What Lennox International (LII) Said on Its Q3 Earnings Call

Key Points

• Third-quarter results were mixed: Revenue grew 10.2% to $1.6 billion, but segment profit fell about 2% and adjusted EPS declined 7% to $6.84 as competitive pricing, tariffs and inflation pressured margins.
• Commercial growth offset residential weakness: Building Climate Solutions revenue increased 24%, including 15% organic growth, while Home Comfort Solutions organic revenue declined 1% and organic profit dropped $46 million due to price-cost pressure.
• Lennox lowered its outlook and launched a recovery plan: Full-year adjusted EPS guidance was cut to $21.00–$21.50, revenue growth guidance to approximately 6%, and free-cash-flow guidance to $700–$750 million. The recovery plan focuses on targeted pricing, productivity, entry-tier products and share gains.

Lennox International NYSE: LII reported third-quarter revenue growth of 10.2% to $1.6 billion, supported by commercial-equipment demand, acquisitions and improving residential sales volumes. However, total segment profit declined about 2% to $323 million and adjusted earnings per share fell 7% to $6.84 as competitive pricing conditions and higher tariff-related costs weighed on margins.

Chief Executive Officer Alok Maskara said the company adopted a more dynamic pricing strategy in its residential business to defend and stabilize market share. While he said early results have been encouraging, the strategy reduced price realization at a time when tariffs and inflation were increasing.

“Profitability, however, fell short of our expectations,” Maskara said. He added that homeowner affordability, elevated mortgage rates and consumer uncertainty continued to constrain underlying residential demand.

Residential Margins Face Price-Cost Pressure

Home Comfort Solutions revenue increased 3% in the third quarter, though organic revenue declined 1%. That marked an improvement from a 9% organic decline in the second quarter. Direct-to-contractor sales fell 6%, compared with a 12% decline in the prior quarter, while two-step organic sales rose 13%, aided by comparisons against industry destocking last year.

Acquisitions added $39 million in Home Comfort Solutions revenue and $6 million in segment profit. Still, organic segment profit declined $46 million. Favorable mix and price contributed $13 million, but tariffs and related inflation, net of productivity savings, created $47 million in cost headwinds.

Maskara said the company had expected a late-second-quarter price increase to cover more of those costs. But competitive conditions and what he described as pricing fatigue limited the company’s ability to implement a midyear increase.

Management said the company did not experience additional share losses beyond those previously discussed in residential new construction. Instead, pricing actions during the quarter were intended to prevent further losses. Lennox expects full-year one-step organic sales to decline by low double digits, while two-step sales are expected to increase by low single digits.

Commercial Business Continues to Grow

Building Climate Solutions revenue rose 24% in the third quarter, including 15% organic growth. Acquisitions accounted for 9 percentage points of the reported increase and contributed about $13 million in segment profit.

The company said investments in factories and sales coverage improved quoting speed and product availability, helping it win more emergency replacement business. Lennox also cited continued growth with national accounts through equipment and service offerings, as well as new heat-pump products.

Although higher sales volumes lifted organic segment profit, Building Climate Solutions margins declined because pricing did not fully offset tariff and inflation costs. Price increases take longer to implement under large national-account contracts, while competitive conditions limited realization with local contractors, according to the company.

Recovery Plan Targets Share, Productivity and Entry-Tier Products

Lennox has launched a recovery plan focused on regaining share and restoring margins. The plan includes more targeted pricing by region and customer segment, productivity efforts across manufacturing, distribution and selling, general and administrative expenses, a refreshed entry-tier portfolio, and efforts to deepen relationships with national accounts and contractors.

The company plans to introduce additional entry-tier products, including side-discharge offerings, in early 2027. Maskara said entry-tier products have become more relevant as affordability challenges persist and overseas competition expands. The company expects the margin percentage on the lower-cost products to be similar to that of its current entry-level offerings after cost reductions.

Lennox also said its acquisition of the Comfort-Aire and Century brands, completed during the third quarter for $200 million, is performing in line with expectations. Management expects the businesses to contribute to earnings per share in 2027, with a significant portion of SG&A synergies anticipated after the acquired businesses transition to Lennox’s enterprise resource planning platform.

Chief Financial Officer Michael Quenzer said restructuring actions have begun, largely involving acquired operations, distribution consolidation and SG&A. The company may pursue additional restructuring as it evaluates distribution capacity and leases following the opening of a facility in Dallas.

Guidance Reduced as Pricing Outlook Weakens

Lennox reduced its full-year adjusted EPS outlook to $21.00 to $21.50. The company cited lower-than-expected price realization and an expected tax rate of 21%, compared with its prior 20% assumption.

• Full-year revenue growth is now expected to be approximately 6%, down from the prior 8% forecast.
• Building Climate Solutions revenue growth is projected at approximately 23%, up from 20% previously.
• Home Comfort Solutions revenue is expected to decline about 4%, compared with prior guidance for 1% growth.
• Free cash flow is expected to total $700 million to $750 million, reduced from $750 million to $850 million.

For the full year, management expects enterprise margin to decline by about 200 basis points. Building Climate Solutions margins are expected to be roughly flat, while Home Comfort Solutions margins are projected to contract approximately 350 basis points, primarily due to lower one-step volumes and price-cost pressure.

The company generated $395 million in operating cash flow during the quarter, up $95 million from a year earlier, and reported trailing 12-month free-cash-flow conversion of 108%. Organic inventory units declined more than 15% year over year. Lennox repurchased approximately $151 million in shares during the quarter and expects about $225 million in capital expenditures for the year.

Looking ahead, Lennox did not provide formal 2027 guidance but said it expects its recovery plan to support sales, EBIT and EPS growth next year, with momentum building during the year. Management plans around muted industry volumes, resilient replacement demand and continued softness in new construction rather than a broad market recovery.

About Lennox International (NYSE:LII)

Lennox International Inc is a heating, ventilation, air conditioning and refrigeration company headquartered in Richardson, Texas. Founded in 1895 by Dave Lennox, the company develops and markets products designed to provide climate control and improve indoor air quality in residential and commercial buildings.

Its product portfolio includes air conditioners, heat pumps, furnaces, air handlers, thermostats, indoor air-quality equipment and related controls. Lennox also provides commercial heating and cooling systems, replacement components, installation support and other services through distributors, dealers and contractors.

Lennox primarily serves customers in the United States and Canada, with products and services also marketed in selected international markets.

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