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Lennox International Reports Second Quarter Results
Jul 26, 2011
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Lennox International Inc. (Dallas) today reported second quarter 2011 revenue of $937 million, up 7% from the prior-year quarter, including a 3 point positive impact from foreign exchange. Excluding the Kysor/Warren acquisition that closed in January 2011, organic revenue was up 1% in the second quarter. At constant currency, organic revenue was down 2% from the prior-year quarter. Volume was down, and price/mix was up from the prior-year quarter.

"Our residential equipment and service businesses were soft in the second quarter, impacted by consumer weakness, cooler weather in key regions, and lower system sales and product mix versus a year ago when the federal government's $1,500 tax credit for high-efficiency heating and cooling products was in place," said Todd Bluedorn, CEO of Lennox International. "Residential was also impacted by lower new construction business than a year ago when federal tax credits for homebuyers were in place."

In constant currency, Bluedorn said, 2Q residential segment revenue was down 5%. With weak residential market conditions, Lennox lowered revenue and EPS guidance for 2011 and is taking cost-cutting steps.

Gross profit for the second quarter was $248 million, down 6% from $265 million in the prior-year quarter. Gross margin was 26.4% compared to 30.4% in the prior-year quarter. Gross margin was impacted primarily by higher commodity costs and the Kysor/Warren acquisition, with offsets from improved price/mix and productivity initiatives. The annual adjustment for warranty was favorable by $3 million in the second quarter of 2011, which compares to a favorable adjustment of $6 million in the second quarter a year ago.

2Q income was $45.6 million, or $0.84 diluted earnings per share, compared to adjusted income from continuing operations of $54.7 million, or $0.97 diluted earnings per share in the prior-year quarter. Adjusted income from continuing operations for the second quarter of 2011 excludes: an after-tax charge of $1.5 million for restructuring activities; a $1.5 million favorable special product quality adjustment, net; $0.5 million after-tax for the net change in unrealized losses on open future contracts; and $0.3 million for other items, net.

First half profits were $412.7 million, down from 439.1 million in the first half of 2010. First half sales were $1,624.7 million, up from 1,516.2 million in the first half of 2010.

Residential Heating & Cooling: 2Q revenue was $395 million, down 4% from $413 million in 2Q 2010. At constant currency, revenue was down 5%. Segment profit was $33 million and segment profit margin was 8.4%, compared to segment profit of $53 million and segment profit margin of 12.7% in the prior-year quarter. Results were primarily impacted by lower volume, higher commodity costs, and a lower favorable warranty adjustment than in the prior-year quarter, with offsets from productivity initiatives and lower SG&A expenses. Price/mix was flat with the prior-year quarter due to a lower product mix.

Revenue in the Commercial Heating & Cooling business segment was $198 million, up 13% from $176 million in 2Q 2010. At constant currency, revenue was up 9%. Total segment profit was $27 million, and segment profit margin was 13.7%, compared to segment profit of $28 million and segment profit margin of 15.8% in the prior-year quarter. Results were primarily impacted by higher volume and favorable price/mix, with offsets from higher commodity costs and a lower favorable warranty adjustment than in the prior-year quarter.

Revenue in the Refrigeration business segment was $218 million in the second quarter, up 56% from $140 million in 2Q 2010. At constant currency, revenue was up 47%. Excluding the Kysor/Warren acquisition, organic revenue was up 4% at constant currency. Segment profit was $21 million and segment profit margin was 9.8% in the second quarter, compared to segment profit of $15 million and segment profit margin of 10.9% in the year-ago quarter. Excluding the Kysor/Warren acquisition, segment profit margin was up 260 basis points from the prior-year quarter. Results were primarily impacted by higher volume and favorable price/mix, with offsets from higher commodity costs and selling expenses.

Revenue in the Service Experts business segment was $145 million in the second quarter, down 13% from $168 million in the prior-year quarter. At constant currency, revenue was down 14%.

Full-Year Outlook

Lennox is lowering its revenue and EPS guidance ranges for 2011:
• adjusting the guidance range for revenue growth from 11-14% to a range of 8-11%
• adjusting the guidance range for organic revenue growth from 5-8% to a range of 1-4%

Raw Materials Costly

Lennox now expects $60-65 million added raw and component commodity costs for the full year, up from $45-50 million previously.

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