Lennox International (NYSE: LII) manufactures heating, ventilation and air-conditioning (HVAC) products for commercial and residential applications as well as commercial refrigeration products. 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. The companies decreased residential sales were partially offset by increased sales abroad and increased sales to commercial customers.
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. Lennox also faces pressure from decreased spending on new residential construction which fell 20% between April 2007 and April 2008. As a result, Lennox's Residential Heating & Cooling revenue decreased 10% in 2007. 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. Lennox competes with other companies that manufacture HVAC and refrigeration equipment such as United Technologies (UTX), Ingersoll-Rand Company (IR) and Johnson Controls (JCI).
Lennox manufactures and markets heating, ventilation and air-conditioning (HVAC) as well as refrigeration products for residential and commercial use. The company maintains sales growth by offering products that help their customers save energy and expanding into global markets. 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. 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. On the other hand, the company's operating margin has hovered around 7% for the last 3 years, despite the Lennox's efforts to cut manufacturing costs and increase the efficiency of its distribution system.
|Residential Heating & Cooling||1,670||1,861||1,699|
|Commercial Heating & Cooling||875||751||675|
Between April 2007 and April 2008, total construction spending fell 4%, with a 20% decrease in residential construction spending. 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. 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.
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. 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. 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.
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. As a result of the weak dollar, Lennox received a $80.3 million dollar boost to international revenues in 2007. In general, when foreign currencies depreciate relative to the U.S. dollar, the value of Lennox's international sales decreases. On the other hand, exchange rates resulting in a weak U.S. dollar boost the value of Lennox's international sales.
Lennox and Key Competitors 2007 ($ in millions)
|Company||Total Revenues||Net Income||Net Profit Margin|
|United Technologies (UTX)||54,759||4,224||7.7%|
|Ingersoll-Rand Company (IR)||8,763||3,967||45.3%|
|Johnson Controls (JCI)||34,624||1,252||3.6%|