Lennox cut its full-year 2026 adjusted earnings and free-cash-flow guidance after third-quarter profit declined despite a 10% increase in revenue, as competitive pressure in residential HVAC, tariffs and material inflation weighed on margins.
The HVACR company now expects adjusted earnings of $21.00 to $21.50 per share, down from its prior range of $23.00 to $24.00. Free cash flow is projected at $700 million to $750 million, compared with the previous forecast of $750 million to $850 million.
For the quarter ended Sept. 30, revenue rose to $1.57 billion from $1.43 billion a year earlier. Total segment profit, including unallocated corporate expenses, fell 2% to $323 million, while the corresponding margin contracted 240 basis points to 20.6%. Higher tariffs and material costs reduced segment profit by $45 million, more than offsetting contributions from volume, price and mix.
Adjusted net income declined to $235.9 million from $259.9 million, and adjusted earnings per diluted share fell 7% to $6.84 from $7.38. On a GAAP basis, net income was $221.2 million, or $6.41 per diluted share, compared with $259.9 million, or $7.38 per share, a year earlier. GAAP operating income fell to $312 million from $329 million.
Residential pressure offsets commercial growth
Home Comfort Solutions revenue increased 3% to $937 million, supported by acquisitions and pricing and mix. Organic revenue declined 1%, with volume down 3%. Segment profit fell $40 million to $176 million, and return on sales dropped to 18.7% from 23.6%.
Lennox attributed the segment’s weaker profitability to higher tariffs and material inflation, along with fuel, logistics and selling, general and administrative cost inflation. Acquisition accretion contributed about $6 million. The company said its residential volume has lagged the market recovery, while growth through traditional dealers has not offset declines in residential national accounts.
Building Climate Solutions delivered stronger results. Revenue rose 24% to $635 million, driven by a 13% volume increase, a 2% contribution from mix and pricing, and a 9% contribution from other factors. Lennox cited strength in light-commercial equipment and services.
Segment profit increased $26 million to $167 million, including about $13 million of acquisition accretion. The segment’s return on sales nevertheless eased to 26.2% from 27.3% as tariffs, material costs, logistics expenses and SG&A inflation partly offset the benefit of higher volume and pricing.
Recovery plan targets share and margins
Lennox outlined a recovery plan focused on regaining residential market share and restoring margins. The plan includes dynamic pricing, a refreshed entry-level product platform intended to improve affordability, and productivity measures across manufacturing, distribution, tariffs and SG&A. The company also plans to resize capacity and improve customer experience through higher fill rates and more efficient service.
For 2026, Lennox expects total revenue to rise about 6%, with Home Comfort Solutions revenue declining about 4% and Building Climate Solutions revenue increasing about 23%. The company projects low-single-digit volume declines, a low-single-digit benefit from price and mix, and a mid-single-digit contribution from acquisitions.
The guidance assumes approximately 5% inflation, $35 million of investments, $25 million of acquisition-related amortization and $60 million of productivity savings. Lennox also expects about $70 million of interest expense, a tax rate near 21% and approximately 35 million shares outstanding.
Management’s preliminary framework for 2027 assumes continued inflation from tariffs, components and commodities, with price realization building through the year. The company expects industry demand to remain muted, with resilient replacement activity but soft new construction. Its priorities include residential share recapture, value-tier products, parts and joint ventures, as well as commercial national accounts, emergency replacement and services. Formal 2027 guidance is scheduled to accompany fourth-quarter results.
Cash flow improves as leverage rises
Third-quarter operating cash flow increased to $395.3 million from $300.7 million, while free cash flow rose to $362.7 million from $265.3 million. Trailing-12-month free-cash-flow conversion reached 108%.
Net debt stood at $1.58 billion as of Sept. 30, up from $952.9 million a year earlier. The net-debt-to-adjusted-EBITDA ratio increased to 1.4 times from 0.8 times. Lennox said it intends to maintain a strong balance sheet while investing in its entry-tier portfolio, contractor training facilities, data-center cooling innovation and artificial-intelligence tools, alongside a greater focus on share repurchases.
The outlook remains subject to uncertainty in North American HVAC and refrigeration demand, competitive conditions, weather, new-construction activity, tariffs, raw-material prices and supply disruptions. Lennox also identified acquisition integration, product execution, regulatory changes, cybersecurity and broader economic conditions among the risks that could cause actual results to differ from its expectations.
Find out more
Comments