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| LII > SEC Filings for LII > Form 10-Q on 30-Apr-2009 | All Recent SEC Filings |
30-Apr-2009
Quarterly Report
Impact of Current Economic Environment on Our Business
The first quarter of each fiscal year is our most seasonally challenging
quarter. During the first quarter of 2009, as we had for all of 2008, we faced
unprecedented market challenges. Tight credit markets contributed to lower
demand for housing that has resulted in significantly fewer housing starts in
residential new construction as well as lower existing home sales. In addition
to Residential Heating & Cooling, the global economic downturn also negatively
impacted our Commercial Heating & Cooling, Refrigeration, and Service Experts
businesses. We continued to execute on our strategic priorities to win new
business, capture opportunities in the replacement market, and lower our cost
structure for the current market conditions.
We are continuing to adjust to lower demand levels in the marketplace by
accelerated efforts to increase our operational efficiency and reduce costs
while we continue to focus on providing our customers a high level of value and
service. During the first quarter of 2009, we recorded restructuring charges of
$11.2 million. In addition to the savings related to restructuring activities,
we believe that we will realize additional savings from commodity prices and
from our global sourcing initiatives in the remainder of 2009. We are also
executing on additional operating efficiency and cost reduction initiatives that
are designed to substantially reduce our selling, general and administrative
expenses through salaried headcount reduction and other measures. We believe
that when market conditions recover, we will be well-positioned with significant
upside leverage in our business model.
Company Highlights
• Net sales for the first quarter of 2009 were $585.4 million,
$179.1 million or 23.4% below the first quarter of 2008. Lower volumes
across all business segments negatively impacted revenues on a
year-over-year basis. Foreign currency translation rates had an
unfavorable impact on net sales in the first quarter of 2009.
• Operational loss for the first quarter of 2009 was $27.2 million compared to operational income of $13.4 million for the first quarter of 2008. The decline in operational income was primarily due to lower sales volumes partially offset by savings from cost reduction and cost control initiatives.
• Net loss for the first quarter of 2009 was $18.1 million compared to net income of $6.3 million in the prior year. Diluted loss per share was $0.33 per share in 2009 compared to diluted earnings of $0.10 per share in the first quarter of 2008.
• We generated $16.3 million of cash from operating activities for the first quarter of 2009, compared to cash used in operating activities of $32.6 million during the same period in 2008 as we continued to focus on working capital improvements. Cash flow from operating activities increased primarily due to favorable working capital changes in inventory and accounts receivable and the reduction of collateral posted for our commodity hedges. These increases in cash flow were partially offset by the net loss posted for the quarter as compared to net income in 2008.
Results of Operations
The following table presents certain information concerning our financial
results, including information presented as a percentage of net sales (dollars
in millions):
First Quarter
2009 2008
Dollars Percent Dollars Percent
Net sales $ 585.4 100.0 % $ 764.5 100.0 %
Cost of goods sold 446.7 76.3 570.8 74.7
Gross profit 138.7 23.7 193.7 25.3
Selling, general and administrative
expenses 156.8 26.7 184.0 24.0
Gains and other expenses, net (0.8 ) (0.1 ) (3.4 ) (0.4 )
Restructuring charges 11.2 1.9 2.8 0.3
Income from equity method
investments (1.3 ) (0.2 ) (3.1 ) (0.4 )
Operational (loss) income $ (27.2 ) (4.6) % $ 13.4 1.8 %
Net (loss) income $ (18.1 ) (3.1) % $ 6.3 0.8 %
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The following table sets forth net sales by geographic market (dollars in millions):
First Quarter
2009 2008
Dollars Percent Dollars Percent
Geographic Market:
U.S. $ 424.9 72.6 % $ 531.7 69.5 %
Canada 58.4 10.0 81.5 10.7
International 102.1 17.4 151.3 19.8
Total net sales $ 585.4 100.0 % $ 764.5 100.0 %
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First Quarter of 2009 Compared to First Quarter of 2008 - Consolidated Results
Net Sales
Net sales decreased $179.1 million, or 23.4%, for the first quarter of 2009 as
compared to the same period in 2008. The decrease in net sales was due to a
decrease in sales volumes across all segments, but was primarily caused by lower
volumes related to U.S. residential and commercial new construction. We
experienced a decrease in volumes in all of our business segments as
deteriorating economic conditions in the U.S. residential market spread to the
commercial market and to other areas of the globe. The declines in unit volumes
were partially offset by moderate pricing gains and a slight favorable change in
sales mix. Changes in foreign currency exchange rates adversely impacted
revenues by $38.4 million.
Gross Profit
Gross profit margin declined to 23.7% for the first quarter of 2009 compared to
25.3% for the same period in 2008. Gross profit margins were negatively impacted
by the lower sales volumes and the related under-absorbed fixed manufacturing
costs as well as higher commodity costs. The changes in foreign currency
exchange rates also had a negative impact on our gross margins. Higher average
selling prices and lower fuel costs partially offset these negative impacts.
Positive sales mix also contributed to the offset as a greater portion of our
Residential Heating & Cooling and Commercial Heating & Cooling customers
purchased our premium product offerings.
While we realized savings from previously announced and implemented
restructuring activities and cost reduction programs, the full effect on gross
margins was mitigated by manufacturing inefficiencies related to lower volumes.
Selling, General and Administrative Expenses
SG&A expenses for the first quarter decreased by $27.2 million in 2009 compared
to the same period in 2008. As a percentage of total net sales, SG&A expenses
were 26.7% for the first quarter of 2009 and 24.0% for the first quarter of 2008
primarily due to the decline in sales volumes. The decrease in SG&A expenses was
primarily due to cost control measures, lower sales volumes and the impact of
foreign exchange rates. Volume driven decreases in expenses included lower sales
commissions and variable advertising expenses while cost controls lowered
advertising and promotion. Selling and administrative expenses decreased
generally due to headcount reductions and other cost control measures to reduce
or eliminate discretionary spending. Research and development expenses remained
constant as the Company continued to invest in its future product offerings.
Gains and Other Expenses, Net
Gains and other expenses, net for the first quarters of 2009 and 2008 included
the following (in millions):
First Quarter
2009 2008
Realized losses (gains) on settled futures contracts $ 1.9 $ (0.4 )
Net change in unrealized gains on unsettled futures contracts (2.7 ) (2.8 )
Foreign currency exchange gains (0.2 ) (0.1 )
Other items, net 0.2 (0.1 )
Gains and other expenses, net $ (0.8 ) $ (3.4 )
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The changes in gains and losses on futures contracts were primarily due to
decreases in commodity prices relative to the futures contract prices during
2009 as compared to 2008. For more information, see Note 5 in the Notes to the
Consolidated Financial Statements.
Restructuring Charges
As part of our strategic priorities of manufacturing and sourcing excellence,
distribution excellence and expense reduction, we have initiated actions
designed to improve the delivery of our products to customers and also to lower
our cost structure. We have initiated one new significant manufacturing
rationalization action in 2009 and also have begun to reorganize our sales
support and administrative functions to be more effective and efficient in the
markets we serve. We continue to focus on restructuring activities to position
our company for profitable growth as the economy improves.
In the first quarters of 2009 and 2008, we incurred restructuring charges
consisting of:
First Quarter
2009 2008
Manufacturing rationalizations $ 7.6 $ 2.8
Reorganization of distribution network 0.1 -
Reorganizations of corporate and business unit
selling and administrative functions 3.5 -
Total $ 11.2 $ 2.8
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For further detail regarding restructuring reserves and individual restructuring
actions, see Note 12 in the Notes to our Consolidated Financial Statements.
Manufacturing Rationalizations
The restructuring charges incurred in the first quarter of 2009 primarily
related to the consolidation of Residential Heating & Cooling manufacturing
operations from Blackville, South Carolina into our operations in Orangeburg,
South Carolina and Saltillo, Mexico. The consolidation is expected to be
completed within two years. These restructuring charges related to manufacturing
rationalizations included $3.0 million of severance and related charges,
$1.4 million of asset write-offs and accelerated depreciation, $0.8 million of
equipment move charges and $2.4 million of other costs. The other costs were
primarily related to the return of previously received government economic
development credits, facilities clean-up and demolition costs, and manufacturing
overhead costs in significantly under-utilized facilities as production
activities wind down and transition to the new facility.
In the future, we expect to incur additional charges of $9.2 million related to
the manufacturing rationalization projects that were in process during the first
quarter of 2009. Of the additional charges expected, $5.0 million is accelerated
depreciation or asset impairment charges and, therefore, non-cash. We also
expect to incur $2.8 million in equipment move costs.
Reorganization of North American Distribution Network
In the first quarter of 2009, we incurred $0.1 million of restructuring charges
related to the transition of activities currently performed at our North
American Parts Center in Des Moines, Iowa to other locations, including our
North American Distribution Center in Marshalltown, Iowa.
In the future, we expect to incur additional charges of $1.8 million related to
this project consisting of $0.7 million in severance, $0.4 million in equipment
move costs, $0.1 million in accelerated depreciation and $0.6 million of other
costs. The current restructuring project is expected to be completed within two
years. We anticipate that we will initiate additional restructuring activities
in this area as we seek to further enhance our North American distribution
network.
Reorganizations of Corporate and Business Unit Selling and Administrative
Functions
The restructuring charges incurred in first quarter 2009 related to the
reorganization of selling and administrative functions included $2.8 million of
severance and related charges, $0.3 million of lease termination costs,
$0.1 million of asset write-offs and accelerated depreciation and $0.3 million
of other costs.
To date and in total, we have incurred $8.8 million of restructuring charges
related to reorganizations of selling and administrative functions for projects
that were in process during the first quarter of 2009. Of that amount,
$6.5 million was severance costs, $0.9 million was asset write-offs and
accelerated depreciation, $0.5 was million lease termination costs, and the
remainder of $0.9 million was other charges.
In the future, we expect to incur additional charges of $2.3 million related to
these projects, of which $1.8 million is expected to be severance. All of these
future charges will require the use of cash.
Cash Used in Restructuring Activities, Future Charges and Expense Savings
Total cash paid for restructuring activities during the first quarter 2009 was
$5.6 million, an increase over the 2008 amount of $3.9 million. A significant
portion of this amount related to increased restructuring activities and was
primarily composed of severance payments related to our various restructuring
projects. We use operating cash as the funding source for restructuring
activities.
We anticipate incurring approximately $13.2 million of future restructuring
charges relating to projects that were in process during the first quarter of
2009. Of that amount, about $5.2 million are anticipated to be non-cash charges
for accelerated depreciation and asset impairments. Future cash outlays for
restructuring activities that are currently in progress are estimated to be
$21.3 million. These restructuring charges and cash outlays are expected to be
incurred generally within the next two years.
We expect to realize $25.5 million of incremental expense savings in 2009.
Income from Equity Method Investments
Investments where we do not exercise control but have significant influence are
accounted for using the equity method of accounting. Income from equity method
investments decreased to $1.3 million in the first quarter of 2009 compared to
$3.1 million during the same period in 2008 primarily due to the lowered
performance of our U.S. joint venture in compressor manufacturing due to a
reduction in our volume of purchases from such joint venture.
Interest Expense, net
Interest expense, net, decreased to $1.7 million in the first quarter of 2009
from $2.7 million during the same period in 2008. The decrease in interest
expense was primarily attributable to a decrease in the average interest rate
paid on variable rate debt. Partially offsetting this decrease was an increase
in the average amounts borrowed in the first quarter of 2009 as compared to the
same period in 2008.
Income Taxes
The benefit from income taxes was $10.7 million in the first quarter of 2009
compared to a provision for income taxes of $4.0 million during the same period
in 2008. The effective tax rate was 37.0% for the first quarter of 2009 as
compared to 37.4% for the same period in 2008. Our effective rates differ from
the statutory federal rate of 35% for certain items, such as state and local
taxes, non-deductible expenses, foreign operating losses for which no tax
benefits have been recognized and foreign taxes at rates other than 35%.
First Quarter 2009 Compared to First Quarter 2008 - Results by Segment
Residential Heating & Cooling
The following table details our Residential Heating & Cooling segment's net
sales and (loss) profit for the first quarters of 2009 and 2008 (dollars in
millions):
First Quarter
2009 2008 Difference % Change
Net sales $ 246.3 $ 329.2 $ (82.9 ) (25.2) %
(Loss) profit (4.8 ) 13.2 (18.0 ) (136.4 )
% of net sales (1.9) % 4.0 %
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The decrease in net sales was due to continuing weakness in the U.S. residential
new construction market and softer replacement business as consumers remain
cautious in the current economic environment. We believe that unit volumes were
generally lower across the industry. An additional impact on volume for our
value product offerings is that a higher number of consumers in difficult market
conditions are electing to repair versus replace their equipment. As a result,
unit volumes were down in 2009 as compared to 2008. The decrease related to
sales volumes was partially offset by favorable product mix shift towards our
premium products and pricing gains related to increases that were enacted in the
later quarters of 2008. The unfavorable impact of changes in foreign currency
exchange rates decreased net sales by $6.4 million.
Segment profit decreased primarily due to the unfavorable impact of lower unit
volumes and the related under-absorbed fixed manufacturing costs and increased
commodity costs. These unfavorable impacts to segment profit were partially
offset by pricing gains, favorable product mix, and lower expenses due to lower
sales volumes and cost controls.
While the Residential Heating & Cooling segment realized savings from previously
announced and implemented restructurings and cost reduction programs, the full
effect on gross margins was mitigated by some manufacturing inefficiencies
related to those activities and the lower unit volumes driven by market
conditions.
Commercial Heating & Cooling
The following table details our Commercial Heating & Cooling segment's net sales
and profit for the first quarters of 2009 and 2008 (dollars in millions):
First Quarter
2009 2008 Difference % Change
Net sales $ 131.5 $ 165.2 $ (33.7 ) (20.4) %
Profit 2.0 6.2 (4.2 ) (67.7 )
% of net sales 1.5 % 3.8 %
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Our domestic operations experienced lower sales volumes on a year-over-year
basis primarily due to the continued weakness of the overall commercial unitary
market as a result of tight commercial lending and continued deferrals of
commercial construction projects. Strong volumes in our retail national account
business have partially offset the industry declines. The reduction in volumes
was also partially offset by pricing gains from increases that were enacted
during the later quarters of 2008. Sales mix was favorable due to the relatively
high levels of premium product introduced during the early part of 2008. The
unfavorable impact of changes in foreign currency exchange rates was
$7.6 million.
The reduced segment profit was due primarily to lower sales volumes, increased
commodity costs and the unfavorable impact of lower unit volumes and the related
under-absorbed fixed manufacturing costs. Favorable sales mix, pricing gains and
lower advertising, sales commissions and selling expenses from cost control
programs partially offset the effects of lower sales volumes.
Service Experts
The following table details our Service Experts segment's net sales and loss for
the first quarters of 2009 and 2008 (dollars in millions):
First Quarter
2009 2008 Difference % Change
Net sales $ 109.2 $ 137.5 $ (28.3 ) (20.6) %
Loss (7.9 ) (6.9 ) (1.0 ) 14.5
% of net sales (7.2) % (5.0) %
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The decrease in net sales was primarily due to the decline in the residential service and replacement and residential new construction markets resulting from the weakness of the U.S. economy. The sales decrease was primarily due to volume as both price and sales mix were relatively flat. The unfavorable impact of changes in foreign currency exchange rates decreased net sales by $5.5 million.
The increase in segment loss was primarily due to the decrease in sales volume.
The lower sales volumes were partially offset by lower salary and personnel
costs due to current and previous headcount reductions and restructuring
activities, lower commissions due to lower sales volumes, lower advertising
expenditures and cost controls and programs that resulted in lower
personnel-related and incentive compensation expenses.
Near the end of 2008, we announced plans to exit seven unprofitable service
centers. As a result, we have reclassified income related these service centers
in the first quarter 2009 of $0.2 million to discontinued operations. Included
in this income were gains realized upon sale of the services centers of
$1.0 million. This compares with losses from these discontinued operations
incurred in the first quarter of 2008 of $0.7 million. We sold all of these
service centers prior to the end of the first quarter of 2009.
Refrigeration
The following table details our Refrigeration segment's net sales and profit for
the first quarters of 2009 and 2008 (dollars in millions):
First Quarter
2009 2008 Difference % Change
Net sales $ 113.7 $ 154.8 $ (41.1 ) (26.6) %
Profit 6.5 14.8 (8.3 ) (56.1 )
% of net sales 5.7 % 9.6 %
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Net sales decreased due to lower sales volumes and the unfavorable impact of
changes in foreign currency exchange rates of $19.9 million. Pricing gains
partially offset these negative impacts.
The decrease in segment profit was primarily due to lower sales volumes,
. . .
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