Edgar Filing: LENNOX INTERNATIONAL INC

e10vq

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 SEPTEMBER 30, 2010


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

For the transition period from to

Commission file number 001-15149

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 has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

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 Exchange Act. (Check one):


Large accelerated filer þ		Accelerated filer o		Non-accelerated filer o (Do not check if a smaller reporting company)		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 October 19, 2010, the number of shares outstanding of the registrant’s common stock, par value $.01 per share, was 53,439,246.

LENNOX INTERNATIONAL INC.

FORM 10-Q
For the Three and Nine Months Ended September 30, 2010

INDEX


	Page
Part I. Financial Information
Item 1. Financial Statements		3
Consolidated Balance Sheets – September 30, 2010 (Unaudited) and December 31, 2009		3
Consolidated Statements of Operations (Unaudited) – Three and Nine Months Ended September 30, 2010 and 2009		4
Consolidated Statements of Stockholders’ Equity and Comprehensive Income – Nine Months Ended September 30, 2010 (Unaudited) and Year Ended December 31, 2009		5
Consolidated Statements of Cash Flows (Unaudited) – Nine Months Ended September 30, 2010 and 2009		6
Notes to Consolidated Financial Statements (Unaudited)		7
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		33
Item 3. Quantitative and Qualitative Disclosures About Market Risk		43
Item 4. Controls and Procedures		45

Part II. Other Information
Item 1. Legal Proceedings		46
Item 1A. Risk Factors		46
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		46
Item 6. Exhibits		46
EX-31.1
EX-31.2
EX-32.1
EX-101 INSTANCE DOCUMENT
EX-101 SCHEMA DOCUMENT
EX-101 CALCULATION LINKBASE DOCUMENT
EX-101 LABELS LINKBASE DOCUMENT
EX-101 PRESENTATION LINKBASE DOCUMENT
EX-101 DEFINITION LINKBASE DOCUMENT

PART I — FINANCIAL INFORMATION


Item 1.		Financial Statements.

LENNOX INTERNATIONAL INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(In millions, except share and per share data)


	As of			As of
	September 30,			December 31,
	2010			2009
	(unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents	$	92.4		$	124.3
Restricted cash		13.1			—
Accounts and notes receivable, net of allowances of $14.9 and $15.6 in 2010 and 2009, respectively		429.2			357.0
Inventories, net		347.7			250.2
Deferred income taxes		36.7			34.9
Other assets		63.8			67.5

Total current assets		982.9			833.9
PROPERTY, PLANT AND EQUIPMENT, net		320.9			329.6
GOODWILL		267.6			257.4
DEFERRED INCOME TAXES		66.1			74.6
OTHER ASSETS, net		59.8			48.4

TOTAL ASSETS	$	1,697.3		$	1,543.9


LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES:
Short-term debt	$	8.2		$	2.2
Current maturities of long-term debt		0.8			35.5
Accounts payable		284.0			238.2
Accrued expenses		329.1			317.9
Income taxes payable		5.4			—

Total current liabilities		627.5			593.8
LONG-TERM DEBT		362.1			193.8
POSTRETIREMENT BENEFITS, OTHER THAN PENSIONS		13.1			13.4
PENSIONS		70.7			66.7
OTHER LIABILITIES		67.3			71.8

Total liabilities		1,140.7			939.5
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, 86,143,637 shares and 85,567,485 shares issued for 2010 and 2009, respectively		0.9			0.9
Additional paid-in capital		857.2			839.1
Retained earnings		622.6			558.6
Accumulated other comprehensive income (loss)		19.6			(0.8	)
Treasury stock, at cost, 32,709,867 shares and 29,292,512 shares for 2010 and 2009, respectively		(943.7	)		(793.4	)

Total stockholders’ equity		556.6			604.4

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	1,697.3		$	1,543.9

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

LENNOX INTERNATIONAL INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited, in millions, except per share data)


	For the Three Months						For the Nine Months
	Ended September 30,						Ended September 30,
	2010			2009			2010			2009
NET SALES	$	818.2		$	749.5		$	2,334.4		$	2,114.0
COST OF GOODS SOLD		585.4			527.7			1,662.6			1,529.8

Gross profit		232.8			221.8			671.8			584.2
OPERATING EXPENSES:
Selling, general and administrative expenses		163.5			157.1			513.0			473.7
Losses (gains) and other expenses, net		0.8			(2.1	)		6.3			(2.3	)
Restructuring charges		4.7			11.5			15.0			27.4
Income from equity method investments		(2.8	)		(2.4	)		(8.9	)		(5.6	)

Operational income from continuing operations		66.6			57.7			146.4			91.0
INTEREST EXPENSE, net		3.5			2.2			9.1			6.1
OTHER EXPENSE, net		—			0.1			0.1			0.2

Income from continuing operations before income taxes		63.1			55.4			137.2			84.7
PROVISION FOR INCOME TAXES		21.2			21.7			47.9			32.8

Income from continuing operations		41.9			33.7			89.3			51.9
DISCONTINUED OPERATIONS:
Loss from discontinued operations		0.1			2.9			0.9			10.2
Income tax benefit		—			(0.2	)		(0.1	)		(3.0	)

Loss from discontinued operations		0.1			2.7			0.8			7.2

Net income	$	41.8		$	31.0		$	88.5		$	44.7


EARNINGS PER SHARE — BASIC:
Income from continuing operations	$	0.78		$	0.60		$	1.62		$	0.94
Loss from discontinued operations		—			(0.05	)		(0.01	)		(0.13	)

Net income	$	0.78		$	0.55		$	1.61		$	0.81


EARNINGS PER SHARE — DILUTED:
Income from continuing operations	$	0.76		$	0.59		$	1.59		$	0.92
Loss from discontinued operations		—			(0.05	)		(0.02	)		(0.13	)

Net income	$	0.76		$	0.54		$	1.57		$	0.79


AVERAGE SHARES OUTSTANDING:
Basic		53.8			55.8			55.0			55.5
Diluted		55.0			57.1			56.2			56.3

CASH DIVIDENDS DECLARED PER SHARE	$	0.15		$	0.14		$	0.45		$	0.42

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 Nine Months Ended September 30, 2010 (unaudited) and the Year Ended December 31, 2009
(In millions, except share and 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, 2008		84.2	$	0.8	$	805.6	$	538.8		$	(98.8	)	$	(787.8	)	$	458.6

Net income		—		—		—		51.1			—			—			51.1		$	51.1
Dividends, $0.56 per share		—		—		—		(31.3	)		—			—			(31.3	)		—
Foreign currency translation adjustments, net		—		—		—		—			59.5			—			59.5			59.5
Pension and postretirement liability changes, net of tax provision of $6.4		—		—		—		—			8.1			—			8.1			8.1
Stock-based compensation expense		—		—		12.8		—			—			—			12.8			—
Derivatives and other, net of tax provision of $15.4		—		—		—		—			30.4			—			30.4			30.4
Common stock issued		1.4		0.1		9.3		—			—			—			9.4			—
Treasury stock purchases (183,484 shares at $30.55 average price per share)		—		—		—		—			—			(5.6	)		(5.6	)		—
Tax benefits of stock-based compensation		—		—		6.0		—			—			—			6.0			—
Other tax related items		—		—		5.4		—			—			—			5.4			—

Comprehensive income		—		—		—		—			—			—			—		$	149.1


BALANCE AS OF DECEMBER 31, 2009		85.6		0.9		839.1		558.6			(0.8	)		(793.4	)		604.4

Net income		—		—		—		88.5			—			—			88.5		$	88.5
Dividends, $0.45 per share		—		—		—		(24.5	)		—			—			(24.5	)		—
Foreign currency translation adjustments, net		—		—		—		—			17.8			—			17.8			17.8
Stock-based compensation expense		—		—		11.8		—			—			—			11.8			—
Derivatives and other, net of tax provision of $1.7		—		—		—		—			2.6			—			2.6			2.6
Common stock issued		0.5		—		2.5		—			—			—			2.5			—
Treasury stock purchases (3,417,355 shares at $43.97 average price per share)		—		—		—		—			—			(150.3	)		(150.3	)		—
Tax benefits of stock-based compensation		—		—		3.8		—			—			—			3.8			—

Comprehensive income		—		—		—		—			—			—			—		$	108.9


BALANCE AS OF SEPTEMBER 30, 2010		86.1	$	0.9	$	857.2	$	622.6		$	19.6		$	(943.7	)	$	556.6

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

LENNOX INTERNATIONAL INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Nine Months Ended September 30, 2010 and 2009
(Unaudited, in millions)


	2010			2009
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	88.5		$	44.7
Adjustments to reconcile net income to net cash provided by operating activities:
Income from equity method investments		(8.9	)		(5.6	)
Dividends from affiliates		7.4			6.8
Restructuring expenses, net of cash paid		(7.1	)		11.9
Impairment of assets held for sale and equity method investment		—			2.1
Provision for bad debts		3.9			11.0
Unrealized loss (gain) on derivative contracts		1.0			(6.3	)
Return of collateral for hedges		—			37.9
Stock-based compensation expense		11.8			9.0
Depreciation and amortization		39.9			39.2
Deferred income taxes		7.8			12.5
Other items, net		10.0			18.4
Changes in assets and liabilities, net of effects of acquisitions and divestitures:
Accounts and notes receivable		(71.6	)		(18.9	)
Inventories		(102.7	)		21.1
Other current assets		(6.7	)		16.2
Accounts payable		43.8			37.3
Accrued expenses		19.0			(1.9	)
Income taxes payable and receivable		11.1			0.4
Other		(3.6	)		(22.5	)

Net cash provided by operating activities		43.6			213.3

CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from the disposal of property, plant and equipment		0.1			0.9
Purchases of property, plant and equipment		(30.0	)		(33.9	)
Proceeds from sale of businesses		3.5			0.5
Acquisition of business		(6.0	)		—
Return of investment		—			0.7
Restricted cash		(13.1	)		—
Purchases of short-term investments		—			(16.9	)
Proceeds from sales and maturities of short-term investments		—			50.2

Net cash (used in) provided by investing activities		(45.5	)		1.5

CASH FLOWS FROM FINANCING ACTIVITIES:
Short-term borrowings (payments), net		5.7			(1.0	)
Long-term payments		(35.8	)		(1.5	)
Issuance of senior unsecured notes		199.8			—
Payments on revolving credit facility		(31.5	)		(217.3	)
Additional investment in affiliate		(1.0	)		—
Proceeds from stock option exercises		2.5			7.6
Payments of deferred financing costs		(1.8	)		—
Repurchases of common stock		(150.3	)		(3.1	)
Excess tax benefits related to share-based payments		3.7			3.4
Cash dividends paid		(24.4	)		(23.2	)

Net cash used in financing activities		(33.1	)		(235.1	)

DECREASE IN CASH AND CASH EQUIVALENTS		(35.0	)		(20.3	)
EFFECT OF EXCHANGE RATES ON CASH AND CASH EQUIVALENTS		3.1			0.1
CASH AND CASH EQUIVALENTS, beginning of period		124.3			122.1

CASH AND CASH EQUIVALENTS, end of period	$	92.4		$	101.9


Supplementary disclosures of cash flow information:
Cash paid during the year for:
Interest	$	5.8		$	5.2

Income taxes (net of refunds)	$	25.7		$	13.5

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 Sheet as of September 30, 2010, the accompanying unaudited Consolidated Statements of Operations for the three and nine months ended September 30, 2010 and 2009, the accompanying unaudited Consolidated Statement of Stockholders’ Equity for the nine months ended September 30, 2010 and the accompanying unaudited Consolidated Statements of Cash Flows for the nine months ended September 30, 2010 and 2009 should be read in conjunction with our audited consolidated financial statements and footnotes included in our Annual Report on Form 10-K for the year ended December 31, 2009. The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. The accompanying consolidated financial statements contain all material adjustments, consisting principally of normal recurring adjustments, necessary for a fair presentation of our 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 we believe 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 the full year.

Our fiscal year ends on December 31 and our quarters are each comprised of 13 weeks. For convenience, throughout these financial statements, the 13 weeks comprising each quarterly period are denoted by the last day of the respective calendar quarter.

Use of Estimates

The preparation of financial statements requires us to make estimates and assumptions about future events. These estimates and the underlying assumptions affect the amounts of assets and liabilities reported, disclosures about contingent assets and liabilities, and reported amounts of revenues and expenses. Such estimates include the valuation of accounts receivable, inventories, goodwill, intangible assets, and other long-lived assets, contingencies, guarantee obligations, indemnifications, and assumptions used in the calculation of income taxes, pension and postretirement medical benefits, among others. These estimates and assumptions are based on our best estimates and judgment.

We evaluate our estimates and assumptions on an ongoing basis using historical experience and other factors, including the current economic environment. We believe these estimates and assumptions to be reasonable under the circumstances and adjust such estimates and assumptions when facts and circumstances dictate.

Reclassifications

Certain prior year amounts have been reclassified to conform to the current year presentation.

2. Inventories:

Components of inventories are as follows (in millions):


	As of			As of
	September 30,			December 31,
	2010			2009
Finished goods	$	241.3		$	182.3
Work in process		9.0			7.2
Raw materials and repair parts		169.9			132.7

		420.2			322.2
Excess of current cost over last-in, first-out cost		(72.5	)		(72.0	)

Total inventories	$	347.7		$	250.2

3. Goodwill:

The changes in the carrying amount of goodwill for the nine months ended September 30, 2010, in total and by segment, are as follows (in millions):


	Segment
	Residential		Commercial
	Heating &		Heating &			Service
	Cooling		Cooling			Experts			Refrigeration		Total
Balance as of January 1, 2010:
Goodwill	$	33.7	$	31.3		$	314.9		$	85.5	$	465.4
Accumulated impairment loss		—		—			(208.0	)		—		(208.0	)

		33.7		31.3			106.9			85.5		257.4


Changes (1)		—		(0.7	)		7.3			3.6		10.2


Balance as of September 30, 2010:
Goodwill		33.7		30.6			322.2			89.1		475.6
Accumulated impairment loss		—		—			(208.0	)		—		(208.0	)

	$	33.7	$	30.6		$	114.2		$	89.1	$	267.6


(1)		During the second quarter of 2010, our Service Experts segment acquired a company which resulted in additional goodwill of $3.5 million. Adjustments to the purchase price in the third quarter resulted in additional goodwill of $0.6 million. The other changes are related to fluctuations in foreign currency translation rates.

4. Derivatives:

Cash Flow Hedges

We include (gains) losses in accumulated other comprehensive income (“AOCI”) in connection with our commodity cash flow hedges. The (gains) losses related to commodity price hedges are expected to be reclassified into earnings within the next 18 months based on the prices of the commodities at settlement date. Assuming that commodity prices remain constant, $5.1 million of derivative gains are expected to be reclassified into earnings within the next 12 months. Commodity futures contracts that are designated as cash flow hedges and are in place as of September 30, 2010 are scheduled to mature through February 2012.

On June 12, 2009, we entered into a $100 million pay-fixed, receive-variable interest rate swap with a financial institution at a fixed interest rate of 2.66%. The variable portion of the interest rate swap is tied to the 1-Month LIBOR (the benchmark interest rate). The interest rates under both the interest rate swap and the underlying debt are reset, the swap is settled with the counterparty, and interest is paid, on a monthly basis. The interest rate swap expires October 12, 2012. We account for the interest rate swap as a cash flow hedge. The (gains) losses related to our interest rate swap are expected to be reclassified into earnings within the next 25 months based on the term of the swap. Assuming that the benchmark interest rate remains constant, $1.4 million of derivative losses are expected to be reclassified into earnings within the next 12 months.

We recorded the following amounts related to our cash flow hedges (in millions):


	As of			As of
	September 30,			December 31,
	2010			2009
Commodity Price Hedges:
Gains included in AOCI, net of tax	$	(5.6	)	$	(7.2	)
Provision for income taxes		3.2			4.1
Interest Rate Swap:
Losses included in AOCI, net of tax	$	2.7		$	1.4
Benefit from income taxes		(1.5	)		(0.8	)

We had the following outstanding commodity futures contracts designated as cash flow hedges (in millions):


	As of		As of
	September 30,		December 31,
	2010		2009
	(pounds)		(pounds)
Copper		16.0		12.6

Derivatives not Designated as Cash Flow Hedges

For commodity derivatives not designated as cash flow hedges, we follow the same hedging strategy as for derivatives designated as cash flow hedges. We elect not to designate these derivatives as cash flow hedges at the inception of the arrangement. We had the following outstanding commodity futures contracts not designated as cash flow hedges (in millions):


	As of		As of
	September 30,		December 31,
	2010		2009
	(pounds)		(pounds)
Copper		1.3		0.9
Aluminum		1.3		0.9

During the third quarter of 2010, we entered into foreign currency forward contracts with notional amounts of $62.5 million and £6.5 million, of which $35.0 million and £4.0 million were outstanding at September 30, 2010.

Information About the Location and Amounts of Derivative Instruments

For information on the location and amounts of derivative fair values in the Consolidated Balance Sheets and derivative gains and losses in the Consolidated Statements of Operations, see the tabular information presented below (in millions):

Fair Values of Derivative Instruments


	As of September 30,			As of December 31,
	2010			2009
Asset Derivatives	Balance Sheet Location	Fair Value		Balance Sheet Location	Fair Value
Derivatives designated as hedging instruments:
Commodity futures contracts	Other Assets (Current)	$	8.3	Other Assets (Current)	$	11.1
Commodity futures contracts	Other Assets (Non-current)		0.8	Other Assets (Non-current)		0.3

			9.1			11.4

Derivatives not designated as hedging instruments:
Commodity futures contracts	Other Assets (Current)		0.8	Other Assets (Current)		1.1
Commodity futures contracts	Other Assets (Non-current)		0.1	Other Assets (Non-current)		—
Foreign currency forward contracts	Other Assets (Current)		0.2	Other Assets (Current)		—

			1.1			1.1



Total Asset for Derivatives		$	10.2		$	12.5


Liability Derivatives
Derivatives designated as hedging instruments:
Interest rate swap	Accrued Expenses	$	2.2	Accrued Expenses	$	2.0
Interest rate swap	Other Liabilities		2.1	Other Liabilities		0.3

			4.3			2.3

Derivatives not designated as hedging instruments:
Foreign currency forward contracts	Accrued Expenses		0.8	Accrued Expenses		—



Total Liability for Derivatives		$	5.1		$	2.3

The Effect of Derivative Instruments on the Consolidated Statements of Operations


	Location of Gain or (Loss) Reclassified	Amount of Gain or (Loss) Reclassified
Derivatives in Cash Flow	from AOCI into Income	from AOCI into Income
Hedging Relationships	(Effective Portion)	(Effective Portion)
		For the Three Months					For the Nine Months
		Ended September 30,					Ended September 30,
		2010			2009		2010			2009
Commodity futures contracts	Cost of Goods Sold	$	(1.4	)	$	2.8	$	(9.0	)	$	19.7
Interest rate swap	Interest Expense, net		0.6			0.6		1.8			0.7

		$	(0.8	)	$	3.4	$	(7.2	)	$	20.4

Location of (Gain) or Loss Recognized

Amount of (Gain) or Loss Recognized

Derivatives in Cash Flow

in Income on Derivatives

in Income on Derivatives (Ineffective

Hedging Relationships

(Ineffective Portion)

Portion)

For the Three Months

For the Nine Months

Ended September 30,

2010

2009

2010

2009

Commodity futures contracts

Losses (Gains) and Other Expenses, net

(0.3

)

—

(0.4

)

(0.1

)


	Location of (Gain) or Loss
Derivatives Not Designated	Recognized in Income on	Amount of (Gain) or Loss Recognized in Income on
as Hedging Instruments	Derivatives	Derivatives
		For the Three Months						For the Nine Months
		Ended September 30,						Ended September 30,
		2010			2009			2010			2009
Commodity futures contracts	Losses (Gains) and Other Expenses, net	$	(1.3	)	$	(0.8	)	$	(0.7	)	$	(2.6	)
Foreign currency forward contracts	Losses (Gains) and Other Expenses, net		0.7			0.9			(0.1	)		3.2

		$	(0.6	)	$	0.1		$	(0.8	)	$	0.6

For more information on the fair value of these derivative instruments, see Note 14.

5. Income Taxes:

As of September 30, 2010, we had approximately $1.4 million in total gross unrecognized tax benefits. Of this amount, $0.9 million (net of federal benefit on state issues), if recognized, would be recorded through the Consolidated Statement of Operations. As of September 30, 2010, we had recognized $0.1 million (net of federal tax benefits) in interest and penalties in income tax expense.

We are currently under examination for our U.S. federal income taxes for 2010, 2009 and 2008 and are subject to examination by numerous other taxing authorities in the U.S. and in jurisdictions such as Australia, Belgium, France, Canada, and Germany. We are generally no longer subject to U.S. federal, state and local, or non-U.S. income tax examinations by taxing authorities for years before 2002.

Since January 1, 2010, numerous states including Colorado, Maine, Utah, the District of Columbia and California have enacted legislation effective for tax years beginning on or after January 1, 2010, including requirements for combined reporting and changes to apportionment methods.

6. Commitments and Contingencies:

We are subject to contingencies that arise in the normal course of business, including product warranties and other product related contingencies, pending litigation, environmental matters and other guarantees or claims.

We use a combination of third-party insurance and self-insurance plans (large deductible or captive) to provide protection against claims relating to contingencies such as workers’ compensation, general liability, product liability, property damage, aviation liability, directors’ and officers’ liability, auto liability, physical damage and other exposures. Self-insurance expense and liabilities are actuarially determined based on our

historical claims information, as well as industry factors and trends and because we have a captive insurance company, we are required to maintain specified levels of liquid assets from which we must pay claims. The majority of our self-insured risks (excluding auto liability and physical damage) will be paid over an extended period of time. There have been no material changes since our latest fiscal year-end. We also maintain third-party insurance coverage for risks not retained within our large deductible or captive insurance plans. The self-insurance liabilities recorded in Accrued Expenses in the accompanying Consolidated Balance Sheets were $63.3 million and $60.4 million as of September 30, 2010 and December 31, 2009, respectively.

Product Warranties and Product Related Contingencies

Total liabilities for estimated warranty are included in the following captions on the accompanying Consolidated Balance Sheets (in millions):


	As of		As of
	September 30,		December 31,
	2010		2009
Accrued Expenses	$	31.5	$	31.5
Other Liabilities		44.6		50.0

	$	76.1	$	81.5

The changes in the total warranty liabilities for the first nine months of 2010 were as follows (in millions):


Total warranty liability as of December 31, 2009	$	81.5
Payments made in 2010		(21.2	)
Changes resulting from issuance of new warranties		20.9
Changes in estimates associated with pre-existing liabilities		(5.3	)
Changes in foreign currency exchange rates		0.2

Total warranty liability as of September 30, 2010	$	76.1


	As of		As of
	September 30,		December 31,
	2010		2009
Accrued product quality issue (not covered under warranty)	$	17.5	$	21.6

At the end of each accounting period, we evaluate our warranty liabilities and during the second quarter of each year, we perform a complete reevaluation of our heating, ventilation and air conditioning (“HVAC”) warranty liabilities. As a result of our annual evaluation, we have recorded a reduction of $6.3 million in warranty liabilities that is the principal amount contained within the changes in estimates associated with pre-existing liabilities.

We incur the risk of liability claims for the installation and service of heating and air conditioning products, and we maintain liabilities for those claims that we self-insure. We are involved in various claims and lawsuits related to our products. Our product liability insurance policies have limits that, if exceeded, may result in substantial costs that could have an adverse effect on our results of operations. In addition, warranty claims are not covered by our product liability insurance and certain product liability claims may also not be covered by our product liability insurance. There have been no material changes in the circumstances since our latest fiscal year-end.

We have identified a product quality issue in a heating and cooling product line produced in 2006 and 2007 that we believe results from a vendor-supplied materials quality issue. We have recorded an expense of $24.6 million in 2009 for the portion of the issue that is probable and can be reasonably estimated. There were no additional charges recorded in 2010. We may incur additional charges in the future as more information becomes available. The expense for this product quality issue, and the related liability, is not included in the tables related to our estimated warranty liabilities. The expense related to this product quality issue was classified in Cost of Goods Sold in the Consolidated Statements of Operations and the related liability is included in Accrued Expenses in the accompanying Consolidated Balance Sheets.

We estimate the costs to settle pending litigation based on experience involving similar claims and specific facts known. We do not believe that any current or pending or threatened litigation will have a material adverse effect on our financial position. Litigation and arbitration, however, involve uncertainties and it is possible that the eventual outcome of litigation could adversely affect our results of operations for a particular period. We are the defendant in a class action lawsuit related to certain hearth products we produced and sold that claims such products are hazardous and that consumers were not adequately warned. On August 23, 2010, the Company and the plaintiffs entered into a binding Memorandum of Understanding (“MOU”) and have reached tentative terms for settlement of the case. At the parties’ request, the court has stayed the litigation. If the terms of the MOU are fulfilled, as is expected, the parties will file a motion for preliminary approval of the settlement with the court by December 1, 2010. Total charges related to this matter recorded in the first nine months of 2010 were $8.2 million. We recorded charges totaling $2.6 million related to this matter during the third quarter of 2010 and we may incur additional charges in the future. These charges are included in Selling, General and Administrative Expenses and Losses (Gains) and Other Expenses, Net in the accompanying Consolidated Statement of Operations.

Our obligations under the Lake Park Lease are secured by a pledge of our interest in the leased property and are also guaranteed by us and certain of our subsidiaries. The Lake Park Lease, as amended, contains restrictive covenants that are consistent with those of our domestic revolving credit facility. We are in compliance with these financial covenants as of September 30, 2010.

7. Lines of Credit and Financing Arrangements:

Long –Term Debt and Lines of Credit

The following tables summarize our outstanding debt obligations and the classification in the accompanying Consolidated Balance Sheets (in millions):


Description of Obligations	Short-Term		Current		Long-Term
As of September 30, 2010	Debt		Maturities		Maturities		Total
Domestic revolving credit facility	$	—	$	—	$	145.0	$	145.0
Senior unsecured notes		—		—		200.0		200.0
Capital lease obligations		—		0.8		17.1		17.9
Foreign obligations		8.2		—		—		8.2

Total debt	$	8.2	$	0.8	$	362.1	$	371.1


Description of Obligations	Short-Term		Current		Long-Term
As of December 31, 2009	Debt		Maturities		Maturities		Total
Domestic promissory notes⁽¹⁾	$	—	$	35.0	$	—	$	35.0
Domestic revolving credit facility		—		—		176.5		176.5
Capital lease obligations		—		0.4		17.1		17.5
Foreign obligations		2.2		0.1		0.2		2.5

Total debt	$	2.2	$	35.5	$	193.8	$	231.5


(1)		The domestic promissory notes that were due to mature on June 1, 2010 were prepaid during the first quarter of 2010.

As of September 30, 2010, we had outstanding borrowings of $145.0 million under the $650 million domestic revolving credit facility and $69.5 million was committed to standby letters of credit. All of the remaining $435.5 million was available for future borrowings after consideration of covenant limitations. The facility matures in October 2012. As of September 30, 2010, we were in compliance with all covenant requirements.

We have additional borrowing capacity through several of our foreign subsidiaries used primarily to finance seasonal borrowing needs. We had $8.2 million and $2.5 million of obligations outstanding through our foreign subsidiaries as of September 30, 2010 and December 31, 2009, respectively. Available borrowing capacity at September 30, 2010 and December 31, 2009, under foreign facilities was $10.0 million and $12.6 million, respectively.

The domestic revolving credit facility includes a subfacility for swingline loans of up to $50 million and provides for the issuance of letters of credit for the full amount of the credit facility. Our weighted average borrowing rate on the facility was 0.96% and 0.84% as of September 30, 2010 and December 31, 2009, respectively.

Our domestic revolving credit facility contains financial covenants relating to leverage and interest coverage. Other covenants contained in the domestic revolving credit facility restrict, among other things, mergers, asset dispositions, guarantees, debt, liens, acquisitions, investments, affiliate transactions and our ability to make restricted payments. The financial covenants require us to maintain defined levels of Consolidated Indebtedness to Adjusted EBITDA Ratio and a Cash Flow (defined as EBITDA minus capital expenditures) to Net Interest Expense Ratio. The required ratios under our domestic revolving credit facility as of September 30, 2010 are detailed below:


Consolidated Indebtedness to Adjusted EBITDA Ratio no greater than			3.5 : 1.0
Cash Flow to Net Interest Expense Ratio no less than			3.0 : 1.0

Our domestic revolving credit facility contains customary events of default. These events of default include nonpayment of principal or interest, breach of covenants or other restrictions or requirements, default on certain other indebtedness or receivables securitizations (cross default), and bankruptcy. A cross default under our revolving credit facility could occur if:

	•		we fail to pay any principal or interest when due on any other indebtedness or receivables securitization of at least $40.0 million; or

	•		we are in default in the performance of, or compliance with any term of any other indebtedness or receivables securitization in an aggregate principal amount of at least $40.0 million, or any other condition exists which would give the holders the right to declare such indebtedness due and payable prior to its stated maturity.

Each of our major debt agreements contains provisions by which a default under one agreement causes a default in the others (a cross default). If a cross default under the revolving credit facility, our senior unsecured notes, or our revolving period asset securitization program were to occur, it could have a wider impact on our liquidity than might otherwise occur from a default of a single debt instrument or lease commitment.

If any event of default occurs and is continuing, lenders with a majority of the aggregate commitments may require the administrative agent to terminate our right to borrow under our domestic revolving credit facility and accelerate amounts due under our domestic revolving credit facility (except for a bankruptcy event of default, in which case such amounts will automatically become due and payable and the lenders’ commitments will automatically terminate).

On May 6, 2010, we issued $200.0 million of senior unsecured notes due May 15, 2017 bearing fixed interest at 4.90% as a result of a public offering of securities. We received proceeds of $199.8 million from the offering

for a yield of 4.91%. We also paid and capitalized $1.9 million of debt issue costs related to the issuance. We will pay interest on the notes semiannually on May 15 and November 15.

The notes are guaranteed, on a senior unsecured basis, by each of our domestic subsidiaries that guarantee payment by us of any indebtedness under our domestic revolving credit facility. The indenture governing the notes contains covenants that, among other things, limit our ability and the ability of the subsidiary guarantors to: create or incur certain liens; enter into certain sale and leaseback transactions; enter into certain mergers, consolidations and transfers of substantially all of our assets; and transfer certain properties. The indenture also contains a cross default provision which is triggered if we default on other debt of at least $75 million in principal which is then accelerated, and such acceleration is not rescinded within 30 days of the notice date.

During the first quarter of 2010, our captive insurance subsidiary entered into an agreement in which cash was placed into a trust for the benefit of a third-party insurance provider. The purpose of the trust is to pay Workers Compensation claims for policy years 2003 – 2009 until the liabilities are fully extinguished. These policies were written by the third-party insurance provider, and then reinsured by our captive insurance subsidiary. This transaction was classified as restricted cash on the accompanying Consolidated Balance Sheets. The balance at September 30, 2010 was $13.1 million.

Asset Securitization

Under a revolving period asset securitization arrangement (“ASA”), we are eligible to sell beneficial interests in a portion of our trade accounts receivable to participating financial institutions for cash.

The ASA contains certain restrictive covenants relating to the quality of our accounts receivable and cross-default provisions with our Credit Agreement. The administrative agent under the ASA is also a participant in our Credit Agreement. The administrative agent has an investment grade credit rating. We continue to evaluate its creditworthiness and have no reason to believe it will not perform under the ASA. As of September 30, 2010, we were in compliance with all covenant requirements.

The ASA provides for a maximum securitization amount of $100.0 million or 100% of the net pool balance as defined by the ASA. However, eligibility for securitization is limited based on the amount and quality of the qualifying accounts receivable and is calculated monthly. The beneficial interest sold cannot exceed the maximum amount even if our qualifying accounts receivable is greater than the maximum amount at any point in time. The eligible amounts available and beneficial interests sold were as follows (in millions):


	As of		As of
	September 30,		December 31,
	2010		2009
Eligible amount available under the ASA on qualified accounts receivable	$	93.9	$	72.5
Beneficial interest sold		—		—

Remaining amount available	$	93.9	$	72.5

Under the ASA, we pay certain discount fees to use the program and have the facility available to us. These fees relate to both the used and unused portions of the securitization. The used fee is based on the beneficial interest sold and calculated on the average floating commercial paper rate determined by the purchaser of the beneficial interest, plus a program fee of 1.15%. The rate was 1.45% and 1.38% as of September 30, 2010 and December 31, 2009, respectively. The unused fee is based on 102% of the maximum available amount less the beneficial interest sold and calculated at 0.5% fixed rate throughout the term of the agreement. We recorded these fees in Selling, General and Administrative Expenses in the accompanying Consolidated Statements of Operations. The amounts recorded were as follows (in millions):


	For the Three Months Ended				For the Nine Months Ended
	September 30,				September 30,
	2010		2009		2010		2009
Discount fees	$	0.1	$	0.1	$	0.4	$	0.6

8. Pension and Postretirement Benefit Plans:

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


	For the Three Months Ended September 30,
	2010			2009			2010			2009
	Pension Benefits						Other Benefits
Service cost	$	1.3		$	1.4		$	0.2		$	0.2
Interest cost		4.4			4.4			0.2			0.2
Expected return on plan assets		(4.9	)		(4.1	)		—			—
Amortization of prior service cost		0.1			0.2			(0.5	)		(0.5	)
Amortization of net loss		2.1			2.2			0.3			0.3
Settlements or curtailments		—			0.5			—			—

Total net periodic pension cost	$	3.0		$	4.6		$	0.2		$	0.2


	For the Nine Months Ended September 30,
	2010			2009			2010			2009
	Pension Benefits						Other Benefits
Service cost	$	3.7		$	4.2		$	0.4		$	0.5
Interest cost		13.2			13.1			0.6			0.7
Expected return on plan assets		(14.5	)		(12.2	)		—			—
Amortization of prior service cost		0.4			0.5			(1.4	)		(1.5	)
Amortization of net loss		6.4			6.8			0.9			0.9
Settlements or curtailments		—			0.8			—			—

Total net periodic pension cost	$	9.2		$	13.2		$	0.5		$	0.6

The fair values of our pension plan assets, by asset category, are as follows:


	Fair Value Measurements as of
	September 30, 2010
	Quoted Prices in		Significant
	Active Markets		Other		Significant
	for		Observable		Unobservable
	Identical Assets		Inputs		Inputs
	(Level 1)		(Level 2)		(Level 3)		Total
Assets Category:
Cash and cash equivalents	$	0.8	$	—	$	—	$	0.8
Commingled pools / Collective Trusts
U.S. equity (1)		—		31.7		—		31.7
International equity (2)		—		48.4		—		48.4
Fixed income (3)		—		78.7		—		78.7
Mutual funds
U.S. equity (4)		37.8		—		—		37.8
International equity (4)		6.0		—		—		6.0
Fixed income (5)		6.1		—		—		6.1
Balanced pension trust (6)
U.S. equity		—		2.0		—		2.0
International equity		—		7.0		—		7.0
Bonds		—		5.1		—		5.1
Pension fund
U.S. equity (7)		—		1.0		—		1.0
International equity (7)		—		5.1		—		5.1
Fixed income (8)		—		4.1		—		4.1
Money market instruments (9)		—		0.8		—		0.8
Guaranteed investment contracts		—		1.8		—		1.8

Total	$	50.7	$	185.7	$	—	$	236.4

Additional information about assets measured at Net Asset Value per share (in millions):

As of September 30, 2010

Redemption

Frequency

(if currently

Redemption

Fair Value

eligible)

Notice Period

Assets Category:

Commingled pools / Collective Trusts

U.S. equity (1)

31.7

n/a

International equity (2)

48.4

Monthly

10 – 15 days

Fixed income (3)

78.7

Quarterly

15 days

Mutual funds

U.S. equity (4)

37.8

n/a

International equity (4)

6.0

n/a

Fixed income (5)

6.1

n/a

Balanced pension trust (6)

U.S. equity

2.0

Daily

5 days

International equity

7.0

Daily

5 days

Bonds

5.1

Daily

5 days

Pension fund

U.S. equity (7)

1.0

Daily

7 days

International equity (7)

5.1

Daily

7 days

Fixed income (8)

4.1

Daily

7 days

Money market instruments (9)

0.8

Daily

7 days

Total

233.8


(1)		This category includes investments primarily in U.S. equity securities that include large, mid and small capitalization companies.

(2)		This category includes investments primarily in Non-U.S. equity securities that include large, mid and small capitalization companies in large developed markets as well as emerging markets equities.

(3)		This category includes investments in U.S. investment grade and high yield fixed income securities, non-U.S. fixed income securities and emerging markets fixed income securities.

(4)		These funds seek capital appreciation and generally invest in common stocks of U.S. and Non-U.S. issuers. They may invest in growth stocks or value stocks.

(5)		This fund seeks to provide inflation protection. It currently invests at least 80% of its assets in inflation-indexed bonds issued by the U.S. government. It may invest in bonds of any maturity, though the fund typically maintains a dollar-weighted average maturity of 7 to 20 years.

(6)		The investment objectives of the fund are to provide long-term capital growth and income by investing primarily in a well-diversified, balanced portfolio of Canadian common stocks, bonds and money market securities. The fund also holds a portion of its assets in U.S. and non-U.S. equities.

(7)		This category includes investments in U.S. and Non-U.S. equity securities and aims to provide returns consistent with the markets in which it invests and provide broad exposure to countries around the world.

(8)		This category includes investments in United Kingdom (U.K.) government index-linked securities (index-linked gilts) that have maturity periods of 5 years or longer and investment grade corporate bonds denominated in sterling.

(9)		This fund invests in U.K. money market instruments and includes cash, bank deposits and short-term fixed interest investments.

9. Stock-Based Compensation:

Our 2010 Incentive Plan, as amended and restated provides for various long-term incentive awards, which include stock options, performance share units, restricted stock units and stock appreciation rights. Net stock-based compensation expense of $4.1 million and $3.8 million was recognized for the third quarters of 2010 and 2009, respectively. Net stock-based compensation expense of $11.8 million and $9.0 million was recognized for the first nine months of 2010 and 2009, respectively. These expenses are included in Selling, General and Administrative Expenses in the accompanying Consolidated Statements of Operations.

10. Restructuring Charges:

As part of our strategic priorities of manufacturing and sourcing excellence and expense reduction, we have initiated various manufacturing rationalization actions designed to lower our cost structure. We also continue to

reorganize our North American distribution network in order to better serve our customers’ needs by deploying parts and equipment inventory closer to them. We have also initiated a number of activities that rationalize and reorganize various support and administrative functions to reduce ongoing selling and administrative expenses.

Information on Total Restructuring Charges and Related Reserves

Restructuring charges incurred include the following amounts (in millions):


	For the Three Months					For the Nine Months
	Ended September 30,					Ended September 30,
	2010		2009			2010		2009
Manufacturing rationalizations	$	4.0	$	9.7		$	11.7	$	18.7
Reorganization of distribution network		—		(0.5	)		0.1		(0.3	)
Reorganizations of corporate and business unit selling and administrative functions		0.7		2.3			3.2		9.0

Total	$	4.7	$	11.5		$	15.0	$	27.4

The components of the $4.7 million of restructuring charges recorded in the third quarter of 2010 are discussed in greater detail in later sections of this footnote.

In the third quarter of 2009, restructuring charges for manufacturing rationalizations included $7.5 million related to the consolidation of certain Commercial Heating & Cooling manufacturing operations located in Mions, France into our existing manufacturing operations in Longvic, France. Manufacturing rationalizations recorded in the third quarter of 2009 also included $1.5 million related to the consolidation of Residential Heating & Cooling manufacturing operations from Blackville, South Carolina into our operations in Orangeburg, South Carolina and Saltillo, Mexico and $0.2 million of charges related to the transition of production of certain Residential Heating & Cooling products from our Marshalltown, Iowa manufacturing facility to our manufacturing operations in Saltillo, Mexico.

In the third quarter of 2009, restructuring charges related to reorganizations of corporate and business unit selling and administrative functions included $1.2 million related to the relocation of Residential Heating & Cooling factory-built fireplace headquarters from Orange, California to Nashville, Tennessee and the consolidation of customer and technical service departments into our existing hearth products plant in Union City, Tennessee. Reorganization charges recorded in the third quarter of 2009 also included $0.2 million related to the reorganization of our Commercial Heating & Cooling business unit’s selling and administrative functions in Northern Europe and $0.3 million related to the reorganization of the management structure of our Refrigeration administrative and support functions across the globe. Restructuring charges recorded in the third quarter of 2009 also included $0.6 million related to the centralization of certain Service Experts administrative and support functions.

Restructuring reserves are included in Accrued Expenses in the accompanying Consolidated Balance Sheets. The table below details activity within the restructuring reserves for the first three quarters of 2010 (in millions):


	Balance as of		Charged					Non-Cash			Balance as of
	December 31,		to		Cash			Utilization			September 30,
Description of Reserves	2009		Earnings		Utilization			and Other			2010
Severance and related expense	$	21.1	$	8.9	$	(18.7	)	$	(1.4	)	$	9.9
Asset write-offs and accelerated depreciation		—		2.8					(2.8	)		—
Equipment moves		—		0.7		(0.7	)		—			—
Lease termination		0.3		0.2		(0.3	)		—			0.2
Other		0.8		2.4		(2.4	)		—			0.8

Total restructuring reserves	$	22.2	$	15.0	$	(22.1	)	$	(4.2	)	$	10.9

Manufacturing Rationalization Activities

Information regarding the restructuring charges related to manufacturing rationalizations is as follows (in millions):


					Total
	Charges		Charges		Charges
	Incurred in		Incurred to		Expected to
	2010		Date		be Incurred
Severance and related expense	$	6.6	$	31.8	$	31.8
Asset write-offs and accelerated depreciation		2.2		10.7		10.9
Equipment moves		0.5		2.6		3.5
Other		2.4		6.2		8.4

Total	$	11.7	$	51.3	$	54.6

Restructuring expense for manufacturing rationalization activities related to the following:

	•		In the third quarter of 2010, we began to exit contract coil manufacturing in our Refrigeration operations in Milperra, Australia. Total restructuring charges related to this action recorded in the first nine months and third quarter of 2010 were $3.4 million, which was composed of severance of $2.8 million and asset write-offs of $0.6 million. This action is expected to be completed during the fourth quarter of 2010.

	•		In the first quarter of 2010, we began to exit OEM coil manufacturing in our Refrigeration operations in Milperra, Australia. Total restructuring charges related to this action recorded in the first nine months of 2010 were $5.3 million, which was composed of severance of $4.0 million, asset write-offs of $1.1 million and other charges of $0.2 million. During the third quarter of 2010 we recorded $0.1 million of restructuring charges related to this action. This action was substantially completed during the first nine months of 2010.

	•		In the fourth quarter of 2009, we began the consolidation of certain Refrigeration manufacturing operations located in Parets, Spain into our existing operations in Genas, France. During the first nine months of 2010 we recorded restructuring charges totaling $1.5 million related to this action, which was composed of $0.2 of equipment moves, $0.2 million of severance, and $1.1 million of other charges. During the third quarter of 2010 we recorded $0.1 million of restructuring charges related to this action. This action was substantially completed during the first nine months of 2010.

	•		In the first quarter of 2009, we began the consolidation of Residential Heating & Cooling manufacturing operations from Blackville, South Carolina into our operations in Orangeburg, South Carolina and Saltillo, Mexico. Total restructuring charges recorded related to this action in the first nine months of 2010 were $1.3 million, primarily composed of equipment move costs, accelerated depreciation, severance and other plant closure costs. During the third quarter of 2010 we recorded $0.3 million of restructuring charges related to this action. The consolidation is expected to be completed during the third quarter of 2011.

	•		Additionally, during the first nine months of 2010, we reversed $0.3 million of restructuring severance charges related to the consolidation of certain Commercial Heating & Cooling manufacturing operations located in Mions, France into our existing manufacturing operations in Longvic, France to adjust estimated amounts to actual.

Reorganization of Distribution Network

In the fourth quarter of 2008, we commenced the transition of activities currently performed at our North American Parts Center in Des Moines, Iowa to other locations, including our North American Distribution Center in Marshalltown, Iowa. We incurred $0.1 million of restructuring charges, which was composed of severance, during the first nine months of 2010 related to this transition. To date, we have incurred $3.2 million, which was composed primarily of severance, and we expect the total cost to be $3.6 million related to this restructuring activity. The total cost of this restructuring activity will be composed of severance of $2.6 million, equipment moving costs of $0.3 million and other costs of $0.7 million. The transition is expected to be completed in the fourth quarter of 2011.

Reorganizations of Corporate and Business Unit Selling and Administrative Functions

Information regarding the restructuring charges related to the reorganization of corporate and business unit selling and administrative functions is as follows (in millions):


					Total
	Charges		Charges		Charges
	Incurred in		Incurred to		Expected to
	2010		Date		be Incurred
Employee relocation	$	1.2	$	1.6	$	1.7
Severance and related expense		1.0		21.5		21.6
Asset write-offs and accelerated depreciation		0.5		1.4		1.4
Lease termination		0.3		2.0		2.4
Other		0.2		0.8		0.9

Total	$	3.2	$	27.3	$	28.0

We incurred costs related to the following restructuring actions in our selling and administrative activities:

•

In the third quarter of 2009, we initiated the relocation of Residential Heating & Cooling factory-built fireplace headquarters from Orange, California to Nashville, Tennessee and the consolidation of customer and technical service departments into our existing hearth products plant in Union City, Tennessee. As a result of this action, we recorded restructuring charges of $1.9 million during the first nine months of 2010, which primarily consisted of employee relocation and lease termination costs. During the third quarter of 2010 we recorded $0.3 million of restructuring charges related to this action. Total anticipated restructuring charges related to this action are expected to total $4.1 million and consist principally of severance, recruiting, relocation costs and lease termination costs. We substantially completed this action during the first nine months of 2010.

	•		During the first quarter of 2009, we reorganized the management structure of our Refrigeration administrative and support functions across the globe. As a result of this action, we recorded restructuring severance charges of $0.5 million during the first nine months of 2010. During the third quarter of 2010 we recorded no restructuring charges related to this action. The action was completed in the third quarter of 2010.

	•		During the second quarter of 2010, we reorganized certain administrative operations of an acquired company within our Service Experts segment. In connection with this action, we recorded asset write-offs totaling $0.5 million during the first nine months of 2010. During the third quarter of 2010 we recorded $ 0.3 million of restructuring charges related to this action. Total anticipated restructuring costs associated with this action are $0.9 million and will consist of primarily of asset write-offs and lease termination costs. This action is expected to be completed by the end of the fourth quarter of 2010.

	•		In the third quarter of 2008, our Commercial Heating & Cooling business unit began to reorganize its selling and administrative functions in Northern Europe through a series of restructuring actions. Total restructuring charges recorded in the first nine months of 2010 related to this action were $0.3 million.

11. Discontinued Operations:

Service Experts Discontinued Operations

A summary of net trade sales and operational losses classified as Discontinued Operations in the accompanying Consolidated Statements of Operations are detailed below (in millions):


	For the Three Months Ended				For the Nine Months Ended
	September 30,				September 30,
	2010		2009		2010		2009
Net trade sales	$	—	$	7.6	$	0.2	$	20.2
Operational loss from discontinued operations⁽¹⁾		0.1		2.9		0.9		10.2


(1)		Included in the operational loss from discontinued operations are losses on the disposal of the assets and liabilities of the service centers sold of $0.3 million for the nine months ended September 30, 2010, and gains on disposal of the assets and liabilities of service centers sold of $1.1 million for the nine months ended September 30, 2009. Included in operational loss from discontinued operations for the nine months ended September 30, 2009, was a charge of $6.2 million for litigation related to the sale of a service center in 2004. Included in operational loss from discontinued operations for the three and nine months ended September 30, 2009, was an impairment charge of $2.1 million from discontinued operations during the third quarter of 2009 that related to service centers where the estimated selling price less cost to sell off the assets was below the net book value of those assets.

The assets and liabilities of the discontinued operations are presented as follows in the accompanying Consolidated Balance Sheets (in millions):


	As of		As of
	September 30,		December 31,
	2010		2009
Assets of discontinued operations:
Other assets	$	—	$	3.6
Liabilities of discontinued operations:
Accrued expenses	$	0.5	$	1.3

12. Earnings Per Share:

Basic earnings per share are computed by dividing net income by the weighted-average number of common

shares outstanding during the period. Diluted earnings per share are computed by dividing net income by the sum of the weighted-average number of shares and the number of equivalent shares assumed outstanding, if dilutive, under our stock-based compensation plans.

The computations of basic and diluted earnings per share for Income from Continuing Operations were as follows (in millions, except per share data):


	For the				For the
	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2010		2009		2010		2009
Net income	$	41.8	$	31.0	$	88.5	$	44.7
Add: Loss from discontinued operations		0.1		2.7		0.8		7.2

Income from continuing operations	$	41.9	$	33.7	$	89.3	$	51.9


Weighted-average shares outstanding — basic		53.8		55.8		55.0		55.5
Effect of diluted securities attributable to stock-based payments		1.2		1.3		1.2		0.8

Weighted-average shares outstanding — diluted		55.0		57.1		56.2		56.3


Earnings per share from continuing operations:
Basic	$	0.78	$	0.60	$	1.62	$	0.94
Diluted	$	0.76	$	0.59	$	1.59	$	0.92

Stock appreciation rights were outstanding, but not included in the diluted earnings per share calculation because the assumed exercise of such rights would have been anti-dilutive. The details are as follows:


	For the Nine Months Ended
	September 30,
	2010		2009
Number of shares		520,817		609,286
Price ranges per share	$	36.94	$	34.52 – 37.11

13. Reportable Business Segments:

We operate in four reportable business segments of the heating, ventilation, air conditioning and refrigeration (“HVACR”) industry. Our segments are organized primarily by the nature of the products and services provided. The table below details the nature of the operations of each reportable segment:


Segment	Product or Services	Markets Served	Geographic Areas
Residential Heating	Heating	Residential Replacement	United States
& Cooling	Air Conditioning	Residential New	Canada
	Hearth Products	Construction

Commercial Heating	Rooftop Products	Light Commercial	United States
& Cooling	Chillers		Canada
	Air Handlers		Europe

Service Experts	Equipment Sales	Residential	United States
	Installation	Light Commercial	Canada
	Maintenance Repair

Refrigeration	Unit Coolers	Light Commercial	United States
	Condensing Units	Food Preservation and	Canada
	Other Commercial	Non-Food/Industrial	Europe
	Refrigeration Products		Asia Pacific South America

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 from continuing operations before income taxes below.

We use segment profit or loss as the primary measure of profitability to evaluate operating performance and to allocate capital resources.

Our 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. We 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 (loss) by business segment, along with a reconciliation of segment profit (loss) to Income from Continuing Operations Before Income Taxes are shown below (in millions):


	For the Three Months						For the Nine Months
	Ended September 30,						Ended September 30,
	2010			2009			2010			2009
Net Sales
Residential Heating & Cooling	$	370.9		$	347.1		$	1,068.5		$	972.7
Commercial Heating & Cooling		176.3			154.4			471.7			448.6
Service Experts		150.9			137.3			445.6			389.0
Refrigeration		140.6			133.6			411.8			369.4
Eliminations (1)		(20.5	)		(22.9	)		(63.2	)		(65.7	)

	$	818.2		$	749.5		$	2,334.4		$	2,114.0


Segment Profit (Loss)(2)
Residential Heating & Cooling	$	39.0		$	39.0		$	98.6		$	73.5
Commercial Heating & Cooling		24.9			17.1			56.2			38.4
Service Experts		6.0			7.9			14.2			9.6
Refrigeration		17.3			16.8			47.5			32.9
Corporate and other		(15.5	)		(13.4	)		(48.2	)		(42.0	)
Eliminations (1)		0.1			0.2			(0.2	)		(0.2	)

Subtotal that includes segment profit and eliminations		71.8			67.6			168.1			112.2
Reconciliation to income from continuing operations before income taxes:
Items in losses (gains) and other expenses, net that are excluded from segment profit (3)		0.5			(1.6	)		6.7			(6.2	)
Restructuring charges		4.7			11.5			15.0			27.4
Interest expense, net		3.5			2.2			9.1			6.1
Other expense, net		—			0.1			0.1			0.2

Income from continuing operations before income taxes	$	63.1		$	55.4		$	137.2		$	84.7


(1)		Eliminations consist of intercompany sales between business segments, such as products sold to Service Experts by the Residential Heating & Cooling segment.

(2)		We define segment profit and loss as a segment’s income or loss from continuing operations before income taxes included in the accompanying Consolidated Statements of Operations: Excluding:

	o		Special product quality adjustments.

	o		Items within Losses (Gains) and Other Expenses, net that are noted in ⁽³⁾.

	o		Restructuring charges.

	o		Goodwill and equity method investment impairments.

	o		Interest expense, net.

	o		Other expense, net.


(3)		Items in Losses (Gains) and Other Expenses, net that are excluded from segment profit are net change in unrealized gains and/or losses on open future contracts, discount fee on accounts sold, realized gains and/or losses on marketable securities, special legal contingency charge, and other items.

Total assets by business segment are shown below (in millions). The assets in the Corporate segment are primarily comprised of cash and deferred tax assets. Assets recorded in the operating segments represent those assets directly associated with those segments.


	As of			As of
	September 30,			December 31,
	2010			2009
Total Assets
Residential Heating & Cooling	$	576.6		$	484.2
Commercial Heating & Cooling		290.3			238.5
Service Experts		193.5			173.1
Refrigeration		380.9			357.5
Corporate and other		267.0			297.3
Eliminations⁽¹⁾		(11.0	)		(10.3	)

Total assets		1,697.3			1,540.3
Discontinued operations (See Note 11)		—			3.6

Total assets	$	1,697.3		$	1,543.9


(1)		Eliminations consist of net intercompany receivables and intercompany profit included in inventory from products sold between business segments, such as products sold to Service Experts by the Residential Heating & Cooling segment.

14. Fair Value Measurements:

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 (in millions):

Fair Value Measurements on a Recurring Basis as of

September 30, 2010

Quoted Prices in

Significant

Active Markets

Other

Significant

for

Observable

Unobservable

Identical Assets

Inputs

(Level 1)

(Level 2)

(Level 3)

Total

Assets:

Investment in marketable equity securities ⁽¹⁾

11.1

—

11.1

Derivatives, net ⁽²⁾

—

5.1

—

5.1

Fair Value Measurements on a Recurring Basis as of

December 31, 2009

Quoted Prices in

Significant

Active Markets

Other

Significant

for

Observable

Unobservable

Identical Assets

Inputs

(Level 1)

(Level 2)

(Level 3)

Total

Assets:

Investment in marketable equity securities⁽¹⁾

5.4

—

5.4

Derivatives, net ⁽²⁾

—

10.2

—

10.2


(1)		Investment in marketable equity securities is recorded in Other Long-term Assets in the accompanying Consolidated Balance Sheets.

(2)		Liability derivatives are recorded in Accrued Expenses and Other Liabilities and asset derivatives are recorded in Other Assets in the accompanying Consolidated Balance Sheets. See Note 4 for more information.

Other Fair Value Measurements

The carrying amounts of cash and cash equivalents, accounts and notes receivable, net, accounts payable and other current liabilities approximate fair value due to the short maturities of these instruments. The fair values of each of our long-term debt instruments are based on the quoted market prices for the same issues or on the amount of future cash flows associated with each instrument using current market rates for debt instruments of similar maturities and credit risk. The estimated fair value of long-term debt (including our domestic revolving credit facility, capital lease obligations, foreign obligations and any related current maturities) was $168.0 million and $242.5 million as of September 30, 2010 and December 31, 2009, respectively. The estimated fair value of our senior unsecured notes was $218.1 million as of September 30, 2010. The fair values presented are estimates and are not necessarily indicative of amounts for which we could settle such instruments currently or indicative of our intent or ability to dispose of or liquidate them.

15. Condensed Consolidating Financial Statements

The Company’s senior unsecured notes are unconditionally guaranteed by certain of the Company’s subsidiaries (the “Guarantor Subsidiaries”) while they are not by other subsidiaries (the “Non-Guarantor Subsidiaries”). As results of these guarantee arrangements, we are required to present the following condensed consolidating financial statements.

The condensed consolidating financial statements reflect the investments in subsidiaries of the Company using the equity method of accounting. Intercompany account balances have been included in Accounts and Notes Receivable, Other (Current) Assets, Other Assets, net, Short-Term Debt, Accounts Payable, and Long-Term Debt line items of the Parent, Guarantor and Non-Guarantor balance sheets. The principal elimination entries eliminate investments in subsidiaries and intercompany balances and transactions.

Condensed consolidating financial statements of the Company, its Guarantor Subsidiaries and Non-Guarantor Subsidiaries as of September 30, 2010 and December 31, 2009 and for the three and nine months ended September 30, 2010 and 2009 are shown below:

Condensed Consolidating Balance Sheets
As of September 30, 2010
(In millions)


						Non-
				Guarantor		Guarantor
	Parent			Subsidiaries		Subsidiaries		Eliminations			Consolidated
ASSETS
CURRENT ASSETS:
Cash and cash equivalents	$	0.8		$	17.8	$	73.8	$	—		$	92.4
Short-term investments		—			—		13.1		—			13.1
Accounts and notes receivable, net		(1,017.8	)		793.5		645.1		8.4			429.2
Inventories, net		—			218.2		134.5		(5.0	)		347.7
Deferred income taxes		2.0			25.4		15.6		(6.3	)		36.7
Other assets		9.5			20.7		91.6		(58.0	)		63.8

Total current assets		(1,005.5	)		1,075.6		973.7		(60.9	)		982.9
PROPERTY, PLANT AND EQUIPMENT, net		—			203.1		117.8		—			320.9
GOODWILL		—			50.9		221.5		(4.8	)		267.6
DEFERRED INCOME TAXES		(5.0	)		67.0		18.1		(14.0	)		66.1
OTHER ASSETS, net		2,033.0			412.0		49.6		(2,434.8	)		59.8

TOTAL ASSETS	$	1,022.5		$	1,808.6	$	1,380.7	$	(2,514.5	)	$	1,697.3


LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES:
Short-term debt	$	32.1		$	—	$	8.5	$	(32.4	)	$	8.2
Current maturities of long-term debt		—			0.3		0.5		—			0.8
Accounts payable		8.0			140.3		133.7		2.0			284.0
Accrued expenses		10.0			218.7		128.6		(28.2	)		329.1


						Non-
				Guarantor		Guarantor
	Parent			Subsidiaries		Subsidiaries		Eliminations			Consolidated
Income taxes payable		(26.6	)		12.6		23.4		(4.0	)		5.4

Total current liabilities		23.5			371.9		294.7		(62.6	)		627.5
LONG-TERM DEBT		345.0			5.4		143.7		(132.0	)		362.1
POSTRETIREMENT BENEFITS, OTHER THAN PENSIONS		—			13.1		—		—			13.1
PENSIONS		—			62.2		8.5		—			70.7
OTHER LIABILITIES		5.0			47.0		30.2		(14.9	)		67.3

Total liabilities		373.5			499.6		477.1		(209.5	)		1,140.7
COMMITMENTS AND CONTINGENCIES		—			—		—		—			—
TOTAL STOCKHOLDERS’ EQUITY		649.0			1,309.0		903.6		(2,305.0	)		556.6

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	1,022.5		$	1,808.6	$	1,380.7	$	(2,514.5	)	$	1,697.3

Condensed Consolidating Statements of Operations
For the Three Months Ended September 30, 2010
(In millions)


							Non-
				Guarantor			Guarantor
	Parent			Subsidiaries			Subsidiaries			Eliminations			Consolidated
NET SALES	$	—		$	563.0		$	318.8		$	(63.6	)	$	818.2
COST OF GOODS SOLD		0.1			413.4			233.6			(61.7	)		585.4

Gross profit		(0.1	)		149.6			85.2			(1.9	)		232.8
OPERATING EXPENSES:
Selling, general and administrative expenses		—			120.0			43.5			—			163.5
Losses (gains) and other expenses, net		(1.5	)		2.1			0.3			(0.1	)		0.8
Restructuring charges		—			0.8			3.8			0.1			4.7
Loss (income) from equity method investments		(52.6	)		(4.1	)		(2.8	)		56.7			(2.8	)

Operational income (loss) from continuing operations		54.0			30.8			40.4			(58.6	)		66.6
INTEREST EXPENSE, net		8.9			(5.9	)		0.5			—			3.5
OTHER EXPENSE, net		—			—			—			—			—

Income (loss) from continuing operations before income taxes		45.1			36.7			39.9			(58.6	)		63.1
(BENEFIT FROM) PROVISIONS FOR INCOME TAXES		(2.7	)		12.1			11.9			(0.1	)		21.2

Income (loss) from continuing operations		47.8			24.6			28.0			(58.5	)		41.9
Loss from discontinued operations		—			—			0.1			—			0.1

Net income (loss)	$	47.8		$	24.6		$	27.9		$	(58.5	)	$	41.8

Condensed Consolidating Statements of Operations
For the Nine Months Ended September 30, 2010
(In millions)


							Non-
				Guarantor			Guarantor
	Parent			Subsidiaries			Subsidiaries			Eliminations			Consolidated
NET SALES	$	—		$	1,606.7		$	922.9		$	(195.2	)	$	2,334.4
COST OF GOODS SOLD		0.2			1,170.9			684.7			(193.2	)		1,662.6

Gross profit		(0.2	)		435.8			238.2			(2.0	)		671.8
OPERATING EXPENSES:
Selling, general and administrative expenses		—			367.3			145.7			—			513.0
Losses (gains) and other expenses, net		(0.1	)		6.6			(0.2	)		—			6.3
Restructuring charges		—			4.0			11.0			—			15.0
(Income) loss from equity method investments		(103.8	)		(7.6	)		(8.9	)		111.4			(8.9	)

Operational income (loss) from continuing operations		103.7			65.5			90.6			(113.4	)		146.4
INTEREST EXPENSE, net		8.9			(2.1	)		2.3			—			9.1
OTHER EXPENSE, net		—			—			0.1			—			0.1

Income (loss) from continuing operations before income taxes		94.8			67.6			88.2			(113.4	)		137.2
(BENEFIT FROM) PROVISIONS FOR INCOME TAXES		(3.3	)		22.2			29.0			—			47.9

Income (loss) from continuing operations		98.1			45.4			59.2			(113.4	)		89.3
Loss from discontinued operations		—			—			0.8			—			0.8

Net income (loss)	$	98.1		$	45.4		$	58.4		$	(113.4	)	$	88.5

Condensed Consolidating Balance Sheets
As of December 31, 2009
(In millions)


							Non-
				Guarantor			Guarantor
	Parent			Subsidiaries			Subsidiaries		Eliminations			Consolidated
ASSETS
CURRENT ASSETS:
Cash and cash equivalents	$	0.8		$	6.6		$	116.9	$	—		$	124.3
Accounts and notes receivable, net		(975.0	)		775.1			558.3		(1.4	)		357.0
Inventories, net		—			139.4			113.7		(2.9	)		250.2
Deferred income taxes		—			25.4			15.8		(6.3	)		34.9
Other assets		12.2			19.1			93.0		(56.8	)		67.5

Total current assets		(962.0	)		965.6			897.7		(67.4	)		833.9
PROPERTY, PLANT AND EQUIPMENT, net		—			207.8			121.8		—			329.6
GOODWILL		—			46.7			215.4		(4.7	)		257.4
DEFERRED INCOME TAXES		—			67.3			21.2		(13.9	)		74.6
OTHER ASSETS, net		1,905.1			371.4			41.5		(2,269.6	)		48.4

TOTAL ASSETS	$	943.1		$	1,658.8		$	1,297.6	$	(2,355.6	)	$	1,543.9


LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES:
Short-term debt	$	25.1		$	—		$	2.5	$	(25.4	)	$	2.2
Current maturities of long-term debt		35.0			—			0.5		—			35.5
Accounts payable		7.9			115.4			122.7		(7.8	)		238.2
Accrued expenses		5.1			192.5			154.3		(34.0	)		317.9
Income taxes payable		(17.5	)		(21.6	)		43.2		(4.1	)		—

Total current liabilities		55.6			286.3			323.2		(71.3	)		593.8
LONG-TERM DEBT		176.5			98.8			117.4		(198.9	)		193.8
POSTRETIREMENT BENEFITS, OTHER THAN PENSIONS		—			13.4			—		—			13.4
PENSIONS		—			56.3			10.5		(0.1	)		66.7
OTHER LIABILITIES		2.6			50.9			32.9		(14.6	)		71.8

Total liabilities		234.7			505.7			484.0		(284.9	)		939.5
COMMITMENTS AND CONTINGENCIES
TOTAL STOCKHOLDERS’ EQUITY		708.4			1,153.1			813.6		(2,070.7	)		604.4

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	943.1		$	1,658.8		$	1,297.6	$	(2,355.6	)	$	1,543.9

Condensed Consolidating Statements of Operations
For the Three Months Ended September 30, 2009
(In millions)


							Non-
				Guarantor			Guarantor
	Parent			Subsidiaries			Subsidiaries			Eliminations			Consolidated
NET SALES	$	—		$	512.7		$	310.1		$	(73.3	)	$	749.5
COST OF GOODS SOLD		0.1			368.0			232.8			(73.2	)		527.7

Gross profit		(0.1	)		144.7			77.3			(0.1	)		221.8
OPERATING EXPENSES:
Selling, general and administrative expenses		—			111.2			45.9			—			157.1
(Gains) losses and other expenses, net		(1.2	)		(0.4	)		(0.5	)		—			(2.1	)
Restructuring charges		—			2.7			8.8			—			11.5
(Income) loss from equity method investments		(26.8	)		3.5			(2.4	)		23.3			(2.4	)

Operational income (loss) from continuing operations		27.9			27.7			25.5			(23.4	)		57.7
INTEREST (INCOME) EXPENSE, net		(0.2	)		0.8			1.7			(0.1	)		2.2
OTHER EXPENSE, net		—			—			0.1			—			0.1

Income (loss) from continuing operations before income taxes		28.1			26.9			23.7			(23.3	)		55.4
PROVISIONS FOR INCOME TAXES		0.5			11.2			10.0			—			21.7

Income (loss) from continuing operations		27.6			15.7			13.7			(23.3	)		33.7
Loss from discontinued operations		—			—			2.6			0.1			2.7

Net income (loss)	$	27.6		$	15.7		$	11.1		$	(23.4	)	$	31.0

Condensed Consolidating Statements of Operations
For the Nine Months Ended September 30, 2009
(In millions)


							Non-
				Guarantor			Guarantor
	Parent			Subsidiaries			Subsidiaries			Eliminations			Consolidated
NET SALES	$	—		$	1,476.1		$	827.9		$	(190.0	)	$	2,114.0
COST OF GOODS SOLD		0.2			1,083.8			635.7			(189.9	)		1,529.8

Gross profit		(0.2	)		392.3			192.2			(0.1	)		584.2
OPERATING EXPENSES:
Selling, general and administrative expenses		—			336.7			137.0			—			473.7
(Gains) losses and other expenses, net		(6.0	)		(0.4	)		4.1			—			(2.3	)
Restructuring charges		—			11.7			15.7			—			27.4
(Income) loss from equity method investments		(27.0	)		13.7			(5.6	)		13.3			(5.6	)

Operational income from continuing operations		32.8			30.6			41.0			(13.4	)		91.0
INTEREST (INCOME) EXPENSE, net		(0.6	)		5.3			1.4			—			6.1
OTHER EXPENSE, net		—			—			0.2			—			0.2

Income (loss) from continuing operations before income taxes		33.4			25.3			39.4			(13.4	)		84.7
PROVISIONS FOR INCOME TAXES		2.4			14.4			16.1			(0.1	)		32.8

Income (loss) from continuing operations		31.0			10.9			23.3			(13.3	)		51.9
Loss from discontinued operations		—			—			7.2			—			7.2

Net income (loss)	$	31.0		$	10.9		$	16.1		$	(13.3	)	$	44.7

Condensed Consolidating Statements of Cash Flows
For the Nine Months Ended September 30, 2010
(In millions)


							Non-
				Guarantor			Guarantor
	Parent			Subsidiaries			Subsidiaries			Eliminations		Consolidated
Net cash (used in) provided by operating activities	$	(89.4	)	$	158.2		$	(25.2	)	$	—	$	43.6
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from the disposal of property, plant and equipment		—			0.1			—			—		0.1
Purchases of property, plant and equipment		—			(23.2	)		(6.8	)		—		(30.0	)
Proceeds from sale of business		—			0.1			3.4			—		3.5
Acquisition of business		—			(6.0	)		—			—		(6.0	)
Restricted cash		—			—			(13.1	)		—		(13.1	)

Net cash used in investing activities		—			(29.0	)		(16.5	)		—		(45.5	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Short-term borrowings, net		—			—			5.7			—		5.7
Long-term payments		(35.0	)		(0.1	)		(0.7	)		—		(35.8	)
Issuance of senior unsecured notes		199.8			—			—			—		199.8
Revolver long-term borrowings, net		(31.5	)		—			—			—		(31.5	)
Additional investment in affiliate		—			—			(1.0	)		—		(1.0	)
Proceeds from stock option exercises		2.5			—			—			—		2.5
Payments of deferred financing costs		(1.8	)		—			—			—		(1.8	)
Repurchases of common stock		(150.3	)		—			—			—		(150.3	)
Excess tax benefits related to share-based payments		3.7			—			—			—		3.7
Intercompany debt		82.5			(102.6	)		20.1			—		—
Intercompany financing activity		42.8			(15.3	)		(27.5	)		—		—
Intercompany investments		(7.9	)		—			7.9			—		—
Intercompany dividends		9.0			—			(9.0	)		—		—
Cash dividends paid		(24.4	)		—			—			—		(24.4	)

Net cash provided by (used in) financing activities		89.4			(118.0	)		(4.5	)		—		(33.1	)
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS		—			11.2			(46.2	)		—		(35.0	)
EFFECT OF EXCHANGE RATES ON CASH AND CASH EQUIVALENTS		—			—			3.1			—		3.1
CASH AND CASH EQUIVALENTS, beginning of year		0.8			6.6			116.9			—		124.3

CASH AND CASH EQUIVALENTS, end of year	$	0.8		$	17.8		$	73.8		$	—	$	92.4

Condensed Consolidating Statements of Cash Flows
For the Nine Months Ended September 30, 2009
(In millions)


							Non-
				Guarantor			Guarantor
	Parent			Subsidiaries			Subsidiaries			Eliminations		Consolidated
Net cash provided by (used in) operating activities	$	65.4		$	93.9		$	54.0		$	—	$	213.3
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from the disposal of property, plant and equipment		—			0.2			0.7			—		0.9
Purchases of property, plant and equipment		—			(28.4	)		(5.5	)		—		(33.9	)
Proceeds from sale of business		—			0.5			—			—		0.5
Return on investment		—			—			0.7			—		0.7
Purchases of short-term investments		—			—			(16.9	)		—		(16.9	)
Proceeds from sales and maturities of short-term investments		—			—			50.2					50.2

Net cash (used in) provided by investing activities		—			(27.7	)		29.2			—		1.5
CASH FLOWS FROM FINANCING ACTIVITIES:
Short-term borrowings, net		—			—			(1.0	)		—		(1.0	)
Long-term payments		—			—			(1.5	)		—		(1.5	)
Revolver long-term payments, net		(217.3	)		—			—			—		(217.3	)
Proceeds from stock option exercises		7.6			—			—					7.6
Repurchases of common stock		(3.1	)		—			—			—		(3.1	)
Excess tax benefits related to share-based payments		3.4			—			—			—		3.4
Intercompany debt		19.1			(3.5	)		(15.6	)		—		—
Intercompany financing activity		143.8			(52.6	)		(91.2	)		—		—
Intercompany dividends		5.0			—			(5.0	)		—		—
Cash dividends paid		(23.2	)		—			—			—		(23.2	)

Net cash used in financing activities		(64.7	)		(56.1	)		(114.3	)		—		(235.1	)
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS		0.7			10.1			(31.1	)		—		(20.3	)
EFFECT OF EXCHANGE RATES ON CASH AND CASH EQUIVALENTS		—			—			0.1			—		0.1
CASH AND CASH EQUIVALENTS, beginning of year		—			3.1			119.0			—		122.1

CASH AND CASH EQUIVALENTS, end of year	$	0.7		$	13.2		$	88.0		$	—	$	101.9

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, as amended, that are based on information currently available to management as well as management’s assumptions and beliefs. All statements, other than statements of historical fact, included in this Quarterly Report on Form 10-Q constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including but not limited to statements identified by the words “may,” “will,” “should,” “plan,” “predict,” “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, 2009, 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.

Overview

We operate in four reportable business segments of the heating, ventilation, air conditioning and refrigeration, (“HVACR”) industry. Our reportable segments are Residential Heating & Cooling, Commercial Heating & Cooling, Service Experts and Refrigeration. For more detailed information regarding our reportable segments, see Note 13 in the Notes to our Consolidated Financial Statements.

Our products and services are sold through a combination of distributors, independent and company-owned dealer service centers, other installing contractors, wholesalers, manufacturers’ representatives, original equipment manufacturers and to national accounts. The demand for our products and services is seasonal and dependent on the weather. Warmer than normal summer temperatures generate strong demand for replacement air conditioning and refrigeration products and services and colder than normal winter temperatures have the same effect on heating products and services. Conversely, cooler than normal summers and warmer than normal winters depress HVACR sales 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 in our manufacturing operations are components, raw materials, factory overhead, labor and estimated costs of warranty expense. In our Service Experts segment, the principal components of cost of goods sold are equipment, parts and supplies and labor. The principal raw materials used in our manufacturing processes are steel, copper and aluminum. In recent years, the volatility of commodity prices and related components has impacted us and the HVACR industry in general. We partially mitigate the impact of higher commodity prices through a combination of price increases, commodity 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.

Our fiscal year ends on December 31 and our interim fiscal quarters are each comprised of 13 weeks. 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 calendar quarter.

The third quarter of each fiscal year marks the end of the summer cooling period and our most profitable season. The seasonal fluctuations in mix and volume drive our sales and related segment profit, resulting in higher sales in the second and third quarters due to the larger cooling season relative to the heating season. Sales improved in our Commercial Heating & Cooling and Refrigeration businesses as compared to the third quarter of 2009. While overall our end markets continue to recover modestly, the rate of recovery has slowed during the third quarter and the global economic climate continues to be highly uncertain.

While our results will continue to benefit from the economic recovery over the longer term, we will continue

to focus on overall cost containment through restructuring savings, SG&A cost controls and sourcing initiatives. We also believe that commodity costs will put pressure on our earnings for the remainder of the year. As end markets recover, we are well-positioned to drive increased earnings leverage, and we will continue to execute on our strategic priorities to win new business and capture opportunities through innovative product and system solutions.

Company Highlights

	•		Net sales for the third quarter of 2010 were $818.2 million, compared to $749.5 million in 2009 and were favorably impacted by higher volumes across all segments.

	•		Operational income from continuing operations for the third quarter of 2010 was $66.6 million compared to $57.7 million for the third quarter of 2009. The improvement to operational income was primarily due to higher sales volumes.

	•		Net income for the third quarter of 2010 was $41.8 million compared to $31.0 million in the same period in 2009. Diluted earnings per share was $0.76 per share in the third quarter 2010 compared to $0.54 per share in the third quarter of 2009.

	•		We generated $43.6 million of cash flow from operating activities for first nine months of 2010 compared to $213.3 million in the first nine months of 2009. Cash provided by operating activities was lower primarily due to increased working capital requirements including the increased build of inventory levels in the first nine months of 2010 in order to support increased production volumes and new product introductions and increased accounts receivable due to increased sales. Also, first nine months of 2009 cash flows from operating activities were favorably impacted by the return of $37.9 million of collateral posted related to commodity hedges.

	•		During the first nine months of 2010, we returned $144.3 million to shareholders through share repurchases.

Results of Operations

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


	Three Months Ended September 30,												Nine Months Ended September 30,
	2010						2009						2010						2009
	Dollars			Percent			Dollars			Percent			Dollars			Percent			Dollars			Percent
Net sales	$	818.2			100.0	%	$	749.5			100.0	%	$	2,334.4			100.0	%	$	2,114.0			100.0	%
Cost of goods sold		585.4			71.5			527.7			70.4			1,662.6			71.2			1,529.8			72.4

Gross profit		232.8			28.5			221.8			29.6			671.8			28.8			584.2			27.6
Selling, general and administrative expenses		163.5			20.0			157.1			21.0			513.0			22.0			473.7			22.4
Losses (gains) and other expenses, net		0.8			0.1			(2.1	)		(0.2	)		6.3			0.3			(2.3	)		(0.1	)
Restructuring charges		4.7			0.6			11.5			1.5			15.0			0.6			27.4			1.3
Income from equity method investments		(2.8	)		(0.3	)		(2.4	)		(0.3	)		(8.9	)		(0.4	)		(5.6	)		(0.3	)

Operational income	$	66.6			8.1	%	$	57.7			7.6	%	$	146.4			6.3	%	$	91.0			4.3	%


Net income	$	41.8			5.1	%	$	31.0			4.1	%	$	88.5			3.8	%	$	44.7			2.1	%

Third Quarter of 2010 Compared to Third Quarter of 2009 – Consolidated Results

Net Sales

Sales increased 9.2% for the third quarter of 2010 as compared to 2009 primarily due to increased sales volumes of 7% across all four business segments. These increases were supplemented by favorable price and mix of approximately 2%.

Gross Profit

Gross profit margins declined approximately 110 basis points to 28.5% for the third quarter of 2010, compared to gross profit margins of 29.6% in 2009. The decline was primarily driven by commodity headwinds and other material costs of 60 basis points and increases in other costs of 40 basis points.

Selling, General and Administrative Expenses

Selling, general and administrative (“SG&A”) expenses increased by $6.4 million in the third quarter of 2010 as compared to 2009 and as a percentage of sales, SG&A expenses were 20.0% for 2010 and 21.0% for 2009. SG&A expenses increased $5 million primarily due to increased variable incentive compensation driven by improved financial performance; $2 million related to increased variable selling expenses in support of our sales growth, and $3 million due to increased administrative support expenses. These increases were partially offset by $5 million favorable bad debt experience as compared to the prior year period.

Losses and Other Expenses, Net

Losses (gains) and other expenses, net for the third quarters of 2010 and 2009 included the following (in millions):


	Three Months Ended
	September 30,
	2010			2009
Realized (gains) losses on settled futures contracts	$	(0.2	)	$	0.4
Unrealized gains on unsettled futures contracts		(1.4	)		(1.2	)
Special legal contingency charge		1.8			—
Foreign currency exchange losses		0.6			(0.4	)
Other items, net		—			(0.9	)

Losses (gains) and other expenses, net	$	0.8		$	(2.1	)

The change in gains and losses on futures contracts was primarily due to increases in commodity prices relative to the futures contract prices during 2010 as compared to 2009 for the contracts that settled during the quarter. For more information, see Note 4 in the Notes to the Consolidated Financial Statements. For more information regarding the special legal contingency charge, see Note 6 in the Notes to the Consolidated Financial Statements.

Restructuring Charges

We anticipate incurring approximately $5 million of future restructuring charges relating to projects that were in process during the third quarter of 2010. Substantially all future restructuring charges will require the use of cash. Future cash outlays for restructuring activities that are currently in progress are estimated to be $14 million. These restructuring charges and cash outlays are expected to be incurred generally prior to the end of 2011.

Total cash paid for restructuring activities during the first nine months of 2010 was $18.1 million, an increase of $2.6 million from the same period in 2009. A significant portion of this amount related to an increase in restructuring activities related to manufacturing rationalization and was primarily composed of severance payments related to our various restructuring projects. We use operating cash as the funding source for restructuring activities.

We expect to realize $15 million of incremental expense savings for 2010.

For a detail discussion regarding restructuring activities for the three months and nine months ended September 30, 2010, see Note 10 in the Notes to the Consolidated Financial Statements.

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 increased to $2.8 million in the third quarter of 2010 compared to $2.4 million during the same period in 2009 primarily due to the improved

performance of our joint venture in Latin America.

Interest Expense, net

Interest expense, net, increased to $3.5 million in the third quarter of 2010 from $2.2 million during the same period in 2009. The increase in interest expense was primarily attributable to a higher interest rate on our senior unsecured notes as compared to our revolver.

Income Taxes

The income tax provision was $21.2 million in the third quarter of 2010 compared to $21.7 million during the same period in 2009. The effective tax rate was 33.6% for the third quarter of 2010 as compared to 39.2% for the same period in 2009. Our effective rates differ from the statutory federal rate of 35% for certain items, such as state and local taxes, non-deductible expenses, foreign operating losses for which no tax benefits have been recognized and foreign taxes at rates other than 35%.

Discontinued Operations

Near the end of 2008, we announced plans to sell seven unprofitable service centers. We sold all of these service centers during 2009. Also, during the third quarter of 2009, we announced plans to sell an additional five service centers. We have sold all of these service centers as of the end of the first quarter of 2010.

We have recorded an operational loss of $0.1 million related to these service centers in third quarter of 2010 as discontinued operations as compared to an operational loss of $2.7 million during the same period of 2009. The loss from discontinued operations for the third quarter of 2009 included an impairment charge of $2.1 million related to service centers where the estimated selling prices of the assets were below the net book value of those assets.

Third Quarter of 2010 Compared to Third Quarter of 2009 – Results by Segment

Residential Heating & Cooling

The following table details our Residential Heating & Cooling segment’s net sales and profit for the third quarters of 2010 and 2009 (dollars in millions):


	Three Months Ended
	September 30,
	2010			2009			Difference		% Change
Net sales	$	370.9		$	347.1		$	23.8		6.9	%
Profit		39.0			39.0			—		—
% of net sales		10.5	%		11.2	%

The increase in sales was driven by higher unit volume resulting in part from the warmer than normal summer temperatures throughout the U.S. that drove increased residential replacement sales as compared to the prior year, although new construction business was down from a year ago. Sales volumes increased net sales by 5% in 2010 as compared to 2009. Price and mix was favorable by 1%. Changes in foreign currency exchange favorably impacted sales by 1%.

Segment profit remained constant in the third quarter of 2010 as compared to 2009 as the increase in segment profit from higher sales of $5 million was offset by commodities headwinds of $6 million and other product cost increase of $1 million, including higher product launch costs related to our new furnace platform. Lower SG&A expenses of $1 million increased segment profit and were the result of $3 million of favorable bad debt experience as compared to the prior year offset by $2 million of increased selling and advertising expenses.

Commercial Heating & Cooling

The following table details our Commercial Heating & Cooling segment’s net sales and profit for the third quarters of 2010 and 2009 (dollars in millions):


	Three Months Ended
	September 30,
	2010			2009			Difference		% Change
Net sales	$	176.3		$	154.4		$	21.9		14.2	%
Profit		24.9			17.1			7.8		45.6
% of net sales		14.1	%		11.1	%

Our Commercial Heating & Cooling business experienced higher sales volumes of 12% in the third quarter of 2010 as compared to 2009 primarily due to introductions of energy efficient products and an increase in planned replacement business at national retail accounts. Price and mix were also favorable by 4%. Foreign currency exchange rates decreased net sales by 2%.

Segment profit increased for the third quarter of 2010 as compared to 2009 primarily due to the increase in segment profit from higher sales of nearly $11 million resulting from higher sales volume and favorable price and mix. Product costs remained relatively flat as factory productivity gains were partially offset by commodity headwinds. SG&A expenses increased by $3 million as higher variable selling expenses and incentive compensation more than offset favorable bad debt expense.

Service Experts

The following table details our Service Experts segment’s net sales and profit for the third quarters of 2010 and 2009 (dollars in millions):


	Three Months Ended
	September 30,
	2010			2009			Difference			% Change
Net sales	$	150.9		$	137.3		$	13.6			9.9	%
Profit		6.0			7.9			(1.9	)		(24.1	)
% of net sales		4.0	%		5.8	%

Net sales increased driven in part by warmer than normal summer temperatures throughout the U.S. and strong growth in commercial services. The sales increase was primarily due to an increase in sales volumes of 5%. Price and mix increased sales 4%. Foreign currency exchange rates increased net sales by 1%.

Segment profit decreased as the favorable impact of increased in sales volumes of $2 million was more than offset by the timing of insurance expenses and other costs of $2 million and increased variable selling expenses of $1 million.

Refrigeration

The following table details our Refrigeration segment’s net sales and profit for the third quarters of 2010 and 2009 (dollars in millions):


	Three Months Ended
	September 30,
	2010			2009			Difference		% Change
Net sales	$	140.6		$	133.6		$	7.0		5.2	%
Profit		17.3			16.8			0.5		3.0
% of net sales		12.3	%		12.6	%

Net sales increased due to higher sales volumes of about 3% as growth in all other geographic areas of the business was partially offset by the effects our strategic exit of OEM coil production in Australia. Changes in foreign currency exchange rates favorably impacted sales by 1%. Price and mix also increased sales by approximately 1%.

Segment profit increased $2 million due to the increase in net sales. Gross profit margins remained relatively flat as cost pressures primarily composed of commodities headwinds offset factory productivity gains. Higher SG&A expenses of $1 million reduced segment profit and were the result of increased incentive compensation offset by favorable bad debt experience.

Corporate and Other

Corporate and other expenses were $15.5 million in the third quarter of 2010, up from $13.4 million in 2009. The increase was primarily driven by the timing of corporate expense allocations related to business segments of $2 million.

Year-to-Date Through September 30, 2010 Compared to Year-to-Date Through September 30, 2009 – Consolidated Results

Net Sales

Sales increased 10.4% for the first nine months of 2010 as compared to 2009 due to increased sales volumes of 7% primarily driven by growth across all four business segments. Residential Heating & Cooling and Service Experts segments showed the highest growth levels predominantly earlier in the year. The Refrigeration segment also showed growth as compared to a year ago. Sales volumes in Commercial Heating & Cooling segment were higher in the first nine months of 2010 as compared to 2009, as sales increases in the second and third quarters of 2010 more than offset the market pressures experienced in the first quarter. Favorable price and mix of approximately 1% also increased sales. Changes in foreign currency exchange rates favorably impacted net sales by 2%.

Gross Profit

Gross profit margins improved approximately 120 basis points to 28.8% for the first nine months of 2010, compared to gross profit margins of 27.6% in 2009. This improvement was primarily driven by lower product costs from material savings and manufacturing efficiencies of approximately 200 basis points. Partially offsetting these positive impacts to gross profit margins was commodities headwinds of 40 basis points and price and mix primarily in the Residential Heating & Cooling segment that decreased gross profit margins by approximately 50 basis points.

Selling, General and Administrative Expenses

As a percentage of sales, SG&A expenses were 22.0% for 2010 and 22.4% for 2009. SG&A expenses for the first nine months increased by $39.4 million in 2010 as compared to the same period in 2009. Selling and administrative expenses increased generally due to increased incentive compensation of $17 million driven by improved financial performance, and increased advertising associated with new product introductions and increased variable selling expenses of $13 million in support of our sales growth. The impact of changes in foreign exchange rates increased SG&A expenses by $10 million.

Losses (Gains) and Other Expenses, Net

Losses (gains) and other expenses, net for the first nine months of 2010 and 2009 included the following (in millions):


	Nine Months Ended
	September 30,
	2010			2009
Realized (gains) losses on settled futures contracts	$	(1.0	)	$	3.6
Unrealized gains on unsettled futures contracts		(0.1	)		(6.3	)
Special legal contingency charge		6.3			—
Foreign currency exchange losses		0.6			0.9
Other items, net		0.5			(0.5	)

Losses (gains) and other expenses, net	$	6.3		$	(2.3	)

The change in gains and losses on both settled and unsettled futures contracts was primarily due to increases in commodity prices relative to the futures contract prices during 2010 as compared to 2009. Conversely, the change in unrealized losses (gains) related to unsettled futures contracts was primarily due to lower commodity prices relative to the futures contract prices for those contracts. For more information, see Note 4 in the Notes to the Consolidated Financial Statements. For more information regarding the special legal contingency charge, see Note 6 in the Notes to the Consolidated Financial Statements.

Income from Equity Method Investments

Income from equity method investments increased to $8.9 million in the first nine months of 2010 compared to $5.6 million during the same period in 2009 primarily due to the improved performance of our U.S. joint venture in compressor manufacturing, which experienced increased sales and profitability.

Interest Expense, net

Interest expense, net increased to $9.1 million during the first nine months of 2010 from $6.1 million during the same period in 2009. The increase in interest expense was primarily attributable to an increase in the interest rate paid, including the effects of our interest rate swap, on variable rate debt and the issuance of $200 million of our senior unsecured notes at 4.91%.

Income Taxes

The income tax provision was $47.9 million in the first nine months of 2010 compared to $32.8 million during the same period in 2009. The effective tax rate was 34.9% for the first nine months of 2010 as compared to 38.7% for the same period in 2009. Our effective rates differ from the statutory federal rate of 35% for certain items, such as state and local taxes, non-deductible expenses, foreign operating losses for which no tax benefits have been recognized and foreign taxes at rates other than 35%.

Discontinued Operations

Included in the operational loss from discontinued operations are losses on the disposal of the assets and liabilities of the service centers sold of $0.3 million for the first nine months of 2010, and gains on disposal of the assets and liabilities of service centers sold of $1.1 million for the first nine months of 2009. The loss from discontinued operations for the first nine months of 2009 included a provision of $6.2 million for an unfavorable judgment in litigation related to the sale of a service center in 2004 that was included in discontinued operations.

Year-to-Date Through September 30, 2010 Compared to Year-to-Date Through September 30, 2009 – Results by Segment

Residential Heating & Cooling

The following table details our Residential Heating & Cooling segment’s net sales and profit for the first nine months of 2010 and 2009 (dollars in millions):


	Nine Months Ended
	September 30,
	2010			2009			Difference		% Change
Net sales	$	1,068.5		$	972.7		$	95.8		9.8	%
Profit		98.6			73.5			25.1		34.1
% of net sales		9.2	%		7.6	%

The increase in sales was due to the recovery of the U.S. residential end markets, primarily the replacement market. Sales volumes increased net sales by 10% in 2010 as compared to 2009. The positive impact of changes in foreign currency exchange rates also increased sales by almost 2%. These increases in sales were partially offset by lower price and mix of almost 2%.

Segment profit increased $25.1 million, including $14 million due to the increase in sales and $14 million due to material savings and manufacturing efficiencies partially offset by commodities headwinds and product launch costs. These were partially offset by higher SG&A expenses of $6 million and consisted primarily of increased variable selling expenses and incentive compensation.

Commercial Heating & Cooling

The following table details our Commercial Heating & Cooling segment’s net sales and profit for the first nine months of 2010 and 2009 (dollars in millions):


	Nine Months Ended
	September 30,
	2010			2009			Difference		% Change
Net sales	$	471.7		$	448.6		$	23.1		5.1	%
Profit		56.2			38.4			17.8		46.4
% of net sales		11.9	%		8.6	%

Our Commercial Heating & Cooling business experienced increased sales volumes of nearly 4% during the first nine months of 2010 primarily due to introductions of energy efficient products and an increase in planned replacement business at national retail accounts as well as strong growth in the schools market in the second and third quarters of 2010. Price and mix were favorable by 2%.

Segment profit increased $17.8 million, including nearly $14 million due to the increase in net sales and $4 million due to material savings and manufacturing efficiencies.

Service Experts

The following table details our Service Experts segment’s net sales and profit for the first nine months of 2010 and 2009 (dollars in millions):


	Nine Months Ended
	September 30,
	2010			2009			Difference		% Change
Net sales	$	445.6		$	389.0		$	56.6		14.6	%
Profit		14.2			9.6			4.6		47.9
% of net sales		3.2	%		2.5	%

Net sales increased primarily due to the improvements in the residential service and replacement end markets. In addition, we have had significant growth in our commercial service business. The sales increase was primarily due to an increase in sales volumes of 9%. Price and mix increased sales by 3%. Foreign currency exchange rates increased sales by 3%.

Segment profit increased $4.6 million, including $10 million due to the increase in sales. Offsetting this increase to segment profit was an SG&A expense increase of $4 million due to higher variable selling expenses and the timing of insurance expenses.

Refrigeration

The following table details our Refrigeration segment’s net sales and profit for the first nine months of 2010 and 2009 (dollars in millions):


	Nine Months Ended
	September 30,
	2010			2009			Difference		% Change
Net sales	$	411.8		$	369.4		$	42.4		11.5	%
Profit		47.5			32.9			14.6		44.4
% of net sales		11.5	%		8.9	%

Net sales increased due to higher sales volumes of about 4% and the favorable impact of changes in foreign currency exchange rates of 7%. Price and mix also increased sales by approximately 1%.

Segment profit increased $14.6 million, including $11 million due to the increase in sales and almost $4 million in improved material savings and manufacturing efficiencies as those factors more than offset commodity price pressures.

Corporate and Other

Corporate and other expenses were $48.2 million in the first nine months of 2010, up from $42.0 million during the same period in 2009. The increase was primarily driven by increases in stock-based and incentive compensation expenses of approximately $7 million.

Liquidity and Capital Resources

Our working capital and capital expenditure requirements are generally met through internally generated funds, our domestic revolving credit facility and our revolving period asset securitization arrangement. Working capital needs are generally greater in the first and second quarters due to the seasonal nature of our business cycle.

Statement of Cash Flows

The following table summarizes our cash activity for the nine months ended September 30, 2010 and 2009 (in millions):


	2010			2009
Net cash provided by operating activities	$	43.6		$	213.3
Net cash (used in) provided by investing activities		(45.5	)		1.5
Net cash used in financing activities		(33.1	)		(235.1	)

Net Cash Provided by Operating Activities

The cash usage experienced during the first three quarters of 2010 in operating activities was primarily due to increased working capital requirements related to higher revenues. Accounts receivable increased by $71.6 million during the first nine months of 2010, compared to an increase of $18.9 million a year ago, reflecting higher sales. In addition, inventories increased during the period by $102.7 million due to new product introductions, compared to a decrease of $21.1 million for the same period in 2009. These impacts were partially offset by higher earnings for the first nine months of 2010 of $88.5 million compared to $44.7 million in 2009 and higher accounts payable of $43.8 million compared to $37.3 million for the first nine months of 2009.

There were several other factors that impacted the year-over-year comparisons of our cash flows from operations during the first nine months of 2010 and 2009. In 2009, we had $37.9 million source of cash from the return of collateral posted for hedge losses. In addition, net income taxes payable increased by $11.1 million in 2010 compared to $0.4 million for the same period in 2009.

Net Cash (Used in) Provided by Investing Activities

Capital expenditures in the first three quarters of 2010 were $30.0 million, which was slightly less than the $33.9 million incurred in the first three quarters of 2009. Capital expenditures for the first three quarters of 2010 were principally driven by:

	•		Purchases of production equipment in our Residential Heating & Cooling and Commercial Heating & Cooling segments, and

	•		Purchases of systems and software to support our regional distribution center initiative as well as the overall enterprise.

Other factors impacting net cash from investing activities for the first nine months of 2010 included $13.1 million of restricted cash representing amounts placed into a trust by our captive insurance subsidiary for the benefit of a third-party insurance provider to pay worker’s compensation claims, and net use for acquisitions of $6.0 million offset by sale of businesses of $3.5 million.

Net Cash Used in Financing Activities

To support working capital needs and share repurchases, we had net borrowings of $138.2 million during the first nine months of 2010 as compared to a net reduction of $219.8 million for the same period in 2009, driven largely by working capital requirements. We also repurchased common shares of $144.3 million in the first nine months of 2010 under the current share repurchase program. We paid a total of $24.4 million and $23.2 million in dividends on our common stock in the first nine months of 2010 and 2009, respectively.

Debt Position and Financial Leverage

Our debt-to-capital ratio increased to 40% as of September 30, 2010 from 28% as of December 31, 2009 due to increased debt balances. For a detailed description regarding our debt including our debt covenants, see Note 7 in the Notes to the Consolidated Financial Statements.

As of September 30, 2010, we had outstanding borrowings of $145.0 million under the $650.0 million domestic revolving credit facility and $69.5 million was committed to standby letters of credit. All of the remaining $435.5 million was available for future borrowings after consideration of covenant limitations. The facility matures in October 2012. As of September 30, 2010, we were in compliance with all covenant requirements. Our domestic revolving credit facility is guaranteed by our material subsidiaries.

We have additional borrowing capacity through several foreign facilities governed by agreements between us and various banks. These borrowings are used primarily to finance seasonal borrowing needs of our foreign subsidiaries. We had $8.2 million and $2.5 million of obligations outstanding through our foreign subsidiaries as of September 30, 2010 and December 31, 2009, respectively. Available borrowing capacity at September 30, 2010 and December 31, 2009, on foreign facilities was $10.0 million and $12.6 million, respectively.

On May 6, 2010, we issued $200.0 million of senior unsecured notes due May 15, 2017 bearing fixed interest at 4.90% as a result of a public offering of securities. The purpose of the debt issuance was to extend our debt maturities and diversify our funding sources. Additionally, we were able to take advantage of liquid capital markets and historically low interest rates.

The proceeds from the issuance were used to repay outstanding indebtedness under our domestic revolving credit facility. They will also be used for working capital and other general corporate purposes, including repurchases of shares of our common stock pursuant to our previously announced share repurchase plans.

Upon a change of control, holders of our notes will have the right to require us to repurchase all or a portion of the senior unsecured notes at a repurchase price equal to 101% of the principal amount of the notes repurchased, plus accrued and unpaid interest, if any. The indenture also contains a cross default provision which is triggered if we default on other debt of at least $75 million in principal which is then accelerated, and such acceleration is not rescinded within 30 days of the notice date.

Under a revolving period asset securitization arrangement (“ASA”), we are eligible to transfer beneficial interests in a portion of our trade accounts receivable to third parties in exchange for cash. Our continued involvement in the transferred assets includes servicing, collection and administration of the transferred beneficial interests. The sale of the beneficial interests in our trade accounts receivable are reflected as secured borrowings. The fair values assigned to the retained and transferred interests are based primarily on the receivables’ carrying value given the short term to maturity and low credit risk. The ASA provides for a maximum securitization amount of $100 million or 100% of the net pool balance as defined by the ASA. However, eligibility for securitization is limited based on the amount and quality of the qualifying accounts receivable and is calculated monthly. The beneficial interest sold cannot exceed the maximum amount even if our qualifying accounts receivable is greater than the maximum amount at any point in time. The eligible amounts available and beneficial interests sold were as follows (in millions):


	As of		As of
	September 30,		December 31,
	2010		2009
Eligible amount available under the ASA on qualified accounts receivable	$	93.9	$	72.5
Beneficial interest sold		—		—

Remaining amount available	$	93.9	$	72.5

As of September 30, 2010, $13.1 million of cash and cash equivalents were restricted and held in a trust for our captive insurance subsidiary.

We periodically review our capital structure, including our primary bank facility, to ensure that it has

adequate liquidity. We believe that cash flows from operations, as well as available borrowings under our revolving credit facility and other existing sources of funding, will be sufficient to fund our operations for the foreseeable future and share repurchases under the terms of our 2008 Share Repurchase Plan.

Off-Balance Sheet Arrangements

In addition to the credit facilities and senior unsecured notes described above, we also lease real estate and machinery and equipment pursuant to operating leases that are not capitalized on the balance sheet, including high-turnover equipment such as autos and service vehicles and short-lived equipment such as personal computers.

Commitments, Contingencies and Guarantees

For a detailed discussion of commitments, contingencies and guarantees, see Note 6 in the Notes to the Consolidated Financial Statements.

The estimate of our liability for future warranty costs requires us to make significant assumptions about the amount, timing and nature of the costs we will incur in the future. We review the assumptions used to determine the liability periodically and we adjust our assumptions based upon factors such as actual failure rates and cost experience. Numerous factors could affect actual failure rates and cost experience, including the amount and timing of new product introductions, changes in manufacturing techniques or locations, components or suppliers used. In recent years, changes in the warranty liability as the result of the issuance of new warranties and the payments made have remained relatively stable. Should actual warranty costs differ from our estimates, we may be required to record adjustments to accruals and expense in the future. At the end of each accounting period, we evaluate our warranty liabilities and during the second quarter of each year, we perform a complete reevaluation of our warranty liabilities. As a result of our annual evaluation, we have recorded a reduction to the warranty liability that is the principal amount contained within changes in estimates associated with pre-existing liabilities of $6.3 million. The reduction to our warranty liabilities was principally caused by lower than expected failure rates, reductions to future cost estimates, and new experience data.

We also may incur costs related to our products that may not be covered under our warranties and are not covered by insurance, and we may, from time to time, repair or replace installed products experiencing quality issues in order to satisfy our customers and to protect our brand. These product quality issues may be caused by vendor-supplied components that fail to meet required specifications. We have identified a product quality issue in a heating and cooling product line produced in 2006 and 2007 period that we believe results from a vendor-supplied materials quality issue. In 2009, we recorded an expense of $24.6 million for the portion of the issue that is probable and can be reasonably estimated and $17.5 million was accrued as of September 30, 2010. We may incur additional charges in the future as more information becomes available.

We estimate the costs to settle pending litigation based on experience involving similar claims and specific facts known. We do not believe that any current or pending or threatened litigation with have a material adverse effect on our financial position. Litigation and arbitration, however, involve uncertainties and it is possible that the eventual outcome of litigation could adversely affect our results of operations for a particular period. We are the defendant in a class action lawsuit related to certain hearth products we produced and sold that claims such products are hazardous and that consumers were not adequately warned. On August 23, 2010, the Company and the plaintiffs entered into a binding MOU and have reached tentative terms for settlement of the case. At the parties’ request, the court has stayed the litigation. If the terms of the MOU are fulfilled, as is expected, the parties will file a motion for preliminary approval of the settlement with the court by December 1, 2010. We recorded charges totaling $2.6 million related to this matter during the third quarter of 2010 and we may incur additional charges in the future.

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

Commodity Price Risk

We enter into commodity futures contracts to stabilize prices expected to be paid for raw materials and parts containing high copper and aluminum content. These contracts are for quantities equal to or less than quantities expected to be consumed in future production.

Fluctuations in metal commodity prices impact the value of the derivative instruments that we hold. When metal commodity prices rise, the fair value of our futures contracts increases and conversely, when commodity prices fall, the fair value of our futures contracts decreases.

Information about our exposure to market risks related to metal commodity prices and a sensitivity analysis related to our metal commodity hedges is presented below (in millions):


Notional amount (pounds)		18.6
Carrying amount and fair value of asset	$	10.0
Change in fair value from 10% change in forward prices	$	1.0

Interest Rate Risk

Our results of operations can be affected by changes in interest rates due to variable rates of interest on our revolving credit facilities, cash, cash equivalents and short-term investments.

In order to partially mitigate interest rate risk, we use a hedging strategy to eliminate the variability of cash flows in the interest payments for the first $100 million of the total variable-rate debt outstanding under the domestic revolving credit facility that is solely due to changes in the benchmark interest rate. This strategy allows us to fix a portion of our interest payments while also taking advantage of historically low interest rates.

On June 12, 2009, we entered into a $100 million pay-fixed, receive-variable interest rate swap with a large financial institution at a fixed interest rate of 2.66%. The variable portion of the interest rate swap is tied to 1-Month LIBOR (the benchmark interest rate). The interest rates under both the interest rate swap and the underlying debt are reset, the swap is settled with the counterparty, and interest is paid, on a monthly basis. The interest rate swap expires October 12, 2012. We account for the interest rate swap as a cash flow hedge.

Information about our exposure to interest rate risk and a sensitivity analysis related to our interest rate swap is presented below (in millions):


Notional amount	$	100.0
Impact of a 100 basis point change in the benchmark interest rate:
Carrying amount and fair value of liability	$	2.4
Interest expense	$	1.3

Foreign Currency Exchange Rate Risk

Our results of operations can be affected by changes in exchange rates. Net sales and expenses in foreign currencies are translated into U.S. dollars for financial reporting purposes based on the average exchange rate for the period. For the three months ended September 30, 2010 and 2009, net sales from outside the U.S. represented 26.3% and 29.0%, respectively, of our total net sales. Historically, foreign currency transaction gains (losses) have not had a material effect on our overall operations. As of September 30, 2010, the impact to net income of a 10% change in exchange rates is estimated to be approximately $3.5 million.

Item 4. Controls and Procedures.

Disclosure Controls and Procedures

As required by Rule 13a-15 under the Securities Exchange Act of 1934, we carried out an evaluation, under the supervision and with the participation of our current management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report. There are inherent limitations to the effectiveness of any system of disclosure controls and procedures, including the possibility of human error and circumvention or overriding of the controls and procedures. Accordingly, even effective disclosure controls and procedures can only provide reasonable assurance of achieving their control objectives. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of the period covered by this report September 30, 2010 our disclosure controls and procedures were effective to provide reasonable assurance that information required to be disclosed by us in the reports we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported, within the time periods specified in the applicable rules and forms, and that such information is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure.

Changes in Internal Control Over Financial Reporting

During the quarter ended September 30, 2010, there were no changes in our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II — OTHER INFORMATION

Item 1. Legal Proceedings.

On February 6, 2008, a class action lawsuit was filed against us in the U.S. District Court for the Northern District of California styled Keilholtz v. Lennox Hearth Products, Lennox Industries and Lennox International, Inc. The lawsuit, which involves no personal injury claims, alleges that certain of our single-pane, glass-front, gas fireplaces are hazardous and that consumers were not adequately warned, and seeks economic damages. On February 16, 2010, the court issued an order certifying a nationwide class of plaintiffs.

On August 23, 2010, the Company and the plaintiffs entered into a binding Memorandum of Understanding (MOU) and have reached tentative terms for settlement of the case. At the parties’ request, the court has stayed the litigation. If the terms of the MOU are fulfilled, as is expected, the parties will file a motion for preliminary approval of the settlement with the court by December 1, 2010.

Other than the lawsuit described above, there have been no significant changes concerning our legal proceedings since December 31, 2009. See Note 6 in the Notes to the Consolidated Financial Statements set forth in Part I, Item 1, of this Quarterly Report on Form 10-Q for additional discussion regarding legal proceedings.

Item 1A. Risk Factors.

There have been no material changes to the risk factors previously disclosed in our 2009 Annual Report on Form 10-K.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

In June 2008 our Board of Directors approved a new share repurchase plan for $300 million, pursuant to which we are authorized to repurchase shares of our common stock through open market purchases (the “2008 Share Repurchase Plan”). The 2008 Share Repurchase Plan has no stated expiration date. In the third quarter of 2010, we repurchased shares of our common stock as follows:


							Approximate
							Dollar
							Value of Shares
			Average				that
			Price		Total Number of		may yet be
			Paid per		Shares Purchased		Purchased
	Total Number		Share		As Part of Publicly		Under the Plans or
	of Shares		(including		Announced Plans		Programs
Period	Purchased ⁽¹⁾		fees)		or Programs		(in millions)
July 1 through July 31		831	$	44.97		—	$	190.8

August 1 through August 31		1,117,770	$	45.32		1,099,886	$	141.0

September 1 through September 30		1,798	$	42.44		—	$	141.0

		1,120,399	$	45.32		1,099,886


(1)		This column reflects the repurchases of 1,099,886 shares under the 2008 Share Repurchase Plan and the surrender to LII of 20,513 shares of common stock to satisfy tax-withholding obligations in connection with the vesting of restricted stock and performance share units.

Item 6. Exhibits.


3.1	—	Restated Certificate of Incorporation of Lennox International Inc. (“LII”) (filed as Exhibit 3.1 to LII’s Registration Statement on Form S-1 (Registration Statement No. 333-75725) filed on April 6, 1999 and incorporated herein by reference).

3.2	—	Amended and Restated Bylaws of LII (filed as Exhibit 3.1 to LII’s Current Report on Form 8-K filed on March 15, 2010 and incorporated herein by reference).


4.1	—	Specimen Stock Certificate for the Common Stock, par value $.01 per share, of LII (filed as Exhibit 4.1 to LII’s Amendment to Registration Statement on Form S-1/A (Registration No. 333-75725) filed on June 16, 1999 and incorporated herein by reference).

4.2	—	LII is a party to a long-term debt instrument under which the total amount of securities authorized under such instrument does not exceed 10% of the total assets of LII and its subsidiaries on a consolidated basis. Pursuant to paragraph 4(iii)(A) of Item 601(b) of Regulation S-K, LII agrees to furnish a copy of such instrument to the Securities and Exchange Commission upon request.

4.3	—	Indenture, dated as of May 3, 2010, between the Company and U.S. Bank National Association, as trustee (incorporated by reference to Exhibit 4.3 to the Company’s Post-Effective Amendment No. 1 to Registration Statement on S-3 (Registration No. 333-155796)).

4.4	—	Form of First Supplemental Indenture among the Company, the guarantors party thereto and U.S. Bank National Association, as trustee (incorporated by reference to Exhibit 4.11 to the Company’s Post-Effective Amendment No. 1 to Registration Statement on S-3 (Registration No. 333-155796)).

31.1	—	Certification of the principal executive officer (filed herewith).

31.2	—	Certification of the principal financial officer (filed herewith).

32.1	—	Certification of the principal executive officer and the principal financial officer pursuant to 18 U.S.C. Section 1350 (filed herewith).

Exhibit No. (101).INS* XBRL Instance Document

Exhibit No. (101).SCH* XBRL Taxonomy Extension Schema Document

Exhibit No. (101).CAL* XBRL Taxonomy Extension Calculation Linkbase Document

Exhibit No. (101).LAB* XBRL Taxonomy Extension Label Linkbase Document

Exhibit No. (101).PRE* XBRL Taxonomy Extension Presentation Linkbase Document

Exhibit No. (101).DEF* XBRL Taxonomy Extension Definition Linkbase Document


*		In accordance with Regulation S-T, the XBRL-related information in Exhibit No. (101) to this Quarterly Report on Form 10-Q shall be deemed “furnished” and not “filed.”

SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


	LENNOX INTERNATIONAL INC.
Date: October 26, 2010	/s/ Robert W. Hau
	Robert W. Hau
	Chief Financial Officer (on behalf of registrant and as principal financial officer)