Lennox International Reports Second Quarter Results and Raises 2020 Guidance

Rhea-AI Summary

Lennox International reported second-quarter 2020 revenue of $941 million, a 14% decline year-over-year. GAAP operating income fell to $136 million from $214 million in 2019. Adjusted earnings per share dropped to $2.97 from $3.74.

The COVID-19 pandemic affected all sectors, with Residential revenue down 6% but showing a 7% increase in June. Commercial revenue dropped 28%, and Refrigeration revenue declined 26%. The company raised its 2020 guidance, expecting adjusted revenue to decline 10-15% and adjusted EPS between $7.90-$8.70.

Positive

• Residential business showed a 7% year-over-year revenue increase in June.
• Updated guidance raises expectations for adjusted EPS to $7.90-$8.70.

Negative

• Overall revenue decreased by 14% year-over-year.
• GAAP operating income declined by 36% to $136 million.
• Commercial Heating & Cooling revenue fell 28%, with segment profit down 34%.

DALLAS, July 20, 2020 /PRNewswire/ -- Lennox International Inc. (NYSE: LII) today reported financial results for the second quarter of 2020. All comparisons are to the prior-year period. The company's insurance references relate to the July 2018 tornado damage at a Residential manufacturing facility in Iowa. Adjusted revenue and profit exclude non-core Refrigeration businesses divested in prior periods.

For the second quarter of 2020, Lennox International reported revenue of $941 million, down 14%. GAAP operating income was $136 million compared to $214 million in the prior-year quarter. GAAP earnings per share from continuing operations was $2.62 compared to $2.81 in the prior-year quarter. The second quarter of 2019 included an insurance benefit of $26 million and a pension settlement charge of $61 million.

Total adjusted segment profit was $153 million in the second quarter compared to $202 million in the prior-year quarter that included $18 million of insurance benefit. Total adjusted segment margin was 16.3% compared to 18.4% in the prior-year quarter. Adjusted earnings per share from continuing operations was $2.97 compared to $3.74 in the prior-year quarter.

"The COVID-19 pandemic significantly impacted all our businesses in the second quarter, but our Residential business improved each month through the quarter and was up 7% year-over-year in June as the economy continued to re-open and weather heated up," said Todd Bluedorn, Chairman and CEO. "With hot weather continuing month-to-date in July, we are seeing strong Residential growth on excellent operational execution by the team to capitalize on market opportunities.

"In total for the second quarter, Residential revenue was down 6%. Segment profit was $127 million, down 17% as reported. From an operational perspective excluding $18 million of insurance benefit in the prior-year quarter, segment profit was down 6%. Segment margin was 19.7%, down 260 basis points as reported. On an operational basis, segment margin was up 10 basis points.

"As expected, our commercial-facing businesses were more heavily impacted from the pandemic. In our Commercial business segment, revenue was down 28%, driven primarily by national account customers pushing out orders as previously discussed. Regional and local business was also down significantly in the quarter. Commercial segment profit was down 34%, and segment margin contracted 170 basis points to 18.9%. In the Refrigeration segment, adjusted revenue was down broadly across our businesses in North America and Europe, declining 26% at constant currency. Segment profit was down 53%, and segment margin contracted 460 basis points to 8.2%.

"We continue to face highly uncertain market conditions in the second half of the year, and the company's stock repurchase program currently remains on hold. Lennox International maintains a strong balance sheet and continues to expect a strong year of cash generation, targeting approximately $340 million of free cash flow. The company has executed well on its $115 million of in-year SG&A savings for 2020 and managed decremental total adjusted segment profit margin of 20% on an operational basis in the second quarter. We are raising our financial guidance for 2020 and now expect adjusted revenue to be down 10-15% and adjusted EPS from continuing operations of $7.90-$8.70. Lennox has a focused and seasoned team with experience managing through economic downturns while continuing to invest and advance the company's position to capitalize on share gains and market opportunities."

FINANCIAL HIGHLIGHTS

Revenue: Revenue was $941 million in the second quarter, down 14%. Foreign exchange was neutral to revenue. Volume was down, and price and mix were favorable to revenue.

Gross Profit: Gross profit was $276 million on a GAAP basis and $275 million on an adjusted basis, both compared to $332 million in the prior-year quarter. GAAP gross margin was 29.3% and adjusted gross margin was 29.2%, compared to 30.2% in the prior-year quarter. Gross profit was impacted by lower volume due to the COVID-19 pandemic, lower factory absorption, higher warranty expense, and unfavorable mix.

Income from Continuing Operations: On a GAAP basis, income from continuing operations for the second quarter was $100.6 million, or $2.62 per share, compared to $111.0 million, or $2.81 per share, in the prior-year quarter.

Adjusted income from continuing operations in the second quarter was $114.0 million, or $2.97 per share, compared to $147.6 million, or $3.74 per share, in the prior-year quarter. Adjusted income from continuing operations for the second quarter of 2020 excludes net after-tax charges of $13.4 million, consisting of: $7.9 million for restructuring activities, $2.6 million for personal protective equipment and facility deep cleaning expenses incurred due to the COVID-19 pandemic, and a net $2.9 million in charges for various other items.

Cash from Operations, Free Cash Flow and Total Debt: Net cash from operations in the second quarter was $105 million, compared to $30 million in the prior-year quarter. Capital expenditures were $19 million in the second quarter, compared to $16 million in the prior-year quarter that also had approximately $6 million in proceeds from insurance and property disposals. Free cash flow was approximately $87 million compared to $20 million in the second quarter a year ago. Total debt at the end of the second quarter was $1.39 billion. Total cash, cash equivalents and short-term investments were $49 million at the end of June. In the second quarter, the company paid approximately $30 million in dividends.

BUSINESS SEGMENT HIGHLIGHTS

Residential Heating & Cooling
Revenue in the Residential Heating & Cooling business segment was $645 million, down 6%. Foreign exchange was neutral. Segment profit was $127 million, compared to $153 million in the prior-year quarter that included $18 million of insurance benefit. Segment margin was 19.7%. In the prior-year quarter, segment margin was 22.3% as reported or 19.6% excluding the $18 million insurance benefit. Residential results were negatively impacted by the year-over-year difference in insurance benefit, higher warranty expense, and the COVID-19 pandemic that led to lower volume and factory inefficiencies. Partial offsets included favorable price and mix, lower material, freight and distribution costs, and lower SG&A expense.

Commercial Heating & Cooling
Revenue in the Commercial Heating & Cooling business segment was $188 million, down 28%. Foreign exchange was neutral. Segment margin was 18.9% compared to 20.6% in the prior-year quarter. Segment profit was $36 million compared to $54 million in the prior-year quarter. Commercial results were negatively impacted by unfavorable mix, higher warranty expense, and the COVID-19 pandemic that led to lower volume.  Partial offsets included lower material, freight and distribution costs, and lower SG&A expense.

Refrigeration
Adjusted revenue in the Refrigeration business segment was $108 million, down 27%. Foreign exchange had a negative 1% impact on revenue. Adjusted segment profit was $9 million compared to $19 million in the prior-year quarter. Segment margin was 8.2% compared to 12.8% in the prior-year quarter. Refrigeration results were negatively impacted by higher warranty expense and the COVID-19 pandemic that led to lower volume and factory inefficiencies. Partial offsets included lower material, freight and distribution costs, lower SG&A expense, and favorable foreign exchange.

FULL-YEAR GUIDANCE
The company is updating its 2020 guidance and raising estimates for revenue and EPS from continuing operations.

• Raising guidance for adjusted revenue to be down 10-15% from the prior year compared to previous guidance to be down 11-17%.
• Raising guidance for GAAP EPS from continuing operations to $7.31-$8.11 from previous guidance of $7.07-$8.07.
• Raising guidance for adjusted EPS from continuing operations to $7.90-$8.70 from previous guidance of $7.50-$8.50.
• Corporate expense is still expected to be approximately $75 million.
• The effective tax rate is still expected to be 21-22% on an adjusted basis for the full year.
• Capital expenditures are still targeted to be $120 million.
• Guidance for free cash flow remains approximately $340 million.
• The company's remaining 2020 stock repurchase program of $300 million currently remains on hold; the company repurchased $100 million of stock in the first quarter.
• The company's quarterly dividend plans remain unchanged at $0.77 per share, or more than $115 million in total for the year.

CONFERENCE CALL INFORMATION
A conference call to discuss the company's second-quarter results and outlook will be held this morning at 8:30 a.m. Central time. To listen, call the conference call line at 844-721-7239 (U.S.) or 409-207-6953 (international) at least 10 minutes prior to the scheduled start time and use participant code 5188986. The conference call also will be webcast on Lennox International's web site at www.lennoxinternational.com. A replay will be available from approximately 11:00 a.m. Central time on July 20 through August 3, 2020 by dialing 866-207-1041 (U.S.) or 402-970-0847 (international) and using access code 2654797. The call also will be archived on the company's website.

About Lennox International
Lennox International Inc. is a global leader in the heating, air conditioning, and refrigeration markets. Lennox International stock is listed on the New York Stock Exchange and traded under the symbol "LII". Additional information is available at: www.lennoxinternational.com or by contacting Steve Harrison, Vice President, Investor Relations, at 972-497-6670.

FORWARD-LOOKING STATEMENTS
The statements in this news release that are not historical statements, including statements regarding the 2020 full-year outlook, expected consolidated and segment financial results for 2020, are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are based on information currently available as well as management's assumptions and beliefs today. These statements are subject to numerous risks and uncertainties that could cause actual results to differ materially from the results expressed or implied by the statements, and investors should not place undue reliance on them. Risks and uncertainties that could cause actual results to differ materially from such statements include risks associated with the economic impact of the COVID-19 pandemic on the company and its employees, customers and suppliers; risks that  the decline in the North American unitary HVAC and refrigeration markets will be greater than current assumptions. Additional statements include, but are not limited to: the impact of higher raw material prices, the impact of new or increased trade tariffs, LII's ability to implement price increases for its products and services, economic conditions in our markets, regulatory changes, the impact of unfavorable weather, and a decline in new construction activity and related demand for products and services. For information concerning these and other risks and uncertainties, see LII's publicly available filings with the Securities and Exchange Commission. LII disclaims any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law.

 

LENNOX INTERNATIONAL INC. AND SUBSIDIARIES
Consolidated Statements of Operations
(Unaudited)
(Amounts in millions, except per share data)	For the Three Months Ended June 30,		For the Six Months Ended June 30,
	2020		2019		2020		2019
Net sales	$	941.3			$	1,099.1			$	1,665.1			$	1,889.4
Cost of goods sold	665.6			767.0			1,223.7			1,355.8
Gross profit	275.7			332.1			441.4			533.6
Operating Expenses:
Selling, general and administrative expenses	129.5			152.4			260.8			298.2
Losses (gains) and other expenses, net	3.6			2.1			2.3			3.2
Restructuring charges	10.0			(0.1)			10.5			0.4
Loss on sale of business	—			0.4			—			8.8
Insurance proceeds for lost profits	—			(26.0)			—			(65.5)
Loss (gain) from natural disaster, net of insurance recoveries	1.0			(5.9)			2.7			(12.8)
Income from equity method investments	(4.4)			(4.6)			(7.2)			(7.2)
Operating income	136.0			213.8			172.3			308.5
Pension settlement	—			60.6			—			60.6
Interest expense, net	6.9			13.1			15.6			23.9
Other expense (income), net	1.1			0.3			2.2			1.2
Income from continuing operations before income taxes	128.0			139.8			154.5			222.8
Provision for income taxes	27.4			28.8			41.4			42.4
Income from continuing operations	100.6			111.0			113.1			180.4
Discontinued Operations:
Loss from discontinued operations before income taxes	(0.8)			(0.3)			(0.8)			(0.4)
Income tax benefit	(0.2)			—			(0.6)			—
Loss from discontinued operations	(0.6)			(0.3)			(0.2)			(0.4)
Net income	$	100.0			$	110.7			$	112.9			$	180.0
Earnings per share – Basic:
Income from continuing operations	$	2.63			$	2.84			$	2.95			$	4.58
Loss from discontinued operations	(0.01)			(0.01)			—			(0.01)
Net income	$	2.62			$	2.83			$	2.95			$	4.57
Earnings per share – Diluted:
Income from continuing operations	$	2.62			$	2.81			$	2.93			$	4.53
Loss from discontinued operations	(0.02)			(0.01)			—			(0.01)
Net income	$	2.60			$	2.80			$	2.93			$	4.52
Weighted Average Number of Shares Outstanding - Basic	38.2			39.1			38.3			39.4
Weighted Average Number of Shares Outstanding - Diluted	38.4			39.5			38.6			39.8

 

LENNOX INTERNATIONAL INC. AND SUBSIDIARIES
Adjusted Segment Net Sales and Profit (Loss)
(Unaudited)
(Amounts in millions)	For the Three Months Ended June 30,		For the Six Months Ended June 30,
	2020		2019		2020		2019
Adjusted Net Sales
Residential Heating & Cooling	$	644.8			$	689.1			$	1,086.9			$	1,154.6
Commercial Heating & Cooling	188.3			261.3			366.7			434.7
Refrigeration (1)	108.2			148.7			$	211.5			265.8
	$	941.3			$	1,099.1			$	1,665.1			$	1,855.1
Adjusted Segment Profit (Loss) (2)
Residential Heating & Cooling	$	127.3			$	153.4			$	159.8			$	240.1
Commercial Heating & Cooling	35.6			53.9			54.3			68.9
Refrigeration (1)	8.9			19.1			9.6			28.5
Corporate and other	(18.8)			(24.1)			(33.1)			(36.2)
Total adjusted segment profit	153.0			202.3			190.6			301.3

FAQ

What were Lennox International's financial results for Q2 2020?

Lennox International reported a revenue of $941 million, a 14% decrease year-over-year, with GAAP operating income of $136 million.

How did COVID-19 impact Lennox International's business in Q2 2020?

The pandemic significantly affected all businesses; Residential revenue was down 6%, while Commercial revenue fell 28%.

What is the updated financial guidance for Lennox International in 2020?

The company raised its guidance, expecting adjusted revenue to decline 10-15% and adjusted EPS from continuing operations to be between $7.90 and $8.70.

What were the earnings per share for Lennox International in Q2 2020?

Adjusted earnings per share from continuing operations were $2.97, down from $3.74 in the prior-year quarter.

What were the market conditions for Lennox International in the second half of 2020?

The company faces highly uncertain market conditions and has put its stock repurchase program on hold.