Morningstar | Lennox Discloses Financial Impact of Tornado-Damaged Manufacturing Facility; Lowers 2018 Guidance
Narrow-moat rated Lennox International issued a press release after market close on Aug. 20 that detailed the financial impact a July 19 tornado had on the firm's Marshalltown, Iowa, residential heating and cooling manufacturing plant. The plant represents approximately 25% of Lennox's residential production capacity. The company estimates that disrupted manufacturing operations will cause the residential segment to lose approximately $100 million in revenue and $55 million in profits during the second half of 2018. The company also expects to incur about $80 million in additional pretax expenses related to clean-up and repair costs, write-offs of damaged assets, and manufacturing inefficiencies. Fortunately, Lennox has property and business interruption insurance policies that should cover these costs. Management expects to receive $80 million in property insurance proceeds in 2018, but proceeds to cover the estimated $55 million in lost profits due to business interruption may not come until 2019. Given that Lennox's losses are covered by insurance policies, and we don't expect the damaged manufacturing facility to affect the firm's longer-term prospects, we're maintaining our $172 per share fair value estimate.Because of the damaged manufacturing facility, management lowered its full-year 2018 revenue and EPS guidance. Management now expects revenue to grow 2% to 4% year over year on a GAAP basis (versus 4% to 6% previously) and adjusted revenue to grow 4% to 6% (versus 6% to 8%). Adjusted revenue excludes the impact of refrigeration segment divestitures. Management now expects GAAP EPS to range between $8.38 to $8.78 (versus $9.43 to $9.83 previously) and adjusted EPS of $8.90 to $9.30 (versus $9.95 to $10.35). Management noted that the $55 million in lost profits equates to a $1.05 per share drag on EPS. If insurance proceeds are not received in 2018, Lennox will recognize a $1.05 per share benefit in 2019 when the insurance payment is received.
Management held a conference call on Aug. 21 to further discuss the press release. Management noted that the firm has $1 billion of insurance coverage (with a $250,000 deductible) from a group of insurance providers, including Zurich Alliance, Chub, Swiss RE, and XL Catlin. While management commented that it is too soon to determine if there will be any additional lost revenue or charges in 2019, the team is confident any additional losses will also be covered by insurance.
Lennox International provides climate control solutions. The company designs, manufactures and markets products for the heating, ventilation, air conditioning and refrigeration markets. The company's segments are: Residential Heating and Cooling, which manufactures and markets furnaces, air conditioners, heat pumps, packaged heating and cooling systems, equipment and accessories, comfort control products, and replacement parts and supplies; Commercial Heating and Cooling, which manufactures and sells unitary heating and cooling equipment; and Refrigeration, which manufactures and markets equipment for the global commercial refrigeration markets under the Heatcraft Worldwide Refrigeration name.
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