LENNOX INTERNATIONAL: Management report and analysis of the financial situation and operating results (Form 10-Q)

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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, 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, 2020,
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.

Company presentation

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 additional 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 parts and supplies 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 warranty costs, 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, including the impact of imposed tariffs on
the import of certain of our raw materials and components, has impacted us and
the HVACR industry in general. We seek to mitigate the impact of volatility in
commodity prices through a combination of price increases, commodity 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 the 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 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
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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 overview

Results for the third quarter of 2021 were driven by overall year over year
sales increases while profit decreased. Net sales decreased 2% and segment
profit decreased $9 million for the Residential Heating & Cooling segment. Net
sales increased 2% and segment profit decreased $16 million for the Commercial
Heating & Cooling segment. Net sales increased 10% and segment profit increased
$2 million for the Refrigeration segment.

Financial Highlights

•Net sales increased $5 million to $1,060 million in the third quarter of 2021
driven by favorable price and mix partially offset by lower sales volume.
•Operating income in the third quarter of 2021 decreased $4 million to $163
million primarily driven by rising costs partially offset by higher net sales.
•Net income for the third quarter of 2021 decreased $6 million to $126 million.
•Diluted earnings per share from continuing operations were $3.41 per share in
the third quarter of 2021 compared to $3.42 per share in the third quarter of
2020.
•For the nine months ended September 30, 2021, we returned $93 million to
shareholders through dividend payments and repurchased $600 million of common
stock through our share repurchase program.


Third quarter 2021 compared to third quarter 2020 – Consolidated results

The following table presents a summary of our financial results, including information presented as a percentage of net sales:

For the three months ended September 30,

                                                       Dollars (in millions)                   Percent                      Percent of Sales
                                                                                               Change
                                                      2021                2020               Fav/(Unfav)                2021                 2020
Net sales                                         $  1,059.9          $ 1,055.0                       0.5  %             100.0  %             100.0  %
Cost of goods sold                                     764.7              731.7                      (4.5)                72.1                 69.4
Gross profit                                           295.2              323.3                      (8.7)                27.9                 30.6
Selling, general and administrative expenses           134.2              151.8                      11.6                 12.7                 14.4
Losses (gains) and other expenses, net                   2.1                3.4                      38.2                  0.2                  0.3
Restructuring charges                                    0.3                0.1                    (200.0)                   -                    -

Loss from natural disasters, net of insurance
recoveries                                                 -                4.9                     100.0                    -                  0.5
Income from equity method investments                   (4.1)              (4.0)                      2.5                 (0.4)                (0.4)
Operating income                                  $    162.7          $   167.1                      (2.6) %              15.4  %              15.8  %



Net Sales

Net sales for the third quarter of 2021 compared to the third quarter of 2020
were impacted by favorable combined price and mix of 4%, which was partially
offset by lower sales volume of 4%.

Gross profit

Gross profit margins in the third quarter of 2021 decreased 270 basis points
("bps") to 27.9% compared to 30.6% in the third quarter of 2020. Gross margin
decreased 220 bps from higher commodity costs, 90 bps from higher freight and
distribution costs, 90 bps from factory inefficiencies, 90 bps from higher other
product costs, 40 bps from sourcing and engineering-led cost increases, and 20
bps from unfavorable mix. Partially offsetting these decreases was 280 bps from
favorable price.


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Selling, general and administrative expenses

Selling, general and administrative expenses ("SG&A") decreased $18 million to
$134 million in the third quarter of 2021 compared to $152 million in the third
quarter of 2020 due to lower incentive compensation and other employee costs. As
a percentage of net sales, SG&A decreased 170 bps to 12.7%.
Losses (gains) and Other Expenses, Net

The losses (gains) and other charges, net for the third quarters of 2021 and 2020 included the following (in millions):

                                                                          For the Three Months Ended
                                                                                September 30,
                                                                           2021                 2020
Realized (gains) losses on settled futures contracts                  $       (0.2)         $       -
Foreign currency exchange gains                                                  -               (0.4)
Gain on disposal of fixed assets                                              (0.1)              (0.2)
Other operating income                                                        (0.5)              (0.4)

Net change in unrealized losses (gains) on unsettled futures contracts

                                                                      0.2               (1.4)
Special legal contingency charges                                              0.1                0.2
Asbestos-related litigation                                                    1.8                2.4
Environmental liabilities                                                      0.3                0.3
Charges incurred related to COVID-19 pandemic                                  0.8                3.0
Other items, net                                                              (0.3)              (0.1)
Losses (gains) and other expenses, net (pre-tax)                      $     

2.1 $ 3.4



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 futures contracts, see Note 7 in the Notes
to the Consolidated Financial Statements. For more information on special legal
contingency charges and asbestos-related litigation, see Note 4 in the Notes to
the Consolidated Financial Statements. The environmental liabilities related to
estimated remediation costs for contamination at some of our facilities.

Restructuring costs

Restructuring charges were immaterial in the third quarter of 2021 and 2020.
Restructuring charges related to ongoing cost reduction actions taken in prior
periods.

Gains and losses from natural disasters

The charges recognized in 2020 related to costs incurred in connection with natural disasters that occurred in previous years.

Investment income using the equity method

We participate in two joint ventures that are engaged in the manufacture and
sale of compressors, unit coolers and condensing units. We exert significant
influence over these affiliates based upon our ownership, but do not control
them due to venture partner participation. Accordingly, these joint ventures
have been accounted for under the equity method and their financial position and
results of operations are not consolidated. Income from equity method
investments of $4 million in the third quarter of 2021 was up slightly compared
to the third quarter of 2020.

Interest Expense, net

Net interest expense was $ 7 million in the third quarter of 2021 and 2020, respectively.

Income taxes

Our effective tax rate was 18.4% for the third quarter of 2021, compared to 17.3% for the third quarter of 2020. The rate increased mainly due to the tax impact of discrete losses recorded in the third quarter of 2020.

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We expect our annual effective tax rate in 2021 to be around 20%, after excluding the impact of excess tax benefits recorded under ASU 2016-09.

Third quarter 2021 compared to third quarter 2020 – Results by segment

Residential heating and air conditioning

The following table presents our Residential Heating & Cooling segment's net
sales and profit for the third quarter of 2021 and 2020 (dollars in millions):
                                                   For the Three Months Ended
                                                          September 30,
                                                     2021                2020             Difference             % Change
Net sales                                       $    711.0            $  722.0          $     (11.0)                   (1.5) %
Profit                                          $    144.0            $  153.0          $      (9.0)                   (5.9) %
% of net sales                                        20.3    %           21.2  %

Net sales decreased by 2% in the third quarter of 2021 compared to 2020. Sales volume decreased by 6%, which was partially offset by a favorable combined price and mix of 4%.

Segment profit in the third quarter of 2021 compared to 2020 decreased $9
million due to $18 million from higher commodity costs, $14 million from lower
sales volume, $6 million from unfavorable freight and distribution costs, $4
million from factory inefficiencies, $3 million from sourcing and
engineering-led cost increases, and $3 million from higher other product costs.
Partially offsetting these declines were $33 million from higher combined price
and mix, $5 million from lower SG&A, and $1 million from favorable foreign
currency.

Commercial heating and cooling

The following table presents our Commercial Heating & Cooling segment's net
sales and profit for the third quarter of 2021 and 2020 (dollars in millions):
                                                   For the Three Months Ended
                                                          September 30,
                                                     2021                2020             Difference             % Change
Net sales                                       $    211.5            $  207.9          $       3.6                     1.7  %
Profit                                          $     22.6            $   38.8          $     (16.2)                  (41.8) %
% of net sales                                        10.7    %           18.7  %


Net sales increased by 2% in the third quarter of 2021 compared to the third quarter of 2020. The combined price and mix increased by 7% and foreign currencies improved by 1%, which was partially offset by a decline sales volume of 6%.

Segment profit in the third quarter of 2021 compared to 2020 decreased $16
million due to $7 million from higher other product costs, $5 million from
higher factory inefficiencies, $3 million from lower sales volume, $3 million
from higher freight and distribution costs, $2 million from higher commodity
costs, $1 million from sourcing and engineering-led cost increases, and $1
million from unfavorable foreign currency. Partially offsetting these declines
were $6 million from higher combined price and mix.





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Refrigeration

The following table shows the net sales and profit of our Refrigeration segment for the third quarters of 2021 and 2020 (in millions of dollars):

                                                  For the Three Months Ended
                                                         September 30,
                                                    2021                2020             Difference             % Change
Net sales                                      $    137.4            $  125.1          $      12.3                     9.8  %
Profit                                         $     14.5            $   13.0          $       1.5                    11.5  %
% of net sales                                       10.6    %           10.4  %



Net sales increased 10% in the third quarter of 2021 compared to the third
quarter of 2020. Sales volume was 9% higher and combined price and mix improved
1%.
Segment profit in the third quarter of 2021 compared to 2020 increased $2
million compared to 2020 due to $5 million from higher sales volume, $3 million
from favorable price and mix combined, and $1 million from higher income from
equity method investments. Partially offsetting these increases was $4 million
from higher commodity costs, $2 million from higher SG&A, and $1 million from
higher freight and distribution costs.

Companies and others

Corporate and other expenses decreased $ 12 million To $ 16 million in the third quarter of 2021 compared to 2020 mainly due to the timing of variable incentive compensation costs.

Since the beginning of the year September 30, 2021 Compared to year-to-date
September 30, 2020 – Consolidated results

The following table presents a summary of our financial results, including information presented as a percentage of net sales:

For the nine months ended September 30,

                                                       Dollars (in millions)                 Percent                     Percent of Sales
                                                                                              Change
                                                      2021                2020             Fav/(Unfav)               2021                 2020
Net sales                                         $  3,229.3          $ 2,720.1                18.7                   100.0  %             100.0  %
Cost of goods sold                                   2,294.5            1,955.3               (17.3)                   71.1                 71.9
Gross profit                                           934.8              764.8                22.2                    28.9                 28.1
Selling, general and administrative expenses           447.4              412.7                (8.4)                   13.9                 15.2
Losses (gains) and other expenses, net                   4.7                5.6                16.1                     0.1                  0.2
Restructuring charges                                    1.6               10.6                84.9                       -                  0.4

Loss (gain) from natural disasters, net of
insurance recoveries                                       -                7.6              (100.0)                      -                  0.3
Income from equity method investments                  (11.6)             (11.2)                3.6                    (0.4)                (0.4)
Operating income                                  $    492.7          $   339.5                45.1                    15.3  %              12.5  %



Net Sales

Net sales increased 19% for the nine months ended September 30, 2021 compared to
the nine months ended September 30, 2020 due to higher sales volumes of 15%,
favorable combined price and mix of 3%, and a 1% increase from to foreign
currency.
Gross Profit

Gross profit margins for the nine months ended September 30, 2021 increased 80
bps to 28.9% compared to 28.1% for the nine months ended September 30, 2020.
Gross margin increased 160 bps from favorable price, 90 bps from favorable mix,
and
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40 basis points of plant productivity which was partially offset by 130 basis points of higher commodity costs, 50 basis points of higher costs of other products, 20 basis points of transportation costs and higher distribution and 10 basis points higher warranty costs.

Selling, general and administrative expenses

SG&A increased $34 million to $447 million for the nine months ended September
30, 2021 compared to $413 million for the nine months ended September 30, 2020
primarily due to higher incentive compensation costs and higher other employee
related costs. As a percentage of net sales, SG&A decreased 130 bps to 13.9%
from 15.2%.

Losses (gains) and other charges, net

Losses (gains) and other charges, net for the nine months ended September 30, 2021 and 2020 included the following (in millions):

Nine months ended September 30,

                                                                            2021               2020
Realized (gains) losses on settled futures contracts                    $     (0.9)         $    0.2
Foreign currency exchange gains                                               (1.6)             (3.0)
Gain on disposal of fixed assets                                              (0.6)             (0.4)
Other operating income                                                        (0.9)             (1.7)

Net change in unrealized (gains) losses on unsettled futures contracts

    0.1                 -
Special legal contingency charges                                              1.0               0.9
Asbestos-related litigation                                                    4.5               1.9
Environmental liabilities                                                      1.8               1.5
Charges incurred related to COVID-19 pandemic                                  1.9               6.4
Other items, net                                                              (0.6)             (0.2)
Losses (gains) and other expenses, net (pre-tax)                        $   

4.7 $ 5.6



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 futures contracts, see Note 7 in the Notes to the
Consolidated Financial Statements. For more information on special legal
contingency charges and asbestos-related litigation, see Note 4 in the Notes to
the Consolidated Financial Statements. The environmental liabilities related to
estimated remediation costs for contamination at some of our facilities.

Restructuring costs

Restructuring charges were $2 million for the first nine months of 2021 and $11
million for the nine months ended September 30, 2020. Charges primarily relate
to several cost reduction actions taken in response to the economic impact of
the COVID-19 pandemic on our business.

Gains and losses from natural disasters

The activity of this account for 2020 related to costs arising from natural disasters at our manufacturing facility in Iowa. There was no activity in 2021.

Investment income using the equity method

Income from equity method investments of $12 million for the nine months ended
September 30, 2021 was materially consistent with the amount for the nine months
ended September 30, 2020.

Interest Expense, net

Interest expense, net was down $3 million for the nine months ended September
30, 2021 compared to the nine months ended September 30, 2020 primarily due to
lower borrowing costs.

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Income taxes

Our effective tax rate decreased to 19.0% for the nine months ended September
30, 2021 compared to 22.0% for the nine months ended September 30, 2020
primarily due to higher excess tax benefits from stock-based compensation and
the recording of a valuation allowance on certain foreign deferred tax assets
recorded in the first quarter of 2020.

Since the beginning of the year September 30, 2021 Compared to year-to-date
September 30, 2020 – Results by segment

Residential heating and air conditioning

The following table presents our Residential Heating & Cooling segment's net
sales and profit for the nine months ended September 30, 2021 and 2020 (dollars
in millions):

                         Nine Months Ended September 30,
                         2021                           2020         Difference       % Change
Net sales         $       2,155.3                   $ 1,808.8       $     346.5         19.2  %
Profit            $         430.1                   $   312.8       $     117.3         37.5  %
% of net sales               20.0   %                    17.3  %


Net sales increased 19% for the nine months ended September 30, 2021 compared to
the nine months ended September 30, 2020. Sales volume was 15% higher, price and
mix combined improved 3%, and foreign currency improved 1%.

Segment profit for the first nine months of 2021 compared to 2020 increased $117
million primarily due to $86 million from higher sales volume, $62 million from
favorable price, $19 million from higher factory productivity, $6 million from
favorable currency exchange, and $5 million from sourcing and engineering-led
cost reductions. Partially offsetting these increases were $35 million from
higher commodity costs and tariffs, $11 million from higher SG&A, $9 million
from higher warranty and other product costs, $4 million from unfavorable mix,
and $2 million from freight and distribution.

Commercial heating and cooling

The following table presents our Commercial Heating & Cooling segment's net
sales and profit for the nine months ended September 30, 2021 and 2020 (dollars
in millions):

                          Nine Months Ended September 30,
                         2021                             2020        Difference       % Change
Net sales         $        663.4                       $ 574.6       $      88.8         15.5  %
Profit            $         95.3                       $  93.1       $       2.2          2.4  %
% of net sales              14.4   %                      16.2  %



Net sales increased 16% for the nine months ended September 30, 2021 compared to
the nine months ended September 30, 2020. Sales volume was 12% higher, price and
mix combined improved 3%, and foreign currency improved 1%.
Segment profit for the first nine months of 2021 compared to 2020 increased $2
million primarily due to $24 million from higher sales volume and $9 million
from favorable price and mix. Partially offsetting these improvements were $11
million from higher other product costs, $8 million from factory inefficiencies,
$4 million from higher freight and distribution costs, $3 million of higher SG&A
costs, $3 million from higher commodity costs and tariffs, and $2 million from
sourcing and engineering-led cost increases.




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Refrigeration

The following table presents our Refrigeration segment's net sales and profit
for the nine months ended September 30, 2021 and 2020 (dollars in millions):

                          Nine Months Ended September 30,
                         2021                             2020        Difference       % Change
Net sales         $        410.6                       $ 336.7       $      73.9         21.9  %
Profit            $         35.8                       $  22.6       $      13.2         58.4  %
% of net sales               8.7   %                       6.7  %



Net sales increased 22% for the nine months ended September 30, 2021 compared to
the nine months ended September 30, 2020. Sales volume was 17% higher, foreign
currency improved 3% and combined price and mix was 2% higher.

Segment profit for the first nine months of 2021 compared to 2020 increased $13
million primarily due to $21 million from higher volume, $7 million from
favorable price and mix combined, $2 million from sourcing and engineering-led
cost reductions, and $1 million from favorable foreign currency exchange.
Partially offsetting these increases were $10 million from higher SG&A, $5
million from higher commodity costs, $2 million from higher other product costs,
and $1 million from higher freight and distribution expense.

Companies and others

Corporate and other expenses decreased $ 2 million in the nine months ended
September 30, 2021 compared to the nine months ended September 30, 2020
primarily due to changes in incentive compensation costs.

Liquidity and capital resources

Our working capital and capital expenditure needs are generally met through internally generated funds, bank lines of credit and an asset securitization arrangement. Working capital requirements are generally greater in the first and second quarters due to the seasonal nature of our business cycle.

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