tapebrief
LII · Q3 2025

LII · Q4 2025 Earnings

Cautious

Lennox International

Reported January 28, 2026

30-second summary

Lennox delivered Q4 revenue of $1.20B (-11% YoY) and adjusted EPS of $4.45, with Home Comfort Solutions revenue down 21% as channel destocking ran deeper into Q4 than the Q3 call implied. Full-year EPS of $23.16 landed inside the guided $22.75–$23.25 range and FY FCF of $640M came in $90M above the cut-down ~$550M guide — both wins for credibility after a brutal Q3 reset. The FY26 setup is the real news: revenue +6–7% with 4 points from acquisitions, EPS $23.50–$25.00 (+1.5% to +8% YoY), and FCF $750–850M, an aggressive cash step-up that leans on margin mix and disciplined $250M capex more than on organic volume.

Headline numbers

EPS

Q4 FY2025

$4.45

Revenue

Q4 FY2025

$1.20B

-11.0% YoY

Gross margin

Q4 FY2025

32.6%

Free cash flow

Q4 FY2025

$0.38B

Operating margin

Q4 FY2025

16.4%

Key financials

Q4 FY2025
MetricQ4 FY2025YoYQ3 FY2025QoQ
Revenue$1.20B-11.0%$1.43B-16.2%
EPS$4.45—$6.98-36.2%
Gross margin32.6%—32.8%-20bps
Operating margin16.4%—21.7%-530bps
Free cash flow$0.38B—$0.27B+42.1%

Guidance

FY2025 results met guidance; FY2026 targets a sharp inflection to +6–7% revenue growth with EPS and FCF expansion as industry normalizes.

Guidance is issued for the full year only, refreshed each quarter. Prior and new below are the same FY updated this quarter.

Actuals vs prior guidance

MetricPeriodPrior guideActualΔResult
Earnings Per Share (non-GAAP)FY2025$22.75 to $23.25$23.16in-line with prior guide rangeMet
Revenue GrowthFY2025down approximately 1%-3% YoY-2 percentage points below guided -1%Met
Free Cash FlowFY2025approximately $550 million$640 million+$90 million above guided $550 millionMet

New guidance

MetricPeriodGuideYoY
Revenue GrowthFY2026approximately 6% to 7% (with 4% from acquisitions)—
Capital ExpendituresFY2026approximately $250 million—
Free Cash FlowFY2026$750 million to $850 million—

Changes to prior guidance

MetricPeriodPrior guideNew guideΔResult
Earnings Per Share (non-GAAP)
FY2026
N/A (no prior FY2026 guide)$23.50 to $25.00new forward guidance for FY2026Raised

Segment KPIs

Q4 FY2025
SegmentQ4 FY2025YoY
Home Comfort Solutions$0.7B-21.0%
Building Climate Solutions$0.495B+8.0%

Other KPIs

Q4 FY2025
SegmentQ4 FY2025
Segment Profit Margin17.7%
Home Comfort Solutions Margin19.6%
Building Climate Solutions Margin23.1%
Operating Cash Flow$405.9M
Full Year Segment Profit Margin20.4%
Full Year Operating Margin20.0%

Management tone

Narrative arc: Q2 "raise on momentum" → Q3 "transitional year, destocking through Q2 2026" → Q4 "industry normalizes; M&A carries the recovery"

The recovery narrative has rotated from organic to inorganic. Three quarters ago management was raising guidance on price/mix lift and explicitly framing 2025 as a year of share defense. Last quarter the tone shifted to "transitional year" and a Q2 2026 destocking-end date. This quarter the FY26 framework leans openly on acquisitions for 4 of the 6–7 points of growth — the verbatim guide language is "revenue is anticipated to increase by approximately 6% to 7%, with growth from completed acquisitions contributing approximately 4%." That is a meaningful admission that organic momentum remains constrained even with destocking ending; the recovery is being engineered, not waited for.

Management's confidence on channel normalization has firmed up but the timeline didn't shorten. Q3's framing was that one-step and two-step destocking would normalize "by Q2 2026." This quarter the language is "we have a more constructive backdrop as we enter the new year with one-step channel's inventory destock nearly complete and two-step inventories expected to normalize by the second quarter" — same Q2 2026 end date, with one-step explicitly closer to done. The Q4 HCS decline of 21% (vs. Q3 -12%) tells you the trough deepened before it ended, but the channel call from Q3 is intact.

The CapEx withdrawal from Q3 has been reversed, and that is a posture shift worth flagging. Q3 dropped the $150M capex guide entirely, which read as cash defense. The FY26 framework reintroduces capex at $250M alongside an $750–850M FCF guide — that's both a confidence signal on cash conversion and an acknowledgment that the growth-investment posture is back on. Combined with reaffirmed acquisition contribution from Duraline and Samsung/Ariston still in the pipeline, the message is that management has moved from defending 2025 cash to deploying 2026 cash.

The Q4 segment margin deceleration is the unspoken concern. HCS margin fell to 19.6% in Q4 from 22.2% in Q3 and 25.3% in Q2 — that's a 570bps deterioration across two quarters, breaking the 20% floor the Q3 watch list flagged. Management didn't volunteer this in the framing; it surfaced through the segment numbers. The FY26 guide of HCS "flat to slightly down" on margins acknowledges this won't snap back quickly even with volumes recovering.

Q&A highlights

Ryan Merkle · William Blair

HCS revenue down 21% in Q4 was worse than expected. Asked about monthly trends within Q4 and whether surprise was in one-step or two-step channel. Then asked how to reconcile tailwinds on slide 4 with only 2% HCS growth guidance given implied mid-single-digit volume declines.

November and December were worse than October. Residential new construction performed worse than expected; both one-step and two-step channels underwent destocking. HCS guidance of 2% growth implies mid-single-digit volume declines for full year, with volumes down more in first half and recovery in second half as destocking completes.

Q4 HCS revenue down 21%Both channels experienced destocking in Q4, more severe than anticipatedOne-step channel expected to be flattish to slightly up for full yearTwo-step channel expected to be down

Amit Mehrotra · UBS

Asked about inventory normalization timing from both internal and channel perspective (one-step vs two-step). Also asked for breakdown of price/mix guidance between carryover effects and new prospective increases.

The company has $200M excess inventory above seasonal normal, with $100M dedicated to customer experience initiatives. One-step destocking nearly complete by Q1; two-step destocking expected complete by Q2. Price/mix guidance of mid-single digits includes approximately 1-2 points of carryover mix benefit in first half from R454B conversion, with remainder from new pricing initiatives.

$200 million excess inventory above seasonal levels$100 million allocated to strategic initiativesOne-step destocking complete by Q1 2026Two-step destocking complete by Q2 2026

Joe Ritchie · Goldman Sachs

Asked for guidance on Q1 seasonality and EPS cadence given multiple moving parts. Followed up asking about swing factors for residential volume guidance of mid-single-digit decline and key assumptions driving recovery.

Q1 expected to be down due to tough comparatives from prior-year 454B stocking. First half expected down, second half up. Monitoring consumer confidence, interest rates, housing (existing and new), and dealer confidence. Destocking was largest 2025 headwind; confidence it will be behind in second half supports growth assumption. Early/hot summer could accelerate two-step inventory replenishment.

Q1 expected to be weakFirst half down, second half upMid-single-digit volume decline for HCS full year 2026Destocking identified as largest 2025 headwind

Jeff Hammond · Stifel KeyBank Capital Markets

Asked for detailed unpacking of BCS 15% growth guidance by price, volume, and M&A components. Also asked about commercial unitary market inflection and repair-replace dynamics.

BCS 15% growth comprises: high single-digit M&A (mostly Duraline), mid-single-digit organic volume growth from market recovery and share gains, and low single-digit price/mix. Commercial market has completed 17 straight months of decline by December 2025; seeing good uptake in quotations and backlog. Repair-replace dynamic viewed as deferred replacement; assuming stabilization at 2025 levels, not improvement.

BCS guidance 15% growthHigh single-digit M&A contributionMid-single-digit organic volume growth expectedLow single-digit price/mix in BCS

Julian Mitchell · Barclays

Asked whether full-year margin guidance implies slight operating margin decline year-over-year, and requested breakdown by segment and first-half vs second-half seasonality.

Guidance implies 20 basis points of EBIT-ROS expansion (fourth consecutive year). BCS margins expanding more significantly; HCS flat to slightly down due to volume deleveraging. Seasonality shifts from ~50-50 split in 2025 to 3-4 points lower in first half and 3-4 points higher in second half in 2026. Normal incrementals 35% on volume with cost inflation and productivity offsets.

EBIT margin expansion of 20 basis points guided for 2026Fourth consecutive year of margin expansionHCS margins flat to slightly downBCS margins expanding materially

Answers to last quarter's watch list

Sell-in vs. sell-through gap closure — The gap did not close in Q4; HCS revenue down 21% YoY with November/December worse than October indicates sell-in deepened, not narrowed. Management's Q2 2026 destocking-complete timeline is being held, with one-step characterized as "nearly complete" and two-step expected to normalize by Q2. The watch question gets the right narrative answer but the Q4 trajectory was worse than the Q3 call implied. Status: Continue monitoring
HCS segment margin floor — Broke below the 20% threshold flagged. Q4 HCS margin landed at 19.6%, with FY26 guided "flat to slightly down" by management's own framing. The absorption headwind continues into Q1 2026 as previewed. Status: Resolved negatively
FCF delivery vs. $550M FY guide — FY FCF of $640M came in $90M above the cut guide, with Q4 operating cash flow of $405.9M. This is the cleanest positive of the print and removes the working-capital question that Q3 created. Status: Resolved positively
2026 industry volume framing — The 9–10M unit framing from Q3 wasn't restated explicitly in the press-release-driven framework, but the FY26 HCS guide implies mid-single-digit volume declines for the full year with first-half weakness — broadly consistent with the Q3 view that 2025 was the trough. Organic growth of ~2–3% (excluding M&A) is the implied 2026 industry recovery shape. Status: Continue monitoring
Capex disclosure — Reintroduced at ~$250M for FY26, vs. the $150M Q3 number that was withdrawn. That's a $100M step-up and reads as growth investment posture returning. Status: Resolved positively
BCS margin sustainability — Q4 BCS margin at 23.1%, below the 25% bar from the watch list and down from 26.1% in Q3. Management still guides BCS margins to expand materially in FY26, but the Q4 print is a step-down. Status: Resolved negatively

What to watch into next quarter

Organic vs. acquisition revenue split — FY26 guide bakes in 4pp from acquisitions out of 6–7pp reported growth. Watch Q1 disclosure of organic growth specifically; sub-2% organic with destocking ending would be a meaningful negative tell on underlying demand.

HCS Q1 margin trough — Q4 came in at 19.6%; Q1 carries an absorption headwind from the prior-year R454B stocking comp plus continued production right-sizing. Watch whether Q1 HCS margin breaks the high-teens or holds above 18%.

Two-step channel inventory by end of Q2 — management's load-bearing claim for the recovery is that two-step destocking completes by Q2 2026. Watch Q1 commentary on sell-in/sell-through gap in the two-step channel specifically; the one-step is already nearly resolved.

FCF run-rate to support $750–850M guide — implied FY26 average quarterly OCF of ~$200M+. Watch Q1 working capital as inventory unwinds; a slow Q1 cash conversion would put the FCF guide in question early.

BCS organic growth vs. guide — mid-single-digit organic BCS growth is the bull leg of the FY26 framework; management cited 17 months of commercial decline ending in December. Watch Q1 BCS organic revenue ex-Duraline for confirmation of the commercial inflection.

Price/mix carryover roll-off — management quantified 1–2pp of H1 carryover from R454B conversion. Watch the H2 mix/price contribution; if new pricing initiatives don't pick up the slack as carryover laps, EPS upside compresses toward the low end of the $23.50–$25.00 range.

Sources

  1. Lennox International Q4 2025 press release (SEC EDGAR): https://www.sec.gov/Archives/edgar/data/1069202/000106920226000005/lii-20251231xexx991pressre.htm
  2. Q&A commentary integrated from supplied analyst exchange extraction.

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