LENNOX INTERNATIONAL INC (LII)

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934 (the "Exchange Act"), as amended, that are based on information currently available to management as well as management’s assumptions and beliefs as of the date such statements were made. All statements, other than statements of historical fact, included in this Quarterly Report on Form 10-Q constitute forward-looking statements, including but not limited to statements identified by forward-looking terminology, such as the words “may,” “will,” “should,” “plan,” “anticipate,” “believe,” “intend,” “estimate,” and “expect” and similar expressions. Such statements reflect our current views with respect to future events, based on what we believe are reasonable assumptions; however, such statements are subject to certain risks and uncertainties.

In addition to the specific uncertainties discussed elsewhere in this Quarterly Report on Form 10-Q, the risk factors set forth in Part I, “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2025, and those set forth in Part II, “Item 1A. Risk Factors” of this report, if any, may affect our performance and results of operations. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may differ materially from those in the forward-looking statements. We disclaim any intention or obligation to update or review any forward-looking statements or information, whether as a result of new information, future events or otherwise, except as required by law.

Business Overview

We operate in two reportable business segments of the HVACR industry, Home Comfort Solutions and Building Climate Solutions. For more detailed information regarding our reportable segments, see Note 2 in the Notes to the Consolidated Financial Statements.

Our fiscal quarterly periods are comprised of approximately 13 weeks, but the number of days per quarter may vary year-over-year. Our quarterly reporting periods usually end on the Saturday closest to the last day of March, June, and September. Our fourth quarter and fiscal year ends on December 31, regardless of the day of the week on which December 31 falls. For convenience, throughout this Management’s Discussion and Analysis of Financial Condition and Results of Operations, the 13-week periods comprising each fiscal quarter are denoted by the last day of the respective calendar quarter.

We sell our products and services through a combination of direct sales, distributors and company-owned stores. The demand for our products and services is seasonal and can be significantly impacted by the weather. Warmer than normal summer temperatures generate demand for replacement air conditioning and refrigeration products and services, and colder than normal winter temperatures have a similar effect on heating products and services. Conversely, cooler than normal summers and warmer than normal winters depress the demand for HVACR products and services. In addition to weather, demand for our products and services is influenced by national and regional economic and demographic factors, such as interest rates, the availability of financing, regional population and employment trends, new construction, general economic conditions, and consumer spending habits and confidence. A substantial portion of the sales in each of our business segments is attributable to replacement business, with the balance comprised of new construction business.

The principal elements of cost of goods sold are components, raw materials, factory overhead, labor, estimated costs of warranty expense, and freight and distribution costs. The principal raw materials used in our manufacturing processes are steel, aluminum and copper. In recent years, pricing volatility for these commodities and related components has impacted us and the HVACR industry in general. We seek to mitigate the impact of certain commodity price volatility and tariffs through a combination of pricing actions, vendor contracts, improved production efficiency, and cost reduction initiatives. We also partially mitigate volatility in the prices of these commodities by entering into futures contracts and fixed forward contracts.

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Financial Overview

Results for the second quarter of 2026 were mixed as our Home Comfort Solutions segment faced volume headwinds driven by market softness. Overall our net sales increased 3% and our segment profit was relatively flat as compared to prior year. For our Home Comfort Solutions segment, net sales decreased 7% and segment profit decreased $30 million. For our Building Climate Solutions segment, net sales increased 24% and segment profit increased $35 million.

Financial Highlights

•Net sales of $1,545 million in the second quarter of 2026 reflected a 3% increase as compared to the same period in 2025.

•Operating income in the second quarter of 2026 increased $6 million to $355 million as favorable mix and price were partially offset by lower sales volumes, higher product costs and higher freight and distribution costs.

•Net income for the second quarter of 2026 was $269 million.

•Diluted earnings per share was $7.72 per share in the second quarter of 2026 as compared to $7.71 per share in the same period in 2025.

•For the six months ended June 30, 2026, we returned $91 million to shareholders through dividend payments and repurchased $151 million of common stock through our share repurchase program.

Recent Developments

Throughout 2025 and 2026, the U.S. government implemented new tariff measures under various authorities, including the International Emergency Economic Powers Act ("IEEPA") and Sections 122, 232, and 301 of the Trade Expansion Act of 1962.

In February 2026, the U.S. Supreme Court ruled against tariffs imposed under IEEPA, and U.S. Customs and Border Protection is now processing valid court-ordered IEEPA refunds. The ruling did not repeal Section 232 tariffs on steel, copper, and aluminum or Section 301 tariffs on covered Chinese HVAC imports.

Following this ruling, the U.S. presidential administration imposed a temporary surcharge, known as Section 122, which applied a 10% global tariff on most imported products, effective through July 24, 2026. The temporary surcharge was replaced by a new Section 301 forced labor tariffs framework of 10% or 12.5%, covering imports from 60 trading partners. Section 232 articles and qualifying USMCA goods are excluded from this new framework. Section 232 tariffs also continued to evolve, with modifications implemented in April and June 2026. The Company is evaluating the potential impact of all tariff actions on future material costs and sourcing decisions.

Three Months Ended June 30, 2026 Compared to Three Months Ended June 30, 2025 - Consolidated Results

The following table provides a summary of our financial results, including information presented as a percentage of net sales:

Net Sales

Net sales for the second quarter of 2026 increased 3% as compared to the same period in 2025 primarily due to a 3% increase from favorable mix and price and a 4% increase in sales volumes from completed acquisitions, which were partially offset by a 4% decrease in sales volumes.

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Gross Profit

Gross profit margins in the second quarter of 2026 increased 40 basis points ("bps") to 34.9% as compared to 34.5% in the same period in 2025. Gross margins increased 120 bps from favorable mix and price and 40 bps from sales volumes from completed acquisitions, which were partially offset by 80 bps from higher product costs, primarily reflecting inflation and factory under absorption, net of $30 million in tariff refunds, and 40 bps from higher freight and distribution inflation and investments.

Selling, General and Administrative Expenses

Selling, general and administrative expenses ("SG&A") increased $10 million to $183 million in the second quarter of 2026 as compared to $173 million in the same period in 2025, primarily attributable to higher discretionary and employee-related costs and the acquisition of Duro Dyne and Supco in the fourth quarter of 2025.

Losses (Gains) and Other Expenses, Net

Losses (gains) and other expenses, net for the second quarter of 2026 and 2025 included the following (in millions):

Income from Equity Method Investments

Investments over which we do not exercise control but have significant influence are accounted for using the equity method of accounting. Income from equity method investments was de minimis in the second quarter of 2026, consistent with 2025.

Interest Expense, net

Interest expense, net increased to $15 million in the second quarter of 2026 from $8 million in the same period in 2025 primarily due to increased borrowings on our commercial paper facility and our term loan agreement entered into in October of 2025.

Income Taxes

Our effective tax rate was 20.8% for the second quarter of 2026 as compared to 19.4% in the same period in 2025. The increase in the rate is primarily due to higher income in higher tax jurisdictions.

Second Quarter of 2026 Compared to Second Quarter of 2025 - Results by Segment

Home Comfort Solutions

The following table presents our Home Comfort Solutions segment's net sales and profit for the second quarter of 2026 and 2025 (dollars in millions):

Net sales decreased 7% in the second quarter of 2026 as compared to the same period in 2025 primarily due to a 12% decrease in sales volumes, which was partially offset by a 3% increase from favorable mix and price and a 2% increase in sales

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volumes from completed acquisitions.

Segment profit in the second quarter of 2026 decreased $30 million as compared to the same period in 2025, primarily due to lower sales volumes, which resulted in a $49 million profit headwind, $3 million from increased freight and distribution costs, $2 million from product cost inflation and lower factory absorption, net of $25 million in tariff refunds, and $8 million from miscellaneous other costs. These impacts were partially offset by a $24 million benefit from favorable mix and price, $5 milli

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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion should be read in conjunction with the other sections of this report, including the Consolidated Financial Statements and related Notes to the Consolidated Financial Statements in Item 8, “Other Financial Statement Details,” of this Annual Report on Form 10-K.

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Forward-Looking Statements

This Annual Report on Form 10-K contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Exchange Act that are based on information currently available to management as well as management’s assumptions and beliefs as of the date hereof. All statements, other than statements of historical fact, included in this Annual Report on Form 10-K constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements can be identified by the words “may,” “will,” “should,” “plan,” “predict,” “anticipate,” “believe,” “intend,” “estimate” and “expect” and similar expressions. Statements that are not historical should also be considered forward-looking statements. Such statements reflect our current views with respect to future events. Readers are cautioned not to place undue reliance on these forward-looking statements. We believe these statements are based on reasonable assumptions; however, such statements are inherently subject to risks and uncertainties, including but not limited to the specific uncertainties discussed elsewhere in this Annual Report on Form 10-K and the risk factors set forth in Item 1A. Risk Factors in this Annual Report on Form 10-K. These risks and uncertainties may affect our performance and results of operations. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may differ materially from those in the forward-looking statements. We disclaim any intention or obligation to update or review any forward-looking statements or information, whether as a result of new information, future events or otherwise unless required by law.

The following are some of the factors that could cause actual results to differ materially from those expressed or implied in forward-looking statements:

•competition in the HVACR business;

•our ability to successfully develop and market new products or execute our business strategy, including the implementation of price increases for products and services;

•our ability to meet and anticipate customer demands;

•our ability to continue to license or enforce our intellectual property rights;

•our ability to attract, motivate, develop and retain our employees, as well as labor relations problems;

•artificial intelligence technologies;

•a decline in new construction activity and related demand for our products and services;

•the impact of weather on our business;

•the impact of higher raw material prices and significant supply interruptions;

•product liability, warranty claims, or recalls;

•changes in environmental and climate-related legislation or government regulations or policies;

•changes in tax legislation;

•the impact of new or increased trade tariffs;

•improper conduct by any of our employees, agents, or business partners;

•litigation risks;

•general economic conditions in the U.S. and abroad;

•extraordinary events beyond our control, such as conflicts, wars, natural disasters, public health crises, terrorist acts, or other civil or political disruptions;

•risks associated with our international operations;

•cyber attacks and other disruptions or misuse of information systems; and

•our ability to successfully realize, complete and integrate acquisitions.

Business Overview

We operate in two reportable business segments of the HVACR industry, Home Comfort Solutions and Building Climate Solutions. In addition to the two major business segments, Corporate and Other is also reported as a segment. For more detailed information regarding our reportable segments, see Note 3 in the Notes to the Consolidated Financial Statements.

In the fourth quarter of 2023, we completed the sale of our European businesses. The European businesses were presented with the Corporate and Other business segment until their divestiture.

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In October 2025, we completed the acquisition of Duro Dyne and Supco, a robust portfolio of HVAC parts and supplies that complement our existing residential and commercial offerings. Duro Dyne is reported in our Business Climate Solutions segment, and Supco is reported in our Home Comfort Solutions segment.

In October 2023, we completed the acquisition of AES, which is included in our Building Climate Solutions segment. AES is a company dedicated to service and sustainability in the light commercial markets across North America.

We sell our products and services through a combination of direct sales, distributors and company-owned stores. The demand for our products and services is seasonal and can be significantly impacted by the weather. Warmer than normal summer temperatures generate demand for replacement air conditioning and refrigeration products and services, and colder than normal winter temperatures have a similar effect on heating products and services. Conversely, cooler than normal summers and warmer than normal winters depress the demand for HVACR products and services. In addition to weather, demand for our products and services is influenced by national and regional economic and demographic factors, such as interest rates, the availability of financing, regional population and employment trends, new construction, general economic conditions and consumer spending habits and confidence. A substantial portion of the sales in each of our business segments is attributable to replacement business, with the balance comprised of new construction business.

The principal elements of cost of goods sold are components, raw materials, factory overhead, labor, estimated costs of warranty expense and freight and distribution costs. The principal raw materials used in our manufacturing processes are steel, aluminum and copper. In recent years, pricing volatility for these commodities and related components has impacted us and the HVACR industry in general. We seek to mitigate the impact of certain commodity price volatility through a combination of pricing actions, vendor contracts, improved production efficiency and cost reduction initiatives. We also partially mitigate volatility in the prices of these commodities by entering into futures contracts and fixed forward contracts.

In the fourth quarter of 2025, we changed the method of accounting for our inventories from last-in-first-out (“LIFO”) to first-in-first-out (“FIFO”). We believe the FIFO method is preferable because it more closely matches the physical flow of materials through purchasing, receiving, warehousing, production and order fulfillment, it results in a more consistent method to value inventory across the Company, and it improves comparability with industry peers. This change increased Retained Earnings by $106.6 million as of January 1, 2023, and increased net income by $1.1 million and $4.2 million for the years ended December 31, 2023 and 2024, respectively. All prior amounts have been adjusted.

Financial Highlights

•Net sales decreased $146 million, or 3%, to $5,195 million in 2025 from $5,341 million in 2024.

•Operating income in 2025 was $1,042 million compared to $1,040 million in 2024.

•Net income in 2025 decreased to $806 million from $811 million in 2024.

•Diluted earnings per share was $22.79 per share in 2025 compared to $22.66 per share in 2024.

•We generated $758 million of cash flow from operating activities in 2025 compared to $946 million in 2024.

•We returned $173 million to shareholders through dividend payments and repurchased $482 million as part of our Share Repurchase Plans in 2025.

Recent Developments

On July 4, 2025, the One Big Beautiful Bill Act (the “OBBBA”) was enacted into law, introducing significant changes to corporate income tax rates and deductions. For fiscal year 2025, the OBBBA did not have a material impact on our effective tax rate. We continue to evaluate the future impact of the OBBBA for those provisions that are effective after fiscal year 2025.

Overview of Results

The Home Comfort Solutions segment experienced a 7% decrease in net sales and a $32 million decrease in segment profit in 2025 as compared to 2024 primarily driven by lower sales volumes. Our Building Climate Solutions segment saw an increase in net sales of 5% and a $33 million increase in segment profit in 2025 compared to 2024, primarily due to favorable price and mix.

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Results of Operations

The following table provides a summary of our financial results, including information presented as a percentage of net sales (dollars in millions):

Year Ended December 31, 2025 Compared to Year Ended December 31, 2024 - Consolidated Results

Net Sales

Net sales decreased 3% in 2025 compared to 2024 as lower sales volumes of 13% were partially offset by favorable price and mix of 9% and a 1% increase in sales volumes due to our fourth quarter acquisition of Duro Dyne and Supco.

Gross Profit

Gross profit margins for 2025 increased 10 basis points (“bps”) to 33.4% compared to 33.3% in 2024. Gross profit margin increased 290 bps from higher price and favorable mix, which was partially offset by 160 bps from higher products costs and 120 bps from higher freight and distribution costs.

Selling, General and Administrative Expenses

SG&A expenses decreased by $49 million in 2025 compared to 2024. As a percentage of net sales, SG&A expenses decreased 60 bps from 13.7% to 13.1% in the same periods, primarily due to lower employee-related costs including reduced incentive compensation and reduced discretionary expenses.

Losses and Other Expenses, Net

Losses and other expenses, net for 2025 and 2024 included the following (in millions):

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