses, Net
Losses (gains) and other expenses, net for the second quarter of 2022 and 2021 included the following (in millions):
For the
Three Months Ended
2022 2021
Realized gains on settled future contracts $ (0.1) $ (0.4)
Foreign currency exchange gains (0.5) (1.3)
Gain on disposal of fixed assets - (0.2)
Other operating income (0.2) (0.2)
Net change in unrealized losses on unsettled futures contracts 1.9 0.1
Environmental liabilities and special litigation charges 1.0 3.2
Charges incurred related to COVID-19 pandemic 0.2 0.5
Other items, net (0.7) 0.6
Losses (gains) and other expenses, net (pre-tax) $
1.6
The net change in unrealized 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.
Restructuring Charges
Restructuring charges were immaterial in the second quarter of 2022 and 2021. Restructuring charges related to ongoing cost reduction actions taken in prior periods.
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 recognized income from equity method investments of$1 million in the second quarter of 2022 and$4 million in the second quarter of 2021. The change was due to rising costs at our equity method investments. Interest Expense, net Interest expense, net increased to$9 million in the second quarter of 2022 from$6 million in the second quarter of 2021 due to higher borrowings and higher borrowing costs during the period.
Income Taxes
Our effective tax rate was 18.4% for the second quarter of 2022 compared to 18.6% for the second quarter of 2021. The rate decreased primarily due to a favorable mix of income in lower tax jurisdictions. We expect our annual effective tax rate in 2022 to be 18-20%.
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--------------------------------------------------------------------------------Second Quarter of 2022 Compared to Second 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 second quarter of 2022 and 2021 (dollars in millions):
For the Three Months Ended June 30,
2022 2021 Difference % Change
Net sales $ 977.5 $ 838.0 $ 139.5 16.6 %
Profit $ 216.3 $ 189.7 $ 26.6 14.0 %
% of net sales 22.1 % 22.6 %
Net sales increased 17% in the second quarter of 2022 compared to 2021, as price increased 13% and sales volume increased by 5%. Partially offsetting these increases was 1% from unfavorable mix.
Segment profit in the second quarter of 2022 compared to 2021 increased by$27 million , driven by$111 million from higher price,$15 million from higher sales volume,$4 million from lower SG&A, and$2 million from lower product warranty costs. Partially offsetting these increases were$27 million from higher commodity costs,$22 million from unfavorable product mix,$18 million from higher other product costs,$16 million from higher component costs,$10 million from higher distribution and freight charges,$5 million from unfavorable foreign currency,$4 million from unfavorable factory productivity, and$3 million from lower earnings from our equity method investments.
Commercial Heating & Cooling
The following table presents our Commercial Heating & Cooling segment's net
sales and profit for the second quarter of 2022 and 2021 (dollars in millions):
For the Three Months Ended June 30,
2022 2021 Difference % Change
Net sales $ 219.6 $ 252.8 $ (33.2) (13.1) %
Profit $ 17.2 $ 45.3 $ (28.1) (62.0) %
% of net sales 7.8 % 17.9 %
Net sales decreased 13% in the second quarter of 2022 compared to 2021. Sales
volume was lower by 22% which was partially offset by favorable mix of 5% and
price increases of 4%.
Segment profit in the second quarter of 2022 compared to 2021 decreased $28
million due to $23 million from lower sales volume from supply chain
constraints, $7 million from higher other product costs, $4 million from higher
component costs, $4 million from unfavorable factory productivity, $4 million in
higher SG&A costs, $3 million from higher commodity costs, and $2 million from
higher freight and distribution costs. These decreases were partially offset by
$11 million in favorable price, $7 million from favorable mix, and $1 million
for lower product warranty costs.
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Refrigeration
The following table presents our Refrigeration segment's net sales and profit for the second quarter of 2022 and 2021 (dollars in millions):
For the Three Months Ended June 30,
2022 2021 Difference % Change
Net sales $ 169.2 $ 148.2 $ 21.0 14.2 %
Profit $ 23.4 $ 13.5 $ 9.9 73.3 %
% of net sales 13.8 % 9.1 %
Net sales increased 14% in the second quarter of 2022 compared to 2021, as price increased 12% and sales volume increased by 9%. Partially offsetting these increases were unfavorable foreign currency of 6% and 1% from unfavorable mix.
Segment profit in the second quarter of 2022 compared to 2021 increased by$10 million driven by$18 million from higher price and$5 million from higher sales volume. Partially offsetting these increases were$5 million from commodity costs,$3 million from higher SG&A costs,$2 million from higher other product costs,$2 million from unfavorable factory productivity, and$1 million from higher freight and distribution costs.
Corporate and Other
There were no material changes in Corporate and Other costs during the second quarter of 2022 as compared to the second quarter of 2021.
Year-to-Date through
The following table provides a summary of our financial results, including information presented as a percentage of net sales:
For the Six Months Ended
Dollars (in millions) Percent Percent of Sales
Change
2022 2021 Fav/(Unfav) 2022 2021
Net sales $ 2,379.7 $ 2,169.4 9.7 % 100.0 % 100.0 %
Cost of goods sold 1,714.4 1,529.7 (12.1) 72.0 70.5
Gross profit 665.3 639.7 4.0 28.0 29.5
Selling, general and administrative expenses 324.9 313.2 (3.7) 13.7 14.4
Losses (gains) and other expenses, net 2.0 2.6 23.1 0.1 0.1 Restructuring charges 1.0 1.3 23.1 - 0.1 Income from equity method investments (1.4) (7.4) (81.1) (0.1) (0.3) Operating income $ 338.8$ 330.0 2.7 % 14.2 % 15.2 % Net Sales Net sales increased 10% for the six months endedJune 30, 2022 compared to the six months endedJune 30, 2021 due to higher price of 10% and favorable mix of 1%. Partially offsetting these increases was a sales volume decline of 1%. Gross Profit Gross profit margins for the six months endedJune 30, 2022 decreased 150 bps to 28.0% compared to 29.5% for the six months endedJune 30, 2021 . Gross margins decreased 270 bps from higher commodity costs, 170 bps from higher component costs, 120 bps from higher other product costs, 110 from higher freight and distribution costs, 80 bps from unfavorable factory productivity, 60 bps from unfavorable mix, and 20 bps from unfavorable foreign currency. Partially offsetting these decreases were 670 bps from higher price and 10 bps from lower tariff costs. 24
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Selling, General and Administrative Expenses
SG&A increased$12 million to$325 million for the six months endedJune 30, 2022 compared to$313 million for the six months endedJune 30, 2021 primarily due to higher employee related costs. As a percentage of net sales, SG&A decreased 70 bps to 13.7% from 14.4%.
Losses (gains) and Other Expenses, Net
Losses (gains) and other expenses, net for the six months ended
For the
Six Months Ended
2022 2021
Realized gains on settled future contracts $ (0.4) $ (0.6)
Foreign currency exchange gains (0.8) (1.6)
Gain on disposal of fixed assets (0.9) (0.5)
Other operating income (0.5) (0.6)
Net change in unrealized losses (gains) on unsettled futures contracts
1.2 (0.2)
Environmental liabilities and special litigation charges 3.1 5.2
Charges incurred related to COVID-19 pandemic 0.5 1.1
Other items, net (0.2) (0.2)
Losses (gains) and other expenses, net (pre-tax) $
2.0
The net change in unrealized losses (gains) 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.
Restructuring Charges
Restructuring charges were$1 million for the six months endedJune 30, 2022 and$1 million for the six months endedJune 30, 2021 . Restructuring charges related to ongoing cost reduction actions taken in prior periods.
Income from Equity Method Investments
Income from equity method investments decreased$6 million to$1 million for the six months endedJune 30, 2022 as compared to$7 million for the six months endedJune 30, 2021 . The decline is due to higher costs at the equity method investments. Interest Expense, net
Interest expense, net increased
Income Taxes
Our effective tax rate decreased to 18.9% for the six months ended
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Year-to-Date through
Residential Heating & Cooling
The following table presents our Residential Heating & Cooling segment's net sales and profit for the six months endedJune 30, 2022 and 2021 (dollars in millions): For the Six Months Ended June 30, 2022 2021 Difference % Change Net sales$ 1,659.6 $ 1,444.2 $ 215.4 14.9 % Profit $ 324.0$ 286.1 $ 37.9 13.2 % % of net sales 19.5 % 19.8 %
Net sales increased 15% for the six months ended
Segment profit for the first six months of 2022 compared to 2021 increased$38 million primarily due to$179 million from favorable price and$15 million from higher sales volume. Partially offsetting the increase were$50 million from higher commodity costs,$26 million from increased component costs,$19 million from unfavorable mix,$18 million from higher other product costs,$18 million from freight and distribution costs,$9 million for unfavorable factory productivity,$6 million from higher SG&A costs,$5 million from unfavorable foreign currency, and$5 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 six months endedJune 30, 2022 and 2021 (dollars in millions): For the Six Months Ended June 30, 2022 2021 Difference % Change Net sales $ 407.3$ 452.0 $ (44.7) (9.9) % Profit $ 23.5$ 72.6 $ (49.1) (67.6) % % of net sales 5.8 % 16.1 % Net sales decreased 10% for the six months endedJune 30, 2022 compared to the six months endedJune 30, 2021 as sales volume decreased by 19%. Partially offsetting the decrease was favorable mix of 5% and favorable price of 4%. Segment profit for the first six months of 2022 compared to 2021 decreased$49 million primarily due to$32 million from decreased volume from supply chain constraints,$12 million from higher component costs,$10 million from unfavorable factory productivity,$9 million from higher other product costs,$6 million from increased SG&A costs,$5 million from higher commodity costs, and$5 million from higher freight and distribution costs. Partially offsetting these decreases were$17 million from higher price and$13 million from favorable product mix. 26 --------------------------------------------------------------------------------
Refrigeration
The following table presents our Refrigeration segment's net sales and profit
for the six months ended
For the Six Months Ended June 30,
2022 2021 Difference % Change
Net sales $ 312.8 $ 273.2 $ 39.6 14.5 %
Profit $ 37.5 $ 21.4 $ 16.1 75.2 %
% of net sales 12.0 % 7.8 %
Net sales increased 15% for the six months ended
Segment profit for the first six months of 2022 compared to 2021 increased$16 million primarily due to$28 million from favorable price and$10 million from higher sales volume. Partially offsetting the increase were$10 million from higher commodity costs,$5 million from higher SG&A costs,$4 million from higher component costs, and$3 million from higher freight and distribution costs.
Corporate and Other
Corporate and other expenses decreased$2 million in the six months endedJune 30, 2022 compared to the six months endedJune 30, 2021 primarily due to lower employee related 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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