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: | | | | (1)Finance lease obligations
| The maximum securitization amount ranges from $250.0 million to $400.0 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. |
| 28.3 | | (2)Credit agreement (2)
| The available future borrowings on our domestic credit facility are $652 million after being reduced by the outstanding borrowings and $2 million in outstanding standby letters of credit. We also had $30.0 million in outstanding standby letters of credit outside of the domestic credit facility as of December 31, 2019. In January 2019, we increased the maximum credit commitments by $350 million as permitted under the Domestic Credit Facility bringing the total maximum credit commitments to $1.0 billion.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.
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 capitalcapital expenditures and share repurchases under our Share Repurchase Plans. Our book value of debt-to-total-capital ratio increaseddecreased to 117.0%115% at December 31, 20192022 compared to 116.8%128% at December 31, 2018. The increase in the ratio in 2019 is primarily due to the increase in total debt.2021.
As of December 31, 2019,2022, our senior credit ratings were Baa3 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 $37$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, 20192022 was $19$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 usedgenerally available for investinguse in our U.S. operations and operating activities in those locations, and we generally
do not have the need or intent to repatriate those funds to the United States. An actual repatriation in the future from our non-U.S. subsidiaries 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 2020.2023. We made $2$22.5 million in total contributions to pension plans in 2019.2022.
Dividend payments were $142 million in 2022 compared to $127 million in 2021. On May 22, 2019,19, 2022, our Board of Directors approved a 20%15% increase in our quarterly dividend on common stock from $0.64$0.92 to $0.77$1.06 per share effective with the July 20192022 dividend payment. Dividend payments were $111 million in 2019 compared to $94 million in 2018, with the increase due to the increase in dividends approved by the Board of Directors.
We also continued to increase shareholder value through our Share Repurchase Plans. We returned $400$300 million to our investors through share repurchases in 2019 and expect to repurchase another $400 million of shares in 2020.2022. Our Board of Directors authorized an incremental $500 million$1.0 billion of share repurchases in December 2019,July 2021, and we havehad $546 million of repurchases available under the Share Repurchase Plans at December 31, 2019.2022. We expect to repurchase $200 million of shares in 2023.
We expect capital expenditures of approximately $153$250 million in 2020, including $53 million to complete the reconstruction of the Marshalltown, Iowa manufacturing facility.2023.
Financial Covenants related to our Debt
Our domestic credit facilityCredit Agreement is guaranteed by certain of our subsidiaries and contains a financial covenantscovenant relating to leverage and interest coverage.leverage. Other covenants contained in the domestic credit facilityour Credit Agreement restrict, among other things, certain mergers, asset dispositions, guarantees, debt, liens, and affiliate transactions. The financial covenants requirecovenant requires us to maintain a defined Consolidated Indebtedness to Adjusted EBITDA Ratio and a Cash Flow (defined as EBITDA minus capital expenditures) to Interest Expense Ratio. The required ratios under our domestic credit facility are detailed below:of no greater than 3.5 : 1.0. | | | Consolidated Indebtedness to Adjusted EBITDA Ratio no greater than | 3.5 : 1.0 | Cash Flow to Interest Expense Ratio no less than | 3.0 : 1.0 |
Our domestic credit facilityCredit 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 domestic credit facility,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 domestic credit facilityCredit Agreement and accelerate amounts due under our domestic credit facilityCredit 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 domestic credit facility.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, 2019,2022, 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
An off-balance sheet arrangement is any transaction, agreement or other contractual arrangement involving an unconsolidated entity under which the company has: (1) made guarantees, (2) a retained or a contingent interest in transferred assets, (3) an obligation under derivative instruments classified as equity or (4) any obligation arising out of a material variable interest in an unconsolidated entity that provides financing, liquidity, market risk or credit risk support to us, or that engages in leasing, hedging or research and development arrangements with us. 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
Summarized below are our contractual obligations as of December 31, 2019 and their expected impact on our liquidity and cash flows in future periods (in millions):
| | | | | | | | | | | | | | | | | | | | | | | Payments Due by Period | | | Total | | 1 Year or Less | | 1 - 3 Years | | 3 - 5 Years | | More than 5 Years | Total long-term debt obligations (1) | $ | 1,174.2 |
| | $ | 322.8 |
| | $ | 486.6 |
| | $ | 353.1 |
| | $ | 11.7 |
| Estimated interest payments on existing debt obligations (2) | 72.5 |
| | 32.4 |
| | 30.5 |
| | 9.3 |
| | 0.3 |
| | Operating leases | 199.3 |
| | 58.4 |
| | 80.1 |
| | 43.7 |
| | 17.1 |
| Purchase obligations (3) | 25.4 |
| | 25.4 |
| | — |
| | — |
| | — |
| | Total contractual obligations | $ | 1,471.4 |
| | $ | 439.0 |
| | $ | 597.2 |
| | $ | 406.1 |
| | $ | 29.1 |
|
(1)Contractual obligations related to finance leases are included as partarise in the normal course of long-term debt.
(2) Estimatedbusiness and include debt and related interest payments, are based on current contractual requirementsleases, purchase obligations, pension and do not reflect seasonal changes in the balance of our domestic credit facility.
(3) Purchase obligations consist of inventory that is part of our third party logistics programs.
The table above does not include pension, post-retirement benefitbenefits and warranty liabilities because it is not certain when these liabilities will be funded.liabilities. For additional information regarding our contractual obligations, see Note 5 of the Notes to the Consolidated Financial Statements. See Note 1110 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.
|
27
| | 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, 20192022 and 2018,2021, the measurement dates. See Note 1716 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 | |
| | | | | | Notional amount (pounds of aluminum and copper) | 61.8 |
| | Carrying amount and fair value of net liability | $ | (0.7 | ) | | Change in fair value from 10% change in forward prices | $ | 9.1 |
|
Refer to Note 109 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 $3.9$1.7 million, $2.7$0.4 million and $1.8$1.3 million for the years ended December 31, 2019, 20182022, 2021 and 2017,2020, 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, 20192022 and 2018,2021, 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 2019, 20182022, 2021 and 2017,2020, net sales from outside the U.S. represented 13.2% 11.4%, 18.5%13.1% and 18.5% 13.0%, respectively, of our total net sales. For the years ended December 31, 20192022, 2021, and 2018,2020, foreign currency transaction gains and losses diddid not have a material impact to our results of operations. A 10% change in foreign exchange rates would have had an estimated $4.2$3.5 million, $2.1$2.7 million and $5.2$0.6 million impact to net income for the years ended December 31, 2019, 20182022, 2021 and 2017,2020, 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 109 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.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk The information required by this item is included under the caption “Market Risk” in Item 7 above.
Item 8. Financial Statements and Supplementary Data
MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Our management is responsible for establishing and maintaining adequate internal control over financial reporting. As defined by the Securities and Exchange Commission, internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of the Consolidated Financial Statements in accordance with U.S. generally accepted accounting principles. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Management, including our Chief Executive Officer and Chief Financial Officer, has undertaken an assessment of the effectiveness of the Company’s internal control over financial reporting as of December 31, 2019,2022, based on criteria established in Internal Control - Integrated Framework (2013) by the Committee of Sponsoring Organizations of the Treadway Commission. Management’s assessment included an evaluation of the design of the Company’s internal control over financial reporting and testing of the operational effectiveness of those controls. Based on this assessment, management concluded that as of December 31, 2019,2022, the Company’s internal control over financial reporting was effective. KPMG LLP, the independent registered public accounting firm that audited the Company’s Consolidated Financial Statements, has issued an audit report including an opinion on the effectiveness of our internal control over financial reporting as of December 31, 2019,2022, a copy of which is included herein.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and Board of Directors Lennox International Inc.: Opinions on the Consolidated Financial Statements and Internal Control Over Financial Reporting We have audited the accompanying consolidated balance sheets of Lennox International Inc. and subsidiaries (the Company) as of December 31, 20192022 and 2018,2021, the related consolidated statements of operations, comprehensive (loss) income, stockholders’ (deficit) equity,deficit, and cash flows for each of the years in the three-year period ended December 31, 2019,2022, and the related notes and Schedule II -– Valuation and Qualifying Accounts and Reserves (collectively, the consolidated financial statements). We also have audited the Company’s internal control over financial reporting as of December 31, 2019,2022, based on criteria established in Internal Control -– Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 20192022 and 2018,2021, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2019,2022, in conformity with U.S. generally accepted accounting principles. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2019,2022 based on criteria established in Internal Control -– Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Change in Accounting Principles
As discussed in Note 2 to the consolidated financial statements, the Company has changed its method of accounting for leases as of January 1, 2019 due to the adoption of Accounting Standards Update (ASU) No. 2016-02, Leases (Topic 842), as amended. As discussed in Note 9 to the consolidated financial statements, the Company has changed its method of accounting for revenue from contracts with customers as of January 1, 2018 due to the adoption of Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts with Customers (Topic 606), as amended.
Basis for Opinions The Company’s management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s consolidated financial statements and an opinion on the Company’s internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions. Definition and Limitations of Internal Control Over Financial Reporting A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Critical Audit Matter The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgment.judgments. The communication of a critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates. Evaluation of the product warranty liability As discussed in Notes 2 and 5 to the consolidated financial statements, the Company provides a product warranty for certain of its products with the warranty period generally ranging from one to 20 years. The product warranty liability is estimated by product category based on the estimated future costs to repair or replace the products under warranty. The Company’s product warranty liability was $113$142.7 million as of December 31, 2019.2022. We identified the evaluation of the product warranty liability as a critical audit matter. Assessing the assumptions used to estimate the product warranty liability, specifically, the estimated failure rates by product category by year, and estimated cost per failure, involved subjective and complex auditor judgment. The following are the primary procedures we performed to address this critical audit matter includedmatter. We evaluated the following. Wedesign and tested the operating effectiveness of certain internal controls over the Company’s estimate of the future failure rates by product category and controls to estimate the cost of failures by product category for products subject to warranty. We assessed the estimated future failure rates by product category and the estimated cost per failure by product category used in the estimation of the product warranty liability by comparing them to the Company’s underlying historical data. We tested a sample of the historical data used as the basis for these assumptions by comparing to the relevant underlying documentation.
/s/ KPMG LLP
We have served as the Company’s auditor since 2002.
Dallas, Texas February 18, 202021, 2023
CONSOLIDATED BALANCE SHEETS LENNOX INTERNATIONAL INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (In millions, except shares and par values) | | | | | | | | | | | As of December 31, | | | 2019 | | 2018 | | ASSETS | | Current Assets: | | | | | Cash and cash equivalents | $ | 37.3 |
| | $ | 46.3 |
| | Short-term investments | 2.9 |
| | — |
| | Accounts and notes receivable, net of allowances of $6.1 and $6.3 in 2019 and 2018, respectively | 477.8 |
| | 472.7 |
| | Inventories, net | 544.1 |
| | 509.8 |
| | Other assets | 58.8 |
| | 60.6 |
| | Total current assets | 1,120.9 |
| | 1,089.4 |
| | Property, plant and equipment, net of accumulated depreciation of $824.3 and $778.5 in 2019 and 2018, respectively | 445.4 |
| | 408.3 |
| | Right-of-use assets from operating leases | 181.6 |
| | — |
| | Goodwill | 186.5 |
| | 186.6 |
| | Deferred income taxes | 21.5 |
| | 67.0 |
| | Other assets, net | 79.0 |
| | 65.9 |
| | Total assets | $ | 2,034.9 |
| | $ | 1,817.2 |
| | LIABILITIES AND STOCKHOLDERS’ DEFICIT | | Current Liabilities: | | | | | Current maturities of long-term debt | 321.9 |
| | 300.8 |
| | Current operating lease liabilities | 52.7 |
| | — |
| | Accounts payable | 372.4 |
| | 433.3 |
| | Accrued expenses | 255.7 |
| | 272.3 |
| | Income taxes payable | — |
| | 2.1 |
| | Total current liabilities | 1,002.7 |
| | 1,008.5 |
| | Long-term debt | 849.3 |
| | 740.5 |
| | Long-term operating lease liabilities | 131.0 |
| | — |
| | Pensions | 87.4 |
| | 82.8 |
| | Other liabilities | 134.7 |
| | 135.0 |
| | Total liabilities | 2,205.1 |
| | 1,966.8 |
| | Commitments and contingencies |
|
| |
|
| | Stockholders' deficit: | | | | | Preferred stock, $.01 par value, 25,000,000 shares authorized, no shares issued or outstanding | — |
| | — |
| | Common stock, $.01 par value, 200,000,000 shares authorized, 87,170,197 shares issued | 0.9 |
| | 0.9 |
| | Additional paid-in capital | 1,093.5 |
| | 1,078.8 |
| | Retained earnings | 2,148.7 |
| | 1,855.0 |
| | Accumulated other comprehensive loss | (103.8 | ) | | (188.8 | ) | | Treasury stock, at cost, 48,575,901 shares and 47,312,248 shares for 2019 and 2018, respectively | (3,309.5 | ) | | (2,895.5 | ) | | Total stockholders' deficit | (170.2 | ) | | (149.6 | ) | | Total liabilities and stockholders' deficit | $ | 2,034.9 |
| | $ | 1,817.2 |
|
| | | | | | | | | | | | | As of December 31, | | 2022 | | 2021 | | ASSETS | | Current Assets: | | | | | Cash and cash equivalents | $ | 52.6 | | | $ | 31.0 | | | Short-term investments | 8.5 | | | 5.5 | | | Accounts and notes receivable, net of allowances of $15.5 and $10.7 in 2022 and 2021, respectively | 608.5 | | | 508.3 | | | Inventories, net | 753.0 | | | 510.9 | | | | | | | Other assets | 73.9 | | | 119.7 | | | Total current assets | 1,496.5 | | | 1,175.4 | | | Property, plant and equipment, net of accumulated depreciation of $920.8 and $888.8 in 2022 and 2021, respectively | 548.9 | | | 515.1 | | | Right-of-use assets from operating leases | 219.9 | | | 196.1 | | | Goodwill | 186.3 | | | 186.6 | | | Deferred income taxes | 27.5 | | | 11.3 | | | Other assets, net | 88.5 | | | 87.4 | | | Total assets | $ | 2,567.6 | | | $ | 2,171.9 | | | LIABILITIES AND STOCKHOLDERS’ DEFICIT | | Current Liabilities: | | | | | | | | | Current maturities of long-term debt | 710.6 | | | 11.3 | | | Current operating lease liabilities | 63.3 | | | 54.8 | | | Accounts payable | 427.3 | | | 402.1 | | | Accrued expenses | 376.9 | | | 358.9 | | | | | | | Income taxes payable | 17.6 | | | — | | | Total current liabilities | 1,595.7 | | | 827.1 | | | Long-term debt | 814.2 | | | 1,226.5 | | | Long-term operating lease liabilities | 161.8 | | | 145.0 | | | Pensions | 40.1 | | | 83.3 | | | Other liabilities | 158.9 | | | 159.0 | | | Total liabilities | 2,770.7 | | | 2,440.9 | | | Commitments and contingencies | | | | | Stockholders' deficit: | | | | | Preferred stock, $0.01 par value, 25,000,000 shares authorized, no shares issued or outstanding | — | | | — | | | Common stock, $0.01 par value, 200,000,000 shares authorized, 87,170,197 shares issued | 0.9 | | | 0.9 | | | Additional paid-in capital | 1,155.2 | | | 1,133.7 | | | Retained earnings | 3,070.6 | | | 2,719.3 | | | Accumulated other comprehensive loss | (90.6) | | | (88.1) | | | Treasury stock, at cost, 51,700,260 shares and 50,536,125 shares for 2022 and 2021, respectively | (4,339.2) | | | (4,034.8) | | | | | | | Total stockholders' deficit | (203.1) | | | (269.0) | | | Total liabilities and stockholders' deficit | $ | 2,567.6 | | | $ | 2,171.9 | |
The accompanying notes are an integral part of these Consolidated Financial Statements.
LENNOX INTERNATIONAL INC. AND SUBSIDIARIES LENNOX INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (In millions, except per share data) | | | | | | | | | | | | | | | For the Years Ended December 31, | | | 2019 | | 2018 | | 2017 | | Net sales | $ | 3,807.2 |
| | $ | 3,883.9 |
| | $ | 3,839.6 |
| | Cost of goods sold | 2,727.4 |
| | 2,772.7 |
| | 2,714.4 |
| | Gross profit | 1,079.8 |
| | 1,111.2 |
| | 1,125.2 |
| | Operating expenses: | | | | | | | Selling, general and administrative expenses | 585.9 |
| | 608.2 |
| | 637.7 |
| | Losses (gains) and other expenses, net | 8.3 |
| | 13.4 |
| | 7.1 |
| | Restructuring charges | 10.3 |
| | 3.0 |
| | 3.2 |
| | Loss (gain), net on sale of businesses and related property | 10.6 |
| | 27.0 |
| | 1.1 |
| | Gain from insurance recoveries, net of losses incurred | (178.8 | ) | | (38.3 | ) | | — |
| | Income from equity method investments | (13.4 | ) | | (12.0 | ) | | (18.4 | ) | | Operating income | 656.9 |
| | 509.9 |
| | 494.5 |
| | Pension settlements | 99.2 |
| | 0.4 |
| | — |
| | Interest expense, net | 47.5 |
| | 38.3 |
| | 30.6 |
| | Other expense (income), net | 2.3 |
| | 3.3 |
| | (0.1 | ) | | Income from continuing operations before income taxes | 507.9 |
| | 467.9 |
| | 464.0 |
| | Provision for income taxes | 99.1 |
| | 107.6 |
| | 156.9 |
| | Income from continuing operations | 408.8 |
| | 360.3 |
| | 307.1 |
| | Discontinued operations: | | | | | | | (Loss) income from discontinued operations before income taxes | (0.1 | ) | | 0.8 |
| | (2.2 | ) | | Provision for (benefit from) income taxes | — |
| | 2.1 |
| | (0.8 | ) | | Loss from discontinued operations | (0.1 | ) | | (1.3 | ) | | (1.4 | ) | | Net income | $ | 408.7 |
| | $ | 359.0 |
| | $ | 305.7 |
| | | | | | | | | Earnings per share – Basic: | | | | | | | Income from continuing operations | $ | 10.49 |
| | $ | 8.87 |
| | $ | 7.28 |
| | Loss from discontinued operations | — |
| | (0.03 | ) | | (0.03 | ) | | Net income | $ | 10.49 |
| | $ | 8.84 |
| | $ | 7.25 |
| | | | | | | | | Earnings per share – Diluted: | | | | | | | Income from continuing operations | $ | 10.38 |
| | $ | 8.77 |
| | $ | 7.17 |
| | Loss from discontinued operations | — |
| | (0.03 | ) | | (0.03 | ) | | Net income | $ | 10.38 |
| | $ | 8.74 |
| | $ | 7.14 |
| | | | | | | | | Weighted Average Number of Shares Outstanding - Basic | 39.0 |
| | 40.6 |
| | 42.2 |
| | Weighted Average Number of Shares Outstanding - Diluted | 39.4 |
| | 41.1 |
| | 42.8 |
|
(In millions, except per share data) | | | | | | | | | | | | | | | | | | | | For the Years Ended December 31, | | | 2022 | | 2021 | | 2020 | | Net sales | $ | 4,718.4 | | | $ | 4,194.1 | | | $ | 3,634.1 | | | Cost of goods sold | 3,433.7 | | | 3,005.7 | | | 2,594.0 | | | Gross profit | 1,284.7 | | | 1,188.4 | | | 1,040.1 | | | Operating expenses: | | | | | | | Selling, general and administrative expenses | 627.2 | | | 598.9 | | | 555.9 | | | Losses (gains) and other expenses, net | 4.9 | | | 9.2 | | | 7.4 | | | Restructuring charges | 1.5 | | | 1.8 | | | 10.8 | | | | | | | | | Loss from natural disasters, net of insurance recoveries | — | | | — | | | 3.1 | | | | | | | | | Income from equity method investments | (5.1) | | | (11.8) | | | (15.6) | | | Operating income | 656.2 | | | 590.3 | | | 478.5 | | | Pension settlements | (0.2) | | | 1.2 | | | 0.6 | | | Interest expense, net | 38.7 | | | 25.0 | | | 28.3 | | | Other expense (income), net | 1.9 | | | 4.0 | | | 4.4 | | | Income from continuing operations before income taxes | 615.8 | | | 560.1 | | | 445.2 | | | Provision for income taxes | 118.7 | | | 96.1 | | | 88.1 | | | Income from continuing operations | 497.1 | | | 464.0 | | | 357.1 | | | Discontinued operations: | | | | | | | Loss from discontinued operations before income taxes | — | | | — | | | (1.5) | | | Income tax benefit | — | | | — | | | (0.7) | | | Loss from discontinued operations | — | | | — | | | (0.8) | | | Net income | $ | 497.1 | | | $ | 464.0 | | | $ | 356.3 | | | | | | | | | Earnings per share – Basic: | | | | | | | Income from continuing operations | $ | 13.92 | | | $ | 12.47 | | | $ | 9.32 | | | Loss from discontinued operations | — | | | — | | | (0.02) | | | Net income | $ | 13.92 | | | $ | 12.47 | | | $ | 9.30 | | | | | | | | | Earnings per share – Diluted: | | | | | | | Income from continuing operations | $ | 13.88 | | | $ | 12.39 | | | $ | 9.26 | | | Loss from discontinued operations | — | | | — | | | (0.02) | | | Net income | $ | 13.88 | | | $ | 12.39 | | | $ | 9.24 | | | | | | | | | Weighted Average Number of Shares Outstanding - Basic | 35.7 | | | 37.2 | | | 38.3 | | | Weighted Average Number of Shares Outstanding - Diluted | 35.8 | | | 37.5 | | | 38.6 | | | | | | | |
The accompanying notes are an integral part of these Consolidated Financial Statements.
LENNOX INTERNATIONAL INC. AND SUBSIDIARIES LENNOX INTERNATIONAL INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME (In millions)
| | | | | | | | | | | | | | | For the Years Ended December 31, | | | 2019 | | 2018 | | 2017 | | Net income | 408.7 |
| | 359.0 |
| | 305.7 |
| | Other comprehensive income (loss): | | | | | | | Foreign currency translation adjustments | 3.7 |
| | (16.9 | ) | | 33.9 |
| | Reclassification of foreign currency translation adjustments into earnings | 2.1 |
| | 27.9 |
| | — |
| | Net change in pension and post-retirement benefit liabilities | (7.1 | ) | | (14.2 | ) | | (5.3 | ) | | Change in fair value of available-for-sale marketable equity securities | — |
| | (1.8 | ) | | (0.5 | ) | | Net change in fair value of cash flow hedges | 1.3 |
| | (13.6 | ) | | 16.1 |
| | Reclassification of pension and post-retirement benefit losses into earnings | 5.7 |
| | 9.3 |
| | 7.3 |
| | Pension settlements | 99.2 |
| | 0.4 |
| | — |
| | Reclassification of cash flow hedge losses into earnings | 6.9 |
| | (6.1 | ) | | (13.7 | ) | | Other comprehensive income (loss) before taxes | $ | 111.8 |
| | $ | (15.0 | ) | | $ | 37.8 |
| | Tax expense | (26.8 | ) | | (16.4 | ) | | (0.1 | ) | | Other comprehensive income (loss), net of tax | 85.0 |
| | (31.4 | ) | | 37.7 |
| | Comprehensive income | $ | 493.7 |
| | $ | 327.6 |
| | $ | 343.4 |
|
(In millions) | | | | | | | | | | | | | | | | | | | | For the Years Ended December 31, | | | 2022 | | 2021 | | 2020 | | Net income | $ | 497.1 | | | $ | 464.0 | | | $ | 356.3 | | | Other comprehensive income (loss): | | | | | | | Foreign currency translation adjustments | (10.2) | | | (7.3) | | | 0.8 | | | | | | | | | Net change in pension and post-retirement benefit liabilities | 20.4 | | | 11.8 | | | (8.7) | | | | | | | | | Net change in fair value of cash flow hedges | (9.9) | | | 29.8 | | | 7.0 | | | Reclassification of pension and post-retirement benefit losses into earnings | 5.4 | | | 7.9 | | | 5.9 | | | Pension settlements | (0.2) | | | 1.2 | | | 0.6 | | | | | | | | | Share of equity method investments other comprehensive income | 0.7 | | | — | | | (1.2) | | | Reclassification of cash flow hedge (gains) losses into earnings | (9.7) | | | (26.9) | | | 3.7 | | | Other comprehensive (income) loss before taxes | $ | (3.5) | | | $ | 16.5 | | | $ | 8.1 | | | Tax benefit (expense) | 1.0 | | | (7.4) | | | (1.5) | | | Other comprehensive (loss) income, net of tax | (2.5) | | | 9.1 | | | 6.6 | | | Comprehensive income | $ | 494.6 | | | $ | 473.1 | | | $ | 362.9 | |
The accompanying notes are an integral part of these Consolidated Financial Statements.
LENNOX INTERNATIONAL INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ (DEFICIT) EQUITYDEFICIT For the Years Ended December 31, 2019, 20182022, 2021 and 20172020 (In millions, except per share data) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Common Stock Issued | | Additional Paid-In Capital | | Retained Earnings | | Accumulated Other Comprehensive Loss | | Treasury Stock at Cost | | Non-controlling Interests | | Total Stockholders’ (Deficit) Equity | | | | | | Shares | | Amount | | | | Balance as of December 31, 2016 | | $ | 0.9 |
| | $ | 1,046.2 |
| | $ | 1,353.0 |
| | $ | (195.1 | ) | | 44.2 |
| | $ | (2,167.4 | ) | | $ | 0.4 |
| | $ | 38.0 |
| | Net income | | — |
| | — |
| | 305.7 |
| | — |
| | — |
| | — |
| | — |
| | 305.7 |
| | Dividends, $1.96 per share | | — |
| | — |
| | (82.8 | ) | | — |
| | — |
| | — |
| | — |
| | (82.8 | ) | | Foreign currency translation adjustments | | — |
| | — |
| | — |
| | 33.9 |
| | — |
| | — |
| | — |
| | 33.9 |
| | Pension and post-retirement liability changes, net of tax benefit of $0.5 | | — |
| | — |
| | — |
| | 2.5 |
| | — |
| | — |
| | — |
| | 2.5 |
| | Change in fair value of available-for-sale marketable equity securities | | — |
| | — |
| | — |
| | (0.5 | ) | | — |
| | — |
| | — |
| | (0.5 | ) | | Stock-based compensation expense | | — |
| | 24.9 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 24.9 |
| | Change in cash flow hedges, net of tax expense of $0.6 | | — |
| | — |
| | — |
| | 1.8 |
| | — |
| | — |
| | — |
| | 1.8 |
| | Treasury shares reissued for common stock | | — |
| | (9.6 | ) | | — |
| | — |
| | (0.4 | ) | | 12.7 |
| | — |
| | 3.1 |
| | Additional investment in subsidiary | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (0.4 | ) | | (0.4 | ) | | Treasury stock purchases | | — |
| | — |
| | — |
| | — |
| | 1.6 |
| | (276.1 | ) | | — |
| | (276.1 | ) | | Balance as of December 31, 2017 | | 0.9 |
| | 1,061.5 |
| | 1,575.9 |
| | (157.4 | ) | | 45.4 |
| | (2,430.8 | ) | | — |
| | 50.1 |
| Cumulative effect adjustment upon adoption of new accounting standards (ASU 2016-16, ASU 2018-02 and ASC 606)
| | — |
| | — |
| | 16.5 |
| | (22.7 | ) | | — |
| | — |
| | — |
| | (6.2 | ) | | Net income | | — |
| | — |
| | 359.0 |
| | — |
| | — |
| | — |
| | — |
| | 359.0 |
| | Dividends, $2.43 per share | | — |
| | — |
| | (98.2 | ) | | — |
| | — |
| | — |
| | — |
| | (98.2 | ) | | Foreign currency translation adjustments | | — |
| | — |
| | — |
| | 11.0 |
| | — |
| | — |
| | — |
| | 11.0 |
| | Pension and post-retirement liability changes, net of tax benefit of $1.6 | | — |
| | — |
| | — |
| | (2.8 | ) | | — |
| | — |
| | — |
| | (2.8 | ) | | Sale of marketable equity securities | | — |
| | — |
| | 1.8 |
| | (1.8 | ) | | — |
| | — |
| | — |
| | — |
| | Stock-based compensation expense | | — |
| | 26.3 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 26.3 |
| | Change in cash flow hedges, net of tax benefit of $4.7 | | — |
| | — |
| | — |
| | (15.1 | ) | | — |
| | — |
| | — |
| | (15.1 | ) | | Treasury shares reissued for common stock | | — |
| | (9.0 | ) | | — |
| | — |
| | (0.4 | ) | | 12.4 |
| | — |
| | 3.4 |
| | Treasury stock purchases | | — |
| | — |
| | — |
| | — |
| | 2.3 |
| | (477.1 | ) | | — |
| | (477.1 | ) | | Balance as of December 31, 2018 | | 0.9 |
| | 1,078.8 |
| | 1,855.0 |
| | (188.8 | ) | | 47.3 |
| | (2,895.5 | ) | | — |
| | (149.6 | ) | Cumulative effect adjustment upon adoption of new accounting standard (ASC 842)
| | | | | | (0.3 | ) | | | | | | | | | | (0.3 | ) | | Net income | | — |
| | — |
| | 408.7 |
| | — |
| | — |
| | — |
| | — |
| | 408.7 |
| | Dividends, $2.95 per share | | — |
| | — |
| | (114.7 | ) | | — |
| | — |
| | — |
| | — |
| | (114.7 | ) | | Foreign currency translation adjustments | | — |
| | — |
| | — |
| | 5.8 |
| | — |
| | — |
| | — |
| | 5.8 |
| | Pension and post-retirement liability changes, net of tax expense of $24.8 | | — |
| | — |
| | — |
| | 73.0 |
| | — |
| | — |
| | — |
| | 73.0 |
| | Stock-based compensation expense | | — |
| | 21.3 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 21.3 |
| | Change in cash flow hedges, net of tax expense of $2.0 | | — |
| | — |
| | — |
| | 6.2 |
| | — |
| | — |
| | — |
| | 6.2 |
| | Treasury shares reissued for common stock | | — |
| | (6.6 | ) | | — |
| | — |
| | (0.3 | ) | | 10.0 |
| | — |
| | 3.4 |
| | Treasury stock purchases | | — |
| | — |
| | — |
| | — |
| | 1.6 |
| | (424.0 | ) | | — |
| | (424.0 | ) | | Balance as of December 31, 2019 | | $ | 0.9 |
| | $ | 1,093.5 |
| | $ | 2,148.7 |
| | $ | (103.8 | ) | | 48.6 |
| | $ | (3,309.5 | ) | | $ | — |
| | $ | (170.2 | ) |
The accompanying notes are an integral part of these Consolidated Financial Statements.
LENNOX INTERNATIONAL INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS For the Years Ended December 31, 2019, 2018 and 2017 (In millions) | | | | | | | | | | | | | | | 2019 | | 2018 | | 2017 | | Cash flows from operating activities: |
| |
| |
| | Net income | $ | 408.7 |
| | $ | 359.0 |
| | $ | 305.7 |
| | Adjustments to reconcile net income to net cash provided by operating activities: |
| |
| |
| | Loss (gain), net on sale of businesses and related property | 10.6 |
| | 27.0 |
| | 1.1 |
| Insurance recoveries received for property damage incurred from natural disaster
| (79.6 | ) | | (10.9 | ) | | — |
| | Income from equity method investments | (13.4 | ) | | (12.0 | ) | | (18.4 | ) | | Dividends from affiliates | 12.3 |
| | 9.6 |
| | 14.7 |
| | Restructuring expenses, net of cash paid | 6.8 |
| | 1.3 |
| | 0.8 |
| | Provision for bad debts | 4.5 |
| | 4.7 |
| | 3.9 |
| Unrealized losses (gains), net on derivative contracts
| (0.5 | ) | | 1.3 |
| | (2.0 | ) | | Stock-based compensation expense | 21.3 |
| | 26.3 |
| | 24.9 |
| | Depreciation and amortization | 71.1 |
| | 66.0 |
| | 64.6 |
| | Deferred income taxes | 16.6 |
| | 25.2 |
| | 43.3 |
| | Pension expense | 106.1 |
| | 8.8 |
| | 5.3 |
| | Pension contributions | (1.8 | ) |
| (20.6 | ) |
| (3.5 | ) | | Other items, net | (0.4 | ) | | 5.1 |
| | 1.3 |
| | Changes in assets and liabilities, net of effects of acquisitions and divestitures: |
| |
| |
| | Accounts and notes receivable | (33.1 | ) | | (9.9 | ) | | (28.4 | ) | | Inventories | (63.9 | ) | | (84.2 | ) | | (56.4 | ) | | Other current assets | 2.8 |
| | (0.2 | ) | | (6.1 | ) | | Accounts payable | (56.1 | ) | | 102.2 |
| | (19.6 | ) | | Accrued expenses | (5.6 | ) | | 5.9 |
| | 0.3 |
| | Income taxes payable and receivable | (1.9 | ) | | (5.5 | ) | | (6.7 | ) | | Leases, net | 2.1 |
| | — |
| | — |
| | Other, net | (10.5 | ) | | (3.6 | ) | | 0.3 |
| | Net cash provided by operating activities | 396.1 |
| | 495.5 |
| | 325.1 |
| | Cash flows from investing activities: |
| |
| |
| | Proceeds from the disposal of property, plant and equipment | 1.3 |
| | 0.1 |
| | 0.2 |
| | Purchases of property, plant and equipment | (105.6 | ) | | (95.2 | ) | | (98.3 | ) | | Purchases of short-term investments | (2.9 | ) | | — |
| | — |
| | Net proceeds from sale of businesses | 43.5 |
| | 114.7 |
| | — |
| | Insurance recoveries received for property damage incurred from natural disaster | 79.6 |
| | 10.9 |
| | — |
| | Net cash provided by (used in) investing activities | 15.9 |
| | 30.5 |
| | (98.1 | ) | | Cash flows from financing activities: |
| |
| |
| | Short-term debt payments | (5.3 | ) | | (40.3 | ) | | (31.9 | ) | | Short-term debt proceeds | 5.3 |
| | 40.3 |
| | 30.4 |
| | Asset securitization borrowings | 184.5 |
| | 155.0 |
| | 315.0 |
| | Asset securitization payments | (167.5 | ) | | (163.0 | ) | | (89.0 | ) | | Long-term debt payments | (6.4 | ) | | (3.0 | ) | | (200.9 | ) | | Borrowings from credit facility | 2,367.0 |
| | 2,435.9 |
| | 2,376.5 |
| | Payments on credit facility | (2,269.5 | ) | | (2,395.0 | ) | | (2,265.5 | ) | | Payments of deferred financing costs | (0.3 | ) | | — |
| | (0.2 | ) | | Proceeds from employee stock purchases | 3.3 |
| | 3.3 |
| | 3.1 |
| | Repurchases of common stock | (400.0 | ) | | (450.2 | ) | | (250.0 | ) | | Repurchases of common stock to satisfy employee withholding tax obligations | (24.0 | ) | | (26.9 | ) | | (26.1 | ) | | Cash dividends paid | (110.5 | ) | | (93.9 | ) | | (79.7 | ) | | Net cash used in financing activities | (423.4 | ) | | (537.8 | ) | | (218.3 | ) | | (Decrease) increase in cash and cash equivalents | (11.4 | ) | | (11.8 | ) | | 8.7 |
| | Effect of exchange rates on cash and cash equivalents | 2.4 |
| | (10.1 | ) | | 9.3 |
| | Cash and cash equivalents, beginning of year | 46.3 |
| | 68.2 |
| | 50.2 |
| | Cash and cash equivalents, end of year | $ | 37.3 |
| | $ | 46.3 |
| | $ | 68.2 |
| | | | | | | | | Supplemental disclosures of cash flow information: | | | | | | | Cash paid during the year for: | | | | | | | Interest, net | $ | 46.8 |
| | $ | 38.7 |
| | $ | 32.4 |
| | Income taxes (net of refunds) | $ | 83.0 |
| | $ | 90.0 |
| | $ | 119.3 |
| | Insurance recoveries received | $ | 243.2 |
| | $ | 124.3 |
| | $ | — |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Common Stock Issued | | Additional Paid-In Capital | | Retained Earnings | | Accumulated Other Comprehensive Loss | | Treasury Stock at Cost | | | | Total Stockholders’ Deficit | | | | | Shares | | Amount | | | | Balance as of December 31, 2019 | | 0.9 | | | 1,093.5 | | | 2,148.7 | | | (103.8) | | | 48.6 | | | (3,309.5) | | | | | (170.2) | | | Cumulative effect adjustment upon adoption of new accounting standard (ASU 2016-13) | | — | | | 0 | | (1.3) | | | 0 | | 0 | | 0 | | | | (1.3) | | | Net income | | — | | | — | | | 356.3 | | | — | | | — | | | — | | | | | 356.3 | | | Dividends, $3.08 per share | | — | | | — | | | (117.9) | | | — | | | — | | | — | | | | | (117.9) | | | Foreign currency translation adjustments | | — | | | — | | | — | | | 0.8 | | | — | | | — | | | | | 0.8 | | | Pension and post-retirement liability changes, net of tax expense of $1.0 | | — | | | — | | | — | | | (1.2) | | | — | | | — | | | | | (1.2) | | | Share of equity method investments other comprehensive income | | — | | | — | | | — | | | (1.2) | | | — | | | — | | | | | (1.2) | | | Stock-based compensation expense | | — | | | 24.3 | | | — | | | — | | | — | | | — | | | | | 24.3 | | | Change in cash flow hedges, net of tax expense of $2.5 | | — | | | — | | | — | | | 8.2 | | | — | | | — | | | | | 8.2 | | | Treasury shares reissued for common stock | | — | | | (4.6) | | | — | | | — | | | (0.3) | | | 7.6 | | | | | 3.0 | | | Treasury stock purchases | | — | | | — | | | — | | | — | | | 0.5 | | | (117.9) | | | | | (117.9) | | | Balance as of December 31, 2020 | | 0.9 | | | 1,113.2 | | | 2,385.8 | | | (97.2) | | | 48.8 | | | (3,419.8) | | | | | (17.1) | | | | | | | | | | | | | | | | | | | | Net income | | — | | | — | | | 464.0 | | | — | | | — | | | — | | | | | 464.0 | | | Dividends, $3.53 per share | | — | | | — | | | (130.5) | | | — | | | — | | | — | | | | | (130.5) | | | Foreign currency translation adjustments | | — | | | — | | | — | | | (7.3) | | | — | | | — | | | | | (7.3) | | | Pension and post-retirement liability changes, net of tax expense of $7.0 | | — | | | — | | | — | | | 13.9 | | | — | | | — | | | | | 13.9 | | | | | | | | | | | | | | | | | | | | Stock-based compensation expense | | — | | | 24.3 | | | — | | | — | | | — | | | — | | | | | 24.3 | | | Change in cash flow hedges, net of tax expense of $0.4 | | — | | | — | | | — | | | 2.5 | | | — | | | — | | | | | 2.5 | | | Treasury shares reissued for common stock | | — | | | (3.8) | | | — | | | — | | | (0.2) | | | 7.1 | | | | | 3.3 | | | Treasury stock purchases | | — | | | — | | | — | | | — | | | 1.9 | | | (622.1) | | | | | (622.1) | | | Balance as of December 31, 2021 | | 0.9 | | | 1,133.7 | | | 2,719.3 | | | (88.1) | | | 50.5 | | | (4,034.8) | | | | | (269.0) | | | | | | | | | | | | | | | | | | | | Net income | | — | | | — | | | 497.1 | | | — | | | — | | | — | | | | | 497.1 | | | Dividends, $4.10 per share | | — | | | — | | | (145.8) | | | — | | | — | | | — | | | | | (145.8) | | | Foreign currency translation adjustments | | — | | | — | | | — | | | (10.2) | | | — | | | — | | | | | (10.2) | | | Pension and post-retirement liability changes, net of tax expense of $3.0 | | — | | | — | | | — | | | 22.6 | | | — | | | — | | | | | 22.6 | | | Share of equity method investments other comprehensive income | | — | | | — | | | — | | | 0.7 | | | — | | | — | | | | | 0.7 | | | Stock-based compensation expense | | — | | | 21.8 | | | — | | | — | | | — | | | — | | | | | 21.8 | | | Change in cash flow hedges, net of tax benefit of $4.0 | | — | | | — | | | — | | | (15.6) | | | — | | | — | | | | | (15.6) | | | Treasury shares reissued for common stock | | — | | | (0.3) | | | — | | | — | | | (0.1) | | | 3.9 | | | | | 3.6 | | | Treasury stock purchases | | — | | | — | | | — | | | — | | | 1.3 | | | (308.3) | | | | | (308.3) | | | Balance as of December 31, 2022 | | 0.9 | | | 1,155.2 | | | 3,070.6 | | | (90.6) | | | 51.7 | | | (4,339.2) | | | | | (203.1) | |
The accompanying notes are an integral part of these Consolidated Financial Statements.
LENNOX INTERNATIONAL INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS For the Years Ended December 31, 2022, 2021 and 2020 (In millions) | | | | | | | | | | | | | | | | | | | 2022 | | 2021 | | 2020 | | Cash flows from operating activities: | | | | | | | Net income | $ | 497.1 | | | $ | 464.0 | | | $ | 356.3 | | | Adjustments to reconcile net income to net cash provided by operating activities: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Income from equity method investments | (5.1) | | | (11.8) | | | (15.6) | | | Dividends from affiliates | 1.7 | | | 9.1 | | | 12.3 | | | Restructuring charges, net of cash paid | 1.0 | | | 1.1 | | | 3.4 | | | Provision for credit losses | 6.9 | | | 4.9 | | | 8.1 | | | Unrealized losses (gains), net on derivative contracts | 1.7 | | | (0.6) | | | 0.3 | | | Stock-based compensation expense | 21.8 | | | 24.3 | | | 24.3 | | | Depreciation and amortization | 77.9 | | | 72.4 | | | 72.6 | | | Deferred income taxes | (15.2) | | | (5.4) | | | 7.2 | | | Pension expense | 6.0 | | | 11.3 | | | 10.5 | | | Pension contributions | (22.5) | | | (1.5) | | | (3.3) | | | Other items, net | (1.1) | | | 0.3 | | | 0.2 | | | Changes in assets and liabilities: | | | | | | | Accounts and notes receivable | (112.4) | | | (68.8) | | | 26.5 | | | Inventories | (249.3) | | | (71.0) | | | 110.3 | | | Other current assets | (7.3) | | | (19.2) | | | 5.3 | | | Accounts payable | 28.2 | | | 55.2 | | | (31.7) | | | Accrued expenses | 13.7 | | | 64.2 | | | 35.4 | | | Income taxes payable and receivable, net | 56.4 | | | (26.5) | | | (5.7) | | | Leases, net | 1.7 | | | 0.2 | | | 2.1 | | | | | | | | | Other, net | 1.1 | | | 13.3 | | | (6.1) | | | Net cash provided by operating activities | 302.3 | | | 515.5 | | | 612.4 | | | Cash flows from investing activities: | | | | | | | Proceeds from the disposal of property, plant and equipment | 1.6 | | | 0.9 | | | 1.0 | | | Purchases of property, plant and equipment | (101.1) | | | (106.8) | | | (78.5) | | | Purchases of short-term investments, net | (3.5) | | | (0.5) | | | (2.2) | | | | | | | | | | | | | | | Net cash used in investing activities | (103.0) | | | (106.4) | | | (79.7) | | | Cash flows from financing activities: | | | | | | | Short-term debt payments | — | | | — | | | (4.6) | | | Short-term debt borrowings | — | | | — | | | 4.6 | | | Asset securitization borrowings | 407.0 | | | 627.0 | | | 91.0 | | | Asset securitization payments | (307.0) | | | (377.0) | | | (376.0) | | | Long-term debt payments | (12.9) | | | (12.3) | | | (10.8) | | | Long-term debt borrowings | — | | | — | | | 600.0 | | | Borrowings from credit facility | 2,537.5 | | | 1,162.5 | | | 1,576.0 | | | Payments on credit facility | (2,352.0) | | | (1,156.0) | | | (2,081.5) | | | Payments of deferred financing costs | — | | | 2.4 | | | (7.5) | | | Proceeds from employee stock purchases | 3.6 | | | 3.3 | | | 3.0 | | | Repurchases of common stock | (300.0) | | | (600.0) | | | (100.0) | | | Repurchases of common stock to satisfy employee withholding tax obligations | (8.3) | | | (22.1) | | | (17.9) | | | Cash dividends paid | (142.0) | | | (126.5) | | | (118.1) | | | Net cash used in financing activities | (174.1) | | | (498.7) | | | (441.8) | | | Increase (decrease) in cash and cash equivalents | 25.2 | | | (89.6) | | | 90.9 | | | Effect of exchange rates on cash and cash equivalents | (3.6) | | | (3.3) | | | (4.3) | | | Cash and cash equivalents, beginning of year | 31.0 | | | 123.9 | | | 37.3 | | | Cash and cash equivalents, end of year | $ | 52.6 | | | $ | 31.0 | | | $ | 123.9 | | | | | | | | | Supplemental disclosures of cash flow information: | | | | | | | Cash paid during the period for: | | | | | | | Interest paid | $ | 35.4 | | | $ | 23.8 | | | $ | 25.3 | | | Income taxes paid (net of refunds) | $ | 77.2 | | | $ | 128.5 | | | $ | 90.3 | | | Insurance recoveries received | $ | — | | | $ | 6.6 | | | $ | — | |
The accompanying notes are an integral part of these Consolidated Financial Statements.
LENNOX INTERNATIONAL INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. Nature of Operations:
Lennox International Inc., a Delaware corporation, through its subsidiaries (referred to herein as “we,” “our,” “us,” “LII,” or the “Company”), is a leading global provider of climate control solutions. We design, manufacture, market and service a broad range of products for the heating, ventilation, air conditioning and refrigeration (“HVACR”) markets and sell our products and services through a combination of direct sales, distributors and company-owned parts and supplies stores. We operate in 3three reportable business segments: Residential Heating & Cooling, Commercial Heating & Cooling, and Refrigeration. See Note 3 for financial information regarding our reportable segments.
2. Summary of Significant Accounting Policies:
Principles of Consolidation
The consolidated financial statements include the accounts of Lennox International Inc. and our majority-owned subsidiaries. All intercompany transactions, profits and balances have been eliminated.
Cash and Cash Equivalents
We consider all highly liquid temporary investments with original maturity dates of three months or less to be cash equivalents. Cash and cash equivalents consisted primarily of bank deposits.
Short term Investments
Short-term investments include all investments, exclusive of cash equivalents, with a stated maturity date of one year or less from the balance sheet date and are expected to be used in current operations.
Accounts and Notes Receivable
Accounts and notes receivable are shown in the accompanying Consolidated Balance Sheet, net of allowance for doubtful accounts. The allowance for doubtful accounts is generally established during the period in which receivables are recognized and is based on the age of the receivables and management’s judgment on our ability to collect. Management considers the historical trends of write-offs and recoveries of previously written-off accounts, the financial strength of customers and projected economic and market conditions. We determine the delinquency status of receivables predominantly based on contractual terms and we write-off uncollectible receivables after management’s review of our ability to collect, as noted above. We have no significant concentrations of credit risk within our accounts and notes receivable.
Inventories
Inventory costs include material, labor, depreciation and plantcapitalized overhead. Inventories of $360.7$465.5 million and $343.5$302.2 million as of December 31, 20192022 and 2018,2021, respectively, were valued at the lower of cost or net realizable value using the last-in, first-out (“LIFO”) cost method. The remainder of inventory is valued at the lower of cost or net realizable value with cost determined primarily using either the first-in, first-out (“FIFO”) or average cost methods.
We elected to use the LIFO cost method for our domestic manufacturing companies in 1974 and continued to elect the LIFO cost method for new operations through the late 1980s. The types of inventory costs that use LIFO include raw materials, purchased components, work-in-process, repair parts and finished goods. Since the late 1990s, we have adopted the FIFO cost method for all new domestic manufacturing operations (primarily acquisitions). Our operating entities with a previous LIFO election continue to use the LIFO cost method. We use the FIFO cost method for our foreign-based manufacturing facilities. See Note 109 for more information on our inventories.
Property, Plant and Equipment
Property, plant and equipment is stated at cost, net of accumulated depreciation. Expenditures that increase the utility or extend the useful lives of fixed assets are capitalized while expenditures for maintenance and repairs are charged to expense as incurred.
Depreciation is computed using the straight-line method over the following estimated useful lives: | | | | | | | Buildings and improvements: | | | Buildings and improvements | 2 to 40 years | | Leasehold improvements | 1 to 39 years | | Machinery and equipment: | | | Computer hardware | 3 to 5 years | | Computer software | 3 to 10 years | | Factory machinery and equipment | 1 to 15 years | | Research and development equipment | 3 to 105 years | | Vehicles | 3 to 10 years |
We periodically review long-lived assets for impairment as events or changes in circumstances indicate that the carrying amount of such assets might not be recoverable. To assess recoverability, we compare the estimated expected future undiscounted cash flows identified with each long-lived asset or related asset group to the carrying amount of such assets. If the expected future cash flows do not exceed the carrying value of the asset or assets being reviewed, an impairment loss is recognized based on the excess of the carrying amount of the impaired assets over their fair value. See Note 109 for additional information on our property, plant and equipment.
Goodwill
Goodwill represents the excess of cost over fair value of assets from acquired businesses. Goodwill is not amortized, but is reviewed for impairment annually during the third quarter and whenever events or changes in circumstances indicate the asset may be impaired. See Note 109 for additional information on our goodwill.
The provisions of the accounting standard for goodwill allow us to first assess qualitative factors to determine whether it is necessary to perform a quantitative goodwill impairment test. As part of our qualitative assessment, we monitor economic, legal, regulatory and other factors, industry trends, our market capitalization, recent and forecasted financial performance of our reporting units and the timing and nature of our restructuring activities for LII asas a whole and for each reporting unit.
If a quantitative goodwill impairment test is determined to be necessary, we estimate reporting unit fair values using a combination of the discounted cash flow approach and a market approach. The discounted cash flows used to estimate fair value are based on assumptions regarding each reporting unit’s estimated projected future cash flows and the estimated weighted-average cost of capital that a market participant would use in evaluating the reporting unit in a purchase transaction. The estimated weighted-average cost of capital is based on the risk-free interest rate and other factors such as equity risk premiums and the ratio of total debt to equity capital. In performing these impairment tests, we take steps to ensure that appropriate and reasonable cash flow projections and assumptions are used. We reconcile our estimated enterprise value to our market capitalization and determine the reasonableness of the cost of capital used by comparing to market data. We also perform sensitivity analyses on the key assumptions used, such as the weighted-average cost of capital and terminal growth rates. The market approach is based on objective evidence of market values.
Intangible Assets
We amortize intangible assets and other assets with finite lives over their respective estimated useful lives to their estimated residual values, as follows:
| | | Asset | Useful Life | Deferred financing costs | Effective interest method | Customer relationships | Straight-line method up to 12 years | Patents and others | Straight-line method up to 20 years |
We periodically review intangible assets with estimable useful lives for impairment as events or changes in circumstances indicate that the carrying amount of such assets might not be recoverable. We assess recoverability by comparing the estimated expected undiscounted future cash flows identified with each intangible asset or related asset group to the carrying amount of such assets. If the expected future cash flows do not exceed the carrying value of the asset or assets being reviewed, an impairment loss is recognized based on the excess of the carrying amount of the impaired assets over their fair value. In assessing the fair
value of these intangible assets, we must make assumptions that a market participant would make regarding estimated future cash flows and other factors to determine the fair value of the respective assets. If these estimates or the related assumptions change, we may be required to record impairment charges for these assets in the future.
We review our indefinite-lived intangible assets for impairment annually in the fourth quarter and whenever events or changes in circumstances indicate the asset may be impaired. The provisions of the accounting standard for indefinite-lived intangible assets allow us to first assess qualitative factors to determine whether it is necessary to perform a quantitative impairment test. As part of our qualitative assessment, we monitor economic, legal, regulatory and other factors, industry trends, recent and forecasted financial performance of our reporting units and the timing and nature of our restructuring activities for LII as a whole and as they relate to the fair value of the assets.
Product Warranties
For some of our heating, ventilation and air conditioning (“HVAC”) products, we provide warranty terms ranging from one to 20 years to customers for certain components such as compressors or heat exchangers. For select products, we also provide limited lifetime warranties. A liability for estimated warranty expense is recorded in cost of goods sold on the date that revenue is recognized. Our estimates of future warranty costs are determined by product category. The number of units we expect to repair or replace is determined by applying an estimated failure rate, which is generally based on historical experience, to the number of units that were sold and are still under warranty. In most cases, the estimated units to be repaired under warranty are multiplied by the estimated cost of replacement parts to determine the estimated future warranty cost. We do not discount product warranty liabilities as the amounts are not fixed and the timing of future cash payments is neither fixed nor reliably determinable. We also provide for specifically-identified warranty obligations. Estimated future warranty costs are subject to adjustment depending on changes in actual failure rate and cost experience. Subsequent costs incurred for warranty claims serve to reduce the accrued product warranty liability. See Note 5 for more information on our estimated future warranty costs.
Pensions and Post-retirement Benefits
We provide pension and post-retirement medical benefits to eligible domestic and foreign employees and we recognize pension and post-retirement benefit costs over the estimated service life or average life expectancy of those employees. We also recognize the funded status of our benefit plans, as measured at year-end by the difference between plan assets at fair value and the benefit obligation, in the Consolidated Balance Sheet. Changes in the funded status are recognized in the year in which the changes occur through Accumulated other comprehensive loss (“AOCL”). Actuarial gains or losses are amortized into net period benefit cost over the estimated service life of covered employees or average life expectancy of participants depending on the plan. The benefit plan assets and liabilities reflect assumptions about the long-range performance of our benefit plans. Should actual results differ from management’s estimates, revisions to the benefit plan assets and liabilities would be required. See Note 1110 for information regarding those estimates and additional disclosures on pension and post-retirement medical benefits.
Self-Insurance Self-insurance expense and liabilities were actuarially determined based primarily on our historical claims information, industry factors, and trends. The self-insurance liabilities as of December 31, 20192022 represent the best estimate of the future payments to be made on reported and unreported losses for 20192022 and prior years. The amounts and timing of payments for claims reserved may vary depending on various factors, including the development and ultimate settlement of reported and unreported claims. To the extent actuarial assumptions change and claims experience rates differ from historical rates, our liabilities may change. See Note 5 for additional information on our self-insured risks and liabilities.
Derivatives
We use futures contracts, forward contracts and fixed forward contracts to mitigate our exposure to volatility in metal commodity prices and foreign exchange rates. We hedge only exposures in the ordinary course of business and do not hold or trade derivatives for profit. All derivatives are recognized in the Consolidated Balance Sheet at fair value and the classification of each derivative instrument is based upon whether the maturity of the instrument is less than or greater than 12 months. See Note 109 for more information on our derivatives.
40
Income Taxes
We recognize deferred tax assets and liabilities for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carry forwards.Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled.The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income in the period that includes the enactment date.Unrecognized tax benefits are accounted for as required by the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 740. See Note 1312 for more information related to income taxes.
Revenue Recognition
Our revenue recognition practices for the sale of goods depend upon the shipping terms for each transaction. Shipping terms are primarily FOB Shipping Point and, therefore, revenue is recognized for these transactions when products are shipped to customers and title and control passes. Certain customers in our smaller operations, primarily outside of North America, have shipping terms where risks and rewards of ownership do not transfer until the product is delivered to the customer. For these transactions, revenue is recognized on the date that the product is received and accepted by such customers. We experience
returns for miscellaneous reasons and record a reserve for these returns at the time we recognize revenue based on historical experience. Our historical rates of return are insignificant as a percentage of sales. We also recognize revenue net of sales taxes. We have elected to recognize the revenue and cost for freight and shipping when control over the sale of goods passes to our customers. See Note 98 for more information on our revenue recognition practices.
Cost of Goods Sold
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.
Selling, General and Administrative Expenses
SG&A expenses include payroll and benefit costs, advertising, commissions, research and development, information technology costs, and other selling, general and administrative related costs such as insurance, travel, non-production depreciation, and rent.
Stock-Based Compensation
We recognize compensation expense for stock-based arrangements over the required employee service periods. We measure stock-based compensation costs based on the estimated grant-date fair value of the stock-based awards that are expected to ultimately vest and we adjust expected vesting rates to actual rates as additional information becomes known. For stock-based arrangements with performance conditions, we periodically adjust performance achievement rates based on our best estimates of those rates at the end of the performance period. See Note 1615 for more information.
Translation of Foreign Currencies
All assets and liabilities of foreign subsidiaries and joint ventures are translated into U.S. dollars using rates of exchange in effect at the balance sheet date. Revenue and expenses are translated at weighted average exchange rates during the year. Unrealized translation gains and losses are included in AOCL in the accompanying Consolidated Balance Sheets. Transaction gains and losses are included in Losses (gains) and other expenses, net in the accompanying Consolidated Statements of Operations.
Use of Estimates
The preparation of financial statements requires us to make estimates and assumptions about future events. These estimates and the underlying assumptions affect the amounts of assets and liabilities reported, disclosures about contingent assets and liabilities, and reported amounts of revenue and expenses. Such estimates include the valuation of accounts receivable, inventories, goodwill, intangible assets and other long-lived assets, contingencies, product warranties, guarantee obligations, indemnifications, and assumptions used in the calculation of income taxes, pension and post-retirement medical benefits, and stock-based compensation among others. These estimates and assumptions are based on our best estimates and judgment.
We evaluate these estimates and assumptions on an ongoing basis using historical experience and other factors, including the current economic environment. We believe these estimates and assumptions to be reasonable under the circumstances and will adjust such estimates and assumptions when facts and circumstances dictate. Volatile equity, foreign currency and commodity
markets and uncertain future economic conditions combine to increase the uncertainty inherent in such estimates and assumptions. Future events and their effects cannot be determined with precision and actual results could differ significantly from these estimates. Changes in these estimates resulting from continuing changes in the economic environment will be reflected in the financial statements in future periods.
Recently Adopted Accounting PronouncementsImpact of COVID-19 Pandemic
On February 25, 2016,A novel strain of coronavirus (“COVID-19”) has surfaced and spread around the FASB issued ASU No. 2016-02, Leases (“ASC 842”). This accounting standard requires lessees to recognize a lease liabilityworld. The COVID-19 pandemic is creating supply chain disruptions and a right-of-use (“ROU”) asset on the balance sheet for operating leases. Accounting for finance leases is substantially unchanged. ASC 842 is effective for fiscal years beginning after December 15, 2018higher employee absenteeism in our factories and we adopted the standard effective January 1, 2019. The adoptiondistribution locations since 2020. We cannot predict whether any of ASC 842 had a material impact on our Consolidated Balance Sheet due to the recognition of operating lease liabilitiesmanufacturing, 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 the corresponding right-of-use assets. Refer to Note 5local governments will react if new variants of the Notes tovirus spread. If the Consolidated Financial Statements for additional information.
Changes in Accounting Standards Effective for Future Reporting Periods
In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. ASU 2016-13 replaces the incurred loss impairment methodology in current GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to estimate credit losses. ASU 2016-13 is effective for interim and annual periods beginning after December 15, 2019. We are currently assessing the impact of ASU 2016-13, but do not expect it to have a material impact on our financial statements.
In January 2017, the FASB issued ASU No. 2017-04, Intangible - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. ASU 2017-04 eliminates step two of the goodwill impairment test and specifies that goodwill impairment should be measured by comparing the fair value of a reporting unit with its carrying amount. Additionally, the amount of goodwill allocated to each reporting unit with a zero or negative carrying amount of net assets should be disclosed. ASU 2017-04 is effective for annual or interim goodwill impairment tests performed in fiscal years beginning after December 15, 2019. We do not expect the adoption of ASU 2017-04 to have a material impact on our financial statements.
In August 2018, the FASB issued ASU No. 2018-15, Intangibles - Internal-Use Software (Topic 350-40): Customer’s Accounting for Implementation Costs incurred in a Cloud Computing Arrangement That is a Service Contract. ASU 2018-15 provides guidance to determine how implementation costs associated with cloud computing arrangements that are incurred to develop or obtain internal-use software should be capitalized or expensed as incurred. ASU 2018-15 is effective for fiscal years beginning after December 15, 2019. We do not expect the adoption of ASU 2018-15 to have a material impact on our financial statements.
In December 2019, the FASB issued ASU No. 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes. ASU 2019-02, in an effort to reduce complexity in accounting for income taxes, removes certain exceptions for measuring intraperiod tax allocations, foreign subsidiary equity method investments and interim period tax losses. ASU 2019-12 is effective for calendar year-end public business entities on January 1, 2021. We are currently assessing the impact of ASU 2019-12, but do not expect it to have a material impact on our financial statements.
3. Reportable Business Segments:
Description of Segments
We operate in 3three reportable business segments of the heating, ventilation, air conditioning and refrigeration (“HVACR”)HVACR industry. Our segments are organized primarily by the nature of the products and services we provide. The following table describes each segment:
| | | | | | | | | | | | | | | | | | | | | | Segment | | Products or Services | | Markets Served | | Geographic Areas | | Residential Heating & Cooling | | Furnaces, air conditioners, heat pumps, packaged heating and cooling systems, indoor air quality equipment, comfort control products, replacement parts and supplies
| | Residential Replacement;
Residential New Construction
| | United States
Canada
| | Commercial Heating & Cooling | | Unitary heating and air conditioning equipment, applied systems, controls, installation and service of commercial heating and cooling equipment, variable refrigerant flow commercial products
| | Light Commercial
| | United States
Canada
| Refrigeration(2)(1) | | Condensing units, unit coolers, fluid coolers, air- cooled condensers, air handlers, process chillers, controls, and compressorized racks
| | Light Commercial;
Food Preservation;
Non-Food/Industrial
| | United States
Canada
Europe(1)
|
(1) Effective January 1, 2019,In November 2022, we realignedannounced the decision to explore strategic alternatives for our segment structure.European commercial HVAC and refrigeration businesses. We shifted financial reportingwill continue to invest in our Heatcraft Worldwide Refrigeration business which will become part of the European Commercial HVAC business from our Commercial Heating & Cooling segment to our Refrigeration segment asbeginning in 2023 and the European portfolio will be presented with Corporate and Other beginning in 2023 until disposition. As we will manage both our commercial HVAC and refrigeration operationsthe businesses in Europe together. We have revised our historical segmentthis manner beginning in 2023, we will present the financial results to present them on a comparable basis.
(2) Descriptions of the products, services, markets and geographic areas of divested businesses were excluded from this table. Refer to Note 7 for details regarding the divestitures of our Australia, Asia, South America and Kysor Warren businesses.revised segments beginning in 2023.
Segment Data
We use segment profit or loss as the primary measure of profitability to evaluate operating performance and to allocate capital resources. We define segment profit or loss as a segment’s income or loss from continuing operations before income taxes included in the accompanying Consolidated Statements of Operations, excluding certain items. The reconciliation below details the items excluded.
Our corporate costs include those costs related to corporate functions such as legal, internal audit, treasury, human resources, tax compliance and senior executive staff. Corporate costs also include the long-term, share-based incentive awards provided to employees throughout our business. We recorded these share-based awards as Corporate costs because they are determined at the discretion of the Board of Directors and based on the historical practice of doing so for internal reporting purposes.
Any intercompany sales and associated profit (and any other intercompany items) are eliminated from segment results. There were no significant intercompany eliminations included in the results presented in the table below.
Net sales and segment profit (loss) by segment, along with a reconciliation of segment profit (loss) to Operating income, are shown below (in millions): | | | | For the Years Ended December 31, | | For the Years Ended December 31, | | | 2019 | | 2018 | | 2017 | | 2022 | | 2021 | | 2020 | Net Sales (1) | | | | | | Net Sales (1) | | | | | | | Residential Heating & Cooling | $ | 2,291.1 |
| | $ | 2,225.0 |
| | $ | 2,140.4 |
| Residential Heating & Cooling | $ | 3,198.3 | | | $ | 2,775.6 | | | $ | 2,361.5 | | | Commercial Heating & Cooling | 947.4 |
| | 900.7 |
| | 819.5 |
| Commercial Heating & Cooling | 900.7 | | | 864.8 | | | 800.9 | | | Refrigeration | 568.7 |
| | 758.2 |
| | 879.7 |
| Refrigeration | 619.4 | | | 553.7 | | | 471.7 | | | | $ | 3,807.2 |
| | $ | 3,883.9 |
| | $ | 3,839.6 |
| | $ | 4,718.4 | | | $ | 4,194.1 | | | $ | 3,634.1 | | Segment profit (loss) (2) | | | | | | Segment profit (loss) (2) | | | | | | | Residential Heating & Cooling | $ | 464.6 |
| | $ | 399.4 |
| | $ | 373.9 |
| Residential Heating & Cooling | $ | 596.9 | | | $ | 540.3 | | | $ | 428.5 | | | Commercial Heating & Cooling | 165.4 |
| | 157.5 |
| | 149.3 |
| Commercial Heating & Cooling | 80.9 | | | 110.9 | | | 136.9 | | | Refrigeration | 61.3 |
| | 68.1 |
| | 80.6 |
| Refrigeration | 78.8 | | | 49.1 | | | 32.8 | | | Corporate and other | (82.4 | ) | | (84.4 | ) | | (89.2 | ) | Corporate and other | (90.8) | | | (96.4) | | | (91.5) | | | Total segment profit | 608.9 |
| | 540.6 |
| | 514.6 |
| Total segment profit | 665.8 | | | 603.9 | | | 506.7 | | | Reconciliation to Operating income: | | | | | | Reconciliation to Operating income: | | | Special inventory write down | — |
| | 0.2 |
| | — |
| | | Special product quality adjustments | (0.6 | ) | | — |
| | 5.4 |
| Special product quality adjustments | — | | | (2.5) | | | 1.0 | | | Loss (gain), net on sale of businesses and related property | 10.6 |
| | 27.0 |
| | 1.1 |
| | | Insurance recoveries received for property damage incurred from natural disaster | (79.6 | ) | | (10.9 | ) | | — |
| | Items in (Gains) Losses and other expenses, net that are excluded from segment profit (loss) (2) | 11.3 |
| | 11.4 |
| | 10.4 |
| | | | Loss from natural disasters, net of insurance recoveries | | Loss from natural disasters, net of insurance recoveries | — | | | — | | | 3.1 | | Items in Losses (gains) and other expenses, net that are excluded from segment profit (loss) (2) | | Items in Losses (gains) and other expenses, net that are excluded from segment profit (loss) (2) | 8.1 | | | 14.3 | | | 13.3 | | | Restructuring charges | 10.3 |
| | 3.0 |
| | 3.2 |
| Restructuring charges | 1.5 | | | 1.8 | | | 10.8 | | | Operating income | $ | 656.9 |
| | $ | 509.9 |
| | $ | 494.5 |
| Operating income | $ | 656.2 | | | $ | 590.3 | | | $ | 478.5 | |
(1) On a consolidated basis, 0no revenue from transactions with a single customer were 10% or greater of our consolidated net sales for any of the periods presented.
(2) We define segment profit (loss) as a segment’s operating income included in the accompanying Consolidated Statements of Operations, excluding: •The following items in Losses (gains)(Gains) losses and other expenses, net: | | ◦ | Net change in unrealized losses (gains) on unsettled futures contracts, |
| | ◦ | Special legal contingency charges, |
| | ◦ | Asbestos-related litigation, |
| | ◦ | Environmental liabilities, |
◦Net change in unrealized (gains) losses on unsettled futures contracts, ◦Environmental liabilities and special litigation charges, ◦Charges incurred related to COVID-19 pandemic, and ◦Other items, net, •Special inventory write down, | | • | Special product quality adjustments
|
Loss (gain), net on sale of businesses and related property,
Insurance recoveries received for property damage incurred•Loss from natural disaster,disasters, net of insurance recoveries
•Restructuring charges, and Restructuring charges.
Total assets by segment are shown below (in millions): | | | | | | | | | | | | | | | | | | | As of December 31, | | 2022 | | 2021 | | 2020 | | Total Assets: | | | | | | | Residential Heating & Cooling | $ | 1,456.4 | | | $ | 1,149.7 | | | $ | 1,034.6 | | | Commercial Heating & Cooling | 456.4 | | | 366.2 | | | 366.5 | | | Refrigeration | 443.6 | | | 426.6 | | | 387.9 | | | Corporate and other | 211.2 | | | 229.4 | | | 243.5 | | | Total assets | $ | 2,567.6 | | | $ | 2,171.9 | | | $ | 2,032.5 | |
| | | | | | | | | | | | | | | As of December 31, | | | 2019 | | 2018 | | 2017 | | Total Assets: | | | | | | | Residential Heating & Cooling | $ | 1,055.7 |
| | $ | 837.4 |
| | $ | 771.3 |
| | Commercial Heating & Cooling | 409.0 |
| | 349.5 |
| | 324.3 |
| | Refrigeration | 393.3 |
| | 462.9 |
| | 626.5 |
| | Corporate and other | 176.9 |
| | 167.4 |
| | 169.4 |
| | Total assets | $ | 2,034.9 |
| | $ | 1,817.2 |
| | $ | 1,891.5 |
|
The assets in the Corporate and other segment primarily consist of cash, short-term investments and deferred tax assets. Assets
recorded in the operating segments represent those assets directly associated with those segments.
Total capital expenditures by segment are shown below (in millions): | | | | | | | | | | | | | | | For the Years Ended December 31, | | | 2019 | | 2018 | | 2017 | | Capital Expenditures: | | | | | | | Residential Heating & Cooling | $ | 59.2 |
| | $ | 45.2 |
| | $ | 38.9 |
| | Commercial Heating & Cooling | 11.3 |
| | 12.5 |
| | 14.7 |
| | Refrigeration | 9.4 |
| | 9.3 |
| | 11.8 |
| | Corporate and other | 25.7 |
| | 28.2 |
| | 32.9 |
| | Total capital expenditures | $ | 105.6 |
| | $ | 95.2 |
| | $ | 98.3 |
|
44
| | | | | | | | | | | | | | | | | | | For the Years Ended December 31, | | 2022 | | 2021 | | 2020 | | Capital Expenditures: | | | | | | | Residential Heating & Cooling | $ | 42.4 | | | $ | 70.0 | | | $ | 44.0 | | | Commercial Heating & Cooling | 21.5 | | | 4.3 | | | 5.9 | | | Refrigeration | 11.2 | | | 11.5 | | | 9.2 | | | Corporate and other | 26.0 | | | 21.0 | | | 19.4 | | | Total capital expenditures | $ | 101.1 | | | $ | 106.8 | | | $ | 78.5 | |
Depreciation and amortization expenses by segment are shown below (in millions): | | | | | | | | | | | | | | | | | | | For the Years Ended December 31, | | 2022 | | 2021 | | 2020 | | Depreciation and Amortization: | | | | | | | Residential Heating & Cooling | $ | 31.5 | | | $ | 27.6 | | | $ | 28.5 | | | Commercial Heating & Cooling | 12.9 | | | 13.2 | | | 13.5 | | | Refrigeration | 9.1 | | | 7.8 | | | 7.8 | | | Corporate and other | 24.4 | | | 23.8 | | | 22.8 | | | Total depreciation and amortization | $ | 77.9 | | | $ | 72.4 | | | $ | 72.6 | |
| | | | | | | | | | | | | | | For the Years Ended December 31, | | | 2019 | | 2018 | | 2017 | | Depreciation and Amortization: | | | | | | | Residential Heating & Cooling | $ | 30.0 |
| | $ | 26.6 |
| | $ | 24.9 |
| | Commercial Heating & Cooling | 12.5 |
| | 8.6 |
| | 8.6 |
| | Refrigeration | 7.9 |
| | 8.9 |
| | 11.4 |
| | Corporate and other | 20.7 |
| | 21.9 |
| | 19.7 |
| | Total depreciation and amortization | $ | 71.1 |
| | $ | 66.0 |
| | $ | 64.6 |
|
The equity method investments are shown below (in millions): | | | | | | | | | | | | | | | | | | | For the Years Ended December 31, | | 2022 | | 2021 | | 2020 | | Income from Equity Method Investments: | | | | | | | Residential Heating & Cooling | $ | 0.9 | | | $ | 6.9 | | | $ | 11.4 | | | Commercial Heating & Cooling | 0.2 | | | 1.2 | | | 2.3 | | | Refrigeration | 4.0 | | | 3.7 | | | 1.9 | | | Total income from equity method investments | $ | 5.1 | | | $ | 11.8 | | | $ | 15.6 | |
| | | | | | | | | | | | | | | For the Years Ended December 31, | | | 2019 | | 2018 | | 2017 | | Income from Equity Method Investments: | | | | | | | Residential Heating & Cooling | $ | 8.8 |
| | $ | 8.5 |
| | $ | 11.7 |
| | Commercial Heating & Cooling | 1.7 |
| | 1.4 |
| | 2.8 |
| | Refrigeration | 2.9 |
| | 2.1 |
| | 3.9 |
| | Total income from equity method investments | $ | 13.4 |
| | $ | 12.0 |
| | $ | 18.4 |
|
Geographic Information
Property, plant and equipment, net for each major geographic area in which we operate, based on the domicile of our operations, are shown below (in millions): | | | | | | | | | | | | | | | | | | | As of December 31, | | 2022 | | 2021 | | 2020 | | Property, Plant and Equipment, net: | | | | | | | United States | $ | 408.8 | | | $ | 381.0 | | | $ | 352.9 | | | Mexico | 110.9 | | | 102.7 | | | 79.2 | | | Canada | 2.1 | | | 2.1 | | | 2.2 | | | Other international | 27.1 | | | 29.3 | | | 30.0 | | | Total Property, plant and equipment, net | $ | 548.9 | | | $ | 515.1 | | | $ | 464.3 | |
| | | | | | | | | | | | | | | As of December 31, | | | 2019 | | 2018 | | 2017 | | Property, Plant and Equipment, net: | | | | | | | United States | $ | 333.6 |
| | $ | 293.3 |
| | $ | 257.6 |
| | Mexico | 82.0 |
| | 86.7 |
| | 79.8 |
| | Canada | 2.2 |
| | 1.7 |
| | 1.7 |
| | Other international | 27.6 |
| | 26.6 |
| | 58.7 |
| | Total Property, plant and equipment, net | $ | 445.4 |
| | $ | 408.3 |
| | $ | 397.8 |
|
4. Earnings Per Share:
Basic earnings per share are computed by dividing net income by the weighted-average number of common shares outstanding during the period. Diluted earnings per share are computed by dividing net income by the sum of the weighted-average number of shares and the number of equivalent shares assumed outstanding, if dilutive, under our stock-based compensation plans.
The computations of basic and diluted earnings per share for Income from continuing operations were as follows (in millions, except per share data): | | | | | | | | | | | | | | | For the Years Ended December 31, | | | 2019 | | 2018 | | 2017 | | Net income | $ | 408.7 |
| | $ | 359.0 |
| | $ | 305.7 |
| | Add: Loss from discontinued operations | 0.1 |
| | 1.3 |
| | 1.4 |
| | Income from continuing operations | $ | 408.8 |
| | $ | 360.3 |
| | $ | 307.1 |
| | | | | | | | | Weighted-average shares outstanding – basic | 39.0 |
| | 40.6 |
| | 42.2 |
| | Add: Potential effect of diluted securities attributable to stock-based payments | 0.4 |
| | 0.5 |
| | 0.6 |
| | Weighted-average shares outstanding – diluted | 39.4 |
| | 41.1 |
| | 42.8 |
| | | | | | | | | Earnings per share - Basic: | | | | | | | Income from continuing operations | $ | 10.49 |
| | $ | 8.87 |
| | $ | 7.28 |
| | Loss from discontinued operations | — |
| | (0.03 | ) | | (0.03 | ) | | Net income | $ | 10.49 |
| | $ | 8.84 |
| | $ | 7.25 |
| | | | | | | | | Earnings per share - Diluted: | | | | | | | Income from continuing operations | $ | 10.38 |
| | $ | 8.77 |
| | $ | 7.17 |
| | Loss from discontinued operations | — |
| | (0.03 | ) | | (0.03 | ) | | Net income | $ | 10.38 |
| | $ | 8.74 |
| | $ | 7.14 |
|
| | | | | | | | | | | | | | | | | | | | For the Years Ended December 31, | | | 2022 | | 2021 | | 2020 | | Net income | $ | 497.1 | | | $ | 464.0 | | | $ | 356.3 | | | Add: Loss from discontinued operations | — | | | — | | | 0.8 | | | Income from continuing operations | $ | 497.1 | | | $ | 464.0 | | | $ | 357.1 | | | | | | | | | Weighted-average shares outstanding – basic | 35.7 | | | 37.2 | | | 38.3 | | | Add: Potential effect of diluted securities attributable to stock-based payments | 0.1 | | | 0.3 | | | 0.3 | | | Weighted-average shares outstanding – diluted | 35.8 | | | 37.5 | | | 38.6 | | | | | | | | | Earnings per share - Basic: | | | | | | | Income from continuing operations | $ | 13.92 | | | $ | 12.47 | | | $ | 9.32 | | | Loss from discontinued operations | — | | | — | | | (0.02) | | | Net income | $ | 13.92 | | | $ | 12.47 | | | $ | 9.30 | | | | | | | | | Earnings per share - Diluted: | | | | | | | Income from continuing operations | $ | 13.88 | | | $ | 12.39 | | | $ | 9.26 | | | Loss from discontinued operations | — | | | — | | | (0.02) | | | Net income | $ | 13.88 | | | $ | 12.39 | | | $ | 9.24 | |
An insignificant number of stock appreciation rights and Restricted Stock UnitsThere were 0.3 million securities in 2022 that were outstanding but not included in the diluted earnings per share calculation becauseas the assumed exercise of such rights would have been anti-dilutive.
5. Commitments and Contingencies:
Leases We adopted ASC 842 on January 1, 2019, using the modified retrospective method, with the cumulative-effect adjustment to the opening balance sheet of retained earnings as of the effective date. The financial results reported in periods prior to January 1, 2019 are unchanged. Upon adoption, we recognized almost all of our leases greater than one year in duration on the balance sheet as right-of-use assets and lease liabilities. For income statement purposes, the FASB retained a dual model, requiring leases to be classified as either operating or finance. Classification is based on criteria that are largely similar to those previously applied. We have made certain assumptions in judgments when applying ASC 842. Those judgments of most significance are as follows:
We elected the package of practical expedients available for transition which allow us to not reassess:
| | ◦ | Whether expired or existing contracts contain leases under the new definition of a lease; |
| | ◦ | Lease classification for expired or existing leases; and |
| | ◦ | Whether previously capitalized initial direct costs would qualify for capitalization under ASC 842. |
We did not elect to use hindsight for transition when considering judgments and estimates such as assessments of lessee options to extend or terminate a lease or purchase the underlying asset.
We did not elect to reassess whether land easements meet the definition of a lease if they were not accounted for as leases under the former rules.
For all asset classes, we elected to not recognize a right-of-use asset and lease liability for leases with a term of 12 months or less.
For all asset classes, we elected to not separate non-lease components from lease components to which they relate and have accounted for the combined lease and non-lease components as a single lease component.
We determine if an arrangement is a lease at inception. Operating leases are included in our Consolidated Balance Sheet as of December 31, 2019 as Right-of-use assets from operating leases, Current operating lease liabilities and Long-term operating lease liabilities. Finance leases are included in Property, plant and equipment, Current maturities of long-term debt and Long-term debt in our Consolidated Balance Sheet. Many of our lease agreements contain renewal options; however, we do not recognize right-of-use assets or lease liabilities for renewal periods unless it is determined that we are reasonably certain of renewing the lease at inception or when a triggering event occurs. Some of our lease agreements contain rent escalation clauses (including index-based escalations), rent holidays, capital improvement funding or other lease concessions. We recognize our minimum rental expense on a straight-line basis based on the fixed components of a lease arrangement. We amortize this expense over the term of the lease beginning with the date of initial possession, which is the date we enter the leased space and begin to make improvements in preparation for its intended use. Variable lease components represent amounts that are not fixed in nature and are not tied to an index or rate, and are recognized as incurred.
Under certain of our third-party service agreements, we control a specific space or underlying asset used in providing the service by the third-party service provider. These arrangements meet the definition under ASC 842 and therefore are accounted for under ASC 842.
In determining our right-of-use assets and lease liabilities, we apply a discount rate to the minimum lease payments within each lease agreement. ASC 842 requires us to use the rate of interest that a lessee would have to pay to borrow on a collateralized basis over a similar term an amount equal to the lease payments in a similar economic environment. When we cannot readily determine the discount rate implicit in the lease agreement, we utilize our incremental borrowing rate. To estimate our specific incremental borrowing rates over various tenors (ranging from 1-year through 30-years), a comparable market yield curve consistent with our credit quality was calibrated to our publicly outstanding debt instruments.
We lease certain real and personal property under non-cancelable operating leases. Approximately 74%81% of our right-of-use assets and lease liabilities relate to our leases of real estate with the remaining amounts relating to our leases of IT equipment, fleet vehicles and manufacturing and distribution equipment.
The components of lease expense were as follows (in millions): | | | | | | | | | | | | | | | | | | | | | | | | | For the Years Ended December 31, | | 2022 | | 2021 | | 2020 | | Finance lease cost: | | | | | | | Amortization of right-of-use assets | $ | 13.2 | | | $ | 11.9 | | | $ | 10.3 | | | Interest on lease liabilities | 0.7 | | | 0.5 | | | 0.7 | | | Operating lease cost | 67.7 | | | 62.2 | | | 62.7 | | | Short-term lease cost | 5.0 | | | 3.8 | | | 4.0 | | | Variable lease cost | 24.5 | | | 21.6 | | | 20.3 | | | | | | | | | Total lease cost | $ | 111.1 | | | $ | 100.0 | | | $ | 98.0 | | | | | | | | | Other information | | | | | | | Cash paid for amounts included in the measurement lease liabilities: | | | | | | | | | | | | | Operating cash flows from operating leases | $ | 66.0 | | | $ | 61.8 | | | $ | 61.6 | | | Financing cash flows from finance leases | $ | 13.6 | | | $ | 12.3 | | | $ | 10.8 | | | Right-of-use assets obtained in exchange for new finance lease liabilities | $ | 14.4 | | | $ | 14.6 | | | $ | 15.4 | | | Right-of-use assets obtained in exchange for new operating lease liabilities | $ | 98.8 | | | $ | 61.8 | | | $ | 67.6 | |
| | | | | | | For the Year Ended December 31, 2019 | | Finance lease cost: | | | Amortization of right-of-use assets | $ | 7.6 |
| | Interest on lease liabilities | 0.9 |
| | Operating lease cost | 59.7 |
| | Short-term lease cost | 4.3 |
| | Variable lease cost | 19.9 |
| | Total lease cost | $ | 92.4 |
| | | | | Other information | | | Cash paid for amounts included in the measurement lease liabilities: | | | Operating cash flows from operating leases | $ | 58.1 |
| | Financing cash flows from finance leases | 6.4 |
| | Right-of-use assets obtained in exchange for new finance lease liabilities | 13.4 |
| | Right-of-use assets obtained in exchange for new operating lease liabilities | 51.5 |
|
| | | | | | | As of December 31, 2019 | | Finance lease right-of-use assets | $ | 28.4 |
| | Operating lease right-of-use assets | $ | 181.6 |
| | Finance lease liability, current | $ | 7.8 |
| | Finance lease liability, non-current | $ | 25.9 |
| | Operating lease liability, current | $ | 52.7 |
| | Operating lease liability, non-current | $ | 131.0 |
| | Weighted-average remaining lease term - finance leases | 4.9 years |
| | Weighted-average remaining lease term - operating leases | 4.5 years |
| | Weighted-average discount rate - finance leases | 2.71 | % | | Weighted-average discount rate – operating leases | 3.69 | % |
| | | | | | | | | | | | | | | | | As of December 31, | | 2022 | | 2021 | Finance lease right-of-use assets(1) | $ | 33.3 | | | $ | 34.5 | | | Operating lease right-of-use assets | $ | 219.9 | | | $ | 196.1 | | Finance lease liability, current(2) | $ | 11.2 | | | $ | 11.3 | | Finance lease liability, non-current(3) | $ | 28.3 | | | $ | 29.0 | | | Operating lease liability, current | $ | 63.3 | | | $ | 54.8 | | | Operating lease liability, non-current | $ | 161.8 | | | $ | 145.0 | | | Weighted-average remaining lease term - finance leases | 3.6 years | | 3.9 years | | Weighted-average remaining lease term - operating leases | 5.1 years | | 4.5 years | | Weighted-average discount rate - finance leases | 1.92 | % | | 1.14 | % | | Weighted-average discount rate – operating leases | 3.44 | % | | 2.62 | % | | (1) Recorded in Property, plant and equipments in Consolidated Balance Sheet | | (2) Recorded in Current maturities of long-term debt in Consolidated Balance Sheet | | (3) Recorded in Long-term debt in Consolidated Balance Sheet |
Future annual minimum lease payments and finance lease commitments as of December 31, 20192022 were as follows (in millions): | | | | | | | | | | | | | Operating Leases | | Finance Leases | | 2023 | $ | 70.0 | | | $ | 11.6 | | | 2024 | 53.2 | | | 8.4 | | | 2025 | 36.9 | | | 5.8 | | | 2026 | 29.0 | | | 2.5 | | | 2027 | 18.9 | | | 0.3 | | | Thereafter | 40.1 | | | 11.7 | | | Total minimum lease payments | $ | 248.1 | | | $ | 40.3 | | | Less imputed interest | (23.0) | | | (0.8) | | | Present value of minimum payments | $ | 225.1 | | | $ | 39.5 | |
| | | | | | | | | | | Operating Leases | | Finance Leases | | 2020 | $ | 58.4 |
| | $ | 8.4 |
| | 2021 | 46.3 |
| | 6.8 |
| | 2022 | 33.8 |
| | 4.9 |
| | 2023 | 26.7 |
| | 2.5 |
| | 2024 | 17.0 |
| | 0.6 |
| | Thereafter | 17.1 |
| | 11.7 |
| | Total minimum lease payments | $ | 199.3 |
| | $ | 34.9 |
| | Less imputed interest | (15.6 | ) | | (1.2 | ) | | Present value of minimum payments | $ | 183.7 |
| | $ | 33.7 |
|
The Company adopted ASU 2016-02 on January 1, 2019 as noted above, and as required, the following disclosure is provided for periods prior to adoption. Future annual minimum lease payments and capital lease commitments as of December 31, 2018 were as follows (in millions):
| | | | | | | | | | | Operating Leases | | Capital Leases | | 2019 | $ | 47.4 |
| | $ | 6.6 |
| | 2020 | 38.4 |
| | 5.4 |
| | 2021 | 27.2 |
| | 3.8 |
| | 2022 | 17.9 |
| | 2.1 |
| | 2023 | 12.7 |
| | 0.9 |
| | Thereafter | 16.1 |
| | 12.8 |
| | Total minimum lease payments | $ | 159.7 |
| | $ | 31.6 |
| | Less amount representing interest | | | (2.1 | ) | | Present value of minimum payments | | | $ | 29.5 |
|
On March 1, 2019, we entered into an agreement with a financial institution to renew the lease of our corporate headquarters in Richardson, Texas for a term of five years through March 1, 2024 (the “Lake Park Renewal”). The leased property consists of an office building of approximately 192,000 square feet, land and related improvements. During the lease term, we are obligated to pay base rent in quarterly installments, payable in arrears. At the end of the lease term, we must do one of the following: (i) purchase the property for $41.2 million; (ii) vacate the property and return it in good condition; (iii) arrange for the sale of the leased property to a third party; or (iv) renew the lease under mutually agreeable terms. If we elect to sell the property to a third party and the sales proceeds are less than the lease balance of $41.2 million, we must pay any such deficit to the financial institution. Any such deficit payment cannot exceed 87% of the lease balance. The headquarters lease is classified as an operating lease and its future annual minimum lease payments are included in the table above.
Our obligations under the Lake Park Renewal are secured by a pledge of our interest in the leased property. The Lake Park Renewal contains customary lease covenants and events of default as well as events of default if (i) indebtedness of $75 million or more is not paid when due, (ii) there is a change of control or (iii) we fail to comply with certain covenants incorporated from our existing credit facility agreement.Credit Agreement. We believe we were in compliance with these financial covenants as of December 31, 2019.2022.
In 2008, we expanded our Tifton, Georgia manufacturing facility using the proceeds from industrial development bonds (“IDBs”). We entered into a lease agreement with the owner of the property and the issuer of the IDBs, and through our lease payments fund the interest payments to investors in the IDBs. We also guaranteed the repayment of the IDBs and have outstanding letters of credit totaling $11.7 million to fund a potential repurchase of the IDBs in the event investors exercised their right to tender the IDBs to the trustee. We had finance lease obligations of $11.7 million related to these transactions as of December 31, 2019 and 2018.
Environmental
Environmental laws and regulations in the locations we operate can potentially impose obligations to remediate hazardous substances at our properties, properties formerly owned or operated by us, and facilities to which we have sent or send waste for treatment or disposal. We are aware of contamination at some facilities; however, we do not believe that any future remediation related to those facilities will be material to our results of operations. Total environmental accruals are included Accrued expenses and Other liabilities on the accompanying Consolidated Balance Sheets. Future environmental costs are estimates and may be subject to change due to changes in environmental remediation regulations, technology or site-specific requirements.
Product Warranties and Product Related Contingencies
We incur the risk of liability for claims related to the installation and service of heating and air conditioning products, and we maintain liabilities for those claims that we self-insure. We are involved in various claims and lawsuits related to our products. Our product liability insurance policies have limits that, if exceeded, may result in substantial costs that could have an adverse effect on our results of operations. In addition, warranty claims and certain product liability claims are not covered by our product liability insurance.
Total product warranty liabilities related to continuing operations are included in the following captions on the accompanying Consolidated Balance Sheets (in millions): | | | | | | | | | | | | | As of December 31, | | 2022 | | 2021 | | Accrued expenses | $ | 41.3 | | | $ | 37.2 | | | Other liabilities | 101.4 | | | 97.0 | | | Total product warranty liabilities | $ | 142.7 | | | $ | 134.2 | |
| | | | | | | | | | | As of December 31, | | | 2019 | | 2018 | | Accrued expenses | $ | 38.2 |
| | $ | 37.9 |
| | Other liabilities | 74.6 |
| | 73.7 |
| | Total product warranty liabilities | $ | 112.8 |
| | $ | 111.6 |
|
The changes in product warranty liabilities related to continuing operations for the years ended December 31, 20192022 and 20182021 were as follows (in millions): | | | | | | Total warranty liability as of December 31, 2017 | $ | 109.9 |
| | Payments made in 2018 | (31.6 | ) | | Changes resulting from issuance of new warranties | 36.8 |
| | Changes in estimates associated with pre-existing liabilities | (1.5 | ) | | Changes in foreign currency translation rates and other | (0.8 | ) | | Warranty liability from divestitures | (1.2 | ) | | Total warranty liability as of December 31, 2018 | $ | 111.6 |
| | Payments made in 2019 | (34.9 | ) | | Changes resulting from issuance of new warranties | 44.1 |
| | Changes in estimates associated with pre-existing liabilities | (7.6 | ) | | Changes in foreign currency translation rates and other | — |
| | Warranty liability from divestitures | (0.4 | ) | | Total warranty liability as of December 31, 2019 | $ | 112.8 |
|
| | | | | | | Total warranty liability as of December 31, 2020 | $ | 119.8 | | | Payments made in 2021 | (31.6) | | | Changes resulting from issuance of new warranties | 43.6 | | | Changes in estimates associated with pre-existing liabilities | 2.7 | | | Changes in foreign currency translation rates and other | (0.3) | | | | | Total warranty liability as of December 31, 2021 | $ | 134.2 | | | Payments made in 2022 | (36.3) | | | Changes resulting from issuance of new warranties | 50.5 | | | Changes in estimates associated with pre-existing liabilities | (4.7) | | | Changes in foreign currency translation rates and other | (1.0) | | | | | Total warranty liability as of December 31, 2022 | $ | 142.7 | |
We have incurred, and will likely continue to incur, product costs not covered by insurance or our suppliers’ warranties, which are not included in the table above. Also, to satisfy our customers and protect our brands, we have repaired or replaced installed products experiencing quality-related issues, and will likely continue such repairs and replacements.
During the second quarter of 2017, we identified a product quality issue in a defective vendor-supplied component affecting a product line in the Residential Heating & Cooling segment. This defect was isolated, the vendor is supplying corrected components, and we are manufacturing products with the corrected components. We incurred and recorded insignificant expenses associated with this product quality issue in 2017. In the second quarter of 2019, the vendor agreed to reimburse us for certain losses incurred due to this quality issue. These reimbursements include cash payments in 2019 and price reductions on annual qualifying purchases from this vendor through 2024.
Self-Insurance
We use a combination of third-party insurance and self-insurance plans to provide protection against claims relating to workers’ compensation/employers’ liability, general liability, product liability, auto liability, auto physical damage and other exposures. We use large deductible insurance plans, written through third-party insurance providers, for workers’ compensation/employers’ liability, general liability, product liability and auto liability. We also carry umbrella or excess liability insurance for all third-party and self-insurance plans, except for directors’ and officers’ liability, property damage and certain other insurance programs. For directors’ and officers’ liability, property damage and certain other exposures, we use third-party insurance plans that may include per occurrence and annual aggregate limits. We believe the deductibles and liability limits for all of our insurance policies are appropriate for our business and are adequate for companies of our size in our industry.
We maintain safety and manufacturing programs that are designed to remove risk, improve the effectiveness of our business processes and reduce the likelihood and significance of our various retained and insured risks. In recent years, our actual claims experience has collectively trended favorably and, as a result, both self-insurance expense and the related liability have decreased.
Total self-insurance liabilities were included in the following captions on the accompanying Consolidated Balance Sheets (in millions): | | | | | | | | | | | | | As of December 31, | | 2022 | | 2021 | | Accrued expenses | $ | 3.0 | | | $ | 3.2 | | | Other liabilities | 14.6 | | | 15.7 | | | Total self-insurance liabilities | $ | 17.6 | | | $ | 18.9 | |
| | | | | | | | | | | As of December 31, | | | 2019 | | 2018 | | Accrued expenses | $ | 5.2 |
| | $ | 6.0 |
| | Other liabilities | 19.4 |
| | 19.5 |
| | Total self-insurance liabilities | $ | 24.6 |
| | $ | 25.5 |
|
Litigation
We are involved in a number of claims and lawsuits incident to the operation of our businesses. Insurance coverages are maintained and estimated costs are recorded for such claims and lawsuits, including costs to settle claims and lawsuits, based on experience involving similar matters and specific facts known.
Some of these claims and lawsuits allege personal injury or health problems resulting from exposure to asbestos that was integrated into certain of our products. We have never manufactured asbestos and have not incorporated asbestos-containing components into our products for several decades. A substantial majority of these asbestos-related claims have been covered by insurance or other forms of indemnity or have been dismissed without payment. The remainder of our closed cases have been resolved for amounts that are not material, individually or in the aggregate.
Our defense costs for asbestos-related claims are generally covered by insurance; however, our insurance coverage for settlements and judgments for asbestos-related claims vary depending on several factors, and are subject to policy limits, so we may have greater financial exposure for future settlements and judgments. For the years ended December 31, 2019 and 2018, we estimated our probable liability for known cases at $10.2 million and $9.7 million, respectively, and these amounts were recorded in Accrued expenses in the Consolidated Balance Sheets. For the years ended December 31, 2019 and 2018, we estimated future asbestos-related litigation cases to be $22.1 million and $19.3 million, respectively, before consideration of probable insurance recoveries and these amounts were recorded in Other liabilities in the Consolidated Balance Sheets. For the years ended December 31, 2019, 2018 and 2017, we recorded expense of $3.1 million, $4.0 million and $3.5 million, respectively, net of probable insurance recoveries, for known and future asbestos-related litigation and is recorded in Losses (gains) and other expenses, net in the Consolidated Statements of Operations.
It is management’s opinion that none of these claims or lawsuits or any threatened litigation will have a material adverse effect, individually or in the aggregate, on our financial condition, results of operations or cash flows. Claims and lawsuits, however, involve uncertainties and it is possible that their eventual outcome could adversely affect our results of operations in a future period.
Marshalltown Tornado and Recovery
On July 19, 2018, our manufacturing facility in Marshalltown, Iowa was severely damaged by a tornado. We have insurance for the repair or replacement of our assets that suffered damage or loss, and we worked closely with our insurance carriers and claims adjusters to ascertain the amount of insurance recoveries due to us as a result of the damage and loss we suffered. Our insurance policies also provide business interruption coverage, including lost profits, and reimbursement for other expenses and costs that have been incurred relating to the damages and losses suffered.
For the years ended December 31, 2019 and 2018, we incurred expenses and losses of $64.4 million and $86.0 million, respectively, related to damages caused by the tornado. These amounts included site clean-up and demolition, factory inefficiencies, freight to move product to other warehouses, professional fees, and sales and marketing promotional costs.
In December 2019, we reached a final settlement with our insurance carriers for the losses we suffered from the tornado. The settlement allowed for total cumulative insurance recoveries of $367.5 million, of which $243.2 million and $124.3 million were received in the years ended December 31, 2019 and 2018, respectively.
These costs and insurance recoveries are shown in Gain from insurance recoveries, net of losses incurred in the Consolidated Statements of Operations. The following table summarizes the Gain from insurance recoveries, net of losses incurred:
| | | | | | | | | | (Amounts in millions) | For the Year Ended December 31, | | | 2019 | | 2018 | | Insurance recoveries received | $ | 243.2 |
| | $ | 124.3 |
| | Less losses and expenses incurred: | | | | | Site clean-up and remediation | 20.4 |
| | 50.9 |
| | Factory inefficiencies due to lower productivity | 9.3 |
| | 7.4 |
| | Write-off of property, plant and equipment | — |
| | 4.2 |
| | Write-off of inventory | — |
| | 5.8 |
| | Other | 34.7 |
| | 17.7 |
| | Total losses and expenses | $ | 64.4 |
| | $ | 86.0 |
| | Gain from insurance recoveries, net of losses incurred | $ | 178.8 |
| | $ | 38.3 |
| | Components of Gain from insurance recoveries, net of losses incurred: | | | | | Insurance proceeds for lost profits | 99.2 |
| | 27.4 |
| | Insurance proceeds for property damage incurred from natural disaster | 79.6 |
| | 10.9 |
|
6. Stock Repurchases:
Our Board of Directors have authorized a total of $3$4 billion to repurchase shares of our common stock (collectively referred to as the “Share Repurchase Plans”), including an incremental $500 milliona $1.0 billion share repurchase authorization in December 2019, under our Share Repurchase Plans.July 2021. The Share Repurchase Plans allow us to repurchase shares from time to time in open market transactions and in privately negotiated transactions based on business, market, applicable legal requirements and other considerations. The Share Repurchase Plans do not require the repurchase of a specific number of shares and may be terminated at any time. As of December 31, 2019,2022, $546 million of shares may yet be repurchasedis available to repurchase shares under the Share Repurchase Plans.
We repurchased 0.4entered into multiple Fixed Dollar Accelerated Share Repurchase Transactions (the "ASR Agreements") to effect an accelerated stock buybacks of the Company's common stock in 2022. Under the ASR Agreements, we paid banks $300.0 million and the banks delivered to us common stock representing approximately 86% of the shares expected to be purchased under the ASR Agreement. After the ASR Agreements were completed, the banks delivered the remaining shares under the arrangement. The banks delivered a total of 1.3 million shares for $100.0 million during the first quarter of 2019, 0.6 million shares for $150.0 million during the second quarter of 2019 and 0.5 million shares for $150.0 million during the third quarter of 2019, respectively, from open market transactions.common stock repurchased under this ASR Agreement.
We also repurchased less than 0.1 million shares for $24.0$8.3 million, 0.1 million shares for $22.1 million, and 0.1 million shares for $26.9$17.9 million for the years ended December 31, 20192022, 2021, and 2018,2020, respectively, from employees who tendered their shares to satisfy minimum tax withholding obligation upon the vesting of stock-based compensation awards.
7. Divestitures:
2019 Divestiture:
During the first quarter of 2019, we obtained Board of Directors’ approval and signed an agreement with EPTA S.p.A., a private Italian company, for the sale of our Kysor Warren business. The sale was completed on March 29, 2019. The following table summarizes the net loss recognized in connection with this divestiture:
| | | | | | (Amounts in millions) | For the Year Ended December 31, 2019 | | Cash received from the buyer | $ | 49.0 |
| | Net assets sold | (52.0 | ) | | AOCI reclassification adjustments, primarily foreign currency translation | (2.1 | ) | | Direct costs to sell | (5.5 | ) | | Loss on sale of business | $ | (10.6 | ) |
2018 Divestitures:
Australia and Asia Divestiture
During the first quarter of 2018, we obtained Board of Directors’ approval and signed an agreement with Beijer Ref AB, a Stockholm Stock Exchange-listed company, for the sale of our Australia and Asia business except for the Milperra property. The Milperra property was sold to another purchaser during the second quarter of 2018. We completed the sale to Beijer Ref AB in the second quarter of 2018 with the final post-completion adjustment being recorded in the third quarter of 2018. The following table summarizes the net loss recognized in connection with this divestiture:
| | | | | | (Amounts in millions) | For the Year Ended December 31, 2018 | | Cash received from the buyer | $ | 82.9 |
| Net assets sold (1) | (87.2 | ) | | AOCL reclassification adjustments, primarily foreign currency translation | (3.2 | ) | | Direct costs to sell | (5.8 | ) | | Loss on sale of business | $ | (13.3 | ) |
(1)
Includes $10.3 million of net assets that were written down during the quarter ended March 31, 2018 based on the expected proceeds from the sale, net of selling costs for the sale for our Australia and Asia business.
The Milperra property was sold during the quarter ended June 30, 2018. We received net cash proceeds of $37.2 million net of direct costs to sell of $1.5 million. The net gain recognized in connection with this sale was $23.8 million.
South America Divestiture
During the second quarter of 2018, we obtained Board of Directors’ approval and signed an agreement with Elgin SA, a private Brazilian company, for the sale of our South America business. The sale was subject to Brazilian antitrust approval. We obtained antitrust approval and completed the sale to Elgin SA in the third quarter of 2018. The following table summarizes the net loss recognized in connection with this divestiture:
| | | | | | (Amounts in millions) | For the Year Ended December 31, 2018 | | Cash received from the buyer | $ | 4.2 |
| Net assets sold (2) | (14.1 | ) | | AOCL reclassification adjustments, primarily foreign currency translation | (24.7 | ) | | Direct costs to sell | (2.9 | ) | | Loss on sale of business | $ | (37.5 | ) |
(2) Includes $1.2 of net assets that were written down during the quarter ended June 30, 2018 based on the expected proceeds from the sale, net of selling costs for the sale for our South America business.
The total Loss (gain), net on sale of businesses and related property in our Consolidated Statements of Operations of $10.6 million for the year ended December 31, 2019 is comprised of the loss on the sale of the Kysor Warren business. The total Loss (gain), net on sale of businesses and related property for the year ended December 31, 2018 of $27.0 million is comprised of the $13.3 million loss on the sale of our Australia and Asia business, the $23.8 million gain on the sale of our Milperra property, and the $37.5 million loss on the sale of our South America business.
8. Restructuring Charges:
We record restructuring charges associated with management-approved restructuring plans to reorganize or to remove duplicative headcount and infrastructure within our businesses. Restructuring charges include severance costs to eliminate a specified number of employees, infrastructure charges to vacate facilities and consolidate operations, contract cancellation costs and other related activities. The timing of associated cash payments is dependent upon the type of restructuring charge and can extend over a multi-year period. Restructuring charges are not included in our calculation of segment profit (loss), as more fully explained in Note 3.
Restructuring Activities in 2019
In the third quarterWe recorded $1.5 million of 2019, the Commercial Heating & Cooling and Corporate segments incurred restructuring charges primarily relatedin 2022, $1.8 million 2021, and $10.8 million in 2020 from actions initiated in prior years including the economic impact of COVID-19. There is not expected to activitiesbe a material amount of costs expected to re-align resources and its product portfolio. In the fourth quarter of 2019, the Residential Heating & Cooling and Commercial Heating & Cooling segmentsbe incurred from existing restructuring charges, primarily related to activities to close certain Lennox Stores and related to reductions of management and support staff.actions in future periods.
Information regarding the restructuring charges for all ongoing activities are presented in the table below (in millions):
| | | | | | | | | | | | | | | Incurred in 2019 | | Incurred to Date | | Total Expected to be Incurred | | Severance and related expense | $ | 2.9 |
| | $ | 5.3 |
| | $ | 5.4 |
| | Asset write-offs and accelerated depreciation | 5.6 |
| | 5.6 |
| | 5.6 |
| | Accelerated depreciation on right-of-use assets from operating leases | 1.2 |
| | 1.9 |
| | 1.9 |
| | Other | 0.6 |
| | 0.6 |
| | 1.6 |
| | Total | $ | 10.3 |
| | $ | 13.4 |
| | $ | 14.5 |
|
While restructuring charges are excluded from our calculation of segment profit (loss), the table below presents the restructuring charges associated with each segment (in millions):
| | | | | | | | | | | | | | | Incurred in 2019 | | Incurred to Date | | Total Expected to be Incurred | | Residential Heating & Cooling | $ | 2.9 |
| | $ | 2.9 |
| | $ | 2.9 |
| | Commercial Heating & Cooling | 1.0 |
| | 2.7 |
| | 3.7 |
| | Refrigeration | 1.2 |
| | 2.6 |
| | 2.7 |
| | Corporate & Other | 5.2 |
| | 5.2 |
| | 5.2 |
| | Total | $ | 10.3 |
| | $ | 13.4 |
| | $ | 14.5 |
|
Restructuring accruals are included in Accrued expenses in the accompanying Consolidated Balance Sheets.
8. Revenue Recognition: 9. Revenue Recognition:
The following table disaggregates our revenue by business segment by geography which providesto provide information as to the major sources of revenue. See Note 3 for additional description of our reportable business segments and the products and services being sold in each segment.
| | | | | | | | | | | | | | | | | | | | | | | | | For the Year Ended December 31, 2022 | | Primary Geographic Markets | Residential Heating & Cooling | | Commercial Heating & Cooling | | Refrigeration | | Consolidated | | United States | $ | 2,957.1 | | | $ | 837.7 | | | $ | 385.7 | | | $ | 4,180.5 | | | Canada | 241.2 | | | 62.4 | | | — | | | 303.6 | | | International | — | | | 0.6 | | | 233.7 | | | 234.3 | | | Total | $ | 3,198.3 | | | $ | 900.7 | | | $ | 619.4 | | | $ | 4,718.4 | |
| | | | | | | | | | | | | | | | | | | | | | | | | For the Year Ended December 31, 2021 | | Primary Geographic Markets | Residential Heating & Cooling | | Commercial Heating & Cooling | | Refrigeration | | Consolidated | | United States | $ | 2,532.4 | | | $ | 790.1 | | | $ | 324.0 | | | $ | 3,646.5 | | | Canada | 243.2 | | | 73.1 | | | — | | | 316.3 | | | International | — | | | 1.6 | | | 229.7 | | | 231.3 | | | Total | $ | 2,775.6 | | | $ | 864.8 | | | $ | 553.7 | | | $ | 4,194.1 | |
| | | | | | | | | | | | | | | | | | | For the Year Ended December 31, 2019 | | Primary Geographic Markets | Residential Heating & Cooling | | Commercial Heating & Cooling | | Refrigeration | | Consolidated | | United States | $ | 2,135.6 |
| | $ | 847.1 |
| | $ | 321.9 |
| | $ | 3,304.6 |
| | Canada | 155.5 |
| | 98.5 |
| | 0.7 |
| | 254.7 |
| | International | — |
| | 1.8 |
| | 246.1 |
| | 247.9 |
| | Total | $ | 2,291.1 |
| | $ | 947.4 |
| | $ | 568.7 |
| | $ | 3,807.2 |
|
50
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | For the Year Ended December 31, 2020 | | Primary Geographic Markets | Residential Heating & Cooling | | Commercial Heating & Cooling | | Refrigeration | | Consolidated | | United States | $ | 2,181.8 | | | $ | 721.1 | | | $ | 257.9 | | | $ | 3,160.8 | | | Canada | 179.7 | | | 77.6 | | | — | | | 257.3 | | | International | — | | | 2.2 | | | 213.8 | | | 216.0 | | | Total | $ | 2,361.5 | | | $ | 800.9 | | | $ | 471.7 | | | $ | 3,634.1 | |
| | | | | | | | | | | | | | | | | | | For the Year Ended December 31, 2018 | | Primary Geographic Markets | Residential Heating & Cooling | | Commercial Heating & Cooling | | Refrigeration | | Consolidated | | United States | $ | 2,066.7 |
| | $ | 805.4 |
| | $ | 403.2 |
| | $ | 3,275.3 |
| | Canada | 158.3 |
| | 92.7 |
| | 4.5 |
| | 255.5 |
| | International | — |
| | 2.6 |
| | 350.5 |
| | 353.1 |
| | Total | $ | 2,225.0 |
| | $ | 900.7 |
| | $ | 758.2 |
| | $ | 3,883.9 |
|
Our revenue recognition practices for the sale of goods depend upon the shipping terms for each transaction. Shipping terms are primarily FOB Shipping Point and, therefore, revenue is recognized for these transactions when products are shipped to customers and title and control passes. Certain customers in our smaller operations, primarily outside of North America, have shipping terms where risks and rewards of ownership do not transfer until the product is delivered to the customer. For these transactions, revenue is recognized on the date that the product is received and accepted by such customers. We experience returns for miscellaneous reasons and record a reserve for these returns at the time we recognize revenue based on historical experience. Our historical rates of return are insignificant as a percentage of sales. We also recognize revenue net of sales taxes. We have elected to recognize the revenue and cost for freight and shipping when control over the sale of goods passes to our customers.
For our businesses that provide services, revenue is recognized at the time services are completed. Our Commercial Heating & Cooling segment also provides sales, installation, maintenance and repair services under fixed-price contracts. Revenue for services is recognized as the services are performed under the contract based on the relative fair value of the services provided. We allocate a portion of the revenue for extended labor warranty obligations and recognize the revenue over the term of the extended warranty. Revenue from extended warranties is insignificant. See Note 5 for more information on product warranties.
Residential Heating & Cooling - We manufacture and market a broad range of furnaces, air conditioners, heat pumps, packaged heating and cooling systems, equipment and accessories to improve indoor air quality, comfort control products, replacement parts and supplies and related products for both the residential replacement and new construction markets in North America. These products are sold under various brand names and are sold either through direct sales to a network of independent installing dealers, including through our network of Lennox stores or to independent distributors. For the years ended December 31, 20192022, 2021 and 2018,2020, direct sales represented 75%70%, 73% and 76%75% of revenues, respectively, and sales to independent distributors represented the remainder. Given the nature of our business, customer product orders are fulfilled at a point in time and not over a period of time.
Commercial Heating & Cooling - In North America, we manufacture and sell unitary heating and cooling equipment used in light commercial applications, such as low-rise office buildings, restaurants, retail centers, churches and schools. These products are distributed primarily through commercial contractors and directly to national account customers in the planned replacement, emergency replacement and new construction markets. Revenue for the products sold is recognized at a point in time when control transfers to the customer, which is generally at time of shipment. Lennox National Account Services provides installation, service and preventive maintenance for HVAC national account customers in the United States and Canada. Revenue related to service contracts is recognized as the services are performed under the contract based on the relative fair value of the services provided.
For the years ended December 31, 20192022, 2021 and 2018,2020, equipment sales represented 86%82%, 82% and 85% of revenues, respectively, and the remainder of our revenue was generated from our service business.
Refrigeration - We manufacture and market equipment for the global commercial refrigeration markets under the Heatcraft Worldwide Refrigeration name. Our products are used in the food retail, food service, cold storage as well as non-food refrigeration markets. We sell these products to distributors, installing contractors, engineering design firms, original equipment manufacturers and end-users. In Europe, we also manufacture and sell unitary heating and cooling products and applied systems. Substantially all segment revenue was related to these types of equipment and systems and is recognized at a point in time when control transfers to the customer, which is generally at time of shipment. Approximately 1% of segment revenue relates to services for start-up and commissioning activities.
Variable Consideration - We engage in cooperative advertising, customer rebate, and other miscellaneous programs that result in payments or credits being issued to our customers. We record these customer discounts and incentives as a reduction of sales when the sales are recorded. For certain cooperative advertising programs, we also receive an identifiable benefit (goods
(goods or services) in exchange for the consideration given, and, accordingly, record a ratable portion of the expenditure to SG&A expenses. All other advertising, promotions and marketing costs are expensed as incurred.
Other Judgments and Assumptions - On January 1, 2018, we adopted Accounting Standards Update No.2014-09, Revenue from Contracts with Customers (Topic 606), as amended and applied it to all contracts using the modified retrospective method. We recognized the cumulative effect of initially applying the new revenue standard as a $1.0 million reduction in the January 1, 2018, balance of retained earnings.We apply the practical expedient in ASC 606-10-50-14 and do not disclose information about remaining performance obligations that have original expected durations of one year or less. Applying the practical expedient in ASC 340-40-25-4, we recognize the incremental costs of obtaining contracts as an expense when incurred if the amortization period of the assets that we otherwise would have recognized is one year or less. These costs are included in SG&A expenses. ASC 606-10-32-18 allows us to not adjust the amount of consideration to be received in a contract for any significant financing component if we expect to receive payment within twelve months of transfer of control of goods or services. We have elected this expedient as we expect all consideration to be received in one year or less at contract inception. We have also elected not to provide the remaining performance obligations disclosures related to service contracts in accordance with the practical expedient in ASC 606-10-55-18. We recognize revenue in the amount to which the entity has a right to invoice and have adopted this election to not provide the remaining performance obligations related to service contracts.
Contract Assets - We do not have material amounts of contract assets since revenue is recognized as control of goods is transferred or as services are performed. There are a small number of installation services that may occur over a period of time, but that period of time is generally very short in duration and right of payment does not exist until the installation is completed. Any contract assets that may arise are recorded in Other assets in our Consolidated Balance Sheets.
Contract Liabilities - Our contract liabilities consist of advance payments and deferred revenue. Our contract liabilities are reported in a net position on a contract-by-contract basis at the end of each reporting period. We classify advance payments and deferred revenue as current or noncurrent based on the timing of when we expect to recognize revenue. Generally all contract liabilities are expected to be recognized within one year and are included in Accrued expenses in our Consolidated Balance Sheet. The noncurrent portion of deferred revenue is included in Other liabilities in our Consolidated Balance Sheets.
Net contract assets (liabilities) consisted of the following: | | | | | | | | | | | | | | | | | December 31, 2022 | | December 31, 2021 | | | | | | | | | | | | | | Contract liabilities - current | (9.6) | | | (10.2) | | | | | | | Contract liabilities - noncurrent | (6.4) | | | (5.5) | | | | | | | Total | $ | (16.0) | | | $ | (15.7) | | | | | |
| | | | | | | | | | | | | | | | | | December 31, 2019 | | December 31, 2018 | | $ Change | | % Change | | Contract assets | $ | — |
| | $ | 2.5 |
| | $ | (2.5 | ) | | (100.0 | )% | | Contract liabilities - current | (8.4 | ) | | (13.0 | ) | | 4.6 |
| | (35.4 | )% | | Contract liabilities - noncurrent | (5.9 | ) | | (5.9 | ) | | — |
| | — | % | | Total | $ | (14.3 | ) | | $ | (16.4 | ) | | $ | 2.1 |
| | |
For the years ended December 31, 20192022, 2021, and 2018,2020 we recognized revenue of $3.3$10.1 million, $3.6 million and $4.8$7.2 million related to our contract liabilities at January 1, 20192022, 2021 and 2018,2020, respectively. Impairment losses recognized in our receivables and contract assets were de minimis in 20182022, 2021 and 2019.
10.
9. Other Financial Statement Details:
Inventories The components of inventories are as follows (in millions): | | | | | | | | | | | | | As of December 31, | | 2022 | | 2021 | | Finished goods | $ | 534.6 | | | $ | 310.8 | | | Work in process | 8.9 | | | 12.4 | | | Raw materials and parts | 328.7 | | | 262.1 | | | Total | 872.2 | | | 585.3 | | | Excess of current cost over last-in, first-out cost | (119.2) | | | (74.4) | | | Total inventories, net | $ | 753.0 | | | $ | 510.9 | |
| | | | | | | | | | | As of December 31, | | | 2019 | | 2018 | | Finished goods | $ | 402.9 |
| | $ | 330.5 |
| | Work in process | 6.0 |
| | 10.0 |
| | Raw materials and parts | 198.8 |
| | 229.1 |
| | Total | 607.7 |
| | 569.6 |
| | Excess of current cost over last-in, first-out cost | (63.6 | ) | | (59.8 | ) | | Total inventories, net | $ | 544.1 |
| | $ | 509.8 |
|
The Company recorded a pre-tax gain of $0.2$0.7 million in 2019 and 02020 from LIFO inventory liquidations. There were no pre-tax gains or losses in 20182022 or 20172021 from LIFO inventory liquidations. Reserves for obsolete and slow-moving inventories were $19.2$34.9 million and $16.5$26.5 million at December 31, 20192022 and December 31, 2018,2021, respectively.
Goodwill The changes in the carrying amount of goodwill in 20192022 and 2018,2021, in total and by segment, are summarized in the table below (in millions): | | | Segment: | Balance at December 31, 2017 (1) | | Write-off due to divested businesses | | Changes in foreign currency translation rates | | Balance at December 31, 2018 | | Goodwill Reallocation (2) | | Changes in foreign currency translation rates | | Balance at December 31, 2019 | Segment: | Balance at December 31, 2020 (1) | | | Changes in foreign currency translation rates | | Balance at December 31, 2021 | | | Changes in foreign currency translation rates | | Balance at December 31, 2022 | | Residential Heating & Cooling | $ | 26.1 |
| | $ | — |
| | $ | — |
| | $ | 26.1 |
| | $ | — |
| | $ | — |
| | $ | 26.1 |
| Residential Heating & Cooling | $ | 26.1 | | | | $ | — | | | $ | 26.1 | | | | $ | — | | | $ | 26.1 | | | Commercial Heating & Cooling | 62.2 |
| | — |
| | (0.8 | ) | | 61.4 |
| | (0.3 | ) | | — |
| | 61.1 |
| Commercial Heating & Cooling | 61.1 | | | | — | | | 61.1 | | | | — | | | 61.1 | | | Refrigeration | 112.2 |
| | (11.5 | ) | | (1.6 | ) | | 99.1 |
| | 0.3 |
| | (0.1 | ) | | 99.3 |
| Refrigeration | 99.7 | | | | (0.3) | | | 99.4 | | | | (0.3) | | | 99.1 | | | | $ | 200.5 |
| | $ | (11.5 | ) | | $ | (2.4 | ) | | $ | 186.6 |
| | $ | — |
| | $ | (0.1 | ) | | $ | 186.5 |
| | $ | 186.9 | | | | $ | (0.3) | | | $ | 186.6 | | | | $ | (0.3) | | | $ | 186.3 | | |
(1) The goodwill balances in the table above are presented net of accumulated impairment charges of $21.2$32.7 million,, all of which relate to impairments in periods prior to 2017.2020. (2)
In 2019, we reorganized our external financial reporting structure by moving our European Commercial HVAC business from our Commercial segment to our Refrigeration segment as we manage both our commercial HVAC and refrigeration operations in Europe together. See Note 3 for additional information.
A qualitative review of impairment indicators was performed in 20192022 for the Residential Heating & Cooling, the Commercial Heating & Cooling, and the Refrigeration segments. Based on our impairment review, weWe did not record any goodwill impairments in 2019.2022, 2021, or 2020.
In 2018, we de-recognized $11.5 million of goodwill as a part of the completed sales of our Australia, Asia and South America businesses as discussed further in Note 7. We did not de-recognize any goodwill in 2017 or 2019 and we did not record any goodwill impairments related to continuing operations in 2017, 2018 or 2019.
Property, Plant and Equipment
Components of Property, plant and equipment, net were as follows (in millions): | | | | | | | | | | | | | As of December 31, | | 2022 | | 2021 | | Land | $ | 24.1 | | | $ | 24.0 | | | Buildings and improvements | 321.6 | | | 285.9 | | | Machinery and equipment | 964.7 | | | 946.5 | | | Finance leases | 66.5 | | | 63.5 | | | Construction in progress and equipment not yet in service | 92.8 | | | 84.0 | | | Total | 1,469.7 | | | 1,403.9 | | | Less accumulated depreciation | (920.8) | | | (888.8) | | | Property, plant and equipment, net | $ | 548.9 | | | $ | 515.1 | |
| | | | | | | | | | | As of December 31, | | | 2019 | | 2018 | | Land | $ | 23.7 |
| | $ | 25.5 |
| | Buildings and improvements | 242.9 |
| | 210.9 |
| | Machinery and equipment | 883.4 |
| | 838.6 |
| | Capital leases | 47.2 |
| | 49.9 |
| | Construction in progress and equipment not yet in service | 72.5 |
| | 61.9 |
| | Total | 1,269.7 |
| | 1,186.8 |
| | Less accumulated depreciation | (824.3 | ) | | (778.5 | ) | | Property, plant and equipment, net | $ | 445.4 |
| | $ | 408.3 |
|
In 2018, we impaired $4 million of property, plant and equipment at our Marshalltown facility that was damaged by a tornado. Refer to Note 5 for more information on the damage to our Marshalltown facility. NaNNo impairment charges were recorded in 20192022 or 2017.2021.
Accrued Expenses
The significant components of Accrued expenses are presented below (in millions): | | | | | | | | | | | | | As of December 31, | | 2022 | | 2021 | | Accrued rebates and promotions | 123.3 | | | 102.9 | | | Accrued compensation and benefits | $ | 90.7 | | | $ | 114.9 | | | Accrued warranties | 41.3 | | | 37.2 | | | Other | 33.8 | | | 32.0 | | | Accrued sales, use, property and VAT taxes | 26.8 | | | 26.9 | | | Accrued Freight | 19.0 | | | 12.0 | | | Accrued asbestos reserves | 14.3 | | | 13.1 | | | Deferred income | 9.6 | | | 10.2 | | | Derivative contracts | 9.0 | | | 1.0 | | | Accrued interest | 6.1 | | | 5.5 | | | Self insurance reserves | 3.0 | | | 3.2 | | | Total Accrued expenses | $ | 376.9 | | | $ | 358.9 | |
| | | | | | | | | | | As of December 31, | | | 2019 | | 2018 | | Accrued rebates and promotions | $ | 70.1 |
| | $ | 70.8 |
| | Accrued compensation and benefits | 70.4 |
| | 69.0 |
| | Accrued warranties | 38.2 |
| | 37.9 |
| | Accrued sales, use, property and VAT taxes | 18.6 |
| | 20.7 |
| | Deferred income | 8.4 |
| | 13.0 |
| | Derivative contracts | 2.9 |
| | 10.2 |
| | Accrued asbestos reserves | 10.2 |
| | 9.7 |
| | Self insurance reserves | 5.2 |
| | 6.0 |
| | Other | 31.7 |
| | 35.0 |
| | Total Accrued expenses | $ | 255.7 |
| | $ | 272.3 |
|
Derivatives
Objectives and Strategies for Using Derivative Instruments
Commodity Price Risk. We utilize a cash flow hedging program to mitigate our exposure to volatility in the prices of metal commodities used in our production processes. Our hedging program includes the use of futures contracts to lock in prices, and as a result, we are subject to derivative losses should the metal commodity prices decrease and gains should the prices increase. We utilize a dollar cost averaging strategy so that a higher percentage of commodity price exposures are hedged near-term with lower percentages hedged at future dates. This strategy allows for protection against near-term price volatility while allowing us to adjust to market price movements over time.
Interest Rate Risk. A portion of our debt bears interest at variable interest rates, and as a result, we are subject to variability in the cash paid for interest. To mitigate a portion of that risk, we may choose to engage in an interest rate swap hedging strategy to eliminate the variability of interest payment cash flows. We are not currently hedged against interest rate risk.
Foreign Currency Risk. Foreign currency exchange rate movements create a degree of risk by affecting the U.S. dollar value of assets and liabilities arising in foreign currencies. We seek to mitigate the impact of currency exchange rate movements on certain short-term transactions by periodically entering into foreign currency forward contracts.
Cash Flow Hedges
We have commodity futures contracts and foreign exchange forward contracts designated as cash flows hedges that are scheduled to mature through May 20212024 and January 2021,2024, respectively. We currently have cash flow hedge contracts with a notional amount of 54.5 million pounds of aluminum and copper. Unrealized gains or losses from our cash flow hedges are included in AOCL and are expected to be reclassified into earnings within the next 1817 months based on the prices of the commodities and foreign currencies at the settlement dates.
We recorded the following amounts related to our cash flow hedges in AOCL (in millions): | | | | | | | | | | | | | As of December 31, | | 2022 | | 2021 | | Unrealized losses (gains), net on unsettled contracts | $ | 6.3 | | | $ | (13.4) | | | Income tax (benefit) expense | (1.4) | | | 2.7 | | Unrealized losses (gains) included in AOCL, net of tax (1) | $ | 4.9 | | | $ | (10.7) | |
| | | | | | | | | | | As of December 31, | | | 2019 | | 2018 | | Unrealized losses on unsettled contracts | $ | 0.2 |
| | $ | 8.4 |
| | Income tax benefit | (0.2 | ) | | (2.2 | ) | | Losses included in AOCL, net of tax (1) | $ | — |
| | $ | 6.2 |
|
(1) Assuming commodity and foreign currency prices remain constant, we expect to reclassify $0.3$5.0 million of derivative losses into earnings within the next 12 months.
Expenses included in our Consolidated Statements of Operations
Below is information about expenses included in Selling, general and administrative expenses in our Consolidated Statements of Operations (in millions): | | | | | | | | | | | | | | | For the Years Ended December 31, | | | 2019 | | 2018 | | 2017 | | Research and development | $ | 69.9 |
| | $ | 72.2 |
| | $ | 73.6 |
| Advertising, promotions and marketing (1) | 43.7 |
| | 42.5 |
| | 45.0 |
| | Cooperative advertising expenditures | 21.3 |
| | 16.8 |
| | 18.6 |
|
| | | | | | | | | | | | | | | | | | | For the Years Ended December 31, | | 2022 | | 2021 | | 2020 | | Research and development | $ | 80.3 | | | $ | 76.1 | | | $ | 66.8 | | Advertising, promotions and marketing (1) | 32.4 | | | 26.9 | | | 26.5 | | | Cooperative advertising expenditures | 28.1 | | | 27.6 | | | 22.2 | | | | | | | |
(1) Cooperative advertising expenditures were not included in these amounts.
Interest Expense, net
The components of Interest expense, net in our Consolidated Statements of Operations were as follows (in millions): | | | | | | | | | | | | | | | | | | | For the Years Ended December 31, | | 2022 | | 2021 | | 2020 | | Interest expense, net of capitalized interest | $ | 39.8 | | | $ | 26.0 | | | $ | 29.7 | | | Less: Interest income | 1.1 | | | 1.0 | | | 1.4 | | | Interest expense, net | $ | 38.7 | | | $ | 25.0 | | | $ | 28.3 | |
| | | | | | | | | | | | | | | For the Years Ended December 31, | | | 2019 | | 2018 | | 2017 | | Interest expense, net of capitalized interest | $ | 48.6 |
| | $ | 39.1 |
| | $ | 32.1 |
| | Interest income | 1.1 |
| | 0.8 |
| | 1.5 |
| | Interest expense, net | $ | 47.5 |
| | $ | 38.3 |
| | $ | 30.6 |
|
Losses (Gains) and Other Expenses, net
Losses (gains) and other expenses, net in our Consolidated Statements of Operations were as follows (in millions): | | | | | | | | | | | | | | | | | | | For the Years Ended December 31, | | 2022 | | 2021 | | 2020 | | Realized losses (gains) on settled future contracts | $ | 0.1 | | | $ | (1.2) | | | $ | 0.1 | | | Foreign currency exchange gains | (1.3) | | | (2.2) | | | (3.6) | | | Loss (gain) on disposal of fixed assets | (1.0) | | | (0.2) | | | (0.2) | | | Other operating income | (1.0) | | | (1.5) | | | (2.2) | | | Net change in unrealized (gains) losses on unsettled futures contracts | 0.4 | | | — | | | (0.3) | | | Environmental liabilities and special litigation charges | 7.5 | | | 9.6 | | | 5.3 | | | | | | | | | | | | | | | Charges incurred related to COVID-19 pandemic | 0.8 | | | 2.2 | | | 8.3 | | | Other items, net | (0.6) | | | 2.5 | | | — | | | (Gains) losses and other expenses, net (pre-tax) | $ | 4.9 | | | $ | 9.2 | | | $ | 7.4 | |
| | | | | | | | | | | | | | | For the Years Ended December 31, | | | 2019 | | 2018 | | 2017 | | Realized losses (gains) on settled futures contracts | $ | 0.4 |
| | $ | (0.4 | ) | | $ | (1.7 | ) | | Foreign currency exchange (gains) losses | (1.5 | ) | | 1.7 |
| | (1.8 | ) | | (Gains) losses on disposal of fixed assets | (0.2 | ) | | 0.7 |
| | 0.2 |
| | Other operating (gains) losses | (1.7 | ) | | — |
| | — |
| | Net change in unrealized (gains) losses on unsettled futures contracts | (0.5 | ) | | 1.5 |
| | 0.9 |
| | Asbestos-related litigation | 3.1 |
| | 4.0 |
| | 3.5 |
| | Special legal contingency charges | 1.2 |
| | 1.9 |
| | 3.7 |
| | Environmental liabilities | 5.7 |
| | 2.2 |
| | 2.2 |
| | Contractor tax payments | — |
| | — |
| | 0.1 |
| | Other items, net | 1.8 |
| | 1.8 |
| | — |
| | Losses (gains) and other expenses, net | $ | 8.3 |
| | $ | 13.4 |
| | $ | 7.1 |
|
11.10. Employee Benefit Plans:
Many of our defined benefit pension and profit sharing plans have been frozen and replaced with defined contribution plans. We have a liability for the benefits earned under these inactive plans prior to the date the benefits were frozen. We also have several active defined benefit plans that provide benefits based on years of service. Our defined contribution plans generally include both company and employee contributions which are based on predetermined percentages of compensation earned by the employee.
In addition to freezing the benefits of our defined benefit pension plans, we have also eliminated nearly all of our post-retirement medical benefits.
Defined Contribution Plans
We recorded the following contributions to the defined contribution plans (in millions):
| | | | | | | | | | | | | | | For the Years Ended December 31, | | | 2019 | | 2018 | | 2017 | | Contributions to defined contribution plans | $ | 19.1 |
| | $ | 18.8 |
| | $ | 18.1 |
|
| | | | | | | | | | | | | | | | | | | For the Years Ended December 31, | | 2022 | | 2021 | | 2020 | | Contributions to defined contribution plans | $ | 22.7 | | | $ | 19.9 | | | $ | 17.8 | |
Pension and Post-retirement Benefit Plans
Pension Settlement Activity in 2019
On April 3, 2019, we entered into an agreement with Pacific Life Insurance Company to purchase a group annuity contract and transfer $100.0 million of our pension plan assets and $105.6 million of related pension benefit obligations. In the second quarter of 2019, we recognized a $60.6 million pension settlement charge in the Statement of Operations and reclassified $5.6 million of pension benefit obligations to AOCL as a result of this transaction.
On October 15, 2019, we entered into an agreement with Pacific Life Insurance Company to purchase a group annuity contract and transfer $73.5 million of our pension plan assets and $77.9 million of related benefit obligations. In the fourth quarter of 2019, we recognized a $38.6 million pension settlement charge in the Statement of Operations and reclassified $4.4 million of pension benefit obligations to AOCL as a result of this transaction.
Benefit Obligations, Fair Value of Plan Assets, Funded Status, and Balance Sheet Position
The following tables set forth amounts recognized in our financial statements and the plans’ funded status for our pension and post-retirement benefit plans (dollars in millions): | | | | | | | | | | | | | | | | | Pension Benefits | | | | 2022 | | 2021 | | | | | | Accumulated benefit obligation | $ | 171.6 | | | $ | 266.1 | | | | | | | | | | | | | | | Changes in projected benefit obligation: | | | | | | | | | Benefit obligation at beginning of year | $ | 269.2 | | | $ | 276.2 | | | | | | | Service cost | 3.8 | | | 6.1 | | | | | | | Interest cost | 6.2 | | | 5.1 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Actuarial (gain) loss | (74.6) | | | (11.2) | | | | | | | Effect of exchange rates | (3.4) | | | (0.7) | | | | | | | | | | | | | | | Settlements | (21.7) | | | (2.1) | | | | | | | Benefits paid | (5.2) | | | (4.2) | | | | | | | Benefit obligation at end of year | $ | 174.3 | | | $ | 269.2 | | | | | | | | | | | | | | | Changes in plan assets: | | | | | | | | | Fair value of plan assets at beginning of year | $ | 184.3 | | | $ | 179.7 | | | | | | | Actual return on plan assets | (45.4) | | | 9.5 | | | | | | | Employer contributions | 22.5 | | | 1.5 | | | | | | | | | | | | | | | Effect of exchange rates | (3.4) | | | (0.1) | | | | | | | | | | | | | | | Plan settlements | (21.7) | | | (2.1) | | | | | | | Benefits paid | (5.2) | | | (4.2) | | | | | | | Fair value of plan assets at end of year | 131.1 | | | 184.3 | | | | | | | Funded status / net amount recognized | $ | (43.2) | | | $ | (84.9) | | | | | | | | | | | | | | | Net amount recognized consists of: | | | | | | | | | Non-current assets | $ | 2.7 | | | $ | 6.5 | | | | | | | Current liability | (5.8) | | | (8.1) | | | | | | | Non-current liability | (40.1) | | | (83.3) | | | | | | | Net amount recognized | $ | (43.2) | | | $ | (84.9) | | | | | |
| | | | | | | | | | | Pension Benefits | | | 2019 | | 2018 | | Accumulated benefit obligation | $ | 237.3 |
| | $ | 368.0 |
| | | | | | | Changes in projected benefit obligation: | | | | | Benefit obligation at beginning of year | $ | 371.9 |
| | $ | 405.5 |
| | Service cost | 4.9 |
| | 5.3 |
| | Interest cost | 10.2 |
| | 12.3 |
| | Other | — |
| | 0.3 |
| | Actuarial (gain) loss | 38.9 |
| | (26.4 | ) | | Effect of exchange rates | 1.1 |
| | (2.7 | ) | | Settlements | (173.5 | ) | | (1.3 | ) | | Benefits paid | (12.0 | ) | | (21.1 | ) | | Benefit obligation at end of year | $ | 241.5 |
| | $ | 371.9 |
| | | | | | | Changes in plan assets: | | | | | Fair value of plan assets at beginning of year | $ | 291.0 |
| | $ | 318.6 |
| | Actual gain (loss) return on plan assets | 45.7 |
| | (23.3 | ) | | Employer contributions | 1.8 |
| | 20.6 |
| | Effect of exchange rates | 1.3 |
| | (2.5 | ) | | Plan settlements | (173.5 | ) | | (1.3 | ) | | Benefits paid | (12.0 | ) | | (21.1 | ) | | Fair value of plan assets at end of year | 154.3 |
| | 291.0 |
| | Funded status / net amount recognized | $ | (87.2 | ) | | $ | (80.9 | ) | | | | | | | Net amount recognized consists of: | | | | | Non-current assets | $ | 3.5 |
| | $ | 3.3 |
| | Current liability | (3.3 | ) | | (1.4 | ) | | Non-current liability | (87.4 | ) | | (82.8 | ) | | Net amount recognized | $ | (87.2 | ) | | $ | (80.9 | ) |
Plans with Benefit Obligations in Excess of Plan Assets | | | | | | | | | | | | | For the Years Ended December 31, | | 2022 | | 2021 | | Pension plans with a benefit obligation in excess of plan assets: | | | | | Projected benefit obligation | $ | 152.1 | | | $ | 234.8 | | | Accumulated benefit obligation | 149.6 | | | 231.4 | | | Fair value of plan assets | 106.2 | | | 143.7 | |
| | | | | | | | | | | For the Years Ended December 31, | | | 2019 | | 2018 | | Pension plans with a benefit obligation in excess of plan assets: | | | | | Projected benefit obligation | $ | 204.5 |
| | $ | 357.2 |
| | Accumulated benefit obligation | 200.5 |
| | 353.4 |
| | Fair value of plan assets | 113.9 |
| | 275.0 |
|
Net Periodic Benefit Cost
Our U.S.-based pension plans comprised approximately 81%84% of the projected benefit obligation and 74%81% of plan assets as of December 31, 2019.2022.
| | | | | | | | | | | | | | | | | | | | | | | | | Pension Benefits | | | | 2022 | | 2021 | | 2020 | | | | | | | | Components of net periodic benefit cost as of December 31: | | | | | | | | | | | | | Service cost | $ | 3.8 | | | $ | 6.1 | | | $ | 5.5 | | | | | | | | | Interest cost | 6.2 | | | 5.1 | | | 6.6 | | | | | | | | | Expected return on plan assets | (9.1) | | | (8.6) | | | (8.2) | | | | | | | | | Amortization of prior service costs | 0.1 | | | 0.2 | | | 0.2 | | | | | | | | | Recognized actuarial loss | 5.3 | | | 7.7 | | | 5.8 | | | | | | | | | Settlements | (0.2) | | | 1.2 | | | 0.6 | | | | | | | | | Other | (0.1) | | | (0.4) | | | — | | | | | | | | | Net periodic benefit cost | $ | 6.0 | | | $ | 11.3 | | | $ | 10.5 | | | | | | | |
| | | | | | | | | | | | | | | Pension Benefits | | | 2019 | | 2018 | | 2017 | | Components of net periodic benefit cost as of December 31: | | | | | | | Service cost | $ | 4.9 |
| | $ | 5.3 |
| | $ | 5.0 |
| | Interest cost | 10.2 |
| | 12.3 |
| | 12.6 |
| | Expected return on plan assets | (13.4 | ) | | (18.8 | ) | | (21.3 | ) | | Amortization of prior service costs | 0.1 |
| | 0.1 |
| | 0.2 |
| | Recognized actuarial loss | 5.6 |
| | 9.2 |
| | 8.1 |
| | Settlements | 99.2 |
| | 0.4 |
| | — |
| | Other | (0.5 | ) | | 0.3 |
| | 0.7 |
| | Net periodic benefit cost | $ | 106.1 |
| | $ | 8.8 |
| | $ | 5.3 |
|
Amounts recognized in AOCL and Other Comprehensive Income
The following table sets forth amounts recognized in AOCL and Other comprehensive income (loss) in our financial statements for 20192022 and 20182021 (in millions): | | | | | | | | | | | | | | | | | Pension Benefits | | | | 2022 | | 2021 | | | | | | Amounts recognized in AOCL: | | | | | | | | | Prior service costs | $ | (0.4) | | | $ | (0.5) | | | | | | | Actuarial loss | (57.7) | | | (83.1) | | | | | | | Subtotal | (58.1) | | | (83.6) | | | | | | | Deferred taxes | 15.8 | | | 18.6 | | | | | | | Net amount recognized | $ | (42.3) | | | $ | (65.0) | | | | | | | Changes recognized in other comprehensive loss: | | | | | | | | | | | | | | | | | | | | | | | | | Current year actuarial gain | (19.4) | | | (12.2) | | | | | | | Effect of exchange rates | (0.9) | | | — | | | | | | | Amortization of prior service costs | (0.1) | | | (0.2) | | | | | | | Amortization of actuarial loss, including settlements and other | (5.1) | | | (8.5) | | | | | | | Total recognized in other comprehensive income (loss) | $ | (25.5) | | | $ | (20.9) | | | | | | | Total recognized in net periodic benefit cost and other comprehensive income | $ | (19.5) | | | $ | (9.6) | | | | | |
| | | | | | | | | | | Pension Benefits | | | 2019 | | 2018 | | Amounts recognized in AOCL: | | | | | Prior service costs | $ | (0.8 | ) | | $ | (0.9 | ) | | Actuarial loss | (101.6 | ) | | (199.4 | ) | | Subtotal | (102.4 | ) | | (200.3 | ) | | Deferred taxes | 24.7 |
| | 49.5 |
| | Net amount recognized | $ | (77.7 | ) | | $ | (150.8 | ) | | Changes recognized in other comprehensive (loss) income: | | | | | Current year prior service costs | — |
| | 0.3 |
| | Current year actuarial (gain) loss | (5.1 | ) | | 15.7 |
| | Effect of exchange rates | 0.5 |
| | (1.1 | ) | | Amortization of prior service costs | (0.1 | ) | | (0.1 | ) | | Amortization of actuarial loss, including settlements | (93.1 | ) | | (9.9 | ) | | Total recognized in other comprehensive (loss) income | $ | (97.8 | ) | | $ | 4.9 |
| | Total recognized in net periodic benefit cost and other comprehensive income (loss) | $ | 8.3 |
| | $ | 13.7 |
|
The estimated prior service costs and actuarial losses for pension benefits that will be amortized from AOCL in 20202023 are $0.2$0.1 million and $5.4$1.2 million, respectively.
Assumptions
The following tables set forth the weighted-average assumptions used to determine Benefit obligations and Net periodic benefit cost for the U.S.-based plans in 20192022 and 2018:2021: | | | | | | | | | | | | | | | | | | | | | Pension Benefits | | | | | 2022 | | 2021 | | | | | | Weighted-average assumptions used to determine benefit obligations as of December 31: | | | | | | | | | | Discount rate | | 5.50 | % | | 2.69 | % | | | | | | Rate of compensation increase | | 4.02 | % | | 4.1 | % | | | | |
| | | | | | | | | | | Pension Benefits | | | | 2019 | | 2018 | | Weighted-average assumptions used to determine benefit obligations as of December 31: | | | | | | Discount rate | | 3.19 | % | | 4.32 | % | | Rate of compensation increase | | 4.23 | % | | 4.23 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | Pension Benefits | | | | 2022 | | 2021 | | 2020 | | | | | | | | Weighted-average assumptions used to determine net periodic benefit cost for the years ended December 31: | | | | | | | | | | | | | | | | | | | | | | | | | Discount rate - service cost | 2.53 | % | | 1.85 | % | | 2.89 | % | | | | | | | | Discount rate - interest cost | 2.48 | % | | 2.16 | % | | 2.99 | % | | | | | | | | Expected long-term return on plan assets | 6.50 | % | | 6.50 | % | | 6.50 | % | | | | | | | | Rate of compensation increase | 4.13 | % | | 4.13 | % | | 4.23 | % | | | | | | |
| | | | | | | | | | | | Pension Benefits | | | 2019 | | 2018 | | 2017 | | Weighted-average assumptions used to determine net periodic benefit cost for the years ended December 31: | | | | | | | Discount rate - service cost | 3.96 | % | | 3.48 | % | | 3.96 | % | | Discount rate - interest cost | 3.67 | % | | 3.22 | % | | 3.51 | % | | Expected long-term return on plan assets | 6.50 | % | | 6.50 | % | | 7.50 | % | | Rate of compensation increase | 4.23 | % | | 4.23 | % | | 4.23 | % |
The change in the discount rate for 2022 was the primary driver in the actuarial gain in the projected benefit obligation during the year.
The following tables set forth the weighted-average assumptions used to determine Benefit obligations and Net periodic benefit cost for the non-U.S.-based plans in 20192022 and 2018:2021: | | | | | | | | | | | | | Pension Benefits | | 2022 | | 2021 | | Weighted-average assumptions used to determine benefit obligations as of December 31: | | | | | Discount rate | 4.72 | % | | 1.99 | % | | Rate of compensation increase | 3.11 | % | | 3.14 | % |
| | | | | | | | | Pension Benefits | | | 2019 | | 2018 | | Weighted-average assumptions used to determine benefit obligations as of December 31: | | | | | Discount rate | 2.15 | % | | 2.93 | % | | Rate of compensation increase | 3.20 | % | | 3.77 | % |
| | | | | | | | | | | | | | | | | | | Pension Benefits | | 2022 | | 2021 | | 2020 | | Weighted-average assumptions used to determine net periodic benefit cost for the years ended December 31: | | | | | | | Discount rate - service cost | 0.86 | % | | 0.42 | % | | 0.73 | % | | Discount rate - interest cost | 2.07 | % | | 1.51 | % | | 2.3 | % | | Expected long-term return on plan assets | 2.75 | % | | 2.10 | % | | 3.31 | % | | Rate of compensation increase | 3.14 | % | | 3.17 | % | | 3.20 | % |
| | | | | | | | | | | | Pension Benefits | | | 2019 | | 2018 | | 2017 | | Weighted-average assumptions used to determine net periodic benefit cost for the years ended December 31: | | | | | | | Discount rate - service cost | 1.60 | % | | 1.32 | % | | 1.34 | % | | Discount rate - interest cost | 2.98 | % | | 2.67 | % | | 2.75 | % | | Expected long-term return on plan assets | 3.92 | % | | 4.19 | % | | 4.40 | % | | Rate of compensation increase | 3.77 | % | | 3.62 | % | | 3.78 | % |
To develop the expected long-term rate of return on assets assumption for the U.S. plans, we considered the historical returns for each asset category, as well as the target asset allocation of the pension portfolio and the effect of periodic balancing. These results were adjusted for the payment of reasonable expenses of the plan from plan assets. This resulted in the selection of the 6.50% long-term rate of return on assets assumption. A similar process was followed for the non-U.S.-based plans.
To select a discount rate for the purpose of valuing the plan obligations for the U.S. plans, we performed an analysis in which the projected cash flows from defined benefit and retiree healthcare plans was matched with a yield curve based on the appropriate universe of high-quality corporate bonds that were available. We used the results of the yield curve analysis to select the discount rate for each plan. The analysis was completed separately for each U.S. pension and OPEB plan. A similar process was followed for the non-U.S.-based plans with sufficient corporate bond information. In other countries, the discount rate was selected based on the approximate duration of plan obligations.
Assumed health care cost trend rates have an effect on the amounts reported for our healthcare plan. The following table sets forth the healthcare trend rate assumptions used: | | | | | | | | | | | | | 2022 | | 2021 | | Assumed health care cost trend rates as of December 31: | | | | | Health care cost trend rate assumed for next year | 6.50 | % | | 6.00 | % | | Rate to which the cost rate is assumed to decline (the ultimate trend rate) | 5.00 | % | | 5.00 | % | | Year that the rate reaches the ultimate trend rate | 2029 | | 2025 |
| | | | | | | | | 2019 | | 2018 | | Assumed health care cost trend rates as of December 31: | | | | | Health care cost trend rate assumed for next year | 6.50 | % | | 6.50 | % | | Rate to which the cost rate is assumed to decline (the ultimate trend rate) | 5.00 | % | | 5.00 | % | | Year that the rate reaches the ultimate trend rate | 2022 |
| | 2022 |
|
Expected future benefit payments are shown in the table below (in millions): | | | | | | | | | | | | | | | | | | | | | | | | | | | For the Years Ended December 31, | | | 2020 | | 2021 | | 2022 | | 2023 | | 2024 | | 2025-2029 | | Pension benefits | $ | 6.0 |
| | $ | 11.5 |
| | $ | 6.2 |
| | $ | 7.0 |
| | $ | 11.7 |
| | $ | 92.6 |
|
58
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | For the Years Ended December 31, | | 2023 | | 2024 | | 2025 | | 2026 | | 2027 | | 2028-2032 | | Pension benefits | $ | 11.1 | | | $ | 11.9 | | | $ | 7.6 | | | $ | 8.8 | | | $ | 22.9 | | | $ | 56.4 | | | | | | | | | | | | | |
Composition of Pension Plan Assets
We believe asset returnsreturns can be optimized at an acceptable level of risk by adequately diversifying the plan assets between equity and fixed income. In the fourth quarter of 2019, we changed the targeted allocations for our plan assets. The targeted allocation for fixed income and cash investments was changed tois 50%, and the targeted allocation for equity investments was changed tois 50%. Our targeted exposure to International equity including emerging markets was changed to 6.0% of total assets andis 15% while our exposure to domestic equity was changed to 44.0%is 35%. Our U.S. pension plan represents 74%81%, our Canadian pension plan 12%9%, and our United Kingdom (“U.K.”) pension plan 14%10% of the total fair value of our plan assets as of December 31, 2019.2022.
Our U.S. pension plans’ weighted-average asset allocations as of December 31, 20192022 and 2018,2021, by asset category, were as follows: | | | | | | | | | | | | | Plan Assets as of December 31, | | Asset Category: | 2022 | | 2021 | | U.S. equity | 31.3 | % | | 36.1 | % | | International equity | 18.7 | % | | 15.5 | % | | Fixed income | 49.2 | % | | 48.2 | % | | Money market/cash | 0.8 | % | | 0.2 | % | | Total | 100.0 | % | | 100.0 | % |
| | | | | | | | | Plan Assets as of December 31, | | Asset Category: | 2019 | | 2018 | | U.S. equity | 44.6 | % | | 24.6 | % | | International equity | 7.3 | % | | 15.5 | % | | Fixed income | 48.0 | % | | 57.2 | % | | Money market/cash | 0.1 | % | | 2.7 | % | | Total | 100.0 | % | | 100.0 | % |
Our U.S. pension plans’ assets were invested according to the following targets: | | | | | | | Asset Category: | Target | | U.S. equity | 44.035.0 | % | | International equity | 6.015.0 | % | | Fixed income | 50.0 | % | | |
Our Canadian pension plans were invested approximately 73% in Canadian bondsfixed income securities and 27% in international equities. Our U.K. pension plan was invested in fixed income securities, including corporate and government bonds.
The fair values of our pension plan assets, by asset category, were as follows (in millions): | | | | | | | | | | | | | | | | | | | | | | | | | | Fair Value Measurements as of December 31, 2022 | | | Quoted Prices in Active Markets for Identical Assets
(Level 1) | | Significant Other Observable Inputs
(Level 2) | | Significant Unobservable Inputs
(Level 3) | | Total | | | Asset Category: | | | | | | | | | | Cash and cash equivalents | $ | 0.9 | | | $ | — | | | $ | — | | | $ | 0.9 | | | | Commingled pools / Collective Trusts: | | | | | | | | | U.S. equity (1) | — | | | 33.3 | | | — | | | 33.3 | | | International equity (2) | — | | | 19.8 | | | — | | | 19.8 | | | Fixed income (3) | — | | | 52.5 | | | — | | | 52.5 | | | Balanced pension trust: (4) | | | | | | | | | | International equity | — | | | 3.3 | | | — | | | 3.3 | | | | Fixed income | — | | | 8.3 | | | — | | | 8.3 | | | | Pension fund: | | | | | | | | | | | | | | | | | | Fixed income (6) | — | | | 13.0 | | | — | | | 13.0 | | | | | | | | | | | | | Total | $ | 0.9 | | | $ | 130.2 | | | $ | — | | | $ | 131.1 | | |
| | | | | | | | | | | | | | | | | | | Fair Value Measurements as of December 31, 2019 | | | Quoted Prices in Active Markets for Identical Assets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) | | Total | | Asset Category: | | | | | | | | | Cash and cash equivalents | $ | 0.2 |
| | $ | — |
| | $ | — |
| | $ | 0.2 |
| | Commingled pools / Collective Trusts: | | | | | | | | U.S. equity (1) | — |
| | 50.8 |
| | — |
| | 50.8 |
| International equity (2) | — |
| | 8.3 |
| | — |
| | 8.3 |
| Fixed income (3) | — |
| | 54.6 |
| | — |
| | 54.6 |
| Balanced pension trust: (4) | | | | | | | | | International equity | — |
| | 4.8 |
| | — |
| | 4.8 |
| | Fixed income | — |
| | 13.6 |
| | — |
| | 13.6 |
| | Pension fund: | | | | | | | | Fixed income (6) | — |
| | 22.0 |
| | — |
| | 22.0 |
| | Total | $ | 0.2 |
| | $ | 154.1 |
| | $ | — |
| | $ | 154.3 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | Fair Value Measurements as of December 31, 2021 | | | Quoted Prices in Active Markets for Identical Assets
(Level 1) | | Significant Other Observable Inputs
(Level 2) | | Significant Unobservable Inputs
(Level 3) | | Total | | | Asset Category: | | | | | | | | | | Cash and cash equivalents | $ | 0.4 | | | $ | — | | | $ | — | | | $ | 0.4 | | | | Commingled pools / Collective Trusts: | | | | | | | | | U.S. equity (1) | — | | | 51.8 | | | — | | | 51.8 | | | International equity (2) | — | | | 22.2 | | | — | | | 22.2 | | | Fixed income (3) | — | | | 69.3 | | | — | | | 69.3 | | | Balanced pension trust: (4) | | | | | | | | | | International equity | — | | | 4.4 | | | — | | | 4.4 | | | | Fixed income | — | | | 12.6 | | | — | | | 12.6 | | | | Pension fund: | | | | | | | | | | | | | | | | | | Fixed income (5) | — | | | 23.6 | | | — | | | 23.6 | | | | | | | | | | | | | Total | $ | 0.4 | | | $ | 183.9 | | | $ | — | | | $ | 184.3 | | |
| | | | | | | | | | | | | | | | | | | Fair Value Measurements as of December 31, 2018 | | | Quoted Prices in Active Markets for Identical Assets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) | | Total | | Asset Category: | | | | | | | | | Cash and cash equivalents | $ | 7.2 |
| | $ | — |
| | $ | — |
| | $ | 7.2 |
| | Commingled pools / Collective Trusts: | | | | | | | | U.S. equity (1) | — |
| | 62.7 |
| | — |
| | 62.7 |
| International equity (2) | — |
| | 39.5 |
| | — |
| | 39.5 |
| Fixed income (3) | — |
| | 146.2 |
| | — |
| | 146.2 |
| Balanced pension trust: (4) | | | | | | | | | International equity | — |
| | 4.0 |
| | — |
| | 4.0 |
| | Fixed income | — |
| | 12.0 |
| | — |
| | 12.0 |
| | Pension fund: | | | | | | | | International equity (5) | — |
| | 2.7 |
| | — |
| | 2.7 |
| Fixed income (6) | — |
| | 8.9 |
| | — |
| | 8.9 |
| Blend (7) | — |
| | 7.8 |
| | — |
| | 7.8 |
| | Total | $ | 7.2 |
| | $ | 283.8 |
| | $ | — |
| | $ | 291.0 |
|
Additional information about assets measured at Net Asset Value (“NAV”) per share (in millions):
| | | | | | | | | | | As of December 31, 2019 | | | Fair Value | | Redemption Frequency (if currently eligible) | | Redemption Notice Period | | Asset Category: | | | | | | | Commingled pools / Collective Trusts: | | | | | | U.S. equity (1) | $ | 50.8 |
| | Daily | | 5 days | International equity (2) | 8.3 |
| | Daily | | 5 days | Fixed income (3) | 54.6 |
| | Daily | | 5-15 days | Balanced pension trust: (4) | | | | | | | International equity | 4.8 |
| | Daily | | 3-5 days | | Fixed income | 13.6 |
| | Daily | | 3-5 days | | Pension fund: | | | | | | Fixed income (6) | 22.0 |
| | Daily | | 1-3 days | | Total | $ | 154.1 |
| | | | |
| | | | | | | | | | | As of December 31, 2018 | | | Fair Value | | Redemption Frequency (if currently eligible) | | Redemption Notice Period | | Asset Category: | | | | | | | Commingled pools / Collective Trusts: | | | | | | U.S. equity (1) | $ | 62.7 |
| | Daily | | 5 days | International equity (2) | 39.5 |
| | Daily | | 5 days | Fixed income (3) | 146.2 |
| | Daily | | 5-15 days | Balanced pension trust: (4) | | | | | | | International equity | 4.0 |
| | Daily | | 3-5 days | | Fixed income | 12.0 |
| | Daily | | 3-5 days | | Pension fund: | | | | | | International equity (5) | 2.7 |
| | Daily | | 1-3 days | Fixed income (6) | 8.9 |
| | Daily | | 1-3 days | Blend (7) | 7.8 |
| | Daily | | 1-3 days | | Total | $ | 283.8 |
| | | | |
| | | | | | | | | | | | | | | | | | | As of December 31, 2022 | | Fair Value | | Redemption Frequency
(if currently eligible) | | Redemption Notice Period | | Asset Category: | | | | | | | Commingled pools / Collective Trusts: | | | | | | U.S. equity (1) | $ | 33.3 | | | Daily | | 5 days | International equity (2) | 19.8 | | | Daily | | 5 days | Fixed income (3) | 52.5 | | | Daily | | 5 days | Balanced pension trust: (4) | | | | | | | International equity | 3.3 | | | Daily | | 3-5 days | | Fixed income | 8.3 | | | Daily | | 3-5 days | | Pension fund: | | | | | | | | | | | | Fixed income (5) | 13.0 | | | Daily | | 1 - 3 days | | | | | | | | Total | $ | 130.2 | | | | | |
| | | | | | | | | | | | | | | | | | | As of December 31, 2021 | | Fair Value | | Redemption Frequency
(if currently eligible) | | Redemption Notice Period | | Asset Category: | | | | | | | Commingled pools / Collective Trusts: | | | | | | U.S. equity (1) | $ | 51.8 | | | Daily | | 5 days | International equity (2) | 22.2 | | | Daily | | 5 days | Fixed income (3) | 69.3 | | | Daily | | 5-15 days | Balanced pension trust: (4) | | | | | | | International equity | 4.4 | | | Daily | | 3-5 days | | Fixed income | 12.6 | | | Daily | | 3-5 days | | Pension fund: | | | | | | | | | | | | Fixed income (5) | 23.6 | | | Daily | | 1 - 3 days | | | | | | | | Total | $ | 183.9 | | | | | |
| | | | | | | (1) | This category includes investments primarily in U.S. equity securities that include large, mid and small capitalization companies. | (2) | This category includes investments primarily in international equity securities that include large, mid and small capitalization companies in large developed markets as well as emerging markets equities. | (3) | This category includes investments in U.S. investment grade and high yield fixed income securities, international fixed income securities and emerging markets fixed income securities. | (4) | The investment objectives of the plan are to provide long-term capital growth and income by investing primarily in a well-diversified, balanced portfolio of Canadian common stocks, bonds and money market securities. The plan also holds a portion of its assets in international equities, a portion of which may be invested in U.S. securities. | (5)
| This category includes investments in international equity securities, a portion of which may be invested in U.S. securities
and aims to provide returns consistent with the markets in which it invests and provide broad exposure to countries around the world.
| (6)(5)
| This category includes investments in U.K. government index-linked securities (index-linked gilts) that have maturity periods of 5 years or longer with a derivatives overlay and investment grade corporate bonds denominated in sterling. The plan also holds a portion of its assets in international instruments, a portion of which may be invested in U.S. securities. | (7)
| This category includes investments in pooled funds where the fund manager has discretion for the asset allocation and can invest in a wide range of international and US asset classes including equity, credit markets, sovereign debt and alternative assets (including derivative-based strategies).
|
The majority of our commingled pool/collective trusts, mutual funds, balanced pension trusts and pension funds are managed by professional investment advisors. The NAVs per share are furnished in monthly and/or quarterly statements received from the investment advisors and reflect valuations based upon their pricing policies. We assessed the fair value classification of these investments as Level 2 for commingled pool/collective trusts, balanced pension trusts and pension funds based on an examination of their pricing policies and the related controls and procedures. The fair values we report are based on the pool, trust or fund’s NAV per share. The NAVs per share are calculated periodically (daily or no less than one time per month) as the aggregate value of each pool or trust’s underlying assets divided by the number of units owned. See Note 1716 for information about our fair value hierarchies and valuation techniques.
12.
11. Joint Ventures and Other Equity Investments:
We participate in 2two joint ventures, the largest located in the U.S. and the other in Mexico, 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 respective 25% and 50% ownerships, 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.
The combined balance of equity method investments included in Other assets, net totaled (in millions): | | | | | | | | | | | | | As of December 31, | | 2022 | | 2021 | | Equity method investments | $ | 44.4 | | | $ | 37.7 | |
| | | | | | | | | | | As of December 31, | | | 2019 | | 2018 | | Equity method investments | $ | 38.6 |
| | $ | 36.6 |
|
We purchase compressors from our U.S. joint venture for use in certain of our products. The amounts of purchases included in Cost of goods sold in the Consolidated Statements of Operations were as follows (in millions): | | | | | | | | | | | | | | | | | | | For the Years Ended December 31, | | 2022 | | 2021 | | 2020 | | Purchases of compressors from joint venture | $ | 156.2 | | | $ | 141.7 | | | $ | 123.1 | |
| | | | | | | | | | | | | | | For the Years Ended December 31, | | | 2019 | | 2018 | | 2017 | | Purchases of compressors from joint venture | $ | 123.1 |
| | $ | 103.1 |
| | $ | 106.4 |
|
12. Income Taxes:
13. Income Taxes:
Our Provision for income taxes from continuing operations consisted of the following (in millions): | | | | | | | | | | | | | | | | | | | For the Years Ended December 31, | | 2022 | | 2021 | | 2020 | | Current: | | | | | | | Federal | $ | 104.0 | | | $ | 72.0 | | | $ | 61.7 | | | State | 21.6 | | | 17.0 | | | 14.1 | | | Foreign | 7.8 | | | 13.4 | | | 4.8 | | | Total current | 133.4 | | | 102.4 | | | 80.6 | | | Deferred: | | | | | | | Federal | (13.9) | | | (2.6) | | | (0.7) | | | State | (3.1) | | | (1.5) | | | 1.1 | | | Foreign | 2.3 | | | (2.2) | | | 7.1 | | | Total deferred | (14.7) | | | (6.3) | | | 7.5 | | | Total provision for income taxes | $ | 118.7 | | | $ | 96.1 | | | $ | 88.1 | |
| | | | | | | | | | | | | | | For the Years Ended December 31, | | | 2019 | | 2018 | | 2017 | | Current: | | | | | | | Federal | $ | 55.9 |
| | $ | 59.5 |
| | $ | 86.1 |
| | State | 14.2 |
| | 17.8 |
| | 12.5 |
| | Foreign | 9.3 |
| | 4.6 |
| | 15.0 |
| | Total current | 79.4 |
| | 81.9 |
| | 113.6 |
| | Deferred: | | | | | | | Federal | 15.0 |
| | 23.2 |
| | 43.8 |
| | State | 3.9 |
| | 1.0 |
| | 0.9 |
| | Foreign | 0.8 |
| | 1.5 |
| | (1.4 | ) | | Total deferred | 19.7 |
| | 25.7 |
| | 43.3 |
| | Total provision for income taxes | $ | 99.1 |
| | $ | 107.6 |
| | $ | 156.9 |
|
Income from continuing operations before income taxes was comprised of the following (in millions): | | | | | | | | | | | | | | | | | | | For the Years Ended December 31, | | 2022 | | 2021 | | 2020 | | Domestic | $ | 340.2 | | | $ | 307.8 | | | $ | 268.4 | | | Foreign | 275.6 | | | 252.3 | | | 176.8 | | | Total | $ | 615.8 | | | $ | 560.1 | | | $ | 445.2 | |
| | | | | | | | | | | | | | | For the Years Ended December 31, | | | 2019 | | 2018 | | 2017 | | Domestic | $ | 383.2 |
| | $ | 428.7 |
| | $ | 402.5 |
| | Foreign | 124.7 |
| | 39.2 |
| | 61.5 |
| | Total | $ | 507.9 |
| | $ | 467.9 |
| | $ | 464.0 |
|
The difference between the income tax provision from continuing operations computed at the statutory federal income tax rate and the financial statement Provision for income taxes is summarized as follows (in millions): | | | | | | | | | | | | | | | For the Years Ended December 31, | | | 2019 | | 2018 | | 2017 | | Provision at the U.S. statutory rate of 21% (35% for 2017) | $ | 106.7 |
| | $ | 98.3 |
| | $ | 162.4 |
| | Increase (reduction) in tax expense resulting from: | | | | | | | State income tax, net of federal income tax benefit | 13.2 |
| | 15.5 |
| | 9.2 |
| Domestic manufacturing deduction
| — |
| | — |
| | (9.6 | ) | Tax credits, net of unrecognized tax benefits
| (13.8 | ) | | (2.5 | ) | | (8.6 | ) | | Change in unrecognized tax benefits | 3.1 |
| | 0.4 |
| | (0.1 | ) | | Change in valuation allowance | 1.9 |
| | 5.0 |
| | 6.4 |
| | Foreign taxes at rates other than U.S. statutory rate | (20.7 | ) | | (3.2 | ) | | (9.0 | ) | | Deemed inclusions | 8.3 |
| | 3.9 |
| | 0.3 |
| | Global intangible low-taxed income | 9.5 |
| | 0.7 |
| | — |
| | Change in rates from the Tax Act & other law changes | (0.8 | ) | | 1.9 |
| | 31.8 |
| | Excess tax benefits from stock-based compensation | (10.9 | ) | | (10.5 | ) | | (23.6 | ) | | Miscellaneous other | 2.6 |
| | (1.9 | ) | | (2.3 | ) | | Total provision for income taxes | $ | 99.1 |
| | $ | 107.6 |
| | $ | 156.9 |
|
| | | | | | | | | | | | | | | | | | | For the Years Ended December 31, | | 2022 | | 2021 | | 2020 | | Provision at the U.S. statutory rate of 21% | $ | 129.3 | | | $ | 117.6 | | | $ | 93.5 | | | Increase (reduction) in tax expense resulting from: | | | | | | | State income tax, net of federal income tax benefit | 14.6 | | | 12.1 | | | 10.8 | | | | | | | | Tax credits, net of unrecognized tax benefits
| (8.0) | | | (9.3) | | | (7.8) | | | Change in unrecognized tax benefits | 0.2 | | | 0.2 | | | 0.2 | | | Change in valuation allowance | — | | | — | | | 7.8 | | | Foreign taxes at rates other than U.S. statutory rate | (47.4) | | | (43.6) | | | (33.6) | | | Deemed inclusions | 10.0 | | | 7.7 | | | 9.2 | | | Global intangible low-taxed income | 23.9 | | | 18.8 | | | 10.3 | | | Change in rates from the Tax Act & other law changes | 0.1 | | | 0.1 | | | 0.7 | | | Excess tax benefits from stock-based compensation | (0.6) | | | (5.7) | | | (4.2) | | | Miscellaneous other | (3.4) | | | (1.8) | | | 1.2 | | | Total provision for income taxes | $ | 118.7 | | | $ | 96.1 | | | $ | 88.1 | |
Deferred income taxes reflect the tax consequences on future years of temporary differences between the tax basis of assets and liabilities and their financial reporting basis and depending on the classification of the asset or liability generating the deferred tax.The deferred tax provision for the periods shown represents the effect of changes in the amounts of temporary differences during those periods.
Deferred tax assets (liabilities) were comprised of the following (in millions):
| | | | | | | | | | | | | As of December 31, | | 2022 | | 2021 | | Gross deferred tax assets: | | | | | Warranties | $ | 34.9 | | | $ | 32.9 | | | Loss carryforwards (foreign, U.S. and state) | 29.6 | | | 28.5 | | | Post-retirement and pension benefits | 10.2 | | | 15.6 | | | Inventory reserves | 9.3 | | | 7.1 | | | Receivables allowance | 6.0 | | | 4.5 | | | Compensation liabilities | 5.9 | | | 9.5 | | | | | | | Legal reserves | 10.5 | | | 12.1 | | | Tax credits, net of federal effect | 11.9 | | | 11.5 | | | Research and development capitalization | 17.9 | | | — | | | Other | 7.1 | | | 9.6 | | | Total deferred tax assets | 143.3 | | | 131.3 | | | Valuation allowance | (37.9) | | | (37.3) | | | Total deferred tax assets, net of valuation allowance | 105.4 | | | 94.0 | | | Gross deferred tax liabilities: | | | | | Depreciation | (58.9) | | | (58.7) | | | Intangibles | (15.6) | | | (15.5) | | | Insurance liabilities | (1.4) | | | (1.4) | | | Other | (2.0) | | | (7.1) | | | Total deferred tax liabilities | (77.9) | | | (82.7) | | | Net deferred tax assets | $ | 27.5 | | | $ | 11.3 | |
| | | | | | | | | | | As of December 31, | | | 2019 | | 2018 | | Gross deferred tax assets: | | | | | Warranties | $ | 27.8 |
| | $ | 27.8 |
| | Loss carryforwards (foreign, U.S. and state) | 23.2 |
| | 23.1 |
| | Post-retirement and pension benefits | 22.4 |
| | 21.3 |
| | Inventory reserves | 5.6 |
| | 9.3 |
| | Receivables allowance | 3.1 |
| | 3.4 |
| | Compensation liabilities | 6.2 |
| | 7.9 |
| | Insurance liabilities | 1.6 |
| | 2.9 |
| | Legal reserves | 8.5 |
| | 7.4 |
| | Tax credits, net of federal effect | 11.4 |
| | 11.0 |
| | Other | 7.1 |
| | 8.1 |
| | Total deferred tax assets | 116.9 |
| | 122.2 |
| | Valuation allowance | (24.9 | ) | | (25.4 | ) | | Total deferred tax assets, net of valuation allowance | 92.0 |
| | 96.8 |
| | Gross deferred tax liabilities: | | | | | Depreciation | (52.5 | ) | | (22.1 | ) | | Intangibles | (15.1 | ) | | (5.4 | ) | | Other | (2.9 | ) | | (2.3 | ) | | Total deferred tax liabilities | (70.5 | ) | | (29.8 | ) | | Net deferred tax assets | $ | 21.5 |
| | $ | 67.0 |
|
As of December 31, 20192022 and 2018,2021, we had $0.1$21.5 million and $0.6 million in tax-effected state net operating loss carryforwards, respectively, and $14.9 million and $12.6$20.3 million in tax-effected foreign net operating loss carryforwards, respectively. The deferred tax asset valuation allowance relates primarily to the operating loss carryforwards in European tax jurisdictions.carryforwards. The remainder of the valuation allowance relates to state tax credits.
In assessing whether a deferred tax asset will be realized, we consider whether it is more likely than not that some portion or all of the deferred tax asset will not be realized.We consider the reversal of existing taxable temporary differences, projected future taxable income and tax planning strategies in making this assessment.Based upon the level of historical taxable income and projections for future taxable income over the periods in which the deferred tax assets are deductible, we believe it is more likely than not we will realize the benefits of these deductible differences, net of the existing valuation allowances, as ofDecember 31, 2019.2022.
No provision was made for income taxes which may become payable upon distribution of our foreign subsidiaries’ earnings. An actual repatriation in the future from our non-U.S. subsidiaries could still be subject to foreign withholding taxes and U.S. state taxes, but we expect any amounts to be immaterial.
We are currently under examinationin the Bridge program for our U.S. federal income taxes under the Internal Revenue Service’s Compliance Assurance Program for 20192022 and 2018 and2021. As a result, our returns for those years will not be examined. However, we are subject to examination by numerous other taxing authorities in the U.S. and in foreign jurisdictions. We have no material uncertain tax provisions recorded as of December 31, 2022. We are generally no longer subject to U.S., federal, state and local, or non-U.S. income tax examinations by taxing authorities for years before 2012.
14.
13. Lines of Credit and Financing Arrangements:
The following tables summarize our outstanding debt obligations and their classification in the accompanying Consolidated Balance Sheets (in millions): | | | | | | | | | | | | | As of December 31, | | 2022 | | 2021 | | | | | | | | | | | | | | | | | | | | | | Current maturities of long-term debt: | | | | | Asset securitization program | $ | 350.0 | | | $ | — | | | Finance lease obligations | 11.2 | | | 11.3 | | | Senior unsecured notes | 350.0 | | | — | | | | | | | Debt issuance costs | (0.6) | | | — | | | Total current maturities of long-term debt | $ | 710.6 | | | $ | 11.3 | | | Long-Term Debt: | | | | | Asset securitization program | $ | — | | | $ | 250.0 | | | Finance lease obligations | 28.3 | | | 29.0 | | | Credit agreement | 192.0 | | | 6.5 | | | Senior unsecured notes | 600.0 | | | 950.0 | | | Debt issuance costs | (6.1) | | | (9.0) | | | Total long-term debt | $ | 814.2 | | | $ | 1,226.5 | | | Total debt | $ | 1,524.8 | | | $ | 1,237.8 | |
| | | | | | | | | | | As of December 31, | | | 2019 | | 2018 | | Current maturities of long-term debt: | | | | | Asset securitization program | $ | 285.0 |
| | $ | 268.0 |
| | Finance lease obligations | 7.8 |
| | 3.5 |
| | Domestic credit facility | 30.0 |
| | 30.0 |
| | Debt issuance costs | (0.9 | ) | | (0.7 | ) | | Total current maturities of long-term debt | $ | 321.9 |
| | $ | 300.8 |
| | Long-Term Debt: | | | | | Finance lease obligations | 25.9 |
| | 15.7 |
| | Domestic credit facility | 475.5 |
| | 378.0 |
| | Senior unsecured notes | 350.0 |
| | 350.0 |
| | Debt issuance costs | (2.1 | ) | | (3.2 | ) | | Total long-term debt | $ | 849.3 |
| | $ | 740.5 |
| | Total debt | $ | 1,171.2 |
| | $ | 1,041.3 |
|
As of December 31, 2019,2022, the aggregate amounts of required principal payments on total debt excluding finance lease obligations (see Note 5) were as follows (in millions): | | | | | | | 2023 | $ | 700.0 | | | 2024 | — | | | 2025 | 300.0 | | | 2026 | 192.0 | | | 2027 | 300.0 | | | Thereafter | — | | | |
| | | | | | 2020 | $ | 322.8 |
| | 2021 | 481.9 |
| | 2022 | 4.7 |
| | 2023 | 352.5 |
| | 2024 | 0.6 |
| | Thereafter | 11.7 |
|
Short-Term Debt
Foreign Obligations
Through several of our foreign subsidiaries, we have facilities available to assist in financing seasonal borrowing needs for our foreign locations. As of December 31, 20192022 or 2018,2021, we did not have any outstanding short-term foreign obligations. Proceeds and repayments from these facilities were $5.3$0.0 million, $40.3$0.0 million and $30.4$4.6 million during the years ended December 31, 2019, 20182022, 2021 and 2017, respectively. Repayments on the facilities were $5.3 million, $40.3 million and $31.9 million during the years ended December 31, 2019, 2018 and 2017,2020, respectively.
Asset Securitization Program
Under the Asset Securitization Program (“ASP”), we are eligible to sell beneficial interests in a portion of our trade accounts receivable to a financial institution for cash. The ASP contains a provision whereby we retain the right to repurchase all of the outstanding beneficial interests transferred. As a result of the repurchase right, the transfer of the receivables under the ASP is not accounted for as a sale. Accordingly, the cash received from the transfer of the beneficial interests in our trade accounts receivable is reflected as secured borrowings in the accompanying Consolidated Balance Sheet and proceeds received are included in Cash flows from financing activities in the accompanying Consolidated Statements of Cash Flows. Our continued involvement with the transferred assets includes servicing, collection and administration of the transferred beneficial interests. The accounts receivable securitized under the ASP are high-quality domestic customer accounts that have not aged significantly. The receivables represented by the retained interest that we service are exposed to the risk of loss for any uncollectible amounts in the pool of receivables transferred under the ASP.
We renewed the ASP in November 2019,2021, extending its term to November 20212023 and increasing the maximum securitization amount to a range from $250.0$300.0 million to $400.0$450.0 million, depending on the period. The maximum capacity under the ASP is the lesser of the maximum securitization amount or 100% of the net pool balance less allowances, as defined by the ASP. Eligibility for securitization is limited based on the amount and quality of the qualifying accounts receivable and is calculated monthly. The eligible amounts available and beneficial interests sold were as follows (in millions): | | | | | | | | | | | As of December 31, | | | 2019 | | 2018 | | Eligible amount available under the ASP on qualified accounts receivable | $ | 320.0 |
| | $ | 290.0 |
| | Less: Beneficial interest transferred | (285.0 | ) | | (268.0 | ) | | Remaining amount available | $ | 35.0 |
| | $ | 22.0 |
|
| | | | | | | | | | | | | As of December 31, | | 2022 | | 2021 | | Eligible amount available under the ASP on qualified accounts receivable | $ | 350.0 | | | $ | 335.6 | | | Less: Beneficial interest transferred | (350.0) | | | (250.0) | | | Remaining amount available | $ | — | | | $ | 85.6 | |
We pay certain discount fees to use the ASP and to have the facility available to us. These fees relate to both the used and unused portions of the securitization. The used fee is based on the beneficial interest sold and calculated on either the average LIBOR rate or floating commercial paper rate determined by the purchaser of the beneficial interest, plus a program fee of 0.70%. The average rates as of December 31, 20192022 and 20182021 were 2.51%5.17% and 3.27%0.82%, respectively. The unused fee is based on 101% of the maximum available amount less the beneficial interest transferred and is calculated at rate ranging between 0.25% and 0.35%, depending on available borrowings, throughout the term of the agreement. We recorded these fees in Interest expense, net in the accompanying Consolidated Statements of Operations.
The ASP contains certain restrictive covenants relating to the quality of our accounts receivable and cross-default provisions with our Sixth Amended and Restated Credit Facility Agreement (“Domestic Credit Facility”)(as defined below), senior unsecured notes and any other indebtedness we may have over $75.0 million. The administrative agent under the ASP is also a participant in our Domestic Credit Facility.Agreement. The participating financial institutions have investment grade credit ratings. As of December 31, 2019,2022, we believe we were in compliance with all covenant requirements.
Long-Term DebtCredit Agreement
DomesticIn July 2021, we entered into a new Credit FacilityAgreement (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.
On January 22, 2019, we amended our DomesticThe Credit Facility to provide for a $350.0 million increase in revolving commitments. The Domestic Credit Facility currentlyAgreement consists of a $1,000.0$750.0 million unsecured revolving credit facility and a $160.0 million unsecured term loan that matures in August 2021 (the “Maturity Date”). Under our Domestic Credit Facility, weJuly 2026. We had outstanding borrowings of $505.5$192.0 million of which $160.0 million was the term loan balance, as well as $2.4$2.0 million committed to standby letters of credit as of December 31, 2019.2022. Subject to covenant limitations, $652.1$556.0 million was available for future borrowings. The unsecured term loan also matures on the Maturity Date and requires quarterly principal repayments of $7.5 million. 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.
OurBelow is a summary of the weighted average borrowinginterest rate on the facility was as follows:for both December 31, 2022 and 2021:
| | | | | | | | | As of December 31, | | | 2019 | | 2018 | | Weighted average borrowing rate | 2.93 | % | | 3.74 | % |
| | | | | | | | | | | | | As of December 31, | | 2022 | | 2021 | | Weighted average borrowing rate | 5.57 | % | | 1.38 | % |
Our DomesticThe Credit FacilityAgreement 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 covenants relating to leverage and interest coverage. Other covenants contained in the Domestic Credit Facility restrict, among other things, certain mergers, asset dispositions, guarantees, debt, liens, and affiliate transactions. The financial covenants requirecovenant requiring us to maintain, as of the last day of each fiscal quarter for the four prior fiscal quarters, a defined Consolidated IndebtednessTotal Net Leverage Ratio of no more than 3.50 to Adjusted EBITDA Ratio and1.00 (or, at our election, on up to two occasions following a Cash Flow (defined as EBITDA minus capital expenditures)material acquisition, 4.00 to Interest Expense Ratio. 1.00).
The required ratios under our Domestic Credit Facility are detailed below: | | | Consolidated Indebtedness to Adjusted EBITDA Ratio no greater than | 3.5 : 1.0 | Cash Flow to Interest Expense Ratio no less than | 3.0 : 1.0 |
Our Domestic Credit FacilityAgreement contains customary events of default. These events of default include nonpayment of principal or interest, breach of covenants or other restrictions or requirements, default on certain other indebtedness or receivables securitizations (cross default), and bankruptcy. A cross default under our Domestic Credit FacilityAgreement 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 the Domestic Credit Facility,Agreement, our senior unsecured notes, our lease of our corporate headquarters in Richardson, Texas (recorded as an operating lease), 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 Domestic Credit FacilityAgreement and accelerate amounts due under our Domestic Credit FacilityAgreement (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). As of December 31, 2019,2022, we believe we were in compliance with all covenant requirements.
Senior Unsecured Notes
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 on February and August at 1.35% and 1.70% respectively, per annum. We also issued $350.0 million of senior unsecured notes in November 2016 (the “Notes”"2023 Notes," and together with the 2025 Notes and the 2027 Notes, the "Notes") which will mature on November 15, 2023 with interest being paid semi-annually on May 15 and November 15 at 3.00% per annum semiannually. Theannum.
All the Notes are guaranteed, on a senior unsecured basis, by eachcertain of our subsidiaries that guarantee indebtedness under our Domestic Credit Facility.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 million in principal which is then accelerated, and such acceleration is not rescinded within 30 days of the notice date. As of December 31, 2019,2022, we believe we were in compliance with all covenant requirements.
15.14. Comprehensive Income:
The following table provides information on items not reclassified in their entirety from AOCL to Net Income in the accompanying Consolidated Statements of Operations (in millions):
| | | | | | | | | | | | | | | For the Years Ended December 31, | | | | AOCL Component | | 2019 | | 2018 | | Affected Line Item(s) in the Consolidated Statements of Operations | | Gains/(Losses) on cash flow hedges: | | | | | | | | Derivative contracts | | $ | (6.9 | ) | | $ | 6.1 |
| | Cost of goods sold and Losses (gains) and other expenses, net.
| | Income tax benefit (expense) | | 1.6 |
| | (1.4 | ) | | Provision for income taxes | | Net of tax | | $ | (5.3 | ) | | $ | 4.7 |
| | | | | | | | | | | | Defined Benefit Plan Items: | | | | | | | | Pension and post-retirement benefits costs | | $ | (5.7 | ) | | $ | (9.3 | ) | | Cost of goods sold; Selling, general, administrative expenses and Other (income) expense, net | | Pension settlements | | (99.2 | ) | | (0.4 | ) | | Pension settlements | | Income tax benefit | | 26.2 |
| | 2.4 |
| | Provision for income taxes | | Net of tax | | $ | (78.7 | ) | | $ | (7.3 | ) | | | | | | | | | | | | Foreign currency translation adjustments: | | | | | | | | Foreign currency adjustments on sale of businesses | | (2.1 | ) | | (27.9 | ) | | Loss (gain), net on sale of businesses and related property | | Net of tax | | (2.1 | ) | | (27.9 | ) | | | | | | | | | | | | Total reclassifications from AOCL | | $ | (86.1 | ) | | $ | (30.5 | ) | | |
| | | | | | | | | | | | | | | | | | | | | | | For the Years Ended December 31, | | | | AOCL Component | | 2022 | | 2021 | | Affected Line Item(s) in the Consolidated Statements of Operations | | Gains/(Losses) on cash flow hedges: | | | | | | | | Derivative contracts | | $ | 9.7 | | | $ | 26.9 | | | Cost of goods sold and
Losses (gains) and other expenses, net.
| | Income tax expense | | (2.2) | | | (6.2) | | | Provision for income taxes | | Net of tax | | $ | 7.5 | | | $ | 20.7 | | | | | | | | | | | | Defined Benefit Plan Items: | | | | | | | | Pension and post-retirement benefits costs | | $ | (5.4) | | | $ | (7.9) | | | Cost of goods sold; Selling, general, administrative expenses and Other (income) expense, net | | Pension settlements | | 0.2 | | | (1.2) | | | Pension settlements | | Income tax benefit | | 1.3 | | | 2.2 | | | Provision for income taxes | | Net of tax | | $ | (3.9) | | | $ | (6.9) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Total reclassifications from AOCL | | $ | 3.6 | | | $ | 13.8 | | | |
The following tables provide information on changes in AOCL, by component (net of tax), for the years ended December 31, 20192022 and 20182021 (in millions):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Gains (Loss) on Cash Flow Hedges | | Share of equity method investments other comprehensive income | | Defined Benefit Plan Items | | Foreign Currency Translation Adjustments | | Total AOCL | | Balance as of December 31, 2021 | | $ | 10.7 | | | $ | (1.2) | | | $ | (68.8) | | | $ | (28.8) | | | $ | (88.1) | | | Other comprehensive (loss) income before reclassifications | | (8.1) | | | 0.7 | | | 18.7 | | | (10.2) | | | 1.1 | | | Amounts reclassified from AOCL | | (7.5) | | | — | | | 3.9 | | | — | | | (3.6) | | | Net other comprehensive (loss) income | | (15.6) | | | 0.7 | | | 22.6 | | | (10.2) | | | (2.5) | | | Balance as of December 31, 2022 | | $ | (4.9) | | | $ | (0.5) | | | $ | (46.2) | | | $ | (39.0) | | | $ | (90.6) | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Gains (Losses) on Cash Flow Hedges | | Share of equity method investments other comprehensive income | | Defined Benefit Plan Items | | Foreign Currency Translation Adjustments | | Total AOCL | | Balance as of December 31, 2020 | | $ | 8.2 | | | $ | (1.2) | | | $ | (82.7) | | | $ | (21.5) | | | $ | (97.2) | | | Other comprehensive income (loss) before reclassifications | | 23.2 | | | — | | | 7.0 | | | (7.3) | | | 22.9 | | | Amounts reclassified from AOCL | | (20.7) | | | — | | | 6.9 | | | — | | | (13.8) | | | Other comprehensive income (loss) before reclassifications | | 2.5 | | | — | | | 13.9 | | | (7.3) | | | 9.1 | | | Balance as of December 31, 2021 | | $ | 10.7 | | | $ | (1.2) | | | $ | (68.8) | | | $ | (28.8) | | | $ | (88.1) | |
| | | | | | | | | | | | | | | | | | | | | | | | | Gains (Losses) on Cash Flow Hedges | | Unrealized Gains (Losses) on Available-for-Sale Securities | | Defined Benefit Plan Items | | Foreign Currency Translation Adjustments | | Total AOCL | | Balance as of December 31, 2018 | | $ | (6.2 | ) | | $ | — |
| | $ | (154.5 | ) | | $ | (28.1 | ) | | $ | (188.8 | ) | | Other comprehensive income (loss) before reclassifications | | 0.9 |
| | — |
| | (5.7 | ) | | 3.7 |
| | (1.1 | ) | | Amounts reclassified from AOCL | | 5.3 |
| | — |
| | 78.7 |
| | 2.1 |
| | 86.1 |
| | Net other comprehensive (loss) income | | 6.2 |
| | — |
| | 73.0 |
| | 5.8 |
| | 85.0 |
| | Balance as of December 31, 2019 | | $ | — |
| | $ | — |
| | $ | (81.5 | ) | | $ | (22.3 | ) | | $ | (103.8 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | Gains (Losses) on Cash Flow Hedges | | Unrealized Gains (Losses) on Available-for-Sale Securities | | Defined Benefit Plan Items | | Foreign Currency Translation Adjustments | | Total AOCL | | Balance as of December 31, 2017 | | $ | 7.4 |
| | $ | 1.8 |
| | $ | (127.5 | ) | | $ | (39.1 | ) | | $ | (157.4 | ) | | Other comprehensive loss before reclassifications | | (8.9 | ) | | (1.8 | ) | | (34.3 | ) | | (16.9 | ) | | (61.9 | ) | | Amounts reclassified from AOCI | | (4.7 | ) | | — |
| | 7.3 |
| | 27.9 |
| | 30.5 |
| | Net other comprehensive (loss) income | | (13.6 | ) | | (1.8 | ) | | (27.0 | ) | | 11.0 |
| | (31.4 | ) | | Balance as of December 31, 2018 | | $ | (6.2 | ) | | $ | — |
| | $ | (154.5 | ) | | $ | (28.1 | ) | | $ | (188.8 | ) |
15. Stock-Based Compensation: 16. Stock-Based Compensation:
Stock-based compensation expense related to continuing operations was included in Selling, general and administrative expenses in the accompanying Consolidated Statements of Operations as follows (in millions):
| | | | | | | | | | | | | | | For the Years Ended December 31, | | | 2019 | | 2018 | | 2017 | Compensation expense(1) | $ | 21.3 |
| | $ | 26.3 |
| | $ | 24.9 |
|
| | | | | | | | | | | | | | | | | | | | For the Years Ended December 31, | | 2022 | | 2021 | | 2020 | Compensation expense(1) | $ | 21.8 | | | $ | 24.3 | | | $ | 24.3 | |
(1) Stock-based compensation expense was recorded in our Corporate and other business segment.
Incentive Plan
Under the Lennox International Inc. 2019 Equity and Incentive Plan Compensation Plan, we are authorized to issue awards for 1.51.7 million shares of common stock. The plan provides for various long-term incentive awards, including performance share units, restricted stock units and stock appreciation rights. A description of these long-term incentive awards and related activity within each award category is provided below.
As of December 31, 2019, awards for 1.5 million shares of common stock had been granted, net of cancellations and repurchases, and2022, there were 1.41.5 million shares available for future issuance.
Performance Share Units
Performance share units are granted to certain employees at the discretion of the Board of Directors with a three-year performance period beginning January 1st of each year. Upon meeting the performance and vesting criteria, performance share units are converted to an equal number of shares of our common stock. Performance share units vest if, at the end of the three-year performance period, at least the threshold performance level has been attained. To the extent that the payout level attained is less than 100%, the difference between 100% and the units earned and distributed will be forfeited. Eligible participants may also earn additional units of our common stock, which would increase the potential payout up to 200% of the units granted, dependingdepending on LII’s performance over the three-year performance period.
Performance share units are classified as equity awards. Compensation expense is recognized on an earnings curve over the period and is based on the expected number of units to be earned and the fair value of the stock at the date of grant. The fair value of units is calculated as the average of the high and low market price of the stock on the date of grant discounted by the expected dividend rate over the service period. The number of units expected to be earned will be adjusted in future periods as necessary to reflect changes in the estimated number of award to be issued and, upon vesting, the actual number of units awarded. Our practice is to issue new shares of common stock or utilize treasury stock to satisfy performance share unit distributions.
The following table provides information on our performance share units: | | | | | | | | | | | | | | | | | | | For the Years Ended December 31, | | 2022 | | 2021 | | 2020 | | Compensation expense for performance share units (in millions) | $ | 6.9 | | | $ | 10.8 | | | $ | 8.9 | | | Weighted-average fair value of grants, per share | $ | 237.68 | | | $ | 314.27 | | | $ | 265.96 | | | Payout ratio for shares paid | 126 | % | | 100 | % | | 133 | % |
| | | | | | | | | | | | | | | For the Years Ended December 31, | | | 2019 | | 2018 | | 2017 | | Compensation expense for performance share units (in millions) | $ | 6.8 |
| | $ | 12.3 |
| | $ | 12.2 |
| | Weighted-average fair value of grants, per share | $ | 245.06 |
| | $ | 204.64 |
| | $ | 197.54 |
| | Payout ratio for shares paid | 157.2 | % | | 173.2 | % | | 185.9 | % |
A summary of the status of our undistributed performance share units as of December 31, 2019,2022, and changes during the year then ended, is presented below (in millions,thousands, except per share data): | | | | | | | | | | Shares (2) | | Weighted- Average Grant Date Fair Value per Share | | Undistributed performance share units as of December 31, 2018 | 0.2 |
| | $ | 160.69 |
| | Distributed | 0.1 |
| | 126.31 |
| Undistributed performance share units as of December 31, 2019 (1) | 0.2 |
| | $ | 191.14 |
|
| | | | | | | | | | | | | Shares | | Weighted- Average Grant Date Fair Value per Share | | Undistributed performance share units as of December 31, 2021 | 149.2 | | | $ | 246.84 | | | Granted | 51.5 | | | $ | 237.68 | | | Adjustment to shares paid based on payout ratio | 7.4 | | | 245.06 | | | Distributed | (54.4) | | | $ | 204.64 | | | Forfeited | (29.0) | | | $ | 262.82 | | Undistributed performance share units as of December 31, 2022 (1) | 124.7 | | | $ | 257.55 | |
(1) Undistributed performance share units include approximately 0.1 million93.9 thousand units with a weighted-average grant date fair value of $213.73$261.65 per share that had not yet vested and 0.1 million30.8 thousand units that have vested but were not yet distributed. (2) Share amounts are rounded but the balance of undistributed performance share units as of December 31, 2019 accurately reflects actual units undistributed.
As of December 31, 2019,2022, we had $16.9$18.8 million of total unrecognized compensation cost related to non-vested performance share units that is expected to be recognized over a weighted-average period of 2.32.4 years years. Our weighted-average estimated forfeiture rate for these performance share units was 11.0%10.9% as of December 31, 2019.2022.
The total fair value of performance share units distributed and the resulting tax deductions to realized tax benefits were as follows (in millions): | | | | | | | | | | | | | | | For the Years Ended December 31, | | | 2019 | | 2018 | | 2017 | | Fair value of performance share units distributed | $ | 20.2 |
| | $ | 21.1 |
| | $ | 64.3 |
| | Realized tax benefits from tax deductions | $ | 5.1 |
| | $ | 5.3 |
| | $ | 24.5 |
|
68
| | | | | | | | | | | | | | | | | | | For the Years Ended December 31, | | 2022 | | 2021 | | 2020 | | Fair value of performance share units distributed | $ | 6.1 | | | $ | 10.8 | | | $ | 15.1 | | | Realized tax benefits from tax deductions | $ | 1.5 | | | $ | 2.7 | | | $ | 0.7 | |
Restricted Stock Units
Restricted stock units are issued to attract and retain key employees. Generally, at the end of a three-year retention period, the units will vest and be distributed in shares of our common stock to the participant. Our practice is to issue new shares of common stock or utilize treasury stock to satisfy restricted stock unit vestings. Restricted stock units are classified as equity awards. The fair value of units granted is the average of the high and low market price of the stock on the date of grant discounted by the expected dividend rate over the service period. Units are amortized to compensation expense ratably over the service period.
The following table provides information on our restricted stock units (in millions, except per share data): | | | | | | | | | | | | | | | | | | | For the Years Ended December 31, | | 2022 | | 2021 | | 2020 | | Compensation expense for restricted stock units | $ | 11.0 | | | $ | 8.7 | | | $ | 10.4 | | | Weighted-average fair value of grants, per share | $ | 240.87 | | | $ | 315.70 | | | $ | 265.96 | |
| | | | | | | | | | | | | | | For the Years Ended December 31, | | | 2019 | | 2018 | | 2017 | | Compensation expense for restricted stock units | $ | 9.7 |
| | $ | 9.2 |
| | $ | 8.3 |
| | Weighted-average fair value of grants, per share | $ | 247.02 |
| | $ | 204.64 |
| | $ | 197.54 |
|
A summary of our non-vested restricted stock units as of December 31, 20192022 and changes during the year then ended is presented below (in millions,thousands, except per share data): | | | | | | | | | | | | | Shares | | Weighted- Average Grant Date Fair Value per Share | | Non-vested restricted stock units as of December 31, 2021 | 135.1 | | | $ | 277.85 | | | Granted | 58.8 | | | $ | 240.87 | | | Vested | (37.3) | | | $ | 250.45 | | | Forfeited | (25.6) | | | $ | 268.59 | | Non-vested restricted stock units as of December 31, 2022 (1) | 131.0 | | | $ | 270.86 | |
| | | | | | | | | | Shares | | Weighted- Average Grant Date Fair Value per Share | | Non-vested restricted stock units as of December 31, 2018 | 0.2 |
| | $ | 182.84 |
| | Granted | 0.1 |
| | 247.02 |
| | Vested | (0.1 | ) | | 150.50 |
| | Forfeited | — |
| | — |
| Non-vested restricted stock units as of December 31, 2019 (1) | 0.2 |
| | $ | 216.07 |
|
(1) As of December 31, 2019,2022, we had $20.4$24.7 million of total unrecognized compensation cost related to non-vested restricted stock units that is expected to be recognized over a weighted-average period of 2.32.4 years. Our estimated forfeiture rate for restricted stock units was 14.6%13.3% as of December 31, 2019.2022.
The total fair value of restricted stock units vested and the resulting tax deductions to realized tax benefits were as follows (in millions): | | | | | | | | | | | | | | | | | | | For the Years Ended December 31, | | 2022 | | 2021 | | 2020 | | Fair value of restricted stock units vested | $ | 9.7 | | | $ | 11.0 | | | $ | 15.0 | | | Realized tax benefits from tax deductions | 2.4 | | | 2.7 | | | 2.7 | |
| | | | | | | | | | | | | | | For the Years Ended December 31, | | | 2019 | | 2018 | | 2017 | | Fair value of restricted stock units vested | $ | 10.9 |
| | $ | 9.7 |
| | $ | 19.0 |
| | Realized tax benefits from tax deductions | 2.7 |
| | 2.4 |
| | 7.2 |
|
Stock Appreciation Rights
Stock appreciation rights are issued to certain key employees. Each recipient is given the “right” to receive compensation, paid in shares of our common stock, equal to the future appreciation of our common stock price. Stock appreciation rights generally
vest in one-third increments beginning on the first anniversary date after the grant date and expire after seven years .years. Our practice is to issue new shares of common stock or utilize treasury stock to satisfy the exercise of stock appreciation rights.
The following table provides information on our stock appreciation rights (in millions, except per share data): | | | | | | | | | | | | | | | For the Years Ended December 31, | | | 2019 | | 2018 | | 2017 | | Compensation expense for stock appreciation rights | $ | 4.8 |
| | $ | 4.8 |
| | $ | 4.4 |
| | Weighted-average fair value of grants, per share | 39.40 |
| | 35.57 |
| | 32.32 |
|
69
| | | | | | | | | | | | | | | | | | | For the Years Ended December 31, | | 2022 | | 2021 | | 2020 | | Compensation expense for stock appreciation rights | $ | 3.9 | | | $ | 4.8 | | | $ | 5.0 | | | Weighted-average fair value of grants, per share | $ | 64.54 | | | $ | 70.50 | | | $ | 55.21 | |
Compensation expense for stock appreciation rights is based on the fair value on the date of grant, estimated using the Black-Scholes-Merton valuation model, and is recognized over the service period. We used historical stock price data to estimate the expected volatility. We determined that the recipients of stock appreciation rights can be combined into one employee group that has similar historical exercise behavior and we used our historical pattern of award exercises to estimate the expected life of the awards for the employee group. The risk-free interest rate was based on the zero-coupon U.S. Treasury yield curve with a maturity equal to the expected life of the awards at the time of grant.
The fair value of the stock appreciation rights granted in 2019, 20182022, 2021 and 20172020 were estimated on the date of grant using the following assumptions: | | | | | | | | | | | | | | | | | | | 2022 | | 2021 | | 2020 | | Expected dividend yield | 2.01 | % | | 1.69 | % | | 1.64 | % | | Risk-free interest rate | 3.88 | % | | 0.88 | % | | 0.27 | % | | Expected volatility | 29.90 | % | | 29.80 | % | | 29.70 | % | | Expected life (in years) | 4.18 | | 4.35 | | 3.95 |
| | | | | | | | | | | | 2019 | | 2018 | | 2017 | | Expected dividend yield | 1.77 | % | | 1.76 | % | | 1.47 | % | | Risk-free interest rate | 1.59 | % | | 2.71 | % | | 2.02 | % | | Expected volatility | 21.23 | % | | 20.60 | % | | 19.97 | % | | Expected life (in years) | 3.96 |
| | 3.93 |
| | 3.95 |
|
A summary of our stock appreciation rights as of December 31, 2019,2022, and changes during the year then ended, is presented below (in millions,thousands, except per share data): | | | | | | | | | | | | | Shares | | Weighted-Average Exercise Price per Share | | Outstanding stock appreciation rights as of December 31, 2021 | 478.3 | | | $ | 241.61 | | | Granted | 98.1 | | | $ | 259.56 | | | Exercised | (42.7) | | | $ | 170.48 | | | Forfeited | (45.8) | | | $ | 280.78 | | | Outstanding stock appreciation rights as of December 31, 2022 | 487.9 | | | $ | 247.77 | | | Exercisable stock appreciation rights as of December 31, 2022 | 324.6 | | | $ | 231.24 | |
| | | | | | | | | | Shares | | Weighted-Average Exercise Price per Share | | Outstanding stock appreciation rights as of December 31, 2018 | 0.9 |
| | $ | 148.98 |
| | Granted | 0.1 |
| | 257.08 |
| | Exercised | (0.2 | ) | | 100.75 |
| | Outstanding stock appreciation rights as of December 31, 2019 | 0.8 |
| | $ | 181.15 |
| | Exercisable stock appreciation rights as of December 31, 2019 | 0.5 |
| | $ | 152.28 |
|
The following table summarizes information about stock appreciation rights outstanding as of December 31, 20192022 (in millions, except per share data and years)years; shares in thousands): | | | | | | | | | | | | | | | | | | | | | | | Stock Appreciation Rights Outstanding | | Stock Appreciation Rights Exercisable | | Range of Exercise Prices | | Shares | | Weighted-Average Remaining Contractual Term (in years) | | Aggregate Intrinsic Value | | Shares (1) | | Weighted-Average Remaining Contractual Life (in years) | | Aggregate Intrinsic Value | | $81.11 to $131.94 | | 0.2 |
| | 2.27 | | $ | 28.3 |
| | 0.2 |
| | 1.75 | | $ | 28.3 |
| | $156.94 to $205.53 | | 0.3 |
| | 4.49 | | $ | 19.3 |
| | 0.3 |
| | 4.39 | | $ | 17.4 |
| | $214.63 to $257.08 | | 0.3 |
| | 6.49 | | $ | 4.2 |
| | 0.1 |
| | 6.00 | | $ | 1.4 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Stock Appreciation Rights Outstanding | | Stock Appreciation Rights Exercisable | | Range of Exercise Prices | | Shares | | Weighted-Average Remaining Contractual Term (in years) | | Aggregate Intrinsic Value | | Shares (1) | | Weighted-Average Remaining Contractual Life (in years) | | Aggregate Intrinsic Value | | $124.97 to $214.63 | | 175.7 | | | 2.12 | | $ | 7.7 | | | 175.7 | | | 2.12 | | $ | 7.7 | | | $257.08 to $278.00 | | 147.9 | | | 4.42 | | $ | — | | | 126.9 | | | 4.33 | | $ | — | | | $259.56 to $328.65 | | 164.3 | | | 6.59 | | $ | — | | | 22.1 | | | 6.00 | | $ | — | |
(1) Share amounts are rounded but the balance accurately reflects the actual amount of exercisable stock appreciation rights as of December 31, 2019.2022.
As of December 31, 2019,2022, we had $9.5$10.6 million of unrecognized compensation cost related to non-vested stock appreciation rights that is expected to be recognized over a weighted-average period of 2.32.8 years. Our estimated forfeiture rate for stock appreciation rights was 12.7%12.6% as of December 31, 2019.2022.
The total intrinsic value of stock appreciation rights exercised and the resulting tax deductions to realize tax benefits were as follows (in millions): | | | | | | | | | | | | | | | For the Years Ended December 31, | | | 2019 | | 2018 | | 2017 | | Intrinsic value of stock appreciation rights exercised | $ | 37.1 |
| | $ | 35.9 |
| | $ | 25.1 |
| | Realized tax benefits from tax deductions | $ | 9.3 |
| | $ | 8.9 |
| | $ | 9.6 |
|
70
| | | | | | | | | | | | | | | | | | | For the Years Ended December 31, | | 2022 | | 2021 | | 2020 | | Intrinsic value of stock appreciation rights exercised | $ | 3.5 | | | $ | 31.2 | | | $ | 26.7 | | | Realized tax benefits from tax deductions | $ | 0.9 | | | $ | 7.7 | | | $ | 6.7 | |
Employee Stock Purchase Plan
On May 24, 2022, the Company commenced a new Employee Stock Purchase Plan to succeed the prior agreement from 2012. Under the 20122022 Employee Stock Purchase Plan (“ESPP”), all employees who meet certain service requirements are eligible to purchase our common stock through payroll deductions at the end of three month offering periods. The purchase price for such shares is 95% of the fair market value of the stock on the last day of the offering period. A maximum of 2.51.0 million shares is authorized for purchase until issuance of all shares available under the ESPP plan, termination date of May 10, 2022, unless terminated earlier at the discretion of the Board of Directors. Employees purchased approximately 12,40016,100 shares under the ESPP during the year ended December 31, 2019.2022. Approximately 2.40.8 million shares remain available for purchase under the ESPP as of December 31, 2019.
17.
16. Fair Value Measurements:
Fair value is the price that would be received to sell an asset or 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 the following three-level hierarchy for fair value measurements:
Level 1 - Quoted prices for identical instruments in active markets at the measurement date.
| | Level 2 - | 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.
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, 20192022 and 2018,2021, the measurement dates.
The methodologies used to determine the fair value of our financial assets and liabilities as of December 31, 20192022 were the same as those used as of December 31, 2018.2021.
Fair values are estimates and are not necessarily indicative of amounts for which we could settle such instruments currently nor indicative of our intent or ability to dispose of or liquidate them.
Assets and Liabilities Carried at Fair Value on a Recurring Basis
Derivatives
Derivatives, classified as Level 2, were primarily valued using estimated future cash flows based on observed prices from exchange-traded derivatives. We also considered the counterparty’s creditworthiness, or our own creditworthiness, as appropriate. Adjustments were recorded to reflect the risk of credit default, but they were insignificant to the overall value of the derivatives. Refer to Note 109 for more information related to our derivative instruments. Refer to Note 10 for more information related to the fair value assumptions related to our pension assets and liabilities.
Other Fair Value Disclosures
The carrying amounts of Cash and cash equivalents, Short-term investments, Accounts and notes receivable, net, Accounts payable, Other current liabilities, and Short-term debt approximate fair value due to the short maturities of these instruments. The carrying amount of our Domestic Credit FacilityAgreement in Long-term debt also approximates fair value due to its variable-rate characteristics.
The fair value of our senior unsecured notes in Long-term debt was based on the amount of future cash flows using current market rates for debt instruments of similar maturities and credit risk. The following table presents the fair value for our senior unsecured notes in Long-term debt (in millions): | | | | | | | | | | | | | As of December 31, | | 2022 | | 2021 | | Quoted Prices in Active Markets for Similar Instruments (Level 2): | | | | | Senior unsecured notes | $ | 878.0 | | | $ | 959.2 | |
| | | | | | | | | | | As of December 31, | | | 2019 | | 2018 | | Quoted Prices in Active Markets for Similar Instruments (Level 2): | | | | | Senior unsecured notes | $ | 356.8 |
| | $ | 338.4 |
|
18. Selected Quarterly Financial Information (unaudited):
The following tables provide information on Net sales, Gross profit, Net income, Earnings per share and Cash dividends declared per share by quarter (in millions, except per share data):
| | | | | | | | | | | | | | | | | | | | | | | | | | | Net Sales (1) | | Gross Profit (1) | | Net Income (1) | | | 2019 | | 2018 | | 2019 | | 2018 | | 2019 | | 2018 | | First Quarter | $ | 790.3 |
| | $ | 834.8 |
| | $ | 201.6 |
| | $ | 223.2 |
| | $ | 69.3 |
| | $ | 37.9 |
| | Second Quarter | 1,099.1 |
| | 1,175.4 |
| | 332.1 |
| | 361.6 |
| | 110.7 |
| | 137.6 |
| | Third Quarter | 1,032.9 |
| | 1,030.2 |
| | 298.3 |
| | 301.9 |
| | 114.7 |
| | 108.0 |
| | Fourth Quarter | 885.0 |
| | 843.6 |
| | 247.8 |
| | 224.5 |
| | 114.0 |
| | 75.6 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | Basic Earnings per Share (2) | | Diluted Earnings per Share (2) | | Cash Dividends per Common Share | | | 2019 | | 2018 | | 2019 | | 2018 | | 2019 | | 2018 | | First Quarter | $ | 1.75 |
| | $ | 0.91 |
| | $ | 1.73 |
| | $ | 0.90 |
| | $ | 0.64 |
| | $ | 0.51 |
| | Second Quarter | 2.83 |
| | 3.38 |
| | 2.80 |
| | 3.35 |
| | 0.77 |
| | 0.64 |
| | Third Quarter | 2.97 |
| | 2.68 |
| | 2.94 |
| | 2.65 |
| | 0.77 |
| | 0.64 |
| | Fourth Quarter | 2.96 |
| | 1.89 |
| | 2.93 |
| | 1.87 |
| | 0.77 |
| | 0.64 |
|
(1) The sum of the quarterly results for each of the four quarters may not equal the full year results due to rounding.
(2) EPS for each quarter is computed using the weighted-average number of shares outstanding during that quarter, while EPS for the fiscal year is computed using the weighted-average number of shares outstanding during the year. Thus, the sum of the EPS for each of the four quarters may not equal the EPS for the fiscal year.
Summary of 2019 Quarterly Results
The following unusual or infrequent pre-tax items were included in the 2019 quarterly results:
1st Quarter. We signed an agreement with EPTA S.p.A., a private Italian company, for the sale of our Kysor Warren business. Refer to Note 7 for details regarding the divestiture. We also recorded gains of $46.4 million from insurance recoveries related to our Marshalltown facility; refer to Note 5 for details.
2nd Quarter. We entered into an agreement with Pacific Life Insurance Company to purchase a group annuity contract and transfer our pension plan assets and related pension benefit obligations. Refer to Note 11 for details regarding the transaction. We also recorded gains of $31.9 million from insurance recoveries related to our Marshalltown facility; refer to Note 5 for details.
3rd Quarter. We recorded gains of $7.1 million from insurance recoveries related to our Marshalltown facility; refer to Note 5 for details.
4th Quarter. We entered into a second agreement with Pacific Life Insurance Company to purchase a group annuity contract and transfer our pension plan assets and related pension benefit obligations. Refer to Note 11 for details regarding the transaction. We also reached a final settlement with our insurance carriers for the losses incurred from tornado damage at our Marshalltown facility. We recorded gains of $93.4 million for the settlement and receipt of insurance recoveries; refer to Note 5 for further details.
Summary of 2018 Quarterly Results
The following unusual or infrequent pre-tax items were included in the 2018 quarterly results:
1st Quarter. We obtained board approval and signed an agreement with Beijer Ref AB, a Stockholm Stock Exchange-listed company, for the sale of our Australia and Asia business.
2nd Quarter. We completed the sale to Beijer Ref AB of our Australia and Asia business and sold our Milperra property. We obtained board approval and signed an agreement with Elgin SA, a private Brazilian company, for the sale of our South America business. Refer to Note 7 for details regarding the divestiture.
3rd Quarter. We completed the sale to Elgin SA of our South America business. Our manufacturing facility in Marshalltown, Iowa was severely damaged by a tornado. Refer to Note 7 for details regarding the divestiture and Note 5 for details related to the tornado damage.
4th Quarter. We recorded gains of $38.6 million from insurance recoveries related to our Marshalltown facility, refer to Note 5 for further details.
19. Condensed Consolidating Financial Statements:
The Company’s senior unsecured notes are unconditionally guaranteed by certain of the Company’s subsidiaries (the “Guarantor
Subsidiaries”) and are not secured by our other subsidiaries (the “Non-Guarantor Subsidiaries”). The Guarantor Subsidiaries are 100% owned, all guarantees are full and unconditional, and all guarantees are joint and several. As a result of the guarantee arrangements, we are required to present condensed consolidating financial statements.
The condensed consolidating financial statements reflect the investments in subsidiaries of the Company using the equity method of accounting. The principal elimination entries eliminate investments in subsidiaries and intercompany balances and transactions.
Condensed consolidating financial statements of the Company, its Guarantor Subsidiaries and Non-Guarantor Subsidiaries as of December 31, 2019 and December 31, 2018 and for the years ended December 31, 2019, 2018 and 2017 are shown on the following pages.
Condensed Consolidating Balance Sheets
As of December 31, 2019
(In millions)
| | | | | | | | | | | | | | | | | | | | | | (Amounts in millions) | Parent | | Guarantor
Subsidiaries | | Non-
Guarantor
Subsidiaries | | Eliminations | | Consolidated | | ASSETS | | Current Assets: | | | | | | | | | | | Cash and cash equivalents | $ | 1.2 |
| | $ | 17.5 |
| | $ | 18.6 |
| | $ | — |
| | $ | 37.3 |
| | Short-term investments | — |
| | — |
| | 2.9 |
| | — |
| | 2.9 |
| | Accounts and notes receivable, net | — |
| | 53.5 |
| | 424.3 |
| | — |
| | 477.8 |
| | Inventories, net | — |
| | 477.2 |
| | 68.7 |
| | (1.8 | ) | | 544.1 |
| | Other assets | 4.4 |
| | 40.7 |
| | 48.4 |
| | (34.7 | ) | | 58.8 |
| | Total current assets | 5.6 |
| | 588.9 |
| | 562.9 |
| | (36.5 | ) | | 1,120.9 |
| | Property, plant and equipment, net | — |
| | 388.8 |
| | 56.6 |
| | — |
| | 445.4 |
| | Right-of-use assets from operating leases | — |
| | 158.9 |
| | 22.7 |
| | — |
| | 181.6 |
| | Goodwill | — |
| | 166.2 |
| | 20.3 |
| | — |
| | 186.5 |
| | Investment in subsidiaries | 2,128.9 |
| | 390.6 |
| | 50.2 |
| | (2,569.7 | ) | | — |
| | Deferred income taxes | 4.1 |
| | 5.4 |
| | 24.2 |
| | (12.2 | ) | | 21.5 |
| | Other assets, net | 1.6 |
| | 61.9 |
| | 1.3 |
| | 14.2 |
| | 79.0 |
| | Intercompany (payables) receivables, net | (1,453.6 | ) | | 1,114.6 |
| | 167.1 |
| | 171.9 |
| | — |
| | Total assets | $ | 686.6 |
| | $ | 2,875.3 |
| | $ | 905.3 |
| | $ | (2,432.3 | ) | | $ | 2,034.9 |
| | LIABILITIES AND STOCKHOLDERS’ (DEFICIT) EQUITY | | Current liabilities: | | | | | | | | | | | Current maturities of long-term debt | 29.4 |
| | 6.4 |
| | 286.1 |
| | — |
| | 321.9 |
| | Current operating lease liabilities | — |
| | 45.5 |
| | 7.2 |
| | — |
| | 52.7 |
| | Accounts payable | 29.7 |
| | 296.5 |
| | 46.2 |
| | — |
| | 372.4 |
| | Accrued expenses | 4.2 |
| | 211.2 |
| | 40.3 |
| | — |
| | 255.7 |
| | Income taxes (receivable) payable | (53.4 | ) | | 50.2 |
| | 54.1 |
| | (50.9 | ) | | — |
| | Total current liabilities | 9.9 |
| | 609.8 |
| | 433.9 |
| | (50.9 | ) | | 1,002.7 |
| | Long-term debt | 823.4 |
| | 23.4 |
| | 2.5 |
| | — |
| | 849.3 |
| | Long-term operating lease liabilities | — |
| | 115.3 |
| | 15.7 |
| | — |
| | 131.0 |
| | Pensions | — |
| | 79.4 |
| | 8.0 |
| | — |
| | 87.4 |
| | Other liabilities | 23.5 |
| | 104.4 |
| | 6.8 |
| | — |
| | 134.7 |
| | Total liabilities | 856.8 |
| | 932.3 |
| | 466.9 |
| | (50.9 | ) | | 2,205.1 |
| | Commitments and contingencies |
| |
| |
| |
| |
| | Total stockholders’ (deficit) equity | (170.2 | ) | | 1,943.0 |
| | 438.4 |
| | (2,381.4 | ) | | (170.2 | ) | | Total liabilities and stockholders’ (deficit) equity | $ | 686.6 |
| | $ | 2,875.3 |
| | $ | 905.3 |
| | $ | (2,432.3 | ) | | $ | 2,034.9 |
|
Condensed Consolidating Balance Sheets
As of December 31, 2018
(In millions)
| | | | | | | | | | | | | | | | | | | | | | (Amounts in millions) | Parent | | Guarantor
Subsidiaries | | Non-Guarantor
Subsidiaries | | Eliminations | | Consolidated | | ASSETS | | Current Assets: | | | | | | | | | | | Cash and cash equivalents | $ | 1.8 |
| | $ | 15.4 |
| | $ | 29.1 |
| | $ | — |
| | $ | 46.3 |
| | Accounts and notes receivable, net | — |
| | 44.3 |
| | 428.4 |
| | — |
| | 472.7 |
| | Inventories, net | — |
| | 411.4 |
| | 103.9 |
| | (5.5 | ) | | 509.8 |
| | Other assets | 3.3 |
| | 36.2 |
| | 54.7 |
| | (33.6 | ) | | 60.6 |
| | Total current assets | 5.1 |
| | 507.3 |
| | 616.1 |
| | (39.1 | ) | | 1,089.4 |
| | Property, plant and equipment, net | — |
| | 293.3 |
| | 118.6 |
| | (3.6 | ) | | 408.3 |
| | Goodwill | — |
| | 166.1 |
| | 20.5 |
| | — |
| | 186.6 |
| | Investment in subsidiaries | 1,311.9 |
| | 357.8 |
| | (0.5 | ) | | (1,669.2 | ) | | — |
| | Deferred income taxes | 1.4 |
| | 54.4 |
| | 23.4 |
| | (12.2 | ) | | 67.0 |
| | Other assets, net | 1.5 |
| | 48.1 |
| | 17.8 |
| | (1.5 | ) | | 65.9 |
| | Intercompany (payables) receivables, net | (715.5 | ) | | 675.8 |
| | 142.6 |
| | (102.9 | ) | | — |
| | Total assets | $ | 604.4 |
| | $ | 2,102.8 |
| | $ | 938.5 |
| | $ | (1,828.5 | ) | | $ | 1,817.2 |
| | LIABILITIES AND STOCKHOLDERS’ (DEFICIT) EQUITY | | Current liabilities: | | | | | | | | | | | Current maturities of long-term debt | $ | 29.4 |
| | $ | 2.8 |
| | $ | 268.6 |
| | $ | — |
| | $ | 300.8 |
| | Accounts payable | 25.5 |
| | 295.7 |
| | 112.1 |
| | — |
| | 433.3 |
| | Accrued expenses | 12.1 |
| | 213.8 |
| | 46.4 |
| | — |
| | 272.3 |
| | Income taxes (receivable) payable | (38.5 | ) | | 40.6 |
| | 50.8 |
| | (50.8 | ) | | 2.1 |
| | Total current liabilities | 28.5 |
| | 552.9 |
| | 477.9 |
| | (50.8 | ) | | 1,008.5 |
| | Long-term debt | 724.9 |
| | 15.0 |
| | 0.6 |
| | — |
| | 740.5 |
| | Pensions | — |
| | 75.1 |
| | 7.7 |
| | — |
| | 82.8 |
| | Other liabilities | 0.6 |
| | 126.4 |
| | 8.0 |
| | — |
| | 135.0 |
| | Total liabilities | 754.0 |
| | 769.4 |
| | 494.2 |
| | (50.8 | ) | | 1,966.8 |
| | Commitments and contingencies | | | | | | | | | | | Total stockholders’ (deficit) equity | (149.6 | ) | | 1,333.4 |
| | 444.3 |
| | (1,777.7 | ) | | (149.6 | ) | | Total liabilities and stockholders’ (deficit) equity | $ | 604.4 |
| | $ | 2,102.8 |
| | $ | 938.5 |
| | $ | (1,828.5 | ) | | $ | 1,817.2 |
|
Condensed Consolidating Statements of Operations and Comprehensive Income
For the Year Ended December 31, 2019
(In millions)
| | | | | | | | | | | | | | | | | | | | | | (Amounts in millions) | Parent | | Guarantor
Subsidiaries | | Non-
Guarantor
Subsidiaries | | Eliminations | | Consolidated | | Net Sales | $ | — |
| | $ | 3,479.8 |
| | $ | 555.7 |
| | $ | (228.3 | ) | | $ | 3,807.2 |
| | Cost of goods sold | — |
| | 2,513.2 |
| | 441.6 |
| | (227.4 | ) | | 2,727.4 |
| | Gross profit | — |
| | 966.6 |
| | 114.1 |
| | (0.9 | ) | | 1,079.8 |
| | Operating expenses: | | | | | | | | |
| | Selling, general and administrative expenses | — |
| | 559.6 |
| | 26.3 |
| | — |
| | 585.9 |
| | Losses (gains) and other expenses, net | (0.5 | ) | | 6.4 |
| | 2.7 |
| | (0.3 | ) | | 8.3 |
| | Restructuring charges | — |
| | 9.3 |
| | 1.0 |
| | — |
| | 10.3 |
| | Loss (gain), net on sale of businesses and related property | — |
| | 2.8 |
| | 7.8 |
| | — |
| | 10.6 |
| | Gain from insurance recoveries, net of losses incurred | — |
| | (178.8 | ) | | — |
| | — |
| | (178.8 | ) | | Income from equity method investments | (415.2 | ) | | (54.2 | ) | | (10.5 | ) | | 466.5 |
| | (13.4 | ) | | Operating income | 415.7 |
| | 621.5 |
| | 86.8 |
| | (467.1 | ) | | 656.9 |
| | Pension settlements | — |
| | 99.2 |
| | — |
| | — |
| | 99.2 |
| | Interest expense, net | 8.9 |
| | 29.7 |
| | 8.9 |
| | — |
| | 47.5 |
| | Other expense (income), net | — |
| | 0.5 |
| | 1.8 |
| | — |
| | 2.3 |
| | Income from continuing operations before income taxes | 406.8 |
|
| 492.1 |
| | 76.1 |
| | (467.1 | ) | | 507.9 |
| | Provision for income taxes | (2.0 | ) | | 72.5 |
| | 28.6 |
| | — |
| | 99.1 |
| | Income from continuing operations | 408.8 |
| | 419.6 |
| | 47.5 |
| | (467.1 | ) | | 408.8 |
| | Loss from discontinued operations | — |
| | — |
| | (0.1 | ) | | — |
| | (0.1 | ) | | Net income | $ | 408.8 |
| | $ | 419.6 |
| | $ | 47.4 |
| | $ | (467.1 | ) | | $ | 408.7 |
| | Other comprehensive income | $ | 7.4 |
| | $ | 74.5 |
| | $ | 3.1 |
| | $ | — |
| | $ | 85.0 |
| | Comprehensive income | $ | 416.2 |
| | $ | 494.1 |
| | $ | 50.5 |
| | $ | (467.1 | ) | | $ | 493.7 |
|
Condensed Consolidating Statements of Operations and Comprehensive Income
For the Year Ended December 31, 2018
(In millions)
| | | | | | | | | | | | | | | | | | | | | | (Amounts in millions) | Parent | | Guarantor Subsidiaries | | Non- Guarantor Subsidiaries | | Eliminations | | Consolidated | | Net sales | $ | — |
| | $ | 3,473.2 |
| | $ | 1,129.6 |
| | $ | (718.9 | ) | | $ | 3,883.9 |
| | Cost of goods sold | — |
| | 2,500.6 |
| | 988.7 |
| | (716.6 | ) | | 2,772.7 |
| | Gross profit | — |
| | 972.6 |
| | 140.9 |
| | (2.3 | ) | | 1,111.2 |
| | Operating expenses: | | | | | | | | | | | Selling, general and administrative expenses | — |
| | 555.3 |
| | 53.6 |
| | (0.7 | ) | | 608.2 |
| | Losses (gains) and other expenses, net | 2.0 |
| | 5.4 |
| | 6.3 |
| | (0.3 | ) | | 13.4 |
| | Restructuring charges | — |
| | 1.1 |
| | 1.9 |
| | — |
| | 3.0 |
| | Loss (gain), net on sale of businesses and related property | — |
| | 40.3 |
| | (13.3 | ) | | — |
| | 27.0 |
| | Gain from insurance recoveries, net of losses incurred | — |
| | (38.3 | ) | | — |
| | — |
| | (38.3 | ) | | Income from equity method investments | (367.4 | ) | | (70.3 | ) | | (9.9 | ) | | 435.6 |
| | (12.0 | ) | | Operational income | 365.4 |
| | 479.1 |
| | 102.3 |
| | (436.9 | ) | | 509.9 |
| | Pension settlement | — |
| | — |
| | 0.4 |
| | — |
| | 0.4 |
| | Interest expense, net | 9.0 |
| | 18.5 |
| | 10.8 |
| | — |
| | 38.3 |
| | Other expense (income), net | — |
| | 1.5 |
| | 1.8 |
| | — |
| | 3.3 |
| | Income from continuing operations before income taxes | 356.4 |
| | 459.1 |
| | 89.3 |
| | (436.9 | ) | | 467.9 |
| | Provision for income taxes | (2.6 | ) | | 92.1 |
| | 18.0 |
| | 0.1 |
| | 107.6 |
| | Income from continuing operations | 359.0 |
| | 367.0 |
| | 71.3 |
| | (437.0 | ) | | 360.3 |
| | Loss from discontinued operations | — |
| | — |
| | (1.3 | ) | | — |
| | (1.3 | ) | | Net income | $ | 359.0 |
| | $ | 367.0 |
| | $ | 70.0 |
| | $ | (437.0 | ) | | $ | 359.0 |
| | Other comprehensive loss | $ | (15.4 | ) | | $ | (15.3 | ) | | $ | (0.7 | ) | | $ | — |
| | $ | (31.4 | ) | | Comprehensive income | $ | 343.6 |
| | $ | 351.7 |
| | $ | 69.3 |
| | $ | (437.0 | ) | | $ | 327.6 |
|
Condensed Consolidating Statements of Operations and Comprehensive Income
For the Year Ended December 31, 2017
(In millions)
| | | | | | | | | | | | | | | | | | | | | | (Amounts in millions) | Parent | | Guarantor
Subsidiaries | | Non-Guarantor
Subsidiaries | | Eliminations | | Consolidated | | Net Sales | $ | — |
| | $ | 3,295.8 |
| | $ | 1,144.2 |
| | $ | (600.4 | ) | | $ | 3,839.6 |
| | Cost of goods sold | — |
| | 2,359.6 |
| | 953.6 |
| | (598.8 | ) | | 2,714.4 |
| | Gross profit | — |
| | 936.2 |
| | 190.6 |
| | (1.6 | ) | | 1,125.2 |
| | Operating expenses: | | | | | | | | | | | Selling, general and administrative expenses | — |
| | 553.6 |
| | 85.0 |
| | (0.9 | ) | | 637.7 |
| | Losses (gains) and other expenses, net | 2.0 |
| | 3.3 |
| | 1.9 |
| | (0.1 | ) | | 7.1 |
| | Restructuring charges | — |
|
| 2.1 |
| | 1.1 |
| | — |
| | 3.2 |
| | Loss (gain), net on sale of businesses and related property | — |
| | 1.1 |
| | — |
| | — |
| | 1.1 |
| | Income from equity method investments | (324.3 | ) | | (74.9 | ) | | (14.5 | ) | | 395.3 |
| | (18.4 | ) | | Operational income | 322.3 |
| | 451.0 |
| | 117.1 |
| | (395.9 | ) | | 494.5 |
| | Interest expense, net | 26.9 |
| | (2.7 | ) | | 6.4 |
| | — |
| | 30.6 |
| | Other income, net | — |
| | — |
| | (0.1 | ) | | — |
| | (0.1 | ) | | Income from continuing operations before income taxes | 295.4 |
| | 453.7 |
| | 110.8 |
| | (395.9 | ) | | 464.0 |
| | Provision for income taxes | (10.3 | ) | | 136.2 |
| | 31.2 |
| | (0.2 | ) | | 156.9 |
| | Income from continuing operations | 305.7 |
| | 317.5 |
| | 79.6 |
| | (395.7 | ) | | 307.1 |
| | Loss from discontinued operations | — |
| | — |
| | (1.4 | ) | | — |
| | (1.4 | ) | | Net income | $ | 305.7 |
| | $ | 317.5 |
| | $ | 78.2 |
| | $ | (395.7 | ) | | $ | 305.7 |
| | Other comprehensive income | $ | 1.7 |
| | $ | 5.5 |
| | $ | 30.5 |
| | $ | — |
| | $ | 37.7 |
| | Comprehensive income | $ | 307.4 |
| | $ | 323.0 |
| | $ | 108.7 |
| | $ | (395.7 | ) | | $ | 343.4 |
|
Condensed Consolidating Statements of Cash Flows
For the Year Ended December 31, 2019
(In millions)
| | | | | | | | | | | | | | | | | | | | | | (Amounts in millions) | Parent | | Guarantor Subsidiaries | | Non-Guarantor Subsidiaries | | Eliminations | | Consolidated | | Cash flows from operating activities: | $ | (30.2 | ) | | $ | 421.8 |
| | $ | 4.5 |
| | $ | — |
| | $ | 396.1 |
| | Cash flows from investing activities: | | | | | | | | | | | Proceeds from the disposal of property, plant and equipment | — |
| | 1.0 |
| | 0.3 |
| | — |
| | 1.3 |
| | Purchases of property, plant and equipment | — |
| | (95.2 | ) | | (10.4 | ) | | — |
| | (105.6 | ) | | Purchases of short-term investments | — |
| | — |
| | (2.9 | ) | | | | (2.9 | ) | | Net proceeds from sale of businesses | — |
| | 42.8 |
| | 0.7 |
| | — |
| | 43.5 |
| | Insurance recoveries received for property damage incurred from natural disaster | — |
| | 79.6 |
| | — |
| | — |
| | 79.6 |
| | Net cash provided by (used in) investing activities | — |
| | 28.2 |
| | (12.3 | ) | | — |
| | 15.9 |
| | Cash flows from financing activities: | | | | | | | | | | | Short-term debt payments | — |
| | — |
| | (5.3 | ) | | — |
| | (5.3 | ) | | Short-term debt borrowings | — |
| | — |
| | 5.3 |
| | — |
| | 5.3 |
| | Asset securitization borrowings | — |
| | — |
| | 184.5 |
| | — |
| | 184.5 |
| | Asset securitization payments | — |
| | — |
| | (167.5 | ) | | — |
| | (167.5 | ) | | Long-term debt payments | — |
| | (3.7 | ) | | (2.7 | ) | | — |
| | (6.4 | ) | | Long-term debt borrowings | — |
| | — |
| | — |
| | — |
| | — |
| | Borrowings on credit facility | 2,367.0 |
| | — |
| | — |
| | — |
| | 2,367.0 |
| | Payments on credit facility | (2,269.5 | ) | | — |
| | — |
| | — |
| | (2,269.5 | ) | Payments of deferred financing costs
| — |
| | — |
| | (0.3 | ) | | — |
| | (0.3 | ) | | Proceeds from employee stock purchases | 3.3 |
| | — |
| | — |
| | — |
| | 3.3 |
| | Repurchases of common stock to satisfy employee withholding tax obligations | (24.0 | ) | | — |
| | — |
| | — |
| | (24.0 | ) | Repurchases of common stock
| (400.0 | ) | | — |
| | — |
| | — |
| | (400.0 | ) | | Intercompany debt | 21.8 |
| | (15.1 | ) | | (6.7 | ) | | — |
| | — |
| | Intercompany financing activity | 441.5 |
| | (429.6 | ) | | (11.9 | ) | | — |
| | — |
| | Cash dividends paid | (110.5 | ) | | — |
| | — |
| | — |
| | (110.5 | ) | | Net cash provided by (used in) financing activities | 29.6 |
| | (448.4 | ) | | (4.6 | ) | | — |
| | (423.4 | ) | | (Decrease) increase in cash and cash equivalents | (0.6 | ) | | 1.6 |
| | (12.4 | ) | | — |
|
| (11.4 | ) | | Effect of exchange rates on cash and cash equivalents | — |
| | 0.5 |
| | 1.9 |
| | — |
| | 2.4 |
| | Cash and cash equivalents, beginning of year | 1.8 |
| | 15.4 |
| | 29.1 |
| | — |
| | 46.3 |
| | Cash and cash equivalents, end of year | $ | 1.2 |
| | $ | 17.5 |
| | $ | 18.6 |
| | $ | — |
| | $ | 37.3 |
|
Condensed Consolidating Statements of Cash Flows
For the Year Ended December 31, 2018
(In millions)
| | | | | | | | | | | | | | | | | | | | | | (Amounts in millions) | Parent | | Guarantor Subsidiaries | | Non-Guarantor Subsidiaries | | Eliminations | | Consolidated | | Cash flows from operating activities: | $ | 53.7 |
| | $ | 477.9 |
| | $ | (36.1 | ) | | $ | — |
| | $ | 495.5 |
| | Cash flows from investing activities: | | | | | | | | | | | Proceeds from the disposal of property, plant and equipment | — |
| | — |
| | 0.1 |
| | — |
| | 0.1 |
| | Purchases of property, plant and equipment | — |
| | (76.0 | ) | | (19.2 | ) | | — |
| | (95.2 | ) | | Net proceeds from sale of businesses and related property | — |
| | 2.7 |
| | 112.0 |
| | — |
| | 114.7 |
| | Insurance recoveries received for property damage incurred from natural disaster | — |
| | 10.9 |
| | — |
| | — |
| | 10.9 |
| | Net cash (used in) provided by investing activities | — |
| | (62.4 | ) | | 92.9 |
| | — |
| | 30.5 |
| | Cash flows from financing activities: |
| |
| |
| |
| |
| | Short-term debt borrowings | — |
| | — |
| | 40.3 |
| | — |
| | 40.3 |
| | Short-term debt payments | — |
| | — |
| | (40.3 | ) | | — |
| | (40.3 | ) | | Asset securitization borrowings | — |
| | — |
| | 155.0 |
| | — |
| | 155.0 |
| | Asset securitization payments | — |
| | — |
| | (163.0 | ) | | — |
| | (163.0 | ) | | Long-term debt payments | — |
| | (2.9 | ) | | (0.1 | ) | | — |
| | (3.0 | ) | | Borrowings from credit facility | 2,435.9 |
| | — |
| | — |
| | — |
| | 2,435.9 |
| | Payments on credit facility | (2,395.0 | ) | | — |
| | — |
| | — |
| | (2,395.0 | ) | | Proceeds from employee stock purchases | 3.3 |
| | — |
| | — |
| | — |
| | 3.3 |
| | Repurchases of common stock to satisfy employee withholding tax obligations | (26.9 | ) | | — |
| | — |
| | — |
| | (26.9 | ) | Repurchases of common stock
| (450.2 | ) | | — |
| | — |
| | — |
| | (450.2 | ) | | Intercompany debt | (14.5 | ) | | 83.3 |
| | (68.8 | ) | | — |
| | — |
| | Intercompany financing activity | 487.8 |
| | (508.5 | ) | | 20.7 |
| | — |
| | — |
| | Cash dividends paid | (93.9 | ) | | — |
| | — |
| | — |
| | (93.9 | ) | | Net cash used in financing activities | (53.5 | ) | | (428.1 | ) | | (56.2 | ) | | — |
| | (537.8 | ) | | Increase (decrease) in cash and cash equivalents | 0.2 |
| | (12.6 | ) | | 0.6 |
| | — |
| | (11.8 | ) | | Effect of exchange rates on cash and cash equivalents | — |
| | — |
| | (10.1 | ) | | — |
| | (10.1 | ) | | Cash and cash equivalents, beginning of year | 1.6 |
| | 28.0 |
| | 38.6 |
| | — |
| | 68.2 |
| | Cash and cash equivalents, end of year | $ | 1.8 |
| | $ | 15.4 |
| | $ | 29.1 |
| | $ | — |
| | $ | 46.3 |
|
Condensed Consolidating Statements of Cash Flows
For the Year Ended December 31, 2017
(In millions)
| | | | | | | | | | | | | | | | | | | | | | (Amounts in millions) | Parent | | Guarantor Subsidiaries | | Non-Guarantor Subsidiaries | | Eliminations | | Consolidated | | Cash flows from operating activities: | $ | 467.4 |
| | $ | 31.1 |
| | $ | (173.4 | ) | | $ | — |
| | $ | 325.1 |
| | Cash flows from investing activities: | | | | | | | | | | | Proceeds from the disposal of property, plant and equipment | — |
| | 0.1 |
| | 0.1 |
| | — |
| | 0.2 |
| | Purchases of property, plant and equipment | — |
| | (70.7 | ) | | (27.6 | ) | | — |
| | (98.3 | ) | | Net cash used in investing activities | — |
| | (70.6 | ) | | (27.5 | ) | | — |
| | (98.1 | ) | | Cash flows from financing activities: |
| |
| |
| |
| |
| | Short-term debt borrowings | — |
| | — |
| | 30.4 |
| | — |
| | 30.4 |
| | Short-term debt payments | — |
| | — |
| | (31.9 | ) | | — |
| | (31.9 | ) | | Asset securitization borrowings | — |
| | — |
| | 315.0 |
| | — |
| | 315.0 |
| | Asset securitization payments | — |
| | — |
| | (89.0 | ) | | — |
| | (89.0 | ) | | Long-term debt payments | (200.0 | ) | | (0.3 | ) | | (0.6 | ) | | — |
| | (200.9 | ) | | Borrowings from credit facility | 2,376.5 |
| | — |
| | — |
| | — |
| | 2,376.5 |
| | Payments on credit facility | (2,265.5 | ) | | — |
| | — |
| | — |
| | (2,265.5 | ) | Payments of deferred financing costs
| — |
| | — |
| | (0.2 | ) | | — |
| | (0.2 | ) | | Proceeds from employee stock purchases | 3.1 |
| | — |
| | — |
| | — |
| | 3.1 |
| | Repurchases of common stock to satisfy employee withholding tax obligations | (26.1 | ) | | — |
| | — |
| | — |
| | (26.1 | ) | Repurchases of common stock
| (250.0 | ) | | — |
| | — |
| | — |
| | (250.0 | ) | | Intercompany debt | 56.4 |
| | (34.9 | ) | | (21.5 | ) | | — |
| | — |
| | Intercompany financing activity | (81.7 | ) | | 85.6 |
| | (3.9 | ) | | — |
| | — |
| | Cash dividends paid | (79.7 | ) | | — |
| | — |
| | — |
| | (79.7 | ) | | Net cash (used in) provided by financing activities | (467.0 | ) | | 50.4 |
| | 198.3 |
| | — |
| | (218.3 | ) | | Increase (decrease) in cash and cash equivalents | 0.4 |
| | 10.9 |
| | (2.6 | ) | | — |
| | 8.7 |
| | Effect of exchange rates on cash and cash equivalents | — |
| | — |
| | 9.3 |
| | — |
| | 9.3 |
| | Cash and cash equivalents, beginning of year | 1.2 |
| | 17.1 |
| | 31.9 |
| | — |
| | 50.2 |
| | Cash and cash equivalents, end of year | $ | 1.6 |
| | $ | 28.0 |
| | $ | 38.6 |
| | $ | — |
| | $ | 68.2 |
|
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A. Controls and Procedures
Disclosure Controls and Procedures
As required by Rule 13a-15 under the Exchange Act, we carried out an evaluation, under the supervision and with the participation of our current management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report. There are inherent limitations to the effectiveness of any system of disclosure controls and procedures, including the possibility of human error and circumvention or overriding of the controls and procedures. Accordingly, even effective disclosure controls and procedures can only provide reasonable assurance of achieving their control objectives. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that, as of December 31, 2019,2022, our disclosure controls and procedures were effective to provide reasonable assurance that information required to be disclosed by us in the reports we file or submit under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the applicable rules and forms, and that such information is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure.
Management’s Annual Report on Internal Control Over Financial Reporting
See “Management’s Report on Internal Control Over Financial Reporting” included in Item 8 “Financial Statements and Supplementary Data.”
Attestation Report of the Independent Registered Public Accounting Firm
See “Report of Independent Registered Public Accounting Firm” included in Item 8 “Financial Statements and Supplementary Data.”
Changes in Internal Control Over Financial Reporting
In the first quarter of 2019, we implemented new controls as part of our efforts to adopt ASU 2016-02, including new controls related to monitoring the adoption process, implementing a new IT system to capture, calculate, and account for leases, and gather the necessary data to properly account for leases under ASC 842. There were no other changes during the year ended December 31, 2022 in our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Item 9B. Other Information
None.
PART III
Item 10. Directors, Executive Officers and Corporate Governance
Incorporated herein by reference from the Company’s definitive proxy statement, which will be filed no later than 120 days after December 31, 2019.2022. Also, refer to Part I, Item 1 “Business - Information about our Executive Officers ” of this Annual Report on Form 10-K, which identifies our executive officers and is incorporated herein by reference.
Item 11. Executive Compensation
Incorporated herein by reference from the Company’s definitive proxy statement, which will be filed no later than 120 days after December 31, 2019.2022.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Incorporated herein by reference from the Company’s definitive proxy statement, which will be filed no later than 120 days after December 31, 2019.2022. Also, refer to Note 1615 in the Notes to the Consolidated Financial Statements for additional information about our equity compensation plans.
Item 13. Certain Relationships and Related Transactions and Director Independence
Incorporated herein by reference from the Company’s definitive proxy statement, which will be filed no later than 120 days after December 31, 2019.2022.
Item 14. Principal Accounting Fees and Services
Our independent registered public accounting firm is KPMG LLP, Dallas, TX, Auditor Firm ID: 185.
Incorporated herein by reference from the Company’s definitive proxy statement, which will be filed no later than 120 days after December 31, 2019.2022.
PART IV
Item 15. Exhibits and Financial Statement Schedules
Financial Statements
The following financial statements are included in Part II, Item 8 of the Annual Report on Form 10-K: •Report of Independent Registered Public Accounting Firm (KPMG LLP, Dallas, TX, Auditor Firm ID: 185) | | •Consolidated Balance Sheets as of December 31, 2022 and 2021 •Consolidated Statements of Operations for the Years Ended December 31, 2022, 2021 and 2020 • | Consolidated Balance Sheets as of December 31, 2019 and 2018
|
| | • | Consolidated Statements of Operations for the Years Ended December 31, 2019, 2018 and 2017
|
Consolidated Statements of Comprehensive Income for the Years Ended December 31, 2019, 20182022, 2021 and 20172020 •Consolidated Statements of Stockholders’ (Deficit) EquityDeficit for the Years Ended December 31, 2019, 20182022, 2021 and 20172020 •Consolidated Statements of Cash Flows for the Years Ended December 31, 2019, 20182022, 2021 and 20172020 •Notes to the Consolidated Financial Statements for the Years Ended December 31, 2019, 20182022, 2021 and 20172020
Financial Statement Schedules
The financial statement schedule included in this Annual Report on Form 10-K is Schedule II - Valuation and Qualifying Accounts and Reserves for the Years Ended December 31, 2019, 20182022, 2021 and 20172020 (see Schedule II immediately following the signature page of this Annual Report on Form 10-K).
Financial statement schedules not included in this Annual Report on Form 10-K have been omitted because they are not applicable or the required information is shown in the Consolidated Financial Statements or Notes thereto.
Exhibits
A list of the exhibits required to be filed or furnished as part of this Annual Report on Form 10-K is set forth in the Index to Exhibits, which immediately precedes such exhibits, and is incorporated herein by reference.
INDEX TO EXHIBITS
| | | | | | | 3.1 | | | 3.2 | | 4.24.1 | | 4.3 | | 4.44.2 | Sixth Supplemental Indenture, dated as of November 3, 2016, among LII, each other existing Guarantor under the Indenture, dated as of May 3, 2010, as subsequently supplemented, and USU.S. Bank National Association, as trustee (filed as Exhibit 4.2 to LII’s Current Report on Form 8-K filed on November 3, 2016 and incorporated herein by reference). | 4.54.3 | Seventh Supplemental Indenture, dated as of January 23, 2019, among LII Mexico Holdings Ltd., Lennox International Inc., each other existing Guarantor under the Indenture, dated as of May 3, 2010, as subsequently supplemented, and US Bank National Association, as trustee (filed as Exhibit 4.5 to LII’s Annual Report on Form 10-K filed on February 19,2019 and incorporated herein by reference). | 4.6 | | 4.74.4 | Ninth Supplemental Indenture, dated as of July 30, 2020, among LII, each existing Guarantor under the Indenture, dated as of May 3, 2010, as subsequently supplemented, and U.S. Bank National Association, as trustee (filed as Exhibit 4.2 to LII’s Current Report on Form 8-K filed on July 30, 2020 and incorporated herein by reference). | | 4.5 | | | 4.6 |
| | 4.7 | | | 4.8 | | | 10.1 | Sixth Amended and Restated Credit Facility Agreement, dated as of August 30, 2016,July 14, 2021, among Lennox International Inc., a Delaware corporation, the LendersBanks party thereto, and JPMorgan Chase Bank, N.A., as Administrative Agent (filed as Exhibit 10.1 to LII's Current Report on Form 8-K filed on September 2, 2016 and incorporated herein by reference) | 10.2 | | 10.3 |
| 10.4 | Third Amendment (Incremental Amendment) to Sixth Amended and Restated Credit Facility Agreement dated as of January 22, 2019, among Lennox International Inc., a Delaware corporation, the lenders from time to time party thereto, and J.P.Morgan Chase Bank, N.A., as Administrative Agent (filed as Exhibit 10.1 to LII’s Current Report on Form 8-K filed on January 25, 2019,July 15, 2021 and incorporated herein by reference). | 10.510.2 | Form of Sixth Amended and Restated Subsidiary GuaranteeGuaranty Agreement, for the Sixth Amended and Restated Credit Facility dated as of August 30, 2016 signed by Allied Air Enterprises LLC, Advanced Distributor Products LLC, Heatcraft Inc., Heatcraft Refrigeration Products LLC, Lennox Global Ltd., Lennox Industries Inc., LGL Australia (US) Inc., Lennox National Account Services LLCJuly 14, 2021, among the guarantors party thereto and LGL Europe Holding Co. (filed as Exhibit C in Exhibit 10.1 to LII's Current Report on Form 8-K filed on September 2, 2016 and incorporated herein by reference). | 10.6 | Amendment No. 2 to Amended and Restated Receivables Purchase Agreement, effective as of November 15, 2013, among LPAC Corp.JPMorgan Chase Bank, N.A., as the Seller, Lennox Industries Inc., as the Master Servicer, Victory Receivables Corporation, as a Purchaser, The Bank of Tokyo-Mitsubishi UFJ, Ltd., New York Branch, as Administrative Agent, a Liquidity Bank, and the BTMU Purchaser Agent, and PNC Bank, National Association as a Liquidity Bank and the PNC Purchaser Agent (filed as Exhibit 10.1 to LII's Current Report on Form 8-K filed on November 19, 2013 and incorporated herein by reference). | 10.7 | Omnibus Amendment No. 3 to the Amended and Restated Receivables Purchase agreement, effective as of November 21, 2014 among LPAC Corp., as the Seller, Lennox Industries Inc., as the Master Servicer, Victory Receivables Corporation, as a Purchaser, The Bank of Tokyo-Mitsubishi UFJ, Ltd., New York Branch, as Administrative Agent, a Liquidity Bank, and the BTMU Purchaser Agent, and PNC Bank, National Association, as a Liquidity Bank and the PNC Purchaser Agent (filed as Exhibit 10.1 to LII's Current Report on Form 8-K filed on November 24, 2014 and incorporated herein by reference). |
| | | 10.8 | Amendment to the Amended and Restated Receivables Purchase Agreement, effective as of December 15, 2014, among LPAC Corp., as the Seller, Lennox Industries Inc., as the Master Servicer, with Victory Receivables Corporation, as Purchaser, The Bank of Tokyo-Mitsubishi UFJ, Ltd., New York Branch, as Administrative Agent, a Liquidity Bank and the BTMU purchaser agent, and PNC Bank, National Association, as a Liquidity Bank and the PNC purchaser agent (filed as Exhibit 10.1 to LII's Current Report on Form 8-K filed on December 18, 2014 and incorporated herein by reference). | 10.9 | Amendment No. 4 to Amended and Restated Receivables Purchase Agreement among LPAC Corp., as the Seller, Lennox Industries Inc., as the Master Servicer, Victory Receivables Corporation, as Purchaser, The Bank of Tokyo-Mitsubishi UFJ, Ltd., New York Branch, as Administrative Agent, a Liquidity Bank and a Purchaser Agent, and PNC Bank, National Association, as a Liquidity Bank and a Purchaser Agent, effective as of November 13, 2015 (filed as Exhibit 10.110.2 to LII’s Current Report on Form 8-K filed on November 18, 2015July 15, 2021 and incorporated herein by reference). | 10.10 | Amendment No. 5 to Amended and Restated Receivables Purchase Agreement among LPAC Corp., as the Seller, Lennox Industries Inc., as the Master Servicer, Victory Receivables Corporation, as Purchaser and The Bank of Tokyo-Mitsubishi UFJ, Ltd., New York Branch, as Administrative Agent, a Liquidity Bank and a Purchaser Agent, (filed as Exhibit 10.1 to LII's Current Report on Form 8-K filed on July 6, 2016 and incorporated herein by reference). | 10.1110.3 | Amendment No. 6 to Amended and Restated Receivables Purchase Agreement among LPAC Corp., as the Seller, Lennox Industries Inc., as the Master Servicer, Victory Receivables Corporation, as Purchaser and The Bank of Tokyo-Mitsubishi UFJ, Ltd., New York Branch, as Administrative Agent, a Liquidity Bank and a Purchaser Agent, (filed as Exhibit 10.1 to LII's Current Report on Form 8-K filed on November 16, 2017 and incorporated herein by reference). | 10.12 | Amendment No. 7 to Amended and Restated Receivables Purchase Agreement among LPAC Corp., as the Seller, Lennox Industries Inc., as the Master Servicer, Victory Receivables Corporation, as Purchaser and The Bank of Tokyo-Mitsubishi UFJ, Ltd., New York Branch, as Administrative Agent, a Liquidity Bank and a Purchaser Agent (filed as Exhibit 10.1 to LII’s Quarterly Report on Form 10-Q filed on April 23, 2018, and incorporated herein by reference). | 10.13 | Amendment No. 8 to Amended and Restated Receivables Purchase Agreement among LPAC Corp., as the Seller, Lennox Industries Inc., as the Master Servicer, Victory Receivables Corporation, as Purchaser and MUFG Bank, Ltd., as Administrative Agent, BTMU Liquidity Bank, Wells Fargo Bank, National Association, a Liquidity Bank and PNC Bank, N National Association, a Purchaser Agent (filed as Exhibit 10.1 to LII’s Quarterly Report on Form 10-Q filed on October 22, 2018, and incorporated herein by reference). | 10.14 | Amendment No. 9 to Amended and Restated Receivables Purchase Agreement, dated as of February 15, 2019, among LPAC Corp., as the Seller, Lennox Industries Inc., as the Master Servicer, Lennox International Inc., Victory Receivables Corporation, as a Purchaser, MUFG Bank, Ltd., formerly known as The Bank of Tokyo-Mitsubishi UFJ, Ltd., as administrative agent for the Investors, the purchaser agent for the MUFG Purchaser Group and a MUFG Liquidity Bank, Wells Fargo Bank, N.A., as the purchaser agent for the WFB Purchaser Group and a WFB Liquidity Bank, and PNC Bank, N.A., as the purchaser agent for the PNC Purchaser Group and a PNC Liquidity Bank, including attachments (filed herewith).
| 10.15 | Amendment No. 1011 to Amended and Restated Receivables Purchase Agreement, dated as of November 13, 2019,12, 2021, among LPAC Corp., as the Seller, Lennox Industries Inc., as the Master Servicer, Lennox International Inc., Victory Receivables Corporation, as a Purchaser, MUFG Bank, Ltd., formerly known as The Bank of Tokyo-Mitsubishi UFJ, Ltd., as administrative agent for the Investors, the purchaser agent for the MUFG Purchaser Group and a MUFG Liquidity Bank, Wells Fargo Bank, N.A., as the purchaser agent for the WFB Purchaser Group and a WFB Liquidity Bank, and PNC Bank, N.A., as the purchaser agent for the PNC Purchaser Group and a PNC Liquidity Bank, including attachments (filed as Exhibit 10.1 to LII’s Current Report on Form 8-K filed on November 19, 2019,12, 2021 and incorporated herein by reference).
| 10.17*10.4* |
| 10.18*10.5* | | 10.19*10.6* | | | 10.7* | | 10.20*10.8* | | 10.21*10.9* | | 10.22*10.10* | |
| | | | | | 10.23*10.11* | | 10.24*10.12* | | 10.25*10.13* | | 10.26*10.14* | | 10.27*10.15* | | 10.28*10.16* | | 10.29* | | 10.30* | | 21.110.17* | | | 10.18* | | | 10.19* | | | 21.1 | | 23.122.1 | | | 23.1 | | | 31.1 | | | 31.2 | | | 32.1 | | | 101 | SCH Inline XBRL Taxonomy Extension Schema Document | | 101 | CAL Inline XBRL Taxonomy Extension Calculation Linkbase Document | | 101 | LAB Inline XBRL Taxonomy Extension Label Linkbase Document | | 101 | PRE Inline XBRL Taxonomy Extension Presentation Linkbase Document | | 101 | DEF Inline XBRL Taxonomy Extension Definition Linkbase Document | | 104 | Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101)
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| | | | | | | * | Management contract or compensatory plan or arrangement. |
Item 16. Form 10-K Summary
None.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
LENNOX INTERNATIONAL INC.
By:/s/ Todd M. Bluedorn /s/ Alok Maskara Todd M. BluedornAlok Maskara
Chief Executive Officer February 18, 202021, 2023
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant in the capacities and on the dates indicated.
| | | | | | | | | | | | SIGNATURE | | TITLE | DATE | | | | | /s/ TODD M. BLUEDORNALOK MASKARA | | Chief Executive Officer and Chairman of the Board of Directors | February 18, 202021, 2023 | Todd M. BluedornAlok Maskara | | (Principal Executive Officer) | | | | | | | /s/ JOSEPH W. REITMEIER | | Executive Vice President and Chief Financial Officer | February 18, 202021, 2023 | | Joseph W. Reitmeier | | (Principal Financial Officer) | | | | | | | /s/ CHRIS A. KOSEL | | Vice President, Controller and Chief Accounting Officer | February 18, 202021, 2023 | Chris A. Kosel
| | (Principal Accounting Officer) | | | | | | | /s/ TODD J. TESKE | | Lead DirectorChairman of the Board of Directors | February 18, 202021, 2023 | | Todd J. Teske | | | | | | | | | /s/ SHERRY L. BUCK | | Director | February 18, 202021, 2023 | | Sherry L. Buck | | | | | | | | | /s/ JANET K. COOPER | | Director | February 18, 202021, 2023 | | Janet K. Cooper | | | | | | | | /s/ JOHN E. MAJOR | | Director | February 18, 2020 | John E. Major | | | | | | | | /s/ MAX H. MITCHELL | | Director | February 18, 2020 | Max H. Mitchell
| | | | | | | | | /s/ JOHN W. NORRIS, III | | Director | February 18, 202021, 2023 | | John W. Norris, III | | | | | | | | | /s/ KAREN H. QUINTOS | | Director | February 18, 202021, 2023 | | Karen. H. Quintos | | | | | | | | | /s/ KIM K.W. RUCKER | | Director | February 18, 202021, 2023 | | Kim K.W. Rucker | | | | | | | | /s/ PAUL W. SCHMIDT | | Director | February 18, 2020 | Paul W. Schmidt | | | | | | | | | /s/ GREGORY T. SWIENTON | | Director | February 18, 202021, 2023 | | Gregory T. Swienton | | | | | | | | | /s/ SHANE D. WALL | | Director | February 21, 2023 | | Shane D. Wall | | | | | | | |
LENNOX INTERNATIONAL INC.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS AND RESERVES For the Years Ended December 31, 2019, 20182022, 2021 and 20172020 (In millions)
| | | | | | | | | | | | | | | | | | | | | | | | | | | Balance at beginning of year | | Additions charged to cost and expenses | | Write-offs | | Recoveries | | Other | | Balance at end of year | | 2017 | | | | | | | | | | | | | Allowance for doubtful accounts | $ | 6.7 |
| | $ | 3.9 |
| | $ | (5.6 | ) | | $ | 0.9 |
| | $ | — |
| | $ | 5.9 |
| | 2018 | | | | | | | | | | | | | Allowance for doubtful accounts | $ | 5.9 |
| | $ | 4.8 |
| | $ | (3.7 | ) | | $ | 0.6 |
| | $ | (1.3 | ) | | $ | 6.3 |
| | 2019 | | | | | | | | | | | | | Allowance for doubtful accounts | $ | 6.3 |
| | $ | 4.5 |
| | $ | (4.9 | ) | | $ | 1.6 |
| | $ | (1.4 | ) | | $ | 6.1 |
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| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Balance at beginning of year | | Additions charged to cost and expenses | | Write-offs | | Recoveries | | Other | | Balance at end of year | | 2020 | | | | | | | | | | | | | Allowance for doubtful accounts | $ | 6.1 | | | $ | 8.1 | | | $ | (4.2) | | | $ | 1.2 | | | $ | (1.6) | | | $ | 9.6 | | | 2021 | | | | | | | | | | | | | Allowance for doubtful accounts | $ | 9.6 | | | $ | 0.3 | | | $ | (0.4) | | | $ | 1.2 | | | $ | — | | | $ | 10.7 | | | 2022 | | | | | | | | | | | | | Allowance for doubtful accounts | $ | 10.7 | | | $ | 6.9 | | | $ | (0.4) | | | $ | — | | | $ | (1.7) | | | $ | 15.5 | |
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