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Lennox (LII) Misses Q3 Earnings Estimates, Trims '19 View

Zacks Equity Research

Lennox International, Inc. LII reported lower-than-expected earnings in the third quarter of 2019, thanks to colder-than-normal weather in key regions compared with last year.

Quarterly Numbers
 
Third-quarter adjusted earnings came in at $3.34 per share, which missed the Zacks Consensus Estimate of $3.39 by 1.5%. Nevertheless, the bottom line increased 26% from prior-year quarter’s figure.
 
Total revenues during the reported quarter amounted to $1,032.9 million, which beat the Zacks Consensus Estimate of $1,031 million by 0.2%. Also, the reported figure inched up 0.3% year over year. Adjusted net revenues rose 5.8% from the prior-year quarter’s tally.
 
Segmental Details

Residential Heating & Cooling revenues amounted to $638 million, up 7% year over year. The upside can be attributed to higher volume and pricing along with lower material costs, favorable warranty, tariff rebates as well as insurance proceeds for lost profits.

Commercial Heating & Cooling revenues came in at $253 million, up 7% year over year. This uptick was backed by higher volume, favorable price and mix as well as sourcing and engineering-led cost reductions.

However, revenues in the Refrigeration business fell 2% year over year to $142 million. Notably, the company was affected by lower factory efficiency, unfavorable mix, higher commodities and other product costs, tariffs as well as higher SG&A expenses during the quarter.

Lennox International, Inc. Price, Consensus and EPS Surprise

 

Lennox International, Inc. Price, Consensus and EPS Surprise

Lennox International, Inc. price-consensus-eps-surprise-chart | Lennox International, Inc. Quote

 

Costs/Margins
 
Cost of goods sold during the quarter was $734.6 million, up 0.9% year over year.
 
Adjusted gross profit, which represented 28.8% of total revenues, was up 2% to $297.8 million in the quarter. Gross margin benefitted from higher volume, favorable price and lower material costs. This was partially offset by tornado impact, colder-than-normal weather in the third quarter and factory productivity along with other product costs, unfavorable mix, higher distribution and freight expenses as well as unfavorable foreign exchange.
 
Selling, general and administrative expenses during the quarter totaled $143.4 million compared with $149.4 million reported in the year-ago quarter.
 
Balance Sheet/Cash Flow
 
As of Sep 30 2019, the company’s cash and cash equivalents were $46.1 million compared with $46.3 million on Dec 31, 2018. Long-term debt was $1,056.8 million, higher than $740.5 million recorded at the end of 2018.
 
In the first nine months of 2019, Lennox generated $124.5 million cash from operating activities compared with $231.3 million in the year-ago quarter.
 
2019 Guidance
 
Thanks to the unfavorable weather conditions, Lennox has trimmed its revenues and earnings expectations for 2019.

Notably, the company expects a negative tornado impact of $99 million to Residential revenues for 2019 along with a negative $54-million impact to segment profit. It also anticipates  insurance recovery for lost profits worth $94 million.
 
Overall, this Zacks Rank #3 (Hold) company projects adjusted top-line growth for  2019 in the range of 2-4%, lower than the previous guidance of 2-5%. The company trimmed its adjusted earrings guidance to the range of $11.15-$11.45 per share from its prior expectation of $11.30-$11.90 for 2019.
 
The company maintained its effective tax rate guidance of 22-23% on an adjusted basis. It also reiterated its capital expenditure projection of approximately $155 million, that includes $55 million funded by insurance proceeds.
 
Meanwhile, Lennox expects free cash flow of approximately $320 million for the year compared with $390 million expected earlier.
 
Stocks to Consider
 
Some better-ranked stocks in the Zacks Construction sector include Aegion Corporation AEGN, Construction Partners, Inc. ROAD, and D.R. Horton, Inc. DHI, each sporting a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
 
Aegion has a three-five year expected EPS growth rate of 10%.

Construction Partners and D.R. Horton has have an average earnings surprise of 9.2% and 5.9% in the trailing four quarters, respectively.

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Aegion Corporation (AEGN) : Free Stock Analysis Report
 
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