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, 2009

OR

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

For the transition period from                      to                     

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		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, 2009, the number of shares outstanding of the registrant’s common stock, par value $.01 per share, was 55,412,508.

 

 

LENNOX INTERNATIONAL INC.

FORM 10-Q
For the Quarter Ended March 31, 2009

INDEX

						Page
Part I. Financial Information
Item 1.				Financial Statements
				Consolidated Balance Sheets — March 31, 2009 (Unaudited) and December 31, 2008			3
				Consolidated Statements of Operations (Unaudited) — Quarters Ended March 31, 2009 and 2008			4
				Consolidated Statements of Stockholders’ Equity and Comprehensive Income (Loss) — Quarter Ended March 31, 2009 (Unaudited) and Year Ended December 31, 2008			5
				Consolidated Statements of Cash Flows (Unaudited) — Quarters Ended March 31, 2009 and 2008			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			33
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
Exhibit 31.1
Exhibit 31.2
Exhibit 32.1

PART I — FINANCIAL INFORMATION

Item 1. Financial Statements.

LENNOX INTERNATIONAL INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
As of March 31, 2009 and December 31, 2008
(In millions, except share and per share data)

		March 31,				December 31,
		2009				2008
		(unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents		$	101.9			$	122.1
Short-term investments			32.3				33.4
Accounts and notes receivable, net			334.5				369.6
Inventories, net			321.1				298.3
Deferred income taxes			18.5				24.2
Other assets			80.4				87.4
Total current assets			888.7				935.0
PROPERTY, PLANT AND EQUIPMENT, net			324.3				329.5
GOODWILL			229.4				232.3
DEFERRED INCOME TAXES			105.0				113.5
OTHER ASSETS, net			51.2				49.2
TOTAL ASSETS		$	1,598.6			$	1,659.5
LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES:
Short-term debt		$	8.3			$	6.1
Current maturities of long-term debt			0.4				0.6
Accounts payable			258.2				234.5
Accrued expenses			291.9				331.1
Income taxes payable			—				3.7
Total current liabilities			558.8				576.0
LONG-TERM DEBT			396.4				413.7
POSTRETIREMENT BENEFITS, OTHER THAN PENSIONS			12.3				12.5
PENSIONS			110.8				107.7
OTHER LIABILITIES			88.3				91.0
Total liabilities			1,166.6				1,200.9
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, 84,586,990 shares and 84,215,904 shares issued for 2009 and 2008, respectively			0.8				0.8
Additional paid-in capital			808.0				805.6
Retained earnings			512.9				538.8
Accumulated other comprehensive loss			(99.3	)			(98.8	)
Treasury stock, at cost, 29,210,131 shares and 29,109,058 shares for 2009 and 2008, respectively			(790.4	)			(787.8	)
Total stockholders’ equity			432.0				458.6
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY		$	1,598.6			$	1,659.5

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

LENNOX INTERNATIONAL INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS
For the Quarters Ended March 31, 2009 and 2008
(Unaudited, in millions, except per share data)

		For the
		Quarters Ended
		March 31,
		2009				2008
NET SALES		$	585.4			$	764.5
COST OF GOODS SOLD			446.7				570.8
Gross profit			138.7				193.7
OPERATING EXPENSES:
Selling, general and administrative expenses			156.8				184.0
Gains and other expenses, net			(0.8	)			(3.4	)
Restructuring charges			11.2				2.8
Income from equity method investments			(1.3	)			(3.1	)
Operational (loss) income from continuing operations			(27.2	)			13.4
INTEREST EXPENSE, net			1.7				2.7
(Loss) income from continuing operations before income taxes			(28.9	)			10.7
(BENEFIT FROM) PROVISION FOR INCOME TAXES			(10.7	)			4.0
(Loss) income from continuing operations			(18.2	)			6.7
DISCONTINUED OPERATIONS:
(Income) loss from discontinued operations			(0.2	)			0.7
Income tax provision (benefit)			0.1				(0.3	)
(Income) loss from discontinued operations			(0.1	)			0.4
Net (loss) income		$	(18.1	)		$	6.3
(LOSS) EARNINGS PER SHARE — BASIC:
(Loss) income from continuing operations		$	(0.33	)		$	0.11
Income (loss) from discontinued operations			—				(0.01	)
Net (loss) income		$	(0.33	)		$	0.10
(LOSS) EARNINGS PER SHARE — DILUTED:
(Loss) income from continuing operations		$	(0.33	)		$	0.11
Income (loss) from discontinued operations			—				(0.01	)
Net (loss) income		$	(0.33	)		$	0.10
AVERAGE SHARES OUTSTANDING:
Basic			55.2				60.3
Diluted			55.2				62.7
CASH DIVIDENDS DECLARED PER SHARE		$	0.14			$	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 (LOSS)
For the Quarter Ended March 31, 2009 (unaudited) and the Year Ended December 31, 2008
(In millions, except per share data)

																		Accumulated
		Common Stock								Additional								Other				Treasury				Total
		Issued								Paid-In				Retained				Comprehensive				Stock				Stockholders’				Comprehensive
		Shares				Amount				Capital				Earnings				Income (Loss)				at Cost				Equity				Income (Loss)
BALANCE AS OF DECEMBER 31, 2007			81.9				0.8				760.7				447.4				63.6				(464.0	)			808.5
Net income			—				—				—				122.8				—				—				122.8			$	122.8
Dividends, $0.56 per share			—				—				—				(31.4	)			—				—				(31.4	)			—
Foreign currency translation adjustments, net			—				—				—				—				(84.9	)			—				(84.9	)			(84.9	)
Pension and postretirement liability changes, net of tax benefit of $35.1			—				—				—				—				(55.9	)			—				(55.9	)			(55.9	)
Stock-based compensation expense			—				—				11.8				—				—				—				11.8				—
Derivatives and other, net of tax provision of $12.3			—				—				—				—				(21.6	)			—				(21.6	)			(21.6	)
Common stock issued			2.3				—				19.7				—				—				—				19.7				—
Treasury stock purchases			—				—				—				—				—				(323.8	)			(323.8	)			—
Tax benefits of stock-based compensation			—				—				13.4				—				—				—				13.4				—
Comprehensive loss			—				—				—				—				—				—				—			$	(39.6	)
BALANCE AS OF DECEMBER 31, 2008			84.2			$	0.8			$	805.6			$	538.8			$	(98.8	)		$	(787.8	)		$	458.6
Net loss			—				—				—				(18.1	)			—				—				(18.1	)		$	(18.1	)
Dividends, $0.14 per share			—				—				—				(7.8	)			—				—				(7.8	)			—
Foreign currency translation adjustments, net			—				—				—				—				(11.3	)			—				(11.3	)			(11.3	)
Stock-based compensation expense			—				—				2.1				—				—				—				2.1				—
Derivatives and other, net of tax provision of $6.2.			—				—				—				—				10.8				—				10.8				10.8
Common stock issued			0.4				—				0.6				—				—				—				0.6				—
Treasury stock purchases			—				—				—				—				—				(2.6	)			(2.6	)			—
Tax expense of stock-based compensation			—				—				(0.3	)			—				—				—				(0.3	)			—
Comprehensive loss			—				—				—				—				—				—				—			$	(18.6	)
BALANCE AS OF MARCH 31,2009			84.6			$	0.8			$	808.0			$	512.9			$	(99.3	)		$	(790.4	)		$	432.0

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

LENNOX INTERNATIONAL INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Quarters Ended March 31, 2009 and 2008
(Unaudited, in millions)

		2009				2008
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income		$	(18.1	)		$	6.3
Adjustments to reconcile net (loss) income to net cash provided by (used in) operating activities:
Income from equity method investments			(1.3	)			(3.1	)
Restructuring expenses, net of cash paid			5.6				(1.1	)
Unrealized gains on futures contracts			(2.7	)			(2.8	)
Collateral posted for hedges			23.9				—
Stock-based compensation expense			2.1				3.2
Depreciation and amortization			12.8				12.7
Deferred income taxes			11.0				7.2
Other items, net			9.7				10.8
Changes in assets and liabilities, net of effect of acquisitions and divestitures:
Accounts and notes receivable			27.4				5.5
Inventories			(32.3	)			(54.7	)
Other current assets			1.4				(2.3	)
Accounts payable			24.5				34.4
Accrued expenses			(27.3	)			(33.7	)
Income taxes payable and receivable			(20.8	)			(15.4	)
Other			0.4				0.4
Net cash provided by (used in) operating activities			16.3				(32.6	)
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from the disposal of property, plant and equipment			0.1				0.3
Purchases of property, plant and equipment			(9.9	)			(9.8	)
Proceeds from sales of affiliates			0.5				—
Purchases of short-term investments			(9.1	)			(21.7	)
Proceeds from sales and maturities of short-term investments			10.2				14.9
Net cash used in investing activities			(8.2	)			(16.3	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Short-term borrowing			2.2				0.5
Long-term debt payments			(1.2	)			—
Revolver long-term (payments) borrowings, net			(16.3	)			193.0
Proceeds from stock option exercises			0.6				12.3
Repurchases of common stock			(2.6	)			(183.1	)
Tax (expense) benefits related to stock-based payments			(0.3	)			10.8
Cash dividends paid			(7.7	)			(8.7	)
Net cash (used in) provided by financing activities			(25.3	)			24.8
DECREASE IN CASH AND CASH EQUIVALENTS			(17.2	)			(24.1	)
EFFECT OF EXCHANGE RATES ON CASH AND CASH EQUIVALENTS			(3.0	)			(1.1	)
CASH AND CASH EQUIVALENTS, beginning of period			122.1				145.5
CASH AND CASH EQUIVALENTS, end of period		$	101.9			$	120.3
Supplementary disclosures of cash flow information:
Cash paid during the quarter for:
Interest (net of capitalized interest)		$	0.9			$	2.5
Income taxes (net of refunds)		$	6.8			$	5.9

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

LENNOX INTERNATIONAL INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

1. General:

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

Basis of Presentation

The accompanying unaudited Consolidated Balance Sheet as of March 31, 2009, the accompanying unaudited Consolidated Statements of Operations for the quarters ended March 31, 2009 and 2008, the accompanying unaudited Consolidated Statement of Stockholders’ Equity for the quarter ended March 31, 2009 and the accompanying unaudited Consolidated Statements of Cash Flows for the quarters ended March 31, 2009 and 2008 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, 2008. 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 in conformity with U.S. GAAP 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, legal 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. Declines in the residential and commercial new construction markets and other consumer spending and volatile equity, foreign currency, and commodity markets have combined to increase the uncertainty inherent in such estimates and assumptions. As future events and their effects cannot be determined with precision, actual results could differ significantly from these estimates. Changes in those estimates resulting from continuing changes in the economic environment will be reflected in the financial statements in future periods.

Reclassifications

We have reclassified certain prior period expenses in the Consolidated Statement of Operations from Selling, General and Administration Expenses to Cost of Goods Sold to conform to the current period’s presentation in the Consolidated Statement of Operations. These costs include global sourcing and supplier development, product liability, workers’ compensation and property leases.

2. Accounts and Notes Receivable:

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

		As of				As of
		March 31,				December 31,
		2009				2008
Allowance for doubtful accounts		$	19.3			$	18.6

		For the Quarters Ended March 31,
		2009				2008
Provision for bad debts		$	4.4			$	5.7

3. Inventories:

Components of inventories are as follows (in millions):

		As of				As of
		March 31,				December 31,
		2009				2008
Finished goods		$	244.5			$	232.8
Work in process			8.6				8.4
Raw materials and repair parts			143.1				132.9
			396.2				374.1
Excess of current cost over last-in, first-out cost			(75.1	)			(75.8	)
Total inventories		$	321.1			$	298.3

4. Goodwill:

The changes in the carrying amount of goodwill for the first quarter of 2009, in total and by segment, are as follows (in millions):

		Balance at								Balance at
		December 31,								March 31,
		2008				Changes(1)				2009
Segment
Residential Heating & Cooling		$	33.7			$	—			$	33.7
Commercial Heating & Cooling			31.2				(0.9	)			30.3
Service Experts			93.8				(0.9	)			92.9
Refrigeration			73.6				(1.1	)			72.5
Total		$	232.3			$	(2.9	)		$	229.4

5. Derivatives:

Objectives and Strategies for Using Derivative Instruments

We utilize a hedging program to mitigate the exposure to volatility in the prices of metal commodities we use in our production processes. The hedging program includes the use of futures contracts and we enter into these contracts based on our hedging strategy. We use a dollar cost averaging strategy for our hedge program. As part of this strategy, a higher percentage of commodity price exposures are hedged near term with lower percentages hedged at future dates. This strategy provides us with protection against extreme near-term price volatility caused by market speculators and market forces, such as supply variation, while allowing us to participate in downward market price movements over time. Upon entering into futures contracts, we lock in prices and are subject to derivative losses should the metal commodity prices decrease and gains should the prices increase. During 2008, metal commodity prices decreased significantly in a short time horizon, which resulted in significant derivative losses. As a result of these losses, we were required to post collateral of $14.0 million and $37.9 million as of March 31, 2009 and December 31, 2008, respectively. This transaction was treated as a prepaid expense and recorded in Other Assets in the accompanying Consolidated Balance Sheets. The unrealized derivative losses were recorded in accumulated other comprehensive loss (“AOCL”).

We are required to recognize all derivative instruments as either assets or liabilities at fair value in the Consolidated Balance Sheets. We designate domestic copper futures contracts as cash flow hedges of forecasted copper purchases. To qualify for hedge accounting, we require that the futures contracts be effective in reducing the risk exposure that they are designed to hedge and that it is probable that the underlying transaction will occur. For instruments designated as cash flow hedges, we must formally document, at inception of the arrangement, the relationship between the hedging instrument and the hedged item, including the risk management objective, the hedging strategy for use of the hedged instrument, and how hedge effectiveness is, and will be, assessed. This documentation includes linking the instruments that are designated as cash flow hedges to forecasted transactions. These criteria demonstrate that the futures contracts are expected to be highly effective at offsetting changes in the cash flows of the hedged item, both at inception and on an ongoing basis.

We may also enter into instruments that economically hedge certain of our risks, even though hedge accounting does not apply or we elect not to apply hedge accounting to these instruments. The fair value of the instruments act as an economic offset to changes in the fair value of the underlying item(s).

We monitor our derivative positions and credit ratings of our counterparties and do not anticipate losses due to counterparty non-performance.

Cash Flow Hedges

For futures contracts that are designated and qualify as cash flow hedges, we assess hedge effectiveness and measure hedge ineffectiveness at least quarterly throughout the hedge designation period. The effective portion of the gain or loss on the futures contracts is recorded, net of applicable taxes, in AOCL, a component of Stockholders’ Equity in the accompanying Consolidated Balance Sheets. When earnings is affected by the variability of the underlying cash flow, the applicable offsetting amount of the gain or loss from the futures contracts that is deferred in AOCL is reclassified into earnings and is reported as a component of Cost of Goods Sold in the accompanying Consolidated Statements of Operations. Ineffectiveness, if any, is recorded in earnings each period and reported in Gains and Other Expenses, net in the accompanying Consolidated Statements of Operations. If the hedging relationship ceases to be highly effective, the net gain or loss shall remain in AOCL and will be reclassified into earnings when earnings is affected by the variability of the underlying cash flow. If it becomes probable that the forecasted transaction will not occur by the end of the originally specified period or within two months thereafter, the net gain or loss remaining in AOCL will be reclassified to earnings immediately.

We include (gains) losses in AOCL in connection with our cash flow hedges. These (gains) losses 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, $10.5 million of derivative losses are expected to be reclassified into earnings within the next 12 months. Derivative instruments that are designated as cash flow hedges and are in place as of March 31, 2009 are scheduled to mature through August 2010. We recorded the following amounts related to our cash flow hedges (in millions):

		As of				As of
		March 31,				December 31,
		2009				2008
Losses included in AOCL, net of tax		$	10.3			$	21.3
Tax benefit			(5.8	)			(11.9	)

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

		As of				As of
		March 31,				December 31,
		2009				2008
		(pounds)				(pounds)
Copper			19.0				23.1

Derivatives not Designated as Cash Flow Hedges

For 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 inception of the arrangement. Changes in the fair value of instruments not designated as cash flow hedges are recorded in earnings throughout the term of the derivative instrument and are reported in Gains and Other Expenses, net in the accompanying Consolidated Statements of Operations.

We had the following outstanding futures contracts not designated as cash flow hedges (in millions).

		As of				As of
		March 31,				December 31,
		2009				2008
		(pounds)				(pounds)
Copper			2.4				2.9
Aluminum			2.5				3.2

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 March 31,						As of December 31,
		2009						2008
		Balance Sheet						Balance Sheet
		Location		Fair Value				Location		Fair Value
Asset Derivatives
Derivatives designated as hedging instruments under SFAS No. 133
Futures contracts		Other Assets		$	0.4			Other Assets		$	—
					0.4						—
Derivatives not designated as hedging instruments under SFAS No. 133
Futures contracts		Other Assets		$	0.1			Other Assets		$	—
					0.1						—
Total Asset for Derivatives				$	0.5					$	—
Liability Derivatives
Derivatives designated as hedging instruments under SFAS No. 133
Futures contracts		Accrued Expenses		$	16.6			Accrued Expenses		$	31.0
Futures contracts		Other Liabilities			—			Other Liabilities			2.6
				$	16.6					$	33.6
Derivatives not designated as hedging instruments under SFAS No. 133
Futures contracts		Accrued Expenses		$	3.2			Accrued Expenses		$	5.5
Futures contracts		Other Liabilities			—			Other Liabilities			0.3
				$	3.2					$	5.8
Total Liability for Derivatives				$	19.8					$	39.4

The Effect of Derivative Instruments on the Consolidated Statements of Operations

Location of (Gain) or Loss

Derivatives in SFAS No. 133

Reclassified

Amount of Loss or (Gain) Reclassified

Cash Flow Hedging

from AOCL into Income

from AOCL into Income

Relationships

(Effective Portion)

(Effective Portion)

For the Quarters Ended March 31,

2009

2008

Futures contracts

Cost of Goods Sold

$

10.3

$

(2.1

)

Derivatives in SFAS No. 133

Location of Gain Recognized

Amount of Gain Recognized

Cash Flow Hedging

in Income on Derivatives

in Income on Derivatives (Ineffective

Relationships

(Ineffective Portion)

Portion)

For the Quarters Ended March 31,

2009

2008

Futures contracts

Gains and Other Expenses, net

$

—

$

0.1

Derivatives Not Designated as

Location of Gain

Amount of Gain

Hedging Instruments under

Recognized in Income on

Recognized in Income on

SFAS No. 133

Derivatives

Derivatives

For the Quarters Ended March 31,

2009

2008

Futures contracts

Gains and Other Expenses, net

$

0.7

$

3.1

We report cash flows arising from our hedging instruments consistent with the classification of cash flows from the underlying hedged items. Accordingly, cash flows associated with our derivative programs are classified as from operating activities in the accompanying Consolidated Statements of Cash Flows.

For more information on the fair value of these derivative instruments, see Note 16.

6. Income Taxes:

As of March 31, 2009, we had approximately $14.6 million in total gross unrecognized tax benefits. Of this amount, $6.6 million (net of federal benefit on state issues), if recognized, would be recorded through the Consolidated Statement of Operations. Also included in the balance of unrecognized tax benefits as of March 31, 2009 are liabilities of $6.4 million that, if recognized, would be recorded as an adjustment to stockholders’ equity. As of March 31, 2009, we had recognized $0.9 million (net of federal tax benefits) in interest and penalties in income tax expense in accordance with FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes - an Interpretation of FASB Statement 109 (“FIN No. 48”).

The Internal Revenue Service (“IRS”) has completed its examination of our consolidated tax returns for the years 2004 — 2005 and issued a Revenue Agent’s Report (“RAR”) on July 31, 2008. The IRS has proposed certain significant adjustments to our insurance deductions and research tax credits. We disagree with the RAR and have requested a review by the administrative appeals division of the IRS.

We are subject to examination by numerous taxing authorities in jurisdictions such as Australia, Belgium, Canada, Germany, and the United States. 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, 2009, Wisconsin and California have enacted legislation effective for tax years beginning on or after January 1, 2009, including requirements for combined reporting and changes to apportionment methods. We believe any adjustments will be immaterial.

7. 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.

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,
		2009				2008
Accrued Expenses		$	29.7			$	30.2
Other Liabilities			64.0				64.3
		$	93.7			$	94.5

The changes in the total warranty liabilities for the first quarter of 2009 were as follows (in millions):

Total warranty liability as of December 31, 2008		$	94.5
Payments made in 2009			(6.4	)
Changes resulting from issuance of new warranties			5.4
Changes in estimates associated with pre-existing liabilities			0.7
Changes in foreign currency translation rates			(0.5	)
Total warranty liability as of March 31, 2009		$	93.7

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 during a limited time period that we believe results from a vendor-supplied component that failed to meet required specifications. We are working to determine the scope and nature of the issue. Any liability resulting from the product quality issue and any related recovery from the vendor cannot be reasonably estimated at this time.

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.

Applicable environmental laws can potentially impose obligations to remediate hazardous substances at our properties, at properties formerly owned or operated by us and at facilities to which we have sent or send waste for treatment or disposal. We are aware of contamination at some facilities; however, we do not presently believe that any future remediation costs at such facilities will be material to our results of operations. There have been no material changes to the reserve balances since our latest fiscal year-end.

On June 22, 2006, we entered into an agreement with a financial institution to lease our corporate headquarters in Richardson, Texas for a term of seven years (the “Lake Park Lease”). The leased property consists of an office building of approximately 192,000 square feet, land and related improvements. 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, 2009.

8. 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 Obligation		Short-Term				Current				Long-Term
As of March 31, 2009		Debt				Maturities				Maturities				Total
Domestic promissory notes (1)		$	—			$	—			$	35.0			$	35.0
Domestic revolving credit facility			—				—				343.5				343.5
Capital lease obligations			—				0.2				17.6				17.8
Foreign obligations			8.3				0.2				0.3				8.8
Total debt		$	8.3			$	0.4			$	396.4			$	405.1

Description of Obligation		Short-Term				Current				Long-Term
As of December 31, 2008		Debt				Maturities				Maturities				Total
Domestic promissory notes (1)		$	—			$	—			$	35.0			$	35.0
Domestic revolving credit facility			—				—				359.8				359.8
Capital lease obligations			—				0.3				18.6				18.9
Foreign obligations			6.1				0.3				0.3				6.7
Total debt		$	6.1			$	0.6			$	413.7			$	420.4

As of March 31, 2009, we had outstanding borrowings of $343.5 million under the $650 million domestic revolving credit facility and $115.6 million was committed to standby letters of credit. All of the remaining $190.9 million was available for future borrowings after consideration of covenant limitations. The facility matures in October 2012.

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 1.10% and 2.26% as of March 31, 2009 and December 31, 2008, respectively.

The Third Amendment and Restated Revolving Credit Facility Agreement (the “Credit Agreement”) contains financial covenants relating to leverage and interest coverage. Other covenants contained in the Credit Agreement 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 a Consolidated Indebtedness to Adjusted EBITDA Ratio of no more than 3.50 to 1.0 and a Cash Flow (defined as EBITDA minus capital expenditures) to Net Interest Expense ratio of at least 3.0 to 1.0.

The Credit Agreement contains customary events of default. 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 the Credit Agreement and accelerate amounts due under the Credit Agreement, 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.

In addition to the financial covenants contained in the Credit Agreement outlined above, our domestic promissory notes contain certain financial covenant restrictions. As of March 31, 2009, we were in compliance with all covenant requirements. Our revolving credit facility and promissory notes are guaranteed by our material subsidiaries.

We have additional borrowing capacity through several foreign facilities governed by agreements between us and a syndicate of banks, used primarily to finance seasonal borrowing needs of our foreign subsidiaries. Available capacity at March 31, 2009 and December 31, 2008 on foreign facilities were $20.0 million and $26.0 million, respectively.

During 2008 we expanded our Tifton, Georgia manufacturing facility using the proceeds from Industrial Development Bonds (“IDBs”). We entered into a lease agreement with the owner of the property and the issuer of the IDBs, and through our lease payments fund the interest payments to investors in the IDBs. We also guaranteed the repayment of the IDBs and entered into letters of credit totaling $14.5 million to fund a potential repurchase of the IDBs in the event that investors exercised their right to tender the IDBs to the Trustee. At March 31, 2009 and December 31, 2008 we recorded both a capital lease asset and a corresponding long-term obligation of $14.4 million and $15.3 million, respectively, related to these transactions.

Credit Rating

At March 31, 2009, our senior credit rating was Ba1, with a stable outlook, by Moody’s and BB+, with a stable outlook, by Standard & Poor’s Rating Group (“S&P”).

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 arrangement expires November 25, 2009, and is subject to renewal. Our continued involvement in the transferred assets is limited to servicing, which includes collection and administration of the transferred beneficial interests. The accounts receivable sold under the ASA are high quality domestic customer accounts that have not aged significantly and the program takes into account an allowance for uncollectable accounts. The receivables represented by the retained interest that we service are exposed to the risk of loss for any uncollectable amounts in the pool of receivables sold under the ASA. The fair values assigned to the retained and transferred interests are based on the sold accounts receivable carrying value given the short term to maturity and low credit risk.

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, 2009, we were in compliance with all covenant requirements.

The ASA provides for a maximum securitization amount of $125.0 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 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 were as follows (in millions):

		As of				As of
		March 31,				December 31,
		2009				2008
Eligible amount available under the ASA on qualified accounts receivable		$	78.7			$	91.0
Beneficial interest sold			(30.0	)			(30.0	)
Remaining amount available		$	48.7			$	61.0

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 0.75%. The rate as of March 31, 2009 and December 31, 2008 was 0.66% and 2.14%, respectively. The unused fee is based on 102% of the maximum available amount less the beneficial interest sold and calculated at 0.3% fixed rate throughout the term of the agreement. We recorded these fees in Gains and Other Expenses, net and Selling, General and Administrative Expenses in the accompanying Consolidated Statements of Operations. The amounts recorded were as follows (in millions):

		For the Quarters Ended
		March 31,
		2009				2008
Discount fees		$	0.3			$	—

9. Pension and Postretirement Benefit Plans:

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

		For the Quarters Ended March 31,
		2009				2008				2009				2008
		Pension Benefits								Other Benefits
Service cost		$	1.4			$	1.8			$	0.2			$	0.2
Interest cost			4.3				4.1				0.2				0.2
Expected return on plan assets			(4.0	)			(4.5	)			—				—
Amortization of prior service cost			0.2				0.1				(0.5	)			(0.5	)
Amortization of net loss			2.2				1.2				0.3				0.3
Settlements or curtailments			—				—				—				—
Total net periodic pension cost		$	4.1			$	2.7			$	0.2			$	0.2

10. Comprehensive Income:

Comprehensive (loss) income for the quarters ended March 31, 2009 and 2008 was computed as follows (in millions):

		For the
		Quarters Ended
		March 31,
		2009				2008
Net (loss) income		$	(18.1	)		$	6.3
Foreign currency translation adjustments			(11.3	)			9.2
Derivatives and other			10.8				8.7
Total comprehensive (loss) income		$	(18.6	)		$	24.2

11. 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 $2.1 million and $3.2 million was recognized for the first quarters of 2009 and 2008, respectively, and is included in Selling, General and Administrative Expenses in the accompanying Consolidated Statements of Operations. The decrease in stock-based compensation expense was primarily due to a decrease in the estimated pay-out percentage on outstanding performance share units in the first quarter of 2009 as compared to the same period in 2008. Cash flows from the tax (expense) benefits related to share-based payments of $(0.3) million and $10.8 million were included in cash flows from financing activities for the first quarters of 2009 and 2008, respectively.

12. 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 as a result of the actions include the following amounts (in millions):

		For the Quarters Ended
		March 31,
		2009				2008
Manufacturing rationalizations		$	7.6			$	2.8
Reorganization of distribution network			0.1				—
Reorganizations of corporate and business unit selling and administrative functions			3.5				—
Total		$	11.2			$	2.8

The components of the restructuring charges recorded in the first quarter of 2009 are discussed below.

The restructuring charges recorded during the first quarter of 2008 related to the closure and consolidation of our Refrigeration manufacturing, support and warehouse functions located in Danville, Illinois, Tifton, Georgia and Stone Mountain, Georgia operations and to the closure of certain Residential Heating & Cooling operations in Lynwood, California and the consolidation of factory-built fireplace manufacturing operations into our facility in Union City, Tennessee.

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 2009 (in millions):

		Balance as of				Charged												Balance as of
		December 31,				to				Cash				Non-Cash				March 31,
Description of Reserves		2008				Earnings				Utilization				Utilization and Other				2009
Severance and related expense		$	9.3			$	5.9			$	(3.3	)		$	—			$	11.9
Asset write-offs and accelerated depreciation			—				1.5				—				(1.5	)			—
Equipment moves			—				0.8				(0.8	)			—				—
Lease termination			0.6				0.3				(0.1	)			—				0.8
Other (1)			1.0				2.7				(1.4	)			—				2.3
Total restructuring reserves		$	10.9			$	11.2			$	(5.6	)		$	(1.5	)		$	15.0

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
		2009				Date				be Incurred
Severance and related expense		$	3.0			$	14.8			$	14.8
Asset write-offs and accelerated depreciation			1.4				7.2				12.2
Equipment moves			0.8				3.4				6.2
Other			2.4				12.6				14.0
Total		$	7.6			$	38.0			$	47.2

Restructuring expense for manufacturing rationalization activities related to the following:

	•		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. The consolidation is expected to be completed within two years. Total restructuring charges recorded related to this action in the first quarter of 2009 were $5.3 million, primarily composed of severance, accelerated depreciation and previously received economic development grants that will be returned as a result of the Blackville plant closure.
	•		In the fourth quarter of 2007, we announced plans to close our Refrigeration operations in Danville, Illinois and consolidate Danville manufacturing, support and warehouse functions into our Tifton, Georgia and Stone Mountain, Georgia operations. The operations at Danville have ceased as of the end of the first quarter of 2009 and the transition is expected to be completed in the second quarter of 2009. Total restructuring charges recorded in the first quarter of 2009 related to this action were $1.9 million primarily composed of facility clean-up costs, equipment moving costs and manufacturing inefficiencies incurred prior to the plant closure.
	•		In the second quarter of 2008, we announced the transition of production of certain Residential Heating & Cooling products from our Marshalltown, Iowa manufacturing facility to our manufacturing operations in Saltillo, Mexico. The transition is expected to be completed in the second quarter of 2009. Total restructuring charges recorded in first quarter of 2009 related to this action were $0.4 million.

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 quarter of 2009 related to this transition. To date, we have incurred $3.0 million, which was composed primarily of severance, and we expect the total cost to be $4.8 million related to this restructuring activity. The total cost of this restructuring activity will be composed of severance of $3.5 million, asset write-offs and accelerated depreciation of $0.1 million, equipment moving costs of $0.4 million and other costs of $0.8 million. The transition is expected to be completed in the first 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
		2009				Date				be Incurred
Severance and related expense		$	2.8			$	6.5			$	8.3
Asset write-offs and accelerated depreciation			0.1				0.9				0.9
Lease termination			0.3				0.5				0.9
Other			0.3				0.9				1.0
Total		$	3.5			$	8.8			$	11.1

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

	•		During the first quarter of 2009, we reorganized our Commercial Heating & Cooling selling and administrative organization in the United States and Canada. As result of this action, we recorded restructuring charges of $1.2 million during the first quarter of 2009. The action will be completed during the second quarter of 2009.
	•		In the third quarter of 2008, our Commercial Heating & Cooling business unit reorganized its selling and administrative functions in Northern Europe. This action is expected to be completed by the second quarter of 2009. Total restructuring charges recorded in first quarter of 2009 related to this action were $1.0 million.
	•		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 charges of $0.7 million during the first quarter of 2009. The action will be completed during the third quarter of 2009.
	•		During the first quarter of 2009, we reorganized the Residential Heating & Cooling selling and administrative organization in the United States. As result of this action, we recorded restructuring charges of $0.5 million during the first quarter of 2009. The action will be completed during the second quarter of 2009.
	•		During the first quarter of 2009, Service Experts began to centralize certain of its administrative and support functions. As result of this action, we recorded restructuring charges of $0.1 million during the first quarter of 2009. The action will be completed during the second quarter of 2009.

13. Discontinued Operations:

In the fourth quarter of 2008, our management approved a plan to discontinue operations of seven service centers within our Service Experts business segment. We decided to sell these seven centers due to current economic conditions and a history of operating losses. The related assets and liabilities for these service centers have been classified as current assets and liabilities in the accompanying Consolidated Balance Sheets. By the end of the first quarter of 2009, we had sold all seven service centers.

The operating results of these centers have been classified as Discontinued Operations in the accompanying Consolidated Statements of Operations and prior period results have been reclassified to conform to the current period presentation.

A summary of net trade sales, gain on disposal of assets and liabilities and pre-tax operating losses are detailed below (in millions):

		For the Quarters Ended
		March 31,
		2009				2008
Net trade sales		$	1.3			$	2.6
Gain on disposal of assets and liabilities included in pre-tax operating (income) loss			1.0				—
Pre-tax operating (income) loss			(0.2	)			0.7

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,
		2009				2008
Assets of discontinued operations:
Other assets		$	0.2			$	0.8
Liabilities of discontinued operations:
Accrued expenses(1)		$	1.9			$	3.2

14. (Loss) Earnings Per Share:

Due to our first quarter 2009 net loss, 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. Basic earnings per share for 2008 are computed by dividing net income by the weighted-average number of common shares outstanding during the period. Diluted earnings per share for 2008 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. As of March 31, 2009, we had 84,586,990 shares issued of which 29,210,131 were held as treasury shares and were therefore excluded from the weighted-average shares outstanding.

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

		For the Quarters Ended
		March 31,
		2009				2008
Net (loss) income		$	(18.1	)		$	6.3
Add: (Income) loss from discontinued operations			(0.1	)			0.4
(Loss) income from continuing operations		$	(18.2	)		$	6.7
Weighted-average shares outstanding — basic			55.2				60.3
Effect of dilutive securities			—				2.4
Weighted-average shares outstanding — diluted			55.2				62.7
(Loss) earnings per share from continuing operations:
Basic		$	(0.33	)		$	0.11
Diluted		$	(0.33	)		$	0.11

Because we are in a loss postion in the first quarter of 2009, potentially dilutive securities, including stock options, stock appreciation rights, restricted stock units and performance share units totaling 1,424,279 shares were outstanding, but not included in the 2009 computation 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) earnings per share calculation because the assumed exercise of such rights would have been anti-dilutive. The details are as follows:

		For the Quarters Ended
		March 31,
		2009				2008
Number of shares			1,395,079				15,001
Price ranges per share		$	29.25 – 37.11			$	40.30 – 49.63

15. 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:

	•		Realized gains and/or losses on settled futures contracts.
	•		Foreign currency exchange gains and/or losses.

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 (loss) profit by business segment, along with a reconciliation of segment (loss) profit to (loss) income from continuing operations before income taxes are shown below (in millions):

		For the Quarters Ended
		March, 31
		2009				2008
Net Sales
Residential Heating & Cooling		$	246.3			$	329.2
Commercial Heating & Cooling			131.5				165.2
Service Experts			109.2				137.5
Refrigeration			113.7				154.8
Eliminations (1)			(15.3	)			(22.2	)
		$	585.4			$	764.5
Segment (Loss) Profit
Residential Heating & Cooling		$	(4.8	)		$	13.2
Commercial Heating & Cooling			2.0				6.2
Service Experts			(7.9	)			(6.9	)
Refrigeration			6.5				14.8
Corporate and other			(13.9	)			(12.2	)
Eliminations (1)			(0.4	)			(1.7	)
Subtotal that includes segment (loss) profit and eliminations			(18.5	)			13.4
Reconciliation to (loss) income from continuing operations before income taxes:
Gains and other expenses, net of gain on sale of fixed assets			(0.8	)			(3.3	)
Restructuring charges			11.2				2.8
Interest expense, net			1.7				2.7
Less: Realized (losses) gains on settled futures contracts (2)			(1.9	)			0.4
Less: Foreign currency exchange gains(2)			0.2				0.1
(Loss) income from continuing operations before income taxes		$	(28.9	)		$	10.7

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

		As of				As of
		March 31,				December 31,
		2009				2008
Total Assets
Residential Heating & Cooling		$	520.9			$	492.1
Commercial Heating & Cooling			286.8				319.0
Service Experts			163.1				170.6
Refrigeration			328.3				340.4
Corporate and other			308.4				345.3
Eliminations (1)			(9.1	)			(8.7	)
Total assets			1,598.4				1,658.7
Discontinued operations (See Note 13)			0.2				0.8
Total assets		$	1,598.6			$	1,659.5

16. Fair Value Measurements:

Fair Value Hierarchy

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

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

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
		March 31, 2009
						Significant
		Quoted Prices in				Other				Significant
		Active Markets for				Observable				Unobservable
		Identical Assets				Inputs				Inputs
		(Level 1)				(Level 2)				(Level 3)				Total
Assets:
Short-term investments		$	—			$	32.3			$	—			$	32.3
Investment in marketable equity securities (1)			1.6				—				—				1.6
Derivatives, net (2)			—				0.5				—				0.5
Liabilities:
Derivatives, net (3)		$	—			$	19.8			$	—			$	19.8