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 MARCH 31, 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 o       No o

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

Large Accelerated Filer þ		Accelerated Filer o		Non-Accelerated Filer o (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 April 27, 2010, the number of shares outstanding of the registrant’s common stock, par value $.01 per share, was 55,789,511.

 

 

LENNOX INTERNATIONAL INC.

FORM 10-Q
For the Three Months Ended March 31, 2010

INDEX

		Page
Part I. Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets — March 31, 2010 (Unaudited) and December 31, 2009			3
Consolidated Statements of Operations (Unaudited) — Three Months Ended March 31, 2010 and 2009			4
Consolidated Statements of Stockholders’ Equity and Comprehensive Income — Three Months Ended March 31, 2010 (Unaudited) and Year Ended December 31, 2009			5
Consolidated Statements of Cash Flows (Unaudited) — Three Months Ended March 31, 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			22
Item 3. Quantitative and Qualitative Disclosures About Market Risk			32
Item 4. Controls and Procedures			32
Part II. Other Information
Item 1. Legal Proceedings			34
Item 1A. Risk Factors			34
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			34
Item 6. Exhibits			35
EX-31.1
EX-31.2
EX-32.1

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
		March 31,				December 31,
		2010				2009
		(unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents		$	63.0			$	124.3
Restricted cash			25.1				—
Accounts and notes receivable, net of allowances of $15.7 and $15.6 in 2010 and 2009, respectively			349.5				357.0
Inventories, net			326.4				250.2
Deferred income taxes			34.3				34.9
Other assets			84.8				67.5
Total current assets			883.1				833.9
PROPERTY, PLANT AND EQUIPMENT, net			326.7				329.6
GOODWILL			260.9				257.4
DEFERRED INCOME TAXES			69.5				74.6
OTHER ASSETS, net			50.6				48.4
TOTAL ASSETS		$	1,590.8			$	1,543.9
LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES:
Short-term debt		$	4.2			$	2.2
Current maturities of long-term debt			0.5				35.5
Accounts payable			286.1				238.2
Accrued expenses			285.9				317.9
Total current liabilities			576.7				593.8
LONG-TERM DEBT			286.6				193.8
POSTRETIREMENT BENEFITS, OTHER THAN PENSIONS			13.3				13.4
PENSIONS			68.4				66.7
OTHER LIABILITIES			75.3				71.8
Total liabilities			1,020.3				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, 85,978,262 shares and 85,567,485 shares issued for 2010 and 2009, respectively			0.9				0.9
Additional paid-in capital			846.6				839.1
Retained earnings			548.7				558.6
Accumulated other comprehensive income (loss)			7.1				(0.8	)
Treasury stock, at cost, 30,216,824 shares and 29,292,512 shares for 2010 and 2009, respectively			(832.8	)			(793.4	)
Total stockholders’ equity			570.5				604.4
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY		$	1,590.8			$	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 Ended
		March 31,
		2010				2009
NET SALES		$	644.1			$	580.6
COST OF GOODS SOLD			469.8				442.7
Gross profit			174.3				137.9
OPERATING EXPENSES:
Selling, general and administrative expenses			168.9				155.1
Gains and other expenses, net			(0.3	)			(0.9	)
Restructuring charges			7.2				11.2
Income from equity method investments			(2.0	)			(1.3	)
Operational income (loss) from continuing operations			0.5				(26.2	)
INTEREST EXPENSE, net			2.5				1.9
Loss from continuing operations before income taxes			(2.0	)			(28.1	)
BENEFIT FROM INCOME TAXES			(0.7	)			(10.4	)
Loss from continuing operations			(1.3	)			(17.7	)
DISCONTINUED OPERATIONS:
Operational loss from discontinued operations			0.4				0.6
Benefit from income taxes			(0.1	)			(0.2	)
Loss from discontinued operations			0.3				0.4
Net loss		$	(1.6	)		$	(18.1	)
LOSS PER SHARE — BASIC AND DILUTED:
Loss from continuing operations		$	(0.02	)		$	(0.32	)
Loss from discontinued operations			(0.01	)			(0.01	)
Net loss		$	(0.03	)		$	(0.33	)
AVERAGE SHARES OUTSTANDING — BASIC AND DILUTED			56.0				55.2
CASH DIVIDENDS DECLARED PER SHARE		$	0.15			$	0.14

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 Three Months Ended March 31, 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				(Loss) Income				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 loss			—				—				—				(1.6	)			—				—				(1.6	)		$	(1.6	)
Dividends, $0.15 per share			—				—				—				(8.3	)			—				—				(8.3	)			—
Foreign currency translation adjustments, net			—				—				—				—				8.4				—				8.4				8.4
Stock-based compensation expense			—				—				4.3				—				—				—				4.3				—
Derivatives and other, net of tax benefit of $0.1			—				—				—				—				(0.5	)			—				(0.5	)			(0.5	)
Common stock issued			0.4				—				1.0				—				—				—				1.0				—
Treasury stock purchases (924,312 shares at $42.58 average price per share)			—				—				—				—				—				(39.4	)			(39.4	)			—
Tax benefits of stock-based compensation			—				—				2.2				—				—				—				2.2				—
Comprehensive income			—				—				—				—				—				—				—			$	6.3
BALANCE AS OF MARCH 31, 2010			86.0			$	0.9			$	846.6			$	548.7			$	7.1			$	(832.8	)		$	570.5

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

LENNOX INTERNATIONAL INC. AND SUBSIDIARIES

		2010				2009
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss		$	(1.6	)		$	(18.1	)
Adjustments to reconcile net loss to net cash (used in) provided by operating activities:
Income from equity method investments			(2.0	)			(1.3	)
Restructuring expenses, net of cash paid			(0.8	)			5.6
Provision for bad debts			2.1				4.3
Unrealized loss (gain) on derivative contracts			0.1				(2.7	)
Return of collateral for hedges			—				23.9
Stock-based compensation expense			4.3				2.1
Depreciation and amortization			12.9				12.8
Deferred income taxes			2.2				11.0
Other items, net			9.7				5.3
Changes in assets and liabilities, net of effects of acquisitions and divestitures:
Accounts and notes receivable			4.3				25.8
Inventories			(85.6	)			(32.4	)
Other current assets			(4.8	)			3.1
Accounts payable			48.7				24.5
Accrued expenses			(28.7	)			(27.2	)
Income taxes payable and receivable			(5.7	)			(20.8	)
Other			4.6				0.4
Net cash (used in) provided by operating activities			(40.3	)			16.3
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from the disposal of property, plant and equipment			—				0.1
Purchases of property, plant and equipment			(10.7	)			(9.9	)
Proceeds from sale of businesses			3.2				0.5
Acquisition of business			(6.7	)			—
Restricted cash			(25.1	)			—
Purchases of short-term investments			—				(9.1	)
Proceeds from sales and maturities of short-term investments			—				10.2
Net cash used in investing activities			(39.3	)			(8.2	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Short-term borrowings, net			2.1				2.2
Long-term payments			(35.1	)			(1.2	)
Revolver long-term borrowings (payments), net			93.0				(16.3	)
Proceeds from stock option exercises			1.0				0.6
Repurchases of common stock			(39.4	)			(2.6	)
Excess tax benefits (shortfall) related to share-based payments			2.1				(0.3	)
Cash dividends paid			(7.9	)			(7.7	)
Net cash provided by (used in) financing activities			15.8				(25.3	)
DECREASE IN CASH AND CASH EQUIVALENTS			(63.8	)			(17.2	)
EFFECT OF EXCHANGE RATES ON CASH AND CASH EQUIVALENTS			2.5				(3.0	)
CASH AND CASH EQUIVALENTS, beginning of period			124.3				122.1
CASH AND CASH EQUIVALENTS, end of period		$	63.0			$	101.9
Supplementary disclosures of cash flow information:
Cash paid during the year for:
Interest		$	2.7			$	0.9
Income taxes (net of refunds)		$	0.5			$	6.8

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 March 31, 2010, the accompanying unaudited Consolidated Statements of Operations for the three months ended March 31, 2010 and 2009, the accompanying unaudited Consolidated Statement of Stockholders’ Equity and Comprehensive Income for the three months ended March 31, 2010 and the accompanying unaudited Consolidated Statements of Cash Flows for the three months ended March 31, 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 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 a 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 three-month 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 amounts have been reclassified from the prior year presentation to conform to the current year presentation.

2. Inventories:

     Components of inventories are as follows (in millions):

		As of				As of
		March 31,				December 31,
		2010				2009
Finished goods		$	241.8			$	182.3
Work in process			7.8				7.2
Raw materials and repair parts			148.8				132.7
			398.4				322.2
Excess of current cost over last-in, first-out cost			(72.0	)			(72.0	)
Total inventories		$	326.4			$	250.2

3. Goodwill:

     The changes in the carrying amount of goodwill for the first quarter of 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)			—				(1.1	)			4.2				0.4				3.5
Balance as of March 31, 2010:
Goodwill			33.7				30.2				319.1				85.9				468.9
Accumulated impairment loss			—				—				(208.0	)			—				(208.0	)
		$	33.7			$	30.2			$	111.1			$	85.9			$	260.9

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 16 months based on the prices of the commodities at settlement date. Assuming that commodity prices remain constant, $7.4 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 March 31, 2010 are scheduled to mature through June 2011.

     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 31 months based on the term of the swap. Assuming that the benchmark interest rate remains constant, $1.3 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
		March 31,				December 31,
		2010				2009
Commodity Price Hedges:
Gains included in AOCI, net of tax		$	(7.8	)		$	(7.2	)
Provision for income taxes			4.5				4.1
Interest Rate Swap:
Losses included in AOCI, net of tax		$	1.8			$	1.4
Benefit from income taxes			(1.0	)			(0.8	)

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

		As of				As of
		March 31,				December 31,
		2010				2009
		(pounds)				(pounds)
Copper			14.9				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
		March 31,				December 31,
		2010				2009
		(pounds)				(pounds)
Copper			1.0				0.9
Aluminum			0.8				0.9

     During the first quarter of 2010, we entered into foreign currency forward contracts with notional amounts of $43.9 million, of which $14.4 million were outstanding at March 31, 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 March31,						As of December 31,
		2010						2009
Asset Derivatives		Balance Sheet Location		Fair Value				Balance Sheet Location		Fair Value
Derivatives designated as hedging instruments under FASB ASC Topic 815:
Commodity futures contracts		Other Assets (Current)		$	11.7			Other Assets (Current)		$	11.1
Commodity futures contracts		Other Assets (Non-current)			0.7			Other Assets (Non-current)			0.3
					12.4						11.4
Derivatives not designated as hedging instruments under FASB ASC Topic 815:
Commodity futures contracts		Other Assets (Current)			1.0			Other Assets (Current)			1.1
					1.0						1.1
Total Asset for Derivatives				$	13.4					$	12.5
Liability Derivatives
Derivatives designated as hedging instruments under FASB ASC Topic 815:
Interest rate swap		Accrued Expenses			2.0			Accrued Expenses			2.0
Interest rate swap		Other Liabilities			0.8			Other Liabilities			0.3
Total Liability for Derivatives				$	2.8					$	2.3

The Effect of Derivative Instruments on the Consolidated Statements of Operations

		Location of (Gain) or Loss				Amount of (Gain) or Loss
		Reclassified				Reclassified
Derivatives in FASB ASC Topic 815		from AOCI into Income				from AOCI into Income
Cash Flow Hedging Relationships		(Effective Portion)				(Effective Portion)
						For the Three Months Ended
						March 31,
						2010				2009
Futures contracts		Cost of Goods Sold				$	(2.9	)		$	10.3
Interest rate swap		Interest Expense, net					0.6				—
						$	(2.3	)		$	10.3

Derivatives Not Designated as		Location of Gain				Amount of Gain
Hedging Instruments under		Recognized in Income on				Recognized in Income on
FASB ASC Topic 815		Derivatives				Derivatives
						For the Three Months Ended
						March 31,
						2010				2009
Futures contracts		Gains and Other Expenses, net				$	(0.3	)		$	(0.7	)
Foreign currency forward contracts		Gains and Other Expenses, net					(0.7	)			—
						$	(1.0	)		$	(0.7	)

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

5. Income Taxes:

     As of March 31, 2010, we had approximately $1.5 million in total gross unrecognized tax benefits. Of this amount, $1.0 million (net of federal benefit on state issues), if recognized, would be recorded through the Consolidated Statement of Operations. As of March 31, 2010, we had recognized $0.1 million (net of federal tax benefits) in interest and penalties in income tax expense in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 740.

     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 and the District of Columbia have enacted legislation effective for tax years beginning on or after January 1, 2010, including requirements for combined reporting and changes to apportionment methods. We believe any adjustments will be immaterial.

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 $62.3 million and $60.4 million as of March 31, 2010 and December 31, 2009, respectively.

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

		As of				As of
		March 31,				December 31,
		2010				2009
Accrued Expenses		$	30.0			$	31.5
Other Liabilities			52.4				50.0
		$	82.4			$	81.5

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

Total warranty liability as of December 31, 2009		$	81.5
Payments made in 2010			(5.4	)
Changes resulting from issuance of new warranties			5.8
Changes in estimates associated with pre-existing liabilities			0.5
Total warranty liability as of March 31, 2010		$	82.4

		As of				As of
		March 31,				December 31,
		2010				2009
Accrued product quality issue (not covered under warranty)		$	19.9			$	21.6

     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 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 that we believe results from a vendor-supplied materials quality issue. To date, we have recorded an expense of $24.6 million for the portion of the issue that is probable and can be reasonably estimated based upon the current data available and $19.9 million remained accrued as of March 31, 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 has been classified in Cost of Goods Sold in the accompanying Consolidated Statements of Operations and the related liability is included in Accrued Expenses in the 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 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. The outcome related to this action is uncertain and we therefore cannot reasonably estimate the amount of any potential loss.

     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 March 31, 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 March 31, 2010		Debt				Maturities				Maturities				Total
Domestic revolving credit facility		$	—			$	—			$	269.5			$	269.5
Capital lease obligations			—				0.4				17.1				17.5
Foreign obligations			4.2				0.1				—				4.3
Total debt		$	4.2			$	0.5			$	286.6			$	291.3

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

     As of March 31, 2010, we had outstanding borrowings of $269.5 million under the $650 million domestic revolving credit facility and $96.9 million was committed to standby letters of credit. All of the remaining $283.6 million was available for future borrowings after consideration of covenant limitations. The facility matures in October 2012. As of March 31, 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 $4.3 million and $2.5 million of obligations outstanding through our foreign subsidiaries as of March 31, 2010 and December 31, 2009, respectively. Available borrowing capacity at March 31, 2010 and December 31, 2009, under foreign facilities was $12.7 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 0.83% and 0.84% as of March 31, 2010 and December 31, 2009, respectively.

     Our captive insurance subsidiary entered into an agreement in which $25.1 million of 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. As of March 31, 2010, this transaction was classified as restricted cash on the accompanying Consolidated Balance Sheets.

Credit Rating

     At March 31, 2010, our senior credit rating was Ba1, with a stable outlook, by Moody’s. On April 30, 2010, Moody’s upgraded our senior credit rating to Baa3, with a stable outlook. During the first quarter of 2010, Standard & Poor’s Rating Group (“S&P”) raised our senior credit rating from BB+, with a positive outlook, to BBB-, with a stable outlook.

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 participating financial institution has an investment grade credit rating. We continue to evaluate its credit rating and have no reason to believe it will not perform under the ASA. As of March 31, 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
		March 31,				December 31,
		2010				2009
Eligible amount available under the ASA on qualified accounts receivable		$	77.6			$	72.5
Beneficial interest sold			—				—
Remaining amount available		$	77.6			$	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 as of March 31, 2010 and December 31, 2009 was 1.38%. 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
		March 31,
		2010				2009
Discount fees		$	0.1			$	0.3

8. Pension and Postretirement Benefit Plans:

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

						For the Three Months Ended March 31,
		2010				2009				2010				2009
		Pension Benefits								Other Benefits
Service cost		$	1.2			$	1.4			$	0.2			$	0.2
Interest cost			4.4				4.3				0.2				0.2
Expected return on plan assets			(4.8	)			(4.0	)			—				—
Amortization of prior service cost			0.1				0.2				(0.5	)			(0.5	)
Amortization of net loss			2.2				2.2				0.3				0.3
Total net periodic pension cost		$	3.1			$	4.1			$	0.2			$	0.2

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

						Fair Value Measurements as of
		March 31, 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		$	5.0			$	—			$	—			$	5.0
Commingled pools / Collective Trusts
U.S. equity (1)			—				48.0				—				48.0
International equity (2)			—				47.8				—				47.8
Fixed income (3)			—				71.9				—				71.9
Mutual funds
U.S. equity (4)			23.8				—				—				23.8
International equity (4)			5.7				—				—				5.7
Fixed income (5)			5.9				—				—				5.9
Balanced pension trust (6)
U.S. equity			—				2.2				—				2.2
International equity			—				7.5				—				7.5
Bonds			—				5.3				—				5.3
Deposit pension fund (7)			—				8.0				—				8.0
Guaranteed investment contracts			—				1.9				—				1.9
Total		$	40.4			$	192.6			$	—			$	233.0

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

As of March 31, 2010

Redemption

Frequency

(if currently

Redemption

Fair Value

eligible)

Notice Period

Assets Category:

Commingled pools / Collective Trusts

U.S. equity (1)

$

48.0

Daily

4 days

International equity (2)

47.8

Daily, Monthly

4 – 15 days

Fixed income (3)

71.9

Quarterly

15 days

Mutual funds

U.S. equity (4)

23.8

n/a

n/a

International equity (4)

5.7

n/a

n/a

Fixed income (5)

5.9

n/a

n/a

Balanced pension trust (6)

U.S. equity

2.2

Daily

5 days

International equity

7.5

Daily

5 days

Bonds

5.3

Daily

5 days

Deposit pension fund (7)

8.0

Daily

7 days

Total

$

226.1

9. Stock-Based Compensation:

Our Amended and Restated 1998 Incentive Plan provides for various long-term incentive awards, which include stock options, performance share units, restricted stock units and stock appreciation rights. Compensation expense of $4.3 million and $2.1 million was recognized for the first quarters of 2010 and 2009, respectively, and is 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 have begun 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 Ended
		March 31,
		2010				2009
Manufacturing rationalizations		$	5.4			$	7.6
Reorganization of distribution network			0.2				0.1
Reorganizations of corporate and business unit selling and administrative functions			1.6				3.5
Total		$	7.2			$	11.2

     The components of the $7.2 million of restructuring charges recorded in the first quarter of 2010 are discussed in greater detail in later sections of this footnote.

     In the first quarter of 2009, restructuring charges for manufacturing rationalizations included $5.3 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. Manufacturing rationalizations recorded in the first quarter of 2009 also included $1.9 million of charges related to the closure of our Refrigeration operations in Danville, Illinois and the consolidation of Danville manufacturing, support and warehouse functions into our Tifton, Georgia and Stone Mountain, Georgia operations and $0.4 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 first quarter of 2009, restructuring charges for reorganizations of corporate and business unit selling and administrative functions included $1.2 million related to the reorganization of our Commercial Heating & Cooling selling and administrative organization in the United States and Canada. Restructuring charges related to reorganizations of corporate and business unit selling and administrative functions also included $1.0 million related to the reorganization of our Commercial Heating & Cooling business unit’s selling and administrative functions in Northern Europe, $0.7 million related to the reorganization of the management structure of our Refrigeration administrative and support functions across the globe, and $0.5 million related to the reorganization of the Residential Heating & Cooling selling and administrative organization in the United States. Additionally, during the first quarter of 2009, we recorded restructuring charges of $0.1 million as Service Experts centralized certain of its 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 quarter of 2010 (in millions):

		Balance as of				Charged								Non-Cash				Balance as of
		December 31,				to				Cash				Utilization				March 31,
Description of Reserves		2009				Earnings				Utilization				and Other				2010
Severance and related expense		$	21.1			$	4.1			$	(6.5	)		$	(0.6	)		$	18.1
Asset write-offs and accelerated depreciation			—				1.3								(1.3	)			—
Equipment moves			—				0.3				(0.3	)			—				—
Lease termination			0.3				0.3				(0.3	)			—				0.3
Other			0.8				1.2				(0.9	)			(1.0	)			0.1
Total restructuring reserves		$	22.2			$	7.2			$	(8.0	)		$	(2.9	)		$	18.5

     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		$	3.6			$	28.7			$	29.6
Asset write-offs and accelerated depreciation			1.3				9.7				10.1
Equipment moves			0.1				2.3				3.9
Other			0.4				4.2				6.1
Total		$	5.4			$	44.9			$	49.7

     Restructuring expense for manufacturing rationalization activities related to the following:

	•		In the first quarter of 2010, we began to exit certain Refrigeration manufacturing operations in Milperra, Australia. Total restructuring charges related to this action were $5.1 million, which was composed of severance of $4.0 million and asset impairment charges of $1.1 million. We do not anticipate any additional restructuring charges related to this action. This activity is expected to be completed by the second quarter 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 quarter of 2010 were $0.6 million, primarily composed of equipment move costs, accelerated depreciation and other plant closure costs. The consolidation is expected to be completed during the first quarter of 2011.
	•		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 and we recorded restructuring severance charges totaling $0.2 million related to this action. We expect to complete this action during the first half of 2010.
	•		Also, we reversed $0.5 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 $0.2 million of restructuring charges, which was composed of severance, during the first quarter 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 $2.7 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 2010.

     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		$	0.8			$	1.2			$	1.5
Severance and related expense			0.3				23.4				23.6
Asset write-offs and accelerated depreciation			0.1				0.9				0.9
Lease termination			0.3				2.0				2.1
Other			0.1				0.8				1.2
Total		$	1.6			$	28.3			$	29.3

     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 $1.4 million during first quarter of 2010. Total anticipated restructuring charges related to this action are expected to total $4.0 million and consist principally of severance, recruiting, relocation costs and lease termination costs. We expect to complete this action during the first half of 2010.
	•		During the first quarter of 2010, 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 $0.2 million during the first quarter of 2010. The action will be completed during the third quarter of 2010.

11. Discontinued Operations:

     Service Experts Discontinued Operations

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

		For the Three Months Ended
		March 31,
		2010				2009
Net trade sales		$	0.2			$	6.1
Operational loss from discontinued operations(1)			0.4				0.6

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

		As of				As of
		March 31,				December 31,
		2010				2009
Assets of discontinued operations:
Other assets		$	0.4			$	3.6
Liabilities of discontinued operations:
Accrued expenses		$	0.7			$	1.3

12. Loss Per Share:

     Due to the net losses recorded for the first quarters of 2010 and 2009, both basic and diluted net loss per share are computed by dividing net loss by the weighted-average number of common shares outstanding during the period, because the inclusion of dilutive securities would reduce the reported net loss per share.

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

		For the Three Months Ended
		March 31,
		2010				2009
Net loss		$	(1.6	)		$	(18.1	)
Add: Loss from discontinued operations			0.3				0.4
Loss from continuing operations		$	(1.3	)		$	(17.7	)
Weighted-average shares outstanding – basic and diluted			56.0				55.2
Loss per share from continuing operations – basic and diluted		$	(0.02	)		$	(0.32	)

     Because we are in a loss position in the first quarters of 2010 and 2009, potentially dilutive securities, including stock options, stock appreciation rights, restricted stock units and performance share units totaling 1,274,529 and 1,424,279 shares were outstanding, but not included in the 2010 and 2009 computations, respectively, of the diluted loss per share because their inclusion would have had an anti-dilutive impact.

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

		For the Three Months Ended
		March 31,
		2010				2009
Number of shares			555,628				1,395,079
Price ranges per share		$	36.94			$	29.25 – 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 & Cooling		Heating Air Conditioning Hearth Products		Residential Replacement Residential New Construction		United States Canada
Commercial Heating & Cooling		Rooftop Products Chillers Air Handlers		Light Commercial		United States Canada Europe
Service Experts		Equipment Sales Installation Maintenance Repair		Residential Light Commercial		United States Canada
Refrigeration		Unit Coolers Condensing Units Other Commercial Refrigeration Products		Light Commercial		United States Canada Europe Asia Pacific 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. We define segment profit or loss as a segment’s income or loss from continuing operations before income taxes included in the accompanying Consolidated Statements of Operations:

          Excluding:

	•		Gains and/or losses and other expenses, net except for gains and/or losses on the sale of fixed assets.
	•		Restructuring charges.

	•		Goodwill and equity method investment impairments.
	•		Interest expense, net.
	•		Other expense, net.
	Less amounts included in Gains and Other Expenses, net: