$LII · LENNOX INTERNATIONAL INC
Lennox International filed its Q3 FY2026 10-Q, reporting net sales of $1.573B (+10.2% YoY) but diluted EPS of $6.41, down 13.1% from $7.38 a year ago. Gross margin contracted to 31.6% from 34.1% as COGS growth outpaced revenue. Operating income declined 5.1% to $312.1M, while interest expense surged 66.7% to $17.5M. Nine-month operating cash flow improved significantly to $583.4M from $351.7M.
- Q3 diluted EPS dropped to $6.41 from $7.38 YoY, a 13.1% decline despite 10.2% revenue growth to $1.573B.
- Gross margin contracted to 31.6% from 34.1% YoY as cost of goods sold rose 14.4% vs. 10.2% revenue growth.
- Operating income fell 5.1% to $312.1M; operating margin compressed to 19.8% from 23.0% in Q3 2025.
- Interest expense surged 66.7% to $17.5M from $10.5M, reflecting higher debt levels including $455.1M in commercial paper.
- Nine-month operating cash flow improved to $583.4M from $351.7M, driven by working capital management.
Stock fell 10.59% in regular trading to $332.64, reflecting a sharp negative reaction to the earnings miss and margin compression. The $11.50B market cap HVAC leader saw a ~$1.4B single-day value erosion as investors repriced for deteriorating profitability trends.
A 13% EPS decline on 10% revenue growth signals meaningful operating deleverage at a premium HVAC name, with margin compression and rising debt costs threatening the investment thesis.
Lennox's margin compression contrasts with the broader HVAC sector where peers have generally maintained pricing power. The 250 bps gross margin decline raises questions about competitive dynamics and raw material cost absorption relative to Carrier and Trane.
Gross margin fell 250 bps YoY as COGS growth (+14.4%) outpaced revenue growth (+10.2%), signaling input cost pressure or unfavorable mix. Interest expense jumped 66.7% YoY to $17.5M, with commercial paper borrowings at $455.1M and total debt rising materially. Restructuring charges of $8.2M were recorded in Q3 with no comparable prior-year charge.