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Text: I'm here today with Chairman and CEO, Todd Bluedorn; and CFO, Joe Reitmeier.
Todd will review key points for the quarter and Joe will take you through the company's financial performance and outlook for 2021.
To give everyone time to ask questions during the Q&A, please limit yourself to a couple of questions or follow-ups and requeue for any additional questions.
All comparisons mentioned today are against the prior year period.
For information concerning these risks and uncertainties, see Lennox International's publicly available filings with the SEC.
The format will be virtual again this year.
Please mark your calendars, invitations and more details will follow.
Strong demand continued in the third quarter across all our businesses, but global supply chain and COVID-19 disruptions to production and labor availability negatively impacted our financial results; approximately a $75 million impact to revenue and $75 million to operating profit in the quarter.
Company revenue was up slightly to a third quarter record of $1.06 billion with the benefit of strong price in the shipment constrained environment.
GAAP operating income was down 3%.
GAAP earnings per share from continuing operations was relatively flat at $3.41 compared to $3.42 in the prior year quarter.
Total segment profit was down 7% and total segment margin was down 120 basis points to 15.5%.
Adjusted earnings per share from continuing operations was down 4% to $3.40, including approximately $0.55 of negative impact from the global supply chain and COVID-19 disruptions.
Looking at business segment highlights for the third quarter.
Residential revenue was down 2% and segment profit was down 6%.
Segment margin was down 90 basis points to 20.3%.
Residential revenue from replacement business was down mid-single-digits.
Revenue from new construction was up low-double-digits.
Lennox Brand revenue was down low-single-digits and revenue from our Allied and our other brands were up low-single-digits.
Market demand remains high entering the fourth quarter, and we remained bullish on the residential market as we look ahead to 2022 in the coming years.
More people continue to work from home and run our HVAC systems than before the pandemic.
With global warming, the hotter weather we are seeing has an exponential impact on reducing the life of cooling systems, and there are more complete HVAC system sales taking place with all R22 refrigerant systems in replacement window.
This is driven by the EPA ban on the sale and distribution of equipment using R22 refrigerant effective January 1, 2010 and the ban of the production or import of R22 refrigerant effective January 1, 2020.
While R22 refrigerant is still available on the market, it's significantly more expensive than 410A.
In many cases, it is cheaper to replace with the new 410A system, which is also more efficient and comes with the new warranty then to repair the old R22 system.
For 2005 to 2010, 60% of air conditioners and heat pumps sold were R22.
The need to replace these has a meaningful benefit to residential growth.
We expect these dynamics to lead the strong residential market conditions for the years ahead.
In addition, Lennox and Allied will be running a proven playbook for market share gains.
Moving to our Commercial business.
Third quarter revenue was up 2%.
Commercial profit was down 42%.
Segment margin declined 800 basis points to 10.7%.
On top of supply chain shortages and bottlenecks disrupting production, our Arkansas factory was hit the hardest by COVID-19 in the quarter and labor availability was a significant issue.
At constant currency, commercial equipment revenue was down low-single-digits in the quarter.
Within this, replacement revenue was up low-single-digits with planned replacement up more than 20% and emergency replacement down more than 30%.
New construction revenue was down mid-single digits.
Breaking out revenue another way, regional and local business revenue was down high-single-digits.
National Account equipment revenue was up high-single-digits.
The team won two National Account equipment customers in the third quarter to total 11 year-to-date.
On the service side, Lennox National Account Service revenue was up mid-teens.
VRF revenue was up more than 30%.
In Refrigeration, for the third quarter, revenue was up 10%.
North America revenue was up more than 20%.
Europe Refrigeration revenue was relatively flat.
And Europe HVAC revenue was down mid-single-digits.
Refrigeration segment profit was up 12% as margin expanded 20 basis points to 10.6%.
Looking ahead for both our Refrigeration and Commercial businesses, demand remained strong.
Backlog is up approximately 60% for Refrigeration and 90% for Commercial and order rates continued to be strong.
Demand is clearly not an issue, but as we look to the fourth quarter, we continue to expect a material impact to production for supply chain shortages and bottlenecks.
We currently expect a similar negative financial impact to our business as we saw in the third quarter, approximately $75 million of revenue and $25 million of operating profit.
We continue to see broad inflationary pressures, including for commodities and components, but we have enacted three rounds of price increases this year.
The latest one was just on September 1 with a focus on staying ahead of inflation.
The company yielded 4% price overall in the third quarter, including 5% in residential.
In addition to the carryover benefit next year from our June and September price increases, we're announcing additional price increases heading into 2022.
Our Refrigeration business has announced a price increase of 8% in North America effective for December 1.
Likewise, our European business has recently announced another round of increases generally from 5% to 10% to drive price in 2022.
Our Commercial business has announced a price increase of up to 13% effective January 1.
And our Residential business will be announcing another round of price increases in November to be effective heading into 2022.
For 2021, we are narrowing our revenue and earnings per share guidance for the year.
We are narrowing 2021 guidance for revenue from 12% to 16% to new range of 13% to 15%.
Foreign exchange is still expected to be a 1% favorable to revenue.
We are narrowing 2021 guidance for adjusted earnings per share from continuing operations from $12.10 to $12.70 to a new range of $12.10 to $12.30.
Our free cash flow guidance remains $400 million for the year.
As the company continues to battle through the disruptions to production from the global supply chain and COVID-19, we are also positioning the company for the future.
It's too early to set guidance for 2020, but as we think about next year, we expect strong pricing power to continue.
The company yielded 4% in the third quarter, which had just one month of benefit from the third price increase this year.
For 2022, we will have carryover price benefit from our June and September 2021 price increase.
We have announced additional price increases in our next year.
We will have strong price benefit to offset commodity headwind next year.
Looking at market drivers and our strong backlog position and order rates, we see Residential, Commercial Unitary and Refrigeration up in 2022 as you get more and more of the supply disruptions behind us.
We expect to return to strong growth and profitability as we capitalize on market opportunities.
I'll provide some additional comments and financial details on the business segments for the quarter, starting with Residential Heating & Cooling.
In the third quarter, revenue from Residential Heating & Cooling was $711 million, down 2%.
Volume was down 6%, price was up 5% and mix was down 1% with foreign exchange neutral to revenue.
Residential segment profit was $144 million, down 6%.
Segment margin was 20.3%, down 90 basis points.
Residential profit was primarily impacted by lower volume due to global supply chain and COVID-19 disruptions to production, factory inefficiencies, unfavorable mix, higher material, freight, distribution, tariffs and other product costs with partial offsets included favorable price and lower SG&A expenses.
Now turning to our Commercial Heating & Cooling business.
In the third quarter, Commercial revenue was $212 million, up 2%.
Volume was down 6%, price was up 1% and mix was up 6%.
Foreign exchange had a positive 1% impact to revenue.
Commercial segment profit was $23 million, down 42%.
Segment margin was 10.7%, down 800 basis points.
Segment profit was primarily impacted by lower volume due to global supply chain and COVID-19 disruptions to production, factory inefficiencies, higher material, freight, distribution, tariffs and other product costs with partial offsets included favorable price and mix.
In Refrigeration, revenue was $137 million, up 10%.
Volume was up 9%, price was up 2% and mix was down 1%.
Foreign exchange was neutral to revenue.
Refrigeration segment profit was $15 million, up 12%.
Segment margin was 10.6%, which was up 20 basis points.
Global supply chain and COVID-19 disruptions to production constrained revenue and profit growth.
Segment profit was negatively impacted by factory inefficiencies and higher material, freight and SG&A costs.
Results were positively impacted by higher volume and favorable price.
Regarding special items in the quarter, the company had net after-tax benefit of $0.5 million that included a benefit of $2.7 million for excess tax benefits from share-based compensation and a net charge of $2.4 million in total for various items excluded from segment profit, including personal protective equipment and facility deep cleaning expenses incurred due to the COVID-19 pandemic and a net benefit of $0.2 million for other items.
Corporate expense was $16 million in the third quarter, down from $28 million in the prior year quarter, primarily due to lower incentive compensation.
Overall, SG&A was $134 million compared to $152 million in the prior year quarter.
SG&A was down as a percent of revenue to 12.7% from 14.4% in the prior year quarter.
In the third quarter, cash from operations was $222 million compared to $440 million in the prior year quarter.
Capital expenditures were $23 million in the third quarter compared to approximately $12 million in the prior year quarter.
Free cash flow was $199 million in the third quarter compared to $428 million in the prior year quarter.
The company paid $34 million in dividends and repurchased $200 million of stock in the quarter.
Total debt was $1.28 billion at the end of the third quarter and we ended the quarter with a debt to EBITDA ratio of 1.8.
Cash, cash equivalents and short-term investments were $44 million at the end of the third quarter.
For Residential and Commercial Unitary HVAC and Refrigeration markets in North America, for the full year, we continue to expect low-double-digit shipment growth for the industry.
For the company, we are now narrowing guidance for 2021 revenue growth from 12% to 16% to a new range of 13% to 15% and we still expect a 1% benefit to revenue from foreign exchange.
We are narrowing guidance for 2021 GAAP earnings per share from continuing operations from $11.97 to $12.57 to a new range of $11.97 to $12.17.
And we are narrowing 2021 guidance for adjusted earnings per share from continuing operations from $12.10 to $12.70 to a new range of $12.10 to $12.30.
And as previously mentioned, the fourth quarter of 2021 will have a headwind of 6% from fewer days than the prior year quarter.
The first quarter of 2021 had a 6% benefit from more days in the prior year quarter.
For 2022, there are no days differences, I'd like just to highlight.
Now let me run you through the key points of our guidance assumptions and puts and takes for 2021.
First for the items that are changing.
We now expect a benefit of $130 million from price for the year, up from prior guidance of $110 million benefit.
We continue to -- with continued inflation in components, we are reducing our net savings from sourcing and engineering-led cost reduction to neutral, down from prior guidance to be a $5 million benefit.
We now expect LIFO accounting adjustments to be approximately $20 million this year, up from a prior guidance of $15 million due to higher material costs from inflationary pressures.
About 40% of that was in the third quarter and about 40% is expected in the fourth quarter.
Factory productivity is now expected to be a $10 million headwind, down from prior guidance to be a $10 million benefit.
Residential mix is swinging from a $10 million headwind -- excuse me, swinging to a $10 million headwind from a $10 million benefit.
And corporate expense is now expected to be $95 million, down from prior guidance of $100 million on lower incentive compensation.
Overall, SG&A is now expected to be approximately a $40 million headwind, down from prior guidance of $45 million.
Within SG&A, we continue to make investments in research and development and IT for continued innovation and leadership in products, controls, e-commerce, factory automation and productivity.
For headwinds that are unchanged from our prior guidance, commodities are still expected to be a headwind of $80 million and freight is still expected to be a $5 million headwind with tariffs still expected to be a $5 million headwind as well.
Other guidance items that remain the same.
Foreign exchange is still expected to be a $10 million benefit.
We still expect a net interest and pension expense to be approximately $35 million.
The effective tax rate guidance remains approximately 20% on an adjusted basis for the full year.
And we still expect capital expenditures to be approximately $135 million this year, about $30 million of which is for the third plant at our campus in Saltillo, Mexico.
This is still on track to be completed by the end of 2021.
Pilot runs of the initial products took place in mid-October.
We now plan to start initial production before the end of 2021 and ramp up to full production in mid-2022.
And we expect nearly a $10 million in annual savings from that third plant.
Free cash flow is targeted to be approximately $400 million for the full year.
In the third quarter, we repurchased $200 million of stock to complete our target of $600 million for the full year.
And then guidance for our weighted average diluted share count for the full year remains between 37 million to 38 million shares.
And with that, operator, let's now go to Q&A.

user
q3 adjusted earnings per share $3.40 from continuing operations.
q3 gaap earnings per share $3.41 from continuing operations.
q3 revenue $1.06 billion.
sees fy adjusted earnings per share $12.10 to $12.30 from continuing operations.
compname says narrowing 2021 guidance for revenue growth to 13%-15% from 12%-16%.
sees fy gaap earnings per share from continuing operations to $11.97-$12.17.
compname says reiterating 2021 capital expenditures guidance of approximately $135 million.

assistant