Lennox (LII) Q3 2026 earnings review
Lennox commercial sales jump, but residential price cuts lower profit
Lennox's commercial cooling unit is expanding fast, while its larger residential division is cutting prices to defend market share. Total sales at the heating and air-conditioning maker rose 10%, helped by recent acquisitions, yet profit per share excluding one-offs fell 7% as tariffs and factory costs bit. Chief executive Alok Maskara cut the full-year profit outlook for a second straight quarter, and by our math the new plan has fourth-quarter profit per share dropping 24%.
| Revenue | $1,572.5M +10.2% from a year ago |
|---|---|
| Profit per share, excluding one-offs | $6.84 -7.3% from a year ago |
| Commercial revenue growth | +24% +15% from businesses owned a year ago |
| Full-year profit per share outlook | Cut $2.25 middle of the range: $21.25 (-8.2%) |
⚖️ Verdict: 🔴 Bearish
The story got worse because Lennox lost pricing power in its residential business just when inflation and tariffs hit hardest. Instead of raising prices to cover costs as planned, the company discounted in select residential segments and saw that division's margin drop nearly 5 percentage points. The bright spot: commercial demand stayed strong, supplying nearly half of segment profit, and warehouse reductions lifted free cash flow.
The question now is whether the residential price cuts are a brief tactical move or the start of an industry price war as homeowners trade down to entry-level units. If rivals match the discounts, residential margins will stay compressed into 2027; if Lennox retools its pricing as Maskara plans, margins can recover once factory volumes normalize. Fourth-quarter residential price and mix numbers will tell.
🐂 Bull Case
Building Climate Solutions Carries Half the Company's Profit
Building Climate Solutions, which sells commercial heating, cooling and refrigeration gear, is carrying Lennox. Segment sales jumped 24% from a year ago to $635.3 million, and sales from businesses owned a year ago rose 15%. The company cited "continued strength across commercial HVAC, refrigeration, and services".
Higher volumes added $24 million to segment profit, while recent acquisitions such as Duro Dyne and Supco added $13 million. Because the residential division shrank, the commercial unit generated 48.7% of segment profit before corporate costs, up from 39.5% a year ago. Its profit margin slipped 1.1 percentage points to 26.2% on tariff and factory costs, but management still expects full-year commercial margins to expand.
What to watch: fourth-quarter underlying commercial revenue growth against harder comparisons. A reading above 10% would show that commercial demand can carry the group into 2027 even before residential buyers return.
Lower Inventory Lifted Free Cash Flow Despite the Profit Drop
Lennox generated $362.7 million of free cash flow in the third quarter, up 36.7% from $265.3 million a year ago even though net income fell 15%. The improvement came from working capital, because the manufacturer finally began clearing its warehouses after last year's refrigerant transition.
Over the first nine months of 2026, working down inventory brought in $26.2 million of cash, whereas building inventory consumed $310.2 million in the same period last year. However, Lennox still trimmed its full-year free cash flow outlook by $75 million at the middle of the range to $700–750 million because lower earnings outweighed the warehouse cleanup.
What to watch: fourth-quarter inventory balances on the balance sheet. Total inventory still sits at $1,176.8 million because of acquired businesses, so Lennox must generate $264 million of fourth-quarter free cash flow to hit the middle of its lowered target.
🐻 Bear Case
Home Comfort Solutions Cut Prices to Defend Market Share
For two quarters Lennox said price increases would drive second-half results. Instead, competition forced the company to discount in Home Comfort Solutions, its residential heating and cooling division. "Targeted price adjustments in select market segments were implemented to defend and recapture share," the company said.
- Home Comfort Solutions revenue: $937.2 million, up 2.7% from a year ago
- Residential segment profit: $175.7 million, down 18.4% from a year ago
- Residential segment margin: 18.7%, down 4.9 percentage points from 23.6% a year ago
- Residential mix and price benefit: $13 million, vs $32 million of product cost inflation and factory headwinds
Cutting prices in the peak cooling quarter breaks the argument that residential pricing would easily cover tariffs. The residential unit is also "introducing new products in the entry-tier portfolio", which shows homeowners are trading down to cheaper systems.
What to watch: residential mix and price contribution in the fourth quarter. Another quarter where cost inflation exceeds pricing by more than $15 million would show that rivals are not following Lennox's price increases.
Second Straight Outlook Cut Points to a Weak Fourth Quarter
Chief executive Alok Maskara said residential markets began stabilizing, but admitted "our margins and results fell short of our expectations, reflecting heightened competitive pressure and the impact of persistent inflation on our costs". Lennox lowered its full-year profit and revenue targets for a second consecutive quarter.
The new outlook cuts full-year revenue growth from 8% to 6%. Because completed acquisitions still provide 5 percentage points of that growth, sales from businesses owned a year ago will grow only 1% this year by our math, down from 3% in the prior plan. In the residential unit, lower sales volumes reduced third-quarter profit by $12 million even against an easy comparison from a year ago.
What to watch: fourth-quarter profit per share excluding one-offs, which the new full-year outlook implies will fall 24% to $3.36 at the middle of the range by our math. A drop that deep would mean residential demand is still shrinking entering 2027.
Cost Inflation and Factory Under-Absorption Swamped Pricing
Inflation and slower factory lines hit Lennox harder than its price increases could cover. Across the company, the cost of making products rose 2.5 percentage points of revenue from a year ago, reaching 68.4% and pushing gross margin down to 31.6%. Maskara said the group is "retooling our processes to more effectively pass through cost increases while accelerating productivity".
Product cost inflation, tariffs and unabsorbed factory overhead reduced third-quarter segment profit by $45 million, while higher fuel, distribution and overhead costs took away another $15 million. Prices and product mix added back only $21 million. Last quarter's profit had included $30 million of one-time tariff refunds; without that help in the third quarter, the gap between costs and prices showed up in full.
What to watch: the gap between product cost headwinds and price benefits in the fourth-quarter profit bridge. If factory under-absorption persists into year-end, it will drag on 2027 margins as well.
Risks this quarter didn't answer
Three standing balance-sheet, legal and operating concerns received no explanation in the earnings release.
- Short-term debt load: commercial paper borrowings reached $455.1 million and current debt maturities jumped to $319.2 million against $43.3 million of unrestricted cash; the quarterly filing will show the refinancing plan.
- Antitrust litigation: Lennox booked a $3.0 million special litigation charge this quarter; the filing's legal footnote will show if the multi-manufacturer class action now has an estimable loss range.
- New-construction customer exit: the release did not say if Lennox has finished walking away from low-margin homebuilder accounts; call commentary will show if those exits are still hurting volume.
💲 Other KPIs
Uncollected customer bills rose 16.2% from a year ago and 52.3% since December, outpacing third-quarter revenue growth of 10.2%. Over the first nine months of 2026, rising receivables tied up $289.2 million of operating cash, compared with $94.7 million in the prior-year period.
Total diluted shares fell 2.0% from 35.2 million a year ago after Lennox spent $151.0 million on buybacks in the third quarter and $301.9 million over the first nine months. The lower share count cushioned the per-share profit drop by 2 percentage points.
Quarterly interest costs rose 66.7% from $10.5 million a year ago and 19.0% from last quarter's $14.7 million. The increase reflects higher commercial paper borrowings used to fund $209.9 million of acquisitions and $301.9 million of stock buybacks during the first nine months.
🔮 Guidance
Cut. The new plan lowers full-year sales growth by 2 percentage points, and acquisitions still supply 5 percentage points of the total. By our math, that cuts growth from businesses owned a year ago to 1%, and leaves fourth-quarter total revenue growth at 5.0% against 10.2% in the third quarter.
Cut. Management lowered the middle of the range by $2.25, or 9.6%, so full-year profit per share is now set to fall 8.2% from last year's $23.16. It is the second cut in two quarters: -$0.75 in Q2, then -$2.25 in Q3. By our math, the middle of the range leaves $3.36 for the fourth quarter, down 24.5% from a year ago.
Cut. The US manufacturer lowered the middle of its cash target by $75 million after holding it steady for two quarters. With $461.0 million generated in the first nine months, the middle of the range leaves $264.0 million for the fourth quarter by our math, down 30.0% from last year's fourth quarter.
❓ Key Questions
How much did residential unit volumes fall in Q3?
The release states that lower sales volumes reduced Home Comfort Solutions profit by $12 million, versus $49 million in the second quarter. Management did not give the exact unit volume percentage change, which is needed to tell if demand is truly stabilizing.
Where did Lennox cut residential prices, and by how much?
Lennox implemented targeted price cuts in select residential segments and plans to launch new entry-tier products. Investors need to know whether the discounting is confined to homebuilders or spreading into the higher-margin replacement dealer channel.
Which segment holds the recent Heat Controller acquisition?
Acquisitions added $6 million to residential profit and $13 million to commercial profit in the third quarter. Clarifying how much revenue the July acquisition of Comfort-Aire and Century added to each division will show the true underlying residential sales rate.
How will Lennox refinance $774 million of short-term debt?
Commercial paper borrowings reached $455.1 million and current debt maturities rose to $319.2 million at quarter-end, while unrestricted cash stood at $43.3 million. Management has not yet detailed whether it will issue long-term bonds or pause share buybacks.