LENNOX INTERNATIONAL INC (LII)
SIC breadcrumb: Manufacturing > Industrial And Commercial Machinery And Computer Equipment > SIC 3585 Air-Cond & Warm Air Heatg Equip & Comm & Indl Refrig Equip
SEC company page: https://www.sec.gov/edgar/browse/?CIK=1069202. Latest filing source: 0001069202-26-000028.
Informational only - descriptive public-record data, not investment advice.
Selected Fundamentals
| Metric | Value | Unit | FY | Filed |
|---|---|---|---|---|
| Revenue | 5,195,300,000 | USD | 2025 | 2026-02-17 |
| Net income | 805,800,000 | USD | 2025 | 2026-02-17 |
| Assets | 4,081,800,000 | USD | 2025 | 2026-02-17 |
Financials
Annual standardized facts from SEC companyfacts as of latest extracted filing date 2026-02-17. Source: https://data.sec.gov/api/xbrl/companyfacts/CIK0001069202.json. Derived margins, ratios, and free cash flow are computed from the extracted annual SEC facts.
| Metric | 2016 | 2017 | 2018 | 2019 | 2020 | 2021 | 2022 | 2023 | 2024 | 2025 |
|---|---|---|---|---|---|---|---|---|---|---|
| Revenue | 3,641,600,000 | 3,839,600,000 | 3,883,900,000 | 3,807,200,000 | 3,634,100,000 | 4,194,100,000 | 4,718,400,000 | 4,981,900,000 | 5,341,300,000 | 5,195,300,000 |
| Net income | 277,800,000 | 305,700,000 | 359,000,000 | 408,700,000 | 356,300,000 | 464,000,000 | 497,100,000 | 591,200,000 | 811,100,000 | 805,800,000 |
| Operating income | 429,400,000 | 494,500,000 | 509,900,000 | 656,900,000 | 478,500,000 | 590,300,000 | 656,200,000 | 791,500,000 | 1,040,400,000 | 1,041,500,000 |
| Gross profit | 1,076,500,000 | 1,125,200,000 | 1,111,200,000 | 1,079,800,000 | 1,040,100,000 | 1,188,400,000 | 1,284,700,000 | 1,549,200,000 | 1,777,500,000 | 1,734,800,000 |
| Diluted EPS | 6.32 | 7.14 | 8.74 | 10.38 | 9.24 | 12.39 | 13.88 | 16.58 | 22.66 | 22.79 |
| Operating cash flow | 373,900,000 | 325,100,000 | 495,500,000 | 396,100,000 | 612,400,000 | 515,500,000 | 302,300,000 | 736,200,000 | 945,700,000 | 757,600,000 |
| Capital expenditures | 84,300,000 | 98,300,000 | 95,200,000 | 105,600,000 | 78,500,000 | 106,800,000 | 101,100,000 | 250,200,000 | 163,600,000 | 118,800,000 |
| Dividends paid | 69,000,000 | 79,700,000 | 93,900,000 | 110,500,000 | 118,100,000 | 126,500,000 | 142,000,000 | 153,400,000 | 160,300,000 | 173,000,000 |
| Share buybacks | 300,000,000 | 250,000,000 | 450,200,000 | 400,000,000 | 100,000,000 | 600,000,000 | 300,000,000 | 0.00 | 53,600,000 | 482,300,000 |
| Assets | 1,760,300,000 | 1,891,500,000 | 1,817,200,000 | 2,034,900,000 | 2,032,500,000 | 2,171,900,000 | 2,567,600,000 | 2,941,000,000 | 3,620,000,000 | 4,081,800,000 |
| Liabilities | 1,722,300,000 | 1,841,400,000 | 1,966,800,000 | 2,205,100,000 | 2,049,600,000 | 2,440,900,000 | 2,770,700,000 | 2,548,000,000 | 2,657,900,000 | 2,918,700,000 |
| Stockholders' equity | 38,000,000 | 50,100,000 | -149,600,000 | -170,200,000 | -17,100,000 | -269,000,000 | -203,100,000 | 393,000,000 | 962,100,000 | 1,163,100,000 |
| Cash and cash equivalents | 50,200,000 | 68,200,000 | 46,300,000 | 37,300,000 | 123,900,000 | 31,000,000 | 52,600,000 | 60,700,000 | 415,100,000 | 34,200,000 |
| Free cash flow | 289,600,000 | 226,800,000 | 400,300,000 | 290,500,000 | 533,900,000 | 408,700,000 | 201,200,000 | 486,000,000 | 782,100,000 | 638,800,000 |
Ratios
| Metric | 2016 | 2017 | 2018 | 2019 | 2020 | 2021 | 2022 | 2023 | 2024 | 2025 |
|---|---|---|---|---|---|---|---|---|---|---|
| Net margin | 7.63% | 7.96% | 9.24% | 10.73% | 9.80% | 11.06% | 10.54% | 11.87% | 15.19% | 15.51% |
| Operating margin | 11.79% | 12.88% | 13.13% | 17.25% | 13.17% | 14.07% | 13.91% | 15.89% | 19.48% | 20.05% |
| Return on equity | 150.43% | 84.31% | 69.28% | |||||||
| Return on assets | 15.78% | 16.16% | 19.76% | 20.08% | 17.53% | 21.36% | 19.36% | 20.10% | 22.41% | 19.74% |
| Liabilities / equity | 45.32 | 36.75 | 6.48 | 2.76 | 2.51 | |||||
| Current ratio | 1.13 | 1.74 | 1.08 | 1.12 | 1.55 | 1.42 | 0.94 | 1.55 | 1.55 | 1.60 |
Financial Charts
Quarterly
Quarterly standardized facts from SEC companyfacts as of latest extracted filing date 2026-04-29. Source: https://data.sec.gov/api/xbrl/companyfacts/CIK0001069202.json.
| Quarter | End Date | Revenue | Net Income | Diluted EPS | Method |
|---|---|---|---|---|---|
| 2022-Q2 | 2022-06-30 | 4.96 | reported discrete quarter | ||
| 2022-Q3 | 2022-09-30 | 3.99 | reported discrete quarter | ||
| 2023-Q1 | 2023-03-31 | 2.75 | reported discrete quarter | ||
| 2023-Q2 | 2023-06-30 | 1,411,400,000 | 217,200,000 | 6.10 | reported discrete quarter |
| 2023-Q3 | 2023-09-30 | 1,366,300,000 | 130,400,000 | 3.65 | reported discrete quarter |
| 2023-Q4 | 2023-12-31 | 1,154,800,000 | 144,500,000 | derived Q4 = FY annual - nine-month YTD | |
| 2024-Q1 | 2024-03-31 | 1,047,100,000 | 124,300,000 | 3.47 | reported discrete quarter |
| 2024-Q2 | 2024-06-30 | 1,451,100,000 | 245,900,000 | 6.87 | reported discrete quarter |
| 2024-Q3 | 2024-09-30 | 1,498,100,000 | 239,000,000 | 6.68 | reported discrete quarter |
| 2024-Q4 | 2024-12-31 | 1,345,000,000 | 197,700,000 | derived Q4 = FY annual - nine-month YTD | |
| 2025-Q1 | 2025-03-31 | 1,072,600,000 | 120,300,000 | 3.37 | reported discrete quarter |
| 2025-Q2 | 2025-06-30 | 1,500,900,000 | 277,600,000 | 7.82 | reported discrete quarter |
| 2025-Q3 | 2025-09-30 | 1,426,800,000 | 245,800,000 | 6.98 | reported discrete quarter |
| 2025-Q4 | 2025-12-31 | 1,195,000,000 | 162,100,000 | derived Q4 = FY annual - nine-month YTD | |
| 2026-Q1 | 2026-03-31 | 1,135,100,000 | 117,200,000 | 3.35 | reported discrete quarter |
Quarterly Charts
Macro Cross-References
- CPIAUCSL - Consumer Price Index for All Urban Consumers: All Items in U.S. City Average
- UNRATE - Unemployment Rate
- FEDFUNDS - Federal Funds Effective Rate
- CES0500000003 - Average Hourly Earnings of All Employees, Total Private
- DFEDTARU - Federal Funds Target Range - Upper Limit
- DFEDTARL - Federal Funds Target Range - Lower Limit
- DGS3MO - Market Yield on U.S. Treasury Securities at 3-Month Constant Maturity
- DGS2 - Market Yield on U.S. Treasury Securities at 2-Year Constant Maturity
- DGS10 - Market Yield on U.S. Treasury Securities at 10-Year Constant Maturity
- DGS30 - Market Yield on U.S. Treasury Securities at 30-Year Constant Maturity
- T10Y2Y - 10-Year Treasury Constant Maturity Minus 2-Year Treasury Constant Maturity
- CPILFESL - Consumer Price Index for All Urban Consumers: All Items Less Food and Energy
- CPIUFDSL - Consumer Price Index for All Urban Consumers: Food
- CPIENGSL - Consumer Price Index for All Urban Consumers: Energy
- CUSR0000SAH1 - Consumer Price Index for All Urban Consumers: Shelter
- PCEPI - Personal Consumption Expenditures: Chain-type Price Index
- PCEPILFE - Personal Consumption Expenditures Excluding Food and Energy: Chain-type Price Index
- PPIACO - Producer Price Index by Commodity: All Commodities
- T10YIE - 10-Year Breakeven Inflation Rate
- U6RATE - Total Unemployed, Plus All Marginally Attached Workers Plus Total Employed Part Time for Economic Reasons
- PAYEMS - All Employees, Total Nonfarm
- CIVPART - Labor Force Participation Rate
- EMRATIO - Employment-Population Ratio
- UNEMPLOY - Unemployed
- CE16OV - Employment Level
- ICSA - Initial Claims
- JTSJOL - Job Openings: Total Nonfarm
- JTSQUR - Quits: Total Nonfarm
- GDPC1 - Real Gross Domestic Product
- A191RL1Q225SBEA - Real Gross Domestic Product: Percent Change from Preceding Period
- INDPRO - Industrial Production: Total Index
- TCU - Capacity Utilization: Total Index
- HOUST - New Privately-Owned Housing Units Started: Total Units
- PERMIT - New Privately-Owned Housing Units Authorized in Permit-Issuing Places: Total Units
- RSAFS - Advance Retail Sales: Retail Trade
- PCE - Personal Consumption Expenditures
- DSPIC96 - Real Disposable Personal Income
- PSAVERT - Personal Saving Rate
- M2SL - M2
- BOPGSTB - U.S. International Trade in Goods and Services: Balance
- MSPUS - Median Sales Price of Houses Sold for the United States
- HSN1F - New One Family Houses Sold: United States
- RHORUSQ156N - Homeownership Rate in the United States
- TTLCONS - Total Construction Spending: Total Construction in the United States
- RRVRUSQ156N - Rental Vacancy Rate in the United States
- TOTALSL - Total Consumer Credit Owned and Securitized
- REVOLSL - Revolving Consumer Credit Owned and Securitized
- DRCCLACBS - Delinquency Rate on Credit Card Loans, All Commercial Banks
- GDP - Gross Domestic Product
- GPDI - Gross Private Domestic Investment
- GCE - Government Consumption Expenditures and Gross Investment
- PCEC - Personal Consumption Expenditures
- NETEXP - Net Exports of Goods and Services
- GFDEBTN - Federal Debt: Total Public Debt
- GFDEGDQ188S - Federal Debt: Total Public Debt as Percent of Gross Domestic Product
- FYFSD - Federal Surplus or Deficit
- FGRECPT - Federal Government Current Receipts
- FGEXPND - Federal Government: Current Expenditures
- MANEMP - All Employees, Manufacturing
- USCONS - All Employees, Construction
- USTRADE - All Employees, Retail Trade
- USFIRE - All Employees, Financial Activities
- USGOVT - All Employees, Government
- AWHAETP - Average Weekly Hours of All Employees, Total Private
- DGORDER - Manufacturers' New Orders: Durable Goods
- NEWORDER - Manufacturers' New Orders: Nondefense Capital Goods Excluding Aircraft
- BUSINV - Total Business Inventories
- EXPGS - Exports of Goods and Services
- IMPGS - Imports of Goods and Services
- IR - Import Price Index (End Use): All Commodities
- PPIFIS - Producer Price Index by Commodity: Final Demand
Latest quarter (10-Q)
Latest 10-Q source: 0001069202-26-000054.
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934 (the "Exchange Act"), as amended, that are based on information currently available to management as well as management’s assumptions and beliefs as of the date such statements were made. All statements, other than statements of historical fact, included in this Quarterly Report on Form 10-Q constitute forward-looking statements, including but not limited to statements identified by forward-looking terminology, such as the words “may,” “will,” “should,” “plan,” “anticipate,” “believe,” “intend,” “estimate,” and “expect” and similar expressions. Such statements reflect our current views with respect to future events, based on what we believe are reasonable assumptions; however, such statements are subject to certain risks and uncertainties.
In addition to the specific uncertainties discussed elsewhere in this Quarterly Report on Form 10-Q, the risk factors set forth in Part I, “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2025, and those set forth in Part II, “Item 1A. Risk Factors” of this report, if any, may affect our performance and results of operations. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may differ materially from those in the forward-looking statements. We disclaim any intention or obligation to update or review any forward-looking statements or information, whether as a result of new information, future events or otherwise, except as required by law.
Business Overview
We operate in two reportable business segments of the HVACR industry, Home Comfort Solutions and Building Climate Solutions. For more detailed information regarding our reportable segments, see Note 2 in the Notes to the Consolidated Financial Statements.
Our fiscal quarterly periods are comprised of approximately 13 weeks, but the number of days per quarter may vary year-over-year. Our quarterly reporting periods usually end on the Saturday closest to the last day of March, June, and September. Our fourth quarter and fiscal year ends on December 31, regardless of the day of the week on which December 31 falls. For convenience, throughout this Management’s Discussion and Analysis of Financial Condition and Results of Operations, the 13-week periods comprising each fiscal quarter are denoted by the last day of the respective calendar quarter.
We sell our products and services through a combination of direct sales, distributors and company-owned stores. The demand for our products and services is seasonal and can be significantly impacted by the weather. Warmer than normal summer temperatures generate demand for replacement air conditioning and refrigeration products and services, and colder than normal winter temperatures have a similar effect on heating products and services. Conversely, cooler than normal summers and warmer than normal winters depress the demand for HVACR products and services. In addition to weather, demand for our products and services is influenced by national and regional economic and demographic factors, such as interest rates, the availability of financing, regional population and employment trends, new construction, general economic conditions, and consumer spending habits and confidence. A substantial portion of the sales in each of our business segments is attributable to replacement business, with the balance comprised of new construction business.
The principal elements of cost of goods sold are components, raw materials, factory overhead, labor, estimated costs of warranty expense, and freight and distribution costs. The principal raw materials used in our manufacturing processes are steel, aluminum and copper. In recent years, pricing volatility for these commodities and related components has impacted us and the HVACR industry in general. We seek to mitigate the impact of certain commodity price volatility and tariffs through a combination of pricing actions, vendor contracts, improved production efficiency, and cost reduction initiatives. We also partially mitigate volatility in the prices of these commodities by entering into futures contracts and fixed forward contracts.
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Financial Overview
Results for the first quarter of 2026 were mixed as our Home Comfort Solutions segment faced volume headwinds driven by market softness. Overall our net sales increased 6% and our segment profit was relatively flat as compared to prior year. For our Home Comfort Solutions segment, net sales decreased 10% and segment profit decreased $37 million. For our Building Climate Solutions segment, net sales increased 38% and segment profit increased $37 million.
Financial Highlights
•Net sales of $1,135 million in the first quarter of 2026 reflected a 6% increase as compared to the same period in 2025.
•Operating income in the first quarter of 2026 decreased $5 million to $163 million as lower sales volumes and higher product costs were partially offset by favorable mix and price.
•Net income for the first quarter of 2026 was $117 million.
•Diluted earnings per share was $3.35 per share in the first quarter of 2026 as compared to $3.63 per share in the same period in 2025.
•For the three months ended March 31, 2026, we returned $45 million to shareholders through dividend payments and repurchased $20 million of common stock through our share repurchase program.
Recent Developments
Throughout 2025, the U.S. government implemented new tariff measures under various authorities, including the International Emergency Economic Powers Act ("IEEPA") and Section 232 of the Trade Expansion Act of 1962 (“Section 232”).
In February 2026, the U.S. Supreme Court ruled against tariffs imposed under IEEPA. The ruling did not address refunds of tariffs paid, nor did it repeal Section 232 tariffs on steel and aluminum. Following this ruling, the U.S. presidential administration imposed a temporary surcharge, known as Section 122, which applies a 10 percent global tariff on most imported products. These tariffs apply broadly to manufactured goods and component parts. Section 232 tariffs on steel and aluminum also continued to evolve, with modifications implemented in April 2026. The Company is evaluating the potential impact of all tariff actions on future material costs and sourcing decisions.
Three Months Ended March 31, 2026 Compared to Three Months Ended March 31, 2025 - Consolidated Results
The following table provides a summary of our financial results, including information presented as a percentage of net sales:
| For the Three Months Ended March 31, | ||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Dollars (in millions) | Percent Change Fav/(Unfav) | Percent of Sales | ||||||||||||||
| 2026 | 2025 | 2026 | 2025 | |||||||||||||
| Net sales | $ | 1,135.1 | $ | 1,072.6 | 5.8 | % | 100.0 | % | 100.0 | % | ||||||
| Cost of goods sold | 783.8 | 731.7 | (7.1) | 69.1 | 68.2 | |||||||||||
| Gross profit | 351.3 | 340.9 | 3.1 | 30.9 | 31.8 | |||||||||||
| Selling, general and administrative expenses | 185.2 | 171.3 | (8.1) | 16.3 | 16.0 | |||||||||||
| Losses and other expenses, net | 2.2 | 2.8 | 21.4 | 0.2 | 0.3 | |||||||||||
| Loss (income) from equity method investments | 0.4 | (1.2) | (133.3) | — | (0.1) | |||||||||||
| Operating income | $ | 163.5 | $ | 168.0 | (2.7) | % | 14.4 | % | 15.7 | % |
Net Sales
Net sales for the first quarter of 2026 increased 6% as compared to the same period in 2025 primarily due to a 9% increase from favorable mix and price and a 5% increase in sales volumes from completed acquisitions, which were partially offset by an 8% decrease in sales volumes.
Gross Profit
Gross profit margins in the first quarter of 2026 decreased 90 basis points ("bps") to 30.9% as compared to 31.8% in the same period in 2025. Gross margins decreased 300 bps from higher product costs, primarily related to inflationary impacts and
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factory under absorption, and 40 bps from higher freight and distribution inflation and investments, which were partially offset by 250 bps from favorable mix and price.
Selling, General and Administrative Expenses
Selling, general and administrative expenses ("SG&A") increased $14 million to $185 million in the first quarter of 2026 as compared to $171 million in the same period in 2025, primarily attributable to higher discretionary and employee-related costs and the acquisition of Duro Dyne and Supco in the fourth quarter of 2025.
(Gains) losses and Other Expenses, Net
Losses (gains) and other expenses, net for the first quarter of 2026 and 2025 included the following (in millions):
| For the Three Months Ended March 31, | ||||||
|---|---|---|---|---|---|---|
| 2026 | 2025 | |||||
| Foreign currency exchange (gains) losses | $ | (0.3) | $ | 0.8 | ||
| Gain on disposal of fixed assets | (0.6) | (0.1) | ||||
| Environmental liabilities and special litigation charges | 3.1 | 2.1 | ||||
| Losses (gains) and other expenses, net (pre-tax) | $ | 2.2 | $ | 2.8 |
Income from Equity Method Investments
Investments over which we do not exercise control but have significant influence are accounted for using the equity method of accounting. Income from equity method investments was de minimis in the first quarter of 2026, consistent with 2025.
Interest Expense, net
Interest expense, net increased to $15 million in the first quarter of 2026 from $6 million in the same period in 2025 primarily due to increased borrowings on our commercial paper facility and our term loan agreement entered into in October of 2025.
Income Taxes
Our effective tax rate was 20.2% for the first quarter of 2026 as compared to 19.4% in the same period in 2025. The increase in rate is primarily due to income in higher tax jurisdictions.
First Quarter of 2026 Compared to First Quarter of 2025 - Results by Segment
Home Comfort Solutions
The following table presents our Home Comfort Solutions segment's net sales and profit for the first quarter of 2026 and 2025 (dollars in millions):
| For the Three Months Ended March 31, | ||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2026 | 2025 | Difference | % Change | |||||||||||
| Net sales | $ | 650.0 | $ | 721.4 | $ | (71.4) | (10) | % | ||||||
| Profit | $ | 86.5 | $ | 123.9 | $ | (37.4) | (30) | % | ||||||
| % of net sales | 13.3 | % | 17.2 | % |
Net sales decreased 10% in the first quarter of 2026 as compared to the same period in 2025 primarily due to a 21% decrease in sales volumes, which was partially offset by a 9% increase from favorable mix and price and a 2% increase in sales volumes from completed acquisitions.
Segment profit in the first quarter of 2026 decreased $37 million as compared to the same period in 2025, primarily due to lower sales volumes, resulting in a $56 million profit headwind, $23 million in product cost inflation and lower factory absorption, and $1 million in other costs. These impacts were partially offset by a $41 million benefit from favorable mix and price and $2 million from completed acquisitions.
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Building Climate Solutions
The following table presents our Building Climate Solutions segment's net sales and profit for the first quarter of 2026 and 2025 (dollars in millions):
| For the Three Months Ended March 31, | ||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2026 | 2025 | Difference | % Change | |||||||||||
| Net sales | $ | 485.1 | $ | 351.2 | $ | 133.9 | 38 | % | ||||||
| Profit | $ | 95.6 | $ | 58.8 | $ | 36.8 | 63 | % | ||||||
| % of net sales | 19.7 | % | 16.7 | % |
Net sales increased 38% in the
[Excerpt truncated for page length; source filing is linked above.]
Latest 10-K MD&A
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion should be read in conjunction with the other sections of this report, including the Consolidated Financial Statements and related Notes to the Consolidated Financial Statements in Item 8, “Other Financial Statement Details,” of this Annual Report on Form 10-K.
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Forward-Looking Statements
This Annual Report on Form 10-K contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Exchange Act that are based on information currently available to management as well as management’s assumptions and beliefs as of the date hereof. All statements, other than statements of historical fact, included in this Annual Report on Form 10-K constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements can be identified by the words “may,” “will,” “should,” “plan,” “predict,” “anticipate,” “believe,” “intend,” “estimate” and “expect” and similar expressions. Statements that are not historical should also be considered forward-looking statements. Such statements reflect our current views with respect to future events. Readers are cautioned not to place undue reliance on these forward-looking statements. We believe these statements are based on reasonable assumptions; however, such statements are inherently subject to risks and uncertainties, including but not limited to the specific uncertainties discussed elsewhere in this Annual Report on Form 10-K and the risk factors set forth in Item 1A. Risk Factors in this Annual Report on Form 10-K. These risks and uncertainties may affect our performance and results of operations. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may differ materially from those in the forward-looking statements. We disclaim any intention or obligation to update or review any forward-looking statements or information, whether as a result of new information, future events or otherwise unless required by law.
The following are some of the factors that could cause actual results to differ materially from those expressed or implied in forward-looking statements:
•competition in the HVACR business;
•our ability to successfully develop and market new products or execute our business strategy, including the implementation of price increases for products and services;
•our ability to meet and anticipate customer demands;
•our ability to continue to license or enforce our intellectual property rights;
•our ability to attract, motivate, develop and retain our employees, as well as labor relations problems;
•artificial intelligence technologies;
•a decline in new construction activity and related demand for our products and services;
•the impact of weather on our business;
•the impact of higher raw material prices and significant supply interruptions;
•product liability, warranty claims, or recalls;
•changes in environmental and climate-related legislation or government regulations or policies;
•changes in tax legislation;
•the impact of new or increased trade tariffs;
•improper conduct by any of our employees, agents, or business partners;
•litigation risks;
•general economic conditions in the U.S. and abroad;
•extraordinary events beyond our control, such as conflicts, wars, natural disasters, public health crises, terrorist acts, or other civil or political disruptions;
•risks associated with our international operations;
•cyber attacks and other disruptions or misuse of information systems; and
•our ability to successfully realize, complete and integrate acquisitions.
Business Overview
We operate in two reportable business segments of the HVACR industry, Home Comfort Solutions and Building Climate Solutions. In addition to the two major business segments, Corporate and Other is also reported as a segment. For more detailed information regarding our reportable segments, see Note 3 in the Notes to the Consolidated Financial Statements.
In the fourth quarter of 2023, we completed the sale of our European businesses. The European businesses were presented with the Corporate and Other business segment until their divestiture.
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In October 2025, we completed the acquisition of Duro Dyne and Supco, a robust portfolio of HVAC parts and supplies that complement our existing residential and commercial offerings. Duro Dyne is reported in our Business Climate Solutions segment, and Supco is reported in our Home Comfort Solutions segment.
In October 2023, we completed the acquisition of AES, which is included in our Building Climate Solutions segment. AES is a company dedicated to service and sustainability in the light commercial markets across North America.
We sell our products and services through a combination of direct sales, distributors and company-owned stores. The demand for our products and services is seasonal and can be significantly impacted by the weather. Warmer than normal summer temperatures generate demand for replacement air conditioning and refrigeration products and services, and colder than normal winter temperatures have a similar effect on heating products and services. Conversely, cooler than normal summers and warmer than normal winters depress the demand for HVACR products and services. In addition to weather, demand for our products and services is influenced by national and regional economic and demographic factors, such as interest rates, the availability of financing, regional population and employment trends, new construction, general economic conditions and consumer spending habits and confidence. A substantial portion of the sales in each of our business segments is attributable to replacement business, with the balance comprised of new construction business.
The principal elements of cost of goods sold are components, raw materials, factory overhead, labor, estimated costs of warranty expense and freight and distribution costs. The principal raw materials used in our manufacturing processes are steel, aluminum and copper. In recent years, pricing volatility for these commodities and related components has impacted us and the HVACR industry in general. We seek to mitigate the impact of certain commodity price volatility through a combination of pricing actions, vendor contracts, improved production efficiency and cost reduction initiatives. We also partially mitigate volatility in the prices of these commodities by entering into futures contracts and fixed forward contracts.
In the fourth quarter of 2025, we changed the method of accounting for our inventories from last-in-first-out (“LIFO”) to first-in-first-out (“FIFO”). We believe the FIFO method is preferable because it more closely matches the physical flow of materials through purchasing, receiving, warehousing, production and order fulfillment, it results in a more consistent method to value inventory across the Company, and it improves comparability with industry peers. This change increased Retained Earnings by $106.6 million as of January 1, 2023, and increased net income by $1.1 million and $4.2 million for the years ended December 31, 2023 and 2024, respectively. All prior amounts have been adjusted.
Financial Highlights
•Net sales decreased $146 million, or 3%, to $5,195 million in 2025 from $5,341 million in 2024.
•Operating income in 2025 was $1,042 million compared to $1,040 million in 2024.
•Net income in 2025 decreased to $806 million from $811 million in 2024.
•Diluted earnings per share was $22.79 per share in 2025 compared to $22.66 per share in 2024.
•We generated $758 million of cash flow from operating activities in 2025 compared to $946 million in 2024.
•We returned $173 million to shareholders through dividend payments and repurchased $482 million as part of our Share Repurchase Plans in 2025.
Recent Developments
On July 4, 2025, the One Big Beautiful Bill Act (the “OBBBA”) was enacted into law, introducing significant changes to corporate income tax rates and deductions. For fiscal year 2025, the OBBBA did not have a material impact on our effective tax rate. We continue to evaluate the future impact of the OBBBA for those provisions that are effective after fiscal year 2025.
Overview of Results
The Home Comfort Solutions segment experienced a 7% decrease in net sales and a $32 million decrease in segment profit in 2025 as compared to 2024 primarily driven by lower sales volumes. Our Building Climate Solutions segment saw an increase in net sales of 5% and a $33 million increase in segment profit in 2025 compared to 2024, primarily due to favorable price and mix.
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Results of Operations
The following table provides a summary of our financial results, including information presented as a percentage of net sales (dollars in millions):
| For the Years Ended December 31, | ||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2025 | 2024 | 2023 | ||||||||||||||||||
| Dollars | Percent | Dollars | Percent | Dollars | Percent | |||||||||||||||
| Net sales | $ | 5,195.3 | 100.0 | % | $ | 5,341.3 | 100.0 | % | $ | 4,981.9 | 100.0 | % | ||||||||
| Cost of goods sold | 3,460.5 | 66.6 | % | 3,563.8 | 66.7 | % | 3,432.7 | 68.9 | % | |||||||||||
| Gross profit | 1,734.8 | 33.4 | % | 1,777.5 | 33.3 | % | 1,549.2 | 31.1 | % | |||||||||||
| Selling, general and administrative expenses | 681.4 | 13.1 | % | 730.6 | 13.7 | % | 705.5 | 14.2 | % | |||||||||||
| Losses (gains) and other expenses, net | 12.0 | 0.2 | % | 12.9 | 0.2 | % | 8.5 | 0.2 | % | |||||||||||
| Restructuring charges | 6.8 | 0.1 | % | — | — | % | 3.1 | 0.1 | % | |||||||||||
| Impairment on assets held for sale | — | — | % | — | — | % | 63.2 | 1.3 | % | |||||||||||
| Loss (gain) on sale of businesses | (0.9) | — | % | 1.5 | — | % | (14.1) | (0.3) | % | |||||||||||
| Income from equity method investments | (6.0) | (0.1) | % | (7.9) | (0.1) | % | (8.5) | (0.2) | % | |||||||||||
| Operating income | $ | 1,041.5 | 20.0 | % | $ | 1,040.4 | 19.5 | % | $ | 791.5 | 15.9 | % | ||||||||
| Net income | $ | 805.8 | 15.5 | % | $ | 811.1 | 15.2 | % | $ | 591.2 | 11.9 | % |
Year Ended December 31, 2025 Compared to Year Ended December 31, 2024 - Consolidated Results
Net Sales
Net sales decreased 3% in 2025 compared to 2024 as lower sales volumes of 13% were partially offset by favorable price and mix of 9% and a 1% increase in sales volumes due to our fourth quarter acquisition of Duro Dyne and Supco.
Gross Profit
Gross profit margins for 2025 increased 10 basis points (“bps”) to 33.4% compared to 33.3% in 2024. Gross profit margin increased 290 bps from higher price and favorable mix, which was partially offset by 160 bps from higher products costs and 120 bps from higher freight and distribution costs.
Selling, General and Administrative Expenses
SG&A expenses decreased by $49 million in 2025 compared to 2024. As a percentage of net sales, SG&A expenses decreased 60 bps from 13.7% to 13.1% in the same periods, primarily due to lower employee-related costs including reduced incentive compensation and reduced discretionary expenses.
Losses and Other Expenses, Net
Losses and other expenses, net for 2025 and 2024 included the following (in millions):
| For the Years Ended December 31, | ||||||
|---|---|---|---|---|---|---|
| 2025 | 2024 | |||||
| Foreign currency exchange (gains) losses | (10.5) | 7.7 | ||||
| Loss (gain) on disposal of fixed assets | 1.1 | (2.1) | ||||
| Acquisition costs | 10.3 | — | ||||
| Other operating loss | 0.2 | 0.5 | ||||
| Environmental liabilities and special litigation charges | 10.9 | 6.8 | ||||
| Losses and other expenses, net (pre-tax) | $ | 12.0 | $ | 12.9 |
Foreign currency exchange gains increased in 2025 primarily due to changes in foreign exchange rates in our primary markets. Acquisition costs are related to the acquisition of Duro Dyne and Supco. The acquisition occurred in the fourth quarter
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of 2025. The Environmental liabilities and special litigation charges in 2025 relate to estimated remediation costs at some of our facilities and outstanding legal settlements including asbestos. Refer to Note 5 in the Notes to the Consolidated Financial Statements for more information on litigation, including asbestos-related litigation, and environmental liabilities.
Restructuring Charges
There were $6.8 million in restructuring charges in 2025 to realize SG&A and distribution efficiencies. There were no charges in 2024. For more information on our restructuring activities, see Note 7 in the Notes to the Consolidated Financial Statements.
Goodwill
We performed a qualitative impairment analysis and noted no indicators of goodwill impairment for the year ended December 31, 2025. Refer to Note 9 in the Notes to the Consolidated Financial Statements for more information on goodwill.
Income from Equity Method Investments
Investments over which we do not exercise control but have significant influence are accounted for using the equity method of accounting. Income from equity method investments was $6 million in 2025 as compared to $8 million in 2024.
Interest Expense, net
Net interest expense of $41 million in 2025 increased slightly from $39 million in 2024 primarily due to increased borrowings as a result of decreased cash flow.
Income Taxes
The income tax provision was $191 million in 2025 compared to $188 million in 2024, and the effective tax rate was 19.2% in 2025 compared to 18.8% in 2024. The 2025 and 2024 effective tax rates differ from the statutory rate of 21% primarily due to foreign taxes. Refer to Note 12 in the Notes to the Consolidated Financial Statements for more information on income taxes.
Year Ended December 31, 2025 Compared to Year Ended December 31, 2024 - Results by Segment
Home Comfort Solutions
The following table presents our Home Comfort Solutions segment’s net sales and profit for 2025 and 2024 (dollars in millions):
| For the Years Ended December 31, | |||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2025 | 2024 | Difference | % Change | ||||||||||
| Net sales | $ | 3,343.4 | $ | 3,577.1 | $ | (233.7) | (7)% | ||||||
| Segment profit | $ | 728.5 | $ | 760.5 | $ | (32.0) | (4)% | ||||||
| % of net sales | 21.8 | % | 21.3 | % |
Net sales decreased 7% in 2025 compared to 2024 as a 17% decrease in sales volumes was partially offset by a 10% increase in price and mix.
Segment profit in 2025 decreased $32 million compared to 2024 primarily due to $224 million reduction in sales volumes, $64 million increase in product costs and factory inefficiencies, and $47 million in higher freight and distribution costs. Partially offsetting these decreases was $256 million in favorable price and mix and $47 million from improvement in other costs, including selling expenses.
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Building Climate Solutions
The following table presents our Building Climate Solutions segment’s net sales and profit for 2025 and 2024 (dollars in millions):
| For the Years Ended December 31, | ||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2025 | 2024 | Difference | % Change | |||||||||||
| Net sales | $ | 1,851.9 | $ | 1,764.2 | $ | 87.7 | 5 | % | ||||||
| Segment profit | $ | 434.2 | $ | 401.7 | $ | 32.5 | 9 | % | ||||||
| % of net sales | 23.4 | % | 22.8 | % |
Net sales increased 5% in 2025 compared to 2024 due to an 8% increase in favorable price and mix and a 2% increase in sales volumes from our Duro Dyne acquisition, which were partially offset by a 5% decrease in sales volumes.
Segment profit in 2025 increased $33 million compared to 2024 due to $100 million from price and mix benefit. Partially offsetting this increase was $31 million in lower sales volumes, a $16 million increase in product costs, net of factory efficiencies, and $20 million from inflation in distribution and selling as well as other discretionary spend.
Corporate and Other
The following table presents our Corporate and Other segment’s net sales and loss for 2025 and 2024 (dollars in millions):
| For the Years Ended December 31, | ||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2025 | 2024 | Difference | % Change | |||||||||||
| Net sales | $ | — | $ | — | $ | — | N/A | |||||||
| Loss | $ | (105.0) | $ | (120.3) | $ | 15.3 | (13) | % |
Corporate and Other costs decreased $15 million in 2025 as compared to 2024, primarily due to lower employee costs, including reduced incentive compensation, as well as improved productivity in consultant spending.
Year Ended December 31, 2024 Compared to Year Ended December 31, 2023 - Consolidated Results
Net Sales
Net sales increased 7% in 2024 compared to 2023 as higher sales volumes of 8%, favorable price and mix of 3% and an increase of sales volumes of 1% from our AES acquisition were partially offset by a 5% reduction in sales due to the fourth quarter 2023 sale of our European businesses.
Gross Profit
Gross profit margins for 2024 increased 220 bps to 33.3% compared to 31.1% in 2023. Gross profit margin increased 250 bps from higher price and favorable mix, which was partially offset by 30 bps from higher freight and distribution costs and product costs.
Selling, General and Administrative Expenses
SG&A expenses increased by $25 million in 2024 compared to 2023. As a percentage of net sales, SG&A expenses decreased 50 bps from 14.2% to 13.7% in the same periods, primarily due to higher employee-related costs including increased incentive compensation, which was partially offset by a $62 million reduction in SG&A expenses from our 2023 divestiture of our European businesses.
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Losses and Other Expenses, Net
Losses and other expenses, net for 2024 and 2023 included the following (in millions):
| For the Years Ended December 31, | ||||||
|---|---|---|---|---|---|---|
| 2024 | 2023 | |||||
| Realized losses on settled futures contracts | $ | — | $ | 0.1 | ||
| Foreign currency exchange losses (gains) | 7.7 | (4.3) | ||||
| Gain on disposal of fixed assets | (2.1) | (0.5) | ||||
| Other operating income (loss) | 0.5 | (1.6) | ||||
| Net change in unrealized gains on unsettled futures contracts | — | (0.1) | ||||
| Environmental liabilities and special litigation charges | 6.8 | 15.6 | ||||
| Other items, net | — | (0.7) | ||||
| Losses and other expenses, net | $ | 12.9 | $ | 8.5 |
The net change in unrealized (gains) losses on unsettled futures contracts was due to changes in commodity prices relative to the unsettled futures contract prices. For more information on our derivatives, see Note 9 in the Notes to the Consolidated Financial Statements. Foreign currency exchange losses increased in 2024 primarily due to changes in foreign exchange rates in our primary markets. Environmental liabilities and special litigation charges in 2024 relate to estimated remediation costs at some of our facilities and outstanding legal settlements including asbestos. Refer to Note 5 in the Notes to the Consolidated Financial Statements for more information on litigation, including asbestos-related litigation, and environmental liabilities.
Restructuring Charges
There were no restructuring charges in 2024 compared to $3.1 million in 2023. Charges in 2023 were related to the reorganization or removal of duplicative headcount and infrastructure. For more information on our restructuring activities, see Note 7 in the Notes to the Consolidated Financial Statements.
Goodwill
We performed a qualitative impairment analysis and noted no indicators of goodwill impairment for the year ended December 31, 2024. Refer to Note 9 in the Notes to the Consolidated Financial Statements for more information on goodwill. In 2023, we recorded a $2.3 million impairment of goodwill related to our agreement to sell our European commercial HVAC and refrigeration businesses.
Asset Impairments
We did not have any impairments of assets in 2024. In the third quarter of 2023, we recorded a $22.6 million impairment of property, plant and equipment related to our agreement to sell our European commercial HVAC and refrigeration businesses.
Income from Equity Method Investments
Investments over which we do not exercise control but have significant influence are accounted for using the equity method of accounting. Income from equity method investments was $8 million in 2024 consistent with 2023.
Interest Expense, net
Net interest expense of $39 million in 2024 decreased from $52 million in 2023 primarily due to decreased borrowings as a result of increased cash flow.
Income Taxes
The income tax provision was $188 million in 2024 compared to $148 million in 2023, and the effective tax rate was 18.8% in 2024 compared to 20.0% in 2023. The 2024 and 2023 effective tax rates differ from the statutory rate of 21% primarily due to foreign taxes. Refer to Note 12 in the Notes to the Consolidated Financial Statements for more information on income taxes.
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Year Ended December 31, 2024 Compared to Year Ended December 31, 2023 - Results by Segment
Home Comfort Solutions
The following table presents our Home Comfort Solutions segment’s net sales and profit for 2024 and 2023 (dollars in millions):
| For the Years Ended December 31, | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| 2024 | 2023 | Difference | % Change | ||||||||
| Net sales | $ | 3,577.1 | $ | 3,222.9 | $ | 354.2 | 11% | ||||
| Segment profit | $ | 760.5 | $ | 611.6 | $ | 148.9 | 24% | ||||
| % of net sales | 21.3 | % | 19.0 | % |
Net sales increased 11% in 2024 compared to 2023 due to a 7% increase in volume and a 4% increase in price and mix.
Segment profit in 2024 increased $149 million compared to 2023 primarily due to $122 million from higher price and favorable mix, $90 million from higher sales volumes and $9 million from factory productivity and favorable product costs. Partially offsetting these increases were $37 million from higher SG&A costs, $20 million from higher freight and distribution costs, $9 million from unfavorable foreign currency, and $6 million from miscellaneous other items.
Building Climate Solutions
The following table presents our Building Climate Solutions segment’s net sales and profit for 2024 and 2023 (dollars in millions):
| For the Years Ended December 31, | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| 2024 | 2023 | Difference | % Change | ||||||||
| Net sales | $ | 1,764.2 | $ | 1,511.4 | $ | 252.8 | 17% | ||||
| Segment profit | $ | 401.7 | $ | 340.8 | $ | 60.9 | 18% | ||||
| % of net sales | 22.8 | % | 22.5 | % |
Net sales increased 17% in 2024 compared to 2023 primarily due to a 9% increase in sales volumes, a 3% increase in higher price and favorable mix, and a 5% increase in sales volumes from our AES acquisition.
Segment profit in 2024 increased $61 million compared to 2023 primarily due to $44 million from higher sales volumes, $39 million from price and mix benefit, and $15 million from our AES acquisition. Partially offsetting these increases were $28 million in expenses from higher factory inefficiencies, which includes costs related to the ramp up of our new facility in Mexico, slightly higher product costs, and $9 million of inflationary wage impacts.
Corporate and Other
The following table presents our Corporate and Other segment’s net sales and loss for 2024 and 2023 (dollars in millions):
| For the Years Ended December 31, | ||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2024 | 2023 | Difference | % Change | |||||||||||
| Net sales | $ | — | $ | 247.6 | $ | (247.6) | (100) | % | ||||||
| Loss | $ | (120.3) | $ | (93.9) | $ | (26.4) | 28 | % |
Net sales decreased $248 million and segment loss increased $26 million in 2024 as compared to 2023. Our European businesses, which were sold in 2023, generated net sales of $248 million and a profit of $7 million in 2023. Excluding our European business, Corporate and Other costs increased $19 million in 2024 as compared to 2023 primarily due to higher incentive compensation and other employee costs and wage inflation.
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Accounting for Futures Contracts
Realized gains and losses on settled futures contracts are a component of segment profit (loss). Unrealized gains and losses on unsettled futures contracts are excluded from segment profit (loss) as they are subject to changes in fair value until their settlement date. Both realized and unrealized gains and losses on futures contracts are a component of Losses (gains) and other expenses, net in the accompanying Consolidated Statements of Operations. See Note 9 of the Notes to Consolidated Financial Statements for more information on our derivatives and Note 3 of the Notes to the Consolidated Financial Statements for more information on our segments and for a reconciliation of segment profit to operating income.
Liquidity and Capital Resources
Our working capital and capital expenditure requirements are generally met through internally generated funds, bank lines of credit and our commercial paper program. Working capital needs are generally greater in the first and second quarters due to the seasonal nature of our business cycle.
Statement of Cash Flows
The following table summarizes our cash flow activity for the years ended December 31, 2025, 2024 and 2023 (in millions):
| 2025 | 2024 | 2023 | ||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| Net cash provided by operating activities | $ | 757.6 | $ | 945.7 | $ | 736.2 | ||||
| Net cash used in investing activities | $ | (655.6) | $ | (174.4) | $ | (319.7) | ||||
| Net cash used in financing activities | $ | (465.7) | $ | (418.6) | $ | (406.2) |
Net Cash Provided By Operating Activities - Net cash provided by operating activities decreased $188 million to $758 million in 2025 compared to $946 million in 2024. The decrease was primarily attributable to an increase in net working capital of $217 million.
Net Cash Used In Investing Activities - Net cash used in investing activities increased $481 million from 2024 to 2025 primarily due to $545 million related to our acquisition of Duro Dyne and Supco, which was partially offset by lower capital expenditures. Capital expenditures were $119 million, $164 million and $250 million in 2025, 2024 and 2023, respectively. Capital expenditures in 2025 were primarily related to the expansion of our manufacturing capacity equipment and investments in systems and software to support the overall enterprise.
Net Cash Used In Financing Activities - Net cash used in financing activities was $466 million in 2025 and $419 million in 2024. The increase was primarily due to share repurchases in 2025, offset by higher net debt borrowings. We repurchased $482 million and $54 million in 2025 and 2024, respectively, as part of our Share Repurchase Plans. There were no repurchases in 2023. We also returned $173 million to shareholders through dividend payments in 2025.
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Debt Position
The following table details our lines of credit and financing arrangements as of December 31, 2025 (in millions):
| Outstanding Borrowings | ||
|---|---|---|
| Commercial paper: | $ | 226.0 |
| Current maturities of long-term debt: | ||
| Finance lease obligations | $ | 18.3 |
| Total current maturities of long-term debt | $ | 18.3 |
| Long-term debt: | ||
| Finance lease obligations | $ | 50.6 |
| Term loan | 300.0 | |
| Senior unsecured notes | 800.0 | |
| Debt issuance costs | (6.5) | |
| Total long-term debt | $ | 1,144.1 |
| Total debt | $ | 1,388.4 |
Commercial Paper Program
On October 25, 2023, we established a commercial paper program (the “Program”), as a replacement to our Asset Securitization Program which expired in November 2023, pursuant to which we may issue short-term, unsecured commercial paper notes (the “CP Notes”) under the exemption from registration contained in Section 4(a)(2) of the Securities Act. Amounts available under the Program may be borrowed, repaid, and re-borrowed from time to time, with the aggregate face or principal amount of the CP Notes outstanding under the Program at any time not to exceed $500.0 million. The CP Notes have maturities of up to 397 days from the date of issue and rank pari passu with all of our other unsecured and unsubordinated indebtedness. The net proceeds from issuances of the CP Notes are typically used for general corporate purposes. Our revolving credit facility serves as a liquidity backstop for the repayment of CP Notes outstanding under the Program. There are $226.0 million in CP Notes outstanding under the Program as of December 31, 2025.
Credit Agreement
On May 9, 2025, we entered into an Amendment and Restatement Agreement (the “Credit Agreement”) to our existing unsecured revolving credit facility with JPMorgan Chase Bank, N.A., as administrative agent, and the other lenders party thereto. Our Credit Agreement consists of a $1.0 billion unsecured revolving credit facility with an option to increase the revolving commitments by up to $350 million at our request, subject to the terms and conditions of the Credit Agreement. We had no outstanding borrowings as well as $1.7 million committed to standby letters of credit as of December 31, 2025. Subject to covenant limitations, $772.3 million was available for future borrowings after taking into consideration outstanding borrowings under the Program. The Credit Agreement includes a subfacility for swingline loans of up to $65.0 million. The Credit Agreement will expire and outstanding loans will be required to be repaid in May 2030, unless maturity is extended by the lenders pursuant to two one-year extension options that we may request under the Credit Agreement.
Term Loan
On October 16, 2025, we entered into a Term Credit Agreement (the “Term Credit Agreement”) with Wells Fargo Bank, National Association, as administrative agent, and the other lenders party thereto. We borrowed $300.0 million pursuant to the Term Credit Agreement and used the net proceeds to repay existing borrowings under the Credit Agreement. The Term Credit Agreement matures on October 16, 2027. Loans under the Term Credit Agreement bear interest at our election at a rate per annum equal to (i) a forward-looking term rate based on the secured overnight financing rate for the applicable interest period ("Term SOFR"), plus an applicable margin ranging between 0.90% and 1.025% per annum depending on our long-term unsecured debt rating, or (ii) the highest of the Wells Fargo Bank, National Association prime rate, the Federal Funds rate plus
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0.50%, and Term SOFR for a one month tenor in effect on such day plus 1.00%, plus an applicable margin ranging between 0.00% and 0.025% per annum depending on our long-term unsecured debt rating.
The Term Credit Agreement contains customary covenants and events of default that are substantially similar to the existing covenants and events of default in our Credit Agreement.
Senior Unsecured Notes
In September 2023, we issued $500.0 million of senior unsecured notes, which will mature in September 2028 (the "2028 Notes") with interest being paid semi-annually in March and September at 5.50%. In July 2020, we issued senior unsecured notes for $300.0 million, which will mature on August 1, 2027 (the "2027 Notes" and collectively with the 2028 Notes, the "Notes") with interest being paid semi-annually in February and August at 1.70% per annum. On August 1, 2025, we repaid upon maturity $300.0 million of our 1.35% senior unsecured notes due in 2025 that were originally issued in 2020.
Financial Leverage
We periodically review our capital structure, including our primary bank facility, to ensure the appropriate levels of liquidity and leverage and to take advantage of favorable interest rate environments or other market conditions. We consider various other financing alternatives and may, from time to time, access the capital markets.
We also evaluate our debt-to-capital and debt-to-EBITDA ratios to determine, among other considerations, the appropriate targets for capital expenditures and share repurchases under our Share Repurchase Plans. Our book value of debt-to-total-capital ratio decreased to 54% at December 31, 2025 compared to 57% at December 31, 2024.
As of December 31, 2025, our senior credit ratings were Baa1 with a stable outlook, and BBB with a stable outlook, by Moody’s Investors Service, Inc. (“Moody’s”) and Standard & Poor’s Rating Group (“S&P”), respectively. The security ratings are not a recommendation to buy, sell or hold securities and may be subject to revision or withdrawal at any time by the assigning rating agency. Each rating should be evaluated independently of any other rating. Our goal is to maintain investment grade ratings from Moody’s and S&P to help ensure the capital markets remain available to us.
Liquidity
We believe our cash and cash equivalents of $34.2 million, future cash generated from operations and available future borrowings are sufficient to fund our operations, planned capital expenditures, future contractual obligations, share repurchases, anticipated dividends and other needs in the foreseeable future. Included in our cash and cash equivalents as of December 31, 2025 was $9 million of cash held in foreign locations, although that amount can fluctuate significantly depending on the timing of cash receipts and payments. Our cash and cash equivalents held in foreign locations is generally available for use in our U.S. operations and could be subject to foreign withholding taxes and U.S. state taxes.
No contributions are required to be made to our U.S. defined benefit plans in 2026. We made $7.6 million in total contributions to our pension plans in 2025.
Dividend payments were $173 million in 2025 compared to $160 million in 2024. On May 22, 2025, our Board of Directors approved a 13% increase in our quarterly dividend on common stock from $1.15 to $1.30 per share effective with the July 2025 dividend payment.
Delaware law limits the ability to pay dividends to surplus or, if there is no surplus, out of net profits for the fiscal year in which the dividend is declared and/or the preceding fiscal year. In addition, stock repurchases can only be made out of surplus and only if our capital would not be impaired.
We expect capital expenditures of approximately $250 million in 2026 for general capital improvement projects.
Financial Covenants related to our Debt
The Credit Agreement and Term Credit Agreement (the “Credit Facilities”) are guaranteed by the Guarantor Subsidiaries (as defined below) and contain customary covenants applicable to us and our subsidiaries including limitations on indebtedness, liens, dividends, stock repurchases, mergers and sales of all or substantially all of our assets. In addition, the Credit Facilities each contain a financial covenant requiring us to maintain, as of the last day of each fiscal quarter for the four prior fiscal
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quarters, a Total Net Leverage Ratio of no more than 3.50 to 1.00 (or, at our election, on up to two occasions following a material acquisition, 4.00 to 1.00).
Our Credit Facilities contains customary events of default. These events of default include nonpayment of principal or other amounts, material inaccuracy of representations and warranties, breach of covenants, default on certain other indebtedness or receivables securitizations (cross default), certain voluntary and involuntary bankruptcy events and the occurrence of a change in control. A cross default under our Credit Facilities could occur if:
•We fail to pay any principal or interest when due on any other indebtedness or receivables securitization exceeding $75.0 million; or
•We are in default in the performance of, or compliance with any term of any other indebtedness in an aggregate principal amount exceeding $75.0 million, or any other condition exists which would give the holders the right to declare such indebtedness due and payable prior to its stated maturity.
Each of our major debt agreements contains provisions by which a default under one agreement causes a default in the others (a cross default). If a cross default under our Credit Facilities or our senior unsecured notes were to occur, it could have a wider impact on our liquidity than might otherwise occur from a default of a single debt instrument or lease commitment.
If any event of default occurs and is continuing, the administrative agent, or lenders with a majority of the aggregate commitments, may require the administrative agent to terminate our right to borrow under our Credit Agreement and accelerate amounts due under our Credit Facilities (except for a bankruptcy event of default, in which case such amounts will automatically become due and payable and the lenders’ commitments will automatically terminate).
In the event of a credit rating downgrade below investment grade resulting from a change of control, holders of our senior unsecured notes will have the right to require us to repurchase all or a portion of the senior unsecured notes at a repurchase price equal to 101% of the principal amount of the notes, plus accrued and unpaid interest, if any. The notes are guaranteed, on a senior unsecured basis, by the Guarantor Subsidiaries. The indenture governing the notes contains covenants that, among other things, limit our ability and the ability of the 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 million in principal which is then accelerated, and such acceleration is not rescinded within 30 days of the notice date.
We are currently in compliance with all covenant requirements.
Leasing Commitments
Refer to Note 5 in the Notes to the Consolidated Financial Statements for more details on our leasing commitments.
Guarantees related to our Debt Obligations
Our senior unsecured notes were issued by Lennox International Inc. (the “Parent”) and are unconditionally guaranteed by certain of our subsidiaries (the “Guarantor Subsidiaries”) and are not secured by our other subsidiaries. The Guarantor Subsidiaries are 100% owned and consolidated, all guarantees are full and unconditional, and all guarantees are joint and several.
The following combined Parent and Guarantor Subsidiaries financial information is presented as of December 31, 2025 and for the year ended December 31, 2025 (in millions):
| December 31, 2025 | ||
|---|---|---|
| Current assets | $ | 1,676.4 |
| Non-current assets | 1,824.9 | |
| Current liabilities | 1,000.7 | |
| Non-current liabilities | 1,689.4 | |
| Amounts due to non-Guarantor Subsidiaries | (463.7) |
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| For the Year Ended December 31, 2025 | ||
|---|---|---|
| Net sales | $ | 5,113.8 |
| Gross profit | 1,324.4 | |
| Net income | 406.3 |
Off Balance Sheet Arrangements
We have no off-balance sheet arrangements that we believe may have a material current or future effect on our financial condition, liquidity or results of operations.
Contractual Obligations
Contractual obligations arise in the normal course of business and include debt and related interest payments, leases, purchase obligations, pension and post-retirement benefits and warranty liabilities. For additional information regarding our contractual obligations, see Note 5 of the Notes to the Consolidated Financial Statements. See Note 10 of the Notes to the Consolidated Financial Statements for more information on our pension and post-retirement benefits obligations. See Note 13 of the Notes to the Consolidated Financial Statements for more information on our debt obligations.
Fair Value Measurements
Fair value is the price that would be received to sell an asset or the price paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value is based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date and requires consideration of our creditworthiness when valuing certain liabilities. Our framework for measuring fair value is based on a three-level hierarchy for fair value measurements.
The three-level fair value hierarchy for disclosure of fair value measurements is defined as follows:
Level 1 - Quoted prices for identical instruments in active markets at the measurement date.
Level 2 - Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations in which all significant inputs and significant value drivers are observable in active markets at the measurement date and for the anticipated term of the instrument.
Level 3 - Valuations derived from valuation techniques in which one or more significant inputs or significant value drivers are unobservable inputs that reflect the reporting entity’s own assumptions about the assumptions market participants would use in pricing the asset or liability developed based on the best information available in the circumstances.
Where available, the fair values were based upon quoted prices in active markets. However, if quoted prices were not available, then the fair values were based upon quoted prices for similar assets or liabilities or independently sourced market parameters, such as credit default swap spreads, yield curves, reported trades, broker/dealer quotes, interest rates and benchmark securities. For assets and liabilities without observable market activity, if any, the fair values were based upon discounted cash flow methodologies incorporating assumptions that, in our judgment, reflect the assumptions a marketplace participant would use. Valuation adjustments to reflect either party’s creditworthiness and ability to pay were incorporated into our valuations, where appropriate, as of December 31, 2025 and 2024, the measurement dates. See Note 16 of the Notes to the Consolidated Financial Statements for more information on the assets and liabilities measured at fair value.
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Market Risk
Commodity Price Risk
We enter into commodity futures contracts to stabilize prices expected to be paid for raw materials and parts containing high copper and aluminum content. These contracts are for quantities equal to or less than quantities expected to be consumed in future production. Fluctuations in metal commodity prices impact the value of the futures contracts that we hold. When metal commodity prices rise, the fair value of our futures contracts increases. Conversely, when commodity prices fall, the fair value of our futures contracts decreases. Information about our exposure to metal commodity price market risks and a sensitivity analysis related to our metal commodity hedges is presented below (in millions):
| Notional amount (pounds of aluminum and copper) | 87.6 | |
|---|---|---|
| Carrying amount and fair value of net asset | $ | 23.6 |
| Change in fair value from 10% change in forward prices | $ | 13.2 |
Refer to Note 9 of the Notes to the Consolidated Financial Statements for additional information regarding our commodity futures contracts.
Interest Rate Risk
Our results of operations can be affected by changes in interest rates due to variable rates of interest on our debt facilities, cash, cash equivalents and short-term investments. A 10% adverse movement in the levels of interest rates across the entire yield curve would have resulted in an increase to pre-tax interest expense of approximately $1.1 million, $0.9 million and $2.3 million for the years ended December 31, 2025, 2024 and 2023, respectively.
From time to time, we may use an interest rate swap hedging strategy to eliminate the variability of cash flows in a portion of our interest payments. This strategy, when employed, allows us to fix a portion of our interest payments when interest rates are low. As of December 31, 2025 and 2024, no interest rate swaps were in effect.
Foreign Currency Exchange Rate Risk
Our results of operations are affected by changes in foreign currency exchange rates. Net sales and expenses in foreign currencies are translated into U.S. dollars for financial reporting purposes based on the average exchange rate for the period. Our primary exposure to foreign currencies are the Canadian dollar, Mexican Peso, and the Euro. During 2025, 2024 and 2023, net sales from outside the U.S. represented 7%, 6% and 11%, respectively, of our total net sales. For the years ended December 31, 2025, 2024, and 2023, foreign currency transaction gains and losses did not have a material impact to our results of operations. A 10% change in foreign exchange rates would have had an estimated $5.8 million, $2.6 million and $5.6 million impact to net income for the years ended December 31, 2025, 2024 and 2023, respectively.
We seek to mitigate the impact of currency exchange rate movements on certain short-term transactions by periodically entering into foreign currency forward contracts. By entering into forward contracts, we lock in exchange rates that would otherwise cause losses should the U.S. dollar appreciate and gains should the U.S. dollar depreciate. Refer to Note 9 of the Notes to the Consolidated Financial Statements for additional information regarding our foreign currency forward contracts.
Critical Accounting Estimates
A critical accounting estimate is one that requires difficult, subjective or complex estimates and assessments and is fundamental to our results of operations and financial condition. The following describes our critical accounting estimate related to product warranties and product-related contingencies and how we develop our judgments, assumptions and estimates about future events and how such policies can impact our financial statements. This discussion and analysis should be read in conjunction with our Consolidated Financial Statements and related Notes in “Item 8. Financial Statements and Supplementary Data.”
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Product Warranties and Product-Related Contingencies
The estimate of our liability for future warranty costs requires us to make assumptions about the amount, timing and nature of future product-related costs. Some of the warranties we issue extend 10 years or more in duration and a relatively small adjustment to an assumption may have a significant impact on our overall liability.
From time to time, we may also incur costs to repair or replace installed products experiencing quality issues in order to satisfy our customers and protect our brand. These product-related costs may not be covered under our warranties and are not covered by insurance.
We periodically review the assumptions used to determine the liabilities for product warranties and product-related contingencies and we adjust our assumptions based upon factors such as actual failure rates and cost experience. Numerous factors could affect actual failure rates and cost experience, including the amount and timing of new product introductions, changes in manufacturing techniques or locations, components or suppliers used. Should actual costs differ from our estimates, we may be required to adjust the liabilities and to record expense in future periods. See Note 5 in the Notes to the Consolidated Financial Statements for more information on our product warranties and product-related contingencies.
Recent Accounting Pronouncements
See Note 2 in the Notes to the Consolidated Financial Statements for disclosure of recent accounting pronouncements and the potential impact on our financial statements and disclosures.
MD&A history
Prior-year 10-K MD&A spans are extracted from SEC filings with the same bounded parser used for the latest filing. The latest 10-K appears above; prior years are below.
FY 2024 10-K MD&A
SEC filing source: 0001628280-25-004859.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion should be read in conjunction with the other sections of this report, including the Consolidated Financial Statements and related Notes to the Consolidated Financial Statements in Item 8, “Other Financial Statement Details,” of this Annual Report on Form 10-K.
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Forward-Looking Statements
This Annual Report on Form 10-K contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Exchange Act that are based on information currently available to management as well as management’s assumptions and beliefs as of the date hereof. All statements, other than statements of historical fact, included in this Annual Report on Form 10-K constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements can be identified by the words “may,” “will,” “should,” “plan,” “predict,” “anticipate,” “believe,” “intend,” “estimate” and “expect” and similar expressions. Statements that are not historical should also be considered forward-looking statements. Such statements reflect our current views with respect to future events. Readers are cautioned not to place undue reliance on these forward-looking statements. We believe these statements are based on reasonable assumptions; however, such statements are inherently subject to risks and uncertainties, including but not limited to the specific uncertainties discussed elsewhere in this Annual Report on Form 10-K and the risk factors set forth in Item 1A. Risk Factors in this Annual Report on Form 10-K. These risks and uncertainties may affect our performance and results of operations. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may differ materially from those in the forward-looking statements. We disclaim any intention or obligation to update or review any forward-looking statements or information, whether as a result of new information, future events or otherwise unless required by law.
The following are some of the factors that could cause actual results to differ materially from those expressed or implied in forward-looking statements:
•competition in the HVACR business;
•our ability to successfully develop and market new products or execute our business strategy, including the implementation of price increases for products and services;
•our ability to meet and anticipate customer demands;
•our ability to continue to license or enforce our intellectual property rights;
•our ability to attract, motivate, develop and retain our employees, as well as labor relations problems;
•artificial intelligence technologies;
•a decline in new construction activity and related demand for our products and services;
•the impact of weather on our business;
•the impact of higher raw material prices and significant supply interruptions;
•product liability, warranty claims, or recalls;
•changes in environmental and climate-related legislation or government regulations or policies;
•changes in tax legislation;
•the impact of new or increased trade tariffs;
•improper conduct by any of our employees, agents, or business partners;
•litigation risks;
•general economic conditions in the United States and abroad;
•extraordinary events beyond our control, such as conflicts, wars, natural disasters, public health crises, or terrorist acts;
•risks associated with our international operations;
•cyber attacks and other disruptions or misuse of information systems; and
•our ability to successfully realize, complete and integrate acquisitions.
Business Overview
We operate in two reportable business segments of the HVACR industry, Home Comfort Solutions and Building Climate Solutions. In addition to the two major business segments, Corporate and Other is also reported as a segment. For more detailed information regarding our reportable segments, see Note 3 in the Notes to the Consolidated Financial Statements.
In fourth quarter 2023, we completed the sale of our European businesses. The European businesses were presented with the Corporate and Other business segment until their divestiture.
We sell our products and services through a combination of direct sales, distributors and company-owned stores. The demand for our products and services is seasonal and can be significantly impacted by the weather. Warmer than normal summer temperatures generate demand for replacement air conditioning and refrigeration products and services, and colder than normal winter temperatures have a similar effect on heating products and services. Conversely, cooler than normal summers and warmer than normal winters depress the demand for HVACR products and services. In addition to weather, demand for our products and services is influenced by national and regional economic and demographic factors, such as interest rates, the availability of financing, regional population and employment trends, new construction, general economic conditions and
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consumer spending habits and confidence. A substantial portion of the sales in each of our business segments is attributable to replacement business, with the balance comprised of new construction business.
The principal elements of cost of goods sold are components, raw materials, factory overhead, labor, estimated costs of warranty expense and freight and distribution costs. The principal raw materials used in our manufacturing processes are steel, aluminum and copper. In recent years, pricing volatility for these commodities and related components has impacted us and the HVACR industry in general. We seek to mitigate the impact of certain commodity price volatility through a combination of pricing actions, vendor contracts, improved production efficiency and cost reduction initiatives. We also partially mitigate volatility in the prices of these commodities by entering into futures contracts and fixed forward contracts.
Financial Highlights
•Net sales increased $359 million, or 7%, to $5,341 million in 2024 from $4,982 million in 2023.
•Operating income in 2024 was $1,035 million compared to $790 million in 2023.
•Net income in 2024 increased to $807 million from $590 million in 2023.
•Diluted earnings per share was $22.54 per share in 2024 compared to $16.54 per share in 2023.
•We generated $946 million of cash flow from operating activities in 2024 compared to $736 million in 2023.
•We returned $160 million to shareholders through dividend payments in 2024.
Overview of Results
The Home Comfort Solutions segment experienced an 11% increase in net sales and a $150 million increase in segment profit in 2024 compared to 2023 primarily driven by favorable price and mix and higher sales volumes. Our Building Climate Solutions segment saw an increase in net sales of 17% and a $56 million increase in segment profit in 2024 compared to 2023, primarily due to favorable price and mix. As a result of the transition to low GWP refrigerants, customers pre-purchased R-410A equipment, which is estimated to have positively impacted revenue by $125 million.
Results of Operations
The following table provides a summary of our financial results, including information presented as a percentage of net sales (dollars in millions):
| For the Years Ended December 31, | ||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2024 | 2023 | 2022 | ||||||||||||||||||
| Dollars | Percent | Dollars | Percent | Dollars | Percent | |||||||||||||||
| Net sales | $ | 5,341.3 | 100.0 | % | $ | 4,981.9 | 100.0 | % | $ | 4,718.4 | 100.0 | % | ||||||||
| Cost of goods sold | 3,569.4 | 66.8 | % | 3,434.1 | 68.9 | % | 3,433.7 | 72.8 | % | |||||||||||
| Gross profit | 1,771.9 | 33.2 | % | 1,547.8 | 31.1 | % | 1,284.7 | 27.2 | % | |||||||||||
| Selling, general and administrative expenses | 730.6 | 13.7 | % | 705.5 | 14.2 | % | 627.2 | 13.3 | % | |||||||||||
| Losses (gains) and other expenses, net | 12.9 | 0.2 | % | 8.5 | 0.2 | % | 4.9 | 0.1 | % | |||||||||||
| Restructuring charges | — | — | % | 3.1 | 0.1 | % | 1.5 | — | % | |||||||||||
| Impairment on assets held for sale | — | — | % | 63.2 | 1.3 | % | — | — | % | |||||||||||
| Loss (gain) on sale of businesses | 1.5 | — | % | (14.1) | (0.3) | % | — | — | % | |||||||||||
| Income from equity method investments | (7.9) | (0.1) | % | (8.5) | (0.2) | % | (5.1) | (0.1) | % | |||||||||||
| Operating income | $ | 1,034.8 | 19.4 | % | $ | 790.1 | 15.9 | % | $ | 656.2 | 13.9 | % | ||||||||
| Net income | $ | 806.9 | 15.1 | % | $ | 590.1 | 11.8 | % | $ | 497.1 | 10.5 | % |
Year Ended December 31, 2024 Compared to Year Ended December 31, 2023 - Consolidated Results
Net Sales
Net sales increased 7% in 2024 compared to 2023 as higher sales volumes of 8%, favorable price and mix of 3% and an increase of sales volumes of 1% from our AES acquisition were partially offset by a 5% reduction in sales due to the fourth quarter 2023 sale of our European businesses.
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Gross Profit
Gross profit margins for 2024 increased 210 basis points (“bps”) to 33.2% compared to 31.1% in 2023. Gross profit margin increased 250 bps from higher price and favorable mix, which was partially offset by 40 bps from higher freight and distribution costs.
Selling, General and Administrative Expenses
SG&A expenses increased by $25 million in 2024 compared to 2023. As a percentage of net sales, SG&A expenses decreased 50 bps from 14.2% to 13.7% in the same periods, primarily due to higher employee-related costs including increased incentive compensation, which was partially offset by a $62 million reduction in SG&A expenses from our 2023 divestiture of our European businesses.
Losses (Gains) and Other Expenses, Net
Losses (gains) and other expenses, net for 2024 and 2023 included the following (in millions):
| For the Years Ended December 31, | ||||||
|---|---|---|---|---|---|---|
| 2024 | 2023 | |||||
| Realized losses on settled future contracts | $ | — | $ | 0.1 | ||
| Foreign currency exchange losses (gains) | 7.7 | (4.3) | ||||
| Gain on disposal of fixed assets | (2.1) | (0.5) | ||||
| Other operating (income) loss | 0.5 | (1.6) | ||||
| Net change in unrealized losses (gains) on unsettled futures contracts | — | (0.1) | ||||
| Environmental liabilities and special litigation charges | 6.8 | 15.6 | ||||
| Other items, net | — | (0.7) | ||||
| Losses and other expenses, net (pre-tax) | $ | 12.9 | $ | 8.5 |
The net change in unrealized (gains) losses on unsettled futures contracts was due to changes in commodity prices relative to the unsettled futures contract prices. For more information on our derivatives, see Note 9 in the Notes to the Consolidated Financial Statements. Foreign currency exchange losses increased in 2024 primarily due to changes in foreign exchange rates in our primary markets. Environmental liabilities and special legal contingency charges in 2024 relate to estimated remediation costs at some of our facilities and outstanding legal settlements including asbestos. Refer to Note 5 in the Notes to the Consolidated Financial Statements for more information on litigation, including asbestos-related litigation, and environmental liabilities.
Restructuring Charges
There were no restructuring charges in 2024 compared to $3.1 million in 2023. Charges in 2023 were related to the reorganization or removal of duplicative headcount and infrastructure. For more information on our restructuring activities, see Note 7 in the Notes to the Consolidated Financial Statements.
Goodwill
We performed a qualitative impairment analysis and noted no indicators of goodwill impairment for the year ended December 31, 2024. Refer to Note 9 in the Notes to the Consolidated Financial Statements for more information on goodwill. In 2023, we recorded a $2.3 million impairment of goodwill related to our agreement to sell our European commercial HVAC and refrigeration businesses.
Asset Impairments
We did not have any impairments of assets in 2024. In the third quarter of 2023, we recorded a $22.6 million impairment of property, plant and equipment related to our agreement to sell our European commercial HVAC and refrigeration businesses.
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Income from Equity Method Investments
Investments over which we do not exercise control but have significant influence are accounted for using the equity method of accounting. Income from equity method investments was $8 million in 2024 consistent with 2023.
Interest Expense, net
Net interest expense of $39 million in 2024 decreased from $52 million in 2023 primarily due to decreased borrowings on our revolving credit facility as a result of increased cash flow.
Income Taxes
The income tax provision was $187 million in 2024 compared to $147 million in 2023, and the effective tax rate was 18.8% in 2024 compared to 20.0% in 2023. The 2024 and 2023 effective tax rates differ from the statutory rate of 21% primarily due to lower foreign tax rates. Refer to Note 12 in the Notes to the Consolidated Financial Statements for more information on income taxes.
Year Ended December 31, 2024 Compared to Year Ended December 31, 2023 - Results by Segment
Home Comfort Solutions
The following table presents our Home Comfort Solutions segment’s net sales and profit for 2024 and 2023 (dollars in millions):
| For the Years Ended December 31, | |||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2024 | 2023 | Difference | % Change | ||||||||||
| Net sales | $ | 3,577.1 | $ | 3,222.9 | $ | 354.2 | 11% | ||||||
| Profit | $ | 759.7 | $ | 610.2 | $ | 149.5 | 25% | ||||||
| % of net sales | 21.2 | % | 18.9 | % |
Net sales increased 11% in 2024 compared to 2023 due to a 7% increase in volume and a 4% increase in price and mix.
Segment profit in 2024 increased $150 million compared to 2023 primarily due to $122 million from higher price and favorable mix, $90 million from higher sales volumes and $10 million from factory productivity and favorable product costs, including LIFO. Partially offsetting these increases were $37 million from higher SG&A costs, $20 million from higher freight and distribution costs, $9 million from unfavorable foreign currency, and $6 million from miscellaneous other items.
Building Climate Solutions
The following table presents our Building Climate Solutions segment’s net sales and profit for 2024 and 2023 (dollars in millions):
| For the Years Ended December 31, | ||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2024 | 2023 | Difference | % Change | |||||||||||
| Net sales | $ | 1,764.2 | $ | 1,511.4 | $ | 252.8 | 17 | % | ||||||
| Profit | $ | 396.9 | $ | 340.8 | $ | 56.1 | 16 | % | ||||||
| % of net sales | 22.5 | % | 22.5 | % |
Net sales increased 17% in 2024 compared to 2023 primarily due to a 9% increase in sales volumes, a 3% increase in higher price and favorable mix, and a 5% increase in sales volumes from our AES acquisition.
Segment profit in 2024 increased $56 million compared to 2023 primarily due to $44 million from higher sales volumes, $39 million from price and mix benefit, and $15 million from our AES acquisition. Partially offsetting these increases were $33 million in expenses from higher factory inefficiencies, which includes costs related to the ramp up of our new facility in Mexico, and slightly higher product costs, which includes LIFO, and $9 million of inflationary wage impacts.
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Corporate and Other
The following table presents our Corporate and Other segment’s net sales and loss for 2024 and 2023 (dollars in millions):
| For the Years Ended December 31, | ||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2024 | 2023 | Difference | % Change | |||||||||||
| Net sales | $ | — | $ | 247.6 | $ | (247.6) | (100) | % | ||||||
| Loss | $ | (120.3) | $ | (93.9) | $ | (26.4) | 28 | % |
Net sales decreased $248 million and segment loss increased $26 million in 2024 as compared to 2023. Our European businesses, which were sold in 2023, generated net sales of $248 million and a profit of $7 million in 2023. Excluding our European business, Corporate and Other costs increased $19 million in 2024 as compared to 2023 primarily due to higher incentive compensation and other employee costs and wage inflation.
Year Ended December 31, 2023 Compared to Year Ended December 31, 2022 - Consolidated Results
Net Sales
Net sales increased 6% in 2023 compared to 2022 as favorable mix of 5% and favorable price of 5% were partially offset by unfavorable sales volume of 4%.
Gross Profit
Gross profit margins for 2023 increased 390 bps to 31.1% compared to 27.2% in 2022. Gross profit margin increased 340 bps from favorable price, 100 bps from favorable mix, 90 bps from lower commodity costs and 10 bps from miscellaneous other items. Partially offsetting these margin increases were 70 bps from higher distribution costs, 50 bps from higher other product costs including LIFO and 30 bps from higher component costs.
Selling, General and Administrative Expenses
SG&A expenses increased by $78 million in 2023 compared to 2022. As a percentage of net sales, SG&A expenses increased 90 bps from 13.3% to 14.2% in the same periods primarily due to higher discretionary expenditures.
Losses (Gains) and Other Expenses, Net
Losses (gains) and other expenses, net for 2023 and 2022 included the following (in millions):
| For the Years Ended December 31, | ||||||
|---|---|---|---|---|---|---|
| 2023 | 2022 | |||||
| Realized losses (gains) on settled futures contracts | $ | 0.1 | $ | 0.1 | ||
| Foreign currency exchange gains | (4.3) | (1.3) | ||||
| Gain on disposal of fixed assets | (0.5) | (1.0) | ||||
| Other operating income | (1.6) | (1.0) | ||||
| Net change in unrealized losses on unsettled futures contracts | (0.1) | 0.4 | ||||
| Environmental liabilities and special litigation charges | 15.6 | 7.5 | ||||
| Charges incurred related to COVID-19 pandemic | — | 0.8 | ||||
| Other items, net | (0.7) | (0.6) | ||||
| Losses (gains) and other expenses, net | $ | 8.5 | $ | 4.9 |
The net change in unrealized (gains) losses on unsettled futures contracts was due to changes in commodity prices relative to the unsettled futures contract prices. For more information on our derivatives, see Note 9 in the Notes to the Consolidated Financial Statements. Foreign currency exchange gains increased in 2023 primarily due to changes in foreign exchange rates in our primary markets. Environmental liabilities and special legal contingency charges in 2023 relate to estimated remediation costs at some of our facilities and outstanding legal settlements including asbestos. Refer to Note 5 in the Notes to the
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Consolidated Financial Statements for more information on litigation, including the asbestos-related litigation, and the environmental liabilities.
Restructuring Charges
Restructuring charges were $3.1 million in 2023 compared to $1.5 million in 2022. Charges in 2023 were related to the reorganization or removal of duplicative headcount and infrastructure. For more information on our restructuring activities, see Note 7 in the Notes to the Consolidated Financial Statements.
Goodwill
We performed a qualitative impairment analysis and noted no indicators of goodwill impairment for the year ended December 31, 2023. Refer to Note 9 in the Notes to the Consolidated Financial Statements for more information on goodwill. In 2023, we recorded a $2.3 million impairment of goodwill related to our agreement to sell our European commercial HVAC and refrigeration businesses.
Asset Impairments
In the third quarter of 2023, we recorded a $22.6 million impairment of property, plant and equipment related to our agreement to sell our European commercial HVAC and refrigeration businesses.
Pension Settlement
We did not have significant pension buyout activity in 2023 and 2022. Refer to Note 10 in the Notes to the Consolidated Financial Statements for more information on pensions and employee benefit plans.
Income from Equity Method Investments
Investments over which we do not exercise control but have significant influence are accounted for using the equity method of accounting. Income from equity method investments was $8 million in 2023 compared to $5 million in 2022. The increase is due to better operating results at the investees.
Interest Expense, net
Net interest expense of $52 million in 2023 increased from $39 million in 2022 primarily due to higher borrowing costs.
Income Taxes
The income tax provision was $147 million in 2023 compared to $119 million in 2022, and the effective tax rate was 20.0% in 2023 compared to 19.3% in 2022. The 2023 and 2022 effective tax rates differ from the statutory rate of 21% primarily due to foreign taxes. Refer to Note 12 in the Notes to the Consolidated Financial Statements for more information on income taxes.
Year Ended December 31, 2023 Compared to Year Ended December 31, 2022 - Results by Segment
Home Comfort Solutions
The following table presents our Home Comfort Solutions segment’s net sales and profit for 2023 and 2022 (dollars in millions):
| For the Years Ended December 31, | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| 2023 | 2022 | Difference | % Change | ||||||||
| Net sales | $ | 3,222.9 | $ | 3,198.3 | $ | 24.6 | 1% | ||||
| Profit | $ | 610.2 | $ | 596.9 | $ | 13.3 | 2% | ||||
| % of net sales | 18.9 | % | 18.7 | % |
Net sales increased 1% in 2023 compared to 2022 as a 6% increase in product mix and a 2% increase in price were partially offset by a 7% decrease in sales volume.
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Segment profit in 2023 increased $13 million compared to 2022 primarily due to $82 million from favorable mix, $72 million from higher price, $35 million from lower commodity costs, $5 million from favorable freight, $5 million from lower other product costs including LIFO and $7 million from miscellaneous other items. Partially offsetting these increases were $71 million from lower sales volume, $51 million from higher SG&A costs due primarily to higher discretionary spend and inflationary pressures, $30 million from higher factory inefficiencies, $31 million from higher distributions costs and $10
million from higher component costs.
Building Climate Solutions
The following table presents our Building Climate Solutions segment’s net sales and profit for 2023 and 2022 (dollars in millions):
| For the Years Ended December 31, | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| 2023 | 2022 | Difference | % Change | ||||||||
| Net sales | $ | 1,511.4 | $ | 1,286.3 | $ | 225.1 | 18% | ||||
| Profit | $ | 340.8 | $ | 162.9 | $ | 177.9 | 109% | ||||
| % of net sales | 22.5 | % | 12.7 | % |
Net sales increased 18% in 2023 compared to 2022 primarily due to an 11% increase in price, a 4% increase in product mix, a 2% increase in sales volume and 1% from our acquisition of AES.
Segment profit in 2023 increased $178 million compared to 2022 primarily due to $147 million from favorable price, $47 million from favorable product mix and $9 million from lower commodity costs. Partially offsetting these increases were $15 million from higher SG&A costs, $7 million from higher product warranty costs and $3 million from miscellaneous other items.
Corporate and Other
The following table presents our Corporate and Other segment’s net sales and loss for 2023 and 2022 (dollars in millions):
| For the Years Ended December 31, | ||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2023 | 2022 | Difference | % Change | |||||||||||
| Net sales | $ | 247.6 | $ | 233.7 | $ | 13.9 | 6 | % | ||||||
| Loss | $ | (93.9) | $ | (94.0) | $ | 0.1 | — | % | ||||||
| % of net sales | (37.9) | % | (40.2) | % |
Net sales increased 6% in 2023 as compared to 2022 due to revenue growth in our European businesses.
Segment loss was unchanged in 2023 compared to 2022 as unfavorable SG&A costs of $7 million and unfavorable foreign currency of $4 million were offset by $11 million of higher segment profit from our European businesses primarily due to favorable price.
Accounting for Futures Contracts
Realized gains and losses on settled futures contracts are a component of segment profit (loss). Unrealized gains and losses on unsettled futures contracts are excluded from segment profit (loss) as they are subject to changes in fair value until their settlement date. Both realized and unrealized gains and losses on futures contracts are a component of Losses (gains) and other expenses, net in the accompanying Consolidated Statements of Operations. See Note 9 of the Notes to Consolidated Financial Statements for more information on our derivatives and Note 3 of the Notes to the Consolidated Financial Statements for more information on our segments and for a reconciliation of segment profit to operating income.
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Liquidity and Capital Resources
Our working capital and capital expenditure requirements are generally met through internally generated funds, bank lines of credit and our commercial paper program. Working capital needs are generally greater in the first and second quarters due to the seasonal nature of our business cycle.
Statement of Cash Flows
The following table summarizes our cash flow activity for the years ended December 31, 2024, 2023 and 2022 (in millions):
| 2024 | 2023 | 2022 | ||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| Net cash provided by operating activities | $ | 945.7 | $ | 736.2 | $ | 302.3 | ||||
| Net cash used in investing activities | $ | (174.4) | $ | (319.7) | $ | (103.0) | ||||
| Net cash used in financing activities | $ | (418.6) | $ | (406.2) | $ | (174.1) |
Net Cash Provided By Operating Activities - Net cash provided by operating activities activities increased $210 million to $946 million in 2024 compared to $736 million in 2023. The increase was primarily attributable to an increase in net income of $217 million.
Net Cash Used In Investing Activities - Net cash used in investing activities decreased $145 million from 2023 to 2024 primarily due to lower capital expenditures and $95 million related to our acquisition of AES in the fourth quarter of 2023. Capital expenditures were $164 million, $250 million and $101 million in 2024, 2023 and 2022, respectively. Capital expenditures in 2024 and 2023 were primarily related to the expansion of our manufacturing capacity including investments in our commercial HVAC factory in Mexico, equipment, and investments in systems and software to support the overall enterprise.
Net Cash Used In Financing Activities - Net cash used in financing activities was $419 million in 2024 and $406 million in 2023. The increase was primarily due to share repurchases in 2024, offset by decreased net debt repayments. We repurchased $54 million as part of our Share Repurchase Plans, as compared to no repurchases in 2023. We also returned $160 million to shareholders through dividend payments in 2024.
Debt Position
The following table details our lines of credit and financing arrangements as of December 31, 2024 (in millions):
| Outstanding Borrowings | ||
|---|---|---|
| Commercial paper: | $ | — |
| Current maturities of long-term debt: | ||
| Finance lease obligations | $ | 14.9 |
| Senior unsecured notes | 300.0 | |
| Debt issuance costs | (0.4) | |
| Total current maturities of long-term debt | $ | 314.5 |
| Long-term debt: | ||
| Finance lease obligations | $ | 39.5 |
| Credit agreement (1) | — | |
| Senior unsecured notes | 800.0 | |
| Debt issuance costs | (6.4) | |
| Total long-term debt | $ | 833.1 |
| Total debt | $ | 1,147.6 |
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(1) The total capacity on the facility is $1.1 billion. The amount available for future borrowings on our Credit Agreement (as defined below) is $1,098 million after being reduced by $2 million in outstanding standby letters of credit as of December 31, 2024.
Commercial Paper Program
On October 25, 2023, we established a commercial paper program (the “Program”), as a replacement to our Asset Securitization Program which expired in November 2023, pursuant to which we may issue short-term, unsecured commercial paper notes (the “CP Notes”) under the exemption from registration contained in Section 4(a)(2) of the Securities Act. Amounts available under the Program may be borrowed, repaid, and re-borrowed from time to time, with the aggregate face or principal amount of the CP Notes outstanding under the Program at any time not to exceed $500.0 million. The CP Notes will have maturities of up to 397 days from the date of issue. The CP Notes will rank pari passu with all of our other unsecured and unsubordinated indebtedness. The net proceeds of the issuances of the CP Notes are expected to be used for general corporate purposes. We plan to use our revolving credit facility as a liquidity backstop for the repayment of CP Notes outstanding under the Program. There were no CP Notes outstanding under the Program as of December 31, 2024.
Credit Agreement
In August 2023, we entered into the Second Amendment (the “Second Amendment”) to our existing Credit Agreement, dated as of July 14, 2021 (as amended, the "Credit Agreement"), with JPMorgan Chase Bank, N.A., as administrative agent, and the other lenders party thereto. Under the Second Amendment, the revolving commitments were increased by $350 million
and certain representations required to be made as conditions precedent to borrowing were revised to provide us greater flexibility to enter into additional future financings.
Our Credit Agreement consists of a $1.1 billion unsecured revolving credit facility that matures in July 2026. We had no outstanding borrowings as well as $1.7 million committed to standby letters of credit as of December 31, 2024. Subject to covenant limitations, $1,098.3 million was available for future borrowings. The revolving credit facility includes a subfacility for swingline loans of up to $65.0 million. The Credit Agreement will expire and outstanding loans will be required to be repaid in July 2026, unless maturity is extended by the lenders pursuant to two one-year extension options that we may request under the Credit Agreement.
Senior Unsecured Notes
In September 2023, we issued $500.0 million of senior unsecured notes, which will mature in September 2028 (the "2028 Notes") with interest being paid semi-annually in March and September at 5.50%. We issued two series of senior unsecured notes on July 30, 2020 for $300.0 million each, which will mature on August 1, 2025 (the "2025 Notes") and August 1, 2027 (the "2027 Notes") with interest being paid semi-annually in February and August at 1.35% and 1.70% respectively, per annum (the 2025 Notes, the 2027 Notes, and the 2028 Notes, collectively the “Notes”).
All the Notes are guaranteed, on a senior unsecured basis, by certain of our subsidiaries that guarantee indebtedness under our Credit Agreement. 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 December 31, 2024, we believe we were in compliance with all covenant requirements.
Financial Leverage
We periodically review our capital structure, including our primary bank facility, to ensure the appropriate levels of liquidity and leverage and to take advantage of favorable interest rate environments or other market conditions. We consider various other financing alternatives and may, from time to time, access the capital markets.
We also evaluate our debt-to-capital and debt-to-EBITDA ratios to determine, among other considerations, the appropriate targets for capital expenditures and share repurchases under our Share Repurchase Plans. Our book value of debt-to-total-capital ratio decreased to 57% at December 31, 2024 compared to 82% at December 31, 2023.
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As of December 31, 2024, our senior credit ratings were Baa2 with a positive outlook, and BBB with a stable outlook, by Moody’s Investors Service, Inc. (“Moody’s”) and Standard & Poor’s Rating Group (“S&P”), respectively. The security ratings are not a recommendation to buy, sell or hold securities and may be subject to revision or withdrawal at any time by the assigning rating agency. Each rating should be evaluated independently of any other rating. Our goal is to maintain investment grade ratings from Moody’s and S&P to help ensure the capital markets remain available to us.
Liquidity
We believe our cash and cash equivalents of $415 million, future cash generated from operations and available future borrowings are sufficient to fund our operations, planned capital expenditures, future contractual obligations, share repurchases, anticipated dividends and other needs in the foreseeable future. Included in our cash and cash equivalents as of December 31, 2024 was $14 million of cash held in foreign locations, although that amount can fluctuate significantly depending on the timing of cash receipts and payments. Our cash and cash equivalents held in foreign locations is generally available for use in our U.S. operations and could be subject to foreign withholding taxes and U.S. state taxes.
No contributions are required to be made to our U.S. defined benefit plans in 2025. No contributions were made to our pension plans in 2024.
Dividend payments were $160 million in 2024 compared to $153 million in 2023. On May 20, 2024, our Board of Directors approved a 4.5% increase in our quarterly dividend on common stock from $1.10 to $1.15 per share effective with the July 2024 dividend payment.
Delaware law limits the ability to pay dividends to surplus or, if there is no surplus, out of net profits for the fiscal year in which the dividend is declared and/or the preceding fiscal year. In addition, stock repurchases can only be made out of surplus and only if our capital would not be impaired.
We expect capital expenditures of approximately $150 million in 2025 for general capital improvement projects.
Financial Covenants related to our Debt
The Credit Agreement is guaranteed by certain of our subsidiaries and contains customary covenants applicable to us and our subsidiaries including limitations on indebtedness, liens, dividends, stock repurchases, mergers and sales of all or substantially all of our assets. In addition, the Credit Agreement contains a financial covenant requiring us to maintain, as of the last day of each fiscal quarter for the four prior fiscal quarters, a Total Net Leverage Ratio of no more than 3.50 to 1.00 (or, at our election, on up to two occasions following a material acquisition, 4.00 to 1.00).
Our Credit Agreement contains customary events of default. These events of default include nonpayment of principal or other amounts, material inaccuracy of representations and warranties, breach of covenants, default on certain other indebtedness or receivables securitizations (cross default), certain voluntary and involuntary bankruptcy events and the occurrence of a change in control. A cross default under our credit facility could occur if:
•We fail to pay any principal or interest when due on any other indebtedness or receivables securitization exceeding $75.0 million; or
•We are in default in the performance of, or compliance with any term of any other indebtedness in an aggregate principal amount exceeding $75.0 million, or any other condition exists which would give the holders the right to declare such indebtedness due and payable prior to its stated maturity.
Each of our major debt agreements contains provisions by which a default under one agreement causes a default in the others (a cross default). If a cross default under our Credit Agreement or our senior unsecured notes were to occur, it could have a wider impact on our liquidity than might otherwise occur from a default of a single debt instrument or lease commitment.
If any event of default occurs and is continuing, the administrative agent, or lenders with a majority of the aggregate commitments may require the administrative agent to, terminate our right to borrow under our Credit Agreement and accelerate amounts due under our Credit Agreement (except for a bankruptcy event of default, in which case such amounts will automatically become due and payable and the lenders’ commitments will automatically terminate).
In the event of a credit rating downgrade below investment grade resulting from a change of control, holders of our senior unsecured notes will have the right to require us to repurchase all or a portion of the senior unsecured notes at a repurchase price equal to 101% of the principal amount of the notes, plus accrued and unpaid interest, if any. The notes are guaranteed, on
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a senior unsecured basis, by each of our subsidiaries that guarantee payment by us of any indebtedness under our Credit Agreement. 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; enter into certain mergers, consolidations and transfers of substantially all of our assets; and transfer certain properties. The indenture also contains a cross default provision which is triggered if we default on other debt of at least $75 million in principal which is then accelerated, and such acceleration is not rescinded within 30 days of the notice date.
We are currently in compliance with all covenant requirements.
Leasing Commitments
Refer to Note 5 in the Notes to the Consolidated Financial Statements for more details on our leasing commitments.
Guarantees related to our Debt Obligations
Our senior unsecured notes were issued by Lennox International Inc. (the “Parent”) and are unconditionally guaranteed by certain of our subsidiaries (the “Guarantor Subsidiaries”) and are not secured by our other subsidiaries. The Guarantor Subsidiaries are 100% owned and consolidated, all guarantees are full and unconditional, and all guarantees are joint and several.
The following combined Parent and Guarantor Subsidiaries financial information is presented as of December 31, 2024 and December 31, 2023 and for the year ended December 31, 2024 (in millions):
| December 31, 2024 | December 31, 2023 | |||||
|---|---|---|---|---|---|---|
| Current assets | $ | 1,713.9 | $ | 1,291.0 | ||
| Non-current assets | 6,995.0 | 5,737.1 | ||||
| Current liabilities | 1,084.9 | 843.3 | ||||
| Non-current liabilities | 1,266.8 | 1,477.3 | ||||
| Amounts due to non-guarantor subsidiaries | (536.8) | (472.3) |
| For the Years Ended December 31, | ||||||
|---|---|---|---|---|---|---|
| 2024 | 2023 | |||||
| Net Sales | $ | 5,265.6 | $ | 4,626.8 | ||
| Gross Profit | 1,363.8 | 1,157.8 | ||||
| Net Income | 1,792.5 | 1,331.1 |
Off Balance Sheet Arrangements
We have no off-balance sheet arrangements that we believe may have a material current or future effect on our financial condition, liquidity or results of operations.
Contractual Obligations
Contractual obligations arise in the normal course of business and include debt and related interest payments, leases, purchase obligations, pension and post-retirement benefits and warranty liabilities. For additional information regarding our contractual obligations, see Note 5 of the Notes to the Consolidated Financial Statements. See Note 10 of the Notes to the Consolidated Financial Statements for more information on our pension and post-retirement benefits obligations. See Note 13 of the Notes to the Consolidated Financial Statements for more information on our debt obligations.
Fair Value Measurements
Fair value is the price that would be received to sell an asset or the price paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value is based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date and requires consideration of our creditworthiness when valuing certain liabilities. Our framework for measuring fair value is based on a three-level hierarchy for fair value measurements.
The three-level fair value hierarchy for disclosure of fair value measurements is defined as follows:
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Level 1 - Quoted prices for identical instruments in active markets at the measurement date.
Level 2 - Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations in which all significant inputs and significant value drivers are observable in active markets at the measurement date and for the anticipated term of the instrument.
Level 3 - Valuations derived from valuation techniques in which one or more significant inputs or significant value drivers are unobservable inputs that reflect the reporting entity’s own assumptions about the assumptions market participants would use in pricing the asset or liability developed based on the best information available in the circumstances.
Where available, the fair values were based upon quoted prices in active markets. However, if quoted prices were not available, then the fair values were based upon quoted prices for similar assets or liabilities or independently sourced market parameters, such as credit default swap spreads, yield curves, reported trades, broker/dealer quotes, interest rates and benchmark securities. For assets and liabilities without observable market activity, if any, the fair values were based upon discounted cash flow methodologies incorporating assumptions that, in our judgment, reflect the assumptions a marketplace participant would use. Valuation adjustments to reflect either party’s creditworthiness and ability to pay were incorporated into our valuations, where appropriate, as of December 31, 2024 and 2023, the measurement dates. See Note 16 of the Notes to the Consolidated Financial Statements for more information on the assets and liabilities measured at fair value.
Market Risk
Commodity Price Risk
We enter into commodity futures contracts to stabilize prices expected to be paid for raw materials and parts containing high copper and aluminum content. These contracts are for quantities equal to or less than quantities expected to be consumed in future production. Fluctuations in metal commodity prices impact the value of the futures contracts that we hold. When metal commodity prices rise, the fair value of our futures contracts increases. Conversely, when commodity prices fall, the fair value of our futures contracts decreases. Information about our exposure to metal commodity price market risks and a sensitivity analysis related to our metal commodity hedges is presented below (in millions):
| Notional amount (pounds of aluminum and copper) | 105.9 | |
|---|---|---|
| Carrying amount and fair value of net asset | $ | (0.4) |
| Change in fair value from 10% change in forward prices | $ | 10.6 |
Refer to Note 9 of the Notes to the Consolidated Financial Statements for additional information regarding our commodity futures contracts.
Interest Rate Risk
Our results of operations can be affected by changes in interest rates due to variable rates of interest on our debt facilities, cash, cash equivalents and short-term investments. A 10% adverse movement in the levels of interest rates across the entire yield curve would have resulted in an increase to pre-tax interest expense of approximately $0.9 million, $2.3 million and $1.7 million for the years ended December 31, 2024, 2023 and 2022, respectively.
From time to time, we may use an interest rate swap hedging strategy to eliminate the variability of cash flows in a portion of our interest payments. This strategy, when employed, allows us to fix a portion of our interest payments when interest rates are low. As of December 31, 2024 and 2023, no interest rate swaps were in effect.
Foreign Currency Exchange Rate Risk
Our results of operations are affected by changes in foreign currency exchange rates. Net sales and expenses in foreign currencies are translated into U.S. dollars for financial reporting purposes based on the average exchange rate for the period. Our primary exposure to foreign currencies are the Canadian dollar, Mexican Peso, and the Euro. During 2024, 2023 and 2022, net sales from outside the U.S. represented 6.0%, 11.3% and 11.4%, respectively, of our total net sales. For the years ended December 31, 2024, 2023, and 2022, foreign currency transaction gains and losses did not have a material impact to our results
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of operations. A 10% change in foreign exchange rates would have had an estimated $2.6 million, $5.6 million and $3.5 million impact to net income for the years ended December 31, 2024, 2023 and 2022, respectively.
We seek to mitigate the impact of currency exchange rate movements on certain short-term transactions by periodically entering into foreign currency forward contracts. By entering into forward contracts, we lock in exchange rates that would otherwise cause losses should the U.S. dollar appreciate and gains should the U.S. dollar depreciate. Refer to Note 9 of the Notes to the Consolidated Financial Statements for additional information regarding our foreign currency forward contracts.
Critical Accounting Estimates
A critical accounting estimate is one that requires difficult, subjective or complex estimates and assessments and is fundamental to our results of operations and financial condition. The following describes our critical accounting estimate related to product warranties and product-related contingencies and how we develop our judgments, assumptions and estimates about future events and how such policies can impact our financial statements. This discussion and analysis should be read in conjunction with our Consolidated Financial Statements and related Notes in “Item 8. Financial Statements and Supplementary Data.”
Product Warranties and Product-Related Contingencies
The estimate of our liability for future warranty costs requires us to make assumptions about the amount, timing and nature of future product-related costs. Some of the warranties we issue extend 10 years or more in duration and a relatively small adjustment to an assumption may have a significant impact on our overall liability.
From time to time, we may also incur costs to repair or replace installed products experiencing quality issues in order to satisfy our customers and protect our brand. These product-related costs may not be covered under our warranties and are not covered by insurance.
We periodically review the assumptions used to determine the liabilities for product warranties and product-related contingencies and we adjust our assumptions based upon factors such as actual failure rates and cost experience. Numerous factors could affect actual failure rates and cost experience, including the amount and timing of new product introductions, changes in manufacturing techniques or locations, components or suppliers used. Should actual costs differ from our estimates, we may be required to adjust the liabilities and to record expense in future periods. See Note 5 in the Notes to the Consolidated Financial Statements for more information on our product warranties and product-related contingencies.
Recent Accounting Pronouncements
See Note 2 in the Notes to the Consolidated Financial Statements for disclosure of recent accounting pronouncements and the potential impact on our financial statements and disclosures.
FY 2023 10-K MD&A
SEC filing source: 0001628280-24-004446.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion should be read in conjunction with the other sections of this report, including the Consolidated Financial Statements and related Notes to the Consolidated Financial Statements in Item 8, “Other Financial Statement Details,” of this Annual Report on Form 10-K.
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Forward-Looking Statements
This Annual Report on Form 10-K contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Exchange Act that are based on information currently available to management as well as management’s assumptions and beliefs as of the date hereof. All statements, other than statements of historical fact, included in this Annual Report on Form 10-K constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements can be identified by the words “may,” “will,” “should,” “plan,” “predict,” “anticipate,” “believe,” “intend,” “estimate” and “expect” and similar expressions. Statements that are not historical should also be considered forward-looking statements. Such statements reflect our current views with respect to future events. Readers are cautioned not to place undue reliance on these forward-looking statements. We believe these statements are based on reasonable assumptions; however, such statements are inherently subject to risks and uncertainties, including but not limited to the specific uncertainties discussed elsewhere in this Annual Report on Form 10-K and the risk factors set forth in Item 1A. Risk Factors in this Annual Report on Form 10-K. These risks and uncertainties may affect our performance and results of operations. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may differ materially from those in the forward-looking statements. We disclaim any intention or obligation to update or review any forward-looking statements or information, whether as a result of new information, future events or otherwise unless required by law.
The following are some of the factors that could cause actual results to differ materially from those expressed or implied in forward-looking statements:
•competition in the HVACR business;
•our ability to successfully develop and market new products or execute our business strategy, including the implementation of price increases for products and services;
•our ability to meet and anticipate customer demands;
•our ability to continue to license or enforce our intellectual property rights;
•our ability to attract, motivate, develop and retain our employees, as well as labor relations problems;
•a decline in new construction activity and related demand for our products and services;
•the impact of weather on our business;
•the impact of higher raw material prices and significant supply interruptions;
•changes in environmental and climate-related legislation or government regulations or policies;
•changes in tax legislation;
•the impact of new or increased trade tariffs;
•warranty, intellectual property infringement, product liability and other claims;
•litigation risks;
•general economic conditions in the United States and abroad;
•extraordinary events beyond our controls, such as conflicts, wars, natural disasters, public health crises, or terrorist acts;
•foreign currency fluctuations and changes in local government regulation associated with our international operations;
•cyber attacks and other disruptions or misuse of information systems;
•our ability to successfully realize, complete and integrate acquisitions; and
•impairment of the value of our goodwill.
Business Overview
We operate in two reportable business segments of the HVACR industry, Home Comfort Solutions and Building Climate Solutions. In addition to the two major business segments, Corporate and Other is also reported as a segment. For more detailed information regarding our reportable segments, see Note 3 in the Notes to the Consolidated Financial Statements.
In fourth quarter 2023, we completed the sale of our European businesses. The European businesses are presented with the Corporate and Other business segment.
We sell our products and services through a combination of direct sales, distributors and company-owned stores. The demand for our products and services is seasonal and can be significantly impacted by the weather. Warmer than normal summer temperatures generate demand for replacement air conditioning and refrigeration products and services, and colder than normal winter temperatures have a similar effect on heating products and services. Conversely, cooler than normal summers and warmer than normal winters depress the demand for HVACR products and services. In addition to weather, demand for our products and services is influenced by national and regional economic and demographic factors, such as interest rates, the availability of financing, regional population and employment trends, new construction, general economic conditions and
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consumer spending habits and confidence. A substantial portion of the sales in each of our business segments is attributable to replacement business, with the balance comprised of new construction business.
The principal elements of cost of goods sold are components, raw materials, factory overhead, labor, estimated costs of warranty expense and freight and distribution costs. The principal raw materials used in our manufacturing processes are steel, aluminum and copper. In recent years, pricing volatility for these commodities and related components has impacted us and the HVACR industry in general. We seek to mitigate the impact of certain commodity price volatility through a combination of pricing actions, vendor contracts, improved production efficiency and cost reduction initiatives. We also partially mitigate volatility in the prices of these commodities by entering into futures contracts and fixed forward contracts.
Financial Highlights
•Net sales increased $264 million, or 6%, to $4,982 million in 2023 from $4,718 million in 2022.
•Operating income in 2023 was $790 million compared to $656 million in 2022.
•Net income in 2023 increased to $590 million from $497 million in 2022.
•Diluted earnings per share was $16.54 per share in 2023 compared to $13.88 per share in 2022.
•We generated $736 million of cash flow from operating activities in 2023 compared to $302 million in 2022.
•We returned $153 million to shareholders through dividend payments in 2023.
•We received $23 million in net proceeds from the sale of our European businesses in 2023.
•We purchased AES, a company dedicated to service and sustainability in the light commercial market, for $95 million in 2023.
Overview of Results
The Home Comfort Solutions segment experienced a 1% increase in net sales and a $13 million increase in segment profit in 2023 compared to 2022 as favorable price and mix were partially offset by lower sales volumes. Our Building Climate Solutions segment saw an increase in net sales of 18% and a $178 million increase in segment profit in 2023 compared to 2022, primarily due to favorable price and mix.
Results of Operations
The following table provides a summary of our financial results, including information presented as a percentage of net sales (dollars in millions):
| For the Years Ended December 31, | ||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2023 | 2022 | 2021 | ||||||||||||||||||
| Dollars | Percent | Dollars | Percent | Dollars | Percent | |||||||||||||||
| Net sales | $ | 4,981.9 | 100.0 | % | $ | 4,718.4 | 100.0 | % | $ | 4,194.1 | 100.0 | % | ||||||||
| Cost of goods sold | 3,434.1 | 68.9 | % | 3,433.7 | 72.8 | % | 3,005.7 | 71.7 | % | |||||||||||
| Gross profit | 1,547.8 | 31.1 | % | 1,284.7 | 27.2 | % | 1,188.4 | 28.3 | % | |||||||||||
| Selling, general and administrative expenses | 705.5 | 14.2 | % | 627.2 | 13.3 | % | 598.9 | 14.3 | % | |||||||||||
| Losses (gains) and other expenses, net | 8.5 | 0.2 | % | 4.9 | 0.1 | % | 9.2 | 0.2 | % | |||||||||||
| Restructuring charges | 3.1 | 0.1 | % | 1.5 | — | % | 1.8 | — | % | |||||||||||
| Impairment on assets held for sale | 63.2 | 1.3 | % | — | — | % | — | — | % | |||||||||||
| Gain on sale of businesses | (14.1) | (0.3) | % | — | — | % | — | — | % | |||||||||||
| Income from equity method investments | (8.5) | (0.2) | % | (5.1) | (0.1) | % | (11.8) | (0.3) | % | |||||||||||
| Operating income | $ | 790.1 | 15.9 | % | $ | 656.2 | 13.9 | % | $ | 590.3 | 14.1 | % | ||||||||
| Net income | $ | 590.1 | 11.8 | % | $ | 497.1 | 10.5 | % | $ | 464.0 | 11.1 | % |
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Year Ended December 31, 2023 Compared to Year Ended December 31, 2022 - Consolidated Results
Net Sales
Net sales increased 6% in 2023 compared to 2022 as favorable mix of 5% and favorable price of 5% were partially offset by unfavorable sales volume of 4%.
Gross Profit
Gross profit margins for 2023 increased 390 basis points (“bps”) to 31.1% compared to 27.2% in 2022. Gross profit margin increased 340 bps from favorable price, 100 bps from favorable mix, 90 bps from lower commodity costs and 10 bps from miscellaneous other items. Partially offsetting these margin increases were 70 bps from higher distribution costs, 50 bps from higher other product costs including LIFO and 30 bps from higher component costs.
Selling, General and Administrative Expenses
SG&A expenses increased by $78 million in 2023 compared to 2022. As a percentage of net sales, SG&A expenses increased 90 bps from 13.3% to 14.2% in the same periods primarily due to higher discretionary expenditures.
Losses (Gains) and Other Expenses, Net
Losses (gains) and other expenses, net for 2023 and 2022 included the following (in millions):
| For the Years Ended December 31, | ||||||
|---|---|---|---|---|---|---|
| 2023 | 2022 | |||||
| Realized losses (gains) on settled future contracts | $ | 0.1 | $ | 0.1 | ||
| Foreign currency exchange gains | (4.3) | (1.3) | ||||
| Gain on disposal of fixed assets | (0.5) | (1.0) | ||||
| Other operating income | (1.6) | (1.0) | ||||
| Net change in unrealized (gains) losses on unsettled futures contracts | (0.1) | 0.4 | ||||
| Environmental liabilities and special litigation charges | 15.6 | 7.5 | ||||
| Charges incurred related to COVID-19 pandemic | — | 0.8 | ||||
| Other items, net | (0.7) | (0.6) | ||||
| Losses (gains) and other expenses, net (pre-tax) | $ | 8.5 | $ | 4.9 |
The net change in unrealized (gains) losses on unsettled futures contracts was due to changes in commodity prices relative to the unsettled futures contract prices. For more information on our derivatives, see Note 9 in the Notes to the Consolidated Financial Statements. Foreign currency exchange gains increased in 2023 primarily due to changes in foreign exchange rates in our primary markets. Environmental liabilities and special legal contingency charges in 2023 relate to estimated remediation costs at some of our facilities and outstanding legal settlements including asbestos. Refer to Note 5 in the Notes to the Consolidated Financial Statements for more information on litigation, including the asbestos-related litigation, and the environmental liabilities.
Restructuring Charges
Restructuring charges were $3.1 million in 2023 compared to $1.5 million in 2022. Charges in 2023 were related to the reorganization or removal of duplicative headcount and infrastructure. For more information on our restructuring activities, see Note 7 in the Notes to the Consolidated Financial Statements.
Goodwill
We performed a qualitative impairment analysis and noted no indicators of goodwill impairment for the year ended December 31, 2023. Refer to Note 9 in the Notes to the Consolidated Financial Statements for more information on goodwill. In 2023, we recorded a $2.3 million impairment of goodwill related to our agreement to sell our European commercial HVAC and refrigeration businesses.
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Asset Impairments
In the third quarter of 2023, we recorded a $22.6 million impairment of property, plant and equipment related to our agreement to sell our European commercial HVAC and refrigeration businesses.
Pension Settlement
We did not have significant pension buyout activity in 2023 and 2022. Refer to Note 10 in the Notes to the Consolidated Financial Statements for more information on pensions and employee benefit plans.
Income from Equity Method Investments
Investments over which we do not exercise control but have significant influence are accounted for using the equity method of accounting. Income from equity method investments was $8 million in 2023 compared to $5 million in 2022. The increase is due to better operating results at the investees.
Interest Expense, net
Net interest expense of $52 million in 2023 increased from $39 million in 2022 primarily due to higher borrowing costs.
Income Taxes
The income tax provision was $147 million in 2023 compared to $119 million in 2022, and the effective tax rate was 20.0% in 2023 compared to 19.3% in 2022. The 2023 and 2022 effective tax rates differ from the statutory rate of 21% primarily due to foreign taxes. Refer to Note 12 in the Notes to the Consolidated Financial Statements for more information on income taxes.
Year Ended December 31, 2023 Compared to Year Ended December 31, 2022 - Results by Segment
Home Comfort Solutions
The following table presents our Home Comfort Solutions segment’s net sales and profit for 2023 and 2022 (dollars in millions):
| For the Years Ended December 31, | |||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2023 | 2022 | Difference | % Change | ||||||||||
| Net sales | $ | 3,222.9 | $ | 3,198.3 | $ | 24.6 | 1% | ||||||
| Profit | $ | 610.2 | $ | 596.9 | $ | 13.3 | 2% | ||||||
| % of net sales | 18.9 | % | 18.7 | % |
Net sales increased 1% in 2023 compared to 2022 as a 6% increase in product mix and a 2% increase in price were partially offset by a 7% decrease in sales volume.
Segment profit in 2023 increased $13 million compared to 2022 primarily due to $82 million from favorable mix, $72 million from higher price, $35 million from lower commodity costs, $5 million from favorable freight, $5 million from lower other product costs including LIFO and $7 million from miscellaneous other items. Partially offsetting these increases were $71 million from lower sales volume, $51 million from higher SG&A costs due primarily to higher discretionary spend and inflationary pressures, $30 million from higher factory inefficiencies, $31 million from higher distributions costs and $10 million from higher component costs.
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Building Climate Solutions
The following table presents our Building Climate Solutions segment’s net sales and profit for 2023 and 2022 (dollars in millions):
| For the Years Ended December 31, | ||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2023 | 2022 | Difference | % Change | |||||||||||
| Net sales | $ | 1,511.4 | $ | 1,286.3 | $ | 225.1 | 18 | % | ||||||
| Profit | $ | 340.8 | $ | 162.9 | $ | 177.9 | 109 | % | ||||||
| % of net sales | 22.5 | % | 12.7 | % |
Net sales increased 18% in 2023 compared to 2022 primarily due to an 11% increase in price, a 4% increase in product mix, a 2% increase in sales volume and 1% from our acquisition of AES.
Segment profit in 2023 increased $178 million compared to 2022 primarily due to $147 million from favorable price, $47 million from favorable product mix and $9 million from lower commodity costs. Partially offsetting these increases were $15 million from higher SG&A costs, $7 million from higher product warranty costs and $3 million from miscellaneous other items.
Corporate and Other
The following table presents our Corporate and Other segment’s net sales and loss for 2023 and 2022 (dollars in millions):
| For the Years Ended December 31, | ||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2023 | 2022 | Difference | % Change | |||||||||||
| Net sales | $ | 247.6 | $ | 233.7 | $ | 13.9 | 6 | % | ||||||
| Loss | $ | (93.9) | $ | (94.0) | $ | 0.1 | — | % | ||||||
| % of net sales | (37.9) | % | (40.2) | % |
Net sales increased 6% in 2023 as compared to 2022 due to revenue growth in our European businesses.
Segment loss was unchanged in 2023 compared to 2022 as unfavorable SG&A costs of $7 million and unfavorable foreign currency of $4 million were offset by $11 million of higher segment profit from our European businesses due primarily from favorable price.
Year Ended December 31, 2022 Compared to Year Ended December 31, 2021 - Consolidated Results
Net Sales
Net sales increased 13% in 2022 compared to 2021 as favorable price of 10%, favorable product mix of 2% and 2% from higher sales volume were partially offset by 1% from unfavorable foreign currency.
Gross Profit
Gross profit margins for 2022 declined 110 bps to 27.2% compared to 28.3% in 2021. Gross profit margin decreased 240 bps from higher commodity costs, 170 bps from higher component costs, 140 bps from higher other product costs including LIFO, 90 bps from higher factory inefficiencies, 80 bps from higher freight and distribution costs and 60 bps from unfavorable product mix. Partially offsetting these margin decreases were 650 bps from favorable price and 20 bps from lower product warranty costs.
Selling, General and Administrative Expenses
SG&A expenses increased by $28 million in 2022 compared to 2021. As a percentage of net sales, SG&A expenses decreased 100 bps from 14.3% to 13.3% in the same periods primarily due to lower discretionary expenditures.
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Losses (Gains) and Other Expenses, Net
Losses (gains) and other expenses, net for 2022 and 2021 included the following (in millions):
| For the Years Ended December 31, | ||||||
|---|---|---|---|---|---|---|
| 2022 | 2021 | |||||
| Realized losses (gains) on settled futures contracts | $ | 0.1 | $ | (1.2) | ||
| Foreign currency exchange gains | (1.3) | (2.2) | ||||
| Gain on disposal of fixed assets | (1.0) | (0.2) | ||||
| Other operating income | (1.0) | (1.5) | ||||
| Net change in unrealized losses on unsettled futures contracts | 0.4 | — | ||||
| Environmental liabilities and special litigation charges | 7.5 | 9.6 | ||||
| Charges incurred related to COVID-19 pandemic | 0.8 | 2.2 | ||||
| Other items, net | (0.6) | 2.5 | ||||
| Losses (gains) and other expenses, net | $ | 4.9 | $ | 9.2 |
The net change in unrealized losses on unsettled futures contracts was due to changes in commodity prices relative to the unsettled futures contract prices. For more information on our derivatives, see Note 9 in the Notes to the Consolidated Financial Statements. Foreign currency exchange gains decreased in 2022 primarily due to changes in foreign exchange rates in our primary markets. Environmental liabilities and special legal contingency charges in 2022 relate to estimated remediation costs at some of our facilities and outstanding legal settlements including asbestos. Refer to Note 5 in the Notes to the Consolidated Financial Statements for more information on litigation, including the asbestos-related litigation, and the environmental liabilities. The charges incurred related to the COVID-19 pandemic related primarily to facility cleaning costs and sanitization supplies to support the health and safety of our employees.
Restructuring Charges
Restructuring charges were $1.5 million in 2022 compared to $1.8 million in 2021. Charges in 2022 were related to ongoing cost reduction actions taken in prior years. For more information on our restructuring activities, see Note 7 in the Notes to the Consolidated Financial Statements.
Goodwill
We performed a qualitative impairment analysis and noted no indicators of goodwill impairment for the year ended December 31, 2022. We did not record any goodwill impairments in 2022 or 2021. Refer to Note 9 in the Notes to the Consolidated Financial Statements for more information on goodwill.
Asset Impairments
We did not have any impairments of assets in 2022 or 2021.
Pension Settlement
We did not have significant pension buyout activity in 2022 and 2021. Refer to Note 10 in the Notes to the Consolidated Financial Statements for more information on pensions and employee benefit plans.
Income from Equity Method Investments
Investments over which we do not exercise control but have significant influence are accounted for using the equity method of accounting. Income from equity method investments was $5 million in 2022 compared to $12 million in 2021. The decrease was due to lower operating results at the investees due to higher material costs.
Interest Expense, net
Net interest expense of $39 million in 2022 increased from $25 million in 2021 primarily due to higher borrowing costs.
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Income Taxes
The income tax provision was $119 million in 2022 compared to $96 million in 2021, and the effective tax rate was 19.3% in 2022 compared to 17.2% in 2021. The 2022 and 2021 effective tax rates differ from the statutory rate of 21% primarily due to foreign taxes. Refer to Note 12 in the Notes to the Consolidated Financial Statements for more information on income taxes.
Year Ended December 31, 2022 Compared to Year Ended December 31, 2021 - Results by Segment
Home Comfort Solutions
The following table presents our Home Comfort Solutions segment’s net sales and profit for 2022 and 2021 (dollars in millions):
| For the Years Ended December 31, | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| 2022 | 2021 | Difference | % Change | ||||||||
| Net sales | $ | 3,198.3 | $ | 2,775.6 | $ | 422.7 | 15% | ||||
| Profit | $ | 596.9 | $ | 540.3 | $ | 56.6 | 10% | ||||
| % of net sales | 18.7 | % | 19.5 | % |
Net sales increased 15% in 2022 compared to 2021 due to an increase in price of 11%, an increase in sales volume of 4%, and 1% from favorable product mix. Partially offsetting these increases was 1% from unfavorable foreign currency.
Segment profit in 2022 increased $57 million compared to 2021 due to $297 million from higher price, $33 million from higher sales volume, and $9 million from lower product warranty costs. Partially offsetting these increases were $85 million from higher commodity costs, $49 million from higher component costs, $47 million higher other product costs including LIFO, unfavorable product mix of $34 million, $33 million from higher freight and distribution charges, $20 million from higher SG&A costs, $7 million from factory inefficiencies, $5 million from unfavorable foreign currency, and $2 million from miscellaneous other items.
Building Climate Solutions
The following table presents our Building Climate Solutions segment’s net sales and profit for 2022 and 2021 (dollars in millions):
| For the Years Ended December 31, | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| 2022 | 2021 | Difference | % Change | ||||||||
| Net sales | $ | 1,286.4 | $ | 1,188.8 | $ | 97.6 | 8% | ||||
| Profit | $ | 162.9 | $ | 164.6 | $ | (1.7) | (1)% | ||||
| % of net sales | 12.7 | % | 13.8 | % |
Net sales increased 8% in 2022 compared to 2021 due to an increase in product mix of 9% and an increase in price of 5%. Partially offsetting these increases was lower sales volume of 6%.
Segment profit in 2022 decreased $2 million compared to 2021 due to $30 million from higher factory inefficiencies, $29 million in higher component costs, $23 million in higher commodity costs, $22 million in lower sales volume, $21 million from higher other product costs including LIFO, $16 million in higher SG&A costs, $4 million from higher freight and distribution costs and $2 million from miscellaneous other items. Partially offsetting these decreases was an increase in price of $107 million, $36 million increase in product mix, $1 million in lower product warranty costs and $1 million in favorable foreign currency translation.
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Corporate and Other
The following table presents our Corporate and Other segment’s net sales and loss for 2022 and 2021 (dollars in millions):
| For the Years Ended December 31, | ||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2022 | 2021 | Difference | % Change | |||||||||||
| Net sales | $ | 233.7 | $ | 229.7 | $ | 4.0 | 2 | % | ||||||
| Loss | $ | (94.0) | $ | (101.0) | $ | 7.0 | (7) | % | ||||||
| % of net sales | (40.2) | % | (44.0) | % |
Net sales increased 2% in 2022 compared to 2021 due to our European businesses.
Segment loss decreased by $7 million in 2022 compared to 2021 due primarily to a $7 million reduction in SG&A costs.
Accounting for Futures Contracts
Realized gains and losses on settled futures contracts are a component of segment profit (loss). Unrealized gains and losses on unsettled futures contracts are excluded from segment profit (loss) as they are subject to changes in fair value until their settlement date. Both realized and unrealized gains and losses on futures contracts are a component of Losses (gains) and other expenses, net in the accompanying Consolidated Statements of Operations. See Note 9 of the Notes to Consolidated Financial Statements for more information on our derivatives and Note 3 of the Notes to the Consolidated Financial Statements for more information on our segments and for a reconciliation of segment profit to operating income.
Liquidity and Capital Resources
Our working capital and capital expenditure requirements are generally met through internally generated funds, bank lines of credit and our commercial paper program. Working capital needs are generally greater in the first and second quarters due to the seasonal nature of our business cycle.
Statement of Cash Flows
The following table summarizes our cash flow activity for the years ended December 31, 2023, 2022 and 2021 (in millions):
| 2023 | 2022 | 2021 | ||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| Net cash provided by operating activities | $ | 736.2 | $ | 302.3 | $ | 515.5 | ||||
| Net cash used in investing activities | $ | (319.7) | $ | (103.0) | $ | (106.4) | ||||
| Net cash used in financing activities | $ | (406.2) | $ | (174.1) | $ | (498.7) |
Net Cash Provided By Operating Activities - Net cash provided by operating activities activities increased $434 million to $736 million in 2023 compared to $302 million in 2022. The increase was primarily attributable to efforts to better manage working capital levels and an increase in net income of $93 million.
Net Cash Used In Investing Activities - Net cash used in investing activities increased $217 million from 2022 to 2023 primarily due to higher capital expenditures and $95 million related to our acquisition of AES. Capital expenditures were $250 million, $101 million and $107 million in 2023, 2022 and 2021, respectively. Capital expenditures in 2023 were primarily related to the expansion of our manufacturing capacity including investments in our commercial HVAC factory in Mexico, equipment, and investments in systems and software to support the overall enterprise.
Net Cash Used In Financing Activities - Net cash used in financing activities was $406 million in 2023 and $174 million in 2022. The increase was primarily due to paydown of our debt balances during 2023. We did not repurchase any shares in 2023 compared to $300 million of share repurchases in 2022. We also returned $153 million to shareholders through dividend payments in 2023.
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Debt Position
The following table details our lines of credit and financing arrangements as of December 31, 2023 (in millions):
| Outstanding Borrowings | ||
|---|---|---|
| Commercial paper: | $ | 150.0 |
| Current maturities of long-term debt: | ||
| Finance lease obligations | $ | 12.1 |
| Total current maturities of long-term debt | $ | 12.1 |
| Long-term debt: | ||
| Finance lease obligations | $ | 32.7 |
| Credit agreement (1) | 20.0 | |
| Senior unsecured notes | 1,100.0 | |
| Debt issuance costs | (9.6) | |
| Total long-term debt | $ | 1,143.1 |
| Total debt | $ | 1,305.2 |
(1)The total capacity on the facility is $1,100.0 million. The amount available for future borrowings on our Credit Agreement is $928 million after being reduced by the outstanding borrowings under our Commercial Paper Program and $2 million in outstanding standby letters of credit as of December 31, 2023.
Commercial Paper Program
On October 25, 2023, we established a commercial paper program (the “Program”), as a replacement to our Asset Securitization Program which expired in November 2023, pursuant to which we may issue short-term, unsecured commercial paper notes (the “CP Notes”) under the exemption from registration contained in Section 4(a)(2) of the Securities Act. Amounts available under the Program may be borrowed, repaid, and re-borrowed from time to time, with the aggregate face or principal amount of the CP Notes outstanding under the Program at any time not to exceed $500.0 million. The CP Notes will have maturities of up to 397 days from the date of issue. The CP Notes will rank pari passu with all of our other unsecured and unsubordinated indebtedness. The net proceeds of the issuances of the CP Notes are expected to be used for general corporate purposes. We plan to use our revolving credit facility as a liquidity backstop for the repayment of CP Notes outstanding under the Program. CP Notes currently outstanding under the Program totaled $150 million as of December 31, 2023.
Credit Agreement
In August 2023, we entered into the Second Amendment (the “Second Amendment”) to our existing Credit Agreement, dated as of July 14, 2021 (as amended, the "Credit Agreement"), with JPMorgan Chase Bank, N.A., as administrative agent, and the other lenders party thereto. Under the Second Amendment, the revolving commitments were increased by $350 million
and certain representations required to be made as conditions precedent to borrowing were revised to provide us greater flexibility to enter into additional future financings.
Our Credit Agreement consists of a $1,100.0 million unsecured revolving credit facility that matures in July 2026. We had outstanding borrowings of $20.0 million as well as $1.7 million committed to standby letters of credit as of December 31, 2023. Subject to covenant limitations, $928.3 million was available for future borrowings. The revolving credit facility includes a subfacility for swingline loans of up to $65.0 million. The Credit Agreement will expire and outstanding loans will be required to be repaid in July 2026, unless maturity is extended by the lenders pursuant to two one-year extension options that we may request under the Credit Agreement.
Senior Unsecured Notes
In September 2023, we issued $500.0 million of senior unsecured notes, which will mature in September 2028 (the "2028 Notes") with interest being paid semi-annually in March and September at 5.50%. We issued two series of senior unsecured
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notes on July 30, 2020 for $300.0 million each, which will mature on August 1, 2025 (the "2025 Notes") and August 1, 2027 (the "2027 Notes") with interest being paid semi-annually in February and August at 1.35% and 1.70% respectively, per annum (the 2025 Notes, the 2027 Notes, and the 2028 Notes, collectively the “Notes”).
All the Notes are guaranteed, on a senior unsecured basis, by certain of our subsidiaries that guarantee indebtedness under our Credit Agreement. 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 December 31, 2023, we believe we were in compliance with all covenant requirements.
Financial Leverage
We periodically review our capital structure, including our primary bank facility, to ensure the appropriate levels of liquidity and leverage and to take advantage of favorable interest rate environments or other market conditions. We consider various other financing alternatives and may, from time to time, access the capital markets.
We also evaluate our debt-to-capital and debt-to-EBITDA ratios to determine, among other considerations, the appropriate targets for capital expenditures and share repurchases under our Share Repurchase Plans. Our book value of debt-to-total-capital ratio decreased to 82% at December 31, 2023 compared to 115% at December 31, 2022.
As of December 31, 2023, our senior credit ratings were Baa2 with a stable outlook, and BBB with a stable outlook, by Moody’s Investors Service, Inc. (“Moody’s”) and Standard & Poor’s Rating Group (“S&P”), respectively. The security ratings are not a recommendation to buy, sell or hold securities and may be subject to revision or withdrawal at any time by the assigning rating agency. Each rating should be evaluated independently of any other rating. Our goal is to maintain investment grade ratings from Moody’s and S&P to help ensure the capital markets remain available to us.
Liquidity
We believe our cash and cash equivalents of $61 million, future cash generated from operations and available future borrowings are sufficient to fund our operations, planned capital expenditures, future contractual obligations, share repurchases, anticipated dividends and other needs in the foreseeable future. Included in our cash and cash equivalents as of December 31, 2023 was $30 million of cash held in foreign locations, although that amount can fluctuate significantly depending on the timing of cash receipts and payments. Our cash and cash equivalents held in foreign locations is generally available for use in our U.S. operations and could be subject to foreign withholding taxes and U.S. state taxes.
No contributions are required to be made to our U.S. defined benefit plans in 2024. We made $15.0 million in total contributions to our pension plans in 2023.
Dividend payments were $153 million in 2023 compared to $142 million in 2022. On May 15, 2023, our Board of Directors approved a 4% increase in our quarterly dividend on common stock from $1.06 to $1.10 per share effective with the July 2023 dividend payment.
Delaware law limits the ability to pay dividends to surplus or, if there is no surplus, out of net profits for the fiscal year in which the dividend is declared and/or the preceding fiscal year. In addition, stock repurchases can only be made out of surplus and only if our capital would not be impaired.
We expect capital expenditures of approximately $175 million in 2024, which includes final spending for our new commercial HVAC factory in Mexico and the 2025 low GWP refrigerant transition.
Financial Covenants related to our Debt
The Credit Agreement is guaranteed by certain of our subsidiaries and contains customary covenants applicable to us and our subsidiaries including limitations on indebtedness, liens, dividends, stock repurchases, mergers and sales of all or substantially all of our assets. In addition, the Credit Agreement contains a financial covenant requiring us to maintain, as of the last day of each fiscal quarter for the four prior fiscal quarters, a Total Net Leverage Ratio of no more than 3.50 to 1.00 (or, at our election, on up to two occasions following a material acquisition, 4.00 to 1.00).
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Our Credit Agreement contains customary events of default. These events of default include nonpayment of principal or other amounts, material inaccuracy of representations and warranties, breach of covenants, default on certain other indebtedness or receivables securitizations (cross default), certain voluntary and involuntary bankruptcy events and the occurrence of a change in control. A cross default under our credit facility could occur if:
•We fail to pay any principal or interest when due on any other indebtedness or receivables securitization exceeding $75.0 million; or
•We are in default in the performance of, or compliance with any term of any other indebtedness in an aggregate principal amount exceeding $75.0 million, or any other condition exists which would give the holders the right to declare such indebtedness due and payable prior to its stated maturity.
Each of our major debt agreements contains provisions by which a default under one agreement causes a default in the others (a cross default). If a cross default under our Credit Agreement or our senior unsecured notes were to occur, it could have a wider impact on our liquidity than might otherwise occur from a default of a single debt instrument or lease commitment.
If any event of default occurs and is continuing, the administrative agent, or lenders with a majority of the aggregate commitments may require the administrative agent to, terminate our right to borrow under our Credit Agreement and accelerate amounts due under our Credit Agreement (except for a bankruptcy event of default, in which case such amounts will automatically become due and payable and the lenders’ commitments will automatically terminate).
In the event of a credit rating downgrade below investment grade resulting from a change of control, holders of our senior unsecured notes will have the right to require us to repurchase all or a portion of the senior unsecured notes at a repurchase price equal to 101% of the principal amount of the notes, plus accrued and unpaid interest, if any. The notes are guaranteed, on a senior unsecured basis, by each of our subsidiaries that guarantee payment by us of any indebtedness under our Credit Agreement. 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; enter into certain mergers, consolidations and transfers of substantially all of our assets; and transfer certain properties. The indenture also contains a cross default provision which is triggered if we default on other debt of at least $75 million in principal which is then accelerated, and such acceleration is not rescinded within 30 days of the notice date.
As of December 31, 2023, we believe we were in compliance with all covenant requirements.
Leasing Commitments
Refer to Note 5 in the Notes to the Consolidated Financial Statements for more details on our leasing commitments.
Guarantees related to our Debt Obligations
Our senior unsecured notes were issued by Lennox International Inc. (the “Parent”) and are unconditionally guaranteed by certain of our subsidiaries (the “Guarantor Subsidiaries”) and are not secured by our other subsidiaries. The Guarantor Subsidiaries are 100% owned and consolidated, all guarantees are full and unconditional, and all guarantees are joint and several.
Off Balance Sheet Arrangements
We have no off-balance sheet arrangements that we believe may have a material current or future effect on our financial condition, liquidity or results of operations.
Contractual Obligations
Contractual obligations arise in the normal course of business and include debt and related interest payments, leases, purchase obligations, pension and post-retirement benefits and warranty liabilities. For additional information regarding our contractual obligations, see Note 5 of the Notes to the Consolidated Financial Statements. See Note 10 of the Notes to the Consolidated Financial Statements for more information on our pension and post-retirement benefits obligations. See Note 13 of the Notes to the Consolidated Financial Statements for more information on our debt obligations.
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Fair Value Measurements
Fair value is the price that would be received to sell an asset or the price paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value is based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date and requires consideration of our creditworthiness when valuing certain liabilities. Our framework for measuring fair value is based on a three-level hierarchy for fair value measurements.
The three-level fair value hierarchy for disclosure of fair value measurements is defined as follows:
Level 1 - Quoted prices for identical instruments in active markets at the measurement date.
Level 2 - Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations in which all significant inputs and significant value drivers are observable in active markets at the measurement date and for the anticipated term of the instrument.
Level 3 - Valuations derived from valuation techniques in which one or more significant inputs or significant value drivers are unobservable inputs that reflect the reporting entity’s own assumptions about the assumptions market participants would use in pricing the asset or liability developed based on the best information available in the circumstances.
Where available, the fair values were based upon quoted prices in active markets. However, if quoted prices were not available, then the fair values were based upon quoted prices for similar assets or liabilities or independently sourced market parameters, such as credit default swap spreads, yield curves, reported trades, broker/dealer quotes, interest rates and benchmark securities. For assets and liabilities without observable market activity, if any, the fair values were based upon discounted cash flow methodologies incorporating assumptions that, in our judgment, reflect the assumptions a marketplace participant would use. Valuation adjustments to reflect either party’s creditworthiness and ability to pay were incorporated into our valuations, where appropriate, as of December 31, 2023 and 2022, the measurement dates. See Note 16 of the Notes to the Consolidated Financial Statements for more information on the assets and liabilities measured at fair value.
Market Risk
Commodity Price Risk
We enter into commodity futures contracts to stabilize prices expected to be paid for raw materials and parts containing high copper and aluminum content. These contracts are for quantities equal to or less than quantities expected to be consumed in future production. Fluctuations in metal commodity prices impact the value of the futures contracts that we hold. When metal commodity prices rise, the fair value of our futures contracts increases. Conversely, when commodity prices fall, the fair value of our futures contracts decreases. Information about our exposure to metal commodity price market risks and a sensitivity analysis related to our metal commodity hedges is presented below (in millions):
| Notional amount (pounds of aluminum and copper) | 53.3 | |
|---|---|---|
| Carrying amount and fair value of net asset | $ | (0.1) |
| Change in fair value from 10% change in forward prices | $ | 9.1 |
Refer to Note 9 of the Notes to the Consolidated Financial Statements for additional information regarding our commodity futures contracts.
Interest Rate Risk
Our results of operations can be affected by changes in interest rates due to variable rates of interest on our debt facilities, cash, cash equivalents and short-term investments. A 10% adverse movement in the levels of interest rates across the entire yield curve would have resulted in an increase to pre-tax interest expense of approximately $2.3 million, $1.7 million and $0.4 million for the years ended December 31, 2023, 2022 and 2021, respectively.
From time to time, we may use an interest rate swap hedging strategy to eliminate the variability of cash flows in a portion of our interest payments. This strategy, when employed, allows us to fix a portion of our interest payments when interest rates are low. As of December 31, 2023 and 2022, no interest rate swaps were in effect.
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Foreign Currency Exchange Rate Risk
Our results of operations are affected by changes in foreign currency exchange rates. Net sales and expenses in foreign currencies are translated into U.S. dollars for financial reporting purposes based on the average exchange rate for the period. Our primary exposure to foreign currencies are the Canadian dollar, Mexican Peso, and the Euro. During 2023, 2022 and 2021, net sales from outside the U.S. represented 11.3%, 11.4% and 13.1%, respectively, of our total net sales. For the years ended December 31, 2023, 2022, and 2021, foreign currency transaction gains and losses did not have a material impact to our results of operations. A 10% change in foreign exchange rates would have had an estimated $5.6 million, $3.5 million and $2.7 million impact to net income for the years ended December 31, 2023, 2022 and 2021, respectively.
We seek to mitigate the impact of currency exchange rate movements on certain short-term transactions by periodically entering into foreign currency forward contracts. By entering into forward contracts, we lock in exchange rates that would otherwise cause losses should the U.S. dollar appreciate and gains should the U.S. dollar depreciate. Refer to Note 9 of the Notes to the Consolidated Financial Statements for additional information regarding our foreign currency forward contracts.
Critical Accounting Estimates
A critical accounting estimate is one that requires difficult, subjective or complex estimates and assessments and is fundamental to our results of operations and financial condition. The following describes our critical accounting estimate related to product warranties and product-related contingencies and how we develop our judgments, assumptions and estimates about future events and how such policies can impact our financial statements. This discussion and analysis should be read in conjunction with our Consolidated Financial Statements and related Notes in “Item 8. Financial Statements and Supplementary Data.”
Product Warranties and Product-Related Contingencies
The estimate of our liability for future warranty costs requires us to make assumptions about the amount, timing and nature of future product-related costs. Some of the warranties we issue extend 10 years or more in duration and a relatively small adjustment to an assumption may have a significant impact on our overall liability.
From time to time, we may also incur costs to repair or replace installed products experiencing quality issues in order to satisfy our customers and protect our brand. These product-related costs may not be covered under our warranties and are not covered by insurance.
We periodically review the assumptions used to determine the liabilities for product warranties and product-related contingencies and we adjust our assumptions based upon factors such as actual failure rates and cost experience. Numerous factors could affect actual failure rates and cost experience, including the amount and timing of new product introductions, changes in manufacturing techniques or locations, components or suppliers used. Should actual costs differ from our estimates, we may be required to adjust the liabilities and to record expense in future periods. See Note 5 in the Notes to the Consolidated Financial Statements for more information on our product warranties and product-related contingencies.
Recent Accounting Pronouncements
See Note 2 in the Notes to the Consolidated Financial Statements for disclosure of recent accounting pronouncements and the potential impact on our financial statements and disclosures.
FY 2022 10-K MD&A
SEC filing source: 0001628280-23-004257.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion should be read in conjunction with the other sections of this report, including the Consolidated Financial Statements and related Notes to the Consolidated Financial Statements in Item 8, “Other Financial Statement Details,” of this Annual Report on Form 10-K.
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Business Overview
We operate in three reportable business segments of the heating, ventilation, air conditioning and refrigeration (“HVACR”) industry. Our reportable segments are Residential Heating & Cooling, Commercial Heating & Cooling, and Refrigeration. For more detailed information regarding our reportable segments, see Note 3 in the Notes to the Consolidated Financial Statements.
We sell our products and services through a combination of direct sales, distributors and company-owned stores. The demand for our products and services is seasonal and significantly impacted by the weather. Warmer than normal summer temperatures generate demand for replacement air conditioning and refrigeration products and services, and colder than normal winter temperatures have a similar effect on heating products and services. Conversely, cooler than normal summers and warmer than normal winters depress the demand for HVACR products and services. In addition to weather, demand for our products and services is influenced by national and regional economic and demographic factors, such as interest rates, the availability of financing, regional population and employment trends, new construction, general economic conditions and consumer spending habits and confidence. A substantial portion of the sales in each of our business segments is attributable to replacement business, with the balance comprised of new construction business.
The principal elements of cost of goods sold are components, raw materials, factory overhead, labor, estimated costs of warranty expense and freight and distribution costs. The principal raw materials used in our manufacturing processes are steel, copper and aluminum. In recent years, pricing volatility for these commodities and related components has impacted us and the HVACR industry in general. We seek to mitigate the impact of commodity price volatility through a combination of pricing actions, vendor contracts, improved production efficiency and cost reduction initiatives. We also partially mitigate volatility in the prices of these commodities by entering into futures contracts and fixed forward contracts.
Impact of COVID-19 Pandemic
A novel strain of coronavirus (“COVID-19”) has surfaced and spread around the world. The COVID-19 pandemic is creating supply chain disruptions and higher employee absenteeism in our factories and distribution locations since 2020. We cannot predict whether any of our manufacturing, operational or distribution facilities will experience any future disruptions, or how long such disruptions would last. It also remains unclear how various national, state, and local governments will react if new variants of the virus spread. If the pandemic worsens or continues longer than presently expected, COVID-19 could impact our results of operations, financial position and cash flows.
Executive Leadership Transition
On March 23, 2022, the Board of Directors appointed Alok Maskara as Chief Executive Officer (“CEO”) effective May 9, 2022. Mr. Maskara succeeded Todd Bluedorn, who announced in July 2021 his plans to step down by mid-2022 as Chairman and CEO. Todd J. Teske was appointed Chairman of the Board and served as interim CEO until Mr. Maskara assumed the role on May 9, 2022.
Financial Highlights
•Net sales increased $524 million, or 13%, to $4,718 million in 2022 from $4,194 million in 2021.
•Operating income in 2022 was $656 million compared to $590 million in 2021.
•Net income in 2022 increased to $497 million from $464 million in 2021.
•Diluted earnings per share from continuing operations were $13.88 per share in 2022 compared to $12.39 per share in 2021.
•We generated $302 million of cash flow from operating activities in 2022 compared to $516 million in 2021.
•In 2022, we returned $142 million to shareholders through dividend payments and we used $300 million to purchase 1.3 million shares of stock under our Share Repurchase Plans.
Overview of Results
The Residential Heating & Cooling segment performed well in 2022, with a 15% increase in net sales and a $57 million increase in segment profit compared to 2021 primarily due to higher price and sales volumes. Our Commercial Heating & Cooling segment saw an increase in net sales of 4% and a $30 million decrease in segment profit compared to 2021 primarily
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due to increased product costs. Sales in our Refrigeration segment increased 12% and segment profit increased $30 million compared to 2021 primarily due to higher price and sales volumes.
Results of Operations
The following table provides a summary of our financial results, including information presented as a percentage of net sales (dollars in millions):
| For the Years Ended December 31, | ||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2022 | 2021 | 2020 | ||||||||||||||||||
| Dollars | Percent | Dollars | Percent | Dollars | Percent | |||||||||||||||
| Net sales | $ | 4,718.4 | 100.0 | % | $ | 4,194.1 | 100.0 | % | $ | 3,634.1 | 100.0 | % | ||||||||
| Cost of goods sold | 3,433.7 | 72.8 | % | 3,005.7 | 71.7 | % | 2,594.0 | 71.4 | % | |||||||||||
| Gross profit | 1,284.7 | 27.2 | % | 1,188.4 | 28.3 | % | 1,040.1 | 28.6 | % | |||||||||||
| Selling, general and administrative expenses | 627.2 | 13.3 | % | 598.9 | 14.3 | % | 555.9 | 15.3 | % | |||||||||||
| Losses (gains) and other expenses, net | 4.9 | 0.1 | % | 9.2 | 0.2 | % | 7.4 | 0.2 | % | |||||||||||
| Restructuring charges | 1.5 | — | % | 1.8 | — | % | 10.8 | 0.3 | % | |||||||||||
| Loss from natural disasters, net of insurance recoveries | — | — | % | — | — | % | 3.1 | 0.1 | % | |||||||||||
| Income from equity method investments | (5.1) | (0.1) | % | (11.8) | (0.3) | % | (15.6) | (0.4) | % | |||||||||||
| Operating income | $ | 656.2 | 13.9 | % | $ | 590.3 | 14.1 | % | $ | 478.5 | 13.2 | % | ||||||||
| Loss from discontinued operations | — | — | % | — | — | % | (0.8) | — | % | |||||||||||
| Net income | $ | 497.1 | 10.5 | % | $ | 464.0 | 11.1 | % | $ | 356.3 | 9.8 | % |
Year Ended December 31, 2022 Compared to Year Ended December 31, 2021 - Consolidated Results
Net Sales
Net sales increased 13% in 2022 compared to 2021, driven by higher price of 10%, product mix of 2%, and 2% higher sales volume. Partially offsetting these increases was 1% due to unfavorable foreign currency.
Gross Profit
Gross profit margins for 2022 declined 110 basis points (“bps”) to 27.2% compared to 28.3% in 2021. Gross profit margin decreased 240 bps from higher commodity costs, 170 bps from higher component costs, 140 bps from other product costs including LIFO, 90 bps from factory inefficiencies, 80 bps from higher freight and distribution costs, and 60 bps from product mix. Partially offsetting these margin decreases were 650 bps from favorable price and 20 bps from lower product warranty costs.
Selling, General and Administrative Expenses
SG&A expenses increased by $28 million in 2022 compared to 2021. As a percentage of net sales, SG&A expenses decreased 100 bps from 14.3% to 13.3% in the same periods primarily due to lower discretionary expenditures.
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Losses (Gains) and Other Expenses, Net
Losses (gains) and other expenses, net for 2022 and 2021 included the following (in millions):
| For the Years Ended December 31, | ||||||
|---|---|---|---|---|---|---|
| 2022 | 2021 | |||||
| Realized losses (gains) on settled future contracts | $ | 0.1 | $ | (1.2) | ||
| Foreign currency exchange gains | (1.3) | (2.2) | ||||
| Loss (gain) on disposal of fixed assets | (1.0) | (0.2) | ||||
| Other operating income | (1.0) | (1.5) | ||||
| Net change in unrealized (gains) losses on unsettled futures contracts | 0.4 | — | ||||
| Environmental liabilities and special litigation charges | 7.5 | 9.6 | ||||
| Charges incurred related to COVID-19 pandemic | 0.8 | 2.2 | ||||
| Other items, net | (0.6) | 2.5 | ||||
| (Gains) losses and other expenses, net (pre-tax) | $ | 4.9 | $ | 9.2 |
The net change in unrealized losses on unsettled futures contracts was due to changes in commodity prices relative to the unsettled futures contract prices. For more information on our derivatives, see Note 9 in the Notes to the Consolidated Financial Statements. Foreign currency exchange gains decreased in 2022 primarily due to changes in foreign exchange rates in our primary markets. Environmental liabilities and special legal contingency charges in 2022 relate to estimated remediation costs at some of our facilities and outstanding legal settlements including asbestos. Refer to Note 5 in the Notes to the Consolidated Financial Statements for more information on litigation, including the asbestos-related litigation, and the environmental liabilities. The charges incurred related to the COVID-19 pandemic related primarily to facility cleaning costs and sanitization supplies to ensure the health and safety of our employees.
Restructuring Charges
Restructuring charges were $1.5 million in 2022 compared to $1.8 million in 2021. Charges in 2022 were related to ongoing cost reduction actions taken in prior years. For more information on our restructuring activities, see Note 7 in the Notes to the Consolidated Financial Statements.
Goodwill
We performed a qualitative impairment analysis and noted no indicators of goodwill impairment for the year ended December 31, 2022. We did not record any goodwill impairments in 2022 or 2021. Refer to Note 9 in the Notes to the Consolidated Financial Statements for more information on goodwill.
Asset Impairments
We did not have any impairments of assets in 2022 or 2021.
Pension Settlement
We did not have significant pension buyout activity in 2022 and 2021. Refer to Note 10 in the Notes to the Consolidated Financial Statements for more information on pensions and employee benefit plans.
Income from Equity Method Investments
Investments over which we do not exercise control but have significant influence are accounted for using the equity method of accounting. Income from equity method investments was $5 million in 2022 compared to $12 million in 2021. The decrease is due to lower operating results at the investees due to higher material costs.
Interest Expense, net
Net interest expense of $39 million in 2022 increased from $25 million in 2021 primarily due to higher borrowing costs.
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Income Taxes
The income tax provision was $119 million in 2022 compared to $96 million in 2021, and the effective tax rate was 19.3% in 2022 compared to 17.2% in 2021. The 2022 and 2021 effective tax rates differ from the statutory rate of 21% primarily due to foreign taxes. Refer to Note 12 in the Notes to the Consolidated Financial Statements for more information on income taxes.
Year Ended December 31, 2022 Compared to Year Ended December 31, 2021 - Results by Segment
Residential Heating & Cooling
The following table presents our Residential Heating & Cooling segment’s net sales and profit for 2022 and 2021 (dollars in millions):
| For the Years Ended December 31, | |||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2022 | 2021 | Difference | % Change | ||||||||||
| Net sales | $ | 3,198.3 | $ | 2,775.6 | $ | 422.7 | 15% | ||||||
| Profit | $ | 596.9 | $ | 540.3 | $ | 56.6 | 10% | ||||||
| % of net sales | 18.7 | % | 19.5 | % |
Residential Heating & Cooling net sales increased 15% in 2022 compared to 2021 due to an increase in price of 11%, an increase in sales volume of 4%, and 1% from product mix. Partially offsetting these increases was 1% from unfavorable foreign currency.
Segment profit in 2022 increased $57 million compared to 2021 due to $297 million from higher price, $33 million from higher sales volume, and $9 million from lower product warranty costs. Partially offsetting these increases were $85 million from higher commodity costs, $49 million from higher component costs, $47 million higher other product costs including LIFO, unfavorable product mix of $34 million, $33 million from higher freight and distribution charges, $20 million from higher SG&A costs, $7 million from factory inefficiencies, $5 million from unfavorable foreign currency, and $2 million from miscellaneous other items.
Commercial Heating & Cooling
The following table presents our Commercial Heating & Cooling segment’s net sales and profit for 2022 and 2021 (dollars in millions):
| For the Years Ended December 31, | ||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2022 | 2021 | Difference | % Change | |||||||||||
| Net sales | $ | 900.7 | $ | 864.8 | $ | 35.9 | 4 | % | ||||||
| Profit | $ | 80.9 | $ | 110.9 | $ | (30.0) | (27) | % | ||||||
| % of net sales | 9.0 | % | 12.8 | % |
Commercial Heating & Cooling net sales increased 4% in 2022 compared to 2021 due to an increase in price of 7% and 7% from product mix. Partially offsetting these increases were lower sales volume of 9% and unfavorable foreign currency of 1%.
Segment profit in 2022 decreased $30 million compared to 2021 due to $28 million from factory inefficiencies, $25 million from lower sales volume, $21 million from higher component costs, $20 million from higher other product costs including LIFO, $13 million from higher commodity costs, $8 million from higher SG&A costs, and $2 million from higher freight and distribution charges. Partially offsetting these decreases were $61 million from higher price, $24 million from favorable product mix, and $2 million from lower product warranty costs.
Refrigeration
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The following table presents our Refrigeration segment’s net sales and profit for 2022 and 2021 (dollars in millions):
| For the Years Ended December 31, | ||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2022 | 2021 | Difference | % Change | |||||||||||
| Net sales | $ | 619.4 | $ | 553.7 | $ | 65.7 | 12 | % | ||||||
| Profit | $ | 78.8 | $ | 49.1 | $ | 29.7 | 60 | % | ||||||
| % of net sales | 12.7 | % | 8.9 | % |
Net sales increased 12% in 2022 compared to 2021 due to a 13% increase in price, 3% increase in sales volume, and 1% from product mix. Partially offsetting these increases was unfavorable foreign currency of 5%.
Segment profit in 2022 increased $30 million compared to 2021 due to $70 million from higher price, $7 million from favorable product mix, and $7 million from higher sales volume. Partially offsetting these increases were $17 million from higher commodity costs, $12 million from higher component costs, $12 million from higher SG&A, $7 million from factory inefficiencies, $4 million from higher freight and distribution costs, and $2 million from higher other product costs.
In November 2022, we announced the decision to explore strategic alternatives for our European commercial HVAC and refrigeration businesses. We will continue to invest in our Heatcraft Worldwide Refrigeration business which will become part of the Commercial Heating & Cooling segment beginning in 2023. The European portfolio will be presented with Corporate and Other beginning in 2023 until disposition. As we will manage the businesses in this manner beginning in 2023, we will present the financial results of the revised segments beginning in 2023. The European portfolio realized net sales of $234 million in 2022 and $230 million in 2021 and generated losses of $3 million and $5 million for 2022 and 2021, respectively.
Corporate and Other
Corporate and other expenses decreased by $6 million in 2022 compared to 2021 primarily due to lower incentive compensation costs.
Year Ended December 31, 2021 Compared to Year Ended December 31, 2020 - Consolidated Results
Net Sales
Net sales increased 15% in 2021 compared to 2020, driven by higher sales volumes of 11% and an improved combined price and mix of 4%. The increases in volume, price and mix were due to strong demand across all three of our business segments.
Gross Profit
Gross profit margins for 2021 decreased 30 basis points (“bps”) to 28.3% compared to 28.6% in 2020. Gross profit margin decreased 180 bps from higher commodity costs, 90 bps from other product costs, 20 bps from higher freight and distribution costs, and 10 bps for lower factory efficiency. Partially offsetting these cost increases was 270 bps from favorable combined price and mix.
Selling, General and Administrative Expenses
SG&A expenses increased by $43 million in 2021 compared to 2020. As a percentage of net sales, SG&A expenses decreased 100 bps from 15.3% to 14.3% in the same periods primarily due to lower discretionary expenditures.
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Losses (Gains) and Other Expenses, Net
Losses (gains) and other expenses, net for 2021 and 2020 included the following (in millions):
| For the Years Ended December 31, | ||||||
|---|---|---|---|---|---|---|
| 2021 | 2020 | |||||
| Realized (gains) losses on settled futures contracts | $ | (1.2) | $ | 0.1 | ||
| Foreign currency exchange gains | (2.2) | (3.6) | ||||
| Gain on disposal of fixed assets | (0.2) | (0.2) | ||||
| Other operating income | (1.5) | (2.2) | ||||
| Net change in unrealized gains on unsettled futures contracts | — | (0.3) | ||||
| Environmental liabilities and special litigation charges | 9.6 | 5.3 | ||||
| Charges incurred related to COVID-19 pandemic | 2.2 | 8.3 | ||||
| Other items, net | 2.5 | — | ||||
| Losses (gains) and other expenses, net | $ | 9.2 | $ | 7.4 |
The charges incurred related to the COVID-19 pandemic related primarily to facility cleaning costs and sanitization supplies to ensure the health and safety of our employees. The net change in unrealized losses on unsettled futures contracts was due to changes in commodity prices relative to the unsettled futures contract prices. For more information on our derivatives, see Note 10 in the Notes to the Consolidated Financial Statements.
Foreign currency exchange gains decreased in 2021 primarily due to weakening in foreign exchange rates in our primary markets. The special legal contingency charges in 2021 relate to outstanding legal settlements. The asbestos-related litigation relates to known and estimated future asbestos matters. The environmental liabilities relate to estimated remediation costs for contamination at some of our facilities. Refer to Note 5 in the Notes to the Consolidated Financial Statements for more information on litigation, including the asbestos-related litigation, and the environmental liabilities.
Restructuring Charges
Restructuring charges were $1.8 million in 2021 compared to $10.8 million in 2020. Charges in 2021 were related to ongoing cost reduction actions taken in prior years. The charges in 2020 related primarily to several cost reduction actions taken in response to the economic impact of the COVID-19 pandemic on our business. These actions consisted of employee terminations for positions that were no longer needed to support the business, selective facility closures, and cancellations of certain sales and marketing activities. For more information on our restructuring activities, see Note 7 in the Notes to the Consolidated Financial Statements.
Goodwill
We performed a qualitative impairment analysis and noted no indicators of goodwill impairment for the year ended December 31, 2021. We did not record any goodwill impairments in 2021 or 2020. Refer to Note 9 in the Notes to the Consolidated Financial Statements for more information on goodwill.
Asset Impairments
We did not have any impairments of assets in 2021 or 2020.
Pension Settlement
We did not have significant pension buyout activity in 2021 and 2020. Refer to Note 10 in the Notes to the Consolidated Financial Statements for more information on pensions and employee benefit plans.
Income from Equity Method Investments
Investments over which we do not exercise control but have significant influence are accounted for using the equity method of accounting. Income from equity method investments was $12 million in 2021 compared to $16 million in 2020. The decrease is due to rising production costs at the joint ventures.
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Interest Expense, net
Net interest expense of $25 million in 2021 decreased from $28 million in 2020 primarily due to lower borrowing and lower borrowing costs.
Income Taxes
The income tax provision was $96 million in 2021 compared to $88 million in 2020, and the effective tax rate was 17.2% in 2021 compared to 19.8% in 2020. The 2021 and 2020 effective tax rates differ from the statutory rate of 21% primarily due to state and foreign taxes. Refer to Note 12 in the Notes to the Consolidated Financial Statements for more information on income taxes.
Year Ended December 31, 2021 Compared to Year Ended December 31, 2020 - Results by Segment
Residential Heating & Cooling
The following table presents our Residential Heating & Cooling segment’s net sales and profit for 2021 and 2020 (dollars in millions):
| For the Years Ended December 31, | |||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2021 | 2020 | Difference | % Change | ||||||||||
| Net sales | $ | 2,775.6 | $ | 2,361.5 | $ | 414.1 | 18% | ||||||
| Profit | $ | 540.3 | $ | 428.5 | $ | 111.8 | 26% | ||||||
| % of net sales | 19.5 | % | 18.1 | % |
Residential Heating & Cooling net sales increased 18% in 2021 compared to 2020. Sales volume increased 13%, price increased 5% and favorable foreign currency exchange rates caused an increase of 1%. Partially offsetting these increases was a 1% reduction due to unfavorable product mix.
Segment profit in 2021 increased $112 million compared to 2020 due to $108 million from favorable pricing, $91 million from higher sales volume, $9 million from favorable foreign currency exchange, $5 million from higher factory productivity, and $2 million from sourcing and engineering-led cost reductions. Partially offsetting these increases were $59 million from commodity costs, $20 million from higher warranty and other product costs, $14 million from higher SG&A, $5 million from unfavorable product mix, and $5 million from lower income from equity method investments.
Commercial Heating & Cooling
The following table presents our Commercial Heating & Cooling segment’s net sales and profit for 2021 and 2020 (dollars in millions):
| For the Years Ended December 31, | ||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2021 | 2020 | Difference | % Change | |||||||||||
| Net sales | $ | 864.8 | $ | 800.9 | $ | 63.9 | 8 | % | ||||||
| Profit | $ | 110.9 | $ | 136.9 | $ | (26.0) | (19) | % | ||||||
| % of net sales | 12.8 | % | 17.1 | % |
Commercial Heating & Cooling net sales increased 8% in 2021 compared to 2020. Price and mix combined increased 4%, sales volume was 3% higher, and foreign currency improved 1%.
Segment profit in 2021 decreased $26 million compared to 2020 due to $17 million from higher other product costs, $14 million from factory inefficiencies, $6 million from sourcing and engineering-led cost increases, $6 million from higher commodity costs, $6 million from higher freight and distribution costs, $4 million from higher SG&A costs, and $1 million from unfavorable foreign currency. Partially offsetting these declines was a favorable increase in combined price and mix of $19 million and $9 million from higher sales volume.
Refrigeration
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The following table presents our Refrigeration segment’s net sales and profit for 2021 and 2020 (dollars in millions):
| For the Years Ended December 31, | ||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2021 | 2020 | Difference | % Change | |||||||||||
| Net sales | $ | 553.7 | $ | 471.7 | $ | 82.0 | 17 | % | ||||||
| Profit | $ | 49.1 | $ | 32.8 | $ | 16.3 | 50 | % | ||||||
| % of net sales | 8.9 | % | 7.0 | % |
Net sales increased 17% in 2021 compared to 2020. Sales volume increased 14%, price increased 3%, and foreign currency improved 1%. Partially offsetting these increases was a 1% reduction due to unfavorable mix.
Segment profit in 2021 increased $16 million compared to 2020 due to $23 million from higher sales volume, $13 million from higher price, $3 million from higher factory productivity, and $1 million from higher income from equity method investments. Partially offsetting these increases were $10 million from higher SG&A, $8 million from higher commodity costs, $2 million from higher other product costs, $2 million from unfavorable product mix, and $2 million from higher freight and distribution costs.
In November 2022, we announced the decision to explore strategic alternatives for our European commercial HVAC and refrigeration businesses. We will continue to invest in our Heatcraft Worldwide Refrigeration business which will become part of the Commercial Heating & Cooling segment beginning in 2023 and the European portfolio will be presented with Corporate and Other beginning in 2023 until disposition. As we will manage the businesses in this manner beginning in 2023, we will present the financial results of the revised segments beginning in 2023. The European portfolio realized net sales of $230 million in 2021 and $214 million in 2020 and generated losses of $5 million for both 2021 and 2020.
Corporate and Other
Corporate and other expenses increased by $5 million in 2021 compared to 2020 primarily due to increased headcount and increases in incentive compensation costs.
Accounting for Futures Contracts
Realized gains and losses on settled futures contracts are a component of segment profit (loss). Unrealized gains and losses on unsettled futures contracts are excluded from segment profit (loss) as they are subject to changes in fair value until their settlement date. Both realized and unrealized gains and losses on futures contracts are a component of Losses (gains) and other expenses, net in the accompanying Consolidated Statements of Operations. See Note 9 of the Notes to Consolidated Financial Statements for more information on our derivatives and Note 3 of the Notes to the Consolidated Financial Statements for more information on our segments and for a reconciliation of segment profit to operating income.
Liquidity and Capital Resources
Our working capital and capital expenditure requirements are generally met through internally generated funds, bank lines of credit and an asset securitization arrangement. Working capital needs are generally greater in the first and second quarters due to the seasonal nature of our business cycle.
Statement of Cash Flows
The following table summarizes our cash flow activity for the years ended December 31, 2022, 2021 and 2020 (in millions):
| 2022 | 2021 | 2020 | ||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| Net cash provided by operating activities | $ | 302.3 | $ | 515.5 | $ | 612.4 | ||||
| Net cash used in investing activities | (103.0) | (106.4) | (79.7) | |||||||
| Net cash used in financing activities | $ | (174.1) | $ | (498.7) | $ | (441.8) |
Net Cash Provided By Operating Activities - Net cash provided by operating activities activities decreased $214 million to $302 million in 2022 compared to $516 million in 2021. The decrease was primarily attributable to increases in working capital including a $249 million increase in inventory due to investments to replenish finished goods ahead of the minimum-
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efficiency regulatory changes and in raw material to increase supply chain resiliency and a $112 million increase in accounts and notes receivable due to higher sales volume. Partially offsetting the increased working capital was an increase in net income.
Net Cash Used In Investing Activities - Net cash used in investing activities decreased $3 million from 2021 to 2022 primarily due to lower capital expenditures. Capital expenditures were $101 million, $107 million and $79 million in 2022, 2021 and 2020, respectively. Capital expenditures in 2022 were primarily related to the expansion of our manufacturing capacity including investments in our Commercial factory in Mexico, equipment, and investments in systems and software to support the overall enterprise.
Net Cash Used In Financing Activities - Net cash used in financing activities was $174 million in 2022 and $499 million in 2021. The decrease is primarily due to a decrease in share repurchases in 2022 which was partially offset by an increase in net borrowings and repayments on debt. During 2022 we repurchased $300 million of shares compared to $600 million of shares in 2021. We also returned $142 million to shareholders through dividend payments in 2022. For additional information on share repurchases, refer to Note 6 in the Notes to the Consolidated Financial Statements.
Debt Position
The following table details our lines of credit and financing arrangements as of December 31, 2022 (in millions):
| Outstanding Borrowings | ||
|---|---|---|
| Current maturities of long-term debt: | ||
| Asset securitization program (1) | $ | 350.0 |
| Finance lease obligations | 11.2 | |
| Senior unsecured notes | 350.0 | |
| Debt issuance costs | (0.6) | |
| Total current maturities of long-term debt | $ | 710.6 |
| Long-term debt: | ||
| Finance lease obligations | 28.3 | |
| Credit agreement (2) | 192.0 | |
| Senior unsecured notes | 600.0 | |
| Debt issuance costs | (6.1) | |
| Total long-term debt | 814.2 | |
| Total debt | $ | 1,524.8 |
(1)The maximum securitization amount ranges from $300.0 million to $450.0 million, depending on the period. The maximum capacity of the Asset Securitization Program (“ASP”) is the lesser of the maximum securitization amount or 100% of the net pool balance less reserves, as defined under the ASP. Refer to Note 13 in the Notes to the Consolidated Financial Statements for more details.
(2)The total capacity on the facility is $750.0 million. The amount available future borrowings on our Credit Agreement is $556 million after being reduced by the outstanding borrowings and $2 million in outstanding standby letters of credit as of December 31, 2022.
Both our Asset Securitization Program as well as our $350.0 million 2023 Notes will mature in 2023. We are currently evaluating our options related to these obligations including refinancing and other alternatives. We do not believe that our options or alternatives will have any material impact on our results of operations or liquidity.
Credit Agreement
In July 2021, we entered into a new Credit Agreement (the “Credit Agreement”) with JPMorgan Chase Bank, N.A., as administrative agent, and the other lenders party thereto, which refinanced and replaced the Seventh Amended and Restated Credit Facility.
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The Credit Agreement provides for revolving credit commitments of $750 million with sublimits for swingline loans of up to $65 million, letters of credit up to $100 million and revolving loans in certain non-U.S. currencies up to the U.S. dollar equivalent of $40 million. The Credit Agreement will expire and outstanding loans will be required to be repaid in July 2026, unless maturity is extended by the lenders pursuant to two one-year extension options that we may request under the Credit Agreement. At our request and subject to certain conditions, the revolving credit commitments under the Credit Agreement may be increased by up to a total of $350 million to the extent that existing or new lenders agree to provide additional commitments.
The Credit Agreement is guaranteed by certain of our subsidiaries and contains customary covenants applicable to us and our subsidiaries including limitations on indebtedness, liens, dividends, stock repurchases, mergers and sales of all or substantially all of its assets. In addition, the Credit Agreement contains a financial covenant requiring us to maintain, as of the last day of each fiscal quarter for the four prior fiscal quarters, a Total Net Leverage Ratio of no more than 3.50 to 1.00 (or, at our election, on up to two occasions following a material acquisition, 4.00 to 1.00). The Credit Agreement is subject to customary events of default, including non-payment of principal or other amounts under the Credit Agreement, material inaccuracy of representations and warranties, breach of covenants, cross-default to other indebtedness in excess of $75 million, judgements in excess of $75 million, certain voluntary and involuntary bankruptcy events, and the occurrence of a change of control. As of December 31, 2022, we believe we were in compliance with all covenant requirements.
Financial Leverage
We periodically review our capital structure, including our primary bank facility, to ensure the appropriate levels of liquidity and leverage and to take advantage of favorable interest rate environments or other market conditions. We consider various other financing alternatives and may, from time to time, access the capital markets.
We also evaluate our debt-to-capital and debt-to-EBITDA ratios to determine, among other considerations, the appropriate targets for capital expenditures and share repurchases under our Share Repurchase Plans. Our book value of debt-to-total-capital ratio decreased to 115% at December 31, 2022 compared to 128% at December 31, 2021.
As of December 31, 2022, our senior credit ratings were Baa2 with a stable outlook, and BBB with a stable outlook, by Moody’s Investors Service, Inc. (“Moody’s”) and Standard & Poor’s Rating Group (“S&P”), respectively. The security ratings are not a recommendation to buy, sell or hold securities and may be subject to revision or withdrawal at any time by the assigning rating agency. Each rating should be evaluated independently of any other rating. Our goal is to maintain investment grade ratings from Moody’s and S&P to help ensure the capital markets remain available to us.
Liquidity
We believe our cash and cash equivalents of $53 million, future cash generated from operations and available future borrowings are sufficient to fund our operations, planned capital expenditures, future contractual obligations, share repurchases, anticipated dividends and other needs in the foreseeable future. Included in our cash and cash equivalents as of December 31, 2022 was $23 million of cash held in foreign locations, although that amount can fluctuate significantly depending on the timing of cash receipts and payments. Our cash and cash equivalents held in foreign locations is generally available for use in our U.S. operations and could be subject to foreign withholding taxes and U.S. state taxes.
No contributions are required to be made to our U.S. defined benefit plans in 2023. We made $22.5 million in total contributions to pension plans in 2022.
Dividend payments were $142 million in 2022 compared to $127 million in 2021. On May 19, 2022, our Board of Directors approved a 15% increase in our quarterly dividend on common stock from $0.92 to $1.06 per share effective with the July 2022 dividend payment.
We also continued to increase shareholder value through our Share Repurchase Plans. We returned $300 million to our investors through share repurchases in 2022. Our Board of Directors authorized an incremental $1.0 billion of share repurchases in July 2021, and we had $546 million of repurchases available under the Share Repurchase Plans at December 31, 2022. We expect to repurchase $200 million of shares in 2023.
We expect capital expenditures of approximately $250 million in 2023.
Financial Covenants related to our Debt
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Our Credit Agreement is guaranteed by certain of our subsidiaries and contains a financial covenant relating to leverage. Other covenants contained in the our Credit Agreement restrict, among other things, certain mergers, asset dispositions, guarantees, debt, liens, and affiliate transactions. The financial covenant requires us to maintain a defined Consolidated Indebtedness to Adjusted EBITDA Ratio of no greater than 3.5 : 1.0.
Our Credit Agreement contains customary events of default. These events of default include nonpayment of principal or other amounts, material inaccuracy of representations and warranties, breach of covenants, default on certain other indebtedness or receivables securitizations (cross default), certain voluntary and involuntary bankruptcy events and the occurrence of a change in control. A cross default under our credit facility could occur if:
•We fail to pay any principal or interest when due on any other indebtedness or receivables securitization exceeding $75.0 million; or
•We are in default in the performance of, or compliance with any term of any other indebtedness or receivables securitization in an aggregate principal amount exceeding $75.0 million, or any other condition exists which would give the holders the right to declare such indebtedness due and payable prior to its stated maturity.
Each of our major debt agreements contains provisions by which a default under one agreement causes a default in the others (a cross default). If a cross default under our Credit Agreement, our senior unsecured notes, 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, the administrative agent, or lenders with a majority of the aggregate commitments may require the administrative agent to, terminate our right to borrow under our Credit Agreement and accelerate amounts due under our Credit Agreement (except for a bankruptcy event of default, in which case such amounts will automatically become due and payable and the lenders’ commitments will automatically terminate).
In the event of a credit rating downgrade below investment grade resulting from a change of control, holders of our senior unsecured notes will have the right to require us to repurchase all or a portion of the senior unsecured notes at a repurchase price equal to 101% of the principal amount of the notes, plus accrued and unpaid interest, if any. The notes are guaranteed, on a senior unsecured basis, by each of our subsidiaries that guarantee payment by us of any indebtedness under our Credit Agreement. 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; enter into certain mergers, consolidations and transfers of substantially all of our assets; and transfer certain properties. The indenture also contains a cross default provision which is triggered if we default on other debt of at least $75 million in principal which is then accelerated, and such acceleration is not rescinded within 30 days of the notice date.
As of December 31, 2022, we believe we were in compliance with all covenant requirements. Delaware law limits the ability to pay dividends to surplus or, if there is no surplus, out of net profits for the fiscal year in which the dividend is declared and/or the preceding fiscal year. In addition, stock repurchases can only be made out of surplus and only if our capital would not be impaired.
Leasing Commitments
Refer to Note 5 in the Notes to the Consolidated Financial Statements for more details on our leasing commitments.
Guarantees related to our Debt Obligations
Our senior unsecured notes were issued by Lennox International Inc. (the “Parent”) and are unconditionally guaranteed by certain of our subsidiaries (the “Guarantor Subsidiaries”) and are not secured by our other subsidiaries. The Guarantor Subsidiaries are 100% owned and consolidated, all guarantees are full and unconditional, and all guarantees are joint and several.
Off Balance Sheet Arrangements
We have no off-balance sheet arrangements that we believe may have a material current or future effect on our financial condition, liquidity or results of operations.
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Contractual Obligations
Contractual obligations arise in the normal course of business and include debt and related interest payments, leases, purchase obligations, pension and post-retirement benefits and warranty liabilities. For additional information regarding our contractual obligations, see Note 5 of the Notes to the Consolidated Financial Statements. See Note 10 of the Notes to the Consolidated Financial Statements for more information on our pension and post-retirement benefits obligations. See Note 13 of the Notes to the Consolidated Financial Statements for more information on our debt obligations.
Fair Value Measurements
Fair value is the price that would be received to sell an asset or the price paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value is based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date and requires consideration of our creditworthiness when valuing certain liabilities. Our framework for measuring fair value is based on a three-level hierarchy for fair value measurements.
The three-level fair value hierarchy for disclosure of fair value measurements is defined as follows:
Level 1 - Quoted prices for identical instruments in active markets at the measurement date.
Level 2 - Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations in which all significant inputs and significant value drivers are observable in active markets at the measurement date and for the anticipated term of the instrument.
Level 3 - Valuations derived from valuation techniques in which one or more significant inputs or significant value drivers are unobservable inputs that reflect the reporting entity’s own assumptions about the assumptions market participants would use in pricing the asset or liability developed based on the best information available in the circumstances.
Where available, the fair values were based upon quoted prices in active markets. However, if quoted prices were not available, then the fair values were based upon quoted prices for similar assets or liabilities or independently sourced market parameters, such as credit default swap spreads, yield curves, reported trades, broker/dealer quotes, interest rates and benchmark securities. For assets and liabilities without observable market activity, if any, the fair values were based upon discounted cash flow methodologies incorporating assumptions that, in our judgment, reflect the assumptions a marketplace participant would use. Valuation adjustments to reflect either party’s creditworthiness and ability to pay were incorporated into our valuations, where appropriate, as of December 31, 2022 and 2021, the measurement dates. See Note 16 of the Notes to the Consolidated Financial Statements for more information on the assets and liabilities measured at fair value.
Market Risk
Commodity Price Risk
We enter into commodity futures contracts to stabilize prices expected to be paid for raw materials and parts containing high copper and aluminum content. These contracts are for quantities equal to or less than quantities expected to be consumed in future production. Fluctuations in metal commodity prices impact the value of the futures contracts that we hold. When metal commodity prices rise, the fair value of our futures contracts increases. Conversely, when commodity prices fall, the fair value of our futures contracts decreases. Information about our exposure to metal commodity price market risks and a sensitivity analysis related to our metal commodity hedges is presented below (in millions):
| Notional amount (pounds of aluminum and copper) | 56.6 | |
|---|---|---|
| Carrying amount and fair value of net asset | $ | (7.5) |
| Change in fair value from 10% change in forward prices | $ | 10.1 |
Refer to Note 9 of the Notes to the Consolidated Financial Statements for additional information regarding our commodity futures contracts.
Interest Rate Risk
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Our results of operations can be affected by changes in interest rates due to variable rates of interest on our debt facilities, cash, cash equivalents and short-term investments. A 10% adverse movement in the levels of interest rates across the entire yield curve would have resulted in an increase to pre-tax interest expense of approximately $1.7 million, $0.4 million and $1.3 million for the years ended December 31, 2022, 2021 and 2020, respectively.
From time to time, we may use an interest rate swap hedging strategy to eliminate the variability of cash flows in a portion of our interest payments. This strategy, when employed, allows us to fix a portion of our interest payments while also taking advantage of historically low interest rates. As of December 31, 2022 and 2021, no interest rate swaps were in effect.
Foreign Currency Exchange Rate Risk
Our results of operations are affected by changes in foreign currency exchange rates. Net sales and expenses in foreign currencies are translated into U.S. dollars for financial reporting purposes based on the average exchange rate for the period. Our primary exposure to foreign currencies are the Canadian dollar, Mexican Peso, and the Euro. During 2022, 2021 and 2020, net sales from outside the U.S. represented 11.4%, 13.1% and 13.0%, respectively, of our total net sales. For the years ended December 31, 2022, 2021, and 2020, foreign currency transaction gains and losses did not have a material impact to our results of operations. A 10% change in foreign exchange rates would have had an estimated $3.5 million, $2.7 million and $0.6 million impact to net income for the years ended December 31, 2022, 2021 and 2020, respectively.
We seek to mitigate the impact of currency exchange rate movements on certain short-term transactions by periodically entering into foreign currency forward contracts. By entering into forward contracts, we lock in exchange rates that would otherwise cause losses should the U.S. dollar appreciate and gains should the U.S. dollar depreciate. Refer to Note 9 of the Notes to the Consolidated Financial Statements for additional information regarding our foreign currency forward contracts.
Critical Accounting Estimates
A critical accounting estimate is one that requires difficult, subjective or complex estimates and assessments and is fundamental to our results of operations and financial condition. The following describes our critical accounting estimate related to product warranties and product-related contingencies and how we develop our judgments, assumptions and estimates about future events and how such policies can impact our financial statements. This discussion and analysis should be read in conjunction with our Consolidated Financial Statements and related Notes in “Item 8. Financial Statements and Supplementary Data.”
Product Warranties and Product-Related Contingencies
The estimate of our liability for future warranty costs requires us to make assumptions about the amount, timing and nature of future product-related costs. Some of the warranties we issue extend 10 years or more in duration and a relatively small adjustment to an assumption may have a significant impact on our overall liability.
From time to time, we may also incur costs to repair or replace installed products experiencing quality issues in order to satisfy our customers and protect our brand. These product-related costs may not be covered under our warranties and are not covered by insurance.
We periodically review the assumptions used to determine the liabilities for product warranties and product-related contingencies and we adjust our assumptions based upon factors such as actual failure rates and cost experience. Numerous factors could affect actual failure rates and cost experience, including the amount and timing of new product introductions, changes in manufacturing techniques or locations, components or suppliers used. Should actual costs differ from our estimates, we may be required to adjust the liabilities and to record expense in future periods. See Note 5 in the Notes to the Consolidated Financial Statements for more information on our product warranties and product-related contingencies.
Recent Accounting Pronouncements
See Note 2 in the Notes to the Consolidated Financial Statements for disclosure of recent accounting pronouncements and the potential impact on our financial statements and disclosures.
FY 2021 10-K MD&A
SEC filing source: 0001628280-22-002664.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion should be read in conjunction with the other sections of this report, including the Consolidated Financial Statements and related Notes to the Consolidated Financial Statements in Item 8, “Other Financial Statement Details,” of this Annual Report on Form 10-K.
Business Overview
We operate in three reportable business segments of the heating, ventilation, air conditioning and refrigeration (“HVACR”) industry. Our reportable segments are Residential Heating & Cooling, Commercial Heating & Cooling, and Refrigeration. For more detailed information regarding our reportable segments, see Note 3 in the Notes to the Consolidated Financial Statements.
We sell our products and services through a combination of direct sales, distributors and company-owned stores. The demand for our products and services is seasonal and significantly impacted by the weather. Warmer than normal summer temperatures generate demand for replacement air conditioning and refrigeration products and services, and colder than normal winter temperatures have a similar effect on heating products and services. Conversely, cooler than normal summers and warmer than normal winters depress the demand for HVACR products and services. In addition to weather, demand for our products and services is influenced by national and regional economic and demographic factors, such as interest rates, the availability of financing, regional population and employment trends, new construction, general economic conditions and consumer spending habits and confidence. A substantial portion of the sales in each of our business segments is attributable to replacement business, with the balance comprised of new construction business.
The principal elements of cost of goods sold are components, raw materials, factory overhead, labor, estimated costs of warranty expense and freight and distribution costs. The principal raw materials used in our manufacturing processes are steel, copper and aluminum. In recent years, pricing volatility for these commodities and related components has impacted us and the HVACR industry in general. We seek to mitigate the impact of commodity price volatility through a combination of pricing actions, vendor contracts, improved production efficiency and cost reduction initiatives. We also partially mitigate volatility in the prices of these commodities by entering into futures contracts and fixed forward contracts.
Impact of COVID-19 Pandemic
A novel strain of coronavirus (“COVID-19”) has surfaced and spread around the world, including to the United States. In March 2020, the World Health Organization declared COVID-19 a pandemic. Currently the COVID-19 pandemic has disrupted
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our business operations and caused a significant unfavorable impact on our results of operations in 2020. The COVID-19 pandemic is creating supply chain disruptions and higher employee absenteeism in our factories and distribution locations.
As the COVID-19 pandemic continues, health concern risks remain. We cannot predict whether any of our manufacturing, operational or distribution facilities will experience any future disruptions, or how long such disruptions would last. It also remains unclear how various national, state, and local governments will react if the distribution of vaccines is slower than expected or new variants of the virus become more dominant. If the COVID-19 pandemic worsens or the pandemic continues longer than presently expected, COVID 19 could impact our results of operations, financial position and cash flows.
Financial Highlights
•Net sales increased $560 million, or 15%, to $4,194 million in 2021 from $3,634 million in 2020.
•Operating income in 2021 was $590 million compared to $479 million in 2020.
•Net income in 2021 increased to $464 million from $356 million in 2020.
•Diluted earnings per share from continuing operations were $12.39 per share in 2021 compared to $9.26 per share in 2020.
•We generated $516 million of cash flow from operating activities in 2021 compared to $612 million in 2020.
•In 2021, we returned $127 million to shareholders through dividend payments and we used $600 million to purchase 1.9 million shares of stock under our Share Repurchase Plans.
Overview of Results
The Residential Heating & Cooling segment performed well in 2021, with an 18% increase in net sales and a $112 million increase in segment profit compared to 2020 primarily due to higher sales volumes. Our Commercial Heating & Cooling segment saw an increase in net sales of 8% and a $26 million decrease in segment profit compared to 2020 primarily due to increased combined price and sales mix and increased product costs, respectively. Sales in our Refrigeration segment increased 17% and segment profit increased $16 million compared to 2020 primarily due to higher sales volumes.
Results of Operations
The following table provides a summary of our financial results, including information presented as a percentage of net sales (dollars in millions):
| For the Years Ended December 31, | ||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2021 | 2020 | 2019 | ||||||||||||||||||
| Dollars | Percent | Dollars | Percent | Dollars | Percent | |||||||||||||||
| Net sales | $ | 4,194.1 | 100.0 | % | $ | 3,634.1 | 100.0 | % | $ | 3,807.2 | 100.0 | % | ||||||||
| Cost of goods sold | 3,005.7 | 71.7 | % | 2,594.0 | 71.4 | % | 2,727.4 | 71.6 | % | |||||||||||
| Gross profit | 1,188.4 | 28.3 | % | 1,040.1 | 28.6 | % | 1,079.8 | 28.4 | % | |||||||||||
| Selling, general and administrative expenses | 598.9 | 14.3 | % | 555.9 | 15.3 | % | 585.9 | 15.4 | % | |||||||||||
| Losses (gains) and other expenses, net | 9.2 | 0.2 | % | 7.4 | 0.2 | % | 8.3 | 0.2 | % | |||||||||||
| Restructuring charges | 1.8 | — | % | 10.8 | 0.3 | % | 10.3 | 0.3 | % | |||||||||||
| Loss (gain), net on sale of businesses and related property | — | — | % | — | — | % | 10.6 | 0.3 | % | |||||||||||
| (Gain) loss from natural disasters, net of insurance recoveries | — | — | % | 3.1 | 0.1 | % | (178.8) | (4.7) | % | |||||||||||
| Income from equity method investments | (11.8) | (0.3) | % | (15.6) | (0.4) | % | (13.4) | (0.4) | % | |||||||||||
| Operating income | $ | 590.3 | 14.1 | % | $ | 478.5 | 13.2 | % | $ | 656.9 | 17.3 | % | ||||||||
| Loss from discontinued operations | — | — | % | (0.8) | — | % | (0.1) | — | % | |||||||||||
| Net income | $ | 464.0 | 11.1 | % | $ | 356.3 | 9.8 | % | $ | 408.7 | 10.7 | % |
Year Ended December 31, 2021 Compared to Year Ended December 31, 2020 - Consolidated Results
Net Sales
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Net sales increased 15% in 2021 compared to 2020, driven by higher sales volumes of 11% and an improved combined price and mix of 4%. The increase in volume and price and mix was due to strong demand across all three of our business segments.
Gross Profit
Gross profit margins for 2021 decreased 30 basis points (“bps”) to 28.3% compared to 28.6% in 2020. Gross profit margin decreased 180 bps from higher commodity costs, 90 bps from other product costs, 20 bps from higher freight and distribution costs, and 10 bps for lower factory efficiency. Partially offsetting these cost increases was 270 bps from favorable combined price and mix.
Selling, General and Administrative Expenses
SG&A expenses increased by $43 million in 2021 compared to 2020. As a percentage of net sales, SG&A expenses decreased 100 bps from 15.3% to 14.3% in the same periods primarily due to lower discretionary expenditures.
Losses (Gains) and Other Expenses, Net
Losses (gains) and other expenses, net for 2021 and 2020 included the following (in millions):
| For the Years Ended December 31, | ||||||
|---|---|---|---|---|---|---|
| 2021 | 2020 | |||||
| Realized (gains) losses on settled futures contracts | $ | (1.2) | $ | 0.1 | ||
| Foreign currency exchange gains | (2.2) | (3.6) | ||||
| Gain on disposal of fixed assets | (0.2) | (0.2) | ||||
| Other operating income | (1.5) | (2.2) | ||||
| Net change in unrealized gains on unsettled futures contracts | — | (0.3) | ||||
| Special legal contingency charges | 1.3 | 1.1 | ||||
| Asbestos-related litigation | 5.4 | 5.6 | ||||
| Environmental liabilities | 2.9 | (1.4) | ||||
| Charges incurred related to COVID-19 pandemic | 2.2 | 8.3 | ||||
| Other items, net | 2.5 | — | ||||
| Losses and other expenses, net (pre-tax) | $ | 9.2 | $ | 7.4 |
The charges incurred related to the COVID-19 pandemic related primarily to facility cleaning costs and sanitization supplies to ensure the health and safety of our employees. The net change in unrealized losses on unsettled futures contracts was due to changes in commodity prices relative to the unsettled futures contract prices. For more information on our derivatives, see Note 10 in the Notes to the Consolidated Financial Statements.
Foreign currency exchange gains decreased in 2021 primarily due to weakening in foreign exchange rates in our primary markets. The special legal contingency charges in 2021 relate to outstanding legal settlements. The asbestos-related litigation relates to known and estimated future asbestos matters. The environmental liabilities relate to estimated remediation costs for contamination at some of our facilities. Refer to Note 5 in the Notes to the Consolidated Financial Statements for more information on litigation, including the asbestos-related litigation, and the environmental liabilities.
Restructuring Charges
Restructuring charges were $1.8 million in 2021 compared to $10.8 million in 2020. Charges in 2021 were related to ongoing cost reduction actions taken in prior years. The charges in 2020 related primarily to several cost reduction actions taken in response to the economic impact of the COVID-19 pandemic on our business. These actions consisted of employee terminations for positions that were no longer needed to support the business, selective facility closures, and cancellations of certain sales and marketing activities. For more information on our restructuring activities, see Note 8 in the Notes to the Consolidated Financial Statements.
Goodwill
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We performed a qualitative impairment analysis and noted no indicators of goodwill impairment for the year ended December 31, 2021. We did not record any goodwill impairments in 2021 or 2020. Refer to Note 10 in the Notes to the Consolidated Financial Statements for more information on goodwill.
Asset Impairments
We did not have any impairments of assets related to continuing operations in 2021 or 2020.
Pension Settlement
We did not have significant pension buyout activity in 2021 and 2020. Refer to Note 11 in the Notes to the Consolidated Financial Statements for more information on pensions and employee benefit plans.
Income from Equity Method Investments
Investments over which we do not exercise control but have significant influence are accounted for using the equity method of accounting. Income from equity method investments was $12 million in 2021 compared to $16 million in 2020. The decrease is due to rising production costs at the joint ventures.
Interest Expense, net
Net interest expense of $25 million in 2021 decreased from $28 million in 2020 primarily due to lower borrowing and lower borrowing costs.
Income Taxes
The income tax provision was $96 million in 2021 compared to $88 million in 2020, and the effective tax rate was 17.2% in 2021 compared to 19.8% in 2020. The 2021 and 2020 effective tax rates differ from the statutory rate of 21% primarily due to state and foreign taxes. Refer to Note 13 in the Notes to the Consolidated Financial Statements for more information on income taxes.
Loss from Discontinued Operations
Losses from discontinued operations were immaterial in 2021 and 2020 and relate to changes in retained product liabilities and general liabilities for the Service Experts business sold in 2013 and the Hearth business sold in 2012.
Year Ended December 31, 2021 Compared to Year Ended December 31, 2020 - Results by Segment
Residential Heating & Cooling
The following table presents our Residential Heating & Cooling segment’s net sales and profit for 2021 and 2020 (dollars in millions):
| For the Years Ended December 31, | |||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2021 | 2020 | Difference | % Change | ||||||||||
| Net sales | $ | 2,775.6 | $ | 2,361.5 | $ | 414.1 | 18% | ||||||
| Profit | $ | 540.3 | $ | 428.5 | $ | 111.8 | 26% | ||||||
| % of net sales | 19.5 | % | 18.1 | % |
Residential Heating & Cooling net sales increased 18% in 2021 compared to 2020. Sales volume increased 13%, price increased 5% and favorable foreign currency exchange rates caused an increase of 1%. Partially offsetting these increases was a 1% reduction due to unfavorable product mix.
Segment profit in 2021 increased $112 million compared to 2020 due to $108 million from favorable pricing, $91 million from higher sales volume, $9 million from favorable foreign currency exchange, $5 million from higher factory productivity, and $2 million from sourcing and engineering-led cost reductions. Partially offsetting these increases were $59 million from
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commodity costs, $20 million from higher warranty and other product costs, $14 million from higher SG&A, $5 million from unfavorable product mix, and $5 million from lower income from equity method investments.
Commercial Heating & Cooling
The following table presents our Commercial Heating & Cooling segment’s net sales and profit for 2021 and 2020 (dollars in millions):
| For the Years Ended December 31, | ||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2021 | 2020 | Difference | % Change | |||||||||||
| Net sales | $ | 864.8 | $ | 800.9 | $ | 63.9 | 8 | % | ||||||
| Profit | $ | 110.9 | $ | 136.9 | $ | (26.0) | (19) | % | ||||||
| % of net sales | 12.8 | % | 17.1 | % |
Commercial Heating & Cooling net sales increased 8% in 2021 compared to 2020. Price and mix combined increased 4%, sales volume was 3% higher, and foreign currency improved 1%.
Segment profit in 2021 decreased $26 million compared to 2020 due to $17 million from higher other product costs, $14 million from factory inefficiencies, $6 million from sourcing and engineering-led cost increases, $6 million from higher commodity costs, $6 million from higher freight and distribution costs, $4 million from higher SG&A costs, and $1 million from unfavorable foreign currency. Partially offsetting these declines was a favorable increase in combined price and mix of $19 million and $9 million from higher sales volume.
Refrigeration
The following table presents our Refrigeration segment’s net sales and profit for 2021 and 2020 (dollars in millions):
| For the Years Ended December 31, | ||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2021 | 2020 | Difference | % Change | |||||||||||
| Net sales | $ | 553.7 | $ | 471.7 | $ | 82.0 | 17 | % | ||||||
| Profit | $ | 49.1 | $ | 32.8 | $ | 16.3 | 50 | % | ||||||
| % of net sales | 8.9 | % | 7.0 | % |
Net sales increased 17% in 2021 compared to 2020. Sales volume increased 14%, price increased 3%, and foreign currency improved 1%. Partially offsetting these increases was a 1% reduction due to unfavorable mix.
Segment profit in 2021 increased $16 million compared to 2020 due to $23 million from higher sales volume, $13 million from higher price, $3 million from higher factory productivity, and $1 million from higher income from equity method investments. Partially offsetting these increases were $10 million from higher SG&A, $8 million from higher commodity costs, $2 million from higher other product costs, $2 million from unfavorable product mix, and $2 million from higher freight and distribution costs.
Corporate and Other
Corporate and other expenses increased by $5 million in 2021 compared to 2020 primarily due to increased headcount and increases in incentive compensation costs.
Year Ended December 31, 2020 Compared to Year Ended December 31, 2019 - Consolidated Results
Net Sales
Net sales decreased 5% in 2020 compared to 2019, driven by lower sales volumes of 5% and a 1% decline related to the sale of our Kysor Warren business in the first quarter of 2019, partially offset by improved combined price and mix of 1%. The decrease in sales volume was primarily due to the impact of the COVID-19 pandemic on our Commercial and Refrigeration segments.
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Gross Profit
Gross profit margins for 2020 increased 20 basis points (“bps”) to 28.6% compared to 28.4% in 2019. We saw margin increases of 90 bps from engineering and sourcing led cost reductions, 70 bps from lower commodity costs, and 20 bps from lower freight and distribution costs. These were partially offset by 120 bps from unfavorable combined price and mix, 30 bps from higher product warranties, and 10 bps from other product costs.
Selling, General and Administrative Expenses
SG&A expenses decreased by $30 million in 2020 compared to 2019. As a percentage of net sales, SG&A expenses decreased 10 bps from 15.4% to 15.3% in the same periods primarily due to lower discretionary expenditures.
Losses (Gains) and Other Expenses, Net
Losses (gains) and other expenses, net for 2020 and 2019 included the following (in millions):
| For the Years Ended December 31, | ||||||
|---|---|---|---|---|---|---|
| 2020 | 2019 | |||||
| Realized losses on settled futures contracts | $ | 0.1 | $ | 0.4 | ||
| Foreign currency exchange gains | (3.6) | (1.5) | ||||
| Gain on disposal of fixed assets | (0.2) | (0.2) | ||||
| Net change in unrealized gains on unsettled futures contracts | (0.3) | (0.5) | ||||
| Other operating income | (2.2) | (1.7) | ||||
| Special legal contingency charges | 1.1 | 1.2 | ||||
| Asbestos charges | 5.6 | 3.1 | ||||
| Environmental liabilities | (1.4) | 5.7 | ||||
| Losses from pandemic | 8.3 | — | ||||
| Other items, net | — | 1.8 | ||||
| Losses (gains) and other expenses, net | $ | 7.4 | $ | 8.3 |
The charges incurred related to the COVID-19 pandemic related primarily to facility cleaning costs and sanitization supplies to ensure the health and safety of our employees. The net change in unrealized losses on unsettled futures contracts was due to changes in commodity prices relative to the unsettled futures contract prices. For more information on our derivatives, see Note 10 in the Notes to the Consolidated Financial Statements.
Foreign currency exchange gains increased in 2020 primarily due to strengthening in foreign exchange rates in our primary markets. The special legal contingency charges in 2020 relate to outstanding legal settlements. The asbestos-related litigation relates to known and estimated future asbestos matters. The environmental liabilities relate to estimated remediation costs for contamination at some of our facilities. Refer to Note 5 in the Notes to the Consolidated Financial Statements for more information on litigation, including the asbestos-related litigation, and the environmental liabilities.
Restructuring Charges
Restructuring charges were $10.8 million in 2020 compared to $10.3 million in 2019. The charges in 2020 related primarily to several cost reduction actions taken in response to the economic impact of the COVID-19 pandemic on our business. These actions consisted of employee terminations for positions that were no longer needed to support the business, selective facility closures, and cancellations of certain sales and marketing activities.
Goodwill
We performed a qualitative impairment analysis and noted no indicators of goodwill impairment for the year ended December 31, 2020. We did not record any goodwill impairments in 2019 or 2020. Refer to Note 10 in the Notes to the Consolidated Financial Statements for more information on goodwill.
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Asset Impairments
We did not have any impairments of assets related to continuing operations in 2020 or 2019.
Pension Settlement
In the second and fourth quarters of 2019, we entered into agreements to purchase group annuity contracts and transfer certain pension assets and related pension benefit obligations to Pacific Life Insurance Company. We recognized $99.2 million of pension settlement charges related to these transactions. We did not have significant pension buyout activity in 2020. Refer to Note 11 in the Notes to the Consolidated Financial Statements for more information on pensions and employee benefit plans.
Income from Equity Method Investments
Investments over which we do not exercise control but have significant influence are accounted for using the equity method of accounting. Income from equity method investments was $16 million in 2020 compared to $13 million in 2019. The increase is due to improved operating performance at the joint ventures.
Interest Expense, net
Net interest expense of $28 million in 2020 decreased from $48 million in 2019 primarily due to lower borrowing and lower borrowing costs.
Income Taxes
The income tax provision was $88 million in 2020 compared to $99 million in 2019, and the effective tax rate was 19.8% in 2020 compared to 19.5% in 2019. The 2020 and 2019 effective tax rates differ from the statutory rate of 21% primarily due to state and foreign taxes. Refer to Note 13 in the Notes to the Consolidated Financial Statements for more information on income taxes.
Loss from Discontinued Operations
Losses from discontinued operations were $1 million in 2020 which primarily relate to changes in retained product liabilities and general liabilities for the Service Experts business sold in 2013 and the Hearth business sold in 2012.
Year Ended December 31, 2020 Compared to Year Ended December 31, 2019 - Results by Segment
Residential Heating & Cooling
The following table presents our Residential Heating & Cooling segment’s net sales and profit for 2020 and 2019 (dollars in millions):
| For the Years Ended December 31, | |||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2020 | 2019 | Difference | % Change | ||||||||||
| Net sales | $ | 2,361.5 | $ | 2,291.1 | $ | 70.4 | 3% | ||||||
| Profit | $ | 428.5 | $ | 464.6 | $ | (36.1) | (8)% | ||||||
| % of net sales | 18.1 | % | 20.3 | % |
Residential Heating & Cooling net sales increased 3% in 2020 compared to 2019. Sales volume increased 2% and price and mix combined increased 1%.
Segment profit in 2020 declined $36 million compared to 2019 due to $99 million of non-recurring insurance proceeds for lost profits related to the Marshalltown tornado, $10 million of higher warranty and other product costs, $5 million of higher tariffs, $3 million of combined price and mix, and $1 million of factory inefficiency. Partially offsetting these declines were $25 million of lower SG&A, $25 million of engineering and sourcing led cost reductions, $17 million from lower commodity costs, $8 million of lower freight and distribution expense, $5 million of higher sales volume, and $2 million of higher income from equity method investments.
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Commercial Heating & Cooling
The following table presents our Commercial Heating & Cooling segment’s net sales and profit for 2020 and 2019 (dollars in millions):
| For the Years Ended December 31, | ||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2020 | 2019 | Difference | % Change | |||||||||||
| Net sales | $ | 800.9 | $ | 947.4 | $ | (146.5) | (15) | % | ||||||
| Profit | $ | 136.9 | $ | 165.4 | $ | (28.5) | (17) | % | ||||||
| % of net sales | 17.1 | % | 17.5 | % |
Commercial Heating & Cooling net sales decreased 15% in 2020 compared to 2019. Sales volume was 14% lower and price and mix combined decreased 1%.
Segment profit in 2020 decreased $29 million compared to 2019 due to $47 million of lower sales volume and $10 million of unfavorable mix. Partially offsetting these declines were $9 million of lower SG&A, $7 million of engineering and sourcing led cost reductions, $6 million from lower commodity costs, $2 million of factory productivity, $2 million of other product costs, $1 million of lower tariffs on imports, and $1 million of favorable foreign currency exchange rates.
Refrigeration
The following table presents our Refrigeration segment’s net sales and profit for 2020 and 2019 (dollars in millions):
| For the Years Ended December 31, | ||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2020 | 2019 | Difference | % Change | |||||||||||
| Net sales | $ | 471.7 | $ | 568.7 | $ | (97.0) | (17) | % | ||||||
| Profit | $ | 32.8 | $ | 61.3 | $ | (28.5) | (46) | % | ||||||
| % of net sales | 7.0 | % | 10.8 | % |
Net sales decreased 17% in 2020 compared to 2019. Sales volume was 13% lower and the loss of sales from our divested Kysor Warren business contributed 6% which was partially offset by 1% of favorable combined price and mix and 1% from favorable foreign currency exchange rates.
Segment profit in 2020 decreased $29 million compared to 2019 due to $26 million of lower sales volumes, $10 million of factory inefficiency, $5 million of other product costs and warranty, $2 million from non-recurring European refrigerant quota sales, $1 million of combined price and mix, and $1 million from lower income from equity method investments. Partially offsetting these declines were $5 million from lower commodity costs, $4 million of engineering and sourcing led cost reductions, $4 million lower SG&A, $1 million lower freight and distribution expense, $1 million of higher profit due to the divestiture of the Kysor Warren business, and $1 million of favorable foreign currency exchange rates.
Corporate and Other
Corporate and other expenses increased by $9 million in 2020 compared to 2019 primarily due to short-term and long-term stock-based incentive compensation.
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Accounting for Futures Contracts
Realized gains and losses on settled futures contracts are a component of segment profit (loss). Unrealized gains and losses on unsettled futures contracts are excluded from segment profit (loss) as they are subject to changes in fair value until their settlement date. Both realized and unrealized gains and losses on futures contracts are a component of Losses (gains) and other expenses, net in the accompanying Consolidated Statements of Operations. See Note 10 of the Notes to Consolidated Financial Statements for more information on our derivatives and Note 3 of the Notes to the Consolidated Financial Statements for more information on our segments and for a reconciliation of segment profit to operating income.
Liquidity and Capital Resources
Our working capital and capital expenditure requirements are generally met through internally generated funds, bank lines of credit and an asset securitization arrangement. Working capital needs are generally greater in the first and second quarters due to the seasonal nature of our business cycle.
Statement of Cash Flows
The following table summarizes our cash flow activity for the years ended December 31, 2021, 2020 and 2019 (in millions):
| 2021 | 2020 | 2019 | ||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| Net cash provided by operating activities | $ | 515.5 | $ | 612.4 | $ | 396.1 | ||||
| Net cash (used in) provided by investing activities | (106.4) | (79.7) | 15.9 | |||||||
| Net cash used in financing activities | $ | (498.7) | $ | (441.8) | $ | (423.4) |
Net Cash Provided by Operating Activities - Net cash provided by operating activities decreased $96 million to $516 million in 2021 compared to $612 million in 2020. The decrease was primarily attributable to increases in working capital partially offset by an increase in net income.
Net Cash (Used in) Provided by Investing Activities - Net cash used in investing activities increased $27 million from 2020 to 2021 primarily due to increased capital expenditures. Capital expenditures were $107 million, $79 million and $106 million in 2021, 2020 and 2019, respectively. Capital expenditures in 2021 were primarily related to the expansion of our manufacturing capacity and equipment and investments in systems and software to support the overall enterprise.
Net Cash Used in Financing Activities - Net cash used in financing activities increased to $499 million in 2021 from $442 million in 2020. The increase is primarily due to an increase in share repurchases in 2021 partially offset by net borrowings and repayments on debt. During 2021 we repurchased $600 million of shares compared to $100 million of shares in 2020. We also returned $127 million to shareholders through dividend payments in 2021. For additional information on share repurchases, refer to Note 6 in the Notes to the Consolidated Financial Statements.
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Debt Position
The following table details our lines of credit and financing arrangements as of December 31, 2021 (in millions):
| Outstanding Borrowings | ||
|---|---|---|
| Current maturities of long-term debt: | ||
| Asset Securitization Program (1) | $ | — |
| Capital lease obligations | 11.3 | |
| Debt issuance costs | — | |
| Total current maturities of long-term debt | $ | 11.3 |
| Long-term debt: | ||
| Asset Securitization Program (1) | $ | 250.0 |
| Capital lease obligations | 29.0 | |
| Domestic credit facility (2) | 6.5 | |
| Senior unsecured notes | 950.0 | |
| Debt issuance costs | (9.0) | |
| Total long-term debt | 1,226.5 | |
| Total debt | $ | 1,237.8 |
(1)The maximum securitization amount ranges from $300.0 million to $450.0 million, depending on the period. The maximum capacity of the Asset Securitization Program (“ASP”) is the lesser of the maximum securitization amount or 100% of the net pool balance less reserves, as defined under the ASP. Refer to Note 14 in the Notes to the Consolidated Financial Statements for more details.
(2)The total capacity on the facility is $750.0 million. The amount available future borrowings on our domestic credit facility are $742 million after being reduced by the outstanding borrowings and $2 million in outstanding standby letters of credit as of December 31, 2021.
July 2021 Credit Agreement
In July 2021, we entered into the Credit Agreement (the “Credit Agreement”) with JPMorgan Chase Bank, N.A., as administrative agent, and the other lenders party thereto, which refinanced and replaced the Prior Credit Agreement, among the Company, JPMorgan Chase Bank, N.A., as administrative agent, and the other lenders party thereto.
The Credit Agreement provides for revolving credit commitments of $750 million with sublimits for swingline loans of up to $65 million, letters of credit up to $100 million and revolving loans in certain non-U.S. currencies up to the U.S. dollar equivalent of $40 million. The Credit Agreement will expire and outstanding loans will be required to be repaid in July 2026, unless maturity is extended by the lenders pursuant to two one-year extension options that we may request under the Credit Agreement. At our request and subject to certain conditions, the revolving credit commitments under the Credit Agreement may be increased by up to a total of $350 million to the extent that existing or new lenders agree to provide additional commitments.
The Credit Agreement is guaranteed by certain of our subsidiaries and contains customary covenants applicable to us and its subsidiaries including limitations on indebtedness, liens, dividends, stock repurchases, mergers and sales of all or substantially all of its assets. In addition, the Credit Agreement contains a financial covenant requiring us to maintain, as of the last day of each fiscal quarter for the four prior fiscal quarters, a Total Net Leverage Ratio of no more than 3.50 to 1.00 (or, at our election, on up to two occasions following a material acquisition, 4.00 to 1.00). The Credit Agreement is subject to customary events of default, including non-payment of principal or other amounts under the Credit Agreement, material inaccuracy of representations and warranties, breach of covenants, cross-default to other indebtedness in excess of $75 million, judgements in excess of $75 million, certain voluntary and involuntary bankruptcy events, and the occurrence of a change of control. As of December 31, 2021, we believe we were in compliance with all covenant requirements.
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Financial Leverage
We periodically review our capital structure, including our primary bank facility, to ensure the appropriate levels of liquidity and leverage and to take advantage of favorable interest rate environments or other market conditions. We consider various other financing alternatives and may, from time to time, access the capital markets.
We also evaluate our debt-to-capital and debt-to-EBITDA ratios to determine, among other considerations, the appropriate targets for capital expenditures and share repurchases under our Share Repurchase Plans. Our book value of debt-to-total-capital ratio increased to 128% at December 31, 2021 compared to 102% at December 31, 2020.
As of December 31, 2021, our senior credit ratings were Baa2 with a stable outlook, and BBB with a stable outlook, by Moody’s Investors Service, Inc. (“Moody’s”) and Standard & Poor’s Rating Group (“S&P”), respectively. The security ratings are not a recommendation to buy, sell or hold securities and may be subject to revision or withdrawal at any time by the assigning rating agency. Each rating should be evaluated independently of any other rating. Our goal is to maintain investment grade ratings from Moody’s and S&P to help ensure the capital markets remain available to us.
Liquidity
We believe our cash and cash equivalents of $31 million, future cash generated from operations and available future borrowings are sufficient to fund our operations, planned capital expenditures, future contractual obligations, share repurchases, anticipated dividends and other needs in the foreseeable future. Included in our cash and cash equivalents as of December 31, 2021 was $14 million of cash held in foreign locations, although that amount can fluctuate significantly depending on the timing of cash receipts and payments. Our cash and cash equivalents held in foreign locations is generally available for use in our U.S. operations and could be subject to foreign withholding taxes and U.S. state taxes.
No contributions are required to be made to our U.S. defined benefit plans in 2022. We made $2 million in total contributions to pension plans in 2021.
Dividend payments were $127 million in 2021 compared to $118 million in 2020. On May 19, 2021, our Board of Directors approved a 19% increase in our quarterly dividend on common stock from $0.77 to $0.92 per share effective with the July 2021 dividend payment.
We also continued to increase shareholder value through our Share Repurchase Plans. We returned $600 million to our investors through share repurchases in 2021. Our Board of Directors authorized an incremental $1.0 billion of share repurchases in July 2021, and we had $846 million of repurchases available under the Share Repurchase Plans at December 31, 2021. We expect to repurchase $400 million of shares in 2022.
We expect capital expenditures of approximately $125 million in 2022.
Financial Covenants related to our Debt
Our domestic credit facility is guaranteed by certain of our subsidiaries and contains a financial covenant relating to leverage. Other covenants contained in the domestic credit facility restrict, among other things, certain mergers, asset dispositions, guarantees, debt, liens, and affiliate transactions. The financial covenant requires us to maintain a defined Consolidated Indebtedness to Adjusted EBITDA Ratio of no greater than 3.5 : 1.0.
Our domestic credit facility contains customary events of default. These events of default include nonpayment of principal or other amounts, material inaccuracy of representations and warranties, breach of covenants, default on certain other indebtedness or receivables securitizations (cross default), certain voluntary and involuntary bankruptcy events and the occurrence of a change in control. A cross default under our credit facility could occur if:
•We fail to pay any principal or interest when due on any other indebtedness or receivables securitization exceeding $75.0 million; or
•We are in default in the performance of, or compliance with any term of any other indebtedness or receivables securitization in an aggregate principal amount exceeding $75.0 million, or any other condition exists which would give the holders the right to declare such indebtedness due and payable prior to its stated maturity.
Each of our major debt agreements contains provisions by which a default under one agreement causes a default in the others (a cross default). If a cross default under our domestic credit facility, our senior unsecured notes, or our ASP were to
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occur, it could have a wider impact on our liquidity than might otherwise occur from a default of a single debt instrument or lease commitment.
If any event of default occurs and is continuing, the administrative agent, or lenders with a majority of the aggregate commitments may require the administrative agent to, terminate our right to borrow under our 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 and payable and the lenders’ commitments will automatically terminate).
In the event of a credit rating downgrade below investment grade resulting from a change of control, holders of our senior unsecured notes will have the right to require us to repurchase all or a portion of the senior unsecured notes at a repurchase price equal to 101% of the principal amount of the notes, plus accrued and unpaid interest, if any. The notes are guaranteed, on a senior unsecured basis, by each of our subsidiaries that guarantee payment by us of any 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; enter into certain mergers, consolidations and transfers of substantially all of our assets; and transfer certain properties. The indenture also contains a cross default provision which is triggered if we default on other debt of at least $75 million in principal which is then accelerated, and such acceleration is not rescinded within 30 days of the notice date.
As of December 31, 2021, we believe we were in compliance with all covenant requirements. Delaware law limits the ability to pay dividends to surplus or, if there is no surplus, out of net profits for the fiscal year in which the dividend is declared and/or the preceding fiscal year. In addition, stock repurchases can only be made out of surplus and only if our capital would not be impaired.
Leasing Commitments
Refer to Note 5 in the Notes to the Consolidated Financial Statements for more details on our leasing commitments.
Guarantees related to our Debt Obligations
Our senior unsecured notes were issued by Lennox International Inc. (the “Parent”) and are unconditionally guaranteed by certain of our subsidiaries (the “Guarantor Subsidiaries”) and are not secured by our other subsidiaries. The Guarantor Subsidiaries are 100% owned and consolidated, all guarantees are full and unconditional, and all guarantees are joint and several.
In connection with the Credit Agreement, we entered into in July 2021, Heatcraft Technologies Inc., Lennox National Account Services Inc., Lennox Procurement Company Inc. and Lennox Services LLC became additional guarantors of our debt obligations, guaranteeing the payment when due of all monetary obligations under the Credit Agreement and the Notes. In addition, Lennox Switzerland GmbH was released as a guarantor of all monetary obligations under the Credit Agreement and the Notes. These changes did not result in a material change to the Parent and Guarantor Subsidiaries financial information.
Off Balance Sheet Arrangements
We have no off-balance sheet arrangements that we believe may have a material current or future effect on our financial condition, liquidity or results of operations.
Contractual Obligations
Contractual obligations arise in the normal course of business and include debt and related interest payments, leases, purchase obligations, pension and post-retirement benefits and warranty liabilities. For additional information regarding our contractual obligations, see Note 5 of the Notes to the Consolidated Financial Statements. See Note 11 of the Notes to the Consolidated Financial Statements for more information on our pension and post-retirement benefits obligations. See Note 14 of the Notes to the Consolidated Financial Statements for more information on our debt obligations.
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Fair Value Measurements
Fair value is the price that would be received to sell an asset or the price paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value is based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date and requires consideration of our creditworthiness when valuing certain liabilities. Our framework for measuring fair value is based on a three-level hierarchy for fair value measurements.
The three-level fair value hierarchy for disclosure of fair value measurements is defined as follows:
Level 1 - Quoted prices for identical instruments in active markets at the measurement date.
Level 2 - Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations in which all significant inputs and significant value drivers are observable in active markets at the measurement date and for the anticipated term of the instrument.
Level 3 - Valuations derived from valuation techniques in which one or more significant inputs or significant value drivers are unobservable inputs that reflect the reporting entity’s own assumptions about the assumptions market participants would use in pricing the asset or liability developed based on the best information available in the circumstances.
Where available, the fair values were based upon quoted prices in active markets. However, if quoted prices were not available, then the fair values were based upon quoted prices for similar assets or liabilities or independently sourced market parameters, such as credit default swap spreads, yield curves, reported trades, broker/dealer quotes, interest rates and benchmark securities. For assets and liabilities without observable market activity, if any, the fair values were based upon discounted cash flow methodologies incorporating assumptions that, in our judgment, reflect the assumptions a marketplace participant would use. Valuation adjustments to reflect either party’s creditworthiness and ability to pay were incorporated into our valuations, where appropriate, as of December 31, 2021 and 2020, the measurement dates. See Note 17 of the Notes to the Consolidated Financial Statements for more information on the assets and liabilities measured at fair value.
Market Risk
Commodity Price Risk
We enter into commodity futures contracts to stabilize prices expected to be paid for raw materials and parts containing high copper and aluminum content. These contracts are for quantities equal to or less than quantities expected to be consumed in future production. Fluctuations in metal commodity prices impact the value of the futures contracts that we hold. When metal commodity prices rise, the fair value of our futures contracts increases. Conversely, when commodity prices fall, the fair value of our futures contracts decreases. Information about our exposure to metal commodity price market risks and a sensitivity analysis related to our metal commodity hedges is presented below (in millions):
| Notional amount (pounds of aluminum and copper) | 62.4 | |
|---|---|---|
| Carrying amount and fair value of net asset | $ | 13.3 |
| Change in fair value from 10% change in forward prices | $ | 14.2 |
Refer to Note 10 of the Notes to the Consolidated Financial Statements for additional information regarding our commodity futures contracts.
Interest Rate Risk
Our results of operations can be affected by changes in interest rates due to variable rates of interest on our debt facilities, cash, cash equivalents and short-term investments. A 10% adverse movement in the levels of interest rates across the entire yield curve would have resulted in an increase to pre-tax interest expense of approximately $0.4 million, $1.3 million and $3.9 million for the years ended December 31, 2021, 2020 and 2019, respectively.
From time to time, we may use an interest rate swap hedging strategy to eliminate the variability of cash flows in a portion of our interest payments. This strategy, when employed, allows us to fix a portion of our interest payments while also taking advantage of historically low interest rates. As of December 31, 2021 and 2020, no interest rate swaps were in effect.
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Foreign Currency Exchange Rate Risk
Our results of operations are affected by changes in foreign currency exchange rates. Net sales and expenses in foreign currencies are translated into U.S. dollars for financial reporting purposes based on the average exchange rate for the period. During 2021, 2020 and 2019, net sales from outside the U.S. represented 13.1%, 13.0% and 13.2%, respectively, of our total net sales. For the years ended December 31, 2021, 2020, and 2019, foreign currency transaction gains and losses did not have a material impact to our results of operations. A 10% change in foreign exchange rates would have had an estimated $2.7 million, $0.6 million and $4.2 million impact to net income for the years ended December 31, 2021, 2020 and 2019, respectively.
We seek to mitigate the impact of currency exchange rate movements on certain short-term transactions by periodically entering into foreign currency forward contracts. By entering into forward contracts, we lock in exchange rates that would otherwise cause losses should the U.S. dollar appreciate and gains should the U.S. dollar depreciate. Refer to Note 10 of the Notes to the Consolidated Financial Statements for additional information regarding our foreign currency forward contracts.
Critical Accounting Estimates
A critical accounting estimate is one that requires difficult, subjective or complex estimates and assessments and is fundamental to our results of operations and financial condition. The following describes our critical accounting estimate related to product warranties and product-related contingencies and how we develop our judgments, assumptions and estimates about future events and how such policies can impact our financial statements. This discussion and analysis should be read in conjunction with our Consolidated Financial Statements and related Notes in “Item 8. Financial Statements and Supplementary Data.”
Product Warranties and Product-Related Contingencies
The estimate of our liability for future warranty costs requires us to make assumptions about the amount, timing and nature of future product-related costs. Some of the warranties we issue extend 10 years or more in duration and a relatively small adjustment to an assumption may have a significant impact on our overall liability.
From time to time, we may also incur costs to repair or replace installed products experiencing quality issues in order to satisfy our customers and protect our brand. These product-related costs may not be covered under our warranties and are not covered by insurance.
We periodically review the assumptions used to determine the liabilities for product warranties and product-related contingencies and we adjust our assumptions based upon factors such as actual failure rates and cost experience. Numerous factors could affect actual failure rates and cost experience, including the amount and timing of new product introductions, changes in manufacturing techniques or locations, components or suppliers used. Should actual costs differ from our estimates, we may be required to adjust the liabilities and to record expense in future periods. See Note 5 in the Notes to the Consolidated Financial Statements for more information on our product warranties and product-related contingencies.
Recent Accounting Pronouncements
See Note 2 in the Notes to the Consolidated Financial Statements for disclosure of recent accounting pronouncements and the potential impact on our financial statements and disclosures.