Lennox International Q3 2026: sales up 10% but EPS fell 13% to $6.41 as residential margins sank

Lennox, the Dallas-based maker of home and commercial heating, air-conditioning and refrigeration equipment, grew third-quarter 2026 sales 10% to $1,572.5 million. Profit went the other way. GAAP diluted earnings per share (EPS, profit divided by the share count) fell 13% to $6.41 from $7.38. The company's adjusted EPS, which strips out restructuring, litigation and acquisition costs, fell 7% to $6.84. CEO Alok Maskara said margins "fell short of our expectations, reflecting heightened competitive pressure and the impact of persistent inflation on our costs." Lennox cut its full-year adjusted EPS guidance by about $2.25 at the midpoint, its second cut in two quarters.

This report is written from the earnings release (Exhibit 99.1 to the October 28 8-K). The full 10-Q, with management's discussion and the detailed gross-margin breakdown, is not filed yet.

Results

Operating margin is the share of sales left after running the business, before interest and tax. Segment profit is Lennox's own measure: operating income before restructuring, gains on old disposals, special litigation charges and acquisition costs. The 2025 figures have been restated for Lennox's switch from LIFO to FIFO inventory accounting in Q4 2025.

Two segments, two directions

Home Comfort Solutions (residential): sales were $937.2 million, up 3%. Segment profit fell 18% to $175.7 million. The release lists the causes:

• −$12 million from lower sales volumes. This is much smaller than Q2's $49 million volume hit, and Maskara said residential end-markets "began stabilizing".
• −$32 million from product cost inflation, including tariffs, and lower factory absorption. (Lower absorption means plants run below capacity, so each unit carries more of the fixed factory cost.)
• −$15 million from higher fuel costs, SG&A and distribution inflation, and ongoing investments.
• +$13 million from mix and price, and +$6 million from acquisitions.

In Q2, mix and price added $24 million to this segment. In Q3 it added only $13 million. Lennox says it made "targeted price adjustments in select market segments... to defend and recapture share". Its stated priorities are "mitigating share challenges" and launching new entry-tier products. Together these suggest Lennox lost share at the low end of the market and is now giving up price to win it back.

Building Climate Solutions (commercial): sales were $635.3 million, up 24%, including 15% organic growth (growth not from acquisitions). Profit rose $26 million to $166.5 million. Higher volumes added $24 million, mix and price $8 million and acquisitions $13 million. Cost inflation and tariffs took $14 million and SG&A and distribution $5 million. The segment margin of 26.2% is 1.1 points below last year's record, but Lennox still expects full-year margins here to expand.

Corporate expenses fell $8 million to $18.9 million. That cut helped total segment profit fall only 1.7%.

Across the company, the bridge shows $45 million of product-cost inflation (including tariffs) and lower absorption, plus $15 million of fuel and overhead inflation. Volume ($13 million), mix and price ($21 million) and acquisitions ($20 million) did not fully cover them. Gross margin fell to 31.6% from 34.1%.

Takeaway: The residential business has gone from a volume problem to a pricing problem. Volume losses shrank to $12 million from $49 million in Q2, but Lennox is now cutting prices to win back share while tariff and inflation costs keep rising. That cost the segment 4.9 points of margin. The commercial business is still growing, but not enough to offset this, and the second guidance cut implies the squeeze lasts through Q4.

What the headline numbers hide

• The tax rate made GAAP EPS look worse than the business. The tax provision rose to $72.1 million on lower pretax income, an effective rate of 24.6% against 18.1% a year ago (and 20.8% in Q2). The release does not explain the rise. Pretax income fell 7.6%; net income fell 14.9%. At last year's tax rate, Q3 EPS would have been roughly $6.96 (our estimate). The higher rate therefore cost about $0.55 a share.
• The adjustments are real but small, and net out to $0.43 a share. The add-backs are restructuring ($0.19), acquisition costs ($0.25) and special litigation charges ($0.08), less a $0.09 gain on an old disposal. None of these existed in Q3 2025, so adjusted EPS (−7%) is the fairer comparison. One oddity: the release adds back $8.6 million after tax for acquisition costs, but its operating-income reconciliation shows only $3.8 million of pre-tax acquisition costs. The release does not explain the difference; the 10-Q may.
• Interest is a growing drag. Net interest expense rose to $17.5 million from $10.5 million. Total debt was $1,621 million at September 30: commercial paper (short-term corporate IOUs) of $455 million, current maturities of $319 million and long-term debt of $847 million. It was $1,388 million at year-end. Borrowing funded $210 million of acquisitions this year, including Heat Controller in July, plus $302 million of year-to-date buybacks.
• Cash conversion was strong this quarter. Operating cash flow of $395 million was 1.8 times net income, helped by "reduced inventory levels". Free cash flow (operating cash flow minus capital spending) was $362.7 million, up from $265.3 million. Year to date, operating cash flow of $583 million still trails net income of $607 million.
• Receivables are worth watching. Receivables rose $289 million in the first nine months, against $95 million in the same period of 2025. Part of that is acquired businesses and seasonality, but year-to-date sales grew only 6%. If customers are taking longer to pay, it may be linked to the share-recovery push.
• Buybacks did limited work. Lennox repurchased $151 million of stock in the quarter and paid $47 million in dividends. Diluted shares fell 2.0% to 34.5 million. That slowed the EPS fall by about two points but did not change its direction.

On balance the quarter is understated. A higher tax rate (about $0.55 a share) and one-off charges (a net $0.43) make GAAP EPS fall 13%, against roughly a 7% decline in adjusted EPS and a 1.7% decline in segment profit. Even so, the underlying trend is still down.

Did last time's read hold up?

Our Q2 report named three things to watch in Q3:

1. Whether residential volume declines would narrow. They did. The volume hit to Home Comfort profit shrank to $12 million from $49 million.
2. Whether commercial could keep double-digit organic growth. It did, at 15%.
3. How costs would look without one-off tariff refunds. Q2 was helped by $30 million of refunds. This release mentions none and reports a $45 million cost headwind from inflation and tariffs, which is the main reason margins fell.

Q2's reading, "a weaker quarter underneath", turned out to be right. What we did not anticipate was the price-cutting in residential.

Outlook

Management's revised full-year 2026 guidance:

• Revenue growth: about 6%, including 5 points from acquisitions. It was about 8% (5 points acquired) after Q2. Implied organic growth has fallen to about 1% from about 3%.
• Adjusted EPS: $21.00–$21.50, from $23.00–$24.00. Nine-month adjusted EPS was $17.89, so the range implies $3.11–$3.61 for Q4.
• Free cash flow: $700–$750 million, from $750–$850 million. Nine months delivered $461 million, which implies $239–$289 million in Q4.

Our read: the guidance now assumes the residential margin squeeze continues into the seasonally small fourth quarter. Lennox says it is "retooling our processes to more effectively pass through cost increases". Three things to watch next quarter:

• Whether Home Comfort's mix-and-price contribution turns back up, or price cuts keep eating into it.
• Whether the tax rate settles near 2025's levels.
• Whether the commercial segment's margin expands for the full year, as promised.

Rising debt also leaves less cushion if residential pricing does not recover.