# Lennox International (LII) Financial Model Free Excel 3-statement financial model and company analysis for Lennox International. - Canonical: https://finamodel.com/companies/lennox-international - Industry: Building Products - Downloadable model: Yes - Excel download: https://finamodel.com/company-models/LII.xlsx ## Model Purpose This model forecasts Lennox International's future cash flows and determines its intrinsic equity value, enabling an equity research analyst to issue a buy, hold, or sell recommendation based on the company's ability to navigate the low-GWP refrigerant transition and sustain its recent margin expansion. ## Company Overview Lennox International is a leading global provider of climate control solutions, designing and manufacturing heating, ventilation, air conditioning, and refrigeration (HVACR) equipment. The company operates through two primary business segments: Home Comfort Solutions (approximately 64% of revenue) and Building Climate Solutions (approximately 36% of revenue). Following the divestiture of its European operations in late 2023, the company generates the vast majority of its revenue in North America. Lennox operates an asset-heavy manufacturing business model combined with a highly effective direct-to-dealer distribution network for residential products. The company holds a top-tier competitive position in the North American HVAC market, competing directly with Carrier, Trane Technologies, and Johnson Controls. Recent major events include the 2023 divestiture of its European portfolio, the 2025 acquisitions of Duro Dyne and Supco to bolster its parts and accessories business, and a 2025 accounting change from LIFO to FIFO inventory valuation. ## Revenue Deep Dive **Home Comfort Solutions** - Segment name: Home Comfort Solutions - Revenue driver formula: Unit Volume x Average Selling Price + Parts & Accessories Revenue - Historical growth rate: Highly cyclical; recently experienced a 7% to 12% year-over-year decline due to channel destocking, following a strong double-digit growth period driven by regulatory pre-buys. - Key growth levers and headwinds: The primary lever is the regulatory transition to low-GWP refrigerants, which drives replacement cycles. Headwinds include weak residential new construction and high interest rates deferring consumer upgrades. - Pricing dynamics: The company exhibits strong pricing power, consistently executing price increases and benefiting from a positive mix shift towards higher-efficiency heat pumps. - Revenue recognition notes: Recognised at a point in time when control transfers to the dealer or distributor. - Seasonality: Highly seasonal; the second and third quarters are the strongest due to the summer cooling season, while the first quarter is typically the weakest. **Building Climate Solutions** - Segment name: Building Climate Solutions - Revenue driver formula: Commercial Equipment Volume x Average Selling Price + Commercial Service Revenue - Historical growth rate: Mid-single digits, achieving approximately 5% growth in 2025. - Key growth levers and headwinds: Growth is driven by emergency replacement demand, institutional upgrades for energy efficiency, and expansion of the service network. Headwinds include weakness in the light commercial new construction market. - Pricing dynamics: A mix of contractual and spot pricing. The segment benefits from a high proportion of emergency replacements, which carry premium pricing and are less price-sensitive. - Revenue recognition notes: Equipment sales are recognised at a point in time, while service revenue is recognised over time as services are performed. - Seasonality: Less seasonal than the residential segment, though the second and third quarters generally see higher installation volumes. ## Cost Structure ### Variable Costs / COGS - COGS includes raw materials (copper, steel, aluminium), direct factory labour, manufacturing overhead, and inbound freight. - Gross margin range over the last 5 years has been between 29.0% and 33.4%, peaking at 33.4% in 2025 due to favourable price/mix and cost reduction actions. - Key input costs are highly exposed to commodity cycles, particularly copper and steel, requiring active hedging and pricing adjustments. - COGS scales with volume, but factory under-absorption during periods of low volume (such as the 2025 destocking cycle) can negatively impact gross margins. ### Operating Expenses - R&D: Typically runs at 1.5% to 2.0% of revenue, expensed as incurred, covering engineering and new product development for energy-efficient systems. - SG&A: Includes distribution costs, selling expenses, marketing, and general administrative costs. It typically runs at 13.0% to 15.0% of revenue and is heavily driven by headcount and distribution network investments. - Depreciation & Amortisation: Approximately 1.5% to 2.0% of revenue, primarily related to tangible manufacturing assets. - Stock-Based Compensation: Relatively small, typically under 1.0% of revenue. - Restructuring / one-time charges: Infrequent, though the company incurred costs related to the European divestiture in 2023 and factory ramp-ups in 2024. ### Margin Profile - Gross margin has expanded to approximately 33.4%. - Operating margin reached a record 20.0% in 2025, up from historical mid-teens. - Net margin typically ranges from 12.0% to 15.5%. - Segment-level margins: Home Comfort Solutions runs at 19.0% to 21.0%, while Building Climate Solutions operates at a structurally higher 23.0% to 26.0%. ## Balance Sheet Structure - Total assets are approximately $4.0 billion. - Key asset categories include Inventory, Accounts Receivable, Property, Plant & Equipment (PP&E), and Goodwill from recent bolt-on acquisitions. - Goodwill & intangibles represent approximately 15% to 20% of total assets, reflecting a disciplined, bolt-on M&A strategy. - Working capital profile: - Days Sales Outstanding (DSO): 40 to 45 days. - Days Inventory Outstanding (DIO): 70 to 85 days. This metric has been elevated recently due to inventory builds ahead of the refrigerant transition. - Days Payable Outstanding (DPO): 50 to 60 days. - Net working capital as a percentage of revenue is typically positive, meaning the company requires working capital investment to fund growth. - PP&E consists of manufacturing facilities, distribution centres, and tooling. Useful lives range from 3 to 40 years. Maintenance capex is roughly half of total capex. - Right-of-use assets are material due to leased distribution centres and warehouse spaces. ## Capital Expenditure & Investment - Capex as a percentage of revenue typically runs between 2.0% and 3.0% (approximately $117 million in 2025). - The split is roughly 50% maintenance and 50% growth capex. - Major recent capex programmes included a new commercial factory to expand Building Climate Solutions capacity and retooling lines for low-GWP refrigerant products. - Capitalised software costs are minimal relative to total capex. - M&A pattern: The company is a bolt-on acquirer focused on expanding its parts, accessories, and services portfolio (e.g., AES in 2023, Duro Dyne and Supco in 2025). ## Debt & Capital Structure - Total debt is approximately $1.4 billion. - The company operates with a very conservative balance sheet; Net Debt to Adjusted EBITDA is approximately 0.8x. - The company holds investment-grade credit ratings. - Key debt instruments include unsecured notes and a revolving credit facility. - The maturity profile is well-laddered with a mix of medium and long-term notes. - The interest rate profile is predominantly fixed via the unsecured notes, resulting in a weighted average cost of debt of approximately 4.5% to 5.0%. - The share repurchase programme is highly active; the company repurchased $482 million in stock in 2025 and has over $1.0 billion remaining under its authorisation. - The dividend policy is consistent, with a payout ratio of approximately 20% to 25% of net income, yielding around 1.0%. ## Cash Flow Characteristics - Operating cash flow conversion is strong, typically ranging from 0.9x to 1.1x of Net Income ($758 million OCF in 2025). - Free cash flow margin typically ranges from 12.0% to 15.0% of revenue. - Major non-cash items bridging net income to OCF include depreciation, amortisation, and deferred income taxes. - Working capital can be a significant use of cash during periods of inventory build, such as the 2024 and 2025 transition to new refrigerants, before normalising. - Capex intensity is low, supporting high free cash flow generation. - The cash tax rate closely tracks the GAAP effective tax rate of approximately 21.0% to 22.0%. ## Sheet Structure 1. **Assumptions**: Hardcoded drivers for macroeconomic inputs, segment growth rates, pricing expectations, margin targets, and capital allocation policies. 2. **Revenue Schedule**: Segment build-up for Home Comfort Solutions and Building Climate Solutions, explicitly separating volume growth from price/mix impacts. 3. **Operating Costs**: Detailed schedules for COGS, SG&A, R&D, and D&A, bridging to consolidated operating income. 4. **Working Capital**: Schedules for Accounts Receivable, Inventory, and Accounts Payable based on days outstanding metrics. 5. **Depreciation & Capex**: PP&E roll-forward, separating maintenance and growth capex, with a depreciation waterfall. 6. **Debt Schedule**: Tranche-by-tranche debt roll-forward, interest expense calculation, and revolving credit facility sweep. 7. **Income Statement**: Consolidated P&L from Revenue down to Net Income and EPS, mirroring the 10-K presentation. 8. **Balance Sheet**: Standard balancing statement reflecting the company's asset-heavy manufacturing profile. 9. **Cash Flow Statement**: Indirect method starting from Net Income, adjusting for non-cash items and working capital changes. 10. **DCF Valuation**: Unlevered free cash flow build, WACC calculation, terminal value, and implied share price. ## Key Financial Relationships 1. Home Comfort Solutions Revenue = Prior Year HCS Revenue x (1 + HCS Volume Growth + HCS Price/Mix Growth) 2. Building Climate Solutions Revenue = Prior Year BCS Revenue x (1 + BCS Volume Growth + BCS Price/Mix Growth) 3. Consolidated Revenue = Home Comfort Solutions Revenue + Building Climate Solutions Revenue 4. Consolidated COGS = Consolidated Revenue x (1 - Gross Margin %) 5. SG&A Expense = Consolidated Revenue x SG&A Margin % 6. Segment Profit = Segment Revenue x Segment Margin % 7. Accounts Receivable = (Consolidated Revenue / 365) x DSO 8. Inventory = (Consolidated COGS / 365) x DIO 9. Accounts Payable = (Consolidated COGS / 365) x DPO 10. Free Cash Flow = Cash from Operations - Capital Expenditures 11. Interest Expense = Average Debt Balance x Weighted Average Interest Rate 12. Diluted EPS = Net Income / Diluted Shares Outstanding ## Cross-Sheet Dependencies The **Assumptions** sheet is the foundation and feeds all other schedules. The **Revenue Schedule** feeds the top line of the **Income Statement** and drives Accounts Receivable on the **Working Capital** sheet. The **Operating Costs** sheet feeds the **Income Statement** and drives Inventory and Accounts Payable on the **Working Capital** sheet. Changes in the **Working Capital** sheet feed directly into the **Cash Flow Statement**. The **Depreciation & Capex** sheet feeds D&A on the **Income Statement** and Capex on the **Cash Flow Statement**. The **Cash Flow Statement** determines the cash available for debt paydown or share repurchases, feeding the **Debt Schedule** and the Equity roll-forward on the **Balance Sheet**. The **Debt Schedule** calculates interest expense, which feeds back into the **Income Statement**. This creates a circular reference between interest expense, net income, and debt balances, which must be managed with a circuit breaker toggle. ## Sign Convention All revenue and asset balances must be entered as positive numbers. All expenses, including COGS, SG&A, and Interest Expense, must be entered as positive numbers and subtracted in total formulas. Liability and equity balances are positive. On the Cash Flow Statement, cash inflows are positive, and cash outflows (such as capital expenditures, dividends, and debt repayments) are negative. ## Things Most Likely to Go Wrong - Failing to account for the 2025 accounting change from LIFO to FIFO, which impacts the historical comparability of inventory balances and COGS. - Including the divested European operations in forward-looking revenue projections; core growth calculations must exclude this divested revenue. - Mismodelling the inventory build and subsequent destocking cycle related to the 2025 low-GWP refrigerant transition, which artificially depresses near-term volume growth. - Overestimating Home Comfort Solutions volume growth during periods of weak residential construction and high interest rates. - Ignoring the impact of the aggressive share repurchase programme on the diluted share count, which will artificially depress forecasted EPS. - Misaligning segment profit margins; Building Climate Solutions structurally carries higher margins than Home Comfort Solutions and must be modelled accordingly. - Double-counting corporate expenses; reported segment profit excludes corporate allocations, which must be subtracted separately to reach consolidated operating income. - Creating an unresolvable circular reference between the revolving credit facility, interest expense, and net income without a proper toggle switch. ## Validation Checks - Consolidated Gross Margin should remain between 30.0% and 34.0%; flag if the model projects outside this band. - Operating Margin should be in the 18.0% to 21.0% range based on recent structural improvements. - Capex as a percentage of revenue should typically run between 2.0% and 3.0%. - Net Debt to Adjusted EBITDA should remain below 1.5x given the company's historically conservative balance sheet management. - The Balance Sheet must balance perfectly in every forecasted period (Total Assets = Total Liabilities + Equity). - Operating Cash Flow to Net Income conversion should be greater than 0.9x. - The effective tax rate should be modelled between 20.0% and 23.0%. - The dividend payout ratio should remain between 20.0% and 25.0% of Net Income. ## Key Assumptions (Default Values) | Assumption | Default Value | Unit | Rationale | |---|---|---|---| | HCS Volume Growth | -2.0 | % | Reflects near-term channel destocking and weak residential markets | | HCS Price/Mix Growth | 4.0 | % | Continued pricing power and shift to higher-efficiency units | | BCS Volume Growth | 1.0 | % | Modest volume growth in commercial markets | | BCS Price/Mix Growth | 4.0 | % | Strong pricing execution and emergency replacement mix | | Gross Margin | 33.4 | % | Aligns with actual 2025 reported gross margin | | SG&A Margin | 13.4 | % | Based on historical averages and recent cost control actions | | DSO | 42 | Days | Calculated from recent receivables and revenue | | DIO | 80 | Days | Elevated due to refrigerant transition inventory dynamics | | DPO | 55 | Days | Consistent with historical payable cycles | | Capex % of Revenue | 2.3 | % | Based on 2025 actuals ($117M on $5.2B revenue) | | Effective Tax Rate | 21.5 | % | Blended rate including state and foreign taxes | | Share Repurchases | 400 | $M | Assumes continuation of active buyback programme | | Dividend per Share | 5.00 | $ | Based on recent annualised dividend payouts | | WACC | 10.3 | % | Current estimated cost of capital | | Terminal Growth Rate | 2.5 | % | Long-term GDP and inflation expectations | ## Data Sources & Benchmarks - SEC EDGAR: Lennox International (LII) 10-K and 10-Q filings. - Investor Relations: investor.lennox.com for earnings presentations, press releases, and call transcripts. - Key peers for benchmarking: Carrier Global (CARR), Trane Technologies (TT), and Johnson Controls (JCI). - Industry data sources: AHRI (Air-Conditioning, Heating, and Refrigeration Institute) for monthly shipment data. - Consensus estimates source: FactSet or Bloomberg for forward-looking EPS and revenue estimates. ## Sources - Lennox International 2025 Form 10-K (filed February 2026) - Lennox International Q4 2025 Earnings Release and Presentation - Lennox International Q3 2025 Earnings Release - GuruFocus WACC Data for LII - StockTitan LII 2025 Earnings Summary --- ## Frequently asked questions ### What does Lennox International do? Lennox International is a leading global provider of climate control solutions, specializing in the design and manufacture of heating, ventilation, air conditioning, and refrigeration (HVACR) equipment. The company primarily operates in North America through its Home Comfort Solutions and Building Climate Solutions segments. ### What are the main revenue drivers for Lennox International's Home Comfort Solutions segment? Revenue for the Home Comfort Solutions segment is driven by unit volume, average selling price, and parts & accessories revenue. A primary growth lever is the regulatory transition to low-GWP refrigerants, which stimulates replacement cycles for existing equipment. ### What is Lennox International's typical capital expenditure as a percentage of revenue? Lennox International's capital expenditure typically runs between 2.0% and 3.0% of revenue, with recent capex programs including a new commercial factory and retooling lines for low-GWP refrigerant products. This investment is roughly split equally between maintenance and growth initiatives. ### What are the key cost assumptions used in the Lennox International financial model? The financial model for Lennox International assumes Cost of Goods Sold (COGS) at approximately 71.27% of revenue, Research & Development (R&D) at about 1.82% of revenue, and Selling, General & Administrative (SGA) expenses at roughly 14.48% of revenue. These percentages are crucial for forecasting the company's operational profitability. ### What is the purpose of the Lennox International financial model? The Lennox International financial model is designed to forecast the company's future cash flows and determine its intrinsic equity value. This analysis helps equity research analysts issue informed buy, hold, or sell recommendations based on the company's financial trajectory and strategic execution. ### Can I download an Excel financial model for Lennox International (LII)? Yes, an Excel financial model for Lennox International (LII) is available for download. This model provides a comprehensive forecast of the company's financial performance, covering the period from FY2026 through FY2030. [Interactive forecast calculator](https://finamodel.com/companies/lennox-international/forecast)