LII Lennox International Inc

LENNOX INTERNATIONAL INC. AND SUBSIDIARIES

Segment Net Sales and Profit (Loss)

(Unaudited)

(Amounts in millions)

For the Three Months Ended
September 30,

For the Nine Months Ended
September 30,

2014

2013

2014

2013

Net Sales

Residential Heating & Cooling

$

462.6

$

433.9

$

1,332.5

$

1,224.5

Commercial Heating & Cooling

241.6

239.1

655.6

631.8

Refrigeration

194.2

195.0

566.5

593.2

$

898.4

$

868.0

$

2,554.6

$

2,449.5

Segment Profit (Loss) ⁽¹⁾

Residential Heating & Cooling

$

69.4

$

57.0

$

178.8

$

143.7

Commercial Heating & Cooling

42.2

39.2

91.3

84.8

Refrigeration

16.5

23.9

42.3

66.5

Corporate and other

(17.5)

(16.6)

(47.8)

(56.2)

Subtotal that includes segment profit and eliminations

110.6

103.5

264.6

238.8

Reconciliation to income from continuing operations before income taxes:

Special product quality adjustments

0.2

(0.4)

(0.1)

(0.5)

Items in Losses (gains) and other expenses, net that are excluded from segment profit (loss) ⁽¹⁾

1.8

(0.2)

2.8

2.0

Restructuring charges

1.0

0.3

1.3

3.2

Interest expense, net

4.0

3.8

11.0

10.8

Special inventory write down

1.0

—

1.0

—

Other expense (income), net

—

—

—

(0.1)

Income from continuing operations before income taxes

$

102.6

$

100.0

$

248.6

$

223.4

The Company defines segment profit and loss as a segment's income or loss from continuing operations before income taxes included in the accompanying Consolidated Statements of Operations, excluding:
•  Special product quality adjustments;
•  The following items in Losses (gains) and other expenses, net: 
          ◦  Net change in unrealized gains and/or losses on unsettled futures contracts, 
          ◦  Special legal contingency charges, 
          ◦  Asbestos-related litigation, 
          ◦  Environmental liabilities, and
          ◦  Other items, net;
•  Restructuring charges;
•  Goodwill, long-lived asset, and equity method investment impairments;
•  Interest expense, net;
•  Special inventory write down; and
•  Other expense, net.

LENNOX INTERNATIONAL INC. AND SUBSIDIARIES

Consolidated Balance Sheets

(Amounts in millions, except shares and par values)

As of September 30,
2014

As of December 31,
2013

(unaudited)

ASSETS

Current Assets:

Cash and cash equivalents

$

48.1

$

38.0

Accounts and notes receivable, net of allowances of $9.6 and $9.8 in 2014 and 2013, respectively

501.5

408.1

Inventories, net

501.5

378.8

Deferred income taxes, net

23.8

24.5

Other assets

61.6

53.0

Total current assets

1,136.5

902.4

Property, plant and equipment, net of accumulated depreciation of $648.9 and $617.3 in 2014 and 2013, respectively

350.5

335.5

Goodwill

214.1

216.8

Deferred income taxes

86.2

88.5

Other assets, net

89.2

83.5

Total assets

$

1,876.5

$

1,626.7

LIABILITIES AND STOCKHOLDERS' EQUITY

Current Liabilities:

Short-term debt

$

229.0

$

165.9

Current maturities of long-term debt

1.3

1.3

Accounts payable

333.1

283.1

Accrued expenses

248.7

232.1

Income taxes payable

12.8

31.6

Total current liabilities

824.9

714.0

Long-term debt

365.7

233.2

Post-retirement benefits, other than pensions

2.7

4.6

Pensions

60.6

70.0

Other liabilities

120.9

119.2

Total liabilities

1,374.8

1,141.0

Commitments and contingencies

Stockholders' equity:

Preferred stock, $.01 par value, 25,000,000 shares authorized, no shares issued or outstanding

—

—

Common stock, $.01 par value, 200,000,000 shares authorized, 87,170,197 shares issued

0.9

0.9

Additional paid-in capital

950.2

912.7

Retained earnings

990.9

870.5

Accumulated other comprehensive loss

(76.9)

(61.1)

Treasury stock, at cost, 39,136,472 shares and 38,066,794 shares in 2014 and 2013, respectively

(1,364.2)

(1,238.1)

Noncontrolling interests

0.8

0.8

Total stockholders' equity

501.7

485.7

Total liabilities and stockholders' equity

$

1,876.5

$

1,626.7

LENNOX INTERNATIONAL INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows

(Unaudited)

(Amounts in millions)

2014

2013

Cash flows from operating activities:

Net income

$

161.2

$

136.6

Net loss from discontinued operations

0.8

9.3

Adjustments to reconcile net income to net cash provided by operating activities:

Income from equity method investments

(12.0)

(10.7)

Dividends from affiliates

6.1

9.1

Restructuring expenses, net of cash paid

(0.1)

(1.2)

Provision for bad debts

2.8

2.7

Unrealized losses on derivative contracts

0.1

0.7

Stock-based compensation expense

17.3

20.5

Depreciation and amortization

45.2

43.1

Deferred income taxes

1.4

0.1

Other items, net

0.3

13.5

Changes in assets and liabilities, net of effects of divestitures:

Accounts and notes receivable

(104.0)

(125.3)

Inventories

(127.6)

(76.4)

Other current assets

(6.2)

(13.7)

Accounts payable

51.0

29.4

Accrued expenses

18.2

20.8

Income taxes payable and receivable

(21.1)

12.9

Other

(9.1)

6.8

Net cash used in discontinued operations

(0.8)

(13.2)

Net cash provided by operating activities

23.5

65.0

Cash flows from investing activities:

Proceeds from the disposal of property, plant and equipment

0.2

0.1

Purchases of property, plant and equipment

(59.9)

(41.0)

Net proceeds from sale of business

—

8.1

Net cash used in discontinued operations

—

(0.1)

Net cash used in investing activities

(59.7)

(32.9)

Cash flows from financing activities:

Short-term borrowings, net

3.4

3.8

Asset securitization borrowings

60.0

330.0

Asset securitization payments

—

(200.0)

Long-term debt payments

(1.7)

(0.7)

Borrowings from revolving credit facility

1,483.0

998.0

Payments on revolving credit facility

(1,351.0)

(1,083.5)

Proceeds from employee stock purchases

1.5

1.3

Repurchases of common stock

(100.3)

(66.0)

Repurchases of common stock to satisfy employee withholding tax obligations

(12.3)

(7.7)

Excess tax benefits related to share-based payments

5.3

4.7

Cash dividends paid

(38.2)

(22.1)

Net cash provided by (used in) financing activities

49.7

(42.2)

Increase (decrease) in cash and cash equivalents

13.5

(10.1)

Effect of exchange rates on cash and cash equivalents

(3.4)

(3.9)

Cash and cash equivalents, beginning of period

38.0

51.8

Cash and cash equivalents, end of period

$

48.1

$

37.8

Supplemental disclosures of cash flow information:

Interest paid

$

9.5

$

9.4

Income taxes paid (net of refunds)

$

100.4

$

53.6

LENNOX INTERNATIONAL INC. AND SUBSIDIARIES

Reconciliation to U.S. GAAP (Generally Accepted Accounting Principles) Measures

(Unaudited, in millions, except per share and ratio data)

Use of Non-GAAP Financial Measures

To supplement the Company's consolidated financial statements and segment net sales and profit presented in accordance with U.S. GAAP, additional non-GAAP financial measures are provided and reconciled in the following tables.  In addition to these non-GAAP measures, the Company also provides rates of revenue change at constant currency on a consolidated and segment basis. The Company believes that these non-GAAP financial measures, when considered together with the GAAP financial measures, provide information that is useful to investors in understanding period-over-period operating results.  The Company believes that these non-GAAP financial measures enhance the ability of investors to analyze the Company's business trends and operating performance.

Reconciliation of Income from Continuing Operations, a GAAP measure, to Adjusted Income from Continuing Operations, a Non-GAAP measure

For the Three Months
Ended September 30,

For the Nine Months
Ended September 30,

2014

2013

2014

2013

Income from continuing operations, a GAAP measure

$

67.5

$

65.8

$

162.0

$

145.9

Restructuring charges, after tax

0.8

0.2

1.4

2.1

Special product quality adjustments, after tax ^(b)

0.1

(0.3)

(0.1)

(0.4)

Special legal contingency charges, after tax ^(a)

0.3

0.5

0.4

0.7

Asbestos-related litigation, after tax ^(a)

0.2

—

0.6

—

Net change in unrealized losses (gains) on unsettled future contracts, after tax^(a)

0.2

(0.7)

0.1

0.4

Special inventory write down, after tax ^(b)

0.8

—

0.8

—

Environmental liabilities, after tax ^(a)

0.4

—

0.4

—

Other items, net, after tax ^(a)

—

—

0.5

0.3

Adjusted income from continuing operations, a non-GAAP measure

$

70.3

$

65.5

$

166.1

$

149.0

Income per share from continuing operations - diluted, a GAAP measure

$

1.38

$

1.30

$

3.27

$

2.87

Restructuring charges, after tax

0.02

—

0.03

0.04

Special product quality adjustments, after tax ^(b)

—

—

—

(0.01)

Special legal contingency charges, after tax ^(a)

0.01

0.01

0.01

0.01

Asbestos-related litigation, after tax ^(a)

—

—

0.01

—

Net change in unrealized losses (gains) on unsettled future contracts, after tax^(a)

—

(0.01)

—

0.01

Special inventory write down, after tax ^(b)

0.02

—

0.02

—

Environmental liabilities, after tax ^(a)

0.01

—

0.01

—

Other items, net, after tax ^(a)

—

—

0.01

0.01

Adjusted earnings per share from continuing operations - diluted, a non-GAAP measure

$

1.44

$

1.30

$

3.36

$

2.93

^{(a) Recorded in Losses (gains) and other expenses, net in the Consolidated Statements of Operations}

^{(b) Recorded in Cost of goods sold in the Consolidated Statements of Operations}

For the Three Months
Ended September 30,

For the Nine Months
Ended September 30,

2014

2013

2014

2013

Components of Losses (gains) and other expenses, net (pre-tax):

Realized losses on settled future contracts ^(a)

$

0.1

$

0.4

$

0.6

$

0.8

Foreign currency exchange losses (gains) ^(a)

0.1

(0.5)

0.1

—

Loss on disposal of fixed assets ^(a)

0.1

—

—

—

Net change in unrealized losses (gains) on unsettled futures contracts ^(b)

0.2

(1.1)

0.1

0.7

Special legal contingency charges ^(b)

0.5

0.8

0.7

1.0

Asbestos-related litigation ^(b)

0.4

—

1.0

—

Environmental liabilities ^(b)

0.7

—

0.7

—

Other items, net ^(b)

—

0.1

0.3

0.3

Losses (gains) and other expenses, net (pre-tax)

$

2.1

$

(0.3)

$

3.5

$

2.8

   ^{(a) Included in segment profit (loss) and Adjusted income from continuing operations}

   ^{(b) Excluded from segment profit (loss) and Adjusted income from continuing operations}

Reconciliation of Estimated Adjusted Income per Share from Continuing Operations - Diluted, a Non-GAAP measure, to Income per Share from Continuing Operations - Diluted, a GAAP measure

For the Year
Ended
December 31, 2014
ESTIMATED

 Adjusted income per share from continuing operations - diluted, a Non-GAAP measure

$4.30 - $4.50

Restructuring charges and other items

(0.09)

 Income per share from continuing operations - diluted, a GAAP measure

$4.21 - $4.41

Reconciliation of Net Cash Provided by Operating Activities, a GAAP measure, to Free Cash Flow, a Non-GAAP measure (dollars in millions)

For the Three Months Ended
September 30,

For the Nine Months Ended
September 30,

2014

2013

2014

2013

Net cash provided by operating activities, a GAAP measure

$

96.9

$

153.3

$

23.5

$

65.0

 Purchases of property, plant and equipment

(18.7)

(17.6)

(59.9)

(41.0)

 Proceeds from the disposal of property, plant and equipment

0.2

0.1

0.2

0.1

 Free cash flow, a Non-GAAP measure

$

78.4

$

135.8

$

(36.2)

$

24.1

Calculation of Debt to EBITDA Ratio (dollars in millions):

Trailing
Twelve 
Months to 
September 30, 2014

 Adjusted EBIT (a)

$

326.2

 Depreciation and amortization expense (b)

61.0

 EBITDA (a + b)

 Total debt at September 30, 2014 (c)

596.0

 Total Debt to EBITDA ratio ((c / (a + b))

1.5

Reconciliation of Adjusted EBIT, a Non-GAAP measure, to Income From Continuing Operations Before Income Taxes, a GAAP measure (dollars in millions)

Trailing
Twelve 
Months to 
September 30, 2014

 Adjusted EBIT per above, a Non-GAAP measure

$

326.2

 Special product quality adjustments

(2.0)

 Items in Losses (gains) and other expenses, net that are excluded from segment profit

9.4

 Restructuring charges

3.1

 Interest expense, net

14.8

 Special inventory write down

1.0

 Other expenses, net

0.5

 Income from continuing operations before income taxes, a GAAP measure

$

299.4