Document
false--12-31Q120190001069202YesfalseLarge Accelerated Filerfalse3.03.57785000007851000006300000720000000.010.0120000000020000000087170197871701970.010.01250000002500000000004731224847609360 0001069202 2019-01-01 2019-03-31 0001069202 2019-04-12 0001069202 2019-03-31 0001069202 2018-12-31 0001069202 2018-01-01 2018-03-31 0001069202 us-gaap:RetainedEarningsMember 2019-03-31 0001069202 us-gaap:AdditionalPaidInCapitalMember 2018-12-31 0001069202 us-gaap:TreasuryStockMember 2019-01-01 2019-03-31 0001069202 us-gaap:TreasuryStockMember 2018-12-31 0001069202 us-gaap:CommonStockMember 2019-03-31 0001069202 us-gaap:AdditionalPaidInCapitalMember 2019-01-01 2019-03-31 0001069202 us-gaap:AdditionalPaidInCapitalMember 2019-03-31 0001069202 us-gaap:TreasuryStockMember 2019-03-31 0001069202 us-gaap:AccumulatedOtherComprehensiveIncomeMember 2019-01-01 2019-03-31 0001069202 us-gaap:RetainedEarningsMember 2019-01-01 2019-03-31 0001069202 us-gaap:RetainedEarningsMember 2018-12-31 0001069202 us-gaap:AccumulatedOtherComprehensiveIncomeMember 2018-12-31 0001069202 us-gaap:CommonStockMember 2018-12-31 0001069202 us-gaap:AccumulatedOtherComprehensiveIncomeMember 2019-03-31 0001069202 us-gaap:AdditionalPaidInCapitalMember 2018-03-31 0001069202 us-gaap:AccumulatedOtherComprehensiveIncomeMember 2018-01-01 2018-03-31 0001069202 us-gaap:RetainedEarningsMember 2018-01-01 2018-03-31 0001069202 us-gaap:TreasuryStockMember 2018-01-01 2018-03-31 0001069202 us-gaap:TreasuryStockMember 2017-12-31 0001069202 us-gaap:AdditionalPaidInCapitalMember 2017-12-31 0001069202 us-gaap:TreasuryStockMember 2018-03-31 0001069202 us-gaap:AdditionalPaidInCapitalMember 2018-01-01 2018-03-31 0001069202 us-gaap:AccumulatedOtherComprehensiveIncomeMember 2017-12-31 0001069202 us-gaap:AccumulatedOtherComprehensiveIncomeMember 2018-03-31 0001069202 us-gaap:RetainedEarningsMember 2017-12-31 0001069202 us-gaap:CommonStockMember 2017-12-31 0001069202 us-gaap:CommonStockMember 2018-03-31 0001069202 2018-03-31 0001069202 2017-12-31 0001069202 us-gaap:RetainedEarningsMember 2018-03-31 0001069202 country:CA lii:RefrigerationMember 2019-01-01 2019-03-31 0001069202 lii:InternationalMember lii:CommercialHeatingAndCoolingMember 2019-01-01 2019-03-31 0001069202 lii:CommercialHeatingAndCoolingMember 2019-01-01 2019-03-31 0001069202 country:US 2019-01-01 2019-03-31 0001069202 lii:InternationalMember 2019-01-01 2019-03-31 0001069202 country:US lii:ResidentialHeatingAndCoolingMember 2019-01-01 2019-03-31 0001069202 country:CA lii:ResidentialHeatingAndCoolingMember 2019-01-01 2019-03-31 0001069202 lii:ResidentialHeatingAndCoolingMember 2019-01-01 2019-03-31 0001069202 country:US lii:CommercialHeatingAndCoolingMember 2019-01-01 2019-03-31 0001069202 country:CA lii:CommercialHeatingAndCoolingMember 2019-01-01 2019-03-31 0001069202 lii:RefrigerationMember 2019-01-01 2019-03-31 0001069202 lii:InternationalMember lii:RefrigerationMember 2019-01-01 2019-03-31 0001069202 lii:InternationalMember lii:ResidentialHeatingAndCoolingMember 2019-01-01 2019-03-31 0001069202 country:US lii:RefrigerationMember 2019-01-01 2019-03-31 0001069202 country:CA 2019-01-01 2019-03-31 0001069202 lii:ResidentialHeatingAndCoolingMember 2018-01-01 2018-03-31 0001069202 country:US lii:ResidentialHeatingAndCoolingMember 2018-01-01 2018-03-31 0001069202 country:CA lii:RefrigerationMember 2018-01-01 2018-03-31 0001069202 lii:InternationalMember lii:RefrigerationMember 2018-01-01 2018-03-31 0001069202 country:US lii:RefrigerationMember 2018-01-01 2018-03-31 0001069202 lii:InternationalMember 2018-01-01 2018-03-31 0001069202 country:CA lii:ResidentialHeatingAndCoolingMember 2018-01-01 2018-03-31 0001069202 lii:InternationalMember lii:ResidentialHeatingAndCoolingMember 2018-01-01 2018-03-31 0001069202 country:CA 2018-01-01 2018-03-31 0001069202 lii:InternationalMember lii:CommercialHeatingAndCoolingMember 2018-01-01 2018-03-31 0001069202 lii:CommercialHeatingAndCoolingMember 2018-01-01 2018-03-31 0001069202 country:US 2018-01-01 2018-03-31 0001069202 lii:RefrigerationMember 2018-01-01 2018-03-31 0001069202 country:US lii:CommercialHeatingAndCoolingMember 2018-01-01 2018-03-31 0001069202 country:CA lii:CommercialHeatingAndCoolingMember 2018-01-01 2018-03-31 0001069202 lii:CommercialHeatingAndCoolingMember lii:CommercialHeatingAndCoolingMember 2019-01-01 2019-03-31 0001069202 us-gaap:SalesChannelDirectlyToConsumerMember lii:ResidentialHeatingAndCoolingMember 2018-01-01 2018-03-31 0001069202 lii:EquipmentSalesMember lii:CommercialHeatingAndCoolingMember 2018-01-01 2018-03-31 0001069202 us-gaap:SalesChannelThroughIntermediaryMember lii:ResidentialHeatingAndCoolingMember 2018-01-01 2018-03-31 0001069202 us-gaap:SalesChannelDirectlyToConsumerMember lii:ResidentialHeatingAndCoolingMember 2019-01-01 2019-03-31 0001069202 lii:EquipmentSalesMember lii:CommercialHeatingAndCoolingMember 2019-01-01 2019-03-31 0001069202 lii:CommercialHeatingAndCoolingMember lii:CommercialHeatingAndCoolingMember 2018-01-01 2018-03-31 0001069202 us-gaap:SalesChannelThroughIntermediaryMember lii:ResidentialHeatingAndCoolingMember 2019-01-01 2019-03-31 0001069202 lii:RefrigerationMember 2019-03-31 0001069202 lii:ResidentialHeatingAndCoolingMember 2018-12-31 0001069202 lii:ResidentialHeatingAndCoolingMember 2019-03-31 0001069202 lii:CommercialHeatingAndCoolingMember 2019-03-31 0001069202 lii:CommercialHeatingAndCoolingMember 2018-12-31 0001069202 lii:RefrigerationMember 2018-12-31 0001069202 us-gaap:CashFlowHedgingMember 2019-01-01 2019-03-31 0001069202 us-gaap:CashFlowHedgingMember 2018-12-31 0001069202 us-gaap:CashFlowHedgingMember 2019-03-31 0001069202 2019-03-01 2019-03-01 0001069202 2019-03-01 0001069202 us-gaap:RevolvingCreditFacilityMember 2018-12-31 0001069202 us-gaap:RevolvingCreditFacilityMember 2019-03-31 0001069202 us-gaap:SeniorNotesMember 2019-01-01 2019-03-31 0001069202 lii:DomesticCreditFacilityMember us-gaap:MediumTermNotesMember 2019-01-23 0001069202 us-gaap:SeniorNotesMember 2016-11-01 0001069202 us-gaap:ForeignLineOfCreditMember 2018-01-01 2018-03-31 0001069202 lii:DomesticCreditFacilityMember us-gaap:MediumTermNotesMember 2019-03-31 0001069202 srt:MaximumMember 2019-03-31 0001069202 us-gaap:ForeignLineOfCreditMember 2019-01-01 2019-03-31 0001069202 us-gaap:LineOfCreditMember 2019-01-01 2019-03-31 0001069202 srt:MinimumMember 2019-03-31 0001069202 lii:DomesticCreditFacilityMember us-gaap:MediumTermNotesMember 2019-01-01 2019-03-31 0001069202 lii:SubfacilityforSwinglineLoansMember 2019-03-31 0001069202 us-gaap:RevolvingCreditFacilityMember 2014-11-13 0001069202 lii:DomesticCreditFacilityMember us-gaap:MediumTermNotesMember 2014-11-13 0001069202 us-gaap:DomesticLineOfCreditMember 2018-12-31 0001069202 us-gaap:SeniorNotesMember 2018-12-31 0001069202 lii:AssetSecuritizationMember 2019-03-31 0001069202 us-gaap:SeniorNotesMember 2019-03-31 0001069202 us-gaap:DomesticLineOfCreditMember 2019-03-31 0001069202 lii:AssetSecuritizationMember 2018-12-31 0001069202 srt:MaximumMember us-gaap:RevolvingCreditFacilityMember 2019-01-01 2019-03-31 0001069202 srt:MinimumMember us-gaap:RevolvingCreditFacilityMember 2019-01-01 2019-03-31 0001069202 us-gaap:PensionPlansDefinedBenefitMember 2019-01-01 2019-03-31 0001069202 us-gaap:PensionPlansDefinedBenefitMember 2018-01-01 2018-03-31 0001069202 country:US us-gaap:PensionPlansDefinedBenefitMember 2017-01-01 2017-03-31 0001069202 country:US us-gaap:PensionPlansDefinedBenefitMember 2018-01-01 2018-03-31 0001069202 country:US us-gaap:PensionPlansDefinedBenefitMember 2019-01-01 2019-03-31 0001069202 2018-03-16 0001069202 us-gaap:AccumulatedDefinedBenefitPlansAdjustmentMember 2019-01-01 2019-03-31 0001069202 us-gaap:AccumulatedNetGainLossFromDesignatedOrQualifyingCashFlowHedgesMember 2018-12-31 0001069202 us-gaap:AccumulatedNetGainLossFromDesignatedOrQualifyingCashFlowHedgesMember 2019-01-01 2019-03-31 0001069202 us-gaap:AccumulatedTranslationAdjustmentMember 2019-03-31 0001069202 us-gaap:AccumulatedTranslationAdjustmentMember 2019-01-01 2019-03-31 0001069202 us-gaap:AccumulatedNetGainLossFromDesignatedOrQualifyingCashFlowHedgesMember 2019-03-31 0001069202 us-gaap:AccumulatedTranslationAdjustmentMember 2018-12-31 0001069202 us-gaap:AccumulatedDefinedBenefitPlansAdjustmentMember 2019-03-31 0001069202 us-gaap:AccumulatedDefinedBenefitPlansAdjustmentMember 2018-12-31 0001069202 us-gaap:ReclassificationOutOfAccumulatedOtherComprehensiveIncomeMember us-gaap:AccumulatedDefinedBenefitPlansAdjustmentMember 2018-01-01 2018-03-31 0001069202 us-gaap:CommodityContractMember us-gaap:ReclassificationOutOfAccumulatedOtherComprehensiveIncomeMember us-gaap:AccumulatedNetGainLossFromDesignatedOrQualifyingCashFlowHedgesMember 2019-01-01 2019-03-31 0001069202 us-gaap:ReclassificationOutOfAccumulatedOtherComprehensiveIncomeMember us-gaap:AccumulatedNetGainLossFromDesignatedOrQualifyingCashFlowHedgesMember 2019-01-01 2019-03-31 0001069202 us-gaap:ReclassificationOutOfAccumulatedOtherComprehensiveIncomeMember us-gaap:AccumulatedNetGainLossFromDesignatedOrQualifyingCashFlowHedgesMember 2018-01-01 2018-03-31 0001069202 us-gaap:ReclassificationOutOfAccumulatedOtherComprehensiveIncomeMember 2018-01-01 2018-03-31 0001069202 us-gaap:ReclassificationOutOfAccumulatedOtherComprehensiveIncomeMember 2019-01-01 2019-03-31 0001069202 us-gaap:ReclassificationOutOfAccumulatedOtherComprehensiveIncomeMember us-gaap:AccumulatedDefinedBenefitPlansAdjustmentMember 2019-01-01 2019-03-31 0001069202 us-gaap:CommodityContractMember us-gaap:ReclassificationOutOfAccumulatedOtherComprehensiveIncomeMember us-gaap:AccumulatedNetGainLossFromDesignatedOrQualifyingCashFlowHedgesMember 2018-01-01 2018-03-31 0001069202 us-gaap:AccumulatedTranslationAdjustmentMember 2018-01-01 2018-03-31 0001069202 us-gaap:CorporateAndOtherMember 2019-01-01 2019-03-31 0001069202 us-gaap:CorporateAndOtherMember 2019-03-31 0001069202 us-gaap:ContractTerminationMember 2019-01-01 2019-03-31 0001069202 us-gaap:ContractTerminationMember 2019-03-31 0001069202 us-gaap:OtherRestructuringMember 2019-01-01 2019-03-31 0001069202 us-gaap:EmployeeSeveranceMember 2019-03-31 0001069202 us-gaap:ReducedDepreciationMember 2019-01-01 2019-03-31 0001069202 us-gaap:ReducedDepreciationMember 2019-03-31 0001069202 us-gaap:OtherRestructuringMember 2019-03-31 0001069202 us-gaap:EmployeeSeveranceMember 2019-01-01 2019-03-31 0001069202 us-gaap:DiscontinuedOperationsDisposedOfBySaleMember lii:AustraliaNewZealandandAsiaBusinessesMember 2018-01-01 2018-03-31 0001069202 us-gaap:DiscontinuedOperationsDisposedOfBySaleMember lii:AustraliaNewZealandandAsiaBusinessesMember 2018-01-01 2018-12-31 0001069202 us-gaap:DiscontinuedOperationsDisposedOfBySaleMember lii:AustraliaNewZealandandAsiaBusinessesMember 2018-04-01 2018-06-30 0001069202 us-gaap:DiscontinuedOperationsDisposedOfBySaleMember lii:BrazilBusinessMember 2018-01-01 2018-12-31 0001069202 us-gaap:DiscontinuedOperationsDisposedOfBySaleMember lii:MilperraPropertyMember 2018-01-01 2018-12-31 0001069202 us-gaap:DiscontinuedOperationsDisposedOfBySaleMember lii:KysorWarrenBusinessMemberDomain 2019-01-01 2019-03-31 0001069202 us-gaap:CorporateAndOtherMember 2018-12-31 0001069202 us-gaap:CorporateAndOtherMember 2018-01-01 2018-03-31 0001069202 us-gaap:UnsecuredDebtMember us-gaap:FairValueInputsLevel2Member 2018-12-31 0001069202 us-gaap:UnsecuredDebtMember us-gaap:FairValueInputsLevel2Member 2019-03-31 0001069202 srt:GuarantorSubsidiariesMember 2019-03-31 0001069202 srt:ParentCompanyMember 2019-03-31 0001069202 srt:ConsolidationEliminationsMember 2019-03-31 0001069202 srt:NonGuarantorSubsidiariesMember 2019-03-31 0001069202 srt:ParentCompanyMember 2018-12-31 0001069202 srt:GuarantorSubsidiariesMember 2018-12-31 0001069202 srt:NonGuarantorSubsidiariesMember 2018-12-31 0001069202 srt:ConsolidationEliminationsMember 2018-12-31 0001069202 srt:ConsolidationEliminationsMember 2019-01-01 2019-03-31 0001069202 srt:NonGuarantorSubsidiariesMember 2019-01-01 2019-03-31 0001069202 srt:ParentCompanyMember 2019-01-01 2019-03-31 0001069202 srt:GuarantorSubsidiariesMember 2019-01-01 2019-03-31 0001069202 srt:ParentCompanyMember 2018-01-01 2018-03-31 0001069202 srt:NonGuarantorSubsidiariesMember 2018-01-01 2018-03-31 0001069202 srt:GuarantorSubsidiariesMember 2018-01-01 2018-03-31 0001069202 srt:ConsolidationEliminationsMember 2018-01-01 2018-03-31 0001069202 srt:ParentCompanyMember 2018-03-31 0001069202 srt:ConsolidationEliminationsMember 2018-03-31 0001069202 srt:NonGuarantorSubsidiariesMember 2017-12-31 0001069202 srt:GuarantorSubsidiariesMember 2017-12-31 0001069202 srt:ConsolidationEliminationsMember 2017-12-31 0001069202 srt:ParentCompanyMember 2017-12-31 0001069202 srt:GuarantorSubsidiariesMember 2018-03-31 0001069202 srt:NonGuarantorSubsidiariesMember 2018-03-31 0001069202 us-gaap:SubsequentEventMember 2019-04-03 xbrli:pure utreg:sqft xbrli:shares iso4217:USD xbrli:shares iso4217:USD lii:Segment
 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
_________________________________________________
FORM 10-Q
 _________________________________________________


QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED March 31, 2019        
Commission file number 001-15149
 _________________________________________________
LENNOX INTERNATIONAL INC.
Incorporated pursuant to the laws of the State of Delaware
_________________________________________________ 
Internal Revenue Service Employer Identification No. 42-0991521
2140 LAKE PARK BLVD., RICHARDSON, TEXAS, 75080
(972-497-5000)
_________________________________________________ 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  [X]    No  [ ]
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  [X]    No  [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company” and “emerging growth company" in Rule 12b-2 of the Exchange Act.
Large Accelerated Filer
[X]
 
Accelerated Filer
[ ]
Non-Accelerated Filer
[ ]
 
Smaller Reporting Company
[ ]
 
 
 
Emerging growth company
[ ]
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [ ]
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  [ ]    No  [X]
As of April 12, 2019, the number of shares outstanding of the registrant’s common stock, par value $.01 per share, was 39,217,666.

 





LENNOX INTERNATIONAL INC.
FORM 10-Q
For the three months ended March 31, 2019

INDEX
 
 
Page
Part I
 
 
 
 
Consolidated Balance Sheets - March 31, 2019 (Unaudited) and December 31, 2018
 
Consolidated Statements of Operations (Unaudited) - Three Months Ended March 31, 2019 and 2018
 
Consolidated Statements of Comprehensive Income (Unaudited) - Three Months Ended March 31, 2019 and 2018
 
Consolidated Statements of Stockholders' (Deficit) Equity (Unaudited) - Three Months Ended March 31, 2019 and 2018
 
Consolidated Statements of Cash Flows (Unaudited) - Three Months Ended March 31, 2019 and 2018
 
 
 
 
Part II
 
 
 
 
 

i



Part I - Financial Information
Item 1. Financial Statements
LENNOX INTERNATIONAL INC. AND SUBSIDIARIES
Consolidated Balance Sheets

(Amounts in millions, except shares and par values)
As of March 31, 2019
 
As of December 31, 2018
 
(Unaudited)
 
 
ASSETS
 
 
 
Current Assets:
 
 
 
Cash and cash equivalents
$
31.7

 
$
46.3

Accounts and notes receivable, net of allowances of $7.2 and $6.3 in 2019 and 2018, respectively
502.6

 
472.7

Inventories, net
600.1

 
509.8

Other assets
86.5

 
60.6

Total current assets
1,220.9

 
1,089.4

Property, plant and equipment, net of accumulated depreciation of $785.1 and $778.5 in 2019 and 2018, respectively
411.7

 
408.3

Right-of-use assets from operating leases
170.1

 

Goodwill
186.5

 
186.6

Deferred income taxes
48.5

 
67.0

Other assets, net
68.0

 
65.9

Total assets
$
2,105.7

 
$
1,817.2

 
 
 
 
LIABILITIES AND STOCKHOLDERS’ DEFICIT
 
 
 
Current Liabilities:
 
 
 
Current maturities of long-term debt
$
237.6

 
$
300.8

Current operating lease liabilities
48.1

 

Accounts payable
411.9

 
433.3

Accrued expenses
219.8

 
272.3

Income taxes payable

 
2.1

Total current liabilities
917.4

 
1,008.5

Long-term debt
1,059.0

 
740.5

Long-term operating lease liabilities
122.6

 

Pensions
82.3

 
82.8

Other liabilities
129.2

 
135.0

Total liabilities
2,310.5

 
1,966.8

Commitments and contingencies


 


Stockholders' deficit:
 
 
 
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
1,079.4

 
1,078.8

Retained earnings
1,898.7

 
1,855.0

Accumulated other comprehensive loss
(180.2
)
 
(188.8
)
Treasury stock, at cost, shares 47,609,360 and 47,312,248 shares for 2019 and 2018, respectively
(3,003.6
)
 
(2,895.5
)
Total stockholders' deficit
(204.8
)
 
(149.6
)
Total liabilities and stockholders' deficit
$
2,105.7

 
$
1,817.2

The accompanying notes are an integral part of these consolidated financial statements.

1



LENNOX INTERNATIONAL INC. AND SUBSIDIARIES
Consolidated Statements of Operations
(Unaudited)

(Amounts in millions, except per share data)
For the Three Months Ended March 31,
 
2019
 
2018
Net sales
$
790.3

 
$
834.8

Cost of goods sold
588.7

 
611.6

Gross profit
201.6

 
223.2

Operating Expenses:
 
 
 
Selling, general and administrative expenses
145.8

 
155.2

Losses (gains) and other expenses, net
1.1

 
7.3

Restructuring charges
0.5

 
0.9

Loss on sale of business
8.5

 

Loss on assets held for sale

 
10.3

Insurance proceeds for lost profits
(39.5
)
 

Gain from insurance recoveries, net of losses incurred
(6.9
)
 

Income from equity method investments
(2.6
)
 
(3.5
)
Operating income
94.7

 
53.0

Interest expense, net
10.9

 
8.4

Other expense (income), net
0.8

 
0.6

Income from continuing operations before income taxes
83.0

 
44.0

Provision for income taxes
13.6

 
6.1

Income from continuing operations
69.4

 
37.9

Discontinued Operations:
 
 
 
Loss from discontinued operations before income taxes
(0.1
)
 

Income tax benefit

 

Loss from discontinued operations
(0.1
)
 

Net income
$
69.3

 
$
37.9

 
 
 
 
Earnings per share – Basic:
 
 
 
Income from continuing operations
$
1.75

 
$
0.91

Loss from discontinued operations

 

Net income
$
1.75

 
$
0.91

Earnings per share – Diluted:
 
 
 
Income from continuing operations
$
1.73

 
$
0.90

Loss from discontinued operations

 

Net income
$
1.73

 
$
0.90

 
 
 
 
Weighted Average Number of Shares Outstanding - Basic
39.7

 
41.5

Weighted Average Number of Shares Outstanding - Diluted
40.1

 
42.1

 
 
 
 

The accompanying notes are an integral part of these consolidated financial statements.

2



LENNOX INTERNATIONAL INC. AND SUBSIDIARIES
Consolidated Statements of Comprehensive Income
(Unaudited)

(Amounts in millions)
For the Three Months Ended March 31,
 
2019
 
2018
Net income
$
69.3

 
$
37.9

Other comprehensive income:

 

Foreign currency translation adjustments
0.5

 
7.9

Reclassification of foreign currency translation adjustments into earnings
2.1

 

Net change in pension and post-retirement liabilities
(2.3
)
 
(2.3
)
Reclassification of pension and post-retirement benefit losses into earnings
2.0

 
2.3

Change in available-for-sale marketable equity securities

 
(1.8
)
Net change in fair value of cash flow hedges
6.2

 
(4.3
)
Reclassification of cash flow hedge losses (gains) into earnings
2.4

 
(4.6
)
Other comprehensive income (loss) before income taxes
10.9

 
(2.8
)
Income tax expense
(2.3
)
 
(21.1
)
Other comprehensive income (loss), net of tax
8.6

 
(23.9
)
Comprehensive income
$
77.9

 
$
14.0

The accompanying notes are an integral part of these consolidated financial statements.

3



LENNOX INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' (DEFICIT) EQUITY
For the Three Months ended March 31, 2018 and 2019 (Unaudited)
(In millions, except per share data)

 
 
Common Stock Issued
 
Additional Paid-In Capital
 
Retained Earnings
 
Accumulated Other Comprehensive Loss
 
Treasury Stock at Cost
 
Total Stockholders' (Deficit) Equity
 
 
 
 
Shares
 
Amount
 
Balance as of December 31, 2017
 
$
0.9

 
$
1,061.5

 
$
1,575.9

 
$
(157.4
)
 
45.4

 
$
(2,430.8
)
 
$
50.1

Cumulative effect adjustment upon adoption of new accounting standards (ASU 2016-16), (ASU 2018-02), (ASU2016-1) and (ASC 606)

 

 

 
16.9

 
(24.5
)
 

 

 
(7.6
)
Net income
 

 

 
37.9

 

 

 

 
37.9

Dividends, $0.51 per share
 

 

 
(21.1
)
 

 

 

 
(21.1
)
Foreign currency translation adjustments
 

 

 

 
7.9

 

 

 
7.9

Pension and post-retirement liability changes, net of tax expense of $0.1
 

 

 

 
(0.2
)
 

 

 
(0.2
)
Stock-based compensation expense
 

 
4.8

 

 

 

 

 
4.8

Change in cash flow hedges, net of tax benefit of $1.7
 

 

 

 
(7.1
)
 

 

 
(7.1
)
Treasury shares reissued for common stock
 

 
(7.1
)
 

 

 
(0.3
)
 
7.9

 
0.8

Treasury stock purchases
 

 
(22.5
)
 

 

 
0.8

 
(145.6
)
 
(168.1
)
Balance as of March 31, 2018
 
$
0.9

 
$
1,036.7

 
$
1,609.6

 
$
(181.3
)
 
45.9

 
$
(2,568.5
)
 
$
(102.6
)


 
 
Common Stock Issued
 
Additional Paid-In Capital
 
Retained Earnings
 
Accumulated Other Comprehensive Loss
 
Treasury Stock at Cost
 
Total Stockholders' (Deficit) Equity
 
 
 
 
Shares
 
Amount
 
Balance as of December 31, 2018
 
$
0.9

 
$
1,078.8

 
$
1,855.0

 
$
(188.8
)
 
47.3

 
$
(2,895.5
)
 
$
(149.6
)
Effect on adjustment upon adoption of new accounting standards (ASC 842)


 

 

 
(0.3
)
 

 

 

 
(0.3
)
Net income
 

 

 
69.3

 

 

 

 
69.3

Dividends, $0.64 per share
 

 

 
(25.3
)
 

 

 

 
(25.3
)
Foreign currency translation adjustments
 

 

 

 
2.6

 

 

 
2.6

Pension and post-retirement liability changes
 

 

 

 
(0.2
)
 

 

 
(0.2
)
Stock-based compensation expense
 

 
5.2

 

 

 

 

 
5.2

Change in cash flow hedges, net of tax expense of $2.3
 

 

 

 
6.2

 

 

 
6.2

Treasury shares reissued for common stock
 

 
(4.6
)
 

 

 
(0.2
)
 
5.4

 
0.8

Treasury stock purchases
 

 

 

 

 
0.5

 
(113.5
)
 
(113.5
)
Balance as of March 31, 2019
 
$
0.9

 
$
1,079.4

 
$
1,898.7

 
$
(180.2
)
 
$
47.6

 
$
(3,003.6
)
 
$
(204.8
)

4



LENNOX INTERNATIONAL INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Unaudited)
(Amounts in millions)
For the Three Months Ended March 31,
 
2019
 
2018
Cash flows from operating activities:
 
 
 
Net income
$
69.3

 
$
37.9

Adjustments to reconcile net income to net cash used in operating activities:
 
 
 
Loss on sale of business
8.5

 

Gain from insurance recoveries, net of losses incurred
(6.9
)
 

Income from equity method investments
(2.6
)
 
(3.5
)
Loss on assets held for sale

 
10.3

Restructuring charges, net of cash paid
0.3

 
0.6

Provision for bad debts
1.6

 
1.9

Unrealized losses (gains) on derivative contracts
(0.6
)
 
(0.1
)
Stock-based compensation expense
5.2

 
4.8

Depreciation and amortization
18.2

 
16.6

Deferred income taxes
15.5

 
(2.1
)
Pension expense
2.0

 
2.1

Pension contributions
(2.5
)
 
(0.7
)
Other items, net
0.2

 
0.1

Changes in assets and liabilities, net of effects of divestitures:
 
 
 
Accounts and notes receivable
(62.7
)
 
(44.5
)
Inventories
(120.9
)
 
(124.3
)
Other current assets
4.5

 
(0.7
)
Accounts payable
(1.7
)
 
77.5

Accrued expenses
(35.0
)
 
(35.2
)
Income taxes payable and receivable
(34.1
)
 
(22.3
)
Other
0.7

 
(1.9
)
Net cash used in operating activities
(141.0
)
 
(83.5
)
Cash flows from investing activities:
 
 
 
Proceeds from the disposal of property, plant and equipment
0.3

 
0.1

Purchases of property, plant and equipment
(37.2
)
 
(22.7
)
Net proceeds from sale of business
43.6

 

  Insurance recoveries received for property damage incurred from natural disaster
6.9

 

Net cash provided by (used in) investing activities
13.6

 
(22.6
)
Cash flows from financing activities:
 
 
 
Short-term borrowings, net

 
(0.1
)
Asset securitization payments
(43.5
)
 
(51.0
)
Long-term debt payments
(31.7
)
 
(10.2
)
Long-term debt borrowings
3.3

 

Borrowings from credit facility
844.5

 
790.0

Payments on credit facility
(525.5
)
 
(444.1
)
Proceeds from employee stock purchases
0.8

 
0.8

Repurchases of common stock
(100.0
)
 
(150.0
)
Repurchases of common stock to satisfy employee withholding tax obligations
(13.5
)
 
(18.1
)
Cash dividends paid
(25.5
)
 
(21.3
)
Net cash provided by financing activities
108.9

 
96.0

Decrease in cash and cash equivalents
(18.5
)
 
(10.1
)
Effect of exchange rates on cash and cash equivalents
3.9

 
(1.0
)
Cash and cash equivalents, beginning of period
46.3

 
68.2

Cash and cash equivalents, end of period
$
31.7

 
$
57.1

 
 
 
 
Supplemental disclosures of cash flow information:
 
 
 
Interest paid
$
8.4

 
$
6.0

Income taxes paid (net of refunds)
$
32.0

 
$
32.7

Insurance recoveries received
$
76.0

 
$

The accompanying notes are an integral part of these consolidated financial statements.

5



LENNOX INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. General:

References in this Quarterly Report on Form 10-Q to "we," "our," "us," "LII," or the "Company" refer to Lennox International Inc. and its subsidiaries, unless the context requires otherwise.

Basis of Presentation

The accompanying unaudited Consolidated Balance Sheet as of March 31, 2019, the accompanying unaudited Consolidated Statements of Operations for the three months ended March 31, 2019 and 2018, the accompanying unaudited Consolidated Statements of Comprehensive Income for the three months ended March 31, 2019 and 2018, the accompanying unaudited Consolidated Statements of Stockholders' (Deficit) Equity for the three months ended March 31, 2019 and 2018, and the accompanying unaudited Consolidated Statements of Cash Flows for the three months ended March 31, 2019 and 2018 should be read in conjunction with our audited consolidated financial statements and footnotes included in our Annual Report on Form 10-K for the year ended December 31, 2018. The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. The accompanying consolidated financial statements contain all material adjustments, consisting principally of normal recurring adjustments, necessary for a fair presentation of our financial position, results of operations and cash flows. Certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to applicable rules and regulations, although we believe that the disclosures herein are adequate to make the information presented not misleading. The operating results for the interim periods are not necessarily indicative of the results that may be expected for a full year.

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.

Use of Estimates

The preparation of financial statements requires us to make estimates and assumptions about future events. These estimates and the underlying assumptions affect the amounts of assets and liabilities reported, disclosures about contingent assets and liabilities, and reported amounts of revenues and expenses. Such estimates include the valuation of accounts receivable, inventories, goodwill, intangible assets and other long-lived assets, contingencies, guarantee obligations, indemnifications, and assumptions used in the calculation of income taxes, pension and post-retirement medical benefits, and stock-based compensation, among others. These estimates and assumptions are based on our best estimates and judgment.

We evaluate these estimates and assumptions on an ongoing basis using historical experience and other factors, including the current economic environment. We believe these estimates and assumptions to be reasonable under the circumstances and will adjust such estimates and assumptions when facts and circumstances dictate. Volatile equity, foreign currency and commodity markets combine to increase the uncertainty inherent in such estimates and assumptions. Future events and their effects cannot be determined with precision and actual results could differ significantly from these estimates. Changes in these estimates will be reflected in the financial statements in future periods.

Reclassifications

Certain amounts have been reclassified from the prior year presentation to conform to the current year presentation.

Recently Adopted Accounting Guidance

In August 2018, the SEC issued Release No. 33-10532 that amends and clarifies certain financial reporting requirements. The principal change to our financial reporting is the inclusion of the annual disclosure requirement of changes in stockholders’ equity in Rule 3-04 of Regulation S-X to interim periods.

We also adopted other new accounting standards during the first quarter of 2019. The impact of these additional standards are discussed in their respective Notes to the Consolidated Financial Statements.

6




2. 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 16 for additional description of our reportable business segments and the products and services being sold in each segment.
 
For the Three Months Ended March 31, 2019
Primary Geographic Markets
Residential Heating & Cooling
 
Commercial Heating & Cooling
 
Refrigeration
 
Consolidated
United States
$
433.2

 
$
157.3

 
$
91.6

 
$
682.1

Canada
32.4

 
15.9

 
0.7

 
49.0

International

 
0.1

 
59.1

 
59.2

Total
$
465.6

 
173.3

 
151.4

 
790.3


 
For the Three Months Ended March 31, 2018
Primary Geographic Markets
Residential Heating & Cooling
 
Commercial Heating & Cooling
 
Refrigeration
 
Consolidated
United States
$
423.5

 
$
162.3

 
$
95.7

 
$
681.5

Canada
30.2

 
16.7

 
0.9

 
47.8

International

 
0.1

 
105.4

 
105.5

Total
$
453.7

 
179.1

 
202.0

 
834.8



Residential Heating & Cooling - 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 segment, for the three months ended March 31, 2019 and 2018, direct sales represent approximately $334.7 million and $339.5 million of revenues, and sales to independent distributors represent approximately $130.9 million and $114.2 million of revenues, respectively. Given the nature of our business, customer product orders are fulfilled at a point in time and not over a period of time.

Commercial Heating & Cooling - 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. Revenue for the products sold is recognized at a point in time when control transfers to the customer, which is generally at time of shipment. Lennox National Account Services provides installation, service and preventive maintenance for HVAC national account customers in the United States and Canada. 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 segment, for the three months ended March 31, 2019 and 2018, equipment sales represent approximately $143.5 million and $151.5 million of revenues while $29.8 million and $27.6 million of our revenue is generated from our service business, respectively.

Refrigeration - We manufacture and market equipment for the global 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. In Europe, we also manufacture and sell unitary heating and cooling products and applied systems. Revenue for the products sold is $148.9 million and $200.0 million for the three months ended March 31, 2019 and 2018 and and is recognized at a point in time when control transfers to the customer, which is generally at time of shipment. The remaining segment revenue relates to service revenues related to start-up and commissioning activities.

Variable Consideration - We engage in cooperative advertising, customer rebate, and other miscellaneous programs that result in payments or credits being issued to our customers. We record these customer discounts and incentives as a reduction of sales when the sales are recorded. For certain cooperative advertising programs, we also receive an identifiable benefit (goods or

7



services) in exchange for the consideration given, and, accordingly, record a ratable portion of the expenditure to Selling, general and administrative (“SG&A”) expenses. All other advertising, promotions and marketing costs are expensed as incurred.

Other Judgments and Assumptions - We apply the practical expedient in ASC 606-10-50-14 and do not disclose information about remaining performance obligations that have original expected durations of one year or less. Applying the practical expedient in ASC 340-40-25-4, we recognize the incremental costs of obtaining contracts as an expense when incurred if the amortization period of the assets that we otherwise would have recognized is one year or less. These costs are included in SG&A expenses. ASC 606-10-32-18 allows us to not adjust the amount of consideration to be received in a contract for any significant financing component if we expect to receive payment within twelve months of transfer of control of goods or services. We have elected this expedient as we expect all consideration to be received in one year or less at contract inception. We have also elected not to provide the remaining performance obligations disclosures related to service contracts in accordance with the practical expedient in ASC 606-10-55-18. We recognize revenue in the amount to which the entity has a right to invoice and have adopted this election to not provide the remaining performance obligations related to service contracts.

Contract Assets - We do not have material amounts of contract assets since revenue is recognized as control of goods is transferred or as services are performed. There are a small number of installation services that may occur over a period of time, but that period of time is generally very short in duration and right of payment does not exist until the installation is completed. Any contract assets that may arise are recorded in Other assets, net in our Consolidated Balance Sheet.

Contract Liabilities - Our contract liabilities consist of advance payments and deferred revenue. Our contract liabilities are reported in a net position on a contract-by-contract basis at the end of each reporting period. We classify advance payments and deferred revenue as current or noncurrent based on the timing of when we expect to recognize revenue. Generally all contract liabilities are expected to be recognized within one year and are included in Accrued expenses in our Consolidated Balance Sheet. The noncurrent portion of deferred revenue is included in Other liabilities in our Consolidated Balance Sheet.

Net contract assets (liabilities) consisted of the following:
 
March 31, 2019
 
December 31, 2018
 
$ Change
 
% Change
Contract assets

 
$
2.5

 
$
(2.5
)
 
(100.0
)%
Contract liabilities - current
(5.4
)
 
(13.0
)
 
7.6

 
(58.5
)%
Contract liabilities - noncurrent
(5.7
)
 
(5.9
)
 
0.2

 
(3.4
)%
Total
$
(11.1
)
 
$
(16.4
)
 
$
5.3

 
 


For the three months ended March 31, 2019 and 2018, we recognized revenue of $1.1 million and $1.6 million related to our contract liabilities at January 1, 2019 and 2018, respectively. Impairment losses recognized in our receivables and contract assets were de minimis in the first quarter of 2019 and 2018.

3. Inventories:
     
The components of inventories are as follows (in millions):
 
As of March 31, 2019
 
As of December 31, 2018
Finished goods
$
429.2

 
$
330.5

Work in process
5.4

 
10.0

Raw materials and parts
225.3

 
229.1

Subtotal
659.9

 
569.6

Excess of current cost over last-in, first-out cost
(59.8
)
 
(59.8
)
Total inventories, net
$
600.1

 
$
509.8




8



4. Goodwill:
The changes in the carrying amount of goodwill for the first three months of 2019, in total and by segment, are summarized in the table below (in millions):
 
Balance at December 31, 2018
 
Goodwill Reallocation (1)
 
Changes in foreign currency translation rates
 
Balance at March 31, 2019
Residential Heating & Cooling
$
26.1

 
$

 
$

 
$
26.1

Commercial Heating & Cooling
61.4

 
(0.3
)
 

 
61.1

Refrigeration
99.1

 
0.3

 
(0.1
)
 
99.3

Total Goodwill
$
186.6

 
$


$
(0.1
)
 
$
186.5


(1) In 2019, we reorganized our external financial reporting structure by moving our European Commercial HVAC business from our Commercial segment to our Refrigeration segment as we will manage both our commercial HVAC and refrigeration operations in Europe together. See Note 16 for additional information.
    
We perform our annual goodwill impairment test in the fourth quarter of each year. We continue to 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.

5. 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 January 2020 and August 2020, respectively. 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 18 months 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 March 31, 2019
 
As of December 31, 2018
Unrealized losses on unsettled contracts
$

 
$
8.4

Income tax benefit

 
(2.2
)
Losses (gains) included in AOCL, net of tax (1)
$

 
$
6.2


(1) Assuming commodity and foreign currency prices remain constant, we expect to reclassify $1.2 million of derivative losses into earnings within the next 12 months.


9



6. Income Taxes:

As of March 31, 2019, we had no unrecognized tax benefits.

We are currently under examination for our U.S. federal income taxes under the Internal Revenue Service's Compliance Assurance Program for 2018 and are subject to examination by numerous other taxing authorities in the U.S. and in foreign jurisdictions. 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 2011.

Since January 1, 2019, several states have enacted legislation effective for tax years beginning on or after January 1, 2019, including changes to tax rates and apportionment methods. The impact of these changes is immaterial.

7. Commitments and Contingencies:

Leases
  
On February 25, 2016, the FASB issued ASU No. 2016-02, Leases (ASC 842). We adopted ASC 842 on January 1, 2019, using the effective date method, with the cumulative-effect adjustment to the opening balance sheet of retained earnings as of the effective date. The financial results reported in periods prior to January 1, 2019 are unchanged. Upon adoption, we recognized almost all of our leases greater than one year in duration on the balance sheet as right-of-use assets and lease liabilities. For income statement purposes, the FASB retained a dual model, requiring leases to be classified as either operating or finance. Classification is based on criteria that are largely similar to those applied in current lease accounting, but without explicit bright lines. We have made certain assumptions in judgments when applying ASC 842. Those judgments of most significance are as follows:
We elected the package of practical expedients available for transition which allow us to not reassess:
Whether expired or existing contracts contain leases under the new definition of a lease;
Lease classification for expired or existing leases; and
Whether previously capitalized initial direct costs would qualify for capitalization under ASC 842.
We did not elect to use hindsight for transition when considering judgments and estimates such as assessments of lessee options to extend or terminate a lease or purchase the underlying asset.
We did not elect to reassess whether land easements meet the definition of a lease if they were not accounted for as leases under the former rules.
For all asset classes, we elected to not recognize a right-of-use asset and lease liability for leases with a term of 12 months or less.
For all asset classes, we elected to 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.

We determine if an arrangement is a lease at inception. Operating leases are included in our Consolidated Balance Sheet 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 Sheet. 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 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, which is the date we enter the leased space and begin to make improvements in preparation for its intended use. 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 tenors (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.


10



We lease certain real and personal property under non-cancelable operating leases. Approximately 80% of our right-of-use assets and lease liabilities relate to our leases of real estate with the remaining amounts relating to our leases of IT equipment, fleet vehicles and manufacturing and distribution equipment.

The components of lease expense were as follows (in millions):
 
For the Three Months Ended March 31, 2019
Finance lease cost:
 
Amortization of right-of-use assets
$
1.5

Interest on lease liabilities
0.2

Operating lease cost
14.8

Short-term lease cost
1.1

Variable lease cost
4.5

Total lease cost
$
22.1

 
 
Other information
 
Cash paid for amounts included in the measurement lease liabilities:
 
Operating cash flows from finance leases
$
1.0

Operating cash flows from operating leases
$
12.7

Financing cash flows from finance leases
$
1.6

Right-of-use assets obtained in exchange for new finance lease liabilities
$
3.2

Right-of-use assets obtained in exchange for new operating lease liabilities
$
16.6

 
As of March 31, 2019
Finance lease right-of-use assets
22.7

Operating lease right-of-use assets
170.1

Finance lease liability, current
6.3

Finance lease liability, non-current
22.3

Operating lease liability, current
48.1

Operating lease liability, non-current
122.6

Weighted-average remaining lease term - finance leases
5.46 years

Weighted-average remaining lease term - operating leases
4.37 years

Weighted-average discount rate - finance leases
2.23
%
Weighted-average discount rate – operating leases
4.05
%


Future annual minimum lease payments and capital lease commitments as of March 31, 2019 were as follows (in millions):

 
Operating Leases
 
Finance Leases
2019 (excluding the three months ended March 31, 2019)
$
41.5

 
$
5.5

2020
48.4

 
6.3

2021
35.7

 
4.5

2022
24.5

 
2.7

2023
18.7

 
1.3

2024 and thereafter
18.6

 
12.9

Total minimum lease payments
$
187.4

 
$
33.2

Less imputed interest
(16.7
)
 
(4.6
)
Lease liability
$
170.7

 
$
28.6




11



The Company adopted ASU 2016-02 on January 1, 2019 as noted above, and as required, the following disclosure is provided for periods prior to adoption. Future annual minimum lease payments and capital lease commitments as of December 31, 2018 were as follows (in millions):
 
Operating Leases
 
Capital Leases
2019
$
47.4

 
$
6.6

2020
38.4

 
5.4

2021
27.2

 
3.8

2022
17.9

 
2.1

2023
12.7

 
0.9

Thereafter
16.1

 
12.8

Total minimum lease payments
$
159.7

 
$
31.6

Less amount representing interest
 
 
2.1

Present value of minimum payments
 
 
$
29.5



On March 1, 2019, we entered into an agreement with a financial institution to renew the lease of our corporate headquarters in Richardson, Texas for a term of five years through March 1, 2024. The leased property consists of an office building of approximately 192,000 square feet, land and related improvements. During the lease term, we are obligated to pay base rent in quarterly installments, payable in arrears. At the end of the lease term, we must do one of the following: (i) purchase the property for $41.2 million; (ii) vacate the property and return it in good condition; (iii) arrange for the sale of the leased property to a third party; or (iv) renew the lease under mutually agreeable terms. If we elect to sell the property to a third party and the sales proceeds are less than the lease balance of $41.2 million, we must pay any such deficit to the financial institution. Any such deficit payment cannot exceed 87% of the lease balance. The headquarters lease is classified as an operating lease and its future annual minimum lease payments are included in the table above.

Our obligations under the headquarters lease are secured by a pledge of our interest in the leased property. The lease contains customary lease covenants and events of default as well as events of default if (i) indebtedness of $75 million or more is not paid when due, (ii) there is a change of control or (iii) we fail to comply with certain covenants incorporated from our existing credit facility agreement. We believe we were in compliance with these financial covenants as of March 31, 2019.

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 assumptions, as necessary.

Liabilities for estimated product warranty costs related to continuing operations are included in the following captions on the accompanying Consolidated Balance Sheets (in millions):
 
As of March 31, 2019
 
As of December 31, 2018
Accrued expenses
$
37.4

 
$
37.9

Other liabilities
76.4

 
73.7

Total warranty liability
$
113.8

 
$
111.6


The changes in product warranty liabilities related to continuing operations for the three months ended March 31, 2019 were as follows (in millions):
Total warranty liability as of December 31, 2018
$
111.6

Warranty claims paid
(5.9
)
Changes resulting from issuance of new warranties
8.7

Warranty liability from divestitures
(0.6
)
Total warranty liability as of March 31, 2019
$
113.8



12



We have incurred, and will likely continue to incur, product costs not covered by insurance or our suppliers’ warranties, which are not included in the tables immediately above. Also, to satisfy our customers and protect our brands, we have repaired or replaced installed products experiencing quality-related issues, and will likely continue such repairs and replacements. Liabilities for such quality related issues are not material.

Litigation

We are involved in a number of claims and lawsuits incident 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.

Some of these claims and lawsuits allege personal injury or health problems resulting from exposure to asbestos that was integrated into certain of our products. We have never manufactured asbestos and have not incorporated asbestos-containing components into our products for several decades. A substantial majority of these asbestos-related claims have been covered by insurance or other forms of indemnity or have been dismissed without payment. The remainder of our closed cases have been resolved for amounts that are not material, individually or in the aggregate. Our defense costs for asbestos-related claims are generally covered by insurance; however, our insurance coverage for settlements and judgments for asbestos-related claims varies depending on several factors and are subject to policy limits, so we may have greater financial exposure for future settlements and judgments. For the three months ended March 31, 2019 and 2018, expense for asbestos-related litigation was $1.4 million and $2.1 million, respectively, net of probable insurance recoveries, for known and future asbestos-related litigation and is recorded in Losses (gains) and other expenses, net in the Consolidated Statements of Operations.

It is management's opinion that none of these claims or lawsuits or any threatened litigation will have a material adverse effect on our financial condition, results of operations or cash flows. Claims and lawsuits, however, involve uncertainties and it is possible that their eventual outcome could adversely affect our results of operations for a particular period.

Marshalltown Tornado and Recovery

On July 19, 2018, our manufacturing facility in Marshalltown, Iowa was severely damaged by a tornado. We have insurance for the repair or replacement of our assets that suffered damage or loss, and we are working closely with our insurance carriers and claims adjusters to ascertain the amount of insurance recoveries due to us as a result of the damage and loss we suffered. Our insurance policies also provide business interruption coverage, including lost profits, and reimbursement for other expenses and costs that have been incurred relating to the damages and losses suffered. These costs and insurance recoveries are shown in Gain from insurance recoveries, net of losses incurred and Insurance proceeds for lost profits in the Consolidated Statements of Operations.

The following table summarizes the Gain from insurance recoveries, net of losses incurred:

(Amounts in millions)
For the Three months Ended March 31, 2019
Insurance recoveries received
$
76.0

Less losses and expenses incurred:
 
Site clean-up and remediation
17.1

Factory inefficiencies due to lower productivity
4.0

Other
8.5

Total losses and expenses
$
29.6

Total gain from insurance recoveries
$
46.4

Presentation in the Consolidated Statements of Operations:
 
Gain from insurance recoveries, net of losses incurred
$
(6.9
)
Insurance proceeds for lost profits
$
(39.5
)



13



8. 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 March 31, 2019
 
As of December 31, 2018
Current maturities of long-term debt:
 
 
 
Asset Securitization Program
$
224.5

 
$
268.0

Finance lease obligations
$
6.3

 
$
3.5

Domestic credit facility
7.5

 
30.0

Debt issuance costs
(0.7
)
 
(0.7
)
    Total current maturities of long-term debt
$
237.6

 
$
300.8

Long-Term Debt:
 
 
 
Finance lease obligations
22.3

 
15.7

Domestic credit facility
689.5

 
378.0

Senior unsecured notes
350.0

 
350.0

Debt issuance costs
(2.8
)
 
(3.2
)
Total long-term debt
$
1,059.0

 
$
740.5

Total debt
$
1,296.6

 
$
1,041.3



Short-Term Debt

Foreign Obligations

Through several of our foreign subsidiaries, we have facilities available to assist in financing seasonal borrowing needs for our foreign locations. We had no outstanding foreign obligations as of March 31, 2019 or December 31, 2018. There were no proceeds or repayments on these facilities for the three months ended March 31, 2019. Proceeds and repayments on these facilities were $0.3 million and $0.4 million, respectively, for the three months ended March 31, 2018.

Asset Securitization Program

Under the Asset Securitization Program (“ASP”), we are eligible to sell beneficial interests in a portion of our trade accounts receivable to a financial institution for cash. The ASP contains a provision whereby we retain the right to repurchase all of the outstanding beneficial interests transferred. As a result of the repurchase right, the transfer of the receivables under the ASP is not accounted for as a sale. Accordingly, the cash received from the transfer of the beneficial interests in our trade accounts receivable is reflected as secured borrowings in the accompanying Consolidated Balance Sheets and proceeds received are included in Cash flows from financing activities in the accompanying Consolidated Statements of Cash Flows. Our continued involvement with the transferred assets includes servicing, collection and administration of the transferred beneficial interests. The accounts receivable securitized under the ASP are high-quality domestic customer accounts that have not aged significantly. The receivables represented by the retained interest that we service are exposed to the risk of loss for any uncollectible amounts in the pool of receivables transferred under the ASP. The ASP will expire in November 2019 and we intend to renew the ASP prior to its expiration.

The ASP provides for a maximum securitization amount ranging from $225.0 million to $380.0 million, depending on the period. The maximum capacity under the ASP is the lesser of the maximum securitization amount or 100% of the net pool balance less allowances, as defined by the ASP. Eligibility for securitization is limited based on the amount and quality of the qualifying accounts receivable and is calculated monthly. The eligible amounts available and beneficial interests sold were as follows (in millions):
 
As of March 31, 2019
 
As of December 31, 2018
Eligible amount available under the ASP on qualified accounts receivable
$
225.0

 
$
290.0

Less: Beneficial interest transferred
(224.5
)
 
(268.0
)
Remaining amount available
$
0.5

 
$
22.0



14



We pay certain discount fees to use the ASP and to have the facility available to us. These fees relate to both the used and unused portions of the securitization. The used fee is based on the beneficial interest sold and calculated on either the average LIBOR rate or floating commercial paper rate determined by the purchaser of the beneficial interest, plus a program fee of 0.70%. The average rates as of March 31, 2019 and December 31, 2018 were 3.26% and 3.27%, respectively. The unused fee is based on 101% of the maximum available amount less the beneficial interest transferred and is calculated at a 0.35% fixed rate throughout the term of the agreement. We recorded these fees in Interest expense, net in the accompanying Consolidated Statements of Operations.

The ASP contains certain restrictive covenants relating to the quality of our accounts receivable and cross-default provisions with our Sixth Amended and Restated Credit Facility Agreement ("Domestic Credit Facility"), senior unsecured notes and any other indebtedness we may have over $75.0 million. The administrative agent under the ASP is also a participant in our Domestic Credit Facility. The participating financial institutions have investment grade credit ratings. As of March 31, 2019, we believe we were in compliance with all covenant requirements.

Long-Term Debt

Domestic Credit Facility

On January 22, 2019, we amended our credit facility with the Domestic Credit Facility to provide for a $350.0 million increase in revolving commitments. The Domestic Credit Facility currently consists of a $1,000.0 million unsecured revolving credit facility and a $190.0 million unsecured term loan that matures in August 2021 (the "Maturity Date"). Under our Domestic Credit Facility, we had outstanding borrowings of $697.0 million, of which $160.0 million was the term loan balance, as well as $2.5 million committed to standby letters of credit as of March 31, 2019. Subject to covenant limitations, $460.5 million was available for future borrowings. The unsecured term loan also matures on the Maturity Date and requires quarterly principal repayments of $7.5 million. The revolving credit facility includes a subfacility for swingline loans of up to $65.0 million.

Our weighted average borrowing rate on the facility was as follows:
 
As of March 31, 2019
 
As of December 31, 2018
Weighted average borrowing rate
3.68
%
 
3.74
%

Our Domestic Credit Facility is guaranteed by certain of our subsidiaries and contains financial covenants relating to leverage and interest coverage. Other covenants contained in the Domestic Credit Facility restrict, among other things, certain mergers, asset dispositions, guarantees, debt, liens, and affiliate transactions. The financial covenants require us to maintain a defined Consolidated Indebtedness to Adjusted EBITDA Ratio and a Cash Flow (defined as EBITDA minus capital expenditures) to Net Interest Expense Ratio. The required ratios under our Domestic Credit Facility are detailed below:
 
Consolidated Indebtedness to Adjusted EBITDA Ratio no greater than
3.5 : 1.0
Cash Flow to Net Interest Expense Ratio no less than
3.0 : 1.0

Our Domestic Credit Facility contains customary events of default. These events of default include nonpayment of principal or interest, breach of covenants or other restrictions or requirements, default on certain other indebtedness or receivables securitizations (cross default), and bankruptcy. A cross default under our Domestic Credit Facility could occur if:
We fail to pay any principal or interest when due on any other indebtedness or receivables securitization of at least $75.0 million; or
We are in default in the performance of, or compliance with any term of any other indebtedness or receivables securitization in an aggregate principal amount of at least $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 the Domestic Credit Facility, our senior unsecured notes, our lease of our corporate headquarters in Richardson, Texas (recorded as an operating lease), or our ASP 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, lenders with a majority of the aggregate commitments may require the administrative agent to terminate our right to borrow under our Domestic Credit Facility and accelerate amounts due under our Domestic Credit Facility (except for a bankruptcy event of default, in which case such amounts will automatically become due

15



and payable and the lenders’ commitments will automatically terminate). As of March 31, 2019, we believe we were in compliance with all covenant requirements.

Senior Unsecured Notes

We issued $350.0 million of senior unsecured notes in November 2016 (the "Notes") which will mature on November 15, 2023 with interest being paid on May 15 and November 15 at 3.00% per annum semiannually. The Notes are guaranteed, on a senior unsecured basis, by each of our domestic subsidiaries that guarantee indebtedness under our Domestic Credit Facility. The indenture governing the Notes contains covenants that, among other things, limit our ability and the ability of the subsidiary guarantors 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 March 31, 2019, we believe we were in compliance with all covenant requirements.

9. Pension and Post-Retirement Benefit Plans:

On March 10, 2017, the FASB issued ASU 2017-07, Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost. ASU 2017-07 changes the income statement presentation of defined benefit plan expense by requiring separation between operating expense (service cost component) and non-operating expense (all other components, including interest cost, amortization of prior service cost, curtailments and settlements, etc.). The operating expense component is reported with similar compensation costs while the non-operating components are reported in Other expense (income), net in the Statement of Operations. In addition, only the service cost component is eligible for capitalization as part of an asset such as inventory or property, plant and equipment. We elected the practical expedient to use the prior year's disclosure as a basis for the retroactive adoption of the ASU. The ASU did not have a material impact on our financial results.
The components of net periodic benefit cost were as follows (in millions):
 
For the Three Months Ended March 31,
 
2019
 
2018
 
Pension Benefits
Service cost
$
1.2

 
$
1.4

Interest cost
3.5

 
3.1

Expected return on plan assets
(4.7
)
 
(4.7
)
Recognized actuarial loss
2.0

 
2.3

Net periodic benefit cost
$
2.0


$
2.1


In January 2018, we reduced our estimated long-term rate of return on plan assets for U.S. pension plans from 7.5% to 6.5%. A 25 basis point decrease in the long-term rate of return will result in a $0.7 million increase in net periodic benefit cost for U.S. pension plans.
10. 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. 2010 Incentive Plan, as amended and restated. 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 March 31,
 
2019
 
2018
Stock-based compensation expense (1)
$
5.2

 
$
4.8

(1) All expense was recorded in our Corporate and Other business segment.


16



11. Stock Repurchases:

Our Board of Directors has authorized a total of $2.5 billion to repurchase shares of our common stock (collectively referred to as the "Share Repurchase Plans"), including a $500 million share repurchase authorization in March 2018. Under this program, we may 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. The repurchase program does not require the repurchase of a specific number of shares and may be terminated at any time. As of March 31, 2019, $346 million of shares may be repurchased under the Share Repurchase Plans.

We repurchased 0.4 million shares for $100.0 million from open market transactions during the first quarter of 2019.

We also repurchased 0.1 million shares for $13.5 million during the three months ended March 31, 2019 from employees who surrendered shares to satisfy minimum tax withholding obligations upon the exercise of long-term incentive awards.

12. Comprehensive Income (Loss):

The following table provides information on items not reclassified in their entirety from AOCL to Net income in the accompanying Consolidated Statements of Operations (in millions):
 
 
For the Three Months Ended March 31,
 
Affected Line Item(s) in the Consolidated Statements of Operations
 
 
2019
 
2018
 
Gains/(Losses) on cash flow hedges:
 
 
 
 
 
 
Commodity futures contracts/foreign exchange forward contracts
 
$
(2.4
)
 
$
4.6

 
Cost of goods sold
Income tax benefit (expense)
 
0.6

 
(1.1
)
 
Provision for income taxes
Net of tax
 
$
(1.8
)
 
$
3.5

 
 
 
 
 
 
 
 
 
Defined Benefit Plan items:
 
 
 
 
 
 
Pension and post-retirement benefit costs
 
$
(2.0
)
 
$
(2.3
)
 
Cost of goods sold; Selling, general and administrative expenses
Income tax benefit
 
0.5

 
0.6

 
Provision for income taxes
Net of tax
 
$
(1.5
)
 
$
(1.7
)
 
 
 
 
 
 
 
 
 
Foreign Currency Translation Adjustments:
 
 
 
 
 
 
Foreign currency adjustments upon sale of business
 
$
(2.1
)
 
$

 
Loss (gain), net on sale of businesses and related property
Net of tax
 
$
(2.1
)
 
$

 
 
 
 
 
 
 
 
 
Total reclassifications from AOCL
 
$
(5.4
)
 
$
1.8

 
 



17



The following table provides information on changes in AOCL, by component (net of tax), for the three months ended March 31, 2019 (in millions):
 
 
Gains (Losses) on Cash Flow Hedges
 
Defined Benefit Pension Plan Items
 
Foreign Currency Translation Adjustments
 
Total AOCL
Balance as of December 31, 2018
 
$
(6.2
)
 
$
(154.5
)
 
$
(28.1
)
 
$
(188.8
)
Other comprehensive income (loss) before reclassifications
 
4.4

 
(1.7
)
 
0.5

 
3.2

Amounts reclassified from AOCL
 
1.8

 
1.5

 
2.1

 
5.4

Net other comprehensive (loss) income
 
6.2

 
(0.2
)
 
2.6

 
8.6

Balance as of March 31, 2019
 
$

 
$
(154.7
)
 
$
(25.5
)
 
$
(180.2
)


13. Restructuring Charges:

We record restructuring charges associated with management-approved restructuring plans when we reorganize or remove duplicative headcount or infrastructure within our businesses. Restructuring charges include severance costs to eliminate a specified number of employees, infrastructure charges to vacate facilities and consolidate operations, contract cancellation costs and other related activities. The timing of associated cash payments is dependent upon the type of restructuring charge and can extend over a multi-year period. Restructuring charges are not included in our calculation of segment profit (loss), as more fully explained in Note 16.

Restructuring Activities in 2019

Information regarding the restructuring charges for all ongoing activities is presented in the following table (in millions):
 
 
Charges Incurred in 2019
 
Charges Incurred to Date
 
Total Charges Expected to be Incurred
Severance and related expense
$
0.6

 
$
13.6

 
$
14.0

Asset write-offs and accelerated depreciation

 
3.2

 
3.2

Lease termination
(0.1
)
 
0.8

 
0.8

Other

 
4.7

 
4.7

Total restructuring charges
$
0.5