Lennox Posts 14% EPS Jump in Q2

Lennox International (LII 6.59%), a major provider of heating, ventilation, air conditioning, and refrigeration (HVACR) systems, reported its second-quarter 2025 earnings on July 23, 2025. The company posted better-than-expected results, with non-GAAP earnings per share of $7.82 compared with analyst estimates of $6.86. Revenue was $1.50 billion, also above the $1,471.07 million consensus. This growth came despite lower sales volumes, as pricing and new product mix drove strong margins. Lennox raised its full-year guidance, but highlighted persistent inflation, volume softness, and weaker cash flows as ongoing concerns for investors. The quarter showed robust performance in both core segments, supported by pricing power and execution on strategic initiatives.

Source: Analyst estimates provided by FactSet. Management expectations based on management's guidance, as provided in Q1 2025 earnings report.

Business Overview and Strategic Focus

Lennox International is a well-established manufacturer of climate control solutions, best known for its heating and air conditioning equipment for homes and businesses. It operates through two core segments: Home Comfort Solutions, which focuses on residential HVAC products, and Building Climate Solutions, which provides climate systems and services for commercial and industrial buildings.

Recently, Lennox has focused on several key areas to drive its business forward. The company emphasizes ongoing product innovation, particularly in developing energy-efficient and environmentally friendly HVACR (heating, ventilation, air conditioning, refrigeration) systems. Strategic investments and acquisitions support growth, while regulatory compliance—especially with shifting refrigerant standards—and an evolving distribution network remain at the forefront. Success depends on continuous improvement in product quality, strong channel relationships, agile adaptation to regulation, and effective capital management.

Quarter in Review: Financial and Operational Highlights

In the period, revenue grew 3 %, reaching above analyst expectations. Non-GAAP EPS increased 14 %. Lennox credits these results to disciplined pricing actions, robust product mix, and margin expansion in spite of lower overall volumes in both segments. Operating income rose 11 % year over year, and consolidated operating margin climbed 150 basis points.

Home Comfort Solutions, the company’s largest product family focused on residential heating and cooling equipment, saw segment profits rise 12 %. The business achieved this by emphasizing a favorable product mix, including new environmentally compliant systems using R-454B refrigerant. This shift helped the segment offset a $36 million decrease in sales volumes and $11 million in inflation-related costs with $84 million in pricing and mix benefits. Despite weaker demand for unit replacements, higher-value products and recent pricing supported profitability. The segment’s margin improved 200 basis points to 25.3 %.

The Building Climate Solutions unit, which delivers commercial and industrial HVAC systems, increased revenue by 5 % and segment profit by 7 %. The segment margin rose 60 basis points to 24.9 %. Positive product mix and pricing offset a $6 million drop in sales volumes and $5 million in input costs. The company continued to make progress with its emergency replacement initiative, aiming to fulfill critical orders more quickly and improve customer response rates. The backlog in this commercial unit remained healthy, providing visibility into upcoming quarters.

Lennox operated in a climate of persistent inflation, with input and product costs rising by $16 million for the quarter. Tariffs and transition-related headwinds, particularly as the industry moves to new refrigerant requirements, remained present. However, pricing actions—two midsingle-digit price increases during the quarter, one as a traditional increase and another as a temporary tariff surcharge—helped the company manage those costs. Inventory levels grew due to both working capital needs for new products and ongoing investments in distribution capabilities.

Cash flow and capital deployment shifted in the quarter. Operating cash flow and free cash flow fell sharply to $87 million and $59 million, respectively, from $184 million and $152 million in the prior-year quarter. This was largely driven by higher inventory and absorption of working capital, as the company pre-positioned products for the ongoing transition to new refrigerant-compliant models. Lennox repurchased $210 million of shares, a significant increase compared to prior quarters. Net capital expenditures remained steady year over year. The company ended the quarter with $49 million in cash and equivalents.

During the quarter, Lennox continued to integrate prior acquisitions such as AES Industries and AES Mechanical, both of which expand its reach and capabilities in the Building Climate Solutions segment. The ongoing investments in the emergency replacement initiative and the distribution network, totaling approximately $10–11 million per segment, further support these advances. On the product side, the company advanced its line-up of ducted and ductless heat pumps—types of HVAC equipment used for both heating and cooling—and continued embedding diagnostic and control systems for smarter operation.

Outlook and Investor Considerations

Looking ahead, management raised its full-year 2025 financial guidance. The company now expects revenue to grow 3 %, up from prior projections. Adjusted earnings per share guidance increased to a range of $23.25–$24.25, compared to the $22.25–$23.50 range announced in the previous quarter. The company reaffirmed its free cash flow guidance of $650–$800 million for the year, with capital expenditures expected at $150 million. Backlog remains solid, especially in the commercial segment, and management sees strong ongoing benefits from the product and distribution investments made over the past year.

Investors should note, however, that volume trends remain soft, with both core business units reporting year-over-year declines in sales. Management signaled that destocking related to the refrigerant transition should largely conclude after the quarter, but risks remain if industry demand does not rebound as anticipated. Lennox plans to maintain its focus on offsetting inflation and tariffs through pricing and productivity. Any significant swings in macroeconomic factors, construction activity, or changes in trade policy could influence these expectations and cash-flow dynamics in the quarters ahead.

The quarterly dividend was raised 5 % to $1.10 per share.

Revenue and net income presented using U.S. generally accepted accounting principles (GAAP) unless otherwise noted.