LII Lennox International Inc

LENNOX INTERNATIONAL INC. AND SUBSIDIARIES

Consolidated Statements of Operations

(Amounts in millions, except per share data)

For the Three Months Ended
December 31,

For the Years Ended
December 31,

2014

2013

2014

2013

Net sales

$

812.8

$

749.5

$

3,367.4

$

3,199.1

Cost of goods sold

587.4

541.8

2,464.1

2,337.9

Gross profit

225.4

207.7

903.3

861.2

Operating Expenses:

Selling, general and administrative expenses

148.2

146.0

573.7

570.1

Losses and other expenses, net

3.3

6.4

6.8

9.3

Restructuring charges

0.6

1.8

1.9

5.0

Income from equity method investments

(1.8)

(1.4)

(13.8)

(12.2)

Operational income from continuing operations

75.1

54.9

334.7

289.0

Interest expense, net

6.2

3.8

17.2

14.5

Other expense (income), net

(0.1)

0.3

(0.1)

0.2

Income from continuing operations before income taxes

69.0

50.8

317.6

274.3

Provision for income taxes

22.9

16.8

109.5

94.4

Income from continuing operations

46.1

34.0

208.1

179.9

Discontinued Operations:

Income (loss) from discontinued operations before income taxes

(2.4)

2.4

(3.7)

(13.3)

Provision for (benefit from) income taxes

(0.9)

1.2

(1.4)

(5.2)

Income (loss) from discontinued operations

(1.5)

1.2

(2.3)

(8.1)

Net income

$

44.6

$

35.2

$

205.8

$

171.8

Earnings per share – Basic:

Income from continuing operations

$

1.01

$

0.69

$

4.35

$

3.61

Income (loss) from discontinued operations

(0.03)

0.03

(0.05)

(0.16)

Net income

$

0.98

$

0.72

$

4.30

$

3.45

Earnings per share – Diluted:

Income from continuing operations

$

1.00

$

0.68

$

4.28

$

3.55

Income (loss) from discontinued operations

(0.04)

0.02

(0.05)

(0.16)

Net income

$

0.96

$

0.70

$

4.23

$

3.39

Weighted Average Number of Shares Outstanding - Basic

45.5

49.2

47.9

49.8

Weighted Average Number of Shares Outstanding - Diluted

46.2

50.1

48.6

50.6

Cash dividends declared per share

$

0.30

$

0.24

$

1.14

$

0.92

LENNOX INTERNATIONAL INC. AND SUBSIDIARIES
Segment Net Sales and Profit (Loss)

(Amounts in millions)

For the Three Months Ended
December 31,

For the Years Ended
December 31,

2014

2013

2014

2013

Net Sales

Residential Heating & Cooling

$

404.0

$

358.6

$

1,736.5

$

1,583.2

Commercial Heating & Cooling

222.9

212.6

878.5

844.4

Refrigeration

185.9

178.3

752.4

771.5

$

812.8

$

749.5

$

3,367.4

$

3,199.1

Segment Profit (Loss) ⁽¹⁾

Residential Heating & Cooling

$

57.0

$

36.4

$

235.8

$

180.1

Commercial Heating & Cooling

32.6

33.3

124.0

118.1

Refrigeration

13.1

23.7

55.4

90.2

Corporate and other

(26.4)

(31.8)

(74.3)

(87.9)

Subtotal that includes segment profit and eliminations

76.3

61.6

340.9

300.5

Reconciliation to income from continuing operations before income taxes:

Special product quality adjustments

(1.4)

(1.9)

(1.4)

(2.3)

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

2.0

6.8

4.7

8.8

Restructuring charges

0.6

1.8

1.9

5.0

Interest expense, net

6.2

3.8

17.2

14.5

Special inventory write down

—

—

1.0

—

Other expense (income), net

(0.1)

0.3

(0.1)

0.2

Income from continuing operations before income taxes

$

69.0

$

50.8

$

317.6

$

274.3

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 and other expenses, net: 
       º Net change in unrealized gains and/or losses on unsettled futures contracts, 
       º Special legal contingency charges,  
       º Asbestos-related litigation, 
       º Environmental liabilities, and 
       º 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 December 31, 2014

As of December 31, 2013

ASSETS

Current assets:

Cash and cash equivalents

$

37.5

$

38.0

Accounts and notes receivable, net of allowances of $7.9 and $9.8 in 2014 and 2013, respectively

421.4

408.1

Inventories, net

463.3

378.8

Deferred income taxes, net

32.5

24.5

Other assets

59.3

53.0

Total current assets

1,014.0

902.4

Property, plant and equipment, net

358.6

335.5

Goodwill

209.4

216.8

Deferred income taxes

97.5

88.5

Other assets, net

84.8

83.5

Total assets

$

1,764.3

$

1,626.7

LIABILITIES AND STOCKHOLDERS' EQUITY

Current Liabilities:

Short-term debt

$

226.6

$

165.9

Current maturities of long-term debt

24.0

1.3

Accounts payable

324.3

283.1

Accrued expenses

239.0

232.1

Income taxes payable

13.4

31.6

Total current liabilities

827.3

714.0

Long-term debt

675.0

233.2

Post-retirement benefits, other than pensions

4.5

4.6

Pensions

129.9

70.0

Other liabilities

118.6

119.2

Total liabilities

1,755.3

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

824.9

912.7

Retained earnings

1,022.1

870.5

Accumulated other comprehensive loss

(153.5)

(61.1)

Treasury stock, at cost, 42,535,126 shares and 38,066,794 shares for 2014 and 2013, respectively

(1,686.0)

(1,238.1)

Noncontrolling interests

0.6

0.8

Total stockholders' equity

9.0

485.7

Total liabilities and stockholders' equity

$

1,764.3

$

1,626.7

LENNOX INTERNATIONAL INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows

(Amounts in millions)

For the Years Ended December 31,

2014

2013

Cash flows from operating activities:

Net income

$

205.8

$

171.8

Net loss from discontinued operations

2.3

8.1

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

Income from equity method investments

(13.8)

(12.2)

Dividends from affiliates

9.1

10.3

Restructuring expenses, net of cash paid

0.2

0.1

Provision for bad debts

2.6

3.6

Unrealized losses on derivative contracts

0.3

0.3

Stock-based compensation expense

23.3

29.3

Depreciation and amortization

60.8

58.9

Deferred income taxes

6.1

3.5

Pension costs in excess of (less than) contributions

(8.0)

1.7

Other items, net

0.1

4.5

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

Accounts and notes receivable

(32.6)

(49.0)

Inventories

(96.7)

(19.5)

Other current assets

(8.3)

(16.3)

Accounts payable

46.1

(10.9)

Accrued expenses

6.7

15.4

Income taxes payable and receivable

(15.9)

21.9

Other, net

(1.0)

4.4

Net cash used in discontinued operations

(2.3)

(15.6)

Net cash provided by operating activities

184.8

210.3

Cash flows from investing activities:

Proceeds from the disposal of property, plant and equipment

1.1

2.4

Purchases of property, plant and equipment

(88.4)

(78.3)

Net proceeds from sale of businesses

—

8.6

Net cash used in investing activities

(87.3)

(67.3)

Cash flows from financing activities:

Short-term borrowings, net

1.5

2.0

Asset securitization borrowings

100.0

330.0

Asset securitization payments

(40.0)

(200.0)

Term loan borrowings from credit facility

300.0

—

Long-term debt payments

(2.3)

(1.0)

Borrowings from revolving credit facility

2,073.5

1,425.5

Payments on revolving credit facility

(1,908.5)

(1,543.5)

Payments of deferred financing costs

(2.2)

—

Additional investment in subsidiary

—

(0.5)

Proceeds from employee stock purchases

2.0

1.8

Repurchases of common stock

(550.3)

(125.0)

Repurchases of common stock to satisfy employee withholding tax obligations

(22.4)

(12.0)

Excess tax benefits related to share-based payments

11.8

6.5

Cash dividends paid

(52.6)

(34.0)

Net cash used in financing activities

(89.5)

(150.2)

Increase (decrease) in cash and cash equivalents

8.0

(7.2)

Effect of exchange rates on cash and cash equivalents

(8.5)

(6.6)

Cash and cash equivalents, beginning of year

38.0

51.8

Cash and cash equivalents, end of year

$

37.5

$

38.0

Supplementary disclosures of cash flow information:

Cash paid during the year for:

Interest, net

$

17.6

$

15.7

Income taxes (net of refunds)

$

105.3

$

56.8

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
December 31,

For the Years Ended

December 31,

2014

2013

2014

2013

Income from continuing operations, a GAAP measure

$

46.1

$

34.0

$

208.1

$

179.9

Restructuring charges, after tax

0.4

1.3

1.8

3.4

Special product quality adjustments, after tax ^(b)

(0.8)

(1.1)

(0.9)

(1.5)

Special legal contingency charges, after tax ^(a)

0.2

0.1

0.6

0.7

Asbestos-related litigation, after tax ^(a)

—

3.9

0.6

3.9

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

0.3

(0.2)

0.4

0.3

Special inventory write down, after tax ^(b)

—

—

0.8

—

Environmental liabilities, after tax ^(a)

0.7

—

1.2

—

Other items, net, after tax ^(a)

—

0.3

0.5

0.6

Adjusted income from continuing operations, a non-GAAP measure

$

46.9

$

38.3

$

213.1

$

187.3

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

$

1.00

$

0.68

$

4.28

$

3.55

Restructuring charges, after tax

0.01

0.03

0.03

0.07

Special product quality adjustments, after tax ^(b)

(0.02)

(0.02)

(0.02)

(0.03)

Special legal contingency charges, after tax ^(a)

—

—

0.01

0.01

Asbestos-related litigation, after tax ^(a)

—

0.08

0.01

0.08

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

0.01

—

0.01

0.01

Special inventory write down, after tax ^(b)

—

—

0.02

—

Environmental liabilities, after tax ^(a)

0.02

—

0.03

—

Other items, net, after tax ^(a)

—

—

0.01

0.01

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

$

1.02

$

0.77

$

4.38

$

3.70

^{(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 December 31,

For the Years Ended
December 31,

2014

2013

2014

2013

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

Realized losses on settled future contracts ^(a)

$

0.1

$

0.2

$

0.8

$

1.0

Foreign currency exchange losses ^(a)

1.5

0.4

1.6

0.5

Gain on disposal of fixed assets ^(a)

(0.3)

(1.0)

(0.3)

(1.0)

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

0.5

(0.2)

0.6

0.4

Special legal contingency charges ^(b)

0.3

0.1

0.9

1.2

Asbestos-related litigation ^(b)

—

6.3

0.9

6.3

Environmental liabilities ^(b)

1.2

—

2.0

—

Other items, net ^(b)

—

0.6

0.3

0.9

Losses and other expenses, net (pre-tax)

$

3.3

$

6.4

$

6.8

$

9.3

   ^{(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, 2015
ESTIMATED  

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

$5.20 - $5.60

Restructuring and other items

0.00

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

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
December 31,

For the Years Ended

December 31,

2014

2013

2014

2013

Net cash provided by operating activities, a GAAP measure

$

161.3

$

145.3

$

184.8

$

210.3

 Purchases of property, plant and equipment

(28.5)

(37.3)

(88.4)

(78.3)

 Proceeds from the disposal of property, plant and equipment

0.9

2.3

1.1

2.4

 Free cash flow, a Non-GAAP measure

$

133.7

$

110.3

$

97.5

$

134.4

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

Trailing Twelve  Months to  December 31, 2014

 Adjusted EBIT (a)

$

340.9

 Depreciation and amortization expense (b)

60.8

 EBITDA (a + b)

$

401.7

 Total debt at December 31, 2014 (c)

$

925.6

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

2.3

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 
December 31, 2014

 Adjusted EBIT per above, a Non-GAAP measure

$

340.9

 Special product quality adjustments

(1.4)

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

4.7

 Restructuring charges

1.9

 Interest expense, net

17.2

 Special inventory write down

1.0

 Other expenses, net

(0.1)

 Income from continuing operations before income taxes, a GAAP measure

$

317.6