On this page of StockholderLetter.com we present the 4/6/2023 shareholder letter from LENNOX INTERNATIONAL INC — ticker symbol LII. Reading current and past LII letters to shareholders can bring important insights into the investment thesis.

 •  4/6/2023 Letter Continued (Full PDF)
 •  4/3/2024 LII Stockholder Letter
 •  4/9/2025 LII Stockholder Letter
 •  LII Benford's Law Stock Score = 79

LII 4/6/2023 Shareholder/Stockholder Letter Transcript:

2022
Annual Report

NYSE: LII
2022 | Revenue
2022 | Segment Profit*
13%
19%
68%
10%
11%
79%
Refrigeration
Commercial
Residential
Refrigeration
Commercial
Residential
Revenue
Segment Profit Margin**
(in millions)
$3,884 $3,807
2018
2019
(end of year)
16.0%
$4,718
13.9% 14.4% 14.1%
13.9%
$4,194
Share Price
$273.97
$243.97
$218.86
$3,634
2020
$324.36
2021
2022
2018
2019
2020 2021
2022
2018
2019
$239.23
2020
2021
2022
FINANCIAL HIGHLIGHTS
(in millions, except per share data)
Statement of Operations Data
2022
Revenue...................................................................................... $4,718.4
Operating income....................................................................... $656.2
Income from continuing operations ........................................... $497.1
Net income................................................................................. $497.1
Basic earnings per share from continuing operations.................. $13.92
Diluted earnings per share from continuing operations.............. $13.88
Cash dividends declared per share.............................................. $4.10
Other Data
Capital expenditures...................................................................
Research and development expenses ..........................................
$101.1
$80.3
Balance Sheet Data at Period End
Total assets................................................................................. $2,567.6
Total debt................................................................................... $1,524.8
Stockholders    deficit equity......................................................... ($203.1)
2021
$4,194.1
$590.3
$464.0
$464.0
$12.47
$12.39
$3.53
2020
$3,634.1
$478.5
$357.1
$356.3
$9.32
$9.26
$3.08
2019
$3,807.2
$656.9
$408.8
$408.7
$10.49
$10.38
$2.95
2018
$3,883.9
$509.9
$360.3
$359.0
$8.87
$8.77
$2.43
$106.8
$76.1
$78.5
$66.8
$105.6
$69.9
$95.2
$72.2
$2,171.9
$1,237.8
($269.0)
$2,032.5
$980.6
($17.1)
$2,034.9
$1,171.2
($170.2)
$1,817.2
$1,041.3
($149.6)
*Excludes eliminations and unallocated corporate expenses.
**Segment profit is total segment profit for all of our segments including eliminations. For further detail and a comparison of Segment Profit to Income from
Continuing Operations before Income Taxes, see Note 3 in the Notes to the Consolidated Financial Statements in our Annual Report on Form 10-K for
the year ended December 31, 2022, included herein.

TO OUR STOCKHOLDERS
In March of 2022, the company announced that I would be taking
the helm as the new CEO of Lennox (NYSE: LII), effective May 9,
2022. I am honored to lead this great company as only its eighth
Chief Executive Officer in the company   s 128-year history. I came
to the United States from India 30 years ago to attend graduate
school in New Mexico with only a single piece of luggage and a few
hundred dollars. At the time, I never imagined that I would have
this incredible opportunity to lead a widely admired company with
such a rich history of innovation and performance.
I bring 25 years of leadership experience in manufacturing and
technology, most recently serving as the CEO of Luxfer Holdings
PLC (NYSE: LXFR), an international company focused on advanced
industrial materials. Prior to Luxfer, I held various leadership
positions at Pentair, including serving as the President of business
segments and prior leadership positions at both General Electric
and McKinsey & Company.
To say that I am excited about this opportunity is an understatement.
I am grateful to our Board of Directors for entrusting me with the
responsibility of leading this great company. I would also like to
thank my predecessor, Todd Bluedorn, for his service to Lennox as
Chief Executive Officer and Chair for 15 years, during which the
Lennox share price increased by~9X. I also want to thank Todd
Teske, our new Chair, for his service as interim CEO during the
transition and his past service as Lead Independent Director since
2015 and as a Board Member since 2011.
Finally, I would like to thank the employees of this great company.
Every day, they strive to provide our customers with the most
innovative and environmentally friendly HVACR products. They
have consistently delivered long-term performance while living
our core values of integrity, respect and excellence. My goal for my
tenure here is to leave this company in even better shape for the
next generation. I am excited to join Lennox at a time when we are
driving growth and profitability to maximize shareholder value.
As an industry leader, we recognize our vital sustainability role in
contributing to a better world by designing and manufacturing
the most efficient climate-control products. We develop products
with less carbon impact through greater energy efficiency and are
transitioning to refrigerants with a lower global warming potential
(GWP). For example, in 2022, Lennox was the first manufacturer
to complete the Department of Energy   s Cold Climate Heat Pump
Challenge and is an industry leader in innovative technology for
electric heat pumps.
We continue to expand our diversity and inclusion efforts. As one
of my first actions as CEO and continuing our commitment from
previous Lennox leadership, I proudly joined the CEO Action for
Diversity & Inclusion pledge to promote a more inclusive workplace.
We support the Business Coalition for the Equality Act, a proposed
legislation to address workplace fairness for LGBTQ+ employees.
The health and safety of our employees is our utmost priority. We are
committed to a safe workplace and support our safety goals through
planning, training, performance management and employee
engagement. Year-over-year, we set highly ambitious goals for
reductions based on the prior year   s performance and aim for annual,
corporate-wide 20 percent reductions in the rate of year-over-year
incidents.
We are committed to excellence and, in 2022, delivered another year
of record revenues and earnings per share. Company revenue was
$4.7 billion for the year, up 13 percent, and operating income rose
11 percent to $656 million. Total segment profit rose 10 percent
to $666 million, and total segment margin was 14.1 percent or 30
basis points below the prior year. GAAP earnings per share from
continuing operations rose 12 percent to a record $13.88. Adjusted
earnings per share from continuing operations also rose 12 percent
to a record $14.07.
To accelerate our profitable growth, our investment priorities are to
sustain industry-leading efficiency solutions, improve our customer
experience with digital solutions, introduce new innovative
technologies, expand manufacturing capacity and accomplish
cost productivity initiatives. Execution of these priorities over the
coming years will support market share gains, expand segment
profit margins to 20 percent, and generate cash flows in line with
net income. In addition to investing for growth, we will continue
to efficiently return cash to shareholders with a steadily growing
dividend coupled with share repurchases.
In 2022, supply chain component availability, manufacturing labor
shortages and inflation were strong headwinds that disproportionally
impacted our Commercial segment. We countered these headwinds
with 10 percent price increases, made inventory investments to
keep our product flowing and broke ground on a new Commercial
manufacturing facility. The inventory investments reduced cash
flows from operations but were necessary to replenish our stock
to healthy levels and to transition to new regulatory requirements.
We successfully upgraded our products to meet the new 2023
Department of Energy efficiency standards and are preparing for
more regulatory changes related to refrigerants that will take effect
in 2025.
In November 2022, we announced the decision to explore strategic
alternatives for our European Commercial HVAC and Refrigeration
businesses, which represent approximately 5 percent of our 2022
annual revenues. This decision will enhance management   s focus
on the North American markets and eliminate corporate cost
redundancies. We will continue to invest in our North American
Heatcraft Refrigeration business, which beginning in 2023, will
become part of our Commercial segment.
Turning to the performance of our business segments, Residential set
new records with four consecutive quarters of year-over-year revenue
and profit growth. Revenue rose 15 percent to a record $3.2 billion
on strong growth in the replacement and new construction business.
Despite in-year supply chain challenges and the complexity of the
SEER transition, Residential segment profit rose 10 percent to a
record $597 million, and segment margin was down 80 basis points
to 18.7 percent, impacted by cost inflation and manufacturing
inefficiencies.
We appointed Gary Bedard to President of our Residential business
segment effective January 1, 2023, to allow for a seamless transition
before the retirement of Doug Young on June 30, 2023, who served

Lennox admirably for 24 years. Gary is a seasoned general manager
with a proven record of success at Lennox. Gary joined Lennox
in 1998 and has served as President of our Refrigeration business
segment and as Vice President and General Manager of our Lennox
Residential business. Under Gary   s leadership, our Residential
business segment is well-positioned to outperform our competitors
and win in the marketplace.
We continue to bring innovative new products to market, gaining
traction with existing and new accounts. Our leading residential
products include the SL25 heat pump, the most efficient on the
market, recognized with a 2022 GOOD DESIGN award. This
product formed the foundation for our ability to be the first to meet
the Department of Energy   s Cold Climate Heat Pump Challenge.
Our research and development efforts go beyond product
leadership. They also extend into the core of the product line to
deliver cost-effective products that meet current and emerging
regulatory needs. In 2023, new regional efficiency standards for air
conditioners and national standards for heat pumps went into effect.
Our new products are cost-optimized, using lower-cost components
and existing indoor systems to ensure a smooth transition without
burdening our customers, wholesalers, dealers and consumers.
Regulatory changes present challenges and opportunities.
Historically, Lennox has navigated regulatory transitions well, and
we intend to gain share during the transition. We are preparing for
the 2025 transition to more environmentally friendly refrigerants
with the exceptional products and service our customers expect
from us.
Our Residential business segment serves a desirable market that
has compelling long-term trends. Lennox   s unique go-to-market
strategy, innovative product offering and attractive dealer value
proposition position us to gain incremental share over an extended
period while our operating and digital capabilities support growth
and profitability.
Commercial business segment revenue was up four percent to $901
million. Segment profit was down 27 percent to $81 million, and
segment margin was down 380 basis points to 9.0 percent.
We also appointed Joe Nassab, a 12-year veteran of Lennox, to
President of our Commercial business segment in May of 2022. Joe
previously served as our Allied Air business unit   s Vice President
and General Manager. Under Joe   s leadership, Allied delivered
exceptional growth and profitability over the last decade, with
revenue growing 10 percent annually and earnings growing 23
percent annually. Joe is aggressively addressing the Commercial
business segment   s operating challenges and is positioning the
segment for profitable growth.
In 2022, our Commercial business segment was plagued by
production constraints in our sole commercial factory, severely
impacting our ability to serve our customers. Industrywide, we
saw lead times expand to unprecedented levels as key components
remained in short supply and supply could not fulfill the market   s
demand for commercial rooftop units. This resulted in elevated
backlogs entering 2023 and pent-up demand that was not fulfilled
in 2022, which will benefit 2023.
We implemented near-term initiatives to simplify our company,
streamline our portfolio and increase our margins. Our leadership
team addressed the labor challenges and drove greater price
realization. Additionally, we recently announced a $150 million
investment to add manufacturing capacity with the construction of
a new Commercial factory in Saltillo, Mexico.
Our Lennox Commercial National Account Services (NAS) team
installs, commissions and maintains equipment for key account
customers. The core of this business is proactive preventive
maintenance, but they also repair, replace and install commercial
rooftop equipment when needed. Over 700 trained technicians
operate out of 116 branches with a geographic footprint capable of
serving over 97 percent of our customers    North American sites.
We continue to develop and deliver industry-leading commercial
rooftop HVAC units that enable us to offer the most efficient
products and services in the industry, providing our customers
with optimal solutions for meeting their goals on sustainability
and energy conservation. Our innovative solutions position us
to seize market opportunities as our commercial customers seek
environmentally friendly solutions that optimize their returns on
investment. We have been, and continue to be, their best option.
The Refrigeration business segment revenue was up 12 percent to
$619 million and segment profit rose 60 percent to $79 million,
while the segment margin expanded 380 basis points to 12.7
percent. Our North American Heatcraft business sharply increased
factory output to improve its position as the market leader in North
American commercial refrigeration, while our European businesses
showed modest improvement in profitability.
Our Refrigeration business segment provides climate-control
solutions for the cold chain, keeping food fresh from harvest
through distribution to grocery stores, restaurants and the kitchen
table. We also provide climate-control solutions for other areas,
including the pharmaceutical industry and data centers. These are
essential applications that ensure healthy everyday living.
We face an increasingly complex regulatory environment, and
our customers need to reduce their carbon intensity. Our product
solutions are transitioning to lower GWP refrigerants such as
CO2 and R-32 and are combined with ever increasing efficiencies.
The Intelligen controller delivers ease of use and assistance with
installation and commissioning. It also helps provide business
owners with the ability to lower operating costs (up to 30 percent)
by better managing energy-intensive defrost cycles. We are focused
on productivity initiatives to drive consistently higher performance,
including investments in factory and logistics productivity, eTools
and eDesign and sales and service automation.
In 2022, we overcame supply chain disruptions, productivity
challenges, and cost pressures to deliver a record year. We overcame
these challenges because of the commitment of our employees to
our core values of integrity, respect and excellence and the guiding
behaviors that define them.
For integrity, the guiding behaviors of trust, accountability and
positive engagement make others want to do business with us.

For respect, the guiding behaviors of customer experience, talent
and sustainability build our competitive advantage over others in
the industry. And finally, for excellence, the guiding behaviors of
quality, innovation and results are the key ingredients that enable
us to sustain elevated performance and profitable growth over the
long term.
We are implementing near-term initiatives to simplify our
company, streamline our portfolio and increase our margins. We
are establishing a robust growth operating system that will sustain
elevated performance while building our competitive advantage.
Our purposeful capital deployment strategy will continue to create
significant shareholder value to continue working to generate robust
free cash flow and maintain discipline in allocating that cash flow.
We have a strong history of creating differentiated value for our
shareholders, and we believe that our best days are ahead.
Alok Maskara
Chief Executive Officer



 4/6/2023 Letter Continued (Full PDF)