Lennox International's Second Quarter Earnings Up 42% Before Restructuring Charges; Full-Year EPS Outlook Raised to $0.90-$1.00
DALLAS, July 23 /PRNewswire-FirstCall/ -- Lennox International Inc. (NYSE: LII) today reported second quarter 2002 earnings, before restructuring charges for programs announced in 2001, increased 42% to $27 million from $19 million in the year ago period. Diluted earnings per share were $0.45, comparing favorably with $0.33 last year. Total company sales were $831 million, down 2% versus last year.
Quarterly operating income for this year was up 21% to $53 million from $43 million last year. Operating margins rose to 6.3% from 5.1% last year. EBITDA increased 7% to $69 million. Foreign exchange benefited revenues by four-tenths of one percent and had a positive impact of less than $0.01 on earnings per share in the quarter.
During the second quarter of this year, the company incurred pretax charges of $1.2 million for previously announced restructuring programs to consolidate some operations and phase out certain non-core assets and underperforming product lines. Last year in the second quarter, the company incurred $38 million in restructuring charges to consolidate underperforming service centers in its Service Experts operation.
Had the FAS 142 accounting rule eliminating the amortization of goodwill been effective in 2001, operating income in the second quarter of 2001 would have been $4.6 million higher and earnings per share before restructuring charges would have been $0.40. On a GAAP basis, after accounting for restructuring charges, the company reported net earnings per share of $0.43 in the second quarter 2002, compared with a reported loss per share of $0.12 in the same quarter last year.
"We're very pleased the first-quarter 2002 improvement in LII's operating performance continued in the second quarter, despite mixed market demand in the sectors we serve and an especially challenging commercial air conditioning sector," said Bob Schjerven, chief executive officer. "We are particularly pleased to see the pace of improvement at Service Experts, our retail segment, accelerate in the second quarter."
LII continues a successful focus on free cash flow, with emphasis on working capital management and capital spending. Inventories are down 16%, or $55 million, year-over-year, while working capital - expressed as a percent of sales on a trailing 12 months basis - declined significantly to 21.1% from 24.0%. In the second quarter the company generated $2 million in free cash flow, bringing year-to-date free cash flow to $10 million. "Due to the seasonal nature of our business, we have typically used cash in the first half of the year and generated cash in the second half, so we are encouraged by this performance," Schjerven said.
The company also continues to make significant progress in paying down long-term debt, reducing its total debt as of June 30, 2002 to $511 million, down $103 million from the same time a year earlier. At the end of the second quarter, Debt to Total Capitalization was 53.2%, comparing favorably with 57.3% at the same time last year, adjusted for FAS 142 goodwill impairment charges taken in the first quarter of 2002.
Business segment highlights
All business segment highlights exclude restructuring charges.
North American residential: Revenues grew by 5% from the previous year to $351 million. Segment operating income for the quarter increased 11% to $36.1 million from $32.4 million last year, with FAS 142 contributing $1 million to the overall improvement. Segment operating margins expanded 60 basis points to 10.3%.
The company reported strong market acceptance for the new Dave Lennox Signature Series -- an innovative product line recently introduced by its Lennox Industries unit that features the industry's quietest air conditioners and furnaces, as well as the most effective home air purification system on the market today.
Service Experts: Despite a 7% decrease in revenues to $251 million, the Service Experts segment showed a substantial improvement in operating profitability for the second straight quarter. On a same store basis, adjusting for dealer service centers that were sold or closed in 2001, second quarter sales were down 4% -- a significant improvement over the 9% decline in the first quarter of this year. Segment operating income increased to $15.9 million from $4.2 million last year, with FAS 142 contributing $2.4 million to the year-over-year improvement. Operating margins for the second quarter were 6.3%, compared with 1.6% last year.
"Dennis Smith, who joined us as president of Service Experts in the fourth quarter of last year, is effectively instilling a performance-oriented culture throughout the organization," said Schjerven. "His management's attention to labor productivity -- critical to operating profitability in this type of service business -- and containing S,G & A costs are driving the improvement."
"While we certainly have a way to go to realize the full potential from Service Experts, we are pleased with the trend we are seeing."
Worldwide commercial air conditioning: LII faced lower demand levels for commercial air conditioning equipment, with North American industry shipments of unitary commercial HVAC equipment down approximately 12% in the first five months of 2002 and reports of lower demand levels in Europe. Segment revenues declined 11% in the second quarter to $115 million. Operating profits decreased 34% to $5.7 million due to lower volumes, which could only partially be offset by lower period expenses. As a result, segment operating margins for the quarter were 5%, down from 6.7% last year. Had FAS 142 been effective, 2001 quarterly operating income would have been $400,000 higher.
Worldwide commercial refrigeration: Revenues increased by 6% to $90 million, as the strengthening in the order rate reported at the end of the first quarter was sustained. Segment operating income increased 19% to $9.0 million, with FAS 142 contributing $400,000 to the year-over-year improvement. Benefiting from higher volumes and cost control initiatives, operating margins expanded 110 basis points to 10.0%.
Worldwide heat transfer: Demand for heat transfer components remains soft, with segment sales decreasing 9% to $52 million in the second quarter. This volume erosion resulted in a quarterly segment operating loss of $300,000, compared with operating income of $2.0 million the previous year. 2001 quarterly operating income would have been $300,000 higher if FAS 142 accounting had been effective. Segment operating margins were (0.6%) compared with 3.5% last year.
A planned joint venture with Outokumpu of Finland announced in April will result in Outokumpu purchasing a 55% interest in LII's heat transfer business segment for $55 million, with LII retaining 45% ownership. The joint venture agreement is on track to be completed in the third quarter of this year. "Assuming this transaction is completed as expected, our reported revenues will decline by approximately $60 million in the second half of this year, although it will not have a material impact on our EPS or free cash flow for 2002," said Rick Smith, chief financial officer.
Business outlook: earnings guidance raised
"We previously reported the first quarter of this year was a turning point for LII's operating performance, and we are very pleased to report that momentum carried into the second quarter," Schjerven said. "We are confident this broad-based improvement will continue and we are raising our earnings guidance for 2002." The company expects full year diluted earnings per share, excluding restructuring and goodwill impairment charges, will be in the range of $0.90 to $1.00. The outlook for free cash flow has also been raised to approximately $75 million for full year 2002.
The LII management team continues to focus on reducing product costs, eliminating waste in manufacturing processes, and streamlining overhead structures. Despite their progress, the company is feeling the pressure from increasing material costs, most notably on steel. "Our operating companies are considering the appropriate pricing actions to protect our margins," Schjerven said.
LII has scheduled a conference call to discuss financial results for the second quarter 2001 on Wednesday, July 24 at 9:30 a.m. (CDT). All interested parties are invited to listen as Bob Schjerven and Rick Smith comment on the company's operating results. To listen, please call the conference call line at 952-556-2844 10 minutes prior to the scheduled start time and use reservation number 644301. 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/ajwz361374257gf12.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. July 24 through July 31, 2002 on the Internet or by dialing 800-475-6701, access code 644301.
A Fortune 500 company operating in over 70 countries, Lennox International Inc. is a global leader in the heating, ventilation, air conditioning, and refrigeration markets. 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 Six Months Ended June 30, 2002 and 2001
(Unaudited, in thousands, except per share data)
For the For the
Three Months Ended Six Months Ended
June 30, June 30,
2002 2001 2002 2001
NET SALES $830,608 $848,346 $1,506,382 $1,564,312
COST OF GOODS SOLD 559,607 583,208 1,026,506 1,085,589
Gross profit 271,001 265,138 479,876 478,723
OPERATING EXPENSES:
Selling, general
and administrative
expense 218,403 221,778 417,788 439,334
Restructurings 1,222 38,000 1,875 38,000
Income from
operations 51,376 5,360 60,213 1,389
INTEREST EXPENSE, net 8,258 11,501 16,141 24,278
OTHER (446) (285) (531) 378
MINORITY INTEREST 61 26 127 133
Income (loss) before
income taxes and
cumulative effect
of accounting change 43,503 (5,882) 44,476 (23,400)
PROVISION FOR
(BENEFIT FROM)
INCOME TAXES 17,877 1,129 18,279 (6,141)
Income (loss)
before cumulative
effect of accounting
change 25,626 (7,011) 26,197 (17,259)
CUMULATIVE EFFECT
OF ACCOUNTING CHANGE --- --- 249,224 ---
Net income (loss) $25,626 $(7,011) $(223,027) $(17,259)
INCOME (LOSS) PER SHARE
BEFORE CUMULATIVE
EFFECT OF ACCOUNTING
CHANGE:
Basic $0.45 $(0.12) $0.46 $(0.31)
Diluted $0.43 $(0.12) $0.45 $(0.31)
CUMULATIVE EFFECT OF
ACCOUNTING CHANGE
PER SHARE:
Basic $--- $--- $(4.38) $---
Diluted $--- $--- $(4.27) $---
NET INCOME (LOSS) PER SHARE:
Basic $0.45 $(0.12) $(3.92) $(0.31)
Diluted $0.43 $(0.12) $(3.82) $(0.31)
For the For the
Three Months Ended Six Months Ended
June 30, June 30,
Net Sales 2002 2001 2002 2001
North American
residential $350,935 $335,779 $626,144 $617,804
Service Experts 251,466 270,293 456,480 492,717
Commercial air
conditioning 115,007 128,942 201,811 222,320
Commercial refrigeration 89,619 84,834 174,882 169,923
Heat transfer 52,137 57,048 100,813 115,323
Eliminations (28,556) (28,550) (53,748) (53,775)
$830,608 $848,346 $1,506,382 $1,564,312
For the For the
Three Months Ended Six Months Ended
June 30, June 30,
Income (Loss)
from Operations 2002 2001 2001 2002 2001 2001
(B) (B) Adj.(A,B) (B) (B) Adj.(A,B)
North American
residential $36,118 $32,442 $33,419 $51,620 $44,748 $46,443
Service Experts 15,886 4,212 6,626 13,093 (5,761) (58)
Commercial air
conditioning 5,718 8,622 9,009 5,555 6,805 7,017
Commercial
refrigeration 8,993 7,564 8,011 17,252 13,785 14,442
Heat transfer (293) 2,025 2,303 (1,093) 3,813 4,315
Corporate and other (13,568) (11,505) (11,399) (23,501) (22,508) (22,300)
Eliminations (256) --- --- (838) (1,493) (1,493)
$52,598 $43,360 $47,969 $62,088 $39,389 $48,366
(A) To facilitate comparisons, the reported segment Income (Loss) from
Operations amounts for the three and six months ended June 30, 2001
have been adjusted to reflect the discontinuation of goodwill and
trademark amortization under SFAS 142.
(B) Excluding restructuring charges.
LENNOX INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
As of June 30, 2002 and December 31, 2001
(In thousands, except share data)
ASSETS
June 30, December 31,
2002 2001
(Unaudited)
CURRENT ASSETS:
Cash and cash equivalents $41,747 $34,393
Accounts and notes receivable, net 414,499 291,485
Inventories 301,046 281,170
Deferred income taxes 44,359 42,662
Other assets 58,288 63,655
Total current assets 859,939 713,365
PROPERTY, PLANT AND EQUIPMENT, net 278,558 291,531
GOODWILL, net 423,933 704,713
OTHER ASSETS 125,811 84,379
TOTAL ASSETS $1,688,241 $1,793,988
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Short-term debt $49,121 $23,701
Current maturities of long-term debt 22,923 28,895
Accounts payable 311,498 242,534
Accrued expenses 261,783 249,546
Income taxes payable 29,579 9,870
Total current liabilities 674,904 554,546
LONG-TERM DEBT 438,609 465,163
DEFERRED INCOME TAXES 893 673
POSTRETIREMENT BENEFITS,
OTHER THAN PENSIONS 13,547 14,014
OTHER LIABILITIES 109,162 103,301
Total liabilities 1,237,115 1,137,697
MINORITY INTEREST 1,550 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,
61,713,890 shares and 60,690,198
shares issued for 2002 and 2001,
respectively 617 607
Additional paid-in capital 384,957 372,877
Retained earnings 149,688 383,566
Accumulated other comprehensive loss (47,096) (68,278)
Deferred compensation (7,874) (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 449,576 654,640
TOTAL LIABILITIES
AND STOCKHOLDERS' EQUITY $1,688,241 $1,793,988
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SOURCE Lennox International Inc.
Web site: http: //www.lennoxinternational.com
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CONTACT: Bill Moltner, vice president, investor relations of Lennox International Inc., +1-972-497-6670
Audio: http: //www.firstcallevents.com/service/ajwz361374257gf12.html
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