Dallas-based heating and air conditioning manufacturer
Lennox International (LII 188.53, -4.59) slips to 52-week lows in reaction to
the company’s third quarter sales and profit misses in addition to a full year
2018 guide that underwhelms after adjusting for the impact of a recent tornado.
As a bit of background, Lennox’s tornado references relate to tornado damage incurred on July 19 at a Residential manufacturing facility in Iowa. For 2018, the company raises the estimated business interruption impact from the tornado, which will reverse to a benefit in 2019 upon the receipt of insurance proceeds. The company is also rebalancing the expected tornado impact between Q3 and Q4 of 2018. Lennox had guided that one-third of the impact would be in Q3 and now expect that approximately 40% of the impact was in Q3. Lennox had estimated two-thirds of the impact to come in Q4 and now expect that approximately 60% of the impact will be in Q4.
Jumping right into the results, Lennox reported adjusted earnings per share from continuing operations in Q3 of $2.72, impacted by lost profits from the tornado of about $0.52 per share.
On a GAAP basis, revenue was down 2.1% to $1.03 bln. Adjusted net sales, excluding the non-core business results related to Lennox’s business operations in Australia, Asia, and South America, for which the company announced a divestiture during the first quarter, for 2018 and 2017, were up roughly 1.6% to about $1.02 bln from $1.01 bln a year ago.
Adjusted gross margin was 29.4%, down 50 basis points from a year ago. Gross profit was impacted by the tornado, higher commodity, freight, distribution, and other product costs, and unfavorable foreign exchange. Partial offsets to gross margin included higher price, sourcing, and engineering-led cost reductions, and factory productivity and other product costs.
By business, Lennox reported Residential Heating & Cooling business revenue up 1% to a Q3 record of $595 mln. Foreign exchange in the business was neutral to revenue. Segment profit was $113 mln, down 1%. Segment margin was 19.0%, down 40 basis points. Residential financial results were impacted by the tornado, and the business experienced lower volume, higher commodity, freight, distribution, and other product costs as well as unfavorable foreign exchange.
Lennox’s Commercial Heating & Cooling segment saw revenues up 2% to a Q3 record of $276 mln. Foreign exchange in the business had a neutral impact on revenue. Commercial profit was down 7% to $47 mln, and segment margin was down 170 basis points to 16.9%. Results were impacted by higher commodity, freight and distribution, and other product costs, lower factory productivity, higher SG&A expenses, and unfavorable foreign exchange. Partial offsets included higher volume, favorable price, and sourcing and engineering-led cost reductions.
On an adjusted basis for the Refrigeration business segment, revenue was $153 mln, up 4%. Foreign exchange was also neutral to revenue in this segment. Refrigeration profit was up 19% to $24 mln, and segment margin expanded 190 basis points to 15.4%. Results were positively impacted by higher volume, higher price, sourcing and engineering-led cost reductions, and lower SG&A expenses. Partial offsets included higher commodity and freight costs.
Lennox also plans to repurchase $100 mln of stock in Q4 as management looks toward a strong close to 2018 and ahead to 2019.
Turning to the guidance, Lennox estimates the 2019 tornado impact on the core business at about $85 mln of revenue, $35 mln of segment profit, and $0.70 of EPS. Management also reiterated 2018 revenue guidance of 2-4% growth, with adjusted growth still 4-6%, to about $3.92-4.0 bln. Lennox now sees FY18 EPS of $8.70-9.10, down from $8.90-9.30, reflecting additional tornado impact in 2018 than prior guidance, to be a benefit in 2019 upon receipt of insurance proceeds.
A rough few weeks has seen LII slip below its 50-day simple moving average (216.88) and 200-day (209.11) since following the broader market trend lower since the start of October. Since notching YTD highs on September 13, shares of LII have given back nearly 20% of their value. The stock trades off today’s worst levels, only down -2.2% vs -8.2% at today’s lows, but the damage is done as shares cracked a 52-week low this morning.
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