For the second quarter, Lennox International reported GAAP and adjusted revenue of $1,099 million. GAAP revenue was down 6%. At constant currency, GAAP revenue was down 5%. Adjusted revenue, excluding the impact from divestitures, was down 1%. At constant currency, adjusted revenue was flat, including 3% of negative tornado impact.
GAAP operating income was $214 million, up 10%. GAAP earnings per share from continuing operations was $2.81, down 17%, including a non-cash pension settlement charge of $1.14. Total adjusted segment profit declined 2% to $202 millionin the second quarter, and total segment margin was relatively flat at 18.4%. Adjusted earnings per share from continuing operations was up 2% to $3.74.
"Significantly cooler temperatures and higher precipitation across the United States adversely impacted the HVAC market in the second quarter, and especially in key Central regions where cooling degree days were down over 30% and precipitation was up over 60%," said Chairman and CEO Todd Bluedorn. "Residential segment revenue was down 3% at constant currency and down 4% on a reported basis in the quarter, profit was flat, and margin expanded 80 basis points to 22.3%. Residential price yield was 3.6% in the quarter. Our Residential business had negative tornado impact of $28 million to revenue in the second quarter and $16 million to segment profit offset by $18 million of insurance recovery. Adjusting for the net impact from the tornado and insurance proceeds, Residential revenue was flat, profit was down 1%, and margin was down 40 basis points to 21.1%.
"Slower moving shipments in the industry due to adverse weather has slowed regaining market share following the tornado and extends our recovery timeline to include the fourth quarter," Bluedorn added. "For 2019 overall, we now expect $99 million of negative tornado impact to Residential revenue, up from $70 million previously; a negative $54 million impact to segment profit, up from $40 million previously; and insurance recovery for lost profits of $94 million, up from $80 million previously. The resulting $40 million of net benefit to Residential segment profit in 2019 is unchanged.
"Our Commercial business hit a new second-quarter high for revenue and set new records for segment profit and margin. Commercial revenue was up 4%, led by high-single digit growth in National Account equipment business. Segment profit rose 6% to a record $54 million, and segment margin expanded 50 basis points to a record 20.6%. In Refrigeration, adjusted segment revenue rose 5% at constant currency with volume up in Europe and down in North America. Adjusted segment profit was down 19%, and adjusted segment margin declined 340 basis points to 12.8%, due in part to lower mix and the timing of the sale of refrigerant allocations in Europe compared to the prior-year quarter. We continue to expect revenue growth for both of these businesses in the second half but have reduced the outlook on commercial and refrigeration end markets.
"For the company overall, we are updating 2019 guidance to adjusted revenue growth of 2-5% and adjusted EPS from continuing operations of $11.30-$11.90 and reiterate stock repurchases of $400 million for the full year."
Revenue: On a GAAP and adjusted basis, second-quarter revenue was $1,099 million. GAAP revenue was down 6%, and adjusted revenue was down 1%. Foreign exchange was unfavorable to revenue growth by 1%. Volume was down, and price and mix were favorable.
Gross Profit: On a GAAP and adjusted basis, gross profit was $332 million and gross margin was 30.2%. Gross profit was down 8% on a GAAP basis and down 6% on an adjusted basis. Gross margin was down 60 basis points on a GAAP basis and down 140 basis points on an adjusted basis. Gross profit was impacted by the tornado, cooler and wetter weather and factory productivity, unfavorable mix, higher commodity, freight, tariff and other product costs, distribution investments, and unfavorable foreign exchange. On a GAAP basis, divestitures also had a negative impact on gross profit. Partial offsets to gross profit included favorable price and warranty, and sourcing and engineering-led cost reductions.
Income from Continuing Operations: On a GAAP basis, income from continuing operations for the second quarter was $111.0 million, or $2.81 per share, compared to $139.2 million, or $3.39 per share, in the prior-year quarter.
Adjusted income from continuing operations in the second quarter was $147.6 million, or $3.74 per share, compared to $150.6 million, or $3.67 per share, in the prior-year quarter. Adjusted earnings from continuing operations for the second quarter of 2019 excludes net after-tax charges of $36.6 million: a charge of $45.5 million for pension settlement, a net charge of $1.5 million for various other items, and a gain of $10.4 million from insurance recoveries, net of losses incurred.
Cash from Operations, Free Cash Flow and Total Debt: Net cash from operations in the second quarter was $30 millioncompared to $49 million in the prior-year quarter. Capital expenditures and purchases of short-term investments were $18 million compared to $21 million in the prior-year quarter. Insurance recoveries for damage to property and proceeds from the disposal of property, plant and equipment were approximately $6 million in the second quarter of 2019. Free cash flow was $20 million compared to $28 million in the second quarter a year ago. Total debt at the end of the second quarter was $1.47 billion. Total cash and cash equivalents were $36 million at the end of June. In the second quarter, the company repurchased $150 million of stock and paid $25 million in dividends.
BUSINESS SEGMENT HIGHLIGHTS
Residential Heating & Cooling
Revenue in the Residential Heating & Cooling business segment declined 4% to $689 million. Foreign exchange had a negative 1% impact on revenue. Segment profit was flat at $153 million. Segment margin expanded 80 basis points to 22.3%. Residential results were impacted by favorable price, sourcing and engineering-led cost reductions, favorable warranty, and insurance proceeds. Offsets included cooler and wetter weather, tornado impact, factory productivity, unfavorable mix, higher commodity, freight, tariff and other product costs, distribution and SG&A investments, and unfavorable foreign exchange.
Commercial Heating & Cooling
Revenue in the Commercial Heating & Cooling business segment was a second-quarter record $261 million, up 4%. Foreign exchange was neutral to revenue. Segment profit was a record $54 million, up 6%, and segment margin was a record 20.6%, up 50 basis points. Results were impacted by favorable price, favorable mix, and sourcing and engineering-led cost reductions. Partial offsets included lower volume, higher commodity and other product costs, tariffs, freight, and distribution and SG&A investments.
Adjusted revenue in the Refrigeration business segment was $149 million in the second quarter, up 2%. Foreign exchange had a negative 3% impact on revenue. Refrigeration adjusted profit was $19 million, down 19%, and adjusted segment margin was 12.8%, down 340 basis points. Results were impacted by lower mix and the timing on the sale of refrigerant allocations in Europe compared to the prior-year quarter, higher commodity, freight, distribution, tariffs and other product costs, and unfavorable foreign exchange. Partial offsets included higher volume, favorable price, sourcing and engineering-led cost reductions, and lower SG&A expenses.
- Updating 2019 guidance for adjusted revenue growth from 3-7% to 2-5%.
- Updating guidance for GAAP EPS from continuing operations from $12.65-$13.25 to $11.91-$12.51.
- Updating guidance for adjusted EPS from continuing operations from $12.00-$12.60 to $11.30-$11.90.
- Reiterating guidance for corporate expenses of approximately $90 million.
- Reiterating guidance for an effective tax rate of 22-23% on an adjusted basis for the full year.
- Updating guidance for 2019 capital expenditures from approximately $195 million to $155 million as $40 million of capital to fully reconstruct the Iowa manufacturing facility damaged by the tornado moved from 2019 to 2020.
- Updating guidance for free cash flow from approximately $420 million to $390 million for the full year.
- Reiterating guidance for stock repurchases of $400 million in 2019.
A chart of the company's current view on the tornado financial impact and insurance recovery for 2018-2019 is posted on the company's website at www.lennoxinternational.com.
CONFERENCE CALL INFORMATION
A conference call to discuss the company's second-quarter results will be held this morning at 8:30 a.m. Central time. To listen, call the conference call line at 612-288-0337 at least 10 minutes prior to the scheduled start time and use reservation number 469736. The conference call also will be webcast on Lennox International's web site at www.lennoxinternational.com. A replay will be available from 11:00 a.m. Central time on July 22 through August 5, 2019by dialing 800-475-6701 (U.S.) or 320-365-3844 (international) and using access code 469736. The call also will be archived on the company's website.
About Lennox International
Lennox International Inc. is a global leader in the heating, air conditioning, and refrigeration markets. Lennox International stock is listed on the New York Stock Exchange and traded under the symbol "LII". Additional information is available at: www.lennoxinternational.com or by contacting Steve Harrison, Vice President, Investor Relations, at 972-497-6670.
The statements in this news release that are not historical statements, including statements regarding the 2019 full-year outlook, expected consolidated and segment financial results for 2019, the financial and operational impact of the tornado damage to LII's manufacturing facility in Marshalltown, Iowa, and expected share repurchases, are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are based on information currently available as well as management's assumptions and beliefs today. These statements are subject to numerous risks and uncertainties that could cause actual results to differ materially from the results expressed or implied by the statements, and investors should not place undue reliance on them. Risks and uncertainties that could cause actual results to differ materially from such statements include, but are not limited to: the impact of higher raw material prices, the impact of new trade tariffs, LII's ability to implement price increases for its products and services, economic conditions in our markets, regulatory changes, the impact of unfavorable weather, and a decline in new construction activity and related demand for products and services. With respect to financial and operational impact of the tornado, the risks and uncertainties include, but are not limited to: (1) the impact on LII's results of operations and financial condition resulting from the tornado damage, (2) the cost and timing to rebuild the Marshalltown manufacturing facility and to repair or replace the necessary manufacturing equipment, (3) the timing of the receipt of insurance proceeds for property damage and business interruption losses and the dollar amount of these insurance proceeds, and (4) the accounting treatment and related financial statement impact resulting from the tornado damage and insurance recoveries. For information concerning these and other risks and uncertainties, see LII's publicly available filings with the Securities and Exchange Commission. LII disclaims any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law.