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Lennox International's Second Quarter Is Stymied by Wet, Cold Weather

Asit Sharma, The Motley Fool

Heating, ventilation, and air-conditioning (HVAC) equipment manufacturer Lennox International (NYSE: LII) encountered an uncooperative climate during its second quarter of 2019, as weather hurt sales. The company also cited lingering effects from tornado damage to one of its factories in 2018 for its lack of revenue growth. Below, we'll review big-picture numbers from the report, which was released Monday before the markets opened, and comb through relevant details from the last three months. Note that all comparative numbers are presented against those of the prior-year quarter.

Lennox: The raw numbers

Metric Q2 2019 Q2 2018 Change
Revenue $1.10 billion $1.76 billion (3.8%)
Net income $110.7 million $137.6 million (19.5%)
Diluted earnings per share $2.80 $3.35 (16.4%)

Data source: Lennox International.  

What happened at Lennox this quarter?

  • Colder temperatures and higher rainfall versus the previous year impacted sales of residential HVAC units. Residential heating and cooling sales dipped 4% to $689 million. 
  • The company continues to face the effects from severe tornado damage to its 1-million-square-foot residential systems factory in Marshalltown, Iowa in July 2018. Lennox quantified $28 million in lost revenue from the tornado's damage in the second quarter, and a $16 million drag on segment profit, which was offset by $18 million in insurance recoveries.
  • Total residential segment profit was flat at $153 million, and segment profit margin improved by 80 basis points to 22.3%, led by favorable pricing, insurance recoveries, lower warranty expense, and "engineering-led cost reductions."
  • Lennox's commercial heating and cooling business booked top-line growth of 4% to $261 million, a second-quarter record. Sales were supported by momentum in the signing of national accounts, a revenue stream that grew in the high single digits over the prior-year quarter. Segment profit improved by 6% to a record $54 million, while segment profit margin also hit a record at 20.6%. Management attributed the higher profitability to favorable pricing and product mix, improved materials sourcing, and cost-cutting.
  • The company's smallest segment, refrigeration, saw a 2% increase in revenue, to $149 million, after adjusting for the effects of recent business dispositions. Adjusted segment profit slipped 19% to $19 million, as higher materials, freight, tariffs, and distribution costs weighed on the bottom line. Segment margin tumbled 340 basis points to 12.8%.
  • Lower profitability in the refrigeration businesses offset higher margins in residential and commercial: Total company gross margin slipped by about 60 basis points to 30.2%.
  • Earnings were affected by a previously announced pension settlement that reduced diluted earnings per share by $1.14. Adjusting operating earnings -- which exclude this item, a gain from insurance recoveries related to the July 2018 tornado, and other smaller items -- dipped by 2% to $147 million.
  • Lennox repurchased $150 million in shares during the quarter, bringing its half-year repurchase total to $250 million.
A high-efficiency air-conditioning unit outside an apartment building.

Image source: Getty Images.

What management had to say

In the earnings press release, CEO Todd Bluedorn provided some detail on the weather conditions that crimped first-quarter residential segment revenue. "Significantly cooler temperatures and higher precipitation across the United States adversely impacted the HVAC market in the second quarter," Bluedorn said,  "and especially in key Central regions where cooling degree days were down over 30% and precipitation was up over 60%."

Bluedorn also updated the outlook for the residential business as the segment slowly recovers from production losses at its Iowa plant:

Slower moving shipments in the industry due to adverse weather has slowed regaining market share following the tornado and extends our recovery timeline to include the fourth quarter. For 2019 overall, we now expect $99 million of negative tornado impact to residential revenue, up from $70 million previously; a negative $54 million impact to segment profit, up from $40 million previously; and insurance recovery for lost profits of $94 million, up from $80 million previously. The resulting $40 million of net benefit to residential segment profit in 2019 is unchanged.

Looking forward

After lowering full-year earnings projections last quarter, Lennox was forced to chip away at its guidance again this quarter, due to the soft second quarter in residential and its protracted recovery from last year's tornado damage. Management reduced its 2019 year-over-year revenue growth range of 3%-7% to 2%-5%. A full-year projected EPS band of $12.65-$13.25 has now been reduced to $11.91-$12.51. Adjusted EPS received a similar haircut: The $12-$12.60 projected range now stands at $11.30-$11.90.

Investors felt the chill of the weather-related revisions: Shares opened down 5% Monday following Lennox's earnings release.

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Asit Sharma has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.