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2. Reportable Business Segments:
We operate in two reportable business segments of the heating, ventilation, air conditioning and refrigeration (“HVACR”) industry. Our segments are organized primarily by the nature of the products and services we provide. The following table describes each segment:
| Segment | Product or Services | Markets Served | Geographic Areas | |||||||||||||||||
| Home Comfort Solutions | Furnaces, air conditioners, heat pumps, packaged heating and cooling systems, indoor air quality equipment, comfort control products, replacement parts and supplies | Residential Replacement; Residential New Construction | United States Canada | |||||||||||||||||
| Building Climate Solutions | Commercial heating, air conditioning and refrigeration systems. Products include rooftop packaged units, variable refrigerant flow systems, heat pumps, air cooled condensing units, air handlers, unit coolers, and process chillers. Services include installation, energy monitoring, service and maintenance, and HVAC recycling. | Light Commercial; Food Preservation; Non-Food Industry | United States Canada | |||||||||||||||||
We use segment profit or loss as the primary measure of profitability to evaluate operating performance and to allocate capital resources. We define segment profit or loss as a segment’s income or loss from continuing operations before income taxes included in the accompanying Consolidated Statements of Operations, excluding certain items. The reconciliation in the table below details the items excluded.
Our corporate costs include those costs related to corporate functions such as legal, internal audit, treasury, human resources, tax compliance and senior executive staff. Any intercompany sales and associated profit (and any other intercompany items) are eliminated from segment results. There were no significant intercompany eliminations for the periods presented.
Segment Net Sales and Profit (Loss)
Net sales and segment profit (loss) for each segment, along with a reconciliation of segment profit (loss) to Operating income, are shown below (in millions):
| For the Three Months Ended September 30, | For the Nine Months Ended September 30, | ||||||||||||||||||||||
| 2024 | 2023 | 2024 | 2023 | ||||||||||||||||||||
| Net sales | |||||||||||||||||||||||
| Home Comfort Solutions | $ | $ | $ | $ | |||||||||||||||||||
Business Climate Solutions | |||||||||||||||||||||||
Corporate and Other (1) | |||||||||||||||||||||||
| Total segment net sales | $ | $ | $ | $ | |||||||||||||||||||
Segment profit (loss) (2) | |||||||||||||||||||||||
| Home Comfort Solutions | $ | $ | $ | $ | |||||||||||||||||||
Business Climate Solutions | |||||||||||||||||||||||
Corporate and Other | ( | ( | ( | ( | |||||||||||||||||||
| Total segment profit | |||||||||||||||||||||||
| Reconciliation to Operating income: | |||||||||||||||||||||||
| Impairment on assets held for sale | |||||||||||||||||||||||
| Gain on sale from previous dispositions | ( | ||||||||||||||||||||||
Items in Losses (gains) and other expenses, net that are excluded from segment profit (loss) (2) | |||||||||||||||||||||||
| Restructuring charges | |||||||||||||||||||||||
| Operating income | $ | $ | $ | $ | |||||||||||||||||||
(1) The Corporate and Other segment included our European portfolio. In the fourth quarter of 2023 we completed the divestiture of our European operations.
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(2) We define segment profit (loss) as a segment's operating income included in the accompanying Consolidated Statements of Operations, excluding:
◦The following items in Losses and other expenses, net:
▪Net change in unrealized losses (gains) on unsettled futures contracts,
▪Environmental liabilities and special litigation charges, and
▪Other items, net
◦Impairment on assets held for sale; and
◦Gain on sale from previous dispositions
3. Earnings Per Share:
Basic earnings per share are computed by dividing net income by the weighted-average number of common shares outstanding during the period. Diluted earnings per share are computed by dividing net income by the sum of the weighted-average number of shares and the number of equivalent shares assumed outstanding, if dilutive, under our stock-based compensation plans.
The computations of basic and diluted earnings per share were as follows (in millions, except per share data):
| For the Three Months Ended September 30, | For the Nine Months Ended September 30, | ||||||||||||||||||||||
| 2024 | 2023 | 2024 | 2023 | ||||||||||||||||||||
| Net income | $ | $ | $ | $ | |||||||||||||||||||
| Weighted-average shares outstanding – basic | |||||||||||||||||||||||
| Add: Potential effect of dilutive securities attributable to stock-based payments | |||||||||||||||||||||||
| Weighted-average shares outstanding – diluted | |||||||||||||||||||||||
| Earnings per share – Basic: | $ | $ | $ | $ | |||||||||||||||||||
| Earnings per share – Diluted: | $ | $ | $ | $ | |||||||||||||||||||
The following stock appreciation rights and restricted stock units were outstanding but not included in the diluted earnings per share calculation as the assumed exercise of such rights would have been anti-dilutive (in millions, except for per share data):
| For the Three Months Ended September 30, | For the Nine Months Ended September 30, | ||||||||||||||||||||||
| 2024 | 2023 | 2024 | 2023 | ||||||||||||||||||||
| Weighted-average number of shares | |||||||||||||||||||||||
4. Commitments and Contingencies:
Leases
We determine if an arrangement is a lease at inception. Operating leases are included in our Consolidated Balance Sheets as Right-of-use assets from operating leases, Current operating lease liabilities and Long-term operating lease liabilities. Finance leases are included in Property, plant and equipment, Current maturities of long-term debt and Long-term debt in our Consolidated Balance Sheets. We do not recognize a right-of-use asset and lease liability for leases with a term of 12 months or less. We do not separate non-lease components from lease components to which they relate and have accounted for the combined lease and non-lease components as a single lease component.
Many of our lease agreements contain renewal options; however, we do not recognize right-of-use assets or lease liabilities for renewal periods unless it is determined that we are reasonably certain of renewing the lease at inception or when a triggering
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event occurs. Some of our lease agreements contain rent escalation clauses (including index-based escalations), rent holidays, capital improvement funding or other lease concessions. We recognize our minimum rental expense on a straight-line basis based on the fixed components of a lease arrangement. We amortize this expense over the term of the lease beginning with the date of initial possession. Variable lease components represent amounts that are not fixed in nature and are not tied to an index or rate, and are recognized as incurred. Under certain of our third-party service agreements, we control a specific space or underlying asset used in providing the service by the third-party service provider. These arrangements meet the definition under ASC 842 and therefore are accounted for under ASC 842.
In determining our right-of-use assets and lease liabilities, we apply a discount rate to the minimum lease payments within each lease agreement. ASC 842 requires us to use the rate of interest that a lessee would have to pay to borrow on a collateralized basis over a similar term an amount equal to the lease payments in a similar economic environment. When we cannot readily determine the discount rate implicit in the lease agreement, we utilize our incremental borrowing rate. To estimate our specific incremental borrowing rates over various periods (ranging from 1-year through 30-years), a comparable market yield curve consistent with our credit quality was calibrated to our publicly outstanding debt instruments.
Product Warranties and Product Related Contingencies
We provide warranties to customers for some of our products and record liabilities for the estimated future warranty-related costs based on failure rates, cost experience and other factors. We periodically review the assumptions used to determine the product warranty liabilities and will adjust the liabilities in future periods for changes in experience, as necessary.
Liabilities for estimated product warranty costs are included in the following captions on the accompanying Consolidated Balance Sheets (in millions) as of:
| September 30, 2024 | December 31, 2023 | ||||||||||
| Accrued expenses | $ | $ | |||||||||
| Other liabilities | |||||||||||
| Total warranty liability | $ | $ | |||||||||
The changes in product warranty liabilities for the nine months ended September 30, 2024 were as follows (in millions):
| Total warranty liability as of December 31, 2023 | $ | ||||
| Warranty claims paid | ( | ||||
| Changes resulting from issuance of new warranties | |||||
| Changes in estimates associated with pre-existing liabilities | |||||
| Changes in foreign currency translation rates and other | ( | ||||
Total warranty liability as of September 30, 2024 | $ | ||||
Litigation
We are involved in a number of claims and lawsuits incidental to the operation of our businesses. Insurance coverages are maintained and estimated costs are recorded for such claims and lawsuits, including costs to settle claims and lawsuits, based on experience involving similar matters and specific facts known.
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5. Stock Repurchases:
Our Board of Directors has authorized a total of $4.0 billion to repurchase shares of our common stock (collectively referred to as the "Share Repurchase Plans"), including a $1.0 billion share repurchase authorization in July 2021. The Share Repurchase Plans allow us to repurchase shares from time to time in open market transactions and in privately negotiated transactions based on business, market, applicable legal requirements and other considerations. Such repurchases may also be made in compliance with Rule 10b5-1 trading plans entered into by us, which would permit common stock to be repurchased when the Company might otherwise be precluded from doing so under insider trading laws or self-imposed trading restrictions. The Share Repurchase Plans do not require the repurchase of a specific number of shares and may be terminated at any time. As of September 30, 2024, $532.5 million was available for repurchase under the Share Repurchase Plans.
For the three and nine months ended September 30, 2024, we repurchased 23,000 13.5
6. Revenue Recognition:
The following table disaggregates our revenue by business segment by geography which provides information as to the major source of revenue. See Note 2 for additional information on our reportable business segments and the products and services sold in each segment. All amount presented reflect the revised segment presentation.
| For the Three Months Ended September 30, 2024 | |||||||||||||||||||||||
| Primary Geographic Markets | Home Comfort Solutions | Building Climate Solutions | Corporate and Other | Consolidated | |||||||||||||||||||
| United States | $ | $ | $ | $ | |||||||||||||||||||
| Canada | |||||||||||||||||||||||
| Other international | |||||||||||||||||||||||
| Total | $ | $ | $ | $ | |||||||||||||||||||
| For the Three Months Ended September 30, 2023 | |||||||||||||||||||||||
| Primary Geographic Markets | Home Comfort Solutions | Building Climate Solutions | Corporate and Other | Consolidated | |||||||||||||||||||
| United States | $ | $ | $ | $ | |||||||||||||||||||
| Canada | |||||||||||||||||||||||
| Other international | |||||||||||||||||||||||
| Total | $ | $ | $ | $ | |||||||||||||||||||
| For the Nine Months Ended September 30, 2024 | |||||||||||||||||||||||
| Primary Geographic Markets | Home Comfort Solutions | Building Climate Solutions | Corporate and Other | Consolidated | |||||||||||||||||||
| United States | $ | $ | $ | $ | |||||||||||||||||||
| Canada | |||||||||||||||||||||||
| Other international | |||||||||||||||||||||||
| Total | $ | $ | $ | $ | |||||||||||||||||||
| For the Nine Months Ended September 30, 2023 | |||||||||||||||||||||||
| Primary Geographic Markets | Home Comfort Solutions | Building Climate Solutions | Corporate and Other | Consolidated | |||||||||||||||||||
| United States | $ | $ | $ | $ | |||||||||||||||||||
| Canada | |||||||||||||||||||||||
| Other international | |||||||||||||||||||||||
| Total | $ | $ | $ | $ | |||||||||||||||||||
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Home Comfort Solutions - We manufacture and market a broad range of furnaces, air conditioners, heat pumps, packaged heating and cooling systems, equipment and accessories to improve indoor air quality, comfort control products, replacement parts and supplies and related products for both the residential replacement and new construction markets in North America. These products are sold under various brand names and are sold either through direct sales to a network of independent installing dealers, including through our network of Lennox stores or to independent distributors. For the three months ended September 30, 2024 and 2023, direct sales represented 73% and 77 % of revenues, and sales to independent distributors represented the remainder. For the nine months ended September 30, 2024 and 2023, direct sales represented 74% and 75 % of revenues, and sales to independent distributors represented the remainder. Given the nature of our business, customer product orders are fulfilled at a point in time and not over a period of time.
Building Climate Solutions - In North America, we manufacture and sell unitary heating and cooling equipment used in light commercial applications, such as low-rise office buildings, restaurants, retail centers, churches and schools. These products are distributed primarily through commercial contractors and directly to national account customers in the planned replacement, emergency replacement and new construction markets. We manufacture and market equipment for the commercial refrigeration markets under the Heatcraft Worldwide Refrigeration name. Our products are used in the food retail, food service, cold storage as well as non-food refrigeration markets. We sell these products to distributors, installing contractors, engineering design firms, original equipment manufacturers and end-users. Lennox National Account Services provides installation, service and preventive maintenance for HVAC national account customers in the United States and Canada. AES manufactures curb, curb adapters, drop box diffusers, offers HVAC recycling and salvage services and focuses on multi-family HVAC replacement for expired mechanical assets. Revenue related to service contracts is recognized as the services are performed under the contract based on the relative fair value of the services provided. For the three months ended September 30, 2024 and 2023, equipment sales represented 80% and 88 % of revenues and the remainder of our revenue was generated from our service business. For the nine months ended September 30, 2024 and 2023, equipment sales represented 81% and 87 % of revenues and the remainder of our revenue was generated from our services business.
Corporate and Other - In Europe, we manufactured and marketed equipment for the global commercial refrigeration markets. We also manufactured and sold unitary heating and cooling products and applied systems. A de minimis amount of segment revenue related to services for start-up and commissioning activities. In the fourth quarter of 2023, we completed the divestiture of our European operations.
Contract Liabilities - Our contract liabilities consist of advance payments and deferred revenue. Net contract liabilities consisted of the following (in millions) as of:
| September 30, 2024 | December 31, 2023 | ||||||||||
| Contract assets | $ | $ | |||||||||
| Contract liabilities - current | ( | ( | |||||||||
| Contract liabilities - noncurrent | ( | ( | |||||||||
| Total | $ | ( | $ | ( | |||||||
For the three months ended September 30, 2024 and 2023, we recognized revenue of $0.7 million and $2.8 million and for the nine months ended September 30, 2024 and 2023, we recognized revenue of $6.8 million and $7.0 million related to our contract liabilities at January 1, 2024 and 2023, respectively. Impairment losses recognized in our receivables and contract assets were de minimis in 2024 and 2023.
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7. Other Financial Statement Details:
Inventories:
The components of inventories are as follows (in millions) as of:
| September 30, 2024 | December 31, 2023 | ||||||||||
| Finished goods | $ | $ | |||||||||
| Work in process | |||||||||||
| Raw materials and parts | |||||||||||
| Subtotal | |||||||||||
| Excess of current cost over last-in, first-out cost | ( | ( | |||||||||
| Total inventories, net | $ | $ | |||||||||
Goodwill:
The changes in the carrying amount of goodwill in 2024, in total and by segment, are summarized in the table below (in millions):
Balance as of December 31, 2023 | Goodwill Adjustment (1) | Balance as of September 30, 2024 | |||||||||||||||
| Home Comfort Solutions | $ | $ | $ | ||||||||||||||
Building Climate Solutions (1) | ( | ||||||||||||||||
| Total Goodwill | $ | $ | ( | $ | |||||||||||||
(1) As discussed in Note 13, an update to our purchase price allocation of AES in the first quarter of 2024 resulted in a $2.2 million reduction of goodwill.
We monitor our reporting units for indicators of impairment throughout the year to determine if a change in facts or circumstances warrants a re-evaluation of our goodwill. We have not recorded any goodwill impairments for the nine months ended September 30, 2024 or in any periods presented for our continuing businesses.
Derivatives:
Objectives and Strategies for Using Derivative Instruments
Commodity Price Risk - We utilize a cash flow hedging program to mitigate our exposure to volatility in the prices of metal commodities used in our production processes. Our hedging program includes the use of futures contracts to lock in prices, and as a result, we are subject to derivative losses should the metal commodity prices decrease and gains should the prices increase. We utilize a dollar cost averaging strategy so that a higher percentage of commodity price exposures are hedged near-term and lower percentages are hedged at future dates. This strategy allows for protection against near-term price volatility while allowing us to adjust to market price movements over time.
Interest Rate Risk - A portion of our debt bears interest at variable rates, and as a result, we are subject to variability in the cash paid for interest. To mitigate a portion of that risk, we may choose to engage in an interest rate swap hedging strategy to eliminate the variability of interest payment cash flows. We are not currently hedged against interest rate risk.
Foreign Currency Risk - Foreign currency exchange rate movements create a degree of risk by affecting the U.S. dollar value of assets and liabilities arising in foreign currencies. We seek to mitigate the impact of currency exchange rate movements on certain short-term transactions by periodically entering into foreign currency forward contracts.
Cash Flow Hedges
We have foreign exchange forward contracts and commodity futures contracts designated as cash flow hedges that are scheduled to mature through February 2026. Unrealized gains or losses from our cash flow hedges are included in Accumulated other comprehensive loss (“AOCL”) and are expected to be reclassified into earnings within the next 17 months
13
based on the prices of the commodities and foreign currencies at the settlement dates. We recorded the following amounts in AOCL related to our cash flow hedges (in millions) as of:
| September 30, 2024 | December 31, 2023 | ||||||||||
| Unrealized losses (gains), net on unsettled contracts | $ | ( | $ | ||||||||
| Income tax (benefit) expense | ( | ||||||||||
Unrealized losses (gains), net included in AOCL, net of tax (1) | $ | ( | $ | ||||||||
Stock-Based Compensation:
We issue various long-term incentive awards, including performance share units, restricted stock units and stock appreciation rights under the Lennox International Inc. 2019 Equity and Incentive Plan, as it may be amended and restated from time to time. Stock-based compensation expense related to continuing operations is included in Selling, general and administrative expenses in the accompanying Consolidated Statements of Operations as follows (in millions):
| For the Three Months Ended September 30, | For the Nine Months Ended September 30, | ||||||||||||||||||||||
| 2024 | 2023 | 2024 | 2023 | ||||||||||||||||||||
Stock-based compensation expense | $ | $ | $ | $ | |||||||||||||||||||
8. Pension Benefit Plans:
The components of net periodic benefit cost for pension benefits were as follows (in millions):
| For the Three Months Ended September 30, | For the Nine Months Ended September 30, | ||||||||||||||||||||||
| 2024 | 2023 | 2024 | 2023 | ||||||||||||||||||||
| Service cost | $ | $ | $ | $ | |||||||||||||||||||
| Interest cost | |||||||||||||||||||||||
| Expected return on plan assets | ( | ( | ( | ( | |||||||||||||||||||
| Recognized actuarial loss | |||||||||||||||||||||||
| Other | ( | ||||||||||||||||||||||
| Settlements and curtailments | |||||||||||||||||||||||
| Net periodic benefit cost | $ | $ | $ | $ | |||||||||||||||||||
9. Income Taxes:
As of September 30, 2024, we had approximately $4.5 million in total gross unrecognized tax benefits. If recognized, $4.5 million would be recorded through the Consolidated Statements of Operations.
Our effective tax rate was 19.3 % for the nine months ended September 30, 2024 compared to 21.0 % for the nine months ended September 30, 2023. The decrease in rate is primarily due to a discrete adjustment in the third quarter of 2023 related to the 2023 European divestiture.
We are currently under a limited scope audit by the Internal Revenue Service for our 2021 and 2022 tax years. There are also ongoing U.S. state and local audits and other foreign audits covering fiscal years 2017 through 2023. We are generally no longer subject to U.S. federal, state and local, or non-U.S. income tax examinations by taxing authorities for years prior to 2017.
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10. Lines of Credit and Financing Arrangements:
The following table summarizes our outstanding debt obligations and their classification in the accompanying Consolidated Balance Sheets (in millions) as of:
| September 30, 2024 | December 31, 2023 | ||||||||||
| Commercial paper | $ | $ | |||||||||
| Current maturities of long-term debt: | |||||||||||
| Finance lease obligations | $ | $ | |||||||||
| Senior unsecured notes | |||||||||||
| Debt issuance costs | ( | ||||||||||
Total current maturities of long-term debt | $ | $ | |||||||||
| Long-Term Debt: | |||||||||||
| Finance lease obligations | $ | $ | |||||||||
| Credit agreement | |||||||||||
| Senior unsecured notes | |||||||||||
| Debt issuance costs | ( | ( | |||||||||
| Total long-term debt | $ | $ | |||||||||
| Total debt | $ | $ | |||||||||
Foreign Obligations
Through several of our foreign subsidiaries, we have facilities available to assist us in financing seasonal borrowing needs for our foreign locations. We had no no borrowings or repayments on these facilities during the nine months ended September 30, 2024.
Commercial Paper Program
On October 25, 2023, we established a commercial paper program (the “Program”), as a replacement to our Asset Securitization Program which expired in November 2023, pursuant to which we may issue short-term, unsecured commercial paper notes (the “CP Notes”) under the exemption from registration contained in Section 4(a)(2) of the Securities Act of 1933, as amended. Amounts available under the Program may be borrowed, repaid, and re-borrowed from time to time, with the aggregate face or principal amount of the CP Notes outstanding under the Program at any time not to exceed $500.0 million. The CP Notes have maturities of up to 397 days from the date of issue and rank pari passu with all of our other unsecured and unsubordinated indebtedness. The net proceeds from issuances of the CP Notes are typically used for general corporate purposes. Our revolving credit facility serves as a liquidity backstop for the repayment of CP Notes outstanding under the Program. There were no CP Notes currently outstanding under the Program as of September 30, 2024.
Our weighted average borrowing rate on the Program was as follows as of:
| September 30, 2024 | December 31, 2023 | ||||||||||
| Weighted average borrowing rate | % | % | |||||||||
Credit Agreement
We have an existing $1.1 billion unsecured revolving credit facility dated as of July 14, 2021 (as amended, the "Credit Agreement"), with JPMorgan Chase Bank, N.A., as administrative agent, and the other lenders party thereto. We had no outstanding borrowings and $1.7 million committed to standby letters of credit as of September 30, 2024. Subject to covenant limitations, $1,098.3 million was available for future borrowings after taking into consideration outstanding borrowings under our Program. The Credit Agreement includes a subfacility for swingline loans up to $65.0 million. The Credit Agreement will expire and outstanding loans will be required to be repaid in July 2026, unless maturity is extended by the lenders pursuant to two one-year extension options that we may request under the Credit Agreement.
15
Our weighted average borrowing rate on the facility was as follows as of:
| September 30, 2024 | December 31, 2023 | ||||||||||
| Weighted average borrowing rate | % | % | |||||||||
The Credit Agreement is guaranteed by certain of our subsidiaries and contains customary covenants applicable to us and our subsidiaries including limitations on indebtedness, liens, dividends, stock repurchases, mergers, and sales of all or substantially all of our assets. In addition, the Credit Agreement contains a financial covenant requiring us to maintain, as of the last day of each fiscal quarter for the four prior fiscal quarters, a Total Net Leverage Ratio of no more than 3.50 to 1.00 (or, at our election, on up to two occasions following a material acquisition, 4.00 to 1.00).
Our Credit Agreement contains customary events of default. These events of default include nonpayment of principal or other amounts, material inaccuracy of representations and warranties, breach of covenants, default on certain other indebtedness or receivables securitizations (cross default), certain voluntary and involuntary bankruptcy events, and the occurrence of a change in control. A cross default under our credit facility could occur if:
• We fail to pay any principal or interest when due on any other indebtedness or receivables securitization exceeding $75.0 million; or
• We are in default in the performance of, or compliance with any term of any other indebtedness in an aggregate principal amount exceeding $75.0 million, or any other condition exists which would give the holders the right to declare such indebtedness due and payable prior to its stated maturity.
Each of our major debt agreements contains provisions by which a default under one agreement causes a default in the others (a cross default). If a cross default under our Credit Agreement or our senior unsecured notes were to occur, it could have a wider impact on our liquidity than might otherwise occur from a default of a single debt instrument or lease commitment.
If any event of default occurs and is continuing, the administrative agent, or lenders with a majority of the aggregate commitments may require the administrative agent to, terminate our right to borrow under our Credit Agreement and accelerate amounts due under our Credit Agreement (except for a bankruptcy event of default, in which case such amounts will automatically become due and payable and the lenders’ commitments will automatically terminate).
We are currently in compliance with all covenant requirements.
Senior Unsecured Notes
In September 2023, we issued $500.0 million of senior unsecured notes, which will mature in September 2028 (the "2028 Notes") with interest being paid semi-annually in March and September at 5.50 %. We issued two series of senior unsecured notes on July 30, 2020 for $300.0 1.35 % and 1.70 % respectively, per annum.
16
11. Comprehensive Income (Loss):
The following table provides information on items reclassified from AOCL to Net income in the accompanying Consolidated Statements of Operations (in millions):
| For the Three Months Ended September 30, | For the Nine Months Ended September 30, | Affected Line Item(s) in the Consolidated Statements of Operations | ||||||||||||||||||||||||||||||
| 2024 | 2023 | 2024 | 2023 | |||||||||||||||||||||||||||||
| (Losses) Gains on Cash Flow Hedges: | ||||||||||||||||||||||||||||||||
| Derivatives contracts | $ | ( | $ | ( | $ | ( | $ | ( | Cost of goods sold; Losses (gains) and other expenses, net | |||||||||||||||||||||||
| Income tax (expense) benefit | ( | ( | Provision for income taxes | |||||||||||||||||||||||||||||
| Net of tax | $ | ( | $ | ( | $ | ( | $ | ( | ||||||||||||||||||||||||
| Defined Benefit Plan items: | ||||||||||||||||||||||||||||||||
| Pension and post-retirement benefit costs | $ | ( | $ | $ | ( | $ | ( | Other expense (income), net | ||||||||||||||||||||||||
| Pension settlements | ( | ( | ( | ( | Pension settlements | |||||||||||||||||||||||||||
| Income tax (expense) benefit | ( | ( | Provision for income taxes | |||||||||||||||||||||||||||||
| Net of tax | $ | ( | $ | ( | $ | ( | $ | ( | ||||||||||||||||||||||||
| Total reclassifications from AOCL | $ | ( | $ | ( | $ | ( | $ | ( | ||||||||||||||||||||||||
The following table provides information on changes in AOCL, by component (net of tax), for the nine months ended September 30, 2024 (in millions):
| (Losses) Gains on Cash Flow Hedges | Share of Equity Method Investments Other Comprehensive Income | Defined Benefit Pension Plan Items | Foreign Currency Translation Adjustments | Total AOCL | ||||||||||||||||||||||||||||
Balance as of December 31, 2023 | $ | ( | $ | $ | ( | $ | ( | $ | ( | |||||||||||||||||||||||
| Other comprehensive income (loss) before reclassifications | ( | ( | ( | ( | ||||||||||||||||||||||||||||
| Amounts reclassified from AOCL | ||||||||||||||||||||||||||||||||
| Net other comprehensive income (loss) | ( | ( | ( | ( | ||||||||||||||||||||||||||||
Balance as of September 30, 2024 | $ | $ | $ | ( | $ | ( | $ | ( | ||||||||||||||||||||||||
12. Fair Value Measurements:
Fair Value Hierarchy
The methodologies used to determine the fair value of our financial assets and liabilities as of September 30, 2024 were the same as those used as of December 31, 2023.
Assets and Liabilities Carried at Fair Value on a Recurring Basis
Derivatives were classified as Level 2 and primarily valued using estimated future cash flows based on observed prices from exchange-traded derivatives. We also considered the counterparty's creditworthiness, or our own creditworthiness, as appropriate. Adjustments were recorded to reflect the risk of credit default, however, they were insignificant to the overall value of the derivatives. Refer to Note 7 for more information related to our derivative instruments.
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Other Fair Value Disclosures
The carrying amounts of Cash and cash equivalents, Short-term investments, Accounts and notes receivable, net, Accounts payable, and Short-term debt approximate fair value due to the short maturities of these instruments. The carrying amount of our Credit Agreement in Long-term debt also approximates fair value due to its variable-rate characteristics.
The fair value of our senior unsecured notes in Long-term debt, classified as Level 2, was based on the amount of future cash flows using current market rates for debt instruments of similar maturities and credit risk. The following table presents their fair value (in millions) as of:
| September 30, 2024 | December 31, 2023 | ||||||||||
| Senior unsecured notes | $ | $ | |||||||||
13. Prior Year Acquisition:
In October 2023, we completed the acquisition of AES, a company dedicated to service and sustainability in the light commercial market. Under the terms of the purchase agreement, a final working capital adjustment was completed in the first quarter of 2024. This working capital adjustment resulted in a $1.8 million reduction in the purchase price. Additionally, during the first quarter of 2024 we made certain purchase price adjustments. The following table details the purchase price adjustments that were made during the first quarter of 2024 (in millions) :
| December 31, 2023 | Adjustment | September 30, 2024 | |||||||||||||||
| Net tangible assets acquired | $ | $ | ( | $ | |||||||||||||
| Intangible assets acquired | |||||||||||||||||
| Goodwill | ( | ||||||||||||||||
| Total investment | $ | $ | ( | $ | |||||||||||||
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Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
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 ended December 31, 2023, 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 two reportable business segments of the HVACR industry, Home Comfort Solutions and Building Climate Solutions. In addition to the two major business segments, Corporate and Other is also reported as a segment. For more detailed 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 stores. The demand for our products and services is seasonal and can be 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 costs of warranty expense, and freight and distribution costs. The principal raw materials used in our manufacturing processes are steel, aluminum and copper. In recent years, pricing volatility for these commodities and related components has impacted us and the HVACR industry in general. We seek to mitigate the impact of certain commodity price volatility through a combination of pricing actions, vendor 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.
Financial Overview
Results for the third quarter of 2024 were driven by overall year-over-year sales and profit increases. Net sales increased 15% and segment profit increased $45 million for our Home Comfort Solutions segment. Net sales increased 15% and segment profit increased $9 million for our Building Climate Solutions segment. Net sales decreased $65 million and segment loss increased $6 million for our Corporate and Other segment. Our European businesses were sold in the fourth quarter of 2023 and generated $65 million in net sales with segment profit of $4 million in the third quarter of 2023.
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Financial Highlights
•Net sales of $1,498 million in the third quarter of 2024 reflected a 10% increase as compared to the same period in 2023.
•Operating income in the third quarter of 2024 increased $117 million to $303 million primarily driven by favorable price and mix and higher sales volumes.
•Net income for the third quarter of 2024 was $239 million.
•Diluted earnings per share was $6.68 per share in the third quarter of 2024 as compared to $3.65 per share in the same period in 2023.
•For the nine months ended September 30, 2024, we returned $119 million to shareholders through dividend payments.
Three Months Ended September 30, 2024 Compared to Three Months Ended September 30, 2023 - Consolidated Results
The following table provides a summary of our financial results, including information presented as a percentage of net sales:
| For the Three Months Ended September 30, | |||||||||||||||||||||||||||||
| Dollars (in millions) | Percent Change Fav/(Unfav) | Percent of Sales | |||||||||||||||||||||||||||
| 2024 | 2023 | 2024 | 2023 | ||||||||||||||||||||||||||
| Net sales | $ | 1,498.1 | $ | 1,366.3 | 9.6 | % | 100.0 | % | 100.0 | % | |||||||||||||||||||
| Cost of goods sold | 1,009.7 | 937.8 | (7.7) | 67.4 | 68.6 | ||||||||||||||||||||||||
| Gross profit | 488.4 | 428.5 | 14.0 | 32.6 | 31.4 | ||||||||||||||||||||||||
| Selling, general and administrative expenses | 184.4 | 178.9 | (3.1) | 12.3 | 13.1 | ||||||||||||||||||||||||
| Losses and other expenses, net | 3.1 | 3.5 | 11.4 | 0.2 | 0.3 | ||||||||||||||||||||||||
| Restructuring charges | — | 0.3 | 100.0 | — | — | ||||||||||||||||||||||||
| Impairment on assets held for sale | — | 63.2 | 100.0 | — | 4.6 | ||||||||||||||||||||||||
| Income from equity method investments | (2.4) | (4.2) | (42.9) | (0.2) | (0.3) | ||||||||||||||||||||||||
| Operating income | $ | 303.3 | $ | 186.8 | 62.4 | % | 20.2 | % | 13.7 | % | |||||||||||||||||||
Net Sales
Net sales for the third quarter of 2024 increased 10% as compared to the same period in 2023. This was primarily due to higher sales volumes of 9%, favorable price and mix of 4%, and an increase in sales volumes of 2% from our AES acquisition, which were partially offset by a 5% reduction in sales due to the fourth quarter 2023 sale of our European businesses.
Gross Profit
Gross profit margins in the third quarter of 2024 increased 120 basis points ("bps") to 32.6% as compared to 31.4% in the same period in 2023. Gross margins increased 250 bps from favorable price and mix, which was partially offset by 70 bps from higher material and product costs, including LIFO, 40 bps from higher freight and distribution costs, and 20 bps from miscellaneous other items.
Selling, General and Administrative Expenses
Selling, general and administrative expenses ("SG&A") increased $6 million to $184 million in the third quarter of 2024 as compared to $179 million in the same period in 2023 primarily due to higher employee related costs including increased incentive compensation, which was partially offset by a $14 million reduction in SG&A expenses from our 2023 divestiture of our European businesses. SG&A decreased 80 bps to 12.3%.
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Losses (gains) and Other Expenses, Net
Losses (gains) and other expenses, net for the third quarter of 2024 and 2023 included the following (in millions):
| For the Three Months Ended September 30, | |||||||||||
| 2024 | 2023 | ||||||||||
Foreign currency exchange losses (gains) | 1.6 | (1.2) | |||||||||
Gain on disposal of fixed assets | (0.7) | (0.2) | |||||||||
Other operating income | (0.5) | (0.1) | |||||||||
Net change in unrealized losses (gains) on unsettled futures contracts | 0.1 | — | |||||||||
Environmental liabilities and special litigation charges | 2.6 | 3.9 | |||||||||
Other items, net | — | 1.1 | |||||||||
| Losses (gains) and other expenses, net (pre-tax) | $ | 3.1 | $ | 3.5 | |||||||
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 are 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 $2 million in the third quarter of 2024 and $4 million in the third quarter of 2023.
Interest Expense, net
Interest expense, net decreased to $9 million in the third quarter of 2024 from $11 million in the same period in 2023 due to lower borrowings.
Income Taxes
Our effective tax rate was 18.7% for the third quarter of 2024 as compared to 25.6% in the same period in 2023. The decrease in rate is primarily due to a discrete adjustment in the third quarter of 2023 related to the 2023 European divestiture.
Third Quarter of 2024 Compared to Third Quarter of 2023 - Results by Segment
Home Comfort Solutions
The following table presents our Home Comfort Solutions segment's net sales and profit for the third quarter of 2024 and 2023 (dollars in millions):
| For the Three Months Ended September 30, | |||||||||||||||||||||||
| 2024 | 2023 | Difference | % Change | ||||||||||||||||||||
| Net sales | $ | 1,032.8 | $ | 896.3 | $ | 136.5 | 15 | % | |||||||||||||||
| Profit | $ | 226.5 | $ | 181.4 | $ | 45.1 | 25 | % | |||||||||||||||
| % of net sales | 21.9 | % | 20.2 | % | |||||||||||||||||||
Net sales increased 15% in the third quarter of 2024 as compared to the same period in 2023 primarily due to higher sales volumes of 11% and favorable price and mix of 4%.
Segment profit in the third quarter of 2024 increased by $45 million as compared to the same period in 2023, primarily due to $35 million from higher sales volumes, and $33 million from favorable price and mix, which were partially offset by $8 million from higher SG&A costs, $7 million in higher costs primarily driven by the upcoming regulatory transition and rising commodity prices, and $8 million from miscellaneous other items.
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Building Climate Solutions
The following table presents our Building Climate Solutions segment's net sales and profit for the third quarter of 2024 and 2023 (dollars in millions):
| For the Three Months Ended September 30, | |||||||||||||||||||||||
| 2024 | 2023 | Difference | % Change | ||||||||||||||||||||
| Net sales | $ | 465.3 | $ | 405.5 | $ | 59.8 | 15 | % | |||||||||||||||
| Profit | $ | 105.9 | $ | 97.3 | $ | 8.6 | 9 | % | |||||||||||||||
| % of net sales | 22.8 | % | 24.0 | % | |||||||||||||||||||
Net sales increased 15% in the third quarter of 2024 as compared to the same period in 2023 primarily due to higher sales volumes of 7%, favorable price and mix of 2%, and a 6% increase in sales volumes from our AES acquisition.
Segment profit in the third quarter of 2024 increased $9 million as compared to the same period in 2023 primarily due to $10 million from favorable price and mix, $8 million from higher sales volumes, $4 million from our acquisition of AES, and $3 million from miscellaneous other items, which were partially offset by $10 million in higher factory inefficiencies, including costs related to the ramp up of our new factory in Mexico, and $6 million in increased SG&A expenses.
Corporate and Other
The following table presents our Corporate and Other segment's net sales and loss for the third quarter of 2024 and 2023 (dollars in millions):
| For the Three Months Ended September 30, | |||||||||||||||||||||||
| 2024 | 2023 | Difference | % Change | ||||||||||||||||||||
| Net sales | $ | — | $ | 64.5 | $ | (64.5) | (100) | % | |||||||||||||||
| Loss | $ | (29.1) | $ | (23.4) | $ | (5.7) | (24) | % | |||||||||||||||
Net sales decreased $65 million and segment loss increased $6 million in the third quarter of 2024 as compared to the same period in 2023. Our European businesses, which were sold in 2023, generated $65 million in net sales and $4 million in segment profit in the third quarter of 2023. Excluding our European businesses, Corporate and Other costs increased $2 million in the third quarter of 2024 as compared to the same period in 2023 primarily due to higher employee related costs.
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Year-to-Date through September 30, 2024 Compared to Year-to-Date through September 30, 2023 - Consolidated Results
The following table provides a summary of our financial results, including information presented as a percentage of net sales:
| For the Nine Months Ended September 30, | |||||||||||||||||||||||||||||
| Dollars (in millions) | Percent Change Fav/(Unfav) | Percent of Sales | |||||||||||||||||||||||||||
| 2024 | 2023 | 2024 | 2023 | ||||||||||||||||||||||||||
| Net sales | $ | 3,996.3 | $ | 3,827.1 | 4.4 | % | 100.0 | % | 100.0 | % | |||||||||||||||||||
| Cost of goods sold | 2,679.7 | 2,634.1 | (1.7) | 67.1 | 68.8 | ||||||||||||||||||||||||
| Gross profit | 1,316.6 | 1,193.0 | 10.4 | 32.9 | 31.2 | ||||||||||||||||||||||||
| Selling, general and administrative expenses | 523.6 | 527.6 | 0.8 | 13.1 | 13.8 | ||||||||||||||||||||||||
| Losses (gains) and other expenses, net | 10.5 | 5.2 | (101.9) | 0.3 | 0.1 | ||||||||||||||||||||||||
| Restructuring charges | — | 0.2 | 100.0 | — | — | ||||||||||||||||||||||||
| Impairment on assets held for sale | — | 63.2 | 100.0 | — | 1.7 | ||||||||||||||||||||||||
| Gain on sale from previous dispositions | (1.6) | — | (100.0) | — | — | ||||||||||||||||||||||||
| Income from equity method investments | (6.1) | (8.0) | (23.8) | (0.2) | (0.2) | ||||||||||||||||||||||||
| Operating income | $ | 790.2 | $ | 604.8 | 30.7 | % | 19.8 | % | 15.8 | % | |||||||||||||||||||
Net Sales
Net sales increased 4% for the nine months ended September 30, 2024 as compared to the same period in 2023. This was primarily due to higher sales volumes of 5%, favorable price and mix of 3%, and an increase in sales volumes of 1% from our AES acquisition, which were partially offset by a 5% reduction in sales due to the fourth quarter 2023 sale of our European businesses.
Gross Profit
Gross profit margins for the nine months ended September 30, 2024 increased 170 bps to 32.9% as compared to 31.2% in the same period in 2023. Gross margins increased 270 bps from higher price and favorable mix, which was partially offset by 50 bps from higher material and product costs, including LIFO, and 50 bps from higher freight and distribution costs.
Selling, General and Administrative Expenses
SG&A decreased $4 million to $524 million for the nine months ended September 30, 2024 as compared to $528 million in the same period in 2023 primarily due to a $45 million reduction in SG&A expenses from our 2023 divestiture of our European businesses, which was partially offset by higher employee-related costs including increased incentive compensation. As a percentage of net sales, SG&A decreased 70 bps to 13.1% from 13.8%.
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Losses (gains) and Other Expenses, Net
Losses (gains) and other expenses, net for the nine months ended September 30, 2024 and 2023 included the following (in millions):
| For the Nine Months Ended September 30, | |||||||||||
| 2024 | 2023 | ||||||||||
| Realized losses on settled future contracts | $ | — | $ | 0.1 | |||||||
| Foreign currency exchange losses (gains) | 4.4 | (4.2) | |||||||||
| Gain on disposal of fixed assets | (1.7) | (1.4) | |||||||||
| Other operating loss (income) | 0.4 | (1.4) | |||||||||
| Net change in unrealized losses (gains) on unsettled futures contracts | 0.1 | (0.1) | |||||||||
| Environmental liabilities and special litigation charges | 7.3 | 11.1 | |||||||||
| Other items, net | — | 1.1 | |||||||||
| Losses (gains) and other expenses, net (pre-tax) | $ | 10.5 | $ | 5.2 | |||||||
Income from Equity Method Investments
Income from equity method investments decreased slightly to $6 million for the nine months ended September 30, 2024 as compared to $8 million in the same period in 2023.
Interest Expense, net
Interest expense, net decreased $7 million for the nine months ended September 30, 2024 to $33 million as compared to $40 million in the same period in 2023 primarily due to lower borrowings.
Income Taxes
Our effective tax rate was 19.3% for the nine months ended September 30, 2024 as compared to 21.0% in the same period in 2023. The decrease in rate was primarily due to a discrete adjustment in the third quarter of 2023 related to the 2023 European divestiture.
Year-to-Date through September 30, 2024 Compared to Year-to-Date through September 30, 2023 - Results by Segment
Home Comfort Solutions
The following table presents our Home Comfort Solutions segment's net sales and profit for the nine months ended September 30, 2024 and 2023 (dollars in millions):
| For the Nine Months Ended September 30, | |||||||||||||||||||||||
| 2024 | 2023 | Difference | % Change | ||||||||||||||||||||
| Net sales | $ | 2,689.7 | $ | 2,513.6 | $ | 176.1 | 7 | % | |||||||||||||||
| Profit | $ | 567.1 | $ | 495.2 | $ | 71.9 | 15 | % | |||||||||||||||
| % of net sales | 21.1 | % | 19.7 | % | |||||||||||||||||||
Net sales increased 7% for the nine months ended September 30, 2024 as compared to the same period in 2023. This was primarily due to higher sales volumes of 4% and favorable price and mix of 3%.
Segment profit for the first nine months of 2024 increased $72 million as compared to the same period in 2023 primarily due to $95 million from favorable price and mix, and $33 million from higher sales volumes, which were partially offset by $23 million from higher SG&A costs, $19 million from higher freight and distribution costs, $5 million in higher costs primarily driven by the upcoming regulatory transition and rising commodity prices, and $9 million from miscellaneous other items.
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Building Climate Solutions
The following table presents our Building Climate Solutions segment's net sales and profit for the nine months ended September 30, 2024 and 2023 (dollars in millions):
| For the Nine Months Ended September 30, | |||||||||||||||||||||||
| 2024 | 2023 | Difference | % Change | ||||||||||||||||||||
| Net sales | $ | 1,306.6 | $ | 1,121.5 | $ | 185.1 | 17 | % | |||||||||||||||
| Profit | $ | 298.1 | $ | 250.3 | $ | 47.8 | 19 | % | |||||||||||||||
| % of net sales | 22.8 | % | 22.3 | % | |||||||||||||||||||
Net sales increased 17% for the nine months ended September 30, 2024 as compared to the same period in 2023. This was primarily due to higher sales volumes of 8%, favorable price and mix of 3%, and a 6% increase in sales volumes from our AES acquisition.
Segment profit for the first nine months of 2024 increased $48 million as compared to the same period in 2023 primarily due to $32 million from higher price and mix, $28 million from higher sales volumes, $13 million from our acquisition of AES, and $2 million from miscellaneous other items, which were partially offset by $17 million from higher factory inefficiencies, which includes costs related to the ramp up of our new facility in Mexico, and $10 million from higher SG&A costs.
Corporate and Other
The following table presents our Corporate and Other segment's net sales and loss for the nine months ended September 30, 2024 and 2023 (dollars in millions):
| For the Nine Months Ended September 30, | |||||||||||||||||||||||
| 2024 | 2023 | Difference | % Change | ||||||||||||||||||||
| Net sales | $ | — | $ | 192.0 | $ | (192.0) | (100) | % | |||||||||||||||
| Loss | $ | (76.6) | $ | (65.2) | $ | (11.4) | (17) | % | |||||||||||||||
Net sales decreased $192 million and segment loss increased $11 million during the nine months ended September 30, 2024 as compared to the same period in 2023. Our European businesses, which were sold in 2023, generated net sales of $192 million and a profit of $6 million in the nine months ended September 30, 2023. Excluding our European businesses, Corporate and Other costs increased $5 million in the first nine months of 2024 as compared to the same period in 2023 primarily due to higher incentive compensation and other employee costs and wage inflation.
Liquidity and Capital Resources
Our working capital and capital expenditure requirements are generally met through internally generated funds, bank lines of credit and a commercial paper program (as described below). Working capital needs are generally greater in the first and second quarters due to the seasonal nature of our business cycle.
Statement of Cash Flows
The following table summarizes our cash flow activity for the nine months ended September 30, 2024 and 2023 (in millions):
| For the Nine Months Ended September 30, | |||||||||||
| 2024 | 2023 | ||||||||||
| Net cash provided by operating activities | $ | 613.3 | $ | 429.9 | |||||||
| Net cash used in investing activities | (108.1) | (124.5) | |||||||||
| Net cash used in financing activities | (327.4) | (215.6) | |||||||||
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Net Cash Provided By Operating Activities - The change in net cash provided by operating activities for the nine months ended September 30, 2024 compared to the net cash provided by operating activities for the same period in 2023 primarily reflects changes in working capital and an increase in net income.
Net Cash Used In Investing Activities - Capital expenditures were $103 million for the nine months ended September 30, 2024 compared to $125 million in the same period of 2023. Capital expenditures in 2024 were related to our Commercial factory in Mexico, the general expansion of manufacturing capacity and equipment, and investments in systems and software to support the overall enterprise.
Net Cash Used In Financing Activities - Net cash used in financing activities for the nine months ended September 30, 2024 increased to $327 million as compared to $216 million in the same period of 2023. The change was primarily due to changes in net borrowings and repayments of long-term debt and repurchase of common stock through our share repurchase program. We returned $119 million to shareholders through dividend payments for the nine months ended September 30, 2024 and $153 million in the same period of 2023.
Debt Position
The following table details our lines of credit and financing arrangements as of September 30, 2024 (in millions):
| Outstanding Borrowings | |||||
| Commercial paper: | $ | — | |||
| Current maturities of long-term debt: | |||||
| Finance lease obligations | $ | 13.2 | |||
| Senior unsecured notes | 300.0 | ||||
| Debt issuance costs | (0.5) | ||||
| Total current maturities of long-term debt | $ | 312.7 | |||
| Long-term debt: | |||||
| Finance lease obligations | $ | 34.6 | |||
| Credit agreement | — | ||||
| Senior unsecured notes | 800.0 | ||||
| Debt issuance costs | (7.0) | ||||
| Total long-term debt | $ | 827.6 | |||
| Total debt | $ | 1,140.3 | |||
Commercial Paper Program
On October 25, 2023, we established a commercial paper program, as a replacement to our Asset Securitization Program which expired in November 2023, pursuant to which we may issue short-term, unsecured commercial paper notes under the exemption from registration contained in Section 4(a)(2) of the Securities Act of 1933, as amended. Amounts available under the Program may be borrowed, repaid, and re-borrowed from time to time, with the aggregate face or principal amount of the CP Notes outstanding under the Program at any time not to exceed $500.0 million. The CP Notes have maturities of up to 397 days from the date of issue and rank pari passu with all of our other unsecured and unsubordinated indebtedness. The net proceeds from issuances of the CP Notes are typically used for general corporate purposes. Our revolving credit facility serves as a liquidity backstop for the repayment of CP Notes outstanding under the Program. There are no CP Notes currently outstanding under the Program as of September 30, 2024.
Credit Agreement
We have an existing $1.1 billion unsecured revolving credit facility dated as of July 14, 2021 (as amended, the "Credit Agreement"), with JPMorgan Chase Bank, N.A., as administrative agent, and the other lenders party thereto. We had no outstanding borrowings and $1.7 million committed to standby letters of credit as of September 30, 2024. Subject to covenant
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limitations, $1,098.3 million was available for future borrowings after taking into consideration outstanding borrowings under our Program. The Credit Agreement includes a subfacility for swingline loans up to $65.0 million. The Credit Agreement will expire and outstanding loans will be required to be repaid in July 2026, unless maturity is extended by the lenders pursuant to two one-year extension options that we may request under the Credit Agreement.
Senior Unsecured Notes
In September 2023, we issued $500.0 million of senior unsecured notes, which will mature in September 2028 (the "2028 Notes") with interest being paid semi-annually in March and September at 5.50%. We issued two series of senior unsecured notes on July 30, 2020 for $300.0 million each, which will mature on August 1, 2025 (the "2025 Notes") and August 1, 2027 (the "2027 Notes," and collectively with the 2025 Notes and the 2028 Notes, the "Notes") with interest being paid semi-annually in February and August at 1.35% and 1.70% respectively, per annum.
In the event of a credit rating downgrade below investment grade resulting from a change of control, holders of our senior unsecured notes will have the right to require us to repurchase all or a portion of the senior unsecured notes at a repurchase price equal to 101% of the principal amount of the notes, plus accrued and unpaid interest, if any. All the Notes are guaranteed, on a senior unsecured basis, by the Guarantor Subsidiaries. The indenture governing the Notes contains covenants that, among other things, limit our ability and the ability of the Guarantor Subsidiaries to: create or incur certain liens; enter into certain sale and leaseback transactions; and enter into certain mergers, consolidations and transfers of substantially all of our assets. The indenture also contains a cross default provision which is triggered if we default on other debt of at least $75.0 million in principal which is then accelerated, and such acceleration is not rescinded within 30 days of the notice date. As of September 30, 2024, we believe we were in compliance with all covenant requirements.
Financial Leverage
We periodically review our capital structure to ensure the appropriate levels of leverage and liquidity. We may access the capital markets, as necessary, based on business needs and to take advantage of favorable interest rate environments or other market conditions. We also evaluate our debt-to-capital and debt-to-EBITDA ratios to determine, among other considerations, the appropriate targets for capital expenditures and share repurchases under our share repurchase programs. Our debt-to-total-capital ratio decreased to 60% as of September 30, 2024 from 82% as of December 31, 2023.
As of September 30, 2024, our senior credit ratings were Baa2 with a stable outlook, and BBB with a stable outlook, by Moody's Investors Service, Inc. ("Moody's") and Standard & Poor's Rating Group ("S&P"), respectively. The security ratings are not a recommendation to buy, sell or hold securities and may be subject to revision or withdrawal at any time by the assigning rating agency. Each rating should be evaluated independently of any other rating. Our goal is to maintain investment grade ratings from Moody's and S&P to help ensure the capital markets remain available to us.
Liquidity
We believe our cash and cash equivalents of $243.1 million, future cash generated from operations and available borrowing capacity are sufficient to fund operations, planned capital expenditures, future contractual obligations, potential share repurchases and dividends, and other needs in the foreseeable future. Included in our cash and cash equivalents of $243.1 million as of September 30, 2024 was $25 million of cash held in foreign locations. Our cash held in foreign locations is used for investing and operating activities in those locations, and we generally do not have the need or intent to repatriate those funds to the United States. An actual repatriation in the future from our non-U.S. subsidiaries could be subject to foreign withholding taxes and U.S. state taxes.
Guarantees Related to Our Debt Obligations
Our senior unsecured notes were issued by Lennox International Inc. ("Parent") and are unconditionally guaranteed by the Guarantor Subsidiaries. The Guarantor Subsidiaries are 100% owned and consolidated, all guarantees are full and unconditional, and all guarantees are joint and several.
The following combined Parent and Guarantor Subsidiaries financial information is presented as of September 30, 2024 and December 31, 2023 and for the three and nine months ended September 30, 2024 (in millions):
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| September 30, 2024 | December 31, 2023 | ||||||||||
| Current assets | $ | 1,646.7 | $ | 1,291.0 | |||||||
| Non-current assets | 6,734.9 | 5,737.1 | |||||||||
| Current liabilities | 1,082.7 | 843.3 | |||||||||
| Non-current liabilities | 1,216.8 | 1,477.3 | |||||||||
| Amounts due to non-guarantor subsidiaries | (581.7) | (472.3) | |||||||||
| For the Three Months Ended September 30, 2024 | For the Nine Months Ended September 30, 2024 | ||||||||||
| Net Sales | $ | 1,470.4 | $ | 3,936.3 | |||||||
| Gross Profit | 403.4 | 1,065.2 | |||||||||
| Net Income | 521.1 | 1,366.9 | |||||||||
Off Balance Sheet Arrangements
We have no off-balance sheet arrangements that we believe may have a material current or future effect on our financial condition, liquidity or results of operations.
Commitments, Contingencies, and Guarantees
For information regarding our commitments, contingencies, and guarantees, see Note 4 in the Notes to the Consolidated Financial Statements.
Recent Accounting Pronouncements
There were no recent accounting pronouncements that are expected to have a material impact on our financial statements and disclosures.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
For quantitative and qualitative disclosures about market risk affecting LII, see "Quantitative and Qualitative Disclosures About Market Risk" in Item 7A of Part II of our Annual Report on Form 10-K for the fiscal year ended December 31, 2023. Our exposure to market risk has not changed materially since December 31, 2023.
Item 4. Controls and Procedures
Disclosure Controls and Procedures
As required by Rule 13a-15 under the Exchange Act, we carried out an evaluation, under the supervision and with the participation of our current management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report. There are inherent limitations to the effectiveness of any system of disclosure controls and procedures, including the possibility of human error and circumvention or overriding of the controls and procedures. Accordingly, even effective disclosure controls and procedures can only provide reasonable assurance of achieving their control objectives. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that, as of September 30, 2024, our disclosure controls and procedures were effective to provide reasonable assurance that information required to be disclosed by us in the reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the applicable rules and forms, and that such information is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure.
Changes in Internal Control Over Financial Reporting
There were no changes in our internal control over financial reporting that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Part II - Other Information
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Item 1. Legal Proceedings
We are involved in a number of claims and lawsuits incidental to the operation of our businesses. Where appropriate, insurance coverages are maintained and estimated costs are recorded for such claims and lawsuits. It is management's opinion that none of these claims or lawsuits will have a material adverse effect, individually or in the aggregate, on our financial position, results of operations or cash flows.
Item 1A. Risk Factors
In addition to the other information set forth in this Quarterly Report on Form 10-Q, you should carefully consider the risk factors discussed in Part I, “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2023, which could materially affect our business, financial condition or results of operations. There have been no material changes to our risk factors from those disclosed in our Annual Report on Form 10-K for the year ended December 31, 2023.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
In the third quarter of 2024, we purchased shares of our common stock as follows:
Total Number of Shares Purchased | Average Price Paid per Share (including fees) | Total Number of Shares Purchased As Part of Publicly Announced Plans | Approximate Dollar Value of Shares that may yet be Purchased under our Share Repurchase Plans (in millions) (1) | ||||||||||||||||||||
| July 1 through July 31 | — | $ | — | — | $ | 546.0 | |||||||||||||||||
| August 1 through August 31 | 3,000 | $ | 579.50 | 3,000 | $ | 544.3 | |||||||||||||||||
| September 1 through September 30 | 20,000 | $ | 588.77 | 20,000 | $ | 532.5 | |||||||||||||||||
| 23,000 | 23,000 | ||||||||||||||||||||||
(1) Since the inception of the Company’s share repurchase program in 2008, the Board has authorized share repurchases in an amount not to exceed $4.0 billion (the "Share Repurchase Plans"). The Share Repurchase Plans do not have an expiration date. See Note 5 in the Notes to the Consolidated Financial Statement for further details.
Item 5. Other Information
Rule 10b5-1 Plan Elections
During the quarter ended September 30, 2024, none of our directors or officers adopted, modified, or terminated any Rule 10b5-1 trading arrangement or non-Rule 10b5-1 trading arrangement, as such terms are defined in Item 408(a) of Regulation S-K
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Item 6. Exhibits
| 3.1 | |||||
| 3.2 | |||||
| 4.1 | |||||
| 4.2 | |||||
| 4.3 | |||||
| 4.5 | |||||
| 4.6 | |||||
| 4.7 | |||||
| 4.8 | |||||
| 22.1 | |||||
| 31.1 | |||||
| 31.2 | |||||
| 32.1 | |||||
| 101 | INS Inline XBRL Instance Document | ||||
| 101 | SCH Inline XBRL Taxonomy Extension Schema Document | ||||
| 101 | CAL Inline XBRL Taxonomy Extension Calculation Linkbase Document | ||||
| 101 | LAB Inline XBRL Taxonomy Extension Label Linkbase Document | ||||
| 101 | PRE Inline XBRL Taxonomy Extension Presentation Linkbase Document | ||||
| 101 | DEF Inline XBRL Taxonomy Extension Definition Linkbase Document | ||||
| 104 | Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101) | ||||
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
LENNOX INTERNATIONAL INC.
By: /s/ Michael P. Quenzer
Michael P. Quenzer
Chief Financial Officer
(on behalf of registrant and as principal financial officer)
Date: October 23, 2024
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