Lennox International (NYSE:LII) reported fourth-quarter and full-year 2025 results that reflected weaker end markets and channel destocking, while management emphasized record full-year profitability and outlined expectations for a return to revenue growth in 2026.
Fourth-quarter results pressured by destocking and softer demand
CEO Alok Maskara said 2025 was marked by “regulatory changes, softer demand, and broad market headwinds,” but noted the company achieved full-year segment margins above 20% for the first time. In the fourth quarter, revenue fell 11%, which management attributed to weak residential and commercial end markets. Maskara also cited “deeper channel destocking” and soft residential new construction activity as factors that amplified the decline.
During Q&A, management said trends worsened later in the quarter. In response to a question about the Home Comfort Solutions (HCS) segment, the company said November and December were weaker than October, with a larger-than-expected downside surprise in residential new construction. Executives also said both one-step and two-step channels were destocking during the fourth quarter, with the two-step impact larger but anticipated.
Full-year 2025: record margin, higher EPS, and strong free cash flow
For full-year 2025, revenue declined 3%, driven by volume headwinds from destocking and softer end markets. Despite tariff impacts and inflation, Lennox delivered a record 20.4% segment margin and $23.16 in adjusted EPS, which management said was 2% higher than the prior year’s comparable $22.70.
CFO Michael Quenzer said the company delivered more than $75 million in cost productivity while continuing to invest for long-term growth. Free cash flow for 2025 was $640 million, above prior guidance of $550 million, which management attributed to strong collections and disciplined payments that partly offset temporarily elevated inventory levels.
Accounting change: move from LIFO to FIFO
Management highlighted that the reported results reflect a change from LIFO to FIFO inventory accounting adopted as of the fourth quarter of 2025. Quenzer said adopting FIFO increased 2024 full-year EPS by approximately $0.12 and increased EPS for the first three quarters of 2025 by approximately $0.55, with a full-year 2025 EPS impact of about $1.
Quenzer said the company made the change for three reasons:
- To simplify accounting by eliminating tracking of detailed inventory layers
- To align cost increases more closely with the timing of price realization
- Because FIFO is predominant among peers and better reflects the physical flow of goods
In response to a question about how FIFO could affect 2026 timing, Quenzer said there may be timing shifts (including around absorption dynamics), but the net impact between FIFO and LIFO would be “neutral” for 2026.
Inventory positioning and near-term absorption headwinds
Quenzer said FIFO inventory levels increased by $300 million versus December 2024, partly to support growth initiatives including commercial emergency replacement, Samsung ductless products, and improved equipment fulfillment. Management said Lennox carried about $200 million more inventory than is seasonally typical, and inventory would remain “slightly elevated” in the first quarter but aligned with meeting second-quarter peak demand.
Executives described the strategy as intended to minimize disruption to factory employees and suppliers, though they acknowledged it would create additional absorption headwinds in the first quarter. In Q&A, management said sales in the fourth quarter came in much lower than expected, limiting the company’s ability to reduce inventory meaningfully despite production pullbacks. They also said the largest absorption impact would be in the first quarter because manufacturing for second-quarter selling season typically occurs in Q1, with some impact in Q2 but “most of it” in Q1.
Management also reiterated expectations that channel destocking is nearing completion, stating one-step destocking is nearly done and two-step destocking is expected to be complete in the second quarter.
2026 outlook: return to growth, higher free cash flow, and continued margin expansion
Lennox initiated full-year 2026 guidance that assumes stabilizing end markets, normalized channel inventories, and contributions from acquisitions and joint ventures. The company guided for total revenue growth of 6% to 7% and adjusted EPS of $23.50 to $25, with free cash flow expected between $750 million and $850 million, driven by inventory normalization and higher profitability.
Quenzer said organic volumes are expected to be down low single digits, offset by approximately one point of growth from initiatives across parts and accessories, commercial emergency replacement, and Samsung ductless/ducted heat pump products. He said volumes are expected to be down more in the first half—especially the first quarter—followed by growth in the second half. Price and mix are expected to add mid-single-digit growth, driven by a 2026 price increase and carryover benefit from 2025 regulatory mix.
At the segment level, management guided to approximately 2% growth in HCS and approximately 15% growth in Building Climate Solutions (BCS). For BCS, the company said growth expectations include a high single-digit contribution from acquisitions (with Duro Dyne cited as leaning toward BCS), mid-single-digit volume growth, and low single-digit combined price and mix.
On profitability, Quenzer said the 2026 guide implies about 20 basis points of EBIT return-on-sales expansion, which the company framed as a fourth consecutive year of margin expansion. Management said BCS margins are expected to expand more, while HCS margins are expected to be flat to slightly down due to end-market pressure.
Cost assumptions include approximately 2.5% inflation, $75 million of productivity savings, and about $35 million in additional operating expenses tied to customer experience, ERP upgrades for recent acquisitions, and continued expansion of training and innovation centers. Interest expense is expected to be about $65 million, with a roughly 20% tax rate. The company said M&A-related amortization is expected to increase about $15 million.
In discussing inflation and tariffs, executives referenced hedging programs and a shift away from copper toward aluminum as factors that soften metals exposure. Quenzer also referenced about $125 million of tariffs in 2025 and said 2026 guidance assumes a carryover effect in the first half, assuming tariff structures remain unchanged.
Maskara also said the company plans to share updated long-term targets at the 2026 Lennox Investor Day on March 4, along with additional detail on strategic growth initiatives.
About Lennox International (NYSE:LII)
Lennox International Inc is a global manufacturer of climate control products and services, principally serving residential and commercial heating, ventilation and air conditioning (HVAC) markets. The company designs, engineers and produces a range of products including furnaces, air conditioners, heat pumps, air handlers, packaged rooftop units and related controls and indoor air quality equipment. Lennox also supplies aftermarket parts and accessories and supports its product lines with technical service, training and warranty programs for dealer and distribution partners.
Originally founded in 1895 by Dave Lennox, the company has grown from its early roots into a multinational business with operations concentrated in North America and a presence in other international markets.
