Lennox International (NYSE: LII) manufactures heating, ventilation and air-conditioning (HVAC) products for commercial and residential applications as well as commercial refrigeration products.[1] The manufacturer's total revenues were nearly $3.8 billion in 2007 up only 1% from 2006. This was mostly due to decreased sales of the companies residential products.[2] The companies decreased residential sales were partially offset by increased sales abroad and increased sales to commercial customers.[2]

As a result of the company's increased sales abroad, Lennox became more exposed to fluctuations in exchange rates. In 2007, the weak dollar gave the company's international revenues a $80.3 million dollar boost.[3] Lennox also faces pressure from decreased spending on new residential construction which fell 20% between April 2007 and April 2008.[4] As a result, Lennox's Residential Heating & Cooling revenue decreased 10% in 2007.[2] On the other hand, the price of electricity rose $0.31 per kilowatt hour in 2007, giving commercial building owners an incentive to upgrade their HVAC systems. This was partially responsible for a 17% increase in Lennox's Commercial Heating & Cooling revenue.[2] Lennox competes with other companies that manufacture HVAC and refrigeration equipment such as United Technologies (UTX), Ingersoll-Rand Company (IR) and Johnson Controls (JCI).

Business Overview

Lennox manufactures and markets heating, ventilation and air-conditioning (HVAC) as well as refrigeration products for residential and commercial use.[1] The company maintains sales growth by offering products that help their customers save energy and expanding into global markets.[5] As a result of the company's efforts to increase the energy efficiency of its products, Lennox's sales of HVAC products to commercial customers grew 16% in 2007, up from 11% in 2006.[2] Lennox's push to expand its international business led its international sales to increase from 23% to 27% of the company's international revenues between 2005 and 2007.[2] On the other hand, the company's operating margin has hovered around 7% for the last 3 years,[6] despite the Lennox's efforts to cut manufacturing costs and increase the efficiency of its distribution system.[5]

Segment Information

LII 2007 Revenues by Segment Before Eliminations
LII 2007 Revenues by Segment Before Eliminations[2]
  • Residential Heating & Cooling (43% of revenues) manufactures furnaces, air conditioners and other residential HVAC products as well as replacement parts for those products.[7] The segment's HVAC products are sold at a range of prices and efficiency levels. Residential Heating & Cooling sells its products to the dealers that install them under the Lennox and Aire-Flo brands.[7] The segments other brands--including Armstrong Air, Ducane and others--are sold to third party distributors.[7] In addition to HVAC products, Residential Heating & Cooling sells prefabricated gas, wood burning and electric fireplaces.[7] The segment's products compete with similar products from United Technologies (UTX), Ingersoll-Rand Company (IR) and to a lesser extent Johnson Controls (JCI).
  • Commercial Heating & Cooling (23% of revenues) manufactures HVAC products and systems for light commercial applications such as low-rise office buildings, restaurants, churches and schools in the U.S.[8] Commercial Heating & Cooling sells its U.S. products through commercial contractors or directly to large customers.[8] In Europe, the segment manufactures HVAC products and systems for light to medium commercial applications such as medium-rise office buildings, shopping malls and entertainment buildings.[8] The segments European operation sells its products through a traditional distributor network.[8]
  • Service Experts (18% of revenues) provides installation, replacement, maintenance and emergency repairs through its 120 service centers across the U.S. and Canada.[9] The segment provides service to all of Lennox's products including residential and commercial HVAC products.[9] Although Service Experts will continue to offer installation services, it plans to focus more on the maintenance and replacement markets in the future.[9] The segments products compete with those produced by companies like United Technologies (UTX), Ingersoll-Rand Company (IR) and Johnson Controls (JCI).
  • Refrigeration (16% of revenues) manufactures commercial refrigeration products under the Heatcraft Worldwide Refrigeration name.[10] The segments refrigerators are used in supermarkets, convenience stores, restaurants and similar business both in the U.S. and abroad.[10] The segment's products compete with those made by companies such as Ingersoll-Rand Company (IR).

Business Financials

LII 2007 Revenues by Geography After Eliminations
LII 2007 Revenues by Geography After Eliminations[2]

Lennox Total Revenues, Operating Income and Net Income[2][6]

Segment 2007 2006 2005
Residential Heating & Cooling1,670 1,861 1,699
Commercial Heating & Cooling875 751 675
Service Experts682 654 641
Refrigeration608 530 470
Total Revenues3,750 3,715 3,405
Operating Income266 223 251
Net Income169 166 151

Key Trends and Forces

Decreases in residential construction spending decrease Lennox's Residential Heating & Cooling revenues

Between April 2007 and April 2008, total construction spending fell 4%, with a 20% decrease in residential construction spending.[4] As a result of the decrease in new home construction, contractors are ordering fewer air conditioning systems, heating systems and prefabricated fireplaces. Because of this, Lennox's Residential Heating & Cooling revenues decreased over 10% from $1,861 million in 2006 to $1,670 million in 2007.[2] In general, when spending on residential construction increases, contractors will order more air conditioning, heating and fireplace products to incorporate into the homes they build. The results in increased Residential Heating & Cooling revenues for Lennox. On the other hand when spending on residential construction decreases, so does demand for residential heating and cooling products and Lennox's Residential Heating & Cooling revenue.

Increases in the price of electricity increase the demand for efficient HVAC products such as those produced by Lennox's Commercial Heating & Cooling segment

Between 2006 and 2007, the price of electricity supplied to commercial customers rose from $9.46 per kilowatt hour to $9.67 per kilowatt hour.[11] As commercial building owners looked for ways to decrease the impact of rising electricity costs on their profitability, they began to spend more money on upgrading HVAC systems and components to newer more efficient models. The increase in demand for efficient HVAC products is partially responsible for the 17% increase in revenue from $751 million in 2006 to $875 million in 2007.[2] When the price of electricity rises, individuals and businesses that own office buildings and other commercial real estate spend more money on products and services offered by Johnson Controls that help them cut electricity costs. On the other hand, when the price of electricity falls, commercial real estate owners are less likely to purchase Johnson Controls' Building Efficiency products and services because the savings generated by the new products and services don't cover the costs of implementing them.

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EUR to USD Exchange Rates[12]

Favorable exchange rates gave Lennox a $80.3 million dollar international revenue boost in 2007

Between June 18, 2007 and June 18, 2008, the U.S. dollar depreciated in relation to the euro, the Canadian dollar, the pound and the Chinese yuan.[12][13][14] As a result of the weak dollar, Lennox received a $80.3 million dollar boost to international revenues in 2007.[3] In general, when foreign currencies depreciate relative to the U.S. dollar, the value of Lennox's international sales decreases. On the other hand, exchange rates resulting in a weak U.S. dollar boost the value of Lennox's international sales.

Key Competitors

  • United Technologies (UTX) manufactures commercial and residential HVAC products and systems as well as other products such as elavators, escalators, military aircraft engines and fire safety products. United Technologies' Carrier, Bryant and other residential HVAC products compete with Lennox's Residential Heating & Cooling products and its Carrier commercial systems compete with Lennox's Commercial Heating & Cooling products.[15]
  • Ingersoll-Rand Company (IR) manufactures commercial refrigerators, golf carts, utility vehicles, energy generators, locks, security systems, HVAC systems and other products. The company's Trane HVAC systems compete with similar products manufactured by Lennox's Residential Heating & Cooling and Commercial Heating & Cooling segments. At the same time, Ingersoll-Rand's commercial refrigerators compete with those produced by Lennox's Refrigeration segment.[16]
  • Johnson Controls (JCI) manufactures car batteries, automobile interiors and HVAC systems for commercial and residential markets. Although Johnson's HVAC products are mostly geared toward the commercial market, they sell some residential products under the York name. The company's HVAC products compete with those manufactured by Lennox's Residential Heating & Cooling and Commercial Heating & Cooling segments.[17]

Lennox and Key Competitors 2007 ($ in millions)

Company Total Revenues Net Income Net Profit Margin
United Technologies (UTX)54,7594,2247.7%
Ingersoll-Rand Company (IR)8,7633,96745.3%
Johnson Controls (JCI)34,6241,2523.6%


  1. 1.0 1.1 LII 2007 10-K Item 1: The Company, pg 1
  2. 2.00 2.01 2.02 2.03 2.04 2.05 2.06 2.07 2.08 2.09 2.10 LII 2007 10-K Item 8: Reportable Business Segments, pgs 83, 85
  3. 3.0 3.1 10-K Item 7: Year Ended December 31, 2007 Compared to Year Ended December 31, 2006 — Consolidated Results, pg 19
  4. 4.0 4.1 Value of Construction Put in Place - Seasonally Adjusted Annual Rate
  5. 5.0 5.1 LII 2007 10-K Item 1: Business Strategy, pgs 3-4
  6. 6.0 6.1 LII 2007 10-K Item 6: Selected Financial Data, pg 17
  7. 7.0 7.1 7.2 7.3 LII 2007 10-K Item 1: Residential Heating & Cooling, pg 2
  8. 8.0 8.1 8.2 8.3 LII 2007 10-K Item 1: Commercial Heating & Cooling, pg 2
  9. 9.0 9.1 9.2 LII 2007 10-K Item 1: Service Experts, pg 2
  10. 10.0 10.1 LII 2007 10-K Item 1: Refrigeration, pg 3
  11. Average Retail Price of Electricity to Ultimate Customers: Total by End-Use Sector
  12. 12.0 12.1 EUR to USD Exchange Rates
  13. USD-CAD Exchange Rates
  14. Historic Exchange Rates: USD-CNY Look up on 6/18/07 and 6/18/08
  15. Google Finance: UTX
  16. Google Finance: IR
  17. Google Finance: JCI
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