Air conditioner and refrigeration company Lennox Int'l (LII
209.75, -6.48, -3.00%) trades lower, despite opening Monday modestly in the green, as
investors’ eyes appeared to wander from the second quarter beat to the
underwhelming full year 2018 earnings outlook.
Investors are scrutinizing the guidance, so let’s begin there. Simply put, Lennox's earnings revision wasn't as bullish as the Street had predicted. The company upped the lower end of its full year 2018 earnings outlook to $9.95-10.35 (from $9.75-10.35), the midpoint of the new guidance still narrowly missed market expectations. Further, Lennox updated its 2018 guidance for GAAP revenue growth from 4-8%, with a 1% benefit from foreign exchange, to 4-6% to reflect the timing of Refrigeration divestitures and neutral foreign exchange. Management also raised the lower end of its 2018 guidance for adjusted revenue growth from 4-8%, with a 1% benefit from foreign exchange, to 6-8%, with neutral foreign exchange.
Lennox again raised its 2018 stock repurchase guidance, from the previous $350 mln guidance to the new $450 mln, and updates guidance for the company's average diluted share count from a range of 41-42 mln shares to about 41 mln shares on a full-year basis.
Management held firm on its 2018 corporate expense guidance of about $85 mln, effective tax rate of 22-24% on an adjusted basis for the full year, and capital expenditures of about $100 mln.
Swinging back to the second quarter results, which beat market expectations on both the top and bottom lines, Lennox reported revenue which increased 7% to $1.18 bln. Foreign exchange had a positive 1% impact to revenue on a GAAP and adjusted basis. Volume and price were up, and mix was unfavorable. Earnings for the second quarter came in at $3.67 per share.
On a GAAP basis, gross profit was $362 mln, up 6%. Gross margin was 30.8%, down 10 basis points. On an adjusted basis, gross profit was $357 mln, up 7%. Adjusted gross margin was 30.8%, down 70 basis points.
Revenue in the company’s Residential Heating & Cooling business segment were up 10% to a record $716 mln. At constant currency, revenue was up 9%. Segment margin was flat at the record 21.5% level. Results were positively impacted by higher volume, higher price, sourcing and engineering-led cost reductions, lower SG&A expense, and favorable foreign exchange. Offsets included unfavorable mix, higher commodity and freight costs, distribution investments, a smaller favorable warranty adjustment than in the prior-year quarter, and higher other product costs.
Commercial Heating & Cooling business sales were up 13% to a record $292 mln. At constant currency, revenue was up 12%. Segment margin expanded 70 basis points to 18.0%. Results were positively impacted by higher volume, higher price, sourcing and engineering-led cost reductions, and favorable warranty. Partial offsets included unfavorable mix, higher commodity and freight costs, and higher other product costs.
On an adjusted basis for the Refrigeration business segment, revenue was $150 mln, up 2%. At constant currency, revenue was up 1%. Segment margin expanded 40 basis points to 14.9%. Results were positively impacted by higher volume, higher price, engineering-led cost reductions and sourcing benefits including selling refrigerant allocations in Europe, and favorable foreign exchange. Partial offsets included unfavorable mix, and higher commodity, freight, and other product costs.
Shares retreat following the strong results but tepid guidance as perhaps investors are employing some profit taking in the name which has seen a nearly 12% advance in just three weeks. Into the report, the stock also held gains of about 3% YTD.
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