Lennox International Reports Third Quarter EPS of $0.46
DALLAS, Oct. 22 -- Lennox International Inc. (NYSE: LII) today reported third quarter results for 2002, showing substantial growth in margins and profitability. GAAP income for the quarter rose sharply to $28 million, an increase of more than 80% from $15 million in the year ago period. GAAP earnings per diluted share were up 70% to $0.46 from $0.27 a year ago.
Reported operating income grew 28% to $53 million, while operating margins expanded to 6.4% from 5.0% last year. These significant improvements were realized despite a modest 1% decline in total revenues to $819 million from $825 million in third quarter 2001.
If the FAS 142 accounting rule eliminating amortization had been effective in 2001, operating income in third quarter 2001 would have been $5 million higher and EPS would have been $0.35. Also, third quarter 2002 earnings benefited from the favorable outcome of tax contingencies from prior years, reducing the provision for income taxes by $3 million and adding $0.05 per share to earnings.
"LII has achieved our third consecutive quarter of improvement from our previous year's results," said Bob Schjerven, chief executive officer. "While demand from our commercial customers for heating, cooling, and refrigeration equipment and services has been soft, favorable weather supported our residential businesses. Still, despite mixed demand, our profitability grew significantly, we generated $62 million in free cash, and the debt level on our balance sheet is at its lowest point since LII went public in 1999."
As of September 30, 2002, the company's total debt was $410 million, down $157 million from a year ago. Debt to total capital improved to 46.7%.
Strategic focus sharpens on three core businesses; reporting simplified
The company continues to focus its resources on its three core businesses: heating and cooling, Service Experts, and refrigeration. Consistent with this strategic focus and beginning this quarter, LII has streamlined and simplified its reporting structure to report results in these three business segments.
Several non-recurring events related to narrowing the company's focus to its core businesses affected third quarter 2002 earnings. A gain on the sale of 55% of LII's heat transfer business to Outokumpu Oyj in late August was almost entirely offset by charges, as detailed in the comments and table below, including:
-- A $3.6 million pre-tax charge was incurred to write off the investment in a joint venture in Argentina, as the company exited the HVAC business in that very volatile market. This partially offset a pre- tax $12.5 million gain on the Outokumpu heat transfer joint venture transaction, resulting in a net pre-tax gain of $8.9 million or $5.8 million after taxes. -- A charge of $2.1 million in the quarter, with no tax benefit, was incurred to close a commercial refrigeration equipment factory in Europe eliminating excess capacity, as part of the restructuring program announced in the fourth quarter of 2001. -- A restructuring charge of $4.7 million, or $3.3 million after-tax, was incurred as the company began to wind down a residual piece of the heat transfer business that does not fit with LII's strategic focus and was not included in the joint venture with Outokumpu. LII will continue to wind down the business through 2003 and anticipates an additional $1 million in related restructuring charges. Lennox International Inc. - Segment Operating Income Reconciliation (in thousands) (Gains) Three Months Losses Adjusted Ended and Income September 30, Income from Goodwill Restructuring Other From 2002: Operations Amortization Charges Expenses Operations Heating and Cooling $ 41,395 $ --- $ 15 $ --- $ 41,410 Service Experts 13,076 --- --- --- 13,076 Refrigeration 6,757 --- 2,061 --- 8,818 Corporate and other (8,745) --- 4,666 (8,931) (13,010) Eliminations 141 --- --- --- 141 Income from Operations $ 52,624 $ --- $ 6,742 $(8,931) $ 50,435 (Gains) Three Months Losses Adjusted Ended and Income September 30, Income from Goodwill Restructuring Other From 2001: Operations Amortization Charges Expenses Operations Heating and Cooling $ 39,021 $ 843 $ --- $ --- $ 39,864 Service Experts 3,840 3,569 --- --- 7,409 Refrigeration 7,078 313 --- --- 7,391 Corporate and other (9,561) 425 --- --- (9,136) Eliminations 878 --- --- --- 878 Income from Operations $ 41,256 $5,150 $ --- $ --- $ 46,406
Business Segment Highlights
To facilitate comparisons of operating performance, the segment data below are adjusted for restructuring and other non-recurring charges, and the new goodwill accounting standard.
Heating and Cooling: This segment includes the company's previously reported North American residential products and commercial air conditioning segments. Quarterly revenues increased 4% to $469 million. Segment operating income for the quarter also increased 4% to $41 million, while segment operating margins were flat year-over-year at 8.8%. Shipments of the company's residential equipment increased by 8% due in large part to favorable weather during the cooling season and low inventory levels in the supply chain. Domestic commercial shipments declined by only 3% during a period of double-digit industry declines, caused by depressed construction activity.
Service Experts: The company's retail business segment saw its quarterly operating profit increase 76% to $13 million, with operating margins expanding 240 basis points from last year to 5.2%. Gross margins improved, and S,G & A expenses continued to run below last year both at the center and corporate levels. Revenues declined 6% to $252 million. On a same store basis, adjusting for dealer centers that were sold or closed, third quarter sales were down 5%.
"We continue to realize operational improvements in this business," Schjerven said. "We are also acutely aware the top line remains challenging, and our Service Experts management is currently exploring numerous marketing and business development initiatives to address this situation consistent with our goal of continued improvement in profitability."
Refrigeration: Third quarter revenues in LII's refrigeration segment were up 7% at $93 million. Segment operating income climbed 19% to $9 million, with operating margins expanding 100 basis points to 9.5%. "Our domestic operation continues a very solid record of performance, with EBIT margins in the mid-teens and increasing market share," Schjerven noted.
Business outlook: Full-year 2002
LII management continues to expect revenues from continuing businesses will be down approximately 2%. Reported company revenues are expected to decline by about 5%, including the drop in revenue from the heat transfer joint venture which will not be reported on the company's financial statements in the future. Based on earnings for the first nine months of this year, the company expects diluted EPS for full-year 2002 -- excluding restructuring, goodwill impairment and other non-recurring items -- will be in the range of $0.90 to $1.00, consistent with previously issued guidance. The company also expects to exceed the previously stated free cash flow projection of $75 million, based on performance year-to-date.
"While never satisfied, we are pleased LII's financial improvement continued in the third quarter," Schjerven said. "Our management team believes we have the programs and processes in place to deliver on our full- year projections."
LII has scheduled a conference call to discuss financial results for the third quarter 2002 on Wednesday, October 23 at 9:30 a.m. Central time. All interested parties are invited to listen as Bob Schjerven, CEO and Rick Smith, CFO comment on the company's operating results. To listen, please call the conference call line at 612-332-0228 ten minutes prior to the scheduled start time and use reservation number 655944. The number of connections for this call is limited to 200.
This conference call will be broadcast live on the Internet and can be accessed at http://www.firstcallevents.com/service/ajwz367093174gf12.html . A link to the broadcast can also be found on the company's web site at http://www.lennoxinternational.com . If you are unable to participate in this conference call, a replay will be available from 1:00 p.m. October 23 through October 30, 2002 on the Internet or by dialing 800-475-6701, access code 655944.
Selling heating, ventilation, air conditioning, and refrigeration equipment in over 70 countries, Lennox International Inc. is a global leader in climate control solutions. Lennox operates in three key business segments: Heating and cooling, Service Experts, and refrigeration. Lennox International stock is traded on the New York Stock Exchange under the symbol "LII". Additional information is available at: http://www.lennoxinternational.com or by contacting Bill Moltner, vice president, investor relations, at 972-497-6670.
This news release contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements are subject to numerous risks and uncertainties that could cause actual results to differ materially from such statements. For information concerning these risks and uncertainties, see Lennox' publicly available filings with the Securities and Exchange Commission. Lennox disclaims any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.
LENNOX INTERNATIONAL INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS For the Three Months and Nine Months Ended September 30, 2002 and 2001 (Unaudited, in thousands, except per share data) For the For the Three Months Ended Nine Months Ended September 30, September 30, 2002 2001(A) 2002 2001(A) NET SALES $818,844 $825,060 $2,321,403 $2,386,564 COST OF GOODS SOLD 562,737 575,664 1,590,605 1,665,036 Gross profit 256,107 249,396 730,798 721,528 OPERATING EXPENSES: Selling, general and administrative expense 205,672 208,140 618,275 644,252 Restructurings (B) 6,742 --- 8,617 34,631 (Gains) Losses and other expenses (8,931) --- (8,931) --- Income from operations 52,624 41,256 112,837 42,645 INTEREST EXPENSE, net 8,945 10,330 25,086 34,608 OTHER (288) (93) (819) 285 MINORITY INTEREST 77 2 204 135 Income before income taxes and cumulative effect of accounting change 43,890 31,017 88,366 7,617 PROVISION FOR INCOME TAXES 16,312 15,838 34,591 9,697 Income (loss) before cumulative effect of accounting change 27,578 $ 15,179 53,775 $(2,080) CUMULATIVE EFFECT OF ACCOUNTING CHANGE --- --- 249,224 --- Net income (loss) $ 27,578 $ 15,179 $ (195,449) $(2,080) INCOME (LOSS) PER SHARE BEFORE CUMULATIVE EFFECT OF ACCOUNTING CHANGE: Basic $ 0.48 $ 0.27 $ 0.94 $ (0.04) Diluted $ 0.46 $ 0.27 $ 0.91 $ (0.04) CUMULATIVE EFFECT OF ACCOUNTING CHANGE PER SHARE: Basic $ --- $ --- $ (4.36) $ --- Diluted $ --- $ --- $ (4.24) $ --- NET INCOME (LOSS) PER SHARE: Basic $ 0.48 $ 0.27 $ (3.42) $ (0.04) Diluted $ 0.46 $ 0.27 $ (3.32) $ (0.04) (A) Prior year's sales, cost of sales and operating expenses are restated to conform with current year treatment of certain promotional payments in line with the adoption of EITF 01-9 in 2002. (B) Nine months ended September 30, 2001 restructurings totaled $38,000, of which $3,369 is included in Cost of Goods Sold. LENNOX INTERNATIONAL INC. AND SUBSIDIARIES SEGMENT REVENUES AND OPERATING PROFIT For the Three Months and Nine Months Ended September 30, 2002 and 2001 (Unaudited, in thousands, except per share data) For the Three Months For the Nine Months Ended Sept. 30, Ended Sept. 30, Net Sales 2002 2001 2002 2001 Heating & Cooling $468,821 $450,657 $1,293,212 $1,287,973 Service Experts 251,573 266,683 708,053 759,400 Refrigeration 92,811 86,847 273,152 263,775 Corporate and other (A) 33,055 48,548 128,150 156,866 Eliminations (27,416) (27,675) (81,164) (81,450) $818,844 $825,060 $2,321,403 $2,386,564 Income (Loss) from Operations - before Restructurings, For the Three Months For the Nine Months Ended Sept. 30, Ended Sept. 30, (Gains) Losses 2002 2001 2001 2002 2001 2001 & Other Expenses Adj.(B) Adj. (B) Heating & Cooling $41,410 $39,021 $39,864 $98,585 $90,574 $93,324 Service Experts 13,076 3,840 7,409 26,169 (5,291) 3,981 Refrigeration 8,818 7,078 7,391 26,032 20,559 21,529 Corporate and other (A) (13,010) (9,561) (9,136) (37,566) (27,952) (26,817) Eliminations 141 878 878 (697) (614) (614) $50,435 $41,256 $46,406 $112,523 $77,276 $91,403 (A) In the third quarter of 2002, the Company formed a joint venture with Outokumpu Oyj ("Outokumpu") of Finland by selling to Outokumpu a 55 percent interest in the Company's heat transfer business segment for approximately $55 million. The net sales and results of operations for the current periods and all prior periods of the Company's former heat transfer business segment are now included in Corporate and other. (B) To facilitate comparisons, the reported segment Income (Loss) from Operations amounts for the three and nine months ended September 30, 2001 have been adjusted to reflect the discontinuation of goodwill and trademark amortization under SFAS 142. LENNOX INTERNATIONAL INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS As of September 30, 2002 and December 31, 2001 (In thousands, except share data) ASSETS September 30, December 31, 2002 2001 (Unaudited) CURRENT ASSETS: Cash and cash equivalents $ 55,925 $ 34,393 Accounts and notes receivable, net 364,252 291,485 Inventories 250,340 281,170 Deferred income taxes 45,281 42,662 Other assets 62,725 63,655 Total current assets 778,523 713,365 PROPERTY, PLANT AND EQUIPMENT, net 238,017 291,531 GOODWILL, net 418,003 704,713 OTHER ASSETS 146,954 84,379 TOTAL ASSETS $1,581,497 $1,793,988 LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Short-term debt $ 24,778 $ 23,701 Current maturities of long-term debt 15,278 28,895 Accounts payable 261,614 242,534 Accrued expenses 278,620 249,546 Income taxes payable 35,387 9,870 Total current liabilities 615,677 554,546 LONG-TERM DEBT 369,992 465,163 DEFERRED INCOME TAXES 876 673 POSTRETIREMENT BENEFITS, OTHER THAN PENSIONS 13,642 14,014 OTHER LIABILITIES 111,467 103,301 Total liabilities 1,111,654 1,137,697 MINORITY INTEREST 1,412 1,651 COMMITMENTS AND CONTINGENCIES STOCKHOLDERS' EQUITY: Preferred stock, $.01 par value, 25,000,000 shares authorized, no shares issued or outstanding --- --- Common stock, $.01 par value, 200,000,000 shares authorized, 62,589,638 shares and 60,690,198 shares issued for 2002 and 2001, respectively 626 607 Additional paid-in capital 396,755 372,877 Retained earnings 171,780 383,566 Accumulated other comprehensive loss (59,516) (68,278) Deferred compensation (10,498) (3,710) Treasury stock, at cost, 3,009,656 and 2,980,846 shares for 2002 and 2001, respectively (30,716) (30,422) Total stockholders' equity 468,431 654,640 TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $1,581,497 $1,793,988
Source: Lennox International Inc.