Top-line growth for Lennox in the period was actually quite robust, with revenues rising to $688 million this quarter from $644 million during the same period last year. However, revenues from the residential heating and cooling segment, which is the major contributor, declined this quarter because of product price increases.
Although net sales jumped 7% year over year, beating company expectations, higher commodity and freight costs weighed on the company's profits. The other half of the story lies in the bottom line. Here is where Lennox really failed to impress. Decline in gross margin along with higher selling, general, and administrative expenses resulted in an operating loss of $8.1 million this quarter, compared with an operating profit of $4.8 million in the same quarter of 2010.
Operating losses and higher interest expenses overshadowed the growth in the company's top line. As a result, net loss for the company shot up to $7.2 million this quarter from $2.0 million a year ago. Loss per share jumped to $0.13 from $0.03 in the year-ago quarter. This is raising concerns about the growth of the company.
A (not) fine balance
Another issue is the overall financial health of the company, particularly the debt-to-EBITDA ratio, which has risen sharply to 20.3 this quarter compared to 4.2 in the same period last year. The ratio indicates Lennox is growing more leveraged, a concern for investors. Lennox's peers Johnson Controls
Though part of the increase in this ratio in Lennox's case is because of the recent acquisition of Kysor/Warren from Manitowoc
For now, what matters to me is the debt-to-equity ratio of Lennox, which has shot up to 96.2% this quarter, compared with 51.6% in the same period a year ago. Adding to the woes of the company is the free cash flow, which has declined further to a negative $156 million this quarter, compared with $51 million a year ago. Despite showing a downtrend, I feel that cash flow may also improve with growing operations of the company in the near future.
However, Lennox must control costs, which would help boost margins. One way Lennox could boost margins would be through strategic investments.
The Foolish bottom line
For now, aggravating losses could shake shareholders' confidence. Although Lennox has reiterated its growth forecast for full-year 2011, investors continue to remain bearish. I'd also prefer to stay bearish on the company's prospects for the time being.