UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549

FORM 10-Q

(MARK ONE)

þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2008

o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

LENNOX INTERNATIONAL INC.

Incorporated pursuant to the Laws of the State of DELAWARE

Internal Revenue Service Employer Identification No. 42-0991521

2140 LAKE PARK BLVD.
RICHARDSON, TEXAS
75080
(972-497-5000)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Securities Exchange Act of 1934.

Large Accelerated Filer þ		Accelerated Filer o		Non-Accelerated Filer o		Smaller Reporting Company o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Securities Exchange Act of 1934). Yes o No þ

As of July 23, 2008, the number of shares outstanding of the registrant’s common stock, par value $.01 per share, was 55,147,960.

 

 

LENNOX INTERNATIONAL INC.

FORM 10-Q
For the Three and Six Months Ended June 30, 2008

INDEX

		Page
Part I. Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets — June 30, 2008 (Unaudited) and December 31, 2007			3
Consolidated Statements of Operations (Unaudited) — Three Months and Six Months Ended June 30, 2008 and 2007			4
Consolidated Statements of Stockholders’ Equity and Comprehensive Income — Six Months Ended June 30, 2008 (Unaudited) and Year Ended December 31, 2007			5
Consolidated Statements of Cash Flows (Unaudited) — Six Months Ended June 30, 2008 and 2007			6
Notes to Consolidated Financial Statements (Unaudited)			7
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			22
Item 3. Quantitative and Qualitative Disclosures About Market Risk			34
Item 4. Controls and Procedures			34
Part II. Other Information
Item 1. Legal Proceedings			35
Item 1A. Risk Factors			35
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			35
Item 4. Submission of Matters to a Vote of Security Holders			35
Item 6. Exhibits			36
Exhibit 31.1
Exhibit 31.2
Exhibit 32.1

PART I — FINANCIAL INFORMATION

Item 1. Financial Statements.

LENNOX INTERNATIONAL INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
As of June 30, 2008 and December 31, 2007
(In millions, except share and per share data)

		June 30,				December 31,
		2008				2007
		(unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents		$	95.3			$	145.5
Short-term investments			34.9				27.7
Accounts and notes receivable, net			604.7				492.5
Inventories, net			367.8				325.7
Deferred income taxes			25.9				30.9
Other assets			60.3				48.4
Total current assets			1,188.9				1,070.7
PROPERTY, PLANT AND EQUIPMENT, net			320.7				317.9
GOODWILL, net			268.3				262.8
DEFERRED INCOME TAXES			84.5				94.0
OTHER ASSETS			72.5				69.2
TOTAL ASSETS		$	1,934.9			$	1,814.6
LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES:
Short-term debt		$	10.2			$	4.8
Current maturities of long-term debt			11.3				36.4
Accounts payable			377.5				289.8
Accrued expenses			332.0				352.1
Income taxes payable			—				1.1
Total current liabilities			731.0				684.2
LONG-TERM DEBT			448.6				166.7
POSTRETIREMENT BENEFITS, OTHER THAN PENSIONS			15.9				16.2
PENSIONS			35.8				34.8
OTHER LIABILITIES			106.8				104.2
Total liabilities			1,338.1				1,006.1
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS’ EQUITY:
Preferred stock, $.01 par value, 25,000,000 shares authorized, no shares issued or outstanding			—				—
Common stock, $.01 par value, 200,000,000 shares authorized, 83,577,944 shares and 81,897,439 shares issued for 2008 and 2007, respectively			0.8				0.8
Additional paid-in capital			792.6				760.7
Retained earnings			488.9				447.4
Accumulated other comprehensive income			85.5				63.6
Treasury stock, at cost, 28,440,943 shares and 19,844,677 shares for 2008 and 2007, respectively			(771.0	)			(464.0	)
Total stockholders’ equity			596.8				808.5
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY		$	1,934.9			$	1,814.6

The accompanying notes are an integral part of these consolidated financial statements.

LENNOX INTERNATIONAL INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS
For the Three and Six Months Ended June 30, 2008 and 2007
(Unaudited, in millions, except per share data)

		For the								For the
		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2008				2007				2008				2007
NET SALES		$	1,002.9			$	1,041.8			$	1,770.0			$	1,833.3
COST OF GOODS SOLD			715.6				752.7				1,279.9				1,339.6
Gross profit			287.3				289.1				490.1				493.7
OPERATING EXPENSES:
Selling, general and administrative expenses			196.6				197.3				390.4				388.4
Gains and other expenses, net			(4.4	)			(3.3	)			(7.8	)			(4.0	)
Restructuring charges			7.7				7.6				10.5				9.9
Impairment of equity method investment			2.3				—				2.3				—
Income from equity method investments			(2.9	)			(3.5	)			(6.0	)			(6.2	)
Operational income			88.0				91.0				100.7				105.6
INTEREST EXPENSE, net			3.8				2.0				6.5				2.9
OTHER EXPENSE, NET			0.1				0.1				0.1				0.1
Income before income taxes			84.1				88.9				94.1				102.6
PROVISION FOR INCOME TAXES			32.9				28.6				36.6				33.7
Net income		$	51.2			$	60.3			$	57.5			$	68.9
NET INCOME PER SHARE:
Basic		$	0.91			$	0.89			$	0.99			$	1.02
Diluted		$	0.88			$	0.85			$	0.95			$	0.97
AVERAGE SHARES OUTSTANDING:
Basic			56.2				68.0				58.2				67.7
Diluted			58.0				71.2				60.2				71.1
CASH DIVIDENDS DECLARED PER SHARE		$	0.14			$	0.13			$	0.28			$	0.26

The accompanying notes are an integral part of these consolidated financial statements.

LENNOX INTERNATIONAL INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY AND COMPREHENSIVE INCOME
For the Six Months Ended June 30, 2008 (unaudited) and the Year Ended December 31, 2007
(In millions, except per share data)

																		Accumulated
		Common Stock								Additional								Other				Treasury				Total
		Issued								Paid-In				Retained				Comprehensive				Stock				Stockholders’				Comprehensive
		Shares				Amount				Capital				Earnings				Income (Loss)				At Cost				Equity				Income
BALANCE AS OF DECEMBER 31, 2006			77.0			$	0.8			$	706.6			$	312.5			$	(5.1	)		$	(210.4	)		$	804.4
Impact of adoption of FIN No. 48			—				—				—				0.9				—				—				0.9
ADJUSTED BALANCE AS OF JANUARY 1, 2007			77.0			$	0.8			$	706.6			$	313.4			$	(5.1	)		$	(210.4	)		$	805.3
Net income			—				—				—				169.0				—				—				169.0			$	169.0
Dividends, $0.53 per share			—				—				—				(35.0	)			—				—				(35.0	)			—
Foreign currency translation adjustments, net			—				—				—				—				62.9				—				62.9				62.9
Pension and postretirement liability changes, net of tax benefit of $0.0			—				—				—				—				3.2				—				3.2				3.2
Stock-based compensation expense			—				—				21.0				—				—				—				21.0				—
Reversal of previously recorded stock-based compensation expense related to share-based awards canceled in restructuring			—				—				(2.1	)			—				—				—				(2.1	)			—
Derivatives, net of tax of $1.3			—				—				—				—				2.6				—				2.6				2.6
Common stock issued			4.9				—				21.5				—				—				—				21.5				—
Treasury stock purchases			—				—				—				—				—				(253.6	)			(253.6	)			—
Tax benefits of stock-based compensation			—				—				20.1				—				—				—				20.1				—
Other tax-related items			—				—				(6.4	)			—				—				—				(6.4	)			—
Comprehensive income			—				—				—				—				—				—				—			$	237.7
BALANCE AS OF DECEMBER 31, 2007			81.9			$	0.8			$	760.7			$	447.4			$	63.6			$	(464.0	)		$	808.5
Net income			—				—				—				57.5				—				—				57.5			$	57.5
Dividends, $0.28 per share			—				—				—				(16.0	)			—				—				(16.0	)			—
Foreign currency translation adjustments, net			—				—				—				—				15.9				—				15.9				15.9
Stock-based compensation expense			—				—				6.6				—				—				—				6.6				—
Derivatives, net of tax of $3.4			—				—				—				—				6.0				—				6.0				6.0
Common stock issued			1.7				—				12.8				—				—				—				12.8				—
Treasury stock purchases			—				—				—				—				—				(307.0	)			(307.0	)			—
Tax benefits of stock-based compensation			—				—				12.5				—				—				—				12.5				—
Comprehensive income			—				—				—				—				—				—				—			$	79.4
BALANCE AS OF JUNE 30, 2008			83.6			$	0.8			$	792.6			$	488.9			$	85.5			$	(771.0	)		$	596.8

The accompanying notes are an integral part of these consolidated financial statements.

LENNOX INTERNATIONAL INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Six Months Ended June 30, 2008 and 2007
(Unaudited, in millions)

		2008				2007
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income		$	57.5			$	68.9
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Income from equity method investments			(6.0	)			(6.2	)
Restructuring expenses, net of cash paid			(6.0	)			4.9
Impairment of equity method investment			2.3				—
Unrealized gain on futures contracts			(2.3	)			(0.3	)
Stock-based compensation expense			6.6				13.3
Depreciation and amortization			25.6				23.5
Capitalized interest			(0.8	)			(0.8	)
Deferred income taxes			10.8				4.1
Other items, net			12.5				10.3
Changes in assets and liabilities:
Accounts and notes receivable			(112.0	)			(129.0	)
Inventories			(41.2	)			(72.1	)
Other current assets			(8.5	)			(8.0	)
Accounts payable			87.4				105.5
Accrued expenses			(16.0	)			(20.6	)
Income taxes			4.9				(9.5	)
Long-term warranty, deferred income and other liabilities			8.0				10.7
Net cash provided by (used in) operating activities			22.8				(5.3	)
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from the disposal of property, plant and equipment			0.4				0.3
Purchases of property, plant and equipment			(21.7	)			(25.0	)
Purchases of short-term investments			(35.0	)			(25.7	)
Proceeds from sales and maturities of short-term investments			27.9				1.8
Net cash used in investing activities			(28.4	)			(48.6	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Short-term borrowings, net			4.9				4.0
Long-term payments, net			(25.1	)			(0.1	)
Revolver long-term borrowings			282.0				65.0
Proceeds from stock option exercises			12.8				15.2
Repurchases of common stock			(307.0	)			(45.6	)
Excess tax benefits related to share-based payments			10.9				12.5
Cash dividends paid			(24.6	)			(26.4	)
Net cash (used in) provided by financing activities			(46.1	)			24.6
DECREASE IN CASH AND CASH EQUIVALENTS			(51.7	)			(29.3	)
EFFECT OF EXCHANGE RATES ON CASH AND CASH EQUIVALENTS			1.5				5.1
CASH AND CASH EQUIVALENTS, beginning of period			145.5				144.3
CASH AND CASH EQUIVALENTS, end of period		$	95.3			$	120.1
Supplementary disclosures of cash flow information:
Cash paid during the period for:
Interest		$	9.1			$	5.3
Income taxes (net of refunds)		$	13.9			$	30.4
Non-cash items:
Impact of adoption of FIN No. 48		$	—			$	0.9

The accompanying notes are an integral part of these consolidated financial statements.

LENNOX INTERNATIONAL INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

1. General:

References in this Quarterly Report on Form 10-Q to “we,” “our,” “us,” “LII” or the “Company” refer to Lennox International Inc. and its subsidiaries, unless the context requires otherwise.

Basis of Presentation

The accompanying unaudited Consolidated Balance Sheets as of June 30, 2008, the accompanying unaudited Consolidated Statements of Operations for the three and six months ended June 30, 2008 and 2007, the accompanying unaudited Consolidated Statement of Stockholders’ Equity for the six months ended June 30, 2008 and the accompanying unaudited Consolidated Statements of Cash Flows for the six months ended June 30, 2008 and 2007 should be read in conjunction with LII’s audited consolidated financial statements and footnotes as of December 31, 2007 and 2006 and for each year in the three-year period ended December 31, 2007. The accompanying unaudited consolidated financial statements of LII have been prepared in accordance with generally accepted accounting principles for interim financial information and in accordance with the instructions to Form 10-Q and Article 10 of Regulation S-X. The presentation of financial statements requires the use of management estimates and in the opinion of management, the accompanying consolidated financial statements contain all material adjustments, consisting principally of normal recurring adjustments, necessary for a fair presentation of the Company’s financial position, results of operations and cash flows. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to applicable rules and regulations, although the Company believes that the disclosures herein are adequate to make the information presented not misleading. The operating results for the interim periods are not necessarily indicative of the results that may be expected for a full year.

The Company’s fiscal year ends on December 31 and the Company’s quarters are each comprised of 13 weeks. For convenience, throughout these financial statements, the 13 weeks comprising each three-month period are denoted by the last day of the respective calendar quarter.

Reclassifications

Certain prior-period balances in the accompanying consolidated financial statements have been reclassified to conform to the current period’s presentation of financial information.

Recently Adopted Accounting Pronouncements

Effective January 1, 2008, the Company adopted Statement of Financial Accounting Standards No. 157, Fair Value Measurements (“SFAS No. 157”), which establishes a framework for measuring fair value in generally accepted accounting principles, clarifies the definition of fair value within that framework, and expands disclosures about the use of fair value measurements. SFAS No. 157 is effective for fiscal years beginning after November 15, 2007. However, in February 2008, the Financial Accounting Standards Board (“FASB”) issued FASB Staff Position No. FAS 157-2, Effective Date of FASB Statement No. 157 (“FSP No. 157-2”), which deferred the effective date of SFAS No. 157 for one year for non-financial assets and liabilities, except for certain items that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually). The Company is currently evaluating the impact of SFAS No. 157 on its consolidated financial statements for items within the scope of FSP No. 157-2, which will become effective on January 1, 2009.

Effective January 1, 2008, the Company also adopted Statement of Financial Accounting Standards No. 159, The Fair Value Option for Financial Assets and Financial Liabilities (“SFAS No. 159”). SFAS No. 159 allows an entity the irrevocable option to elect fair value for the initial and subsequent measurement for certain financial assets and liabilities on a contract-by-contract basis. The adoption of SFAS No. 159 had no impact on the Company’s consolidated financial statements.

Newly Issued Accounting Pronouncements

In March 2008, the FASB issued Statement of Financial Accounting Standards No. 161, Disclosures about Derivative Instruments and Hedging Activities (“SFAS No. 161”). SFAS No. 161 amends and expands the disclosure requirements of Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities (“SFAS No. 133”), to provide enhanced disclosures about (a) how and why an entity uses derivative instruments, (b) how derivative instruments and related hedged items are accounted for under SFAS No. 133 and its related interpretations, and (c) how derivative instruments and related hedged items affect an entity’s financial position, results of operations, and cash flows. In order to meet these expanded disclosure objectives, SFAS No. 161 requires entities to disclose the objectives and strategies for using derivatives, information about the volume of derivative activity, fair value amounts of and gains and losses on derivative instruments in tabular format, and credit-risk contingent features in derivative agreements. SFAS No. 161 is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008. Early application is permitted. Management is currently evaluating the effects that SFAS No. 161 will have on its disclosure of derivatives and hedging activities in the consolidated financial statements.

2. Accounts and Notes Receivable:

Accounts and Notes Receivable have been reported in the accompanying Consolidated Balance Sheets net of allowance for doubtful accounts and net of accounts receivable sold under an ongoing asset securitization arrangement, if any. Detailed information regarding the allowance for doubtful accounts is provided below (in millions):

		As of				As of
		June 30,				December 31,
		2008				2007
Allowance for doubtful accounts		$	20.1			$	17.1

		For the								For the
		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2008				2007				2008				2007
Provision for bad debts		$	4.8			$	3.5			$	10.5			$	4.7

None of the accounts receivable as reported in the accompanying Consolidated Balance Sheets as of June 30, 2008 and December 31, 2007 represent retained interests in securitized receivables that have restricted disposition rights per the terms of the asset securitization agreement and would not be available to satisfy obligations to creditors. The Company has no significant concentration of credit risk within its accounts and notes receivable.

3. Inventories:

Components of inventories are as follows (in millions):

		As of				As of
		June 30,				December 31,
		2008				2007
Finished goods		$	275.3			$	247.7
Work in process			12.8				10.5
Raw materials and repair parts			152.7				137.9
			440.8				396.1
Excess of current cost over last-in, first-out cost			(73.0	)			(70.4	)
Total inventories		$	367.8			$	325.7

4. Goodwill:

The changes in the carrying amount of goodwill for the six months ended June 30, 2008, in total and by segment, are as follows (in millions):

		Balance at								Balance at
		December 31,								June 30,
Segment		2007				Changes (1)				2008
Residential Heating & Cooling		$	33.7			$	—			$	33.7
Commercial Heating & Cooling			32.1				1.7				33.8
Service Experts			112.5				(1.7	)			110.8
Refrigeration			84.5				5.5				90.0
Total		$	262.8			$	5.5			$	268.3

5. Short-Term Investments:

The Company’s captive insurance subsidiary (the “Captive”) holds debt securities, consisting of U.S. government and government agency securities, corporate bonds, asset-backed securities, collateralized mortgage obligations and various securitized debt instruments. In accordance with Statement of Financial Accounting Standards No. 115 (as amended), Accounting for Certain Investments in Debt and Equity Securities, the Company classifies these investments as available-for-sale. Any unrealized holding gains and losses are reported in Accumulated Other Comprehensive Income (“AOCI”), net of applicable taxes, until the gain or loss is realized. The Company places its investments in high credit quality financial instruments only and limits the amount invested in any one institution or in any one instrument.

As of June 30, 2008 and December 31, 2007, the Captive held approximately $34.9 million and $27.7 million, respectively, of short-term investments. Unrealized gains included in AOCI in the accompanying Consolidated Balance Sheets as of June 30, 2008 and December 31, 2007 were not material. Realized gains and losses from the sale of securities were also not material for the three or six months ended June 30, 2008 and 2007. The maturities of these securities range from July 2008 to July 2011. It is the Captive’s intention that these investments be available to support its current operations as needed. Due to the liquidity of these investments, they are classified as current assets in the accompanying Consolidated Balance Sheets. For more information on the valuation of these investments, see Note 16.

6. Cash, Lines of Credit and Financing Arrangements:

The Company considers all highly liquid temporary investments with original maturity dates of three months or less to be cash equivalents. Cash and cash equivalents of $95.3 million and $145.5 million as of June 30, 2008 and December 31, 2007, respectively, consisted of cash, overnight repurchase agreements and investment-grade securities and are stated at cost, which approximates fair value.

As of June 30, 2008 and December 31, 2007, $24.9 million and $20.2 million, respectively, of cash and cash equivalents were restricted primarily due to routine lockbox collections and letters of credit issued with respect to the operations of the Captive, which expire on December 31, 2008. The restrictions related to lockbox collections typically expire within three to five business days after receipt. The letter of credit restrictions can be transferred to the Company’s revolving lines of credit as needed.

The following tables summarize the Company’s outstanding debt obligations and the classification in the accompanying Consolidated Balance Sheets as of June 30, 2008 and December 31, 2007 (in millions):

Description of Obligation		Short-Term				Current				Long-Term
As of June 30, 2008		Debt				Maturities				Maturities				Total
Domestic promissory notes (1)		$	—			$	11.1			$	35.0			$	46.1
Domestic revolving credit facility			—				—				413.0				413.0
Other foreign obligations			10.2				0.2				0.6				11.0
Total debt		$	10.2			$	11.3			$	448.6			$	470.1

Description of Obligation		Short-Term				Current				Long-Term
As of December 31, 2007		Debt				Maturities				Maturities				Total
Domestic promissory notes (1)		$	—			$	36.1			$	35.0			$	71.1
Domestic revolving credit facility			—				—				131.0				131.0
Other foreign obligations			4.8				0.3				0.7				5.8
Total debt		$	4.8			$	36.4			$	166.7			$	207.9

		As of				As of
		June 30,				December 31,
		2008				2007
6.73% promissory notes, payable $11.1 annually through 2008		$	11.1			$	11.1
6.75% promissory notes, payable in 2008			—				25.0
8.00% promissory note, payable in 2010			35.0				35.0
Total domestic promissory notes		$	46.1			$	71.1

As of June 30, 2008, the Company had outstanding borrowings of $413.0 million under the $650.0 million domestic revolving credit facility and $113.6 million was committed to standby letters of credit. All of the remaining $123.4 million was available for future borrowings after consideration of covenant limitations. The facility matures in October 2012.

The Company has additional borrowing capacity through several foreign facilities governed by agreements between the Company and a syndicate of banks, used primarily to finance seasonal borrowing needs of its foreign subsidiaries. LII had $11.0 million and $5.8 million of obligations outstanding through its foreign subsidiaries as of June 30, 2008 and December 31, 2007, respectively.

Under a revolving period asset securitization arrangement, the Company is eligible to transfer beneficial interests in a portion of its trade accounts receivable to third parties for cash. The Company’s continued involvement in the transferred assets is limited to servicing. These transfers are accounted for as sales rather than secured borrowings. The fair values assigned to the retained and transferred interests are based primarily on the receivables’ carrying value given the short-term maturity and low credit risk. At June 30, 2008 and December 31, 2007, the Company had not sold any beneficial interests in accounts receivable. The maximum amount available under the securitization arrangement depends on the amount of qualifying accounts receivable. The maximum amount available was $125.0 million and $102.7 million as of June 30, 2008 and December 31, 2007, respectively.

7. Product Warranties:

The changes in the carrying amount of the Company’s total product warranty liabilities for the six months ended June 30, 2008 are as follows (in millions):

Total product warranty liability at December 31, 2007		$	98.4
Changes resulting from issuance of new warranties			15.1
Payments made in 2008			(13.4	)
Changes in estimates associated with pre-existing liabilities			(3.6	)
Changes in foreign currency translation rates			0.6
Total product warranty liability at June 30, 2008		$	97.1

The decreases in estimates of warranties issued prior to 2008 were primarily due to lower failure rates. The product warranty liabilities are recorded as follows in the accompanying Consolidated Balance Sheets as of June 30, 2008 and December 31, 2007, respectively (in millions):

		As of				As of
		June 30,				December 31,
		2008				2007
Short-term warranty liability:
Accrued expenses		$	31.6			$	33.8
Long-term warranty liability:
Other liabilities		$	65.5			$	64.6

8. Pension and Postretirement Benefit Plans:

The components of net periodic benefit cost were as follows (in millions):

		For the
		Three Months Ended June 30,
		2008				2007				2008				2007
		Pension Benefits								Other Benefits
Service cost		$	1.7			$	1.8			$	0.2			$	0.1
Interest cost			4.1				3.8				0.2				0.2
Expected return on plan assets			(4.5	)			(4.4	)			—				—
Amortization of prior service cost			0.2				0.2				(0.5	)			(0.4	)
Amortization of net loss			1.2				1.2				0.3				0.3
Settlements or curtailments(1)			1.6				—				—				—
Total net periodic pension cost		$	4.3			$	2.6			$	0.2			$	0.2

		For the
		Six Months Ended June 30,
		2008				2007				2008				2007
		Pension Benefits								Other Benefits
Service cost		$	3.5			$	3.5			$	0.4			$	0.3
Interest cost			8.2				7.5				0.4				0.4
Expected return on plan assets			(9.0	)			(8.8	)			—				—
Amortization of prior service cost			0.3				0.5				(1.0	)			(0.8	)
Amortization of net loss			2.4				2.4				0.6				0.5
Settlements or curtailments(1)			1.6				0.7				—				—
Total net periodic pension cost		$	7.0			$	5.8			$	0.4			$	0.4

9. Stock-Based Compensation:

The Company’s Amended and Restated 1998 Incentive Plan provides for various long-term incentive awards, which include stock options, performance share units, restricted stock units and stock appreciation rights.

Compensation expense of $3.5 million and $7.1 million and $6.6 million and $13.3 million was recognized for the three months and the six months ended June 30, 2008 and 2007, respectively, and is included in Selling, General and Administrative Expenses in the accompanying Consolidated Statements of Operations. The decrease in stock-based compensation expense was primarily due to an increase in forfeiture rates and a decrease in the estimated pay-out percentage on outstanding performance share units in the first six months of 2008 as compared to the same period in 2007.

The following tables summarize information concerning the Company’s stock options, stock appreciation rights, performance share units and restricted stock units as of June 30, 2008 (in millions, except per share data, years, and forfeiture rates):

						Stock
		Stock				Appreciation
		Options				Rights
Shares outstanding			1.4				1.9
Weighted-average exercise price per share outstanding		$	15.11			$	30.14
Shares exercisable			1.4				0.7
Weighted-average exercise price per exercisable share		$	15.11			$	25.84
Unrecognized expense			—				6.5
Expected weighted-average period to be recognized (in years)			—				2.0
Weighted-average estimated forfeiture rate			—	%			15	%

		Performance				Restricted
		Share Units				Stock Units
Nonvested units			0.8				0.7
Weighted-average grant date fair value per unit		$	27.40			$	31.79
Unrecognized expense		$	11.2			$	9.0
Expected weighted-average period to be recognized (in years)			1.9				2.0
Weighted-average estimated forfeiture rate			29	%			20	%

10. Income Taxes:

As of June 30, 2008, the Company had approximately $24.0 million in total gross unrecognized tax benefits. Of this amount, $12.9 million (net of federal benefit on state issues), if recognized, would be recorded through the statement of operations. Also included in the balance of unrecognized tax benefits as of June 30, 2008 are $3.2 million that, if recognized, would be recorded as an adjustment to goodwill and $6.4 million that, if recognized, would be recorded as an adjustment to stockholders’ equity. In addition, the Company recognizes interest and penalties accrued related to unrecognized tax benefits in income tax expense in accordance with FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes — an Interpretation of FASB Statement 109 (“FIN No. 48”). As of June 30, 2008, the Company had recognized $2.9 million (net of federal tax benefits) in interest and penalties.

The Internal Revenue Service (“IRS”) completed its examination of the Company’s consolidated tax returns for the years 1999 — 2003 and issued a Revenue Agent’s Report (“RAR”) on April 6, 2006. The IRS has proposed certain significant adjustments to the Company’s insurance deductions and research tax credits. The Company disagrees with the RAR, which is currently under review by the administrative appeals division of the IRS, and anticipates resolution by the end of 2008. It is possible that a reduction in the unrecognized tax benefits may occur but an estimate of the impact on the statement of operations cannot be made at this time.

The IRS has also completed its examination of the Company’s consolidated tax returns for the years 2004 — 2005 and expects to issue an RAR by August 31, 2008. The IRS has proposed certain significant adjustments to the Company’s insurance deductions and research tax credits. The Company disagrees with the adjustments and intends to request a review by the administrative appeals division of the IRS.

The Company is subject to examination by numerous taxing authorities in jurisdictions such as Australia, Belgium, Canada, Germany, and the United States. The Company is generally no longer subject to U.S. federal, state and local, or non-U.S. income tax examinations by taxing authorities for years before 1999.

Since January 1, 2008, West Virginia, Colorado and Kansas have enacted legislation effective for tax years beginning on or after January 1, 2008, including adjustments to tax rates, requirements for combined reporting in future years and changes to apportionment methods. The Company believes any adjustments will be immaterial.

11. Restructuring Charges:

Restructuring charges incurred include the following amounts for the three and six months ended June 30, 2008 and 2007 (in millions):

		For the Three Months								For the Six Months
		Ended June 30,								Ended June 30,
		2008				2007				2008				2007
Relocation of Australian Refrigeration operations		$	3.0			$	—			$	3.0			$	—
Relocation of Residential Heating & Cooling production (1)			1.7				—				1.7				—
Consolidation of U.S. Refrigeration production			1.6				—				2.9				—
Consolidation of Lennox Hearth Products operations			0.5				—				1.7				—
Integration of Australia and New Zealand operations			—				—				0.3				—
Reorganizations of corporate administrative function			0.5				6.6				0.5				6.6
Facility lease			—				0.3				—				0.3
Allied Air Enterprises consolidation			—				0.7				—				2.9
Pension settlement (2)			—				—				—				0.7
Other			0.4				—				0.4				(0.6	)
Total		$	7.7			$	7.6			$	10.5			$	9.9

The table below details activity within the Company’s restructuring reserves for the six months ended June 30, 2008 (in millions):

		Balance as of				Charged												Balance as of
		December 31,				to				Cash				Non-Cash				June 30,
Description of Reserves		2007				Earnings				Utilization				Utilization				2008
Severance and related expense		$	15.2			$	4.9			$	(13.8	)		$	—			$	6.3
Asset write-offs and accelerated depreciation			—				1.8				—				(1.8	)			—
Equipment moves			—				1.1				(1.1	)			—				—
Recruiting and relocation			—				0.1				(0.1	)			—				—
Lease termination			1.5				—				(0.6	)			—				0.9
Other			—				2.6				(0.8	)			(0.8	)			1.0
Total restructuring reserves		$	16.7			$	10.5			$	(16.4	)		$	(2.6	)		$	8.2

Manufacturing Rationalization Activities

In the second quarter of 2008, the Company announced the transition of production of selected Refrigeration products currently manufactured in Milperra, Australia to its sister facility in Wuxi, China. The Company recorded severance charges of $3.0 million during the three and six months ended June 30, 2008 for those positions now located in Milperra that will be eliminated. In addition to the amounts accrued as of June 30, 2008, the Company expects to incur future restructuring charges of approximately $2.0 million over the remainder of this project, consisting of asset write-offs, manufacturing inefficiencies and equipment moving costs. The transition is anticipated to extend through the first half of 2009.

Also in the second quarter of 2008, the Company announced the transition of production of certain Residential Heating & Cooling products from its Marshalltown, Iowa manufacturing facility to its new manufacturing operation in Saltillo, Mexico. The transition is anticipated to extend through the first half of 2009. As a result of the transition, certain manufacturing positions now located in Marshalltown will be eliminated. Costs associated with the transition primarily consist of severance, pension curtailment and equipment moving expenses. In connection with the transition, the Company recorded restructuring charges of $1.7 million for the three and six months ended June 30, 2008, including a pension curtailment charge of $0.8 million. In addition to the amounts accrued as of June 30, 2008, the Company expects to incur restructuring charges of approximately $0.8 million over the remainder of this project.

In the fourth quarter of 2007, the Company announced plans to close its Refrigeration operations in Danville, Illinois and consolidate its Danville manufacturing, support and warehouse functions in its Tifton, Georgia and Stone Mountain, Georgia operations. The consolidation is a phased process and is expected to be completed in the first quarter of 2009. In connection with this consolidation project, the Company recorded restructuring charges of $1.6 million and $2.9 million for the three and six months ended June 30, 2008, respectively. The restructuring charges primarily related to costs to move certain equipment and disposal of certain long-lived assets, including charges of $1.6 million of accelerated depreciation recorded in the first half of 2008 related to the reduction in useful lives and disposal of certain long-lived assets. In addition to the amounts accrued as of June 30, 2008, the Company expects to incur future restructuring charges of approximately $7.2 million over the remainder of this project.

In the third quarter of 2007, the Company announced plans to close Lennox Hearth Products Inc.’s operations in Lynwood, California, part of its Residential Heating & Cooling operations, and consolidate its U.S. factory-built fireplace manufacturing operations in its facility in Union City, Tennessee. In connection with this consolidation project, the Company recorded restructuring charges of $0.5 million and $1.7 million for the three and six months ended June 30, 2008, respectively. The restructuring charges primarily related to costs to move equipment and the disposal of certain long-lived assets. The consolidation was substantially complete as of June 30, 2008.

In 2006, the Company commenced consolidation of the manufacturing, distribution, research and development and administrative operations of Allied Air Enterprises Inc., the Company’s two-step Residential Heating & Cooling operations in South Carolina, and closure of its operations in Bellevue, Ohio. The consolidation was substantially complete as of March 31, 2007. In connection with this consolidation project, the Company recorded restructuring charges of $0.7 million and $2.9 million for the three and six months ended June 30, 2007, respectively.

Corporate Reorganizations and Other

In the second quarter of 2007, the Company reorganized its corporate administrative function and eliminated the position of chief administrative officer. In connection with this action, the Company recorded an $8.0 million liability to settle the terms of his employment agreement, of which $6.6 million, net of $1.4 million of previously recorded stock-based compensation expense, was recorded in the second quarter of 2007. The final settlement of this matter occurred and an amount equal to the liability recorded was paid during the three months ended June 30, 2008.

A pension settlement loss of approximately $0.7 million is included in restructuring expense for the six months ended June 30, 2007, which related to the Company’s full funding of lump-sum pension payments to selected participants in March 2007 as part of a prior restructuring initiative in 2001.

12. Earnings per Share:

Diluted earnings per share are computed as follows (in millions, except per share data):

		For the								For the
		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2008				2007				2008				2007
Net income		$	51.2			$	60.3			$	57.5			$	68.9
Weighted-average shares outstanding — basic			56.2				68.0				58.2				67.7
Effect of diluted securities attributable to stock-based payments			1.8				3.2				2.0				3.4
Weighted-average shares outstanding — diluted			58.0				71.2				60.2				71.1
Diluted earnings per share		$	0.88			$	0.85			$	0.95			$	0.97

Options to purchase 49,700 shares of common stock at prices ranging from $35.82 to $43.66 per share and options to purchase 99,613 shares of common stock at prices ranging from $35.82 to $49.63 per share were outstanding for the six months ended June 30, 2008 and 2007, respectively, but were not included in the diluted earnings per share calculation because the assumed exercise of such options would have been anti-dilutive.

13. Comprehensive Income:

Comprehensive income for the three and six months ended June 30, 2008 and 2007 was computed as follows (in millions):

		For the								For the
		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2008				2007				2008				2007
Net income		$	51.2			$	60.3			$	57.5			$	68.9
Foreign currency translation adjustments			6.8				23.3				15.9				30.8
Effective portion of (losses) gains on futures contracts designated as cash flow hedges			(2.7	)			2.6				6.0				8.0
Total comprehensive income		$	55.3			$	86.2			$	79.4			$	107.7

14. Investments in Affiliates:

The Company participates in three joint ventures that are located in the U.S., Mexico, and Thailand through investments in the common stock of the affiliated companies. These joint ventures are engaged in the manufacture and sale of compressors, unit coolers and condensing units. As of June 30, 2008, the Company’s percentage of ownership interest in these affiliates ranges from 13% to 50%. Because the Company exerts significant influence over these affiliates, but does not control them, the investments have been accounted for under the equity method and their financial position and results of operations are not consolidated.

The Company recorded the following amounts of investment income from these equity method investments in the Consolidated Statement of Operations (in millions):

		For the								For the
		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2008				2007				2008				2007
Income from equity method investments		$	2.9			$	3.5			$	6.0			$	6.2

The combined balance of the Company’s equity method investments included in Other Long-Term Assets totaled (in millions):

		As of				As of
		June 30,				December 31,
		2008				2007
Other Long-Term Assets		$	55.9			$	52.6

During the three months ended June 30, 2008, the Company recorded a $2.3 million impairment charge related to the investment in its joint venture in Thailand. The joint venture’s financial results were adversely impacted by recent increases in commodity costs, unfavorable currency exchange fluctuations, and difficulties integrating past acquisitions, which prompted the impairment charge. This charge reflects recent indications of a decrease in the fair value of the investment below its carrying value that the Company believes is not recoverable in the near term.

15. Derivatives:

LII utilizes a program to mitigate the exposure to volatility in the prices of certain commodities the Company uses in its production process. The program includes the use of futures contracts and fixed forward contracts. The intent of the program is to protect the Company’s operating margins and overall profitability from adverse price changes by entering into derivative instruments.

The Company accounts for instruments that qualify as cash flow hedges utilizing Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities, as amended (“SFAS No. 133”). Beginning in the fourth quarter of 2006, futures contracts entered into that met established accounting criteria were formally designated as cash flow hedges. For futures contracts that are designated and qualify as cash flow hedges, the Company assesses hedge effectiveness and measures hedge ineffectiveness at least quarterly throughout the designated period. The effective portion of the gain or loss on the futures contracts is recorded, net of applicable taxes, in AOCI, a component of Stockholders’ Equity in the accompanying Consolidated Balance Sheets. When net income is affected by the variability of the underlying cash flow, the applicable offsetting amount of the gain or loss from the futures contracts that is deferred in AOCI is released to net income and is reported as a component of Cost of Goods Sold in the accompanying Consolidated Statements of Operations. During the three and six months ended June 30, 2008 and 2007, $5.8 million and $3.0 million and $7.9 million and $1.4 million, respectively, in gains, were reclassified from AOCI to net income. Changes in the fair value of futures contracts that do not effectively offset changes in the fair value of the underlying hedged item throughout the designated hedge period (“ineffectiveness”) are recorded in net income each period and are reported in Gains and Other Expenses, net in the accompanying Consolidated Statements of Operations. For the three and six months ended June 30, 2008 and 2007, hedge ineffectiveness recognized in net income was not material.

The Company may enter into instruments that economically hedge certain of its risks, even though hedge accounting does not apply or the Company elects not to apply hedge accounting under SFAS No. 133 to such instruments. In these cases, there exists a natural hedging relationship in which changes in the fair value of the instruments act as an economic offset to changes in the fair value of the underlying item(s). Changes in the fair value of instruments not designated as cash flow hedges are recorded in net income throughout the term of the derivative instrument and are reported in Gains and Other Expenses, net in the accompanying Consolidated Statements of Operations. For the three and six months ended June 30, 2008 and 2007, net gains of $0.3 million and $1.0 million and $3.3 million and $1.9 million, respectively, were recognized in earnings related to instruments not accounted for as cash flow hedges. For more information on the valuation of these derivative instruments, see Note 16.

16. Fair Value Measurements:

SFAS No. 157 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. SFAS No. 157 provides a framework for measuring fair value, establishes a three-level hierarchy for fair value measurements based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date and requires consideration of the Company’s creditworthiness when valuing certain liabilities.

Fair Value Hierarchy

The three-level fair value hierarchy for disclosure of fair value measurements defined by SFAS No. 157 is as follows:

Level 1 -		Quoted prices for identical instruments in active markets at the measurements date.
Level 2 -		Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations in which all significant inputs and significant value drivers are observable in active markets at the measurement date and for the anticipated term of the instrument.
Level 3 -		Valuations derived from valuation techniques in which one or more significant inputs or significant value drivers are unobservable inputs that reflect the reporting entity’s own assumptions about the assumptions market participants would use in pricing the asset or liability developed based on the best information available in the circumstances.

Fair Value Techniques

The Company’s valuation techniques are applied to all of the assets and liabilities carried at fair value as of January 1, 2008, upon adoption of SFAS No. 157. Where available, the fair values are based upon quoted prices in active markets. However, if quoted prices are not available, then the fair values are based upon quoted prices for similar assets or liabilities or independently sourced market parameters, such as credit default swap spreads, yield curves, reported trades, broker/dealer quotes, interest rates and benchmark securities. For assets and liabilities with a lack of observable market activity, if any, the fair values are based upon discounted cash flow methodologies incorporating assumptions that, in management’s judgment, reflect the assumptions a marketplace participant would use. To ensure that financial assets and liabilities are recorded at fair value, valuation adjustments may be required to reflect either party’s creditworthiness and ability to pay. Where appropriate, these amounts were incorporated into the Company’s valuations as of June 30, 2008, the measurement date.

Assets and Liabilities Measured at Fair Value on a Recurring Basis

The following table presents the fair value hierarchy for those assets and liabilities measured at fair value on a recurring basis as of June 30, 2008 (in millions):

Fair Value Measurements on a Recurring Basis as of June 30, 2008

Quoted Prices in

Significant

Active Markets

Other

Significant

for

Observable

Unobservable

Identical Assets

Inputs

Inputs

(Level 1)

(Level 2)

(Level 3)

Total

Assets:

Derivatives, net (1)

$

—

$

10.5

$

—

$

10.5

Short-term investments

—

34.9

—

34.9

The Company’s adoption of SFAS No. 157 has resulted in changes to the valuation techniques used by the Company when determining the fair value of its derivative instruments. These derivatives are primarily valued using estimated future cash flows that are based directly on observed prices from exchange-traded derivatives and therefore have been classified as Level 2. The Company also takes into account the counterparty’s creditworthiness, or the Company’s own creditworthiness, as appropriate. The calculation of the credit adjustment for derivatives is based upon observable credit default swap spreads and interpolation between these observable spreads for interim periods without observable spreads; however, these inputs are insignificant to the fair value measurement. The effect of adopting these changes to the valuation techniques was not material.

The majority of the Company’s short-term investments are managed by professional investment advisors. The net asset values are furnished in statements received from the investment advisor and reflect valuations based upon the respective pricing policies utilized by the investment advisor. The Company has assessed the classification of the inputs used to value these investments as Level 2 through examination of pricing policies and significant inputs and through discussions with investment managers. The fair values of the Company’s short-term investments are based on several observable inputs including, but not limited to, benchmark yields, reported trades, broker/dealer quotes, issuer spreads and benchmark securities. The adoption of SFAS No. 157 resulted in no net changes to the valuations for these securities.

17. Commitments and Contingencies:

Guarantees

On June 22, 2006, Lennox Procurement Company Inc. (“Procurement”), a wholly-owned subsidiary of the Company, entered into a lease agreement with BTMU Capital Corporation (“BTMUCC”), pursuant to which BTMUCC is leasing certain property located in Richardson, Texas to Procurement for a term of seven years (the “Lake Park Lease”). The leased property consists of an office building of approximately 192,000 square feet, which includes the Company’s corporate headquarters, land and related improvements.

During the term, the Lake Park Lease requires Procurement to pay base rent in quarterly installments, payable in arrears. At the end of the term, if Procurement is not in default, Procurement must elect to do one of the following: (i) purchase the leased property for a net price of approximately $41.2 million (the “Lease Balance”); (ii) make a final supplemental payment to BTMUCC equal to approximately 82% of the Lease Balance and return the leased property to BTMUCC in good condition; (iii) arrange a sale of the leased property to a third party; or (iv) renew the Lake Park Lease under mutually agreeable terms. If Procurement elects to arrange a sale of the leased property to a third party, then Procurement must pay to BTMUCC the amount (if any) by which the Lease Balance exceeds the net sales proceeds paid by the third party; provided, however, that, absent certain defaults, such amount cannot exceed approximately 82% of the Lease Balance. If the net sales proceeds paid by the third party are greater than the Lease Balance, the excess sales proceeds will be paid to Procurement.

Procurement’s obligations under the Lake Park Lease and related documents are secured by a pledge of Procurement’s interest in the leased property. Procurement’s obligations under such documents are also guaranteed by the Company pursuant to a Guaranty, dated as of June 22, 2006, in favor of BTMUCC.

In the second quarter of 2008, the Company determined that, primarily due to its share repurchases, it was not in compliance with a financial covenant contained in the Lake Park Lease that requires it to maintain a specified level of net worth. The Company has been granted a waiver through September 30, 2008 and is currently evaluating alternatives to address this matter, including substituting lenders under the lease. If the Company is not in compliance with such covenant after the expiration of the waiver, the lessor may, among other things, declare the Company in default, terminate the lease and demand that the Company return the leased property. However, if the lessor declares a default, the Company has the right to purchase the property for a purchase price equal to the Lease Balance plus lease breakage costs. Should this occur, it would not materially affect the Company’s liquidity.

Although the Company is not in compliance with this financial covenant, the Lake Park Lease continues to be accounted for as an operating lease until the lease is either terminated or modified.

The majority of the Service Experts segment’s motor vehicle fleet is leased through operating leases. The lease terms are generally non-cancelable for the first 12-month term and then are month-to-month, cancelable at the Company’s option. While there are residual value guarantees on these vehicles, the Company has not historically made significant payments to the lessors as the leases are maintained until the fair value of the assets fully mitigates the Company’s obligations under the lease agreements. As of June 30, 2008, the Company estimates that it will incur an additional $9.2 million above the contractual obligations on these leases until the fair value of the leased vehicles fully mitigates the Company’s residual value guarantee obligation under the lease agreements.

Environmental

Applicable environmental laws can potentially impose obligations on the Company to remediate hazardous substances at the Company’s properties, at properties formerly owned or operated by the Company and at facilities to which the Company has sent or sends waste for treatment or disposal. The Company is aware of contamination at some facilities; however, the Company does not presently believe that any future remediation costs at such facilities will be material to the Company’s results of operations. No amounts have been recorded for non-asset retirement obligation environmental liabilities that are not probable or estimable.

Brazil Environmental Reserve

At one site located in Brazil, the Company is currently evaluating the remediation efforts that may be required under applicable environmental laws related to the release of certain hazardous materials. The Company currently believes that the release of the hazardous materials occurred over an extended period of time, including a time when the Company did not own the site. Extensive investigations have been performed and the Company continues to conduct additional assessments of the site to help determine the possible remediation activities that may be conducted. Once the site assessments are completed and the possible remediation activities have been evaluated, the Company plans to commence remediation efforts, pending any required approvals by local governmental authorities. The amount and timing of cash payments are reliably determinable and therefore the Company has recorded its environmental reserves at their present values. The maximum reasonably possible loss presented in the table below is the amount that could be paid if, after the site assessments are completed, it is determined that remediation is more costly or local governmental authorities require more costly remediation activities.

The following information relates to the Brazil environmental reserve (in millions except percentages):

		As of				As of
		June 30,				December 31,
		2008				2007
Discounted liabilities recorded in:
Accrued Expenses		$	0.1			$	0.1
Other Long-Term Liabilities			1.9				1.9
		$	2.0			$	2.0
Undiscounted liabilities		$	2.5			$	2.5
Discount rate			11	%			8.0	%
Maximum reasonably possible loss		$	3.4			$	3.1

Additional Environmental Reserves

The Company maintains environmental reserves for additional sites that are not individually significant. The following information relates to additional environmental reserves (in millions except percentages):

		As of				As of
		June 30,				December 31,
		2008				2007
Discounted liabilities recorded in:
Accrued Expenses		$	0.5			$	2.0
Other Long-Term Liabilities			3.8				1.9
		$	4.3			$	3.9
Undiscounted liabilities		$	6.3			$	6.4
Discount rate			5.0	%			6.0	%

Estimates of future costs are subject to change due to changing environmental remediation regulations and/or site-specific requirements.

Litigation

The Company is involved in various claims and lawsuits incidental to its business. As previously reported, in January 2003, the Company, along with one of its subsidiaries, Heatcraft Inc., was named in the following lawsuits in connection with the Company’s former heat transfer operations:

•

Lynette Brown, et al., vs. Koppers Industries, Inc., Heatcraft Inc., Lennox International Inc., et al., Circuit Court of Washington County, Civil Action No. CI 2002-479;

•

Likisha Booker, et al., vs. Koppers Industries, Inc., Heatcraft Inc., Lennox International Inc., et al., Circuit Court of Holmes County, Civil Action No. 2002-549;

•

Walter Crowder, et al., vs. Koppers Industries, Inc., Heatcraft Inc. and Lennox International Inc., et al., Circuit Court of Leflore County, Civil Action No. 2002-0225; and

•

Benobe Beck, et al., vs. Koppers Industries, Inc., Heatcraft Inc. and Lennox International Inc., et al., Circuit Court of the First Judicial District of Hinds County, No. 03-000030.

On behalf of approximately 100 plaintiffs, the lawsuits allege personal injury resulting from alleged emissions of trichloroethylene, dichloroethylene, and vinyl chloride and other unspecified emissions from the South Plant in Grenada, Mississippi, previously owned by Heatcraft Inc. Each plaintiff seeks to recover alleged actual and punitive damages. On Heatcraft Inc.’s motion to transfer venue, two of the four lawsuits (Booker and Crowder) were ordered severed and transferred to Grenada County by the Mississippi Supreme Court, requiring plaintiffs’ counsel to maintain a separate lawsuit for each of the individual plaintiffs named in these suits. To the Company’s knowledge, as of July 15, 2008, plaintiffs’ counsel has requested the transfer of files regarding five individual plaintiffs from the Booker case and five individual plaintiffs from the Crowder case. It is not possible to predict with certainty the outcome of these matters or an estimate of any potential loss. Based on present knowledge, management believes that it is unlikely that any final resolution of these matters will result in a material liability.

18. Share Repurchase Plan:

On July 25, 2007, LII announced that the Board of Directors approved a share repurchase plan, pursuant to which the Company was authorized to repurchase up to $500 million of shares of its common stock through open market purchases (the “2007 Share Repurchase Plan”). LII was a party to a written trading plan under Rule 10b5-1 of the Securities Exchange Act of 1934, as amended, to facilitate share repurchases under the 2007 Share Repurchase Plan. Prior to April 1, 2008, LII had repurchased 10,609,749 shares of common stock for approximately $376.1 million under the 2007 Share Repurchase Plan, which was completed during the second quarter of 2008. On June 2, 2008, the Company announced that its Board of Directors approved a new share repurchase plan for $300 million, pursuant to which the Company is authorized to repurchase shares of its common stock through open market purchases. In the second quarter of 2008, LII repurchased shares of its common stock as follows:

														Approximate Dollar
										Total Number of				Value of Shares that
						Average Price				Shares Purchased				may yet be Purchased
		Total Number				Paid per				As Part of Publicly				Under the Plans or
		of Shares				Share				Announced Plans				Programs
Period		Purchased (1)				(including fees)				or Programs				(in millions)
April 1 through April 30			2,260,797			$	35.37				2,260,642			$	43.9
May 1 through May 31			1,314,130			$	33.47				1,313,239			$	—
June 1 through June 30			—			$	—				—			$	300.0
Total			3,574,927			$	34.67				3,573,881

19. Reportable Business Segments:

The Company operates in four reportable business segments of the heating, ventilation, air conditioning and refrigeration (“HVACR”) industry. The table below details the nature of the operations of each reportable segment:

Segment		Product or Services		Markets Served		Geographic Areas
Residential Heating & Cooling		Heating Air Conditioning Hearth Products		Residential Replacement Residential New Construction		United States Canada
Commercial Heating & Cooling		Rooftop Products Chillers Air Handlers		Light Commercial		United States Canada Europe
Service Experts		Equipment Sales Installation Maintenance Repair		Residential Light Commercial		United States Canada
Refrigeration		Unit Coolers Condensing Units Other Commercial Refrigeration Products		Light Commercial		United States Canada Europe Asia Pacific

Transactions between segments, such as products sold to Service Experts by the Residential Heating & Cooling segment, are recorded on an arm’s-length basis using the market price for these products. The eliminations of these intercompany sales and any associated profit are noted in the reconciliation of segment results to the income before income taxes below.

The Company uses segment profit or loss as the primary measure of profitability to evaluate operating performance and to allocate capital resources. The Company defines segment profit or loss as a segment’s income or loss from continuing operations before income taxes included in the accompanying Consolidated Statements of Operations:

Excluding:

•

Gains and other expenses, net.

•

Restructuring charges.

•

Goodwill and equity method investment impairments.

•

Interest expense, net.

•

Other expense, net.

Less amounts included in Gains and Other Expenses, net:

•

Realized gains or losses on settled futures contracts not designated as cash flow hedges.

•

Foreign currency exchange gains or losses.

The Company’s corporate costs include those costs related to corporate functions such as legal, internal audit, treasury, human resources, tax compliance and senior executive staff. Corporate costs also include the long-term share-based incentive awards provided to employees throughout LII. The Company recorded these share-based awards as corporate costs as they are determined at the discretion of the Board of Directors and based on the historical practice of doing so for internal reporting purposes.

Net sales and segment profit or loss by business segment, along with a reconciliation of segment profit or loss to net earnings or loss, for the three and six months ended June 30, 2008 and 2007 are shown below (in millions):

		For the								For the
		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2008				2007				2008				2007
Net Sales:
Residential Heating & Cooling		$	450.7			$	497.9			$	779.9			$	859.1
Commercial Heating & Cooling			229.5				232.8				394.7				395.5
Service Experts			182.9				184.2				323.0				328.0
Refrigeration			169.1				151.3				323.8				292.5
Eliminations (1)			(29.3	)			(24.4	)			(51.4	)			(41.8	)
		$	1,002.9			$	1,041.8			$	1,770.0			$	1,833.3
Segment Profit (Loss):
Residential Heating & Cooling		$	50.0			$	59.6			$	63.2			$	79.5
Commercial Heating & Cooling			26.7				30.2				32.9				38.8
Service Experts			13.9				13.0				6.3				9.2
Refrigeration			17.5				16.3				32.2				28.8
Corporate and other			(8.7	)			(20.1	)			(20.9	)			(40.7	)
Eliminations (1)			(0.4	)			—				(2.1	)			(0.2	)
Subtotal that includes segment profit and eliminations			99.0				99.0				111.6				115.4
Reconciliation to income before income taxes:
Gains and other expenses, net			(4.4	)			(3.3	)			(7.8	)			(4.0	)
Restructuring charges			7.7				7.6				10.5				9.9
Impairment of equity method investment			2.3				—				2.3				—
Interest expense, net			3.8				2.0				6.5				2.9
Other expense, net			0.1				0.1				0.1				0.1
Less: Realized gains on settled futures contracts not designated as cash flow hedges (2)			0.7				1.2				1.1				1.7
Less: Foreign currency exchange gains (2)			4.7				2.5				4.8				2.2
		$	84.1			$	88.9			$	94.1			$	102.6