Lennox International Inc. announced third quarter 2003 diluted earnings per share (EPS) of U.S. $0.46. LII also reported $0.46 EPS in the third quarter last year.
Sales increased 2 percent to $839 million from last year's third quarter. Adjusting for $33 million in heat transfer revenues included in last year's sales - essentially all of which are now part of LII's joint venture with Outokumpu and no longer reported by LII - sales for the quarter increased 7 percent, up 4 percent when adjusted for currency exchange. Quarterly operating income was $53 million, up 1 percent from last year. Net income was $28 million, unchanged from the year-ago period.
LII's cash flow performance continued to show significant strength in the third quarter. The company generated $83 million in free cash flow in the third quarter and continued to use that cash flow primarily to reduce debt. In the past 12 months LII has reduced debt by $37 million, lowering debt-to-capitalization ratio to 39.9% from 46.7 percent 1 year ago. Over the past 3 years LII has cut its debt in half for a total reduction of $366 million.
"LII achieved solid results in the third quarter, with higher sales and improved margins in our manufacturing businesses offsetting soft results in our Service Experts segment," said Bob Schjerven, chief executive officer. "Based on the strength of our performance in the first nine months of the year and our momentum going into the final quarter of the year, we are comfortable with our current earnings guidance for 2003 and expect full-year EPS will be in the range of $1.10 to $1.20. We are, however, raising our guidance for free cash flow, and now project full-year free cash flow to substantially exceed our net income." The company's previous guidance was for full-year 2003 free cash flow to be approximately equal to net income.
LII's Heating & Cooling business revenues rose 11 percent to $519 million, reflecting favorable cooling season weather in many key markets. Adjusting for fluctuations in exchange rates, sales were up 8 percent. Segment operating income increased 44% to $60 million and operating margins expanded 270 basis points to 11.5 percent.
LII's Residential Heating & Cooling business continues to outperform the market, with double-digit sales growth for both the Lennox and Ducane brands and continued top line growth in the hearth products division. Revenues grew 7 percent in the third quarter to $368 million, with sales up 6 percent adjusting for foreign exchange. Segment operating income increased 24 percent for the quarter to $42 million. Segment operating margins expanded 160 basis points to 11.5 percent through higher volumes and purchasing savings that have translated to lower product costs.
Revenues for Service Experts were relatively flat at $251 million, down 3 percent adjusting for currency exchange. Consistent with the first half of the year, declines in commercial new construction offset modest revenue growth in residential new construction and both residential and commercial service and replacement. Segment operating income for the quarter declined from $13 million in 2002 to $300,000 this year.
"While Service Experts has positive cash flow, its profitability for the quarter was clearly unsatisfactory," Mr. Schjerven said. "Our aggressiveness in defending the topline in a price competitive environment significantly depressed our gross margins and increased marketing costs."
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