Lennox Reports Record Second Quarter Results and Raises 2023 Guidance

Q2 Highlights
(All comparisons are year-over-year, unless otherwise noted)

• Revenue up 3% to $1.41 billion; core revenue excluding European Operations up 3% to $1.34 billion
• Operating income up 23% to $279 million; adjusted segment profit up 22% to $281 million
• GAAP diluted EPS up 23% to $6.10; adjusted diluted EPS up 22% to $6.15
• Operating cash flow up 101% to $196 million
• Raising 2023 outlook with core revenue up 2% to up 4% and an EPS range of $15.50 to $16.00

DALLAS, July 27, 2023 /PRNewswire/ -- Lennox (NYSE: LII), a leader in energy-efficient climate-control solutions, today reported record second quarter revenue of $1.41 billion. Operating income was a record $279 million and operating margin was 19.8%. GAAP diluted earnings per share was a record $6.10.

Core revenue, excluding European Operations, grew 3% to $1.34 billion. Adjusted segment profit rose 22% to $281 million. Adjusted segment margin was 20.9%, up 320 basis points. Adjusted earnings per share rose 22% to $6.15.

"With record setting results in the second quarter, Lennox once again demonstrates our team's execution prowess and the benefit of a focused growth strategy," said Chief Executive Officer Alok Maskara. "Our commercial growth and profit recovery has gained momentum as our team successfully improved manufacturing output to meet robust demand."

"Strong commercial results offset challenging residential end markets impacted by right sizing of industry inventory levels, post successful transition to the new minimum efficiency standards." Maskara continued. "Given our record first half performance, we are raising our 2023 earnings and cash flow guidance which reflects our exceptional progress towards delivering our long-term financial targets."

In the second quarter, Residential segment revenue was down 4% primarily due to continued distributor destocking. Segment profit was down 6% as the impact of lower sales volume was partially offset by favorable pricing and mix. As we start the third quarter, distributor destocking is decelerating, and we expect the recently announced price increase to fuel margin recovery even though factory productivity and output will remain constrained as we right-size our finished goods inventory levels to improve operating cash flow.

The Commercial segment delivered exceptional second-quarter results with revenues up 24% and profits up 150% while maintaining strong backlog. Last year the commercial segment faced manufacturing and supply chain challenges that tempered revenue and delayed pricing actions. This year's significant improvement in results is driven by improved factory productivity, instituted pricing actions, and product mix benefits. We expect further manufacturing improvements in the second half of this year as our factory output remains below historical levels and our delivery lead times remain extended.

SECOND QUARTER 2023 FINANCIAL HIGHLIGHTS
(All comparisons are year-over-year, unless otherwise noted)

Revenue: $1.41 billion; Core revenue, which excludes our European operations, was $1.34 billion, up 3%. Revenue growth was driven by price and favorable mix and partially offset by lower sales volumes.

Operating Income: $279 million with operating profit margin of 19.8%.

Adjusted Segment Profit: $281 million, up 22%, and adjusted segment profit margin of 20.9%, up 320 basis points. Adjusted segment profit increased $50 million as $106 million of price and mix benefits were partially offset by lower sales volumes and inflationary impacts on SG&A and distribution costs.

Net Income: $217.2 million, or $6.10 per share, compared to $177.2 million, or $4.96 per share, in the prior year quarter.

Adjusted Net Income: $218.8 million, or $6.15 per share, compared to $179.6 million, or $5.03 per share, in the prior year quarter.

Cash: Operating cash flow was $196 million compared to $97 million in the prior-year quarter. Capital expenditures were $49 million compared to $21 million in the prior year quarter with the increase driven by the new Commercial factory investment in Saltillo, Mexico. Total debt at the end of the second quarter was approximately $1.6 billion. Total cash, cash equivalents and short-term investments were $59 million at the end of the quarter.

Residential: Business segment revenue was $936 million, 4% lower than the prior year. Segment Profit was $203 million, down 6%, and segment margin was 21.6%, down 50 basis points. Versus prior year, profit decreased $14 million. The decrease was driven predominately by lower sales volumes of $46 million along with other cost and investment headwinds totaling $8 million, all partially offset with $40 million in pricing and mix benefits.

Commercial: Business segment revenue was $408 million, up 24%. Segment profit was $103 million, up 150%, and segment margin expanded 1,270 basis points to 25.3%. Segment profit increased $62 million compared to prior year, driven by $66 million of pricing and mix benefits and $3 million generated by higher sales volumes. Inflationary impacts on materials and production costs partially offset these gains.

Corporate and Other: Revenue in the European Refrigeration operations was $67.7 million, up 10%. European operations had $2.4 million in profit compared to a $0.6 million loss in the prior year quarter. Corporate expenses were $25 million, or down $2 million compared to the prior year quarter.

As previously announced, beginning in 2023 our North American Refrigeration operations are reported in the Commercial Segment and European operations are classified as non-core and included in the Corporate and Other Segment until disposition.

FULL-YEAR 2023 GUIDANCE
For the full year of 2023, we now expect core revenue to be up 2% to up 4% (previous: flat to up 4%) and we expect earnings per share of $15.50 to $16.00 (previous: $14.25 to $15.25).

Based on our record first half performance and confidence in our outlook for the balance of the year, we are updating our free cash flow outlook to include operating cash flow of $550 million to $600 million and capital expenditures of approximately $250 million.

"Our primary focus remains on self-help operational excellence which includes prioritizing pricing excellence and increasing commercial production output, while normalizing inventory levels to further improve cash flow. Looking ahead, we are excited to build on the current momentum to meet or exceed our long-range targets," Maskara concluded.

CONFERENCE CALL INFORMATION
A conference call to discuss the company's second-quarter results and 2023 outlook will be held this morning at 8:30 a.m. Central Time. To participate in the earnings conference, please call 800-274-8461 (U.S.) or +1 203-518-9765 (international) at least 10 minutes prior to the scheduled start time and use conference ID LIIQ223. The conference call also will be webcast live on the company's investor relations web site at www.investor.lennox.com. A replay of the conference call will be available until August 10, 2023, by calling toll-free 800-925-9354 (U.S.) or +1 402-220-5384 (international). The call will also be archived on the company's web site.

ABOUT LENNOX
Lennox (NYSE: LII) is a leader in energy-efficient climate-control solutions. Dedicated to sustainability and creating comfortable and healthier environments for our residential and commercial customers while reducing their carbon footprint, we lead the field in innovation with our cooling, heating, indoor air quality, and refrigeration systems. Additional information on Lennox is available at www.investor.lennox.com or by contacting [email protected].

FORWARD-LOOKING STATEMENTS & NON-GAAP FINANCIAL MEASURES
The statements in this document that are not historical statements, including statements regarding the 2023 full-year outlook and expected consolidated and segment financial results, as well as financial targets for future years, are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are based on information currently available as well as management's assumptions and beliefs today. These statements are subject to numerous risks and uncertainties that could cause actual results to differ materially from the results expressed or implied by the statements, and investors should not place undue reliance on them. Risks and uncertainties that could cause actual results to differ materially from such statements include risks that the North American unitary HVAC and refrigeration markets perform worse than current assumptions. Additional risks include but are not limited to the impact of higher raw material prices, availability and timely delivery of raw materials and other components, competition in the HVACR business, ability to meet customer demand, the impact of new or increased trade tariffs, LII's ability to successfully execute its business strategy including implementing price increases for its products and services, economic conditions in our markets, regulatory changes, the impact of unfavorable weather, and a decline in new construction activity and related demand for products and services. For information concerning these and other risks and uncertainties, see LII's publicly available filings with the Securities and Exchange Commission. LII disclaims any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law.

A reconciliation of non-GAAP financial measures appearing in this document to financial measures prepared in accordance with U.S. Generally Accepted Accounting Principles (GAAP) are included in the Annex to this document.

This document includes forward-looking statements regarding core revenue, segment profit, adjusted segment profit, adjusted net income, adjusted earnings per share and free cash flow which are non-GAAP financial measures. These non-GAAP financial measures are derived by excluding certain amounts from the corresponding financial measures determined in accordance with GAAP. The determination of the amounts excluded is a matter of management judgment and depends upon, among other factors, the nature of the underlying expense or income amounts recognized in a given period and the high variability of certain amounts, such as unusual gains and losses, the ultimate outcome of pending litigation, fluctuations in foreign currency exchange rates, changes in environmental liabilities, the impact and timing of potential acquisitions and divestitures, future restructuring costs, and other structural changes or their probable significance. Core revenue excludes net sales from our European portfolio, which we plan to divest. We are unable to present a quantitative reconciliation of the aforementioned forward-looking non-GAAP financial measures to their most directly comparable forward-looking GAAP financial measures because such information is not available, and management cannot reliably predict the necessary components of such GAAP measures without unreasonable effort or expense. The unavailable information could have a significant impact on LII's full year GAAP financial results.