Index to Financial Statements

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

Form 10-K

ANNUAL REPORT

PURSUANT TO SECTIONS 13 OR 15(d) OF

THE SECURITIES EXCHANGE ACT OF 1934

 

 

 

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

For the fiscal year ended December 31, 20082009

ORor

 

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

For the transition period from              to             

Commission File No. 1-32850

 

 

GOODMAN GLOBAL, INC.

(Exact name of registrant as specified in our charter)

 

Delaware 20-1932219

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

5151 San Felipe, Suite 500

Houston, Texas

 77056
(Address of principal executive offices) (Zip code)

(713) 861-2500

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act: None

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act:    Yes  ¨    No  x

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act:    Yes  x    No  ¨

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  x¨    No  ¨x Although Goodman Global, Inc. is not required to file reports pursuant to Section 13 or 15(d) of the Exchange Act for the period commencing January 1, 2009, the company has filed all Securities Exchange Act reports for the preceding 12 months.

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ¨    No  ¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in
Part III of this Form 10-K or any amendment to this Form 10-K:  x

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 definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in
Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer  ¨        Accelerated filer  ¨        Non-accelerated filer  x        Smaller Reporting Company  ¨

Large accelerated filer¨Accelerated filer¨
Non-accelerated filerxSmaller reporting company¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).    Yes  ¨    No  x

No public trading market exists for the common stock, par value $0.01 per share, of Goodman Global, Inc. The aggregate market value of the common stock held by non-affiliates of the registrant was zero as of June 30, 2008,2009, the last business day of the registrant’s most recently completed second fiscal quarter. All of the outstanding shares of common stock, par value $0.01 per share, of Goodman Global, Inc. are held by Chill Intermediate Holdings, Inc., the registrant’s parent company.a wholly owned subsidiary of Goodman Global Group, Inc. As of March 2, 2009,1, 2010, there were ten (10) shares outstanding of Goodman Global, Inc.’s common stock, par value $0.01 per share.

DOCUMENTS INCORPORATED BY REFERENCE: None

 

 

 


Index to Financial Statements

GOODMAN GLOBAL, INC.

ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 20082009

TABLE OF CONTENTS

 

PART I

  1

ITEM 1.

  

ITEM 1.Business

  2

ITEM 1A.

 

ITEM 1A.

Risk Factors

  1112

ITEM 1B.

 

ITEM 1B.

Unresolved Staff Comments

19

ITEM 2.

Properties

19

ITEM 3.

Legal Proceedings

  20

ITEM 4.

 

ITEM 2.

Properties21
ITEM 3.Legal Proceedings21
ITEM 4.Submission of Matters to a Vote of Security Holders

  2122

PART II

  21

ITEM 5.

  

ITEM 5.Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

21

ITEM 6.

Selected Financial Data

  22

ITEM 7.

 

ITEM 6.

Selected Financial Data23
ITEM 7.Management’s Discussion and Analysis of Financial Condition and Results of Operations

  2425

ITEM 7A.

 

ITEM 7A.

Quantitative and Qualitative Disclosures about Market Risk

  3637

ITEM 8.

 

ITEM 8.

Financial Statements and Supplementary Data

  37

ITEM 9.

 

ITEM 9.

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

37

ITEM 9A.

Controls and Procedures

37

ITEM 9B.

Other Information

37

PART III

  38

ITEM 10.

 

ITEM 9A.

Controls and Procedures38
ITEM 9B.Other Information38
PART III
ITEM 10.Directors, Executive Officers and Corporate Governance

  3839

ITEM 11.

 

ITEM 11.

Executive Compensation

  4143

ITEM 12.

 

ITEM 12.

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

  5856

ITEM 13.

 

ITEM 13.

Certain Relationships and Related Transactions, and Director Independence

  5958

ITEM 14.

 

ITEM 14.

Principal AccountantAccounting Fees and Services

  6461

PART IV

  65

ITEM 15.

  

ITEM 15.Exhibits and Financial Statement Schedules

  6562

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PART I

Cautionary Note on Forward Looking Statements

This annual report contains forward-looking statements. In particular, statements about our expectations, beliefs, plans, objectives, assumptions or future events or performance or other statements that are not historical statements that are contained in this annual report under the headings “Summary,” “Risk Factors,factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Business” are forward-looking statements. Examples of forward-looking statements include statements such as the statement of our belief that we have sufficient liquidity to fund our business operations for at least the next twelve months. The words “believe,” “expect,” “anticipate,” “intend,” “estimate” and other expressions that are predictions of or indicate future events and trends and that do not relate to historical matters identify forward-looking statements. We have based these forward-looking statements on our current expectations about future events. While we believe these expectations are reasonable, these forward-looking statements are inherently subject to risks and uncertainties, many of which are beyond our control. Our actual results may differ materially from those suggested by these forward-looking statements for various reasons, including those discussed in this annual report under the headings “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” Given these risks and uncertainties, you are cautioned not to place undue reliance on these forward-looking statements. Some of the key factors that could cause actual results to differ from our expectations are:

 

general economic conditions;

 

changes in weather patterns and seasonal fluctuations;

 

changes in governmental regulation and policy and effects on our business from our compliance with regulations;

 

changes in customer demand;

 

the maturation of our new company-operated distribution centers;

 

increased competition and technological and product changes and advances;

 

increases in the cost of raw materials, components and components;warranty expenses;

 

our relations with our independent distributors;

 

damage or injury caused by our products;

 

increases in interest rates; and

 

access by us or our customers to credit and financing.

Although forward-looking statements reflect management’s good faith beliefs, they involve known and unknown risks, uncertainties and other factors, which may cause the actual results, performance or achievements to differ materially from anticipated future results, performance or achievements expressed or implied by such forward-looking statements. The forward-looking statements included in this annual report are made only as of the date hereof. We do not undertake and specifically decline any obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future events or developments, changed circumstances or otherwise. These forward-looking statements are subject to numerous risks and uncertainties, including, but not limited to, the impact of general economic conditions in the regions in which we do business; general industry conditions, including competition and product, raw material and energy prices; the realization of expected tax benefits; changes in exchange rates and currency values; capital expenditure requirements; access to credit financing and the capital markets and the risks and uncertainties described in Item 1A, “Risk Factors.” Given these risks and uncertainties, you are cautioned not to place undue reliance on these forward-looking statements.

Market and Industry Data and Forecasts

Unless otherwise indicated, information contained in this annual report concerning the heating, ventilation and air conditioning, or “HVAC,”HVAC, industry or market refers to the residential and light commercial sector within the domestic HVAC industry. Our general expectations concerning the HVAC industry and its segments and our market position and market share within the HVAC industry and its segments are derived from data from various third-party sources. In addition, this annual report presents similar information based on management estimates. Such estimates are derived from third-party sources as well as data from our internal research and on assumptions made by us,

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based on such data and our knowledge of the HVAC industry, which we believe to be reasonable. Although we are not aware of any misstatements regarding any industry or similar data presented herein, such data involves risks and uncertainties and is subject to change based on various factors, including those described in Item 1A,under the heading “Risk Factors.”

Unless otherwise noted, the terms “company,” “we,” “us,” “our” and “our”“Goodman” refer to Goodman Global, Inc., Goodman Global Holdings, Inc. and our consolidated subsidiaries.

Index to Financial Statements
ITEM 1.Business

Our HistoryOverview

We participate in theGoodman is a leading domestic manufacturer of heating, ventilation and air conditioning, or HVAC, industry. We believe we are the second largest domestic manufacturer ofproducts for residential and light commercial heating and air conditioning productsuse. Since we began to manufacture HVAC equipment in 1982, we believe that we have grown our share of the residential HVAC market to now become one of the country’s largest residential HVAC manufacturers, based on unit sales. Our activities include engineering, manufacturing, distributing, and marketing an extensive line of HVAC equipment and related products. Our products are predominantly marketed under the Goodman®, Amana® and Quietflex® brand names. We believe the Goodman brand is the single largest domestic residential HVAC brand, based on unit sales, and caters to the large segment of the market that is price sensitive and desires reliable and low-cost climate comfort, while our premium Amana brand includes advanced features, quieter operation and enhanced warranties. The Quietflex brand is a recognized brand of flexible duct. Founded in 1975 as a manufacturer of flexible duct, we expanded into the broader HVAC manufacturing market in 1982. Since then, we have expanded our product offerings and maintained our core competency of manufacturing high-quality products at low costs. Our growth and success can be attributed to our strategy of providing a quality, competitively priced product that we believe is designed to be reliable and easy-to-install.

Goodman Global, Inc. was incorporated under the laws of Delaware in 2004. On December 23, 2004, Apollo Management, L.P., or Apollo, through its affiliate, Frio Holdings LLC, acquired our business from Goodman Global Holdings, Inc., a Texas corporation, and following a reorganization, we operated as Goodman Global, Inc.

On April 11, 2006, Goodman Global, Inc. completed thean initial public offering of its common stock.

On February 13, 2008, Chill Acquisition, Inc., a Delaware corporation formed onin October 15, 2007, merged with and into Goodman Global, Inc., with Goodman Global, Inc. as the surviving corporation, now aan indirect subsidiary of Goodman Global Group, Inc. (formerly Chill Holdings, Inc.), or Parent, a Delaware corporation formed onin October 12, 2007 by affiliates of Hellman & Friedman LLC.

Overview

We believe we arerefer to this as the second largest domestic manufacturer of heating, ventilation and air conditioning, or HVAC, products for residential and light commercial use based on unit sales in 2008. Our activities include engineering, manufacturing, assembling, marketing and distributing an extensive line of HVAC and related products. Our products are predominantly marketed under the“2008 Acquisition.” We refer to Goodman®, Amana® and Quietflex® brand names. The Goodman® brand is one of the leading HVAC brands in North America and caters Global, Inc. prior to the large segment of2008 Acquisition as “Predecessor” and subsequent to the market that is price sensitive and desires reliable and low-cost climate comfort, while our premium Amana® brand includes enhanced features such2008 Acquisition as higher efficiency and quieter operation. The Quietflex® brand is a recognized brand of flexible duct.“Successor.”

We selldistribute the majority of our products through a North American distribution network with approximately 900 total distribution points comprisedchain of over 150160 company-operated distribution centers and approximately 750 independent distributor locations. Our company-operated distribution centerslocated in key states such as Texas, Florida, California, Arizona, Florida, Maryland and Nevada providePennsylvania, which provides us with direct access to large marketsmajor HVAC sales regions in North AmericaAmerica. For the years ended December 31, 2008 and enable us2009, approximately 55% and 57%, respectively, of our net sales were made through company-operated distribution centers and our direct sales force. Because we operate our company-operated distribution centers with a common look and feel and a standardized quality control process, we are able to maintaindeliver a significant amountconsistently high level of market intelligence and control over howservice to our installing contractor customers (whom we refer to as dealers) with low overhead costs.

The balance of our products are distributed.sold through our network of over 185 independent distributors who operate over 785 locations throughout North America. Our independent distributors, many of which have multiple locations and most of which exclusivelydo not sell ourcompeting products, enable us to more fully serve other major sales areas and complement our broad distribution network.regions. We offer our independent distributors incentives to promote our brands, which allow them to provide installing contractors, who we refer to as dealers with our products at attractive prices while meeting their own profit targets. We believe that our growth is attributable to our strategy of providing quality, value-priced products through an extensive, growing and loyal distribution network. Our layered distribution strategy enables us to provide comprehensive coverage of major HVAC sales regions and easy access to our product for our installing dealers, which is a core principle of our value proposition.

We operateAs of December 31, 2009, we operated three manufacturing and assembly facilities in Houston, Texas, two in Tennessee, one in Arizona, one in Pennsylvania and one in Florida, totaling approximately two million square feet. Since 1982,In addition, we have a nearly one million square foot logistics center in Houston, Texas. These facilities and our hub-and-spoke distribution model allow us to provide enhanced availability and customer service to our installing dealers.

Our competitive strengths

We believe our competitive strengths include:

Industry leader with track record of industry outperformance. We are a leading domestic manufacturer of HVAC products for residential use based on unit volume salessales. We are a leader in the value sector and have a strengthening position in the premium sector. We believe that our dealer-focused marketing efforts, value-oriented product

Index to Financial Statements

offerings and extensive and growing distribution networks have enabled us to gain a significant share of industry unit volumes over the past few years and have allowed us to achieve operating margins that we believe are some of the most attractive in the industry. This is evidenced by our estimated gain of approximately eight market share have grown to surpass all but one of our competitorspoints in the U.S. residential and light commercial HVAC sector. Approximately 5%industry (excluding window room air conditioners) from 2003 through December 31, 2009.

Low-cost, value leader through efficient manufacturing and innovative product design. Our engineering and design capabilities, lean manufacturing processes, high workforce productivity and raw material sourcing capabilities allow us to minimize costs while maintaining high product quality. Our capabilities are evidenced by our proprietary product innovations, including processes for which we have patents pending. One of our 2008 net salesinnovations involves a technology that we expect will enable us to significantly reduce our product weight and approximately 1%size, allowing us to decrease our usage of commodities such as copper, steel and aluminum.

Targeted and effective dealer promotional strategy. We have developed innovative promotional programs aimed at providing our installing dealers with the flexibility to market and price our products in a manner that best suits the needs of their businesses and their local markets. As part of that effort, we interact each year directly with thousands of dealers through local, regional, and Houston-based dealers meetings, where we demonstrate the distinctive features of our total assets asproduct lines and our value proposition. Compared to a general national advertising campaign, we believe this approach allows us to efficiently spend our marketing dollars on highly effective targeted efforts to educate dealers about our Company and our product lines and innovations.

Comprehensive proprietary and independent distribution networks. Our company-operated distribution network enables us to maintain close relationships with dealers, effectively communicate our selling proposition, capture incremental distribution margins and better manage inventory. Our experience in identifying attractive locations, hiring qualified staff and managing our supply chain has allowed us to open more than 70 net new company-operated distribution centers since January 2003, enabling us to efficiently grow local market share with low up-front investment expenditures. We layer our proprietary distribution channel with a network of over 185 independent distributors operating over 785 distribution locations, most of which do not sell competing products. Over the past few years, we have significantly increased the number of our independent distribution locations, allowing us to better access markets not addressed by our company-operated distribution centers.

Broad, high-quality product line. We manufacture and market an extensive line of products, including split-system air conditioners and heat pumps, gas furnaces, package units, air handlers, package terminal air conditioners, evaporator coils and accessories. Our products feature up-to-date heat transfer technology and are designed to meet an increasing preference for higher efficiency products. We have strengthened our position in the higher-efficiency segment of the market by offering a broad line of Federal tax credit-eligible units and significantly increasing our share of products with a 14+ Seasonal Energy Efficiency Ratio, or SEER.

Consistent, strong cash flow. Our earnings, combined with our modest capital expenditures and limited working capital requirements, result in the generation of significant free cash flow. In the years ended December 31, 2008 were outsideand 2009, our net cash provided by operating activities was $141.4 million and $207.7 million, respectively. In addition, as a result of the United States.prior acquisition of our business in 2004, we have realized a significant step-up in the tax basis of our assets, which is expected to result in additional tax deductions over the next nine years.

Proven and motivated management team. Our management team has significant HVAC industry experience and a strong track record of success. Our twelve-member executive management team, led by David Swift, has over 125 years of total industry or related experience.

Our strategy

We intend to continue to grow operating profits and cash flow through the following key strategies:

Maintain low-cost leadership position. Our value proposition is facilitated by low-cost design and lean manufacturing and sourcing processes. We intend to maintain our cost leadership position by continuing to design low-cost, high-quality products, increasing production efficiencies, improving our raw material and component sourcing and reducing our working capital investment, overhead and other expenses.

Realize benefits of recent company-operated distribution center openings and further increase coverage density. As new company-operated distribution centers opened since 2007 continue to penetrate into their local markets, we believe we will increase our market share in those regions and improve profitability without significant incremental capital expenditures. We plan to opportunistically expand our company-operated distribution center footprint in targeted North American markets currently served by our company-operated distribution channel.

Index to Financial Statements

IndustryStrengthen independent distributor network. We maintain strong relationships with an extensive independent distributor network, which provides us efficient access to certain geographies not addressed by our company-operated distribution centers. We employ a number of programs to measure, incentivize and reward our independent distributors for achieving results that align with our key objectives in areas of growth, profitability and working capital management.

Targeted approach to distribution expansion. We utilize a detailed analytical assessment process to identify and prioritize regions for distribution growth. Our decision to open new company-operated distribution centers or add independent locations is based upon factors such as available market size, existing share and current number of centers and locations.

Expand our product line in the light commercial segment. We believe that many of our dealers also install light commercial products. In recent years, we have taken steps, such as introducing new products to broaden our light commercial lines, which has resulted in light commercial shipment growth of 17% for 2009 compared to a 28% decline in unit shipments for the total industry during the same period. As we expand in this segment, we believe we will also see benefits in our residential business, as we are able to serve a higher proportion of dealers’ needs.

Our industry

The U.S. residential and light commercial HVAC equipment industry (excluding window room air conditioners) is estimated atto have generated approximately $8.3$6.8 billion in annual2008 manufacturers’ sales, and approximately 8.1with an estimated 8.4 million units shipped in 2008. We believe the top fivesix domestic manufacturers representrepresented approximately 80%90% of unit sales in 2008. Overall, the industry has historically been characterized by relatively stable long-term growth, a well-established, fragmented distribution system and significant challenges for new entrants. We further believe the market shares of the large, incumbent industry participants have been relatively stable in recent years, although we have continued to gain market share.

Stable, Long-Term Industry GrowthOpportunity for industry volume growth. On a unit basis, the HVAC industry has grown at a compounded annual growth rate of approximately 1.1%3.1% over the last 2015 years ended 2007. That growth rate was driven primarily by increased central air conditioning penetration in both existing and new homes.homes, and a growing installed base of units that required replacement. According to the U.S. Census Bureau, in 2007, the latest year for which statistics are available, 90%2008, 89% of new single-familysingle family homes completed were equipped with central air conditioning, up from 70% in 1985, and 91% of multi-family homes completed were equipped with air conditioning, up from 88% in 1985. In the U.S. Census Bureau’s South Region, which accounted for 52% of housing units completed, air conditioning was installed in approximately 100% of new single-family homes. The U.S. Census Bureau reported 1.2 million privately-owned housing units were completed during 2007 and the percentage of homes completed with greater than 2,400 square feet increased to approximately 45% in 2007 from approximately 17% in 1985.

Prior to the 1980s, HVAC unit shipments were strongly correlated to new housing construction. As1990s, as the overall housing base expanded due to increased new home sales and central air conditioning increased its penetration into homes, the HVAC industry became more driven by replacement demand. As older units within the large base of existing homes approach the end of their useful lives, they will need to be replaced by newer and more efficient models, creating a relatively stable base of demand for HVAC products. We estimate that replacement and renovation-related products currently rangeaccounted for between 70% and 80% of industry sales.sales over the past three years.

We believe that the recent financial and economic slowdown, beginning in 2007, has led to a decline in the number of HVAC units being replaced as customers have deferred replacements or opted for short-term repairs. Despite an installed base that has grown virtually every year since 1990, unit volume shipments declined by 11.2% in 2008 and 15.0% in 2009. As the domestic economy recovers, we expect consumers will increasingly replace older HVAC units, including those previously repaired units.

Highly Fragmented Customer Basefragmented customer base. HVAC manufacturers sell to a highly fragmented two-tier distribution system, asand no single distributor represents a large share of industry-wide HVAC sales. There are more than 450 independent HVAC distribution companies in the United States. Additionally, the distributors’ customer base is a fragmented groupmade of over 100,000 independent dealers across the country that buy HVAC unitsequipment from the distributors and install them for the ultimate end user. There is limited pricing transparency to the end user due to this tiered distribution system.

We believe that dealers become increasingly loyal as they become accustomed to the installation and service of a particular product and brand. Therefore, dealers prefer distributors that continue to carry a specific manufacturer’s product and prefer product lines that do not change dramatically so that retraining is not required. If a distributor changes the brand of products it carries, that distributor risks alienating dealers who have customized their operations to maximize their efficiency in sourcing and installing the discontinued brand. Further, much of the industry utilizes an exclusive distribution model, which requires distributors to carry only a single manufacturer’s product line in a given area. This distributor/dealer dynamic further encourages independent distributors to continue carrying a specific manufacturer’s products.

Significant Challengesbarriers for New Entrantsnew entrants. The HVAC industry is characterized by a fragmented distribution system, high switching costs for distributors and dealers and the need for sufficient production volume to generate economies of scale. Distributors and dealers are unlikely to switch manufacturers as a result of expenses associated with inventory stocking, marketing material and personnel training requirements. Distributors and dealers also value an established brand with an extensive history to ensure reliable warranty coverage for the end user. As manufacturers build scale, they benefit from a broader distribution network and more efficient manufacturing.

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We believe domestic manufacturers represented over 97%95% of unit shipments in 2007,2008, as competition from foreign manufacturers has remained limited. Foreign manufacturers are presented with logisticalface challenges, due to the expense of shipping HVAC products, as well as other business challenges resulting from differences in consumer preferences for single room HVAC systems abroad versus central systems domestically. Additionally, labor costs represent a small percentage of our total costs of goods sold, making it less economical to capitalize on overseas labor costs, particularly given the added cost of transporting products from outside North America. While foreign competition is limited, HVAC manufacturers do source a significant amount of their components overseas, which serves to reduce costs of goods sold and increase margins.

Trends toward increasingly efficient and environmentally sound HVAC solutions. On December 7, 2009, the EPA approved final rules that complete the phase-out of HCFC-22 in the production of new units, effective January 1, 2010. We have prepared for this phase-out and utilize R410A refrigerant as a substitute for HCFC-22. Various government programs and policies, are creating incentives for consumers to purchase more energy-efficient comfort solutions. Through 2010, tax credits are available to consumers purchasing certain high efficiency products.

IndexOn November 19, 2007, the U.S. Department of Energy, or “DOE,” issued new regulations increasing the minimum annual fuel utilization efficiency, or “AFUE,” for several types of residential furnaces. These regulations apply to Financial Statements
furnaces manufactured for sale in the U.S. or imported into the United States on and after November 19, 2015. On December 19, 2007, federal legislation was enacted authorizing the DOE to study the establishment of regional efficiency standards for furnaces and air conditioners. In October 2009, Goodman and the other leading domestic residential HVAC equipment manufacturers and industry representatives signed an agreement with certain U.S. energy-efficiency advocacy organizations supporting new federal standards for domestic residential central HVAC products. The agreement calls for replacing national efficiency standards with different standard levels in three climate regions—North, South, and Southwest. The supported standards would generally require cooling efficiencies of at least 14 SEER in the South and heating efficiencies of at least 90% AFUE in the North. In addition, the agreement would allow states to include even higher efficiency levels for HVAC systems in residential new construction. The signatories agreed to submit their agreement jointly as a legislative proposal to Congress for inclusion in energy legislation currently under consideration and to recommend that the U.S. Department of Energy promulgate rules adopting the agreed-upon regions and standards.

ProductsOur product offerings

We manufacture and market an extensive line of HVAC products for residential and light commercial use. These products include split-system air conditioners and heat pumps, gas furnaces, package units, air handlers, Package Terminal Air Conditioners/Heat Pumps, or “PTACs,” evaporator coils, flexible duct and accessories. Our products are predominantly marketed under the Goodman®, Amana® and Quietflex® brands.

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Our principal HVAC products are outlined in the following table and summarized below.

 

   Size(1)  Efficiency(2)

Product line

    

Split systems:

    

Air conditioners

  1.5 to 10 Tons  13 to 18 SEER

Heat pumps

  1.5 to 10 Tons  13 to 18 SEER

Gas furnaces

  45,000–140,000 BTUH  80 to 96% AFUE

Package units(3):

    

Gas/electric

  2 to 1012.5 Tons  13 to 15 SEER

Electric/electric (A/C)

  2 to 1012.5 Tons  13 SEER

Electric/electric (heat pump)

  2 to 1012.5 Tons  13 to 15 SEER

Air handlers

  1.5 to 10 Tons  NA

PTAC(3):

    

A/C & electric heat coil

  7,000 to 15,000 BTUH  9.5 to 12.8 EER

Heat pump

  7,000 to 15,000 BTUH  9.3 to 12.8 EER

Evaporator coils

  1.5 to 5 Tons  NA

Flexible duct

  3” to 22”  R-4.2, 6, 8

 

(1)Based on cooling tons of thousands of British Thermal Units Per Hour (BTUH). 12,000 BTUH = 1 ton.

(2)Measure of a product’s efficiency used to rate it comparatively and to calculate energy usage and cost: SEER—Seasonal Energy Efficiency Rating; AFUE—Annual Fuel Utilization Efficiency; EER—Energy Efficiency Rating. R-value is a comparative measure of thermal resistance used to quantify insulating properties.

(3)Products with commercial product characteristics and certain other products are not subject to the 13 SEER minimum efficiency standards.

Split-system air conditioners and heat pump unitsunits.. A split-system air conditioner consists of an outdoor unit that contains a compressor and heat transfer coils and an indoor heat transfer unit with ducting to move air throughout the structure. A split-system heat pump is similar to a split-system air conditioner, but also includes a device that reverses the flow of refrigerant and thus heats when heating is required and cools when cooling is required.

Gas Furnacesfurnaces.. A gas furnace is typically used with a ducting system to heat indoor air. Furnaces use a natural gas-fueled burner and a heat exchanger to heat air and a blower to move the heated air throughout a structure through ducting.

Package unitsunits.. A package unit consists of a condensing unit and an evaporator coil combined with a gas or electric heat source in a single, self-contained unit. It is typically placed outside of the structure on a ground slab or roof.

Air handlers. An air handler is a blower device used in connection with heating and cooling applications to move air throughout the indoor comfort control system.

Package terminal air conditioners. A PTAC is a single unit heating and air conditioning system used primarily in hotel and motel rooms, apartments, schools, assisted living facilities and hospitals.

Evaporator coils. An evaporator coil is a key component of the indoor section of a split-system air conditioner or heat pump unit. An evaporator coil is comprised of a heat transfer surface of copper tubes surrounded by aluminum fins in which compressed gas is permitted to expand and absorb heat, thereby cooling the air around it.

OtherOther.. Other products include flexible duct and other HVAC related products and accessories.

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Distribution Networknetwork

We sell our products through a North American distribution network with approximately 900over 945 total distribution points comprised of over 150160 company-operated distribution centers and approximately 750over 785 independent distributor locations. For the yearyears ended December 31, 2008 and 2009, approximately 62%55% and 57%, respectively, of our net sales were made through company-operated distribution centers and our direct sales force while the remaining 38%45% and 43%, respectively, of our net sales were made through our independent distributors. Our distribution strategy consists of maintaining broad geographic coverage and strong distributor and dealer relationships.

We operate

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Our company-operated distribution centers are located in key states such as Texas, California, Arizona, NevadaFlorida, Maryland and Florida.Pennsylvania. This strategy provides us direct access to large markets in North America and allows us to maintain a significant amount of control over the distribution of our products. Our company-operated distribution center network provides us with considerable operational flexibility by giving us (i) direct access to dealers, which provides us continuous, real-time information regarding their preferences and needs, (ii) better control over inventory through direct information flow, which allows us to market our full line of products in our company-operated distribution centers,efficiently meet customer demand, (iii) the ability to manage marginspricing at our discretion, (iv) an additional channel in which to conduct market tests of new products and (v) the ability to introduce new products broadly and quickly. Our company-operated distribution centers employ a low-cost distribution strategy to provide competitive pricing. In the past five years,Since January 1, 2003, we have increased ouropened more than 70 net new company-operated distribution center base by over 60%.centers. We expect to continue to seek opportunities to expand our company-operated distribution center footprint in targeted North American markets.

We regularly perform market analyses to determine new distribution locations based on whether a given market is either under-served or has poor independent distributor representation. Once an under-served or poorly represented market is identified, we evaluate whether to look for a new independent distributor, open a company-operated distribution center or acquire the under-performing independent distributors.

We maintain an extensive independent distributor network, which providesallows us to access to major sales areasmarkets not addressed by our company-operated distribution centers. We have maintained longstanding relationships with our leading distributors. We seek to effectively align the incentives of our independent distributors with those of the company, while avoiding expensive brand marketing campaigns, through the following programs:

 

  

Mark-up Rebate Programs:rebate programs We offer distributor: Many independent distributors take advantage of our rebates that are inversely related to the distributor’s markup, thus motivating distributors to meet certain pricing targets to the dealers. This program is structured to encourage distributors to pass on lower equipment costs to dealers in order to drive market share expansion while preserving the distributors’ margins. Through this program we are able to encourage low final prices of our products to the ultimate consumer.

 

  

Inventory Consignment:consignment: We provide inventory on consignment to manysome of our independent distributors. This strategy positions finished goods from our factories directly in the market to be sold as demand requires. Under the consignment program, we carry the cost of appropriate finished goods inventories until they are sold by the distributors, which substantially reduces their investment in inventory and allows us to more easily develop new distributor relationships. We also benefit from reduced warehousing costs.

 

  

New Dealer Recruitment Program:dealer recruitment program: We offer a program through which dealers tour our manufacturing and research facilities, are educated onabout our products, review our quality control process and meet with our engineers and management. This interaction allows us to provide visual reinforcement of the quality and care taken in the manufacture of our products. The program also provides us with the opportunity to garnerobtain direct feedback from dealers onregarding end user receptivity to current products, as well as gauge the dealers’ interest in future products ahead of a broader product introduction.

Our independent distributor network provides us market access where we do not employ company-operated distribution centers. Independent distributors are typically selected and retained on the basis of (i) a demonstrated ability to meet or exceed performance targets, (ii) a solid financial position and (iii) operating with a low-cost structure and competitive pricing. Our selection process, coupled with our incentive programs, which makemakes switching costs high, which has resulted in a low distributor turnover rate. Since the beginning of 2004, we added approximately 250new independent distributor locations through the addition of new distributors or the expansion of existing distributors.

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We also seek to broaden our customer base by developing new customer relationships with national homebuilders and further developing our customer relationships with large national and regional homebuilders. We believe these relationships will increase sales and continue to add credibility and visibility to our brand names and products.

Manufacturing

We operate three manufacturing and assembly facilities in Houston, Texas, two in Tennessee, one in Arizona, one in Pennsylvania and one in Florida, totaling approximately two million square feet. We believe we have sufficient manufacturing capacity to achieve our business goals for the foreseeable future without the need for further expansion.

We operate two logistics centers, the Houston Logistics Center (a freestanding center) and the Fayetteville Center (a logistics center in the Fayetteville, Tennessee facility). The manufacturing plants feed finished products into these two logistics centers for deployment into the distribution channels. As the distribution network provides

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point of sale information, these logistics centers deploy products into the marketplace as demand dictates. The Quietflex® branded product is distributed to customers from Quietflex-related manufacturing and assembly facilities located in Houston, Texas, Phoenix, Arizona, Groveland, Florida and Scranton, Pennsylvania.

Raw Materialsmaterials and Purchased Componentspurchased components

We purchase most of our components, such as compressors, motors, capacitors, valves and control systems, from third-party suppliers. In order to maintain low input costs, we also manufacture select components when it is deemed cost effective. We also manufacture heat transfer surfaces and heat exchangers for our units.

Our primary raw materials are steel, copper, aluminum and aluminum,steel, all of which are purchasedwe purchase from third parties. We spent approximately $264.7 million in 2009 and approximately $300.0 million in each of 2008 and 2007 on these raw materials. Cost variability of raw materials can have a material impact on our results of operations. In order to enhance raw material price stability, we monitor principal raw material prices and strategically enter into commodity forward contracts and hedges for the purchase of certain raw materials.

Our procurement initiatives include leveraging our buying power on a global basis to improve purchasing efficiency, reducing the number of suppliers and improving supplier logistics. While we typically concentrate our purchases for a particular material or component with one or two suppliers, alternative suppliers are available and have been identified if we need to procure key raw materials and components.or components from them.

Where feasible, we solicit bids for our material and component needs from multiple suppliers. Supplier selection is based primarily on cost, quality and delivery requirements. After selecting suppliers, we execute short- and long-term agreements by which we seek to ensure availability and delivery of requisite supplies.

In 2008,2009, our top ten suppliers accounted for approximately 76%53% of our supply expenditures. We believe we have strong and longstanding relationships with many of our suppliers.

See “Item 1A Risk Factors—Significant fluctuations in the cost of raw materials and components have, and may continue to, increase our operating margins. In addition, a decline in our relationships with key suppliers may have an adverse effect on our business.”

Sales and Marketingmarketing

Our strategy is to maintain a lean sales and marketing staff, focused primarily on traditional products, in order to derive the greatest value from our marketing budget while minimizing overhead costs. Our longstanding distributor relationships, low turnover rates and company-operated distribution center footprint allow us to implement our sales and marketing strategy with a modest corporate staff. Our corporate sales and marketing staff monitors market information, develops programming and provides distributors with the promotional materials they need to sell our products. We review the need for additional sales and marketing staff as business opportunities arise.

Our primary HVAC products are marketed under the Goodman®, Amana® and Quietflex® brand names. Our Goodman® branded products cater to the large segment of the market that is price sensitive and desires reliable and low cost comfort. We believe the Goodman brand is the single largest domestic residential HVAC brand and we position the Goodman® brand as the top selling residential and light commercial HVAC brand

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in North America and as the preferred brand for quality HVAC equipment at low prices. Our premium Amana® branded products include enhanced features such as higher efficiency and quieter operation and generally longerenhanced warranties. The Amana brand is positioned as the “great American brand” that outlasts the rest, highlighting durability and long-life. The Quietflex® brand is a recognized brand of flexible duct. Our products and brands are marketed for their quality, low cost, ease of installation, superior warranty and reliability.

Weather and Seasonalityseasonality

WeatherWe believe that weather patterns have historically impacted the demand for HVAC products. For example, we believe that hot weather in the spring season causescan cause existing older units to fail earlier in the season, driving customers to accelerate replacement of a unit, which might otherwise be deferred in the case of a late season failure. Similarly, we believe that unseasonably mild weather diminishes customer demand for both commercial and residential HVAC replacement and repairs. Weather also impacts installation during periods of inclement weather as fewer units are installed due to dealers being delayed or forced to shut down their operations.

Although there is demand for our products throughout the year, in each of the past three fiscal years approximately 57%between 58% to 60% of our total sales occurred in the second and third quarters of the fiscal year. Our peak production also typically occurs in the second and third quarters of the fiscal year.

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Customers

Our customers consist primarily of (i)(1) distributors who supply independent dealers who install our products for the ultimate end user and (ii)(2) independent dealers when sellingto whom we sell products through our company-operated distribution centers. We also sell PTAC products directly to the light commercial sector, including hotels, motels and assisted living facilities.

We have a diverse and fragmented customer base in key regions throughout the United States.base. In 2008 and 2009, no independent distributor accounted for more than 10% of our net sales. We believe the loss of any single distributor would not have a material effect on our business and operations. Our top ten independent distributors accounted for approximately 31% and 30% of our net sales in 2008.2008 and 2009, respectively. Our sales, marketing and distribution strategy focuses on keeping prices low to the dealer, while allowing distributors to achieve their profit goals.

Research and Developmentdevelopment

We maintain an engineering and research and development staff whose duties include testing and improving existing product lines and developing new products. Company-sponsored research and development expense was $11.2 million, $10.5 million $9.1 million and $8.8$9.1 million for the years ended December 2009, 2008 2007 and 2006,2007, respectively. We charge research and development costs to selling, general and administrative expense as incurred. Research and development is conducted at our facilities in Houston, Texas, Fayetteville, Tennessee and Dayton, Tennessee. Research and development is focused on maintaining product competitiveness by improving the cost of manufacture, safety characteristics, reliability and performance while ensuring compliance with governmental standards. The engineering staff focuses its cost reduction efforts on standardization, size and weight reduction, the application of new technology and improving production techniques. Our engineering staff maintains close contact with marketing and manufacturing personnel to ensure that their efforts are in lineconsistent with market trends and are compatible with manufacturing processes.

Information Systemssystems

We use software packages from major publishers to support many of our business operations: MAPICS foroperations, including manufacturing, order processing, payroll, and finance; PkMS forfinance, logistics center operation; Kronos foroperation, time and attendance reporting;reporting and Mincron for company-operated distribution operations. The major business systems operate on an IBM AS/400 computer.iSeries computer located with production Microsoft Windows servers at a hardened and guarded facility. Certain systems we designate as critical to continued business operation are the subject of High Availability processes. We improved our systems by installing the current version of MAPICSinstall updated software to improve serviceserviceability and data accuracy, converting Quietflex operations to use MAPICS, implementing a bar code-based control system at our Houston Logistics Center and Fayetteville Logistics Center, and completing the installation of Mincron into our company-operated distribution centers.functionality. Our company-operated distribution centers provide us with significant, real-time information that allows us to monitor the trends in our business and to rapidly respond to changes in the markets we serve to capitalize on potential growth opportunities. We developed and use a custom application system that computes optimal replenishment quantities of equipment and parts intoin our company-operated distribution centers.

centers in order to reduce inventory investment.

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Independent distributors make use of our systems through Internet-based portals. This service givesportals. These services give distributors access to data, such as replacement part lists, and systems, such as thea consigned inventory accounting function. Consumers make use of our Internet-based systems to obtain general and product-specific information and register products for warranty coverage. We also link our systems with those of our suppliers in order to manage the procurement of materials on a real-time basis. Each night, the programs recalculate component requirements, allowing faster notification of schedule changes to suppliers which greatly reduces our working capital requirements.

Competition

The production and sale of HVAC equipment by manufacturers is highly competitive. HVAC manufacturers primarily compete on the basis of price, depth of product line, product efficiency and reliability, product availability and warranty coverage. According to industry sources, the top fivesix domestic manufacturers represented approximately 80%90% of unit sales in the United States residential and light commercial HVAC market in 2007. Based on unit sales, we2008. We are the second-largesta leading domestic manufacturer of HVAC equipmentproducts for residential and light commercial use. Our four largest competitors in this market are Carrier Corporation (a division of United Technologies Corporation), Trane Inc. (a wholly-owned subsidiary of Ingersoll-Rand Company Limited), Lennox International, Inc. and Rheem Manufacturing Company. A number of factors affect competition in the HVAC market, including the development and application of new technologies and an increasing emphasis on the development of more efficient HVAC products. In addition, new product introductions are an important factor in the market categories in which our

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products compete. Some of our competitors are large and have significantly greater financial, marketing and technical resources than we do. Although we believe we have been able to compete successfully in our markets to date, there can be no assurance that we will be able to do so in the future.

Patents and Trademarkstrademarks

We hold a number of patents, and have recently filed a number of patent applications, relating to the design and manufacture of our heating and air conditioning products. We generally endeavor to obtain patent protection for technology that we develop and will enforce such protection as appropriate. Our existing patents generally expire between 20092010 and 2015.2013. In connection with the marketing of our products, we have obtained trademark protection for all of our brand names. The trademark registrationregistrations for these names have an initial term of between five and six years and thereafter a term of 10 years. The 10 year10-year term is renewable for additional 10-year terms so long as the names are still being used by us for the purpose for which they were registered. We have a license to use the Amana brand name and related trademark in connection with our HVAC business. The Amana trademark is controlled by Whirlpool Corporation (subsequent to its acquisition of Maytag), which markets appliances under the Amana brand name. As part of the sale of the Amana appliance business to Maytag in 2001, we entered into a trademark license agreement with Maytag. The trademark license agreement expires in July 2011, with renewal terms available for a total of an additional 15 years. In addition, we possess a wide array of proprietary technology and know-how. We believe that our patents, trademarks, trade names, service marks and other proprietary rights are important to the development and conduct of our business as well as the marketing of our products. We vigorously protect these rights.

Employees

As of December 31, 2008,2009, we had 4,4014,331 full-time employees (3,377(3,290 hourly and 1,0241,041 salaried employees). Of those, 2,7942,570 employees were directly involved in manufacturing processes (assembly, fabrication, maintenance, quality assurance and forklift operations) at our eight manufacturing and assembly facilities. Our only unionized workforce is at our Fayetteville, Tennessee manufacturing facility, which we acquired with the 1997 acquisition of Amana. The 1,063approximately 929 Fayetteville hourly employees are represented by the International Association of Machinist and Aerospace Workers. Although the Fayetteville facility has been unionized since the 1960s, there have been no work stoppages or strikes at the plant since 1978. The current contract will expireWe negotiated a three-year collective bargaining agreement with the union that was ratified by the Fayetteville union membership on December 5, 2009. We believe we have good relations with our employees.

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Regulation

We are subject to extensive, evolving and often increasingly stringent international, federal, state, provincial, municipal and local laws and regulations.

Environmental Refrigeration Regulation.refrigerant regulation

In 1987, the United States became a signatory to the Montreal Protocol on Substances that Deplete the Ozone Layer. The Montreal Protocol addresses the use of certain ozone depletingozone-depleting substances, including hydrochlorofluorocarbons, or “HCFCs,” a refrigerant commonly used for air conditioning and refrigeration equipment. The 1990 amendments to the Clean Air Act implement the Montreal Protocol in the United States and have been used byauthorize the U.S. Environmental Protection Agency, or “EPA,” to issue regulations to accelerate the phase-out of HCFCs between 2010 and 2020.

The EPA is authorized under the Clean Air Act to promulgate regulations to accelerate the statutory phase-out schedule for any Class II substance, which includes HCFC-22. Various groups have proposed that the EPA phase-out Class II substances, including HCFC-22, substantially earlier than under the schedule provided by the Clean Air Act. It is uncertain whetherOn December 7, 2009, the EPA will take action to accelerateapproved final rules that complete the phase-out of HCFC-22 in the production of new units, effective January 1, 2010. We have prepared for this phase-out and utilize R410A refrigerant as a substitute for HCFC-22.

Some cooling products that Under the EPA’s final rules on HCFC-22, we manufacture currently and lawfully contain HCFC-22. This refrigerant is sealed insidegenerally are able to sell or distribute equipment pre-charged with HCFC-22 after the condensing unit or evaporator coil and is expectedphase-out so long as the equipment was manufactured prior to remain within the unit throughout the operating life of the system without leakage to the atmosphere. We believe that our operations materially comply with all current EPA regulations relating to refrigerants. In addition, we do not believe that either the Clean Air Act and its HCFC implementing regulations as currently in effect or any reasonably anticipated accelerated phase-out of HCFC-22 will have a material adverse impact on our business, financial condition or results of operations.January 1, 2010.

As a result of the international and national actions to end use of HCFC-22, we currently use a substitute refrigerant in some of our air conditioning and heat pump products. This substitute refrigerant, HFC-410A,R410A, is a mixture of hydrofluorocarbons that the EPA has determined do not contribute to the depletion of the ozone layer and therefore are not subject to phase-out mandates. We manufactureFor the past five years, we have manufactured and sellsold some of our air conditioning and heat pump equipment incorporating the HFC-410A refrigerant, and have done so for over five years.R410A refrigerant. Products using the new refrigerant require compressors, seals, and heat exchangers designed to meet its higher operating pressures. Although we are unable

Index to predict the full extent of modificationsFinancial Statements

We believe that may be necessaryour operations materially comply with all current EPA regulations relating to our manufacturing processes or the costs associated with the use of alternative refrigerants as we transform all manufacturing lines to make products using HFC-410A refrigerant by 2010,refrigerants. In addition, we do not expectbelieve that either the Clean Air Act or its HCFC implementing regulations will have a material adverse effectimpact on us unless the phase-out is accelerated more rapidly than is currently anticipated under the Clean Air Act.our business, financial condition or results of operations.

Efficiency Standards.standards

We are subject to international, federal, state, provincial, municipal and local laws and regulations concerning the energy efficiency of our products, including, among others, the National Appliance Energy Conservation Act of 1987, as amended, or “NAECA”,“NAECA,” the Canadian Energy Efficiency Act, and regulations promulgated under these acts. Energy efficiency in air conditioning products is measured by a SEER. A higher SEER indicates a lower amount of energy is required for the same amount of cooling capacity. Typical systems range from 10 SEER to 23 SEER, with 14 SEER and higher considered to be premium efficiency systems. Effective January 23, 2006, the U.S. federal minimum efficiency standard for central air conditioners and heat pumps manufactured in the United States increased from 10 SEER to 13 SEER under NAECA, a change we actively supported. We believe such a standard is beneficial to

On November 19, 2007, the environment and that our industry leading cost structure and manufacturing expertise should allow us to capture additional market share. The U.S. Department of Energy, isor DOE, issued new regulations increasing the minimum annual fuel utilization efficiency, or AFUE, for several types of residential furnaces. These regulations apply to furnaces manufactured for sale in the U.S. or imported into the United States on and after November 19, 2015. On December 19, 2007, federal legislation was enacted authorizing the DOE to study the establishment of regional efficiency standards for furnaces and air conditioners. In October 2009, Goodman and the other leading domestic residential HVAC equipment manufacturers and industry representatives signed an agreement with certain U.S. energy-efficiency advocacy organizations supporting new federal standards for domestic residential central HVAC products. The agreement calls for replacing national efficiency standards with different standard levels in three climate regions—North, South, and Southwest. The supported standards would generally require cooling efficiencies of at least 14 SEER in the South and heating efficiencies of at least 90% AFUE in the North. In addition, the agreement would allow states to include even higher efficiency levels for HVAC systems in residential new construction. The signatories agreed to submit their agreement jointly as a legislative proposal to Congress for inclusion in energy legislation currently revisingunder consideration and to recommend that the national residential furnace standard.DOE promulgate rules adopting the agreed-upon regions and standards. We have established processes that we believe will allow us to offer new products that meet or exceed these new national standards well in advance of implementation of the new standards.

Other Environmental, Healthenvironmental, health and Safety Matters.safety matters

We are subject to extensive, evolving and often increasingly stringent international, federal, state, provincial, municipal and local environmental and health and safety laws and regulations, including, among others, NAECA, the Clean Air Act, the Clean Water Act, the Comprehensive Environmental, Response, Compensation and Liability Act, the Resource Conservation and Recovery Act, the Occupational Safety and Health Act, the Toxic Substances Control Act, the Canadian Energy Efficiency Act, and regulations promulgated under these acts. Many of these laws and regulations relate to the protection of human health and the environment, including those limiting the discharge of pollutants into the environment and those regulating the treatment, storage or disposal and remediation of releases of, and exposure to, hazardous wastes and hazardous

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materials. We believe that we are in substantialmaterial compliance with applicable environmental, health and safety laws and regulations, many of which provide for substantial fines andor civil or criminal sanctions for violations. Certain environmental laws and regulations impose strict, joint and several liability on potentially responsible parties, including past and present owners and operators of sites, to clean up, or contribute to the cost of cleaning up sites at which hazardous wastes or materials were disposed or released. We are currently, and may in the future be, required to incur costs relating to the investigation or remediation of such sites, includingor sites owned or operated by third parties where we have, or may have, disposed of our waste.

As required by a March 15, 2001 Consent Order with the Florida Department of Environmental Protection, or “FDEP,” Goodman Distribution Southeast, Inc., or “GDI Southeast,” our wholly-owned subsidiary, is investigating and pursuing, under FDEP oversight, the delineation of groundwater contamination at and around the GDI Southeast facility in Fort Pierce, Florida. Remediation has not yet begun.is expected to begin in 2010. The ultimate cost for this remediation cannot be predicted with certainty due to the variables relating to the contamination and the appropriate remediation methodology, the evolving nature of remediation technologies and governmental regulations, and the inability to determine the extent to which contribution will be available from other parties, all of which factors are taken into account to the extent possible in estimating potential liability. We have reserved approximately $0.5 million as of December 31, 2008, for this matter. It2009, although it is reasonably possible that the costsultimate cost could substantially exceed this amount although weby up to approximately $3.3 million. Costs of future expenditures are not discounted to their present value. We do not believe that this matter is likely to have a material adverse effect on our business or financial condition, or results of operation.operations.

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We believe that this contamination predated GDI Southeast’s involvement with the Fort Pierce facility and that GDI Southeast has not caused or contributed to the contamination. Accordingly, we are pursuing litigation against a former ownersowner and a former lessee of the Fort Pierce facility in an attempt to recover our costs. At this time, we cannot estimate probable recoveries from this litigation.

We are also subject to various laws and regulations relating to worker health and safety. For example, in 2004, we entered into an agreement with the Occupational Safety and Health Administration, or “OSHA,” pursuant to which we conducted certain corrective actions identified during an OSHA inspection of two of our facilities, paid a $277,000 penalty and completed performance in 2008 of certain compliance requirements imposed by the settlement. We expect to continue to make capital expenditures at these and otherour facilities to improve worker health and safety. Expenditures at these and any otherour facilities to assure compliance with OSHA and other applicable standards could be significant, and we may become subject to additional liabilities relating to our facilities in the future.significant. In addition, future inspections at these or otherour facilities may result in additionalliabilities, including enforcement actions by OSHA.

Although we do expect to incur expenses related to environmental, health and safety laws and regulations, based on information presently known to us, we believe that the future cost of complying with such laws and regulations and any liabilities associated with environmental, health and safety obligations will not have a material adverse effect on our business, financial condition or results of operation.operations. However, we cannot assure you that future events, including new or stricter environmental or health and safety laws and regulations, related damage or penalty claims, the discovery of previously unknown environmental or health and safety conditions requiring investigation or remediation, more vigorous enforcement or a new interpretation of existing environmental or health and safety laws and regulations would notcould require us to incur additional costs that couldmay be material.

Florida Officeoffice of Insurance Regulation.insurance regulation

One of our subsidiaries, AsureCare Corp., a Florida corporation, is licensed as a service warranty association and regulated by the Florida Office of Insurance Regulation. As a Florida-domestic service warranty association, AsureCare Corp. is subject to regulation as a specialty insurer under certain provisions of the Florida Insurance Code. Under applicable Florida law, no person can acquire, directly or indirectly, more than 10% of the voting securities of a service warranty association or its controlling company, including Goodman Global, Inc., without the written approval of the Florida Office of Insurance Regulation. Accordingly, any person who acquires, directly or indirectly, 10% or more of our common stock, must first file an application to acquire control of a specialty insurer or its controlling company, and obtain the prior written approval of the Florida Office of Insurance Regulation. The application must be filed with the Florida Office of Insurance Regulation no later than five days after any form of tender offer or exchange offer is proposed, or no later than five days after the acquisition of securities or ownership interest if no tender offer or exchange offer is involved.

The Florida Office of Insurance Regulation may disapprove an acquisition of beneficial ownership of 10% or more of our voting securities by any person who refuses to apply for and obtain regulatory approval of such

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acquisition. In addition, if the Florida Office of Insurance Regulation determines that any person has acquired 10% or more of our voting securities without complying with the applicable suitability provisions, it may order that person to cease the acquisition and divest itself of any shares of such voting securities which may have been acquired in violation of the applicable Florida law. The Florida Office of Insurance Regulation may also take disciplinary action against AsureCare Corp.’s license if it finds that an acquisition made in violation of the applicable Florida law would render the further transaction of its business hazardous to its customers, creditors, stockholders or the public.

Available Information

We make available free of charge through our internet website (www.goodmanglobal.com), including our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished voluntarily and pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, as soon as reasonably practicable after electronically filing with or furnishing to the Securities and Exchange Commission, or SEC, such material. We also make available free of charge through our internet website our code of business conduct and ethics and the charters of our board’s committees. Any amendments to, or waivers from, a provision of our code of ethics that apply to our principal executive officer, principal financial officer, controller, or persons performing similar functions and that relates to any element of the code of ethics enumerated in paragraph (b) of Item 406 of Regulation S-K will be disclosed by posting such information on our website. The reference to our website address does not constitute incorporation by reference of the information contained on our website and should not be considered part of this document.

ITEM 1A.Risk Factors

You should carefully consider the risks described below as well as the other information contained in this annual report. Any of the following risks could materially adversely affect our business, financial condition or results of operations.

Our business has been, and may continue to be, adversely impacted by the current recessionconditions affecting the U.S. economy.

Our business is affected by a number of economic factors, including the level of economic activity in the markets in which we operate. Throughout 2008 and 2009, the decline in economic activity in the United States affected, and may in the future materially affect, our business, financial condition and results of operation.operations. Sales in the residential and commercial new construction market correlate closely to the number of new homes and buildings that are built, which in turn is influenced by factors such as interest rates, inflation or deflation, consumers’ spending habits, employment rates and other macroeconomic factors over which we have no control. Declining economic activity as a result of these factors resulted in a reduction in new construction and replacement purchases, which has affected, and may continue to affect, our sales volume and profitability. The recession affecting the U.S. economy may materially adversely affect our business.

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The volatility and disruption of the capital and credit markets and adverse changes in the U.S. and global economy may negatively impact our ability, and the ability of our customers, to access financing and/orand may impede our internal growth.

TheIn late 2007, 2008 and early 2009, the capital and credit markets have been experiencing extremeexperienced volatility and disruption at unprecedented levels. Significant declines in the housing market during the prior year,that period, coupled with falling home prices, and increasing foreclosures and high levels of unemployment, have resulted in significant write-downs of asset values by financial institutions, including government-sponsored entities and major commercial and investment banks. These write-downs have caused many financial institutions to seek government assistance and additional capital, to merge with larger and stronger institutions and, in some cases, to fail. Many lenders and institutional investors have reduced, and in some cases ceased to provide, funding to borrowers, including other financial institutions. These disruptions in the financial markets may not only impact our liquidity but that of our suppliers, our independent distributors and our customers. If these market disruptions continue,re-emerge, our business, financial position,condition, results of operationoperations and cash flows could be adversely affected.

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Changes in weather patterns and seasonal fluctuations may adversely affect our operating results.

Weather fluctuations may adversely affect our operating results and our ability to maintain our sales volume. Our operations may be adversely affected by unseasonably warm weather in the months of November to February and unseasonably cool weather in the months of May to August, which has the effect of diminishing customer demand for heating, ventilation and air conditioning systems and decreasing our sales volumes. Many of our operating expenses are fixed and cannot be easily reduced during periods of decreased demand for our products. Accordingly, our results of operations will be negatively impacted in quarters with lower sales due to such weather fluctuations. In addition, our sales volumes and operating results in certain regions can be negatively impacted during inclement weather conditions in these regions.

In addition, our quarterly results may vary significantly. Although there is demand for our products throughout the year, in each of the past three fiscal years approximately 57%between 58% to 60% of our total sales occurred in the second and third quarters of the fiscal year. Our peak production also typically occurs in the second and the third quarters of the fiscal year. Therefore, quarterly comparisons of our sales and operating results should not be relied onupon as an indication of future performance, and the results of any quarterly period may not be indicative of expected results for a full year.

Our substantial indebtedness could adversely affect our financial health and prevent us from fulfilling our obligations under our senior secured credit facilities and our 2016 notes.such indebtedness.

We now have and will continue to have a significant amount of indebtedness for the foreseeable future. This indebtedness exposes us to risks that some of our primary competitors, with less outstanding indebtedness, do not face. On December 31, 2008,2009, we had $1,372.0$1,160.8 million of indebtedness, net of original issue discount of $17.2 million, (of which $500.0$424.0 million consists of our 13.50%/14.00% senior subordinated notes due 2016, our 2016which we refer to as the senior subordinated notes, and the balance$754.0 million consists of indebtedness under our senior secured credit facilities), excluding approximately $33.5 million of outstanding and undrawn letters of credit and up to $69.1$266.5 million of additional indebtedness that may be borrowed under the terms and conditions of our revolving credit agreement.facility, of which $198.0 million was available under our borrowing base as of such date.

Our substantial indebtedness could have important consequences to our business, including:

 

making it more difficult for us to satisfy our obligations with respect to our 2016 notes;outstanding notes and other indebtedness;

 

increasing our vulnerability to general adverse economic and industry conditions;

 

requiring us to dedicate a substantial portion of our cash flow from operations to payments on our indebtedness, thereby limiting cash flow available to fund our working capital, capital expenditures or other general corporate requirements;

 

exposing us to the risk of interest rate increases on our variable rate borrowings, including borrowings under our newGoodman Global, Inc.’s senior secured credit facilities;

 

limiting our flexibility in planning for, or reacting to, changes in our business and the industry;

 

placing us at a competitive disadvantage compared to our competitors that have less indebtedness; and

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limiting our ability to obtain additional financing to fund future working capital, capital expenditures, other general corporate requirements and acquisitions.

Our cash interest expense in 2008 and 2009 related to our 2016senior secured credit facilities and senior subordinated notes revolving credit agreementwas $162.2 million (which includes refinancing costs of $35.6 million incurred in connection with the 2008 Acquisition) and term loan credit agreement was $118.7 million.$97.0 million, respectively. At December 31, 2008,2009, we had $500.0$424.0 million of outstanding 13.5%/14% senior subordinated notes, due 2016, the 2016 notes, and owed $772.0 million and $100.0$754.0 million under our term loan credit agreement, had approximately $33.5 million in outstanding letters of credit and had no borrowings under our revolving credit agreement, respectively.agreement. The term loan credit agreement has an interest rate of LIBOR (with a minimum of 3.25%) or Prime, plus an applicable margin, based on certain leverage ratios, which was 4.25% and totaled 7.71% asratios. As of December 31, 2008.2009, the applicable margin was 3.0% and total interest rate, based on the Prime rate, was 6.25%. The revolving credit agreement has an interest rate of LIBOR or Prime, plus an applicable margin, which totaled 4.25% asmargin. As of December 31, 2008.2009, the total interest rate, based on the Prime rate, was 4.25%. An increase of 0.125% in the floating interest rates would have increased our annual interest expense by approximately $1.1$0.9 million in 2008.the year ended December 31, 2009.

Index to Financial Statements

Our debt agreements contain restrictions that limit our flexibility in operating our business.

OurThe agreements governing our senior secured credit facilities and the indenture governing our 2016senior subordinated notes, contain various covenants that limit our ability to engage in specified types of transactions. These covenants limit our and certain of our subsidiaries’ ability to, among other things:

 

incur additional indebtednessdebt or issue certain preferred shares;capital stock;

 

pay dividends on, repurchase or make distributions in respect of our capital stock or make other restricted payments;

 

make certain investments;

 

sell or transfer assets;

 

create liens;

 

consolidate, merge, sell or otherwise dispose of all or substantially all of our assets; and

 

enter into certain transactions with our affiliates.affiliates; and

permit restrictions on the ability of our subsidiaries to make distributions.

In addition, under our revolving credit agreement, when (and for as long as) the combined availability under our revolving credit agreement is less than a specified amount for a certain period of time, or if a payment or bankruptcy event of default has occurred and is continuing, funds deposited into any of our depository accounts will be transferred on a daily basis into a blocked account with the administrative agent and applied to prepay loans under the revolving credit agreement and to cash collateralize letters of credit issued thereunder.

Under our senior secured credit facilities, we will also be required to satisfy and maintain specified financial ratios. Our ability to meet those financial ratios can be affected by events beyond our control, and there can be no assurance that we will meet those ratios.

The failure to comply with any of these covenants would cause a default under our debt instruments. A default, if not waived, could result in acceleration of the outstanding indebtedness under such debt instruments, in which case such indebtedness would become immediately due and payable. In addition, a default or acceleration of indebtedness under our 2016 notes or our senior secured credit facilities or senior subordinated notes could result in a default or acceleration of other indebtedness we may incur withas a result of cross-default or cross-acceleration provisions. If any default occurs, we may not be able to pay our debt or borrow sufficient funds to refinance it. Even if new financing is available, it may not be available on terms that are acceptable to us. Complying with these covenants may cause us to take actions that we otherwise would not take or not take actions that we otherwise would take.

Despite current indebtedness levels, we and our subsidiaries may incur substantially more debt. This could further exacerbate the risks associated with our substantial leverage.

We and our subsidiaries may be able to incur substantial additional indebtedness in the future. For example, as of December 31, 2008,2009, we had an additional $69.1$266.5 million of undrawn commitments under the terms and conditions of our revolving credit agreementfacility (of which $198.0 million was available under our borrowing base as of such date) that, if drawn, would further increase our leverage. Under the terms of the indenture governing our 2016senior subordinated notes we and the terms of our subsidiariessenior secured credit facilities, we are permitted to incur additional indebtedness. If new debt is added to our and our subsidiaries’ current debt levels, the related risks of compliance with certain ratios and of our ability to service our debt obligations that we and they now face could intensify.

Index to Financial Statements

To service our indebtedness, we will require a significant amount of cash. Our ability to generate cash depends on many factors beyond our control.

Our ability to make scheduled payments on or to refinance our debt obligations depends on our financial condition and operating performance. This, to a certain extent, is subject to prevailing economic and competitive conditions and to certain financial, business, regulatory and other factors beyond our control. Our business may not generate sufficient cash flow from operations and future borrowings may not be available to us under our revolving credit agreement in an amount sufficient to enable us to service our debt, including our 2016the senior secured credit facilities and senior subordinated notes, or to fund our other liquidity needs. If we are unable to meet our debt obligations or fund our other liquidity needs, we may need to restructure or refinance all or a portion of our debt, including our 2016senior secured credit facilities and senior subordinated notes, or sell certain of our assets on or before the maturity of our debt. We may not be able to restructure or refinance any of our debt including our 2016 notes, on commercially reasonable terms, ifor at all, which could cause us to default on our debt obligations and impair our liquidity. Any refinancing of our indebtedness could be at higher interest rates and may require us to comply with more onerous covenants that could further restrict our business operations.

In addition, if our cash flowsflow and capital resources are insufficient to fund our debt service obligations, we may be forced to reduce or delay investments and capital expenditures, or to sell assets or seek additional capital.

Index to Financial Statements

These alternative measures may not be available to us, may not be successful and may not permit us to meet our scheduled debt service obligations, which could result in substantial liquidity problems. Our senior secured credit facilities and the indenture governing our 2016senior subordinated notes restrictsrestrict our ability to dispose of assets and use the proceeds from the disposition. We may not be able to consummate those dispositions or to obtain the proceeds which we could realize from them and these proceeds may not be adequate to meet any debt service obligations then due.

A substantial portion of our indebtedness is at a variable rate of interest, which could increase our interest expense in the event interest rates rise.

Certain of our indebtedness bears interest at rates that fluctuate with changes in certain prevailing interest rates. A 1% increase or decrease in the overall interest rate would have resulted in approximately a $8.7$6.9 million ($4.2 million, net of tax) increase or decrease in our interest expense in 2008the year ended December 31, 2009 on our variable rate indebtedness, respectively.indebtedness. If interest rates increase dramatically, we may be unable to meet our debt service obligations. We have entered into an interest rate cap with a notional amount of $150.0 million that matures in May 2010, an interest rate swap with a notional amount of $200.0 million which matures in March 2010 and an interest rate swap with a notional amount of $300.0 million which matures in March 2011. We are not under any obligation to maintain or renew such arrangements or to enter into additional arrangements, and any such arrangements may not be as effective as we expect in mitigating our exposure to interest rate fluctuations.

Any future determination that a significant impairment of the value of our intangible assets or long-lived assets has occurred could have a material adverse effect on our consolidated financial condition and results of operations.

As a result of the 2008 Acquisition, goodwill and other acquired intangible assets represent a substantial portion of our assets. Goodwill was approximately $1.4 billion and other identifiable intangible assets were $802.3$782.2 million as of December 31, 2008.2009. We also have long-lived assets consisting of property and equipment, net of $177.7depreciation, of $169.9 million as of December 31, 2008.2009. We review these assets both on a periodic basis as well as when events or circumstances indicate that the carrying amount of an asset may not be recoverable. Any future determination that an impairment of the value of our goodwill, unamortized intangible assets or long-lived assets has occurred would require us to write-down the impaired portion of those assets to fair value, which would reduce our assets and stockholders’ equity and could have a material adverse effect on our businessfinancial condition and results of operations.

If we fail to improve our existing products or develop new products, or our competitors develop products that are superior to ours, our competitiveness in the marketplace, financial condition, results of operations and cash flows may be adversely affected.

Product innovation and new product development are important to maintaining the competitive position of our business and growing our sales and profit margins. Company-sponsored research and development expenses were $11.2 million, $10.5 million and $9.1 million for the years ended December 2009, 2008 and 2007, respectively. We intend to continue to conduct research and development activities as a means of improving existing

Index to Financial Statements

products and developing new products. However, there can be no assurance that we will be able to improve existing products or develop new products on a cost-effective and timely basis or at all, that such products will compete favorably with products developed by our competitors, or that our existing technology will not be superseded by other technological developments that may be utilized by our competitors. If we fail to improve existing products and/or develop new products, or our competitors develop products that are superior to ours, we could experience lower revenues and/or lower profit margins, which could have an adverse effect on our competitiveness in the marketplace, financial condition, results of operations and cash flows.

Increased competition, and technological changes and advancesas well as consolidation among independent distributors, may reduce our market share and our future sales.

The production and sale of HVAC equipment by manufacturers is highly competitive. According to industry sources, the top fivesix domestic manufacturers (including us) represented approximately 80%90% of the unit sales in the U.S. residential and light commercial HVAC market in 2007.2008. Our four largest competitors in this market are Carrier Corporation (a division of United Technologies Corporation), Trane Inc. (a wholly-owned subsidiary of Ingersoll-Rand Company Limited), Lennox International, Inc. and Rheem Manufacturing Company. Several of our competitors may have greater financial and other resources than we have. A number of factors affect competition in the HVAC industry, including an increasing emphasis on the development of more efficient HVAC products. Existing and future competitive pressures may materially and adversely affect our business, financial condition or results of operations, including pricing pressure if our competitors improve their cost structure. In addition, our company-operated distribution centers face competition from independent distributors and dealers owned by our competitors, some of whom may be able to provide their products or services at lower prices than we can. We may not be able to compete successfully against current and future competition and current and future competitive pressures faced by us may adversely affect our profitability and performance.

There are several companies that have recently sought to purchase, or have purchased, independent distributors and dealers and consolidate them into large enterprises. These consolidated enterprises may be able to exert pressure on us to reduce prices. Additionally, these new enterprises tend to emphasize their company name, rather than the brand of the manufacturer, in their promotional activities, which could lead to dilution of the importance and value of our brand names. Future price reductions and any brand dilution caused by the consolidation among HVAC distributors and dealers could have an adverse effect on our business, financial condition and results of operations.

Significant fluctuations in the cost of raw materials and components have reduced, and may continue to reduce, our operating margins. In addition, a decline in our relationships with key suppliers may have an adverse effect on our business.business, financial condition or results of operations.

Our operations depend on the supply of various raw materials and components, including steel, copper, aluminum, steel, refrigerants, motors and compressors, from domestic and foreign suppliers. We do not enter into long-term supply contracts for many of our raw materials and component requirements. However, our suppliers may

Index to Financial Statements

discontinue providing products to us at attractive prices, and we may be unable to obtain such products in the future from these or other providers on the scale and within the time frames we require. If a key supplier were unable or unwilling to meet our supply requirements, we could experience supply interruptions and/orand cost increases which (to the extent that we are not able to find alternate suppliers or pass these additional costs onto our customers) could adversely affect our business, financial condition or results of operations and financial condition.operations. To the extent any of our suppliers experiences a shortage of components that we purchase, we may not receive shipments of those components and, if we were unable to obtain substitute components on a timely basis, our production would be impaired. For example, in the second quarter of 2004 we experienced supply interruptions for steel, copper and aluminum. Historically, these supply interruptions have resulted in periodic production disruptions and higher transportation costs.

Between 2004 and 2008, commodity prices rose significantly to levels well above prices seen in the prior decade. To help address the rise in commodity costs, we implemented price increases in 2006 and 2008 on the majority of our products. Although commodity prices have moderated, a further increase in commodity prices could have a material adverse effect on our results of operations. We may not be able to further increase the priceprices of our products further or reduce our costs to offset the higher commodity prices. In addition, our efforts to mitigate rising raw materials costs could adversely affect our results of operations if commodity prices were to unexpectedly decline.

We are subject to price risk as it relates to our principal raw materials: copper, aluminum and steel. Cost variability of raw materials can have a material impact on our results of operations. To enhance stability in the cost of major raw material commodities, such as copper and aluminum used in the manufacturing process, we have entered and may continue to enter into commodity derivative arrangements. Maturity dates of the contracts are scheduled to coincide with market purchases of the commodity.commodity, some of which extend through the fourth quarter of 2011. Cash proceeds or payments between the derivative counter-party and us at maturity of the contracts are

Index to Financial Statements

recognized as an adjustment to the cost of the commodity purchased, to the extent the hedge is effective. Charges or credits resulting from ineffective hedges are recognized in income immediately. We generally do not enter commodity hedges extending beyond eighteen months. We have entered into swaps for a portion of our commodity supply which expire by December 31, 2009. A 10% change in the price of commodities hedged would change the fair value of the hedge contracts by approximately $12.9 million and $10.3$8.8 million as of December 31, 2008 and December 31, 2007,2009, respectively.

We continue to monitor and evaluate the prices of our principal raw materials and may decide to enter into additional hedging contracts in the future.

A decline in our relations with our key distributors may adversely affect our business.

Our operations also depend upon our ability to maintain our relationsrelationships with our independent distributors. While we generally enter into contracts with our independent distributors, these contracts typically last for one to two years and can be terminated by either party upon 30 days’ notice. If our key distributors are unwilling to continue to sell our products or if our key distributors merge with or are purchased by a competitor, we could experience a decline in sales. If we are unable to replace such distributors or otherwise replace the resulting loss of sales, our business and results of operations could be adversely affected. For the year ended December 31, 2008 and 2009, approximately 38%45% and 43%, respectively, of our net sales were made through our independent distributors.

Damage or injury caused by our products could result in material liabilities associated with product recalls or reworks.

In the event we produce a product that is alleged to contain a design or manufacturing defect, we could be required to incur costs involved to recall or rework that product. In September 2004, we initiated a voluntary corrective action plan, or “CAP,” regarding a discontinued design of certain Amana®, Trane® and American Standard® brand PTAC units manufactured by one of our subsidiaries. A PTAC is a single unit heating and air conditioning system used primarily in hotel and motel rooms, apartments, schools, assisted living facilities and hospitals. Under the CAP, we agreed to provide a new thermal limit switch to commercial and institutional PTAC owners. Installation of these switches will be at the commercial or institutional owners’ expense, except in special and limited circumstances (e.g., financial hardship). Pursuant to the CAP, we agreed to pay the cost of installing the replacement switch for any individual homeowner having a PTAC unit in his/her residence. We have established a reserve relating to the CAP in an amount that we believe is appropriate, which amounted to $2.6 million as of December 31, 2004, the year in which the CAP was implemented. The costs required to recall or rework any defective products could be material, which may have a material adverse effect on our business. In addition, our

Index to Financial Statements

reputation for safety and quality is essential to maintaining our market share. Any recalls or reworks may adversely affect our reputation as a manufacturer of quality, safe products and could have a material adverse effect on our results of operations.

We may incur material costs as a result of product liability or warranty claims that would negatively affect our profitability.

The development, manufacture, sale and use of our products involve a risk of product liability and warranty claims, including personal injury and property damage arising from fire, soot, mold and carbon monoxide. We currently carry insurance and maintain reserves for potential product liability claims. However, our insurance coverage may be inadequate if such claims do arise and any liability not covered by insurance could have a material adverse effect on our business. To date, we have been able to obtain insurance in amounts we believe to be appropriate to cover such liability. However, our insurance premiums may increase in the future as a consequence of conditions in the insurance business generally or our situation in particular. Any such increase could result in lower profits or cause the need to reduce our insurance coverage. In addition, a future claim may be brought against us which would have a material adverse effect on us. Any product liability claim may also include the imposition of punitive damages, the award of which, pursuant to certain state laws, may not be covered by insurance. Our product liability insurance policies have limits that if exceeded, may result in material costs that would have an adverse effect on our future profitability. In addition, warranty claims are not covered by our product liability insurance. Any product liability or warranty issues may adversely affect our reputation as a manufacturer of safe, quality products and could have a material adverse effect on our business.

Our financial results or liquidity may be adversely impacted by higher than expected tax rates or exposure to additional income tax liabilities and the adoption of new accounting pronouncements regarding income tax accounting.liabilities.

Our effective tax rate is highly dependent upon the geographic composition of our earnings and tax regulations governing each region. We are subject to income taxes in multiple jurisdictions within the United States and Canada, and significant judgment is required to determine our tax liabilities. Our effective tax rate as well as the actual tax ultimately payable could be adversely affected by changes in the split of earnings between jurisdictions with differing statutory tax rates, in the valuation of deferred tax assets, in tax laws or by material audit assessments, which could affect our profitability. In particular, the carrying value of deferred tax assets, which are predominantly in the United States, is dependent on our ability to generate future taxable income in the United States. In addition, the amount of income taxes we pay is subject to ongoing audits in various jurisdictions, and a material assessment by a governing tax authority could affect our profitability.

We adopted the provisions of Financial Accounting Standards Board Interpretation No. 48Accounting for Uncertainty in Income Taxes (FIN 48), an interpretation of FASB Statement No. 109 (SFAS 109), on January 1, 2007. As a result of(FASB) accounting standards that, among other things, require companies to recognize the implementation of FIN 48, we recognized an adjustment in the liability for unrecognized income tax benefits of $1.1 million, which was accounteduncertain positions only when the position is “more likely than not” to be sustained assuming examination by tax authorities. The amount recognized represents the largest amount of tax benefit that is more likely than not to be ultimately realized. A liability is recognized for asany benefit claimed, or expected to be claimed, in a reductiontax return in excess of the benefit recorded in the financial

Index to Financial Statements

statements, along with any interest and penalty (if applicable) on the January 1, 2007 balance of retained earnings. In addition, at January 1, 2007 we reclassified $18.2 million from deferred taxes to other long-term liabilities.excess. At December 31, 2008,2009, we had $43.2established a $53.6 million liability in respect of such unrecognized tax benefits, of which $3.4$4.4 million would impact the effective tax rate at recognition. We may be required to make cash payments in respect of taxes (and interest thereon) in respect of such unrecognized tax benefit. While we do not expect any such payments to have a material impact on our results of operations due to the liability we have already recognized, any such payments could impact our liquidity at the time they are made.

The costcosts of complying with, or addressing liabilities under, laws relating to the protection of the environment and worker health and safety may be significant.

We are subject to extensive, evolving and often increasingly stringent international, federal, state, provincial, municipal and local laws and regulations such as those relating to the protection of human health and the environment, including those limiting the discharge of pollutants into the environment and those regulating the treatment, storage, disposal and remediation of, and exposure to, solid and hazardous wastes and hazardous materials, as well as plaintiffs’ suits seeking to use these laws or common law tort or contractual theories.materials. Certain environmental laws and regulations impose strict, joint and several liability on potentially responsible parties, including past and present owners and operators of sites, to clean up, or contribute to the cost of cleaning up, sites at which hazardous wastes or materials were disposed or released. We are currently, and may in the future be, required to incur costs relating to the investigation or remediation of such sites, includingor sites owned or operated by third parties where we have, or may have, disposed of our waste. See Item 1, “Business—Regulation.”

Index to Financial Statements

We believe that we are in substantialmaterial compliance with applicable environmental laws and regulations, many of which provide for substantial fines andor civil or criminal sanctions for violations. Nonetheless, we expect toWe incur expenses to maintain such compliance and it is possible that more stringent environmental laws and regulations, more vigorous enforcement or a new interpretation of existing laws and regulations could require us to incur additional costs and penalties. Further, existing or future circumstances, such as the discovery of new or materially different environmental conditions, could cause us to incur additionalunanticipated costs that could have a material adverse effect on our business, financial condition or results of operations.

We are also subject to various laws and regulations relating to health and safety. In October 2004, we reached an agreement with the Occupational Safetysafety and Health Administration (OSHA)expect to resolve certain matters identified during an OSHA inspection at our Houston Furnace and Cooling plants. We did not admit any violations of the Occupational Safety and Health Act or OSHA standards, but we did agree, among other things, to address certain issues identified by OSHA during its inspection and to pay OSHA a penalty of $277,000. We have paid the penalty and are currently conducting certain actions required by this settlement, including the installation of certain machine guarding. We expectcontinue to make capital expenditures at these and otherour facilities to improve worker health and safety. Expenditures at these and any otherour facilities to assuremaintain compliance with the Occupational Safety and Health Administration, or OSHA, standards could be significant, and we may become subject to additional liabilities relating to worker health and safety at our facilities in the future. In addition, future inspections at these or otherour facilities may result in additionalenforcement actions by OSHA.

Our products are also subject to international, federal, state, provincial and local laws and regulations. We are required to maintain our products in compliance with applicable current laws and regulations, and any changes which affect our current or future products could have a negative impact on our business and could result in additional compliance costs.

Effective For example, effective January 23, 2006, U.S. federal regulations mandated an increase in the minimum or SEER from 10 to 13 for central air conditioners and heat pumps manufactured in the United States. On November 19, 2007, the U.S. Department of Energy, or DOE, issued new regulations increasing the minimum annual fuel utilization efficiency, or AFUE, for several types of residential furnaces. These regulations apply to furnaces manufactured for sale in the U.S. or imported into the U.S.,United States on and after November 19, 2015. On December 19, 2007, federal legislation was enacted authorizing the U.S. Department of EnergyDOE to study the establishment of regional efficiency standards for furnaces and air conditioners. We anticipate that the U.S. Department of EnergyDOE will consider establishing regional standards for heating and air conditioners during future rulemaking. We have established processes that we believe will allow usour products are on track to offer products that meet or exceed these new standards in advance of implementation. The required efficiency levels for our products may be further increased in the future by the relevant regulatory authorities. Any future changes in required efficiency levels or other government regulations could adversely affect our industry and our business.

We also currently use a refrigerant that the EPA is in the process of phasing out. See Item 1, “Business—Regulation.” To the extent that our competitors are not subject to EPA regulations or continue to use such refrigerants following completion of the EPA phase-out, we may suffer a competitive disadvantage.

Labor disputes with our employees could interrupt our operations and adversely affect our business.

We arenegotiated a party to athree year collective bargaining agreement with the International Association of Machinists and Aerospace Workers, and Affiliatesor the union, that aswas ratified by the union membership on December 5, 2009. As of December 31, 2008,2009, the union represented approximately 24%20% of our employees. Thisemployees, and this agreement covers all hourly employees at our manufacturing facility in Fayetteville, Tennessee and is scheduled to expire in December 2009.Tennessee. If we are unable to successfully negotiate acceptable terms with thisthe union when the current agreement expires, our operating costs could increase as a result of higher wages or benefits paid to union members, or if we fail to reach an agreement with the union, our operations could be disrupted. Either event could have a material adverse effect on our business. In addition, there have been in the past, and may be in the future, attempts to unionize our non-union facilities. If employees at our non-union facilities unionize in the future, our operating costs could increase.

Index to Financial Statements

Our business operations could be significantly disrupted if we lose members of our management team.

Our success depends to a significant degree upon the continued contributions of our executive officers and key employees, both individually and as a group. For example, we have longstanding relationships with most of our independent distributors. In many cases, these relationships have been formed over a period of years through personal networks involving our key personnel. The loss of these personnel could potentially disrupt these

Index to Financial Statements

longstanding relationships and adversely affect our business. We have employment-related agreements with 1211 members of our senior management. Our future performance will be substantially dependent on our ability to retain and motivate our management. The loss of the services of any of our executive officers or key employees could prevent us from executing our business strategy.

We may be adversely affected by any natural or man-made disruptions to our distribution and manufacturing facilities.

We are a manufacturing company that is heavily dependent on our manufacturing and distribution facilities in order to maintain our business and remain competitive. Any serious disruption to a significant portion of our distribution or manufacturing facilities resulting from fire, earthquake, weather-related events, an act of terrorism or any other cause could materially impair our ability to manufacture and distribute our products to customers. Moreover, we could incur significantly higher costs and longer lead times associated with manufacturing or distributing our products to our customers during the time that it takes for us to reopen or replace damaged facilities. Many of our facilities are located at or near Houston, Texas, which is in close proximity to the Gulf of Mexico. This region is particularly susceptible to natural disruptions, as evidenced by recent hurricane activity.activity in prior years. If any of these events were to occur, our financial condition, results of operations and cash flows could be materially adversely affected.

If we are unable to access funds generated by our subsidiaries we may not be able to meet our financial obligations.

Because we conduct our operations through our subsidiaries, we depend on those entities for dividends, distributions and other payments to generate the funds necessary to meet our financial obligations. Legal and contractual restrictions in certain agreements governing current and future indebtedness of our subsidiaries, as well as the financial condition and operating requirements of our subsidiaries, may limit our ability to obtain cash from our subsidiaries. All of our subsidiaries are separate and independent legal entities and have no obligation whatsoever to pay any dividends, distributions or other payments to us.

Our business operations could be negatively impacted if we fail to adequately protect our intellectual property rights or if third parties claim that we are in violation of their intellectual property rights.

Our products are marketed primarily under the Goodman®, Amana® and Quietflex® brand names and, as such, we are dependent on those brand names. Failure to protect these brand names and other intellectual property rights or prevent their unauthorized use by third parties could adversely affect our business. We seek to protect our intellectual property rights through a combination of patent, trademark, copyright and trade secret laws, as well as licensing and confidentiality agreements. These protections may not be adequate to prevent competitors from copying or reverse engineering our products, or from developing and marketing products that are substantially equivalent to or superior to our own. In addition, we face the risk of claims that we are infringing third parties’ intellectual property rights. Any such claim, even if it is without merit, could be expensive and time-consuming; could cause us to cease making, using or selling certain products that incorporate the disputed intellectual property; could require us to redesign our products, if feasible; could divert management time and attention; and could require us to enter into costly royalty or licensing arrangements.

The interests of our controlling stockholder may differ from the interests of the holders of the notes.our outstanding debt.

As of February 28,December 31, 2009, Hellman & Friedman LLC (H&F) and its affiliates owned, in the aggregate, approximately 87% of Parent’s common stock and Parent indirectly owns all of our common stock. In addition, H&F and its affiliates, by virtue of their ownership of our Parent’s common stock and their voting rights under a stockholders agreement, control the vote in connection with substantially all matters subject to Parent stockholder approval. As a result of this ownership and the terms of a stockholders agreement, H&F is entitled to elect directors with majority voting power inon our Parent’s Board of Directors, to appoint new management and to approve actions requiring the approval of the holders of our Parent’s outstanding voting shares as a single class, including adopting most amendments to our certificate of incorporation and approving mergers or sales of all or substantially all of our Parent’s assets. H&F, through its control of Parent and us, also controls all of our subsidiary guarantors.subsidiaries that guarantee our debt.

Index to Financial Statements

The interests of H&F and its affiliates may differ from yours in material respects. For example, if we encounter financial difficulties or are unable to pay our debts as they mature, the interests of H&F and its affiliates,

Index to Financial Statements

as equity holders, might conflict with interests of a note holder. H&F and its affiliates may also have an interest in pursuing acquisitions, divestitures, financings or other transactions that, in its judgment, could enhance its equity investments, even though such transactions might involve risks to a note holder, including the incurrence of additional indebtedness. Additionally, the indenturecertain agreements governing our 2016 notes permitsdebt permit us to pay certain advisory fees, dividends or make other restricted payments under certain circumstances, and H&F may have an interest in our doing so.

H&F and its affiliates are in the business of making investments in companies and may, from time to time in the future, acquire interests in businesses that directly or indirectly compete with certain portions of our business or are suppliers or customers of ours. You should consider that the interests of H&F and its affiliates may differ from yours in material respects.

The requirements of publicly filing periodic and other reports in compliance with the federal securities laws may strain our resources and distract management.

Under Section 404 of the Sarbanes-Oxley Act, we will beare currently required to include a report of management on our internal control over financial reporting in our Annual Reports on Form 10-K, and our10-K. Our independent public accountants auditing our financial statements will be required to attest to and report on management’s assessment of the effectiveness of our internal control over financial reporting. This requirement will first apply toreporting beginning with our Annual Report on Form 10-K for our fiscal year ending December 31, 2010. However, we elected to voluntarily comply for the fiscal year ending December 31, 2009. Previously, in connection with our 2006 year-end close, it was determined that some of our predecessor’s commodity derivatives did not qualify for hedge accounting and, as a result, we restated the prior quarters of 2006 to reflect the changes in fair value of those derivatives in other (income) expense, net, and our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were not then effective for this reason. If we are unable to conclude that our disclosure controls and procedures and internal control over financial reporting are effective, or if our independent public accounting firm is unable to provide us with an unqualified report as to the effectiveness of our internal control over financial reporting in future years, the trading price of our 2016senior subordinated notes may decline.

We may lose the right to use the Amana® brand name which may have an adverse effect on our business.

Under an agreement between the Amana Society and Amana Refrigeration, Inc., Amana Refrigeration, Inc. agreed that it would discontinue the use of the Amana® brand name in its corporate name or in connection with any other business enterprise if it were ever to abandon manufacturing operations in Amana, Iowa. Maytag Corporation purchased the Amana appliance business in July 2001 and now controls the manufacturing operations in Amana, Iowa. Subsequently, Maytag was acquired by Whirlpool Corporation in March 2006. We maintained the right to use the Amana name and trademark under a license agreement with Maytag. The trademark license agreement expires in July, 2011, with renewal terms available for a total of an additional 15 years. Prior to a cessation of such operation or following a decision by Maytag to not maintain trademark registrations for the Amana name, Maytag has agreed to consult with us and provide reasonable assistance to us so that we may register the Amana name as a trademark. However, we have no control over Maytag’s decision to continue operations at that facility, and if such operations are discontinued, it is possible that we could lose the right to use the Amana name in connection with our business, which could have a material adverse effect on our business.

ITEM 1B.Unresolved Staff Comments

None.

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ITEM 2.Properties

As of December 31, 2008,2009, we owned three manufacturing facilities, one manufacturing/distribution facility, one research and development facility and eight Company-operatedseven company-operated distribution facilities. We also leased four manufacturing and assembly facilities, one distribution facility, 148 Company-operated157 company-operated distribution facilities and the space for our corporate headquarters. From time to time, we also lease temporary warehouse space when required due to manufacturing cycles. We believe that our facilities are suitable for their present and intended purposes and are adequate for our current and expected level of operations. We do not anticipate any significant difficulties in renewing or relocating our leased facilities as our leases expire.

Index to Financial Statements

Our headquarters and material operating, manufacturing and distribution facilities are shown in the following table:

 

Location

  

Use

  Owned/Leased  Approximate
Square Footage

Houston, TX

  Split Systems  Owned  518,000

Houston, TX

  Flexible Duct, Fiberglass Insulation and Mat Materials  Owned  400,000

Houston, TX

  Heating and Air Handler Products  Owned  230,000

Houston, TX

  Research and Development  Owned  142,907

Houston, TX

  Corporate Headquarters  Leased(1) 61,000

Houston, TX

  Logistics Center  Leased(2) 969,843

Fayetteville, TN

  Furnaces, Package Units, PTAC, Split Systems and Logistics Center  Owned  780,000

Dayton, TN

  Air Handlers / Coils  Leased(3) 159,000

Location

Use

Owned/
leased

Approximate
square footage

Houston, TX

Split SystemsOwned525,103

Houston, TX

Flexible Duct, Fiberglass Insulation and Mat MaterialsOwned390,000

Houston, TX

Heating and Air Handler ProductsOwned225,295

Houston, TX

Research and DevelopmentOwned156,703

Houston, TX

Corporate HeadquartersLeased(1)61,000

Houston, TX

Logistics CenterLeased(2)969,843

Fayetteville, TN

Furnaces, Package Units, PTAC, Split Systems and Logistics CenterOwned779,620

Dayton, TN

Air Handlers / CoilsLeased(3)188,585

 

(1)Our lease expires in September 2014.

(2)Our Logistics Center is leased under three leases. TwoAll of our Logistics Center leases covering 700,039 square feet will expire in September 2014 and a third lease covering an additional 269,804 will expire in May 2015.February 2016.

(3)Our lease expires December 2010. We have an option to purchase the facility upon the expiration of the lease for $206,400.

 

ITEM 3.Legal Proceedings

In addition to the matters described below, from time to time we are involved in various routine legal proceedings. These primarily involve commercial claims, product liability claims, environmental claims, personal injury claims and workers’ compensation claims. We cannot predict the outcome of these lawsuits, legal proceedings and claims with certainty. Nevertheless, we believe that the outcome of these proceedings, even if determined adversely, would not have a material adverse effect on our business, financial condition and results of operations.

On October 26, 2007, a putative class action was filed on behalf of all similarly situated stockholders of Goodman Global, Inc. in the Harris County District Court, Houston, Texas, styled Call4U, Ltd. v. Carroll, Case Number 2007-66888. A similar case, styled Pipefitters Local No. 636 Defined Benefit Plan vs. Goodman Global, Inc., was later filed and then consolidated with the Call 4U, Ltd. case. The lawsuits named as defendants Goodman Global, Inc., all of its directors and Hellman & Friedman, and asserted claims for breach of fiduciary duty against the directors and aiding and abetting such breaches against Hellman & Friedman. The plaintiffs sought an injunction restraining the closing of the merger, reimbursement of associated attorneys’ and experts’ fees and other relief that the court deems proper. On January 4, 2008 Goodman Global, Inc. entered into a memorandum of understanding setting out an agreement in principal to settle all claims in the litigation, which settlement is subject to certain conditions precedent, including court approval. As of December 31, 2008, the matter is still pending.

As part of the equity contribution associated with the sale of the Amana Appliance business in July 2001, we agreed to indemnify Maytag for certain potential product liability and environmental claims. In light of these potential liabilities, we have purchased insurance that we expect will shield us from incurring material costs due toassociated with such potential claims.

Pursuant to a March 15, 2001 Consent Order with the Florida Department of Environmental Protection (FDEP), our subsidiary, Goodman Distribution Southeast, Inc. (GDI Southeast) (formerly Pioneer Metals Inc.), or GDI Southeast, is continuing to investigate and pursue, under FDEP oversight, the delineation of groundwater contamination at and around the GDI Southeast facility in Fort Pierce, Florida. Remediation has not begun.is expected to begin in 2010. The contamination was discovered through environmental assessments conducted in connection with oura Company subsidiary’s acquisition of the Fort Pierce facility in 2000 and was reported to FDEP, giving rise to the Consent Order.

The ultimate cost for the investigation, remediation and monitoring of the site cannot be predicted with certainty due to the variables relating to the contamination and the appropriate remediation methodology, the

Index to Financial Statements

evolving nature of remediation technologies and governmental regulations and the inability to determine the extent to which contribution will be available from other parties. All of these factors are taken into account to the extent possible in estimating potential liability. A reserve appropriate for the probable remediation costs, which are reasonably susceptible to estimation, has been established.

Based on analyses of currently available information, it is probable that the proposed infrastructure and startup costs associated with the site will be approximately $0.5 million. We reserved approximately $0.5 million as

Index to Financial Statements

of December 31, 2008 in accordance with SFAS 5,Accounting for Contingencies,2009, although it is possible that the ultimate costs could exceed this amount by up to approximately $3.0$3.3 million. Costs of future expenditures are not discounted to their present value. Management believes any liability arising from potential environmental obligations is not likely to have a material adverse effect on our liquidity or financial position as such obligations could be satisfied over a period of years. Nevertheless, future developments could require material changes in the recorded reserve amount.

We believe this contamination predated GDI Southeast’s involvement with the Fort Pierce facility and GDI Southeast’s operation at this location has not caused or contributed to the contamination. Accordingly, we are pursuing litigation against a former ownersowner and a former lessee of the Fort Pierce facility in an attempt to recover our costs. At this time, we cannot estimate probable recoveries from this litigation.

We are party to a number of other pending legal and administrative proceedings and are subject to various regulatory and compliance obligations. We believe that these proceedings and obligations will not have a materiallymaterial adverse effect on our consolidated financial condition, cash flows or results of operations. To the extent required, we have established reserves that we believe to be adequate based on current evaluations and our experience in these types of matters. Nevertheless, an unexpected outcome in any such proceeding could have a material adverse impact on our consolidated results of operations in the period in which it occurs. Moreover, future adverse developments could require material changes in the recorded reserve amounts.

 

ITEM 4.Submission of Matters to a Vote of Security Holders

None

PART II

 

ITEM 5.Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

Market Priceprice for Common Stockcommon stock and Holdersholders

All of our outstanding common stock is owned by Chill Intermediate Holdings, Inc. As a result, there is no established public market for our common stock. Investment funds affiliated with Hellman & Friedman LLC control a majority of the common stock of Goodman Global Group, Inc, which owns all the outstanding stock of Chill Intermediate Holdings, Inc.

Dividends

We have not declared orIn December 2009, we paid any dividendsa special dividend of $115.0 million on our common stock. Our senior secured credit facilities and the indenturesindenture governing our 2016senior subordinated notes generally limit our ability to declare or pay dividends. For more detailed information on our senior secured credit facilities and the indenturesindenture governing our 2016senior subordinated notes, see Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity, Capital Resourcescapital resources and Off-Balance Sheet Arrangements”off-balance sheet arrangements” and notes to our consolidated financial statements.

Index to Financial Statements

Equity Compensation Plan Informationcompensation plan information

The following table provides information as of December 31, 20082009 with respect to the shares of our Parent’s common stock that could have been issued under the Chill Holdings, Inc. 2008 Stock Incentive Plan (the “2008 Plan”) and option rollover agreements as in effect on December 31, 2008.

2009.

Index to Financial Statements

Plan Category

 Number of
Securities to be
Issued Upon Exercise
of Outstanding
Options, Warrants
and Rights (1)
 Weighted
Average Exercise
Price of
Outstanding
Options, Warrants
and Rights (1)
 Number of Securities
Remaining Available
For Future Issuance
Under Equity
Compensation Plan

Equity compensation plans approved by security holders

 6,222,111 $9.82 350,411

Equity compensation plans not approved by security holders (2)

 —    —   —  
       

Total

 6,222,111 $9.82 350,411
       

Plan category

  Number of
securities to be
issued upon exercise
of outstanding
options, warrants
and rights (1)
  Weighted
average exercise
price of
outstanding
options, warrants
and rights (1)
  Number of securities
remaining available
for future issuance
under equity
compensation plans
(excluding securities
reflected in column (a))
   (a)  (b)  (c)

Equity compensation plans approved by security holders

  6,429,111  $9.83  143,411

Equity compensation plans not approved by security holders (2)

  —     —    —  
          

Total

  6,429,111  $9.83  143,411
          

 

(1)All outstanding options were granted under the 2008 Plan, except for 138,849 rollover options which remain subject to the terms and conditions of the Goodman Global, Inc. 2004 Stock Option Plan.Plan (Predecessor plan).

(2)As of December 31, 2008,2009, neither we nor our Parent had any equity compensation plans that were not approved by our stockholders.

 

ITEM 6.Selected Financial Data

The following table presents our selected consolidated financial data. The following selected consolidated financial data should be read in conjunction with, and is qualified by reference to, our Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and our 2016 notes thereto included elsewhere in this annual report, as well as other financial information included elsewhere in this annual report. Risks and uncertainties described in “Item 1A. Riskthe “Risk Factors” ofcontained in this report may cause the selected financial data below not to be indicative of our future financial condition or results of operations.

The consolidated statement of operations data for the yearsyear ended December 31, 2006 and 2007,2009, the period February 14, 2008 to December 31, 2008, the period January 1, 2008 to February 13, 2008 and the period February 14 toyear ended December 31, 20082007 and the consolidated balance sheet data as of December 31, 20072009 and 2008 have been derived from the audited consolidated financial statements included elsewhere in this annual report and have been prepared in accordance with accounting principles generally accepted in the United States, which we refer to throughout this annual report as “GAAP.” The consolidated statement of operations data for the years ended December 31, 20042006 and 2005 and the consolidated balance sheet data as of December 31, 2004,2007, 2006 and 2005 and 2006 have been derived from the consolidated financial statements that are not included in this annual report.

Index to Financial Statements
  Predecessor   Successor 
  Predecessor Successor   Years ended December 31, January 1 to
February 13,
2008
     February 14
to
December 31,
2008
  Year ended
December 31,
2009
 
  January 1 to
December 22,

2004
  December
23 to
December 31,

2004
  Year Ended December 31, January 1 to
February 13,

2008
  February 14 to
December 31,

2008
   2005 2006 2007    
   2005 2006 2007   (In thousands) 

Consolidated statement of income data:

                 

Sales, net(1)

  $1,297,295  $20,285  $1,565,406  $1,794,753  $1,935,690  $147,137  $1,730,229 

Sales, net (1)

  $1,565,406   $1,794,753   $1,935,690   $147,137     $1,730,229   $1,851,186  

Cost of goods sold

   1,005,955   18,471   1,243,408   1,374,774   1,462,776   115,714   1,319,113    1,243,408    1,374,774    1,462,776    115,714      1,319,113    1,290,747  

Selling, general and administrative expenses

   212,890   7,661   170,077   205,894   210,613   65,616   187,144    170,077    205,894    210,613    65,616      187,144    236,231  

Depreciation and amortization expense

   18,101   786   37,717   32,641   35,119   3,835   44,913    37,717    32,641    35,119    3,835      44,913    48,435  
                     
                      

Operating profit

   60,349   (6,633)  114,204   181,444   227,182   (38,028)  179,059    114,204    181,444    227,182    (38,028    179,059    275,773  

Interest expense, net

   10,877   1,601   74,213   77,825   68,378   56,176   135,616    74,213    77,825    68,378    56,176      135,616    134,767  

Other (income) expense, net

   (1,406)  —     (706)  5,264   (2,752)  (347)  1,554    (706  5,264    (2,752  (347    1,554    (19,642
                      

Earnings before income taxes

   50,878   (8,234)  40,697   98,355   161,556   (93,857)  41,889    40,697    98,355    161,556    (93,857    41,889    160,648  

Provision for (benefit from) income taxes

   (1,481)  (3,568)  15,817   34,188   60,177   (27,815)  15,593    15,817    34,188    60,177    (27,815    15,593    58,870  
                                           

Net income

  $52,359  $(4,666) $24,880  $64,167  $101,379  $(66,042) $26,296   $24,880   $64,167   $101,379   $(66,042   $26,296   $101,778  
                     
                      

Statement of cash flows data:

                 

Net cash (used in) provided by operating activities

  $(20,998) $2,440  $105,519  $53,724  $204,217  $(42,689) $184,059   $105,519   $53,724   $204,217   $(42,689   $184,059   $207,705  

Net cash used in investing activities

   (26,136)  (1,451,486)  (24,957)  (39,343)  (14,181)  (3,508)  (1,963,561)   (24,957  (39,343  (14,181  (3,508    (1,963,561  (20,200

Net cash provided by (used in) financing activities

   49,686   1,444,991   (60,639)  (26,591)  (182,650)  36,671   1,914,191    (60,639  (26,591  (182,650  36,671      1,914,191    (291,944

Other financial data:

                 

Capital expenditures

   27,772   —     28,806   39,383   26,416   3,409   18,203    28,806    39,383    26,416    3,409      18,203    20,209  

Ratio of earnings to fixed charges(2)

   5.0x  — (3)  1.5x  2.2x  3.2x  — (3)  1.3x

Cash dividends

   —      —      —      —        —      115,000  

Ratio of earnings to fixed charges (2)

   1.5x    2.2x    3.2x    —   (3)     1.3x   2.1x  

 

  Predecessor     Successor
  Year ended December 31,  As of December 31,
  2004  2005  2006  2007  2008  2005  2006  2007     2008  2009
  (in thousands)  (In thousands)

Consolidated balance sheet data (at period end):

                      

Cash and cash equivalents

  $3,856  $23,779  $11,569  $18,955  $144,118  $23,779  $11,569  $18,955    $144,118  $39,679

Total assets

   1,544,595   1,621,537   1,623,971   1,567,617   3,075,745   1,621,537   1,623,971   1,567,617     3,075,745   2,979,523

Total debt

   1.024,135   961,375   838,050   655,425   1,347,526   961,375   838,050   655,425     1,347,526   1,160,790

Redeemable preferred stock

   225,000   225,570   —     —     —     225,570   —     —       —     —  

Shareholders’ equity

   102,719   107,815   521,085   622,106   1,262,297   107,815   521,085   622,106     1,262,297   1,315,518

 

(1)Sales are presented net of certain rebates paid to customers. See Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the notes to consolidated financial statements appearing elsewhere in this annual report.
(2)For purposes of calculating the ratio of earnings to fixed charges, “earnings” represents income before taxes less capitalized interest, plus amortization of capitalized interest and fixed charges. “Fixed charges” include interest expense (including amortization of debt issuance costs), capitalized interest, and the portion of operating rental expense which management believes is representative of the interest component of rent expense.

(3)For the period December 23 to December 31, 2004, earnings were not adequate to cover fixed charges by $8.2 million and for the period January 1 to February 13, 2008, earnings were not adequate to cover fixed charges by $93.9 million.

Index to Financial Statements
ITEM 7.Management’s Discussion and Analysis of Financial Condition and Results of Operations

Overview

We participate in theGoodman is a leading domestic manufacturer of heating, ventilation and air conditioning, or HVAC, industry. We believe we are the second largest domestic manufacturer ofproducts for residential and light commercial heatinguse. Since we began to manufacture HVAC equipment in 1982, we believe that we have grown our share of the residential HVAC market to now become one of the country’s largest residential HVAC manufacturers, based on unit sales. Our activities include engineering, manufacturing, distributing, and air conditioningmarketing an extensive line of HVAC equipment and related products. Our products are predominantly marketed under the Goodman®, Amana® and Quietflex® brand names. We believe the Goodman brand is the single largest domestic residential HVAC brand, based on unit sales, in 2008.and caters to the large segment of the market that is price sensitive and desires reliable and low-cost climate comfort, while our premium Amana brand includes advanced features, quieter operation and enhanced warranties. The Quietflex brand is a recognized brand of flexible duct. Founded in 1975 as a manufacturer of flexible duct, we expanded into the broader HVAC manufacturing market in 1982. Since then, we have expanded our product offerings and maintained our core competency of manufacturing high-quality products at low costs. Our growth and success can be attributed to our strategy of providing a quality, competitively priced product that we believe is designed to be reliable and easy-to-install.

Acquisition by ChillGoodman Global, Inc. was incorporated under the laws of Delaware in 2004. On December 23, 2004, Apollo Management, L.P., or Apollo, through its affiliate, Frio Holdings LLC, acquired our business from Goodman Global Holdings, Inc., a Texas corporation, and Related Eventsfollowing a reorganization, we operated as Goodman Global, Inc.

On October 21, 2007, Chill Holdings,April 11, 2006, Goodman Global, Inc. (Parent),completed an initial public offering of its common stock.

On February 13, 2008, Chill Acquisition, Inc., a subsidiary of Parent (Merger Sub), and Goodman Global, Inc. entered into an agreement and plan of merger (the Merger Agreement) pursuant to which Merger SubDelaware corporation formed in October 2007, merged with and into Goodman Global, Inc. on February 13, 2008., with Goodman Global, Inc. as the surviving corporation, now an indirect subsidiary of Goodman Global Group, Inc. (formerly Chill Holdings, Inc.), or Parent, a Delaware corporation formed October 2007 by affiliates of Hellman & Friedman LLC. We refer to these transactionsthis as the 2008“2008 Acquisition. Merger Sub was incorporated on October 15, 2007 for the purpose of acquiring” We refer to Goodman Global, Inc. and did not have any operations prior to February 13,the 2008 other than in connection withAcquisition as “Predecessor” and subsequent to the Goodman acquisition. Parent is controlled by investment funds affiliated with Hellman & Friedman LLC, and other stockholders include investment funds affiliated with GSO Capital Partners L.P., Farallon Capital Partners L.P., and AlpInvest Partners N.V., along with certain other investors that GSO syndicated their investments to,2008 Acquisition as well as certain members of management.“Successor.” In connection with the 2008 Acquisition, ourthe common stock of Goodman Global, Inc. was deregistered and our subsidiary’sits senior subordinated 7-7/8% notes due 2012 and its senior floating rates notes due 2012 were repurchased and redeemed, andredeemed. In addition, Goodman Global, Inc. issued $500.0 million aggregate principal amount of 13.5%13.50%/14.0%14.00% senior subordinated notes due 2016. When we refer to the Transactions, we are referring to the foregoing and not our IPO2016, or the 2004 Transactions as defined below.

senior subordinated notes. Also in connection with the 2008 Acquisition, we entered into senior secured credit facilities consisting of a term loan agreement with a six-year maturity, or the “term loan agreement,” under which we borrowed an aggregate of $800.0 million in term loans, and a revolving credit agreement with a five year maturity, or the “revolving credit agreement,” which provided for revolving credit loans of up to $300.0 million, subject to borrowing base availability. The merger was accounted for under the purchase method of accounting. Accordingly, the results of operations will be included in the consolidated financial statements from the acquisition date and are not reflected in our 2007 consolidated financial statements. The purchase price was allocated to the acquired assets and liabilities assumed at their estimated fair market value considering a number of factors. The excess of the cost of the acquisition over the fair value of the net assets acquired iswas recorded as goodwill. The increase

Effective December 7, 2009, we amended our term loan agreement and revolving credit agreement to permit a one-time dividend payable to our stockholder in basisan aggregate amount of $115.0 million. We incurred a fee of $3.0 million to our lenders in satisfaction of a condition to effectiveness of the assets will result in non-cash charges in future periods, principally related toamendments. We paid the step-up in the value of property, plant and equipment and intangible assets.

IPOdividend on December 16, 2009.

On AprilDecember 11, 2006,2009, Parent completed a private placement of $586.0 million in aggregate principal amount at maturity of its 11.5% Senior Discount Notes due 2014 with gross proceeds of approximately $320 million. The senior discount notes are obligations of the Parent. The senior discount notes are not guaranteed by Goodman Global, Inc. completed the initial public offeringand its subsidiaries and are effectively subordinated in right of its common stock. Goodman Global, Inc. offered 20.9 million shares and selling shareholders sold an additional 6.1 million shares, which included 3.5 million shares sold by selling shareholders pursuantpayment to the exercise of the underwriters’ over-allotment option. Before expenses we received proceeds of approximately $354.5 million. These proceeds were used to redeem all of our existing and future indebtedness and other liabilities, including the indebtedness and other obligations under our credit facilities and outstanding Series A Preferred Stock including associated accrued dividends,senior subordinated notes. Parent does not generate operating cash and in the event that a future dividend is required to satisfy a $16.0 million fee resulting fromParent’s obligations under the termination of our management agreement with Apollo Management, L.P., or Apollo, and to redeem $70.7 million of our subsidiary’s floating rate notes.

2004 Transactions

On December 23, 2004, we were acquired by affiliates of Apollo Management, L.P., our senior management and certain trusts associated with members ofdiscount notes, the Goodman family. We refer to these transactions as the 2004 Transactions. In connection with the 2004 Transactions, the seller sold all of its equity interest in its subsidiaries as well as substantially all of its assets and liabilities for $1,477.5 million plus a working capital adjustment of $29.8 million. The 2004 Transactions were financed with the net proceeds of a private offering of senior unsecured notes, borrowings under our senior secured credit facilities and $477.5 million of equity contributions by affiliates of Apollo, the Goodman family trusts and certain members of senior management, which consisted of $225.0 million ofindenture governing our Series A Preferred Stock and $252.5 million ofsenor subordinated notes generally limit our common stock. As partability to declare or pay dividends. Parent used the net proceeds of the equity contribution,senior discount notes along with the Goodman family trustsdividend that it received from us to pay a dividend to its shareholders and members of senior management invested approximately $101.0 million and $18.2 million, respectively. In exchange for the equity contribution, affiliates of Apollo, the Goodman family trusts and certain members ofan equitable distribution to our senior management received a combination ofoption holders as required by our common stock and our Series A Preferred Stock.incentive plan.

Index to Financial Statements

The 2004 Transactions were recorded as of December 23, 2004, in accordance with Statement of Financial Accounting Standard, or SFAS, No. 141, Business Combinations, and Emerging Issues Task Force, or EITF, 88-16, Basis in Leveraged Buyout Transactions. As such, the acquired assets and assumed liabilities were recorded at fair value for the interests acquired and estimates of assumed liabilities by the new investors and at the carrying basis for continuing investors. The acquired assets and assumed liabilities were assigned new book values in the same proportion as the residual interests of the continuing investors and the new interests acquired by the new investors. Under EITF 88-16, we revalued the net assets at the acquisition date to the extent of the new investors’ ownership of 79%. The remaining 21% ownership was accounted for at the continuing investors’ carrying basis. An adjustment of $144.6 million to record this effect was included as a reduction of shareholders’ equity. The excess of the purchase price over the historical basis of the net assets acquired was applied to adjust net assets to their fair market values to the extent of the new investors’ 79% ownership, with the remainder of $391.3 million allocated to goodwill. The increase in basis of the assets will result in non-cash charges in future periods, principally related to the step-up in the value of property, plant and equipment and intangible assets.

Markets and Sales Channelssales channels

We manufacture and market an extensive line of heating, ventilation and air conditioning products for the residential and light commercial markets primarily in the United States and Canada. These products include split-system air conditioners and heat pumps, gas furnaces, package units, air handlers, package terminal air conditioners, evaporator coils and accessories. Essentially all of our products are manufactured and assembled at facilities in Texas, Tennessee, Florida, Pennsylvania and Arizona and are distributed through approximately 900over 945 distribution points across North America.

Our customer relationships include independent distributors, installing contractors or “dealers,” national homebuilders and other national accounts. We sell to dealers primarily through our network of independent distributors and company-operated distribution centers. We sell to some of our independent distribution channel under inventory consignment arrangements. We focus the majority of our marketing on dealers who install residential and light commercial HVAC products. We believe that the dealer is the key participant in a homeowner’s purchasing decision as the dealer is the primary contact for the end user. Given the strategic importance of the dealer, we remain committed to enhancing profitability for this segment of the supply chain while allowing our distributors to achieve their own profit goals. We believe the ongoing focus on the dealer creates loyalty and mutually beneficial relationships betweenamong distributors, dealers and us.

Weather Seasonality and Business Mixseasonality and business mix

WeatherWe believe that weather patterns have historically impacted the demand for HVAC products. For example, we believe that hot weather in the spring season causescan cause existing older units to fail earlier in the season, driving customers to accelerate replacement of a unit, which might otherwise be deferred in the case of a late season failure. Similarly, we believe that unseasonably mild weather diminishes customer demand for both commercial and residential HVAC replacement and repairs. Weather also impacts installation during periods of inclement weather as fewer units are installed due to dealers being delayed or forced to shut down their operations.

Although there is demand for our products throughout the year, in each of the past three fiscal years approximately 57%between 58% to 60% of our total sales occurred in the second and third quarters of the fiscal year. Our peak production also typically occurs in the second and third quarters of the fiscal year. However, given the unprecedented dislocations and disruptions in the global credit markets, and the recession currently affecting the U.S. economy, these historical seasonal trends may not be reliable predicators of our sales in 2009.

We believe approximately 20%15% to 25%20% of our sales have historically beenduring 2009 were associated with residential new construction, with the balance attributable to repair, retrofitting and replacement units. With the current downturn in residential new construction activity, we are seeing a decline in the volume of products we sell into this market.

Index to Financial Statements

Costs

The principal elements of cost of goods sold in our manufacturing operations are component parts, raw materials, factory overhead, labor, transportation costs and warranty. The principal component parts, which, depending on the product, can approach up to 41% of our cost of goods sold, are compressors and motors. We believe thatpurchase most of our components, such as compressors, motors, capacitors, valves and control systems, from third-party suppliers. In order to maintain low input costs, we have good relationships with quality component suppliers. The principalalso manufacture select components when it is deemed cost effective. We also manufacture heat transfer surfaces and heat exchangers for our units. Our primary raw materials usedare copper, aluminum and steel, all of which we purchase from third parties. We spent approximately $264.7 million in our processes are steel, copper2009 and aluminum. In total, we spent approximately $300.0 million in each of 2008 and 2007 on these raw materials. Cost variability of raw materials and their cost variability can have a material impact on our results of operations. In order to enhance raw material price stability, we monitor principal raw material prices and strategically enter into commodity forward contracts and hedges for the purchase of certain raw materials. Shipping and handling costs associated with sales are recorded at the time of the sale. Warranty expense, which is also recorded at the time of sale, is estimated based on historical trends such as incident rates, replacement costs and other factors. We believe our warranty expense, whichfactors and equaled 3.6% and 2.7% of our net sales in 2009 and 2008, is less than or equal to the industry average.respectively.

In 2008, our cost of goods sold reflects a short-term increase as a result of the purchase accounting treatment of the step-up in basis of inventory as a result of the 2008 Acquisition. As a result of the adjustment to our asset basis, the cost of goods sold of our successor companySuccessor was increased by $48.0 million in the first quarter and second quarters of 2008.

Our selling, general and administrative expenses consist of costs incurred to support our marketing, distribution, engineering, information systems, human resources, finance, purchasing, risk management, legal and tax functions. We have historically operated at relatively low levels of selling, general and administrative expense as a percentage of sales compared to other large industry participants. Savings from this lean overhead structure allow us to offer an attractive value proposition to our distributors and support our low-priced philosophy throughout the distribution system. In 2006, our selling, general and administrative expenses were negatively impacted by $16.1 million of transaction costs related to our April 2006 initial public offering. In 2008, our predecessor company’sPredecessor’s selling, general and administrative expenses were negatively affected by approximately $42.9 million of expenses related to the Transactions.2008 Acquisition.

Index to Financial Statements

Depreciation expense is primarily impacted by capital expenditure levels. Under the rules of purchase accounting, in February 2008 we adjusted the value of our assets and liabilities to their respective estimated fair values, to the extent of the new investors’ ownership, with any excess of the purchase price over the fair market value of the net assets acquired allocated to goodwill. As a result of the adjustment to our asset basis, our depreciation and amortization expenses increased.

Interest expense, net consists of interest expense, interest income and gains or losses on the related interest rate derivative instruments. In addition, interest expense includes the amortization of the financing costs associated with the Transaction.2008 Acquisition. In 2008, our predecessor company’sPredecessor’s net interest expense included a $49.8 million charge related to the Transaction2008 Acquisition and the related extinguishment of our predecessorPredecessor’s outstanding debt.

Other income, net consists of gains and losses on the disposalsearly extinguishment of assets,debt, ineffectiveness related to hedge accounting of our commodity swaps and miscellaneous income or expenses.

EmployeesCritical accounting policies and estimates

We utilize a combination of full-time, hourlyEstimates and temporary workers in our manufacturing facilities. The number of people working in these facilities varies based on the level of production. We believe there is an adequate pool of temporary workers near our significant manufacturing facilities to address peak production periods.

As of December 31, 2008, approximately 1,063 employees were members of a collective bargaining unit, representing approximately 24% of our full-time employees. The collective bargaining agreement expires in December 2009. We believe we have good relations with our employees.

Critical Accounting Policies and Estimatesassumptions

PreparationThe preparation of our consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires usmanagement to make estimates and assumptions that affect the amounts reported amountsin the consolidated financial statements and accompanying notes. We must make these estimates and assumptions because certain information is dependent on future events, cannot be calculated with a high degree of assets, liabilities, revenuesprecision from data available or simply cannot be readily calculated based on generally accepted methodologies. In some cases, these estimates are particularly difficult to determine and expenses,significant judgment must be exercised. In preparing the financial statements, the most difficult, subjective and disclosurescomplex estimates and the assumptions that deal with the greatest amount of contingentuncertainty relate to goodwill, intangible and long-lived assets and liabilities. Many of the estimates require us to make significant judgmentsreserves for self-insurance, warranty and assumptions.income tax liabilities. Actual results could differ materially from ourthe estimates and could have a significant impact on our consolidated results of operations, financial position and cash flows. We considerassumptions used in the estimates used to account for warranty liabilities, self-insurance reserves and contingencies, rebates, income taxes and the impairment of long-lived assets and goodwill as our most significant judgments.

Index to Financial Statements

We base manypreparation of our assumptions on our historical experience, recent trends and forecasts. We develop our forecasts based upon current and historical operating performance, expected industry and market trends, and expected overall economic conditions. Our assumptions about future experience, cash flows and profitability require significant judgment since actual results have fluctuated in the past and are expected to continue to do so.financial statements.

WarrantiesWarranty costs

We offer a variety of parts warranties on our products. Provisions for warranties are made at the time revenues are recognized. These reserves are based on estimations derived from historical failure rates, estimated service costs and historical trends. In addition, when new products are introduced, we consult with engineering, manufacturing and quality control personnel to determine the initial warranty expense. On a quarterly basis, we reevaluate the estimated liability related to the installed units still under warranty based on updated failure rates and will, at times, adjust our warranty reserve. We do not discount this liability when making this calculation.

We also sell extended service contracts for certain of our products, most with terms of up to 10 years. Revenues from extended warrantyservice contracts are deferred and amortized on a straight-line basis over the terms of the contracts. Expenses relating to obtaining and servicing these contracts are expensed as incurred.

Self Insuranceinsurance reserves and contingencies

We self-insure worker’s compensation, product liability, general liability, vehicle liability, group health and physical damage up to certain stop-loss amounts. We work with our claims administrator to estimate our self-insurance expenses and liabilities. The expense and liabilities are determined based on historical company claims information, as well as industry factors and trends in the level of such claims and payments. Our self-insurance reserves, calculated on an undiscounted basis, as of December 31, 2007 and December 31, 2008, represent the best estimate of the future payments to be made on incurred claims reported and unreported for 2008 and prior years.all periods presented. We maintain safety and injury prevention programs that are designed to improve the work environment, and as a result, reduce the incident rate and severity of our various self-insured risks. Actual payments for claims reserved may vary depending on various factors including the development and ultimate settlement of reported and unreported claims. Litigation and other uninsured contingencies require significant judgment and not all risks are insured.

Rebates and co-op marketing expenditures

We offer multiple rebate programs to our national accounts, dealers and builders as an inducement to encourage utilization of Goodman® and Amana® branded equipment across replacement and new construction

Index to Financial Statements

markets. These rebates are part of our volume and new construction incentive programs. In addition, we offer a variety of rebate programs to our independent distributors to encourage distributors to pass on lower equipment costs to dealers, in order to drive market share expansion.

Rebates are accrued based on sales. For certain rebates, the accrual rate is impacted by estimates of the customer’s ability to reach targeted purchase levels. Rebates paid or credited to independent distributors, dealers and homebuilders are netted against revenues in accordance with the provisions of EITF Number 01-9,Financial Accounting for Consideration Given to a Customer (Including a Reseller of the Vendor’s Products).

Standards Board (FASB) accounting standards. Co-op marketing expenditures are funds reserved for cooperative marketing programs between us and our distributors. These expenditures are reflected in selling costs because they are based on an annual marketing plan whereby the distributor commits to spending the funds on marketing and advertising our products.

Income taxes

We use the liability method of accounting for taxes. Under this method, deferred tax assets and liabilities are determined based on differences between financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when such differences reverse.

Index to Financial Statements

We regularly evaluate valuation allowances established for deferred tax assets for which future realization is uncertain. We perform this evaluation at least quarterly and at the end of each fiscal year. The estimation of required valuation allowances includes estimates of future taxable income. In assessing the realizability of deferred tax assets, at December 31, 2008, we considered whether it was more likely than not that some portion or all of the deferred tax assets would not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. We consider taxable income in carry back years, the reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. If actual future taxable income is different from the estimates, our results could be affected.

At December 31, 2009 and December 31, 2008, we had a valuation allowance of $3.3 million against certain net operating loss carryforwards.carry forwards. As of December 31, 2009 and December 31, 2008, we had net deferred tax liabilities of $141.9 million and $101.6 million, respectively, primarily related to the non-deductibility of the step-up in basis of theour assets to fair value in accordance with purchase accounting related to the Transactions.2008 Acquisition and other prior events.

Effective January 1, 2007, we adopted the provisions of Financial Accounting Standards Board (FASB) Interpretation No. 48,Accounting for Uncertainty in Income Taxes (FIN 48). FIN 48 clarifies Statement of Financial Accounting Standards (SFAS) No. 109,Accounting for Income Taxes, and requires the CompanyFASB accounting standards require us to evaluate its tax positions for all jurisdictions and for all years where the statute of limitations has not expired. FIN 48 requiresFASB accounting standards require companies to meet a “more-likely-than-not” threshold (i.e. greater than a 50 percent likelihood of a tax position being sustained under examination) prior to recording a benefit for their tax positions. Additionally, for tax positions meeting this “more-likely-than-not” threshold, the amount of benefit is limited to the largest benefit that has a greater than 50 percent probability of being realized upon effective settlement. We recognize interest and penalties related to unrecognized tax benefits in income tax expense on our income statement.

FIN 48 requires significantSignificant judgment is required in determining what constitutes an individual tax position as well as assessing the outcome of each tax position. We consider many factors when evaluating and estimating our tax positions and tax benefits, which may require periodic adjustments and which may not accurately anticipate actual outcomes. Changes in judgment as to recognition or measurement of tax positions can materially affect the estimate of the effective tax rate and consequently, affect our operating results. The accounting treatment for recorded tax assets associated with our tax positions reflectreflects our judgment that it is more likely than not that our positions will be respected and the recorded assets will be realized. However, if such positions are challenged, then, to the extent they are not sustained, the expected benefits of the recorded assets and tax positions will not be fully realized.

Impairment of long-lived assets other than intangibles

We conduct periodic reviews for idle and under-utilized equipment and facilities and review business plans for possible impairment implications. If an impairment were detected, these costs would be expensed in the same period. Historically, no significant impairment charges have been recorded.

Impairment of goodwill

Goodwill is the excess of the cost of an acquired company over the amounts assigned to assets acquired and liabilities assumed. Under SFAS No. 142,Goodwill and Other Intangible Assets, goodwill and other indefinite-lived intangibles are not amortized, but are tested for impairment annually or more frequently if an event occurs or circumstances change that would indicate the carrying amount could be impaired. Impairment testing for goodwill is done at the reporting unit level. An impairment charge

Index to Financial Statements

generally would be recognized when the carrying amount of the reporting unit exceeds the estimated fair market value of the reporting unit. We estimate fair value using standard business valuation techniques such as discounted cash flows, industry participant information and reference to comparable business transactions. The discounted cash flow fair value estimates are based on our projected future cash flows and the estimated weighted-average cost of capital of market participants. Management assumptions about expected future cash flows can be affected by changes in industry or market conditions or the rate and extent to which anticipated synergies or cost savings are realized. The estimated weighted-average cost of capital is based on the risk-free interest rate and other factors such as equity risk premiums and the ratio of total debt and equity capital. Based on the results of our annual impairment tests, we determined that no impairment of our goodwill existed as of December 31, 2008.2009. In assessing the fair value of our goodwill, we must make assumptions regarding estimated future cash flows and other factors to determine the fair value of the respective assets. If these estimates or the related assumptions change, we may be required to record impairment charges for these assets in the future. We performed our annual test as of October 1, 20082009 and determined that no impairment exists. As of December 31, 2008,2009, there were no indicators noted that would require us to re-evaluate our annual impairment test.

Index to Financial Statements

Identifiable intangible assets

The values assigned to amortizable intangible assets are amortized to expense over their estimated useful lives and are reviewed for potential impairment. The estimated useful lives are based on an evaluation of the circumstances surrounding each asset, including an evaluation of events that may have occurred that would cause the useful life to be decreased. In the event the useful life would be considered to be shortened, or if the asset’s future value were deemed to be impaired, an appropriate amount would be charged to amortization expense. Future operating results and residual values could therefore reasonably differ from our current estimates and could require a provision for impairment in a future period. Indefinite lived intangible assets are reviewed in accordance with SFAS No. 142,Goodwill and Other Intangiblesby comparison of the fair market value with its carrying amount. We performed our annual test as of October 1, 20082009 and determined that no impairment exists. As of December 31, 2008,2009, there were no indicators noted that would require us to re-evaluate our annual impairment test.

The values assigned to our identifiable intangible assets were determined using the income approach, whereby the fair value of an asset is based on the present value of its estimated future economic benefits. This approach was considered appropriate, as the inherent value of these intangible assets is their ability to generate current and future cash flows. The key assumption in using this approach is the identification of the revenue streams attributable to these assets based on budgeted future revenues.

Fair value of financial instruments

Financial instruments include cash equivalents, accounts receivable, accounts payable, revolving loans payable, long-term debt, and commodity swap agreements. Management believes the fair value of cash equivalents, accounts receivable and accounts payable approximates their carrying value due to their short-term nature. The fair value of revolving loans payable and long-term debt is estimated based on anticipated interest rates that management believes would currently be available to us for similar issues of debt, taking into account our current credit risk and other market factors and arms length trades for debt securities, which are traded. The fair value of long-term debt is estimated to approximate the carrying amount. Commodity swaps are recorded at fair value.

Derivatives and hedging activities

We use financial instruments to manage market risk from changes in commodity prices and selectively hedge anticipated transactions that are subject to commodity price exposure, primarily using commodity contracts relating to raw materials used in our production process. The instruments are designated as cash flow hedges in accordance with FASB accounting standards and are recorded in the consolidated statement of financial position at fair value. The effective portion of the contracts’ gains or losses due to changes in fair value are initially recorded as a component of accumulated other comprehensive income, or OCI, and are subsequently reclassified into cost of sales in the period in which the end products are sold to our customers.

Revenue recognition

Revenue from the sale of products is recognized when persuasive evidence of an arrangement exists, delivery has occurred, sale price is fixed and determinable and collectability is reasonably assured. Revenues are recorded net of rebates to certain distributors, dealers and builders. These rebates relate to several programs and are designed to stimulate sales of our products. Provisions are made for warranties at the time revenues are recognized. Costs associated with shipping and handling of our products is included in costs of goods sold.

Index to Financial Statements

We consign certain products to many of our independent distributors. Product inventories shipped on consignment terms are maintained under a consignment arrangement on the premises of independent distributors. Revenues and cost of sales are recognized at the time consigned inventory is sold by the independent distributor to a third party.

Inventories

Inventory costs include material, labor, logistics, and plant overhead. Our inventory is stated at the lower of cost or market using the first-in, first-out, or FIFO, method.

Property, plant, and equipment

Property, plant and equipment are recorded at cost less accumulated depreciation. Expenditures for renewals and betterments are capitalized and expenditures for repairs and maintenance are charged to expense as incurred. Buildings and building improvements are depreciated using the straight-line method over the remaining useful lives of the assets, which is 10 to 39 years. Equipment is depreciated on a straight-line basis over the assets’ remaining useful lives, which is 3 to 10 years. Interest attributable to construction in progress is capitalized.

Deferred financing costs

Debt issuance costs are capitalized and amortized to interest expense using the effective interest method over the period the related debt is anticipated to be outstanding.

Trade and other receivables

Our receivables are recorded when billed and represent claims against third parties that will be settled in cash. The customer’s financial position is periodically reviewed, and no collateral is required. The carrying value of our receivables, net of the allowance for doubtful accounts, represents their estimated net realizable value. We estimate our allowance for doubtful accounts based on historical collection trends, type of customer, the age of outstanding receivables and existing economic conditions. If events or changes in circumstances indicate that specific receivable balances may be impaired, further consideration is given to the collectability of those balances, and the allowance is adjusted accordingly. We do not have significant credit risk concentrations and historically have not experienced significant losses related to our receivables.

Pensions and other postretirement benefits

We account for our defined benefit pension plan and our defined benefit postretirement medical plan in accordance with FASB accounting standards. These standards require that amounts recognized in the financial statements be determined on an actuarial basis. Significant assumptions involved in determining our pension and other postretirement benefit expense include the expected return on plan assets, expected healthcare cost and the discount rate for calculating future liability. The assumed long-term rate of return on assets is applied to a calculated value of plan assets, which results in an estimated return on plan assets that is included in current year pension income or expense.

Research and development

Research and development costs are charged to selling, general and administrative expense as incurred.

Stock-based compensation

FASB accounting standards require that all stock-based compensation be recognized as an expense in the financial statements and that such cost be measured at the fair value of the award. We use the modified prospective method of application, which requires us to recognize compensation cost on a prospective basis. We recognize compensation cost on a straight-line basis over the requisite service period for each separately vesting portion of the award. Excess tax benefits related to stock option exercises are reflected as financing cash flows.

All outstanding options to acquire our common stock that were issued prior to the 2008 Acquisition (other than rollover options), whether or not fully vested, became fully vested immediately prior to the 2008 Acquisition and were canceled and converted into cash payments. Immediately following the 2008 Acquisition, on February 13, 2008, the Chill Holdings, Inc. 2008 Stock Incentive Plan, or the 2008 Plan, was adopted.

Index to Financial Statements

Results of Operationsoperations

The followingfinancial information for 2008 in the table sets forth,below is the combined presentation of the pre-merger period January 1 to February 13, 2008 and the post-merger period February 14 to December 31, 2008 and therefore constitutes unaudited non-GAAP financial information.

Management believes that combining the Predecessor results for the period January 1, 2008 through February 13, 2008 with the results of the post-acquisition period provides the basis for a meaningful comparison to the operating results for the year ended December 31, 2009. The combined operating results have not been prepared as pro forma results under applicable regulations, may not reflect the actual results we would have achieved absent the 2008 Acquisition and may not be predictive of future results of operations. In addition, despite the combined presentation not being in accordance with GAAP because of, among other things, the change in the historical carrying value or basis of assets and liabilities that resulted from the 2008 Acquisition, we believe that for comparison purposes, such a presentation is meaningful to an understanding of the results of the business. Where the operating results for the pre-merger and post-merger periods in 2008 have been impacted by 2008 Acquisition costs or changes in the historical carrying values, such items are identified and discussed. Additionally, the historic periods do not reflect the impact the 2008 Acquisition had on us, most notably significantly increased leverage and liquidity requirements, and may not be predictive of future results of operations.

   2009  2008  2007 

Sales, net

  100.0 100.0 100.0

Cost of goods sold

  69.7   76.4   75.6  

Selling, general and administrative

  12.8   11.2   10.9  

Acquisition-related expenses

  —     2.3   —    

Depreciation and amortization expenses

  2.6   2.6   1.8  
          

Operating profit

  14.9   7.5   11.7  

Interest expense, net

  7.3   10.2   3.5  

Other (income) expense, net

  (1.1 0.1   (0.1
          

Earnings before taxes

  8.7   (2.8 8.3  

Provision for income taxes

  3.1   (0.7 3.1  
          

Net income

  5.6   (2.1 5.2  
          

December 31, 2009 compared to December 31, 2008

Sales, net. Net sales for the year ended December 31, 2009 were $1,851.2 million, a $26.2 million, or 1.4%, decrease from $1,877.4 million for the year ended December 31, 2008. Sales volume for the year ended December 31, 2009 was 5.0% lower than the previous year, primarily as a result of declines in the residential new construction market and the overall downturn in the economy. The decline in sales volume was partially offset by a 3.1% increase primarily related to a favorable product mix, including gas furnaces and the continued shift to higher priced, higher SEER cooling products and 0.5% of pricing-related gains.

Cost of goods sold. Cost of goods sold for the year ended December 31, 2009 was $1,290.7 million, a $144.1 million decrease from $1,434.8 million for the year ended December 31, 2008. Cost of goods sold for the year ended December 31, 2008 was negatively affected by a $48.0 million purchase accounting treatment of the step-up in the basis of inventory related to the 2008 Acquisition. Excluding the effect of the amortization of the inventory step-up, cost of goods sold as a percentage of net sales decreased from 73.9% for the year ended December 31, 2008 to 69.7% for the year ended December 31, 2009. This decrease in cost of goods sold as a percentage of net sales was due to a reduction in certain raw material costs, the shift in product mix to higher margin products and cost-reducing product designs.

Selling, general and administrative expense. Selling, general and administrative expense for the year ended December 31, 2009 was $236.2 million, a $26.4 million, or 12.6% increase from $209.8 million for the year ended December 31, 2008, which related primarily to payroll-related expenses. As a percentage of net sales, selling, general and administrative expense was 12.8% and 11.2% for the years ended December 31, 2009 and December 31, 2008, respectively.

Index to Financial Statements

Acquisition-related expense.We incurred $42.9 million in transaction-related expenses during the year ended December 31, 2008 as a result of the 2008 Acquisition.

Depreciation and amortization expense. Depreciation and amortization expense for the years ended December 31, 2009 was $48.4 million, a $0.3 million decrease from $48.7 million for the year ended December 31, 2008. A $1.6 million decrease in depreciation expense related to fully depreciated assets was partially offset by a $1.3 million increase in amortization expense related to the 2008 Acquisition.

Operating profit. Operating profit for the year ended December 31, 2009 was $275.8 million, a $134.8 million increase from a $141.0 million operating profit reported for the year ended December 31, 2008. Operating profit for the year ended December 31, 2008 was negatively impacted by the $48.0 million amortization of the inventory step-up and the $42.9 million acquisition-related expenses. Excluding the effect of the inventory step-up and the acquisition-related expenses, operating profit increased $43.8 million, primarily due to favorability in cost of goods sold that was partially offset by an increase in selling, general and administrative payroll-related expenses.

Interest expense, net.Interest expense, net for the year ended December 31, 2009 was $134.8 million, a decrease of $57.0 million from $191.8 million reported for the year ended December 31, 2008. Interest expense, net for the year ended December 31, 2008 included a $49.8 million charge related to the retirement of Predecessor’s outstanding debt and $14.2 million related to the extinguishment of Predecessor’s outstanding debt. The 2008 Acquisition debt was issued in mid-February 2008 and, on a comparative basis, was outstanding for a longer period in 2009. However, a reduction of our statementterm loan interest rate to 6.25% from 6.5%, the repurchase of operations data:$76.0 million of senior notes and the $100.0 million repayment of our revolving credit agreement in 2009 resulted in lower interest expense in the year ended December 31, 2009 as compared to year ended December 31, 2008. Our outstanding debt was $1,160.8 million at December 31, 2009 and $1,345.7 million at December 31, 2008.

Other (income) expense, net. Other income for the year ended December 31, 2009 was $19.6 million, a net change of $20.8 million from $1.2 million expense reported for the year ended December 31, 2008. Other income for the year ended December 31, 2009 consisted primarily of a $16.6 million gain related to the repurchase of our senior subordinated notes and $2.7 million in foreign currency gains. Other income for the year ended December 31, 2008 consisted primarily of $1.6 million in foreign currency losses.

   Year ended December 31, 
   2006  2007  2008(1) 

Consolidated statements of income:

    

Sales, net

  100.0% 100.0% 100.0%

Cost of goods sold

  76.6% 75.6% 76.4%

Selling, general and administrative expenses

  11.5% 10.9% 13.5%

Depreciation and amortization expense

  1.8% 1.8% 2.6%

Operating profit

  10.1% 11.7% 7.5%

Interest expense, net

  4.3% 3.5% 10.2%

Other (income) expense, net

  0.3% (0.1)% 0.1%

Earnings before taxes

  5.5% 8.3% (2.8)%

Provision for (benefit from) income taxes

  1.9% 3.1% (0.7)%

Net income

  3.6% 5.2% (2.1)%

(1)For comparability purposes, the periods January 1 to February 13, 2008 and February 14 to December 31, 2008 have been combined.

Provision for income taxes. The income tax provision for the year ended December 31, 2009 was $58.9 million compared to the tax benefit of $12.2 million for the year ended December 31, 2008. The effective tax rate for the year ended December 31, 2009 was 37.3%, a 13.8% increase from the effective tax rate of 23.5% for the year ended December 31, 2008. The difference was primarily the result of non-deductible transaction costs in the year ended December 31, 2008 related to the 2008 Acquisition.

December 31, 2008 compared to December 31, 2007

Sales, net. Net sales for the year ended December 31, 2008 were $1,877.4 million, a $58.3 million, or 3.1%, decrease from $1,935.7 million for the year ended December 31, 2007. Sales volume for the year ended December 31, 2008 was 7.9% lower than the previous year, primarily as a result of the continuing decline in the residential new construction market, the mild weather conditions throughout much of the United States and the overall downturn in the economy. The decline in sales volume was partially offset by a 3.0% increase primarily related to a favorable product mix, including the continued shift to higher priced, higher SEER cooling products. Also offsetting the decline were 1.9% of pricing-related gains.

Cost of goods sold. Cost of goods sold for the year ended December 31, 2008 was $1,434.8 million, a $28.0 million, or 1.9%, decrease from $1,462.8 million for the year ended December 31, 2007. The decrease primarily relates to lower sales volume, partially offset by an increase resulting from the purchase accounting treatment of the step-up in basis of inventory related to the Transactions.2008 Acquisition. During the period following the Transactions,2008 Acquisition, our cost of goods sold increased by $48.0 million as we recognized the non-cash increase in our inventory value. Excluding the effect of the amortization of the inventory step up, cost of goods sold as a percentage of net sales decreased to 73.9% for the year ended December 31, 2008 from 75.6% for the year ended December 31, 2007. This decrease in cost of goods sold as a percentage of net sales was due to cost-reducing product design modifications and increased productivity and efficiencies in our factories, offset by higher commodity costs.

Index to Financial Statements

Selling, general and administrative expense. Selling, general and administrative expense for the year ended December 31, 2008 werewas $252.8 million, a $42.2 million, or 20.0%, increase from $210.6 million for the year ended

Index to Financial Statements

December 31, 2007, primarily as a result of the Transactions completed in 2008.2008 Acquisition. Selling, general and administrative expense for the year ended December 31, 2008 included acquisition-related expenses of $42.9 million associated with the Transactions.2008 Acquisition. Excluding acquisition-related fees, our selling, general and administrative expenses for the year ended December 31, 2008 of $209.8 million werewas $0.8 million less than our selling, general and administrative expenses for the year ended December 31, 2007. As a percentage of net sales (exclusive of acquisition-related expenses), selling, general and administrative expense were 11.2% and 10.9% for the years ended December 31, 2008 and December 31, 2007, respectively, and are considered comparable.

Depreciation and amortization expense. Depreciation and amortization expense for the year ended December 31, 2008 werewas $48.7 million, a $13.6 million or 39.0% increase from $35.1 million for the year ended December 31, 2007. The increase was primarily due to increased amortization of identifiable intangible assets and increased depreciation recorded resulting from the Transactions.2008 Acquisition.

Operating profit. Operating profit for the year ended December 31, 2008 was $141.0 million, an $86.1 million, or 37.9%, decrease from $227.2 million reported for the year ended December 31, 2007. Operating profit for the year ended December 31, 2008 was negatively impacted by the $48.0 million amortization of the inventory step up, the $42.9 million Transaction-relatedtransaction-related expenses as a result of the 2008 Acquisition and lower sales volumes. The decrease was partially offset by the favorable product mix and pricing-related gains, mentioned above, cost-reducing product designs, increased productivity and efficiencies in our factories.

Interest expense, net. Interest expense, net for the year ended December 31, 2008 was $191.8 million, an increase of $123.3 million from $68.4 million reported for the year ended December 31, 2007. Interest expense, net for the year ended December 31, 2008 included a charge of $35.6 million related to the Transactions2008 Acquisition and $14.2 million related to the extinguishment of our predecessor company’sPredecessor’s outstanding debt. Additionally, interest expense, net increased due to increases in the amount of debt outstanding and higher interest rates. The outstanding debt balance as of December 31, 2008 was $1,347.5 million compared to $655.4 million as December 31, 2007.

Other (income) expense, net. Other expense for the year ended December 31, 2008 was $1.2 million, a net change of $3.9 million from other income of $2.7 million reported for the year ended December 31, 2007. The change in other (income) expense is primarily due to $1.6 million in foreign currency translation losses;losses, $0.8 million related to overhedges and hedging ineffectiveness; and $0.4 millionineffectiveness and $2.0 million net gains from asset dispositions during the yearsyear ended December 31, 2008 and December 31, 2007, respectively.2007.

Provision for income taxes. The income tax benefit for the year ended December 31, 2008 was $12.2 million compared to the tax provision of $60.2 million for the year ended December 31, 2007. The effective tax rate for the year ended December 31, 2008 and December 31, 2007 was 37.2%23.5% and 37.3%, respectively. The net tax benefit was due to the pre-tax loss in 2008 resulting from expenses related to the Transactions2008 Acquisition and higher interest expense and the benefit of the domestic production activities deduction.

Year Ended December 31, 2007 compared to Year Ended December 31, 2006Liquidity, capital resources and off-balance sheet arrangements

Sales, net. Net sales for the year ended December 31, 2007 were $1,935.7 million, a $140.9 million, or 7.9%, increase from $1,794.8 million for the year ended December 31, 2006. This increase was primarily due to approximately 6% growth in sales volume and favorable product mix including the continued shift to higher priced, higher SEER cooling products. In addition, we benefited from our April 1 and October 1, 2006 price increases, which added approximately 2% to 2007 sales dollars as compared to the prior year. Our sales volume benefited from seven new company-operated distribution centers that were opened in 2006 and 13 in 2007 on a net basis, and the maturing of the 39 company-operated distribution centers opened in 2004 and 2005.

Cost of goods sold. Cost of goods sold for the year ended December 31, 2007, was $1,462.8 million, an $88.0 million, or 6.4%, increase from $1,374.8 million for the year ended December 31, 2006. This increase primarily relates to higher sales volume and higher commodity costs associated with copper and aluminum. Cost of goods sold as a percentage of net sales decreased from 76.6% for the year ended December 31, 2006 to 75.6% for the year

Index to Financial Statements

ended December 31, 2007. This decrease in cost of goods sold as a percentage of net sales was due to cost-reducing product design modifications, increased productivity and efficiencies in our factories and the two price increases implemented in 2006, partially offset by higher commodity costs.

Selling, general and administrative expense. Selling, general and administrative expense for the year ended December 31, 2007, were $210.6 million, a $4.7 million, or 2.3%, increase from $205.9 million for the year ended December 31, 2006. As a percentage of net sales, selling, general and administrative expense were 10.9% and 11.5% for the years ended December 31, 2007 and December 31, 2006, respectively. Selling, general and administrative expense for the year ended December 31, 2006 included IPO-related expenses associated with the termination of the management agreement with Apollo and the acceleration of stock options totaling $16.1 million. Excluding these non-recurring IPO-related expenses, selling, general and administrative expense for the year ended December 31, 2007 increased in dollars and as a percentage of net sales from the year ended December 31, 2006. This increase was primarily due to our continued investment in several of our key growth initiatives, increased incentive compensation expenses, and the additional costs of operating as a public company. These key growth initiatives included costs for expansion of our company-operated distribution network, including our sales manager training program and an increase in our dealer recruitment activities.

Depreciation and amortization expense. Depreciation and amortization expense for the year ended December 31, 2007, were $35.1 million, a $2.5 million or 7.6% increase from $32.6 million for the year ended December 31, 2006. The increase was primarily due to higher depreciation expense related to capital expenditures associated with the transition to the federally mandated 13 SEER minimum efficiency requirements and capacity expansion at our production facilities.

Operating profit. Operating profit for the year ended December 31, 2007, was $227.2 million, a $45.8 million, or 25.2%, increase from $181.4 million reported for the year ended December 31, 2006. Operating profit for the year ended December 31, 2006 was negatively impacted by the $16.1 million IPO-related expenses discussed above. In addition, operating profit increased during the year ended December 31, 2007, as compared to the prior year, due to higher gross profit as a result of the growth in sales volume with an increased proportion of sales from higher SEER products, the 2006 price increases, cost-reducing product design modifications and increased productivity and efficiencies in our factories, partially offset by higher selling, general and administrative expenses, higher commodity costs and depreciation.

Interest expense, net. Interest expense, net for the year ended December 31, 2007, was $68.4 million, a decrease of $9.4 million or 12.1% from $77.8 million reported for the year ended December 31, 2006. Interest expense, net for 2006 included a $1.4 million premium paid for the early pay-down of debt and the acceleration of $2.3 million of deferred financing costs as the result of the early debt pay-down using a portion of the proceeds from our initial public offering. In addition, interest expense, net decreased due to the lower amount of debt outstanding and more interest income. The outstanding long-term debt balance as of December 31, 2007 was $655.4 million compared to $838.1 million as of December 31, 2006.

Other (income) expense, net. Other (income) expense for the year ended December 31, 2007, was $2.7 million of income, a net change of $8.0 million from $5.3 million of expense reported for the year ended December 31, 2006. The change in other (income) expense, net is primarily due to a $6.0 million charge taken in 2006 for unrealized losses resulting from the change in fair market value of some of our commodity derivatives that did not qualify for hedge accounting treatment and $2.0 million net gain from asset dispositions recognized in 2007.

Provision for income taxes. The income tax provision for the year ended December 31, 2007, was $60.2 million, an increase of $26.0 million compared to the tax provision of $34.2 million for the same period in 2006. The effective tax rate for the year ended December 31, 2007 and December 31, 2006 was 37.3% and 34.8%, respectively. The increase in the effective tax rate is due to the impact of recently enacted higher Texas state taxes, the effect of FIN 48, and the expiration of the 2006 benefits from the Extraterritorial Income Exclusion (the amount of extraterritorial income, gross income of the taxpayer attributable to foreign trading gross receipts, that is excluded from gross income for the tax year), net of the benefit of the increased Domestic Production Activities Deduction (the deduction from taxable income attributable to domestic production activities) for 2007.

Index to Financial Statements

Liquidity, Capital Resources and Off-Balance Sheet Arrangements

As of December 31, 2008,2009, we had unrestricted cash and cash equivalents of $144.1$39.7 million, and working capital of $289.4$293.2 million excluding $69.1and $198.0 million of undrawn commitmentsin availability under the terms and conditions of our revolving credit agreement.

At December 31, 2008, primarily2009, we had, excluding original issue discount, $1,178.0 million of indebtedness outstanding that included $424.0 million of senior subordinated notes and $754.0 million related to our term loan credit agreement. At December 31, 2009, we had no borrowings under our revolving credit agreement. Outstanding commercial and standby letters of credit issued under the credit facility totaled $33.5 million as of December 31, 2009.

Effective December 7, 2009, we amended our term loan credit agreement and revolving credit agreement to permit a one-time dividend payable to our stockholder in an aggregate amount of $115.0 million. We incurred a fee of $3.0 million to our lenders in satisfaction of a condition to effect the amendments. We paid the dividend on December 16, 2009.

In 2009, we reduced our outstanding debt by $194.0 million:

In December 2009, we made an $18.0 million payment on our term loan credit agreement to satisfy our obligation of $2.0 million per quarter for the period beginning October 1, 2011 and ending December 31, 2013. As a result, we recognized an expense of $0.3 million of previously

Index to Financial Statements

unamortized deferred financing fees and $0.4 million of previously unamortized original issue discount that related directly to the amount of the early extinguishment of debt. The outstanding balance at December 31, 2009 of $754.0 million is due at maturity in February 2014.

In July 2009, we made a $100 million payment to reduce the outstanding balance of our revolving credit agreement to $0.

In April 2009, in two separate transactions, we purchased for $58.9 million (inclusive of $1.9 million in accrued interest) approximately $76.0 million aggregate face value of our senior subordinated notes. We recognized a gain of $16.6 million as a result of the Transactions,early extinguishment of debt. The $76.0 million in repurchased notes were retired in December 2009.

We paid approximately $97.0 million in cash interest expense in 2009 related to our outstanding debt. At December 31, 2009, we had $1,347.5 millionwere in compliance with all of indebtedness outstanding (excluding approximately $33.5 million of issuedthe covenants under our term loan credit agreement and outstanding letters of credit).revolving credit agreement.

We have funded, and expect to continue to fund, operations through cash flows generated by operating activities and borrowings under our revolving credit agreement. We also expect that ongoing requirements for debt service and capital expenditures will be funded from these sources.

Based on our current level of operations, we believe that cash flow from operations and available cash, together with available borrowings under our revolving credit agreement, will be adequate to meet our short-term and long-term liquidity needs over the next 12 to 24 months. Our future liquidity requirements will be for working capital, capital expenditures, debt service and general corporate purposes. Our ability to meet our working capital and debt service requirements, however, is subject to future economic conditions and to financial, business and other factors, many of which are beyond our control. If we are not able to meet such requirements, we may be required to seek additional financing. There can be no assurance that we will be able to obtain financing from other sources on terms acceptable to us, if at all.

From time to time, we may pursue acquisitions, but the timing, size or success of any acquisition effort and the related potential capital commitments cannot be predicted. We expect to fund any future acquisitions primarily with cash flow from operations and borrowings, including borrowing from amounts available under our subsidiaries’ revolving credit agreement or through new debt issuances. We or our Parent may also issue additional equity either directly or in connection with any such acquisitions. As of December 31, 2008,2009, other than routine leasing agreements, we had no off-balance sheet arrangements.

Operating activities

ForNet cash provided by operating activities for the yearyears ended December 31, 2009, 2008 we generatedand 2007 was $207.7 million, $141.4 million of cash from operations compared toand $204.2 million, and $53.7 million of cash generated from operations in 2007 and 2006, respectively. Cash flow from operations improved in 2009 by $66.3 million as compared to the same period in 2008 primarily as a result of an increase of $142.7 million in net income that was impactedpartially offset by approximately $78.6a $16.6 million of expensesgain related to the Transactions. Additionally, cashretirement of $76.0 million in senior subordinated notes and by 2008 Acquisition related non-cash items that included the $48.0 million step-up in the valuation of inventory that was recognized in cost of sales in 2008 and $14.5 million in deferred financing fees and original issue discount related to the retirement of Predecessor’s debt in 2008. Cash flow from operations decreased duein 2008 by $62.8 million as compared to higher interest expense associated with debt incurredthe same period in connection with the Transactions,2007 primarily as a result of a decrease of $141.2 million in net income that was partially offset by $67.52008 Acquisition related non-cash items that included the $48.0 million received from tax refunds.step-up in the valuation of the inventory that was recognized in cost of sales in 2008 and $23.8 million in deferred financing fees and original issue discount related to the retirement of Predecessor’s and the issuance of Successor’s new debt in 2008. Cash flow from operations in 2007 increased due towas positively impacted by higher net income as well as lower inventory levels resulting from improved production attainment, reduction in certain types of cooling SKU’s,units, improved order cycle times and higher sales, offset by an increase in accounts receivable. Cash flow from operations in 2006 was negatively impacted by higher inventory as a result of the industry shift to more costly 13-and-higher SEER products and increased commodity costs. Also affecting 2006 cash flow from operations were decreases in accounts payablepartially offset by an increase in accounts receivable.

Investing activities

For the year ended December 31, 2008,2009, cash used in investing activities was $1,967.1$20.2 million compared to $1,967.1 million and $14.2 million in 2008 and $39.32007, respectively. Cash used in investing activities in 2009 was primarily related to $20.2 million in 2007 and 2006, respectively. This usageequipment purchases. Cash used in investing activities in 2008 was primarily due to $1,946.6 million of cash relating to the Transactions.2008 Acquisition. Capital expenditures were $21.6 million $26.4 million and $39.4$26.4 million in 2008 2007 and 2006, respectively. The capital expenditures for the year ended December 31, 2008 and 2007, were offset by $1.3 million and $12.2 million of proceeds from the sale of buildings and associated land used in our company operated distribution network. In 2006, our existing production capacity was increased in certain areasrespectively.

Index to meet our current growth expectations, and tooling and modifications were required to prepare for the growth expected to result from the change in minimum SEER standards.

Financial Statements

Financing activities

In 2008,2009, our cash used in financing activities was $291.9 million, compared to $1,950.9 million in cash provided by financing activities was $1,950.9 million, compared toin 2008 and $182.7 million and $26.6 million in cash used in financing activities in 20072007. In 2009, we made payments of $100.0 million to fully satisfy our outstanding obligations under our revolving credit facility, payments of $57.0 million (exclusive of accrued interest) to purchase $76.0 million in face value of our senior notes, prepaid $18.0 million due on term loan credit agreement and 2006, respectively.made a $115.0 million dividend distribution to our stockholder. In 2008, primarily as a result of the 2008 Acquisition, we extinguished our predecessor company debt and received proceeds of $1,373.0 million from long-term debt, net of original issue discount, and $1,278.2 million in equity contributions and repaid $683.5 million in connection with the Transactions. Also during 2008, we repaid $28.0 million of our long-termPredecessor debt. In addition, we had net borrowings of $6.5 million under our revolving credit facility, of which $11.5 million was repaid as a result of the Transactions andWe incurred deferred financing costs of $45.7 million and equity issuance costs of $8.1 million associated with the Transactions.2008 Acquisition. Also during 2008, we repaid $28.0 million of our term loan credit agreement. During 2007, we repaid $182.6 million of our long-term debt. In 2006 as a result of our initial public offering, we received proceeds of $354.5 million, redeemed $255.2 million of preferred stock and accrued dividends, and paid $2.5 million in transaction costs. Also during 2006, we repaid $123.3 million of our long-term debt.

Index to Financial Statements

Long term debt

We incurred substantial indebtedness in connection with the Transactions. On2008 Acquisition.

Senior subordinated notes

In February 13, 2008, Merger Subwe issued and sold $500.0 million of 13.50/14.0%13.50%/14.00% senior subordinated notes due 20162016. The senior subordinated notes bear interest at a rate of 13.50% per annum, provided that we may, at our option, elect to pay interest in any interest period at a rate of 14.00%, per annum, in which case up to 3.0% per annum may be paid by issuing additional notes. The notes are wholly and borrowed (1)unconditionally guaranteed by each subsidiary guarantor.

In April 2009, we formed Goodman Global Finance (Delaware) LLC (GGF), a Delaware limited liability company and, as of that date, an unrestricted subsidiary, which entered into two separate transactions to purchase for $58.9 million (inclusive of $1.9 million in accrued interest) approximately $76.0 million aggregate face value of our senior subordinated notes. We recognized a gain of $16.6 million in the second quarter of 2009 as a result of this early extinguishment of long-term debt, after taking into consideration the recognition of $2.4 million of previously unamortized deferred financing costs associated with the $76.0 million of senior subordinated notes.

In December 2009, we designated GGF a restricted subsidiary and retired the $76.0 million aggregate face value of senior subordinated notes that were held by GGF.

Term loan credit agreement/revolving credit agreement

In February 2008, we entered into an $800.0 million under a new term loan credit agreement with Barclays Capitaldue 2014 and Calyon New York Branch, as joint lead arrangers, Barclays Capital, Calyon New York Branch and General Electric Capital Corporation, as joint bookrunners, General Electric Capital Corporation, as administrative agent and collateral agent, and the lenders from time to time party thereto, and (2) $105.0a $300.0 million under a new revolving credit agreement with Barclays Capital and General Electric Capital Corporation, as joint lead arrangers, Barclays Capital, Calyon New York Branch and General Electric Capital Corporation, as joint bookrunners, General Electric Capital Corporation, as administrative agent and collateral agent, General Electric Capital Corporation, as letter of credit issuer, and the lenders from time to time party thereto.due 2013. The term loan credit agreement has an interest rate of LIBOR (withPrime or London Interbank Offered Rate (LIBOR), with a minimum of 3.25%) or Prime, plus applicable margin, based on certain leverage ratios, which was 4.25%3.0% and totaled 7.71%6.25% as of December 31, 2008.2009. The revolving credit agreement has an interest rate of LIBORPrime or Prime,LIBOR, plus applicable margin, which was 1.0% and totaled 4.25% as of December 31, 2008. The2009.

As of December 31, 2009, we owed $754.0 million on our term loan credit agreement and had no outstanding obligation on our revolving credit agreement, other than outstanding and undrawn letters of credit of $33.5 million.

In December 2009, we made an $18.0 million payment on our term loan credit agreement to satisfy our obligation of $2.0 million per quarter for the period beginning October 1, 2011 and ending December 31, 2013. As a result, we recognized an expense of $0.3 million of previously unamortized deferred financing fees and $0.4 million of previously unamortized original issue discount that related directly to the amount of the early extinguishment of debt. The outstanding balance at December 31, 2009 of $754.0 million is due at maturity in February 2014.

We had availability under the revolving credit agreement of $198.0 million at December 31, 2009 after taking into consideration outstanding commercial and standby letters of credit issued under the credit facility, which totaled $33.5 million as of December 31, 2009.

Index to Financial Statements

Original issue discount

The term loan credit agreement included an original issue discount of $32.0 million. It is being amortized to interest expense using the effective interest method over the period the debt is anticipated to be outstanding through maturity. We incurred $45.7 million in loan origination fees and direct loan origination costs which is also being amortized to interest expense usingAs of December 31, 2009, the effective interest method overunamortized balance of the period that theoriginal issue discount was $17.2 million.

Other

Substantially all of our existing U.S. subsidiaries guarantee our debt is anticipated to be outstanding.

We had availability of $69.1 millionobligations under the terms and conditions of ourterm loan agreement, the revolving credit agreement at December 31, 2008. Outstanding commercial and standby lettersthe senior subordinated notes and have granted security interests in, or mortgages on, substantially all of credit issued under the credit facility totaled $33.5 milliontheir tangible and intangible assets as of December 31, 2008.

In July 2008, we made a $26.0 million payment on our term loan credit agreement to satisfy its obligation of $2.0 million per quartercollateral for the period beginning July 1, 2008 and ending September 30, 2011. In conjunction, we recognized an expense of $0.8 million of previously unamortized deferred financing fees and $0.9 million of previously unamortized original issue discount that related directly to the amount of the prepayment. The next quarterly payment that is dueobligations under the terms of the term loan credit agreement is on December 31, 2011.

Our ability to make scheduled payments of principal of, to payand the interest on, or to refinance our indebtedness or to fund planned capital expenditures will depend on our ability to generate cash in the future. This, to a certain extent, is subject to general economic, financial, competitive, legislative, regulatory and other factors that are beyond our control. Our business may not generate sufficient cash flow from operations and future borrowings may not be available to us under our revolving credit agreement in an amount sufficient to enable us to service our debt or to fund our other liquidity needs. While we currently expect that our net cash provided by operating activities will, together with future borrowings under our revolving credit agreement, be sufficient to meet our total contractual obligations over the next twelve months, if we are unable to meetagreement. In addition, Chill Intermediate Holdings, Inc. guarantees our debt obligations or fund our other liquidity needs, we may need to restructure or refinance all or a portion of our debt or sell certain of our assets on or beforeunder the maturity of our debt. We may not be able to restructure or refinance any of our debt on commercially reasonable terms, if at all, which could cause us to default on our debt obligationsterm loan and impair our liquidity. Any refinancing of our indebtedness could be at higher interest rates and may require us to comply with more onerous covenants that could further restrict our business operations.

All of our existing and future restricted U.S. subsidiaries (other than AsureCare Corp., a Florida corporation) guarantee our debt obligations.revolving credit agreements. We are structured as a holding company and substantially all of our assets and operations are held by our subsidiaries. There are currently no significant restrictions on ourthe ability of Goodman Global, Inc. to obtain funds from ourits subsidiaries by dividend or loan. However, all of our subsidiaries are separate and independent legal entities and have no obligation to pay any dividends, distributions or other payments to us.

Under ourthe term loan credit agreement, we are required to satisfy and maintain specified financial ratios and other financial condition tests, including a minimum interest coverage ratio and a maximum total leverage ratio. In addition, under our revolving credit agreement, we are required to satisfy and maintain, in certain circumstances, a minimum fixed charge coverage ratio. AtAs of December 31, 2008,2009, we were in compliance with all of the covenants under our term loan credit agreement and our revolving credit agreement.

Index to Financial Statements

Our ability to meet the financial ratios and tests can be affected by events beyond our control, and we cannot assure you that we will be able to meet those ratios and tests as required. A breach of any of these covenants would result in a default (which, if not cured, could mature into an event of default) and in certain cases, an immediate event of default under our term loan credit agreement and our revolving credit agreement. Upon the occurrence of an event of default under such agreements, all amounts outstanding under such agreements could be declared to be (or could automatically become) immediately due and payable and all commitments to extend further credit could be terminated.

In addition, oursenior term loan credit agreement and revolving credit agreement, among other things, restrict our ability to incur indebtedness or liens, make investments or declare or pay any dividends. The indentures governing our 2016 notes, among other things: (1) limit our ability and the ability of our subsidiaries to incur additional indebtedness, incur liens, pay dividends or make certain other restricted payments and enter into certain transactions with affiliates; (2) place restrictions on the ability of certain of our subsidiaries to pay dividends or make certain payments to us; and (3) place restrictions on our ability and the ability of our subsidiaries to merge or consolidate with any other person or sell, assign, transfer, convey or otherwise dispose of all or substantially all of our assets. However, all of these covenants are subject to significant exceptions. We are currently in compliance with these covenants.

In connection with the Transactions, we also issued $500.0 million aggregate principal amount of 13.50%/14.00% senior subordinated notes due 2016, our 2016 notes, which are wholly and unconditionally guaranteed by each of our subsidiary guarantors.Our subsidiary guarantors, as primary obligors and not as sureties, jointly and severally, irrevocably and unconditionally guaranteed, on an unsecured senior subordinate basis, the performance and full and punctual payment when due, whether at maturity, by acceleration or otherwise, of all of our obligations under the indenture and our 2016 notes. The notes are our unsecured senior subordinated obligations and are subordinated in right of payment to all of our existing and future senior indebtedness (including the senior secured credit agreement), are effectively subordinated to all of our secured indebtedness (including the senior secured credit agreement) and are senior in right of payment to all of our existing and future subordinate indebtedness. Our 2016 notes, among other things, restrict our and our subsidiary guarantors’ ability to incur additional indebtedness and liens, make certain restricted payments, issue dividends, enter into certain transactions with our affiliates and sell certain assets and stock.

From time to time, we intend to pursue acquisitions, but the timing, size or success of any acquisition effort and the related potential capital commitments cannot be predicted. We expect to fund future acquisitions primarily with cash flow from operations and borrowings, including borrowing from amounts available under our revolving credit agreement or through new debt issuances. We may also issue additional equity either directly or in connection with any such acquisitions. There can be no assurance that acquisition funds will be available on terms acceptable to us, or at all.agreement.

We and our subsidiaries, affiliates or significant stockholders may from time to time, in our or their sole discretion, purchase, repay, redeem or retire any of our outstanding debt or equity securities in privately negotiated or open market transactions, by tender offer or otherwise.

Recent Accounting Pronouncementsaccounting pronouncements

Effective January 1, 2008, we adopted Statement of Financial Accounting Standards No. 157,Fair Value Measurements(SFAS No. 157), which establishes a framework for measuring fair valueRefer to Note 2 in generally accepted accounting principles, clarifies the definition of fair value within that framework, and expands disclosures about the use of fair value measurements. SFAS No. 157 is effective for fiscal years beginning after November 15, 2007. However, in February 2008, the Financial Accounting Standards Board (FASB) issued FASB Staff Position No. FA5 157-2, Effective Date of FASB Statement No. 157 (FSP No. 157-2), which deferred the effective date of SFAS No. 157 for one year for non-financial assets and liabilities, except for certain items that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually). We are currently evaluating the impact of SFAS No. 157 on our Consolidated Financial Statements for items within the scope of FSP No. 157-2, which will become effective on January 1, 2009.

Index to Financial Statements

Beginning January 1, 2009, we will adopt the provisions for nonfinancial assets and nonfinancial liabilities that are not required or permitted to be measured at fair value on a recurring basis, which include those measured at fair value in goodwill impairment testing, indefinite-lived tangible assets measured at fair value for impairment assessments, nonfinancial long-lived assets measured at fair value for impairment assessments and those initially measured at fair value in a business combination. We do not expect the provisions of FSP No. 157-2 related to these items to have a material impact on our consolidated financial statements.

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

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

Level 1Quoted prices foridentical instruments in active markets at the measurement date.
Level 2Quoted prices forsimilarinstruments 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 3Valuations derived from valuation techniques in which one or more significant inputs or significant value drivers areunobservableinputs 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.

Our valuation techniques are applied to all of the financial assetscritical accounting policies and liabilities carried at fair value as of January 1, 2008, upon adoption of SFAS No. 157. Currently, our commodity derivative instruments are carried at fair value under SFAS No. 157. The fair values are based upon independently sourced market parameters. To ensure that these derivative instruments are recorded at fair value, valuation adjustments may be required to reflect the creditworthiness of either party and constraints on liquidity. Any such adjustment is not material as of December 31, 2008.estimates.

Effective January 1, 2008, we also adopted Statement of Financial Accounting Standards No. 159,The Fair Value Option for Financial AssetsContractual obligations and Financial Liabilitiescommitments(SFAS No. 159). SFAS No. 159 allows an entity the irrevocable option to elect fair value for the initial and subsequent measurement for certain financial assets and liabilities on a contract-by-contract basis. As we have not elected the fair value option for any of our assets or liabilities, the adoption of SFAS No. 159 had no impact on our Consolidated Financial Statements.

Contractual Obligations and Commitments

The following table reflects our contractual obligations and commercial commitments as of December 31, 2008.2009. Commercial commitments include lines of credit, guarantees and other potential cash outflows resulting from a contingent event that requires our performance pursuant to a funding commitment.

   Payments due by period (1)
   Total  Less than
1 year
  1 to 3
years
  3 to 5
years
  More than
five years
   (In millions)

Senior subordinated notes

  $424.0  $—    $—    $—    $424.0

Term loan credit agreement

   754.0   —     —     754.0   —  

Interest payments (2)

   598.9   119.8   235.8   173.9   69.4

Operating leases

   88.8   26.3   36.9   21.5   4.1

Self insurance

   10.8   6.6   3.5   0.7   —  

Pension payments

   19.1   1.4   3.1   3.5   11.1
                    

Total contractual obligations

  $1,895.6  $154.1  $279.3  $953.6  $508.6
                    

(1)Excluded from the foregoing contractual obligations table are open purchase orders at December 31, 2009 for raw materials and supplies used in the normal course of business, supply contracts with customers, distribution agreements and other contracts without express funding requirements.
(2)Interest payments reflect interest payable on our outstanding long term obligations at December 31, 2009 and include our senior subordinated notes and term loan credit agreement. Interest payments are calculated based on an assumed rate of 13.5% for the senior subordinated notes (i.e., payment entirely in cash, rather than using the partial payment, in-kind option) and an assumed rate of 6.25% for the term loan credit agreement.

Index to Financial Statements
   Payments due by period
   Total  Less than 1
year
  2 to 3
years
  4 to 5
years
  More than 5
years
   (in millions)

Senior subordinated notes

  $500.0  $—    $—    $—    $500.0

Revolving credit agreement

   100.0   —     —     100.0   —  

Term loan credit agreement

   772.0   —     2.0   16.0   754.0

Interest payments

   805.4   131.3   262.5   261.0   150.6

Operating leases

   98.3   26.1   38.6   22.6   11.0

Self insurance

   6.3   4.0   1.6   0.4   0.3

Pension payments

   17.3   1.3   2.8   3.2   10.0
                    

Total contractual obligations

  $2,299.3  $162.7  $307.5  $403.2  $1,425.9
                    

Excluded from the foregoing contractual obligations table are open purchase orders at December 31, 2008 for raw materials and supplies used in the normal course of business, supply contracts with customers, distribution agreements and other contracts without express funding requirements.

Contingencies

Various claims, lawsuits and administrative proceedings with respect to commercial, product liability and environmental matters are pending or threatened against us and our subsidiaries arising from the ordinary course of business. We are also subject to various regulatory and compliance obligations.

 

ITEM 7A.Quantitative and Qualitative Disclosures about Market Risk

We are exposed to market risks, which arise during the normal course of business from changes in interest rates, foreign exchange rates and commodity prices. A discussion of our primary market risks are presented below.

Interest Rate Riskrate risk

We are subject to interest rate and related cash flow risk in connection with borrowings under our term loan credit agreement and our revolving credit agreementfacilities which totaled $772.0$754.0 million and $100.0 million, respectively as ofat December 31, 2008.2009. To reduce the risk associated with fluctuations in the interest rate of our floating rate debt,debt: (1) in May 2008, we entered into a two-year interest rate cap with a notional amount of $150.0 million. The London Interbank Offered Rate (LIBOR) cap is 7%.million that matures in May 2010; (2) in March 2009, we entered into an interest rate swap with a notional amount of $200.0 million that matures in March 2010; and (3) in March 2009, we entered into an interest rate swap with a notional amount of $300.0 million that matures in March 2011.

Our results of operations can be affected by changes in interest rates due to variable interest rates on our senior securedterm loan credit facilities. The annual impact of aagreement and revolving credit agreement. A 1% increase or decrease in the overall interest ratesrate would change our results of operations by $8.7have resulted in approximately a $6.9 million ($5.44.2 million, net of tax). increase or decrease in our interest expense in the year ended December 31, 2009 on our variable rate indebtedness, after taking into consideration our interest rate swaps.

Foreign Currency Exchange Rate Riskcurrency exchange rate risk

We conduct our business primarily in the United States. We have limited sales in Canada, which are transacted in Canadian dollars. Other export sales, primarily to Latin America and the Middle East, are transacted in United States dollars. Therefore, we have only minor exposure to changes in foreign currency exchange rates. Sales outside the United States have not exceeded 5% in any of the three years ended December 31, 2009, 2008 2007 or 2006.2007. Approximately 1% of our total assets are outside the United States. There has been minimal impact on our commodity costs operations due to currency fluctuations.

Commodity Price Riskprice risk

We are subject to price risk as it relates to our principal raw materials: copper, aluminum and steel. Cost variability of raw materials can have a material impact on our results of operations. To enhance stability in the cost of major raw material commodities, such as copper and aluminum used in the manufacturing process, we have entered and may continue to enter into commodity derivative arrangements. Maturity dates of the contracts are scheduled to coincide with market purchases of the commodity. Cash proceeds or payments between the derivative counter-party and us at maturity of the contracts are recognized as an adjustment to the cost of the commodity purchased, to the extent the hedge is effective. Charges or credits resulting from ineffective hedges are recognized in

Index to Financial Statements

income immediately. We generally do not enter commodity hedges extending beyond eighteen months. We have entered into swaps for a portion of our commodity supply whichthat expire bythrough December 31, 2011. These swaps had a net fair value as an asset of $23.4 million ($14.4 million, net of tax) as of December 31, 2009. A 10% change in the price of commodities hedged would change the fair value of the hedge contracts by approximately $12.9$8.8 million ($7.9 million, net of tax) and $10.3 million ($6.35.4 million, net of tax) as of December 31, 2008 and 2007, respectively.2009.

We continue to monitor and evaluate the prices of our principal raw materials and may decide to enter into hedging contracts in the future.

 

ITEM 8.Financial Statements and Supplementary Data

Our financial statements are listed under Part IV, Item 15 of this Annual Report on the pages indicated.

Index to Financial Statements
ITEM 9.Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

None.

 

ITEM 9A.Controls and Procedures

Effectiveness of controls and procedures

We maintain a set of disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) promulgated under the Securities Exchange Act of 1934, or the “Exchange Act”) that are designed to ensure that information we are required to be discloseddisclose in Exchange Act reports that we file or submit with the SEC is recorded, processed, summarized and reported within the time periods specified inby the rulesSEC. An evaluation was carried out under the supervision and formswith the participation of the SEC and that such information is accumulated and communicated to ourCompany’s management, including ourthe Chief Executive Officer (“CEO”) and Chief Financial Officer as appropriate, to allow timely decisions regarding required disclosure. Any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives.

Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness(“CFO”), of the design and operationeffectiveness of our disclosure controls and procedures as of December 31, 2008. Based upon this evaluation and subject to the foregoing, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of December 31, 2008, the end of the period covered by this annual report.

Our Chief Executive Officer Based on that evaluation, the CEO and Chief Financial Officer do not expectCFO have concluded that ourthe Company’s disclosure controls orand procedures are effective to provide reasonable assurance that information required to be disclosed by us in reports we file with the SEC is recorded, processed, summarized and reported within the time periods required by the SEC, and is accumulated and communicated to management including our CEO and CFO, as appropriate, to allow timely decisions regarding disclosure.

Management’s report on internal control over financial reporting

Management’s report on our internal controls will prevent all errorcontrol over financial reporting can be found in Part IV, Item 15, “Exhibits and all fraud.Financial Statement Schedules”, of this report and is incorporated herein by reference. The designIndependent Registered Public Accounting Firm’s attestation report on management’s assessment of athe effectiveness of our internal control system must reflectover financial reporting can also be found in Part IV, Item 15, “Exhibits and Financial Statement Schedules” of this report and is incorporated by reference.

Changes in internal control over financial reporting

Management, together with our CEO and CFO, evaluated the factchanges in our internal control over financial reporting during the quarter ended December 31, 2009. We determined that there are resource constraints and the benefit of controls must be considered relative to their cost. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that we have detected all of our control issues and all instances of fraud, if any. The design of any system of controls also is based partly on certain assumptions about the likelihood of future events and there can be no assurance that any design will succeed in achieving our stated goals under all potential future conditions.

There have beenwere no changes in our internal control over financial reporting that occurred during our fiscalthe quarter ended December 31, 2008,2009 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

This annual report does not include a report of management’s assessment regarding internal control over financial reporting or an attestation report of the Company’s registered public accounting firm due to a transition period established by rules of the Securities and Exchange Commission for newly public companies.

ITEM 9B.Other Information

None.

Index to Financial Statements

PART III

 

ITEM 10.Directors, Executive Officers and Corporate Governance

MANAGEMENT

The following table provides information regarding our executive officers and directors:

 

Name

  Age  

Position

David L. Swift  5051  President, Chief Executive Officer and Director
Lawrence M. Blackburn  5455  Executive Vice President, Chief Financial Officer and Director
Ben D. Campbell  5253  Executive Vice President, Secretary and General Counsel
Donald R. King  5253  Executive Vice President, Human Resources
Peter H. Alexander  7071  Senior Vice President, Independent Distribution
Samuel G. Bikman  4041  Senior Vice President, Logistics and Business Development
Gary L. Clark  4647  Senior Vice President, Marketing
James L. Mishler  5455  Senior Vice President and President of Company Owned Distribution
Terrance M. Smith  5960  Senior Vice President and Chief Information Officer
William L. Topper  5153  Senior Vice President, Operations
Mark M. Dolan  4950  Vice President, Corporate Controller and Treasurer
Ardee Toppe  4546  Vice President and President and General Manager of Quietflex
Erik Ragatz37Chairman of the Board of Directors
Charles A. Carroll  59Chairman and Director
Philip U. Hammarskjold4460  Director
Robert B. Henske  4748  Director
Erik Ragatz36Director
Saloni K. Saraiya Multani  3031  Director

Mr. David L. Swift joined us on April 21, 2008 as President, Chief Executive Officer and Director. From November 2001 to July 2007, Mr. Swift was President of Whirlpool North America where he also served on its Board of Directors. From December 2000 to November 2001, Mr. Swift served as President of Eastman Kodak Company’s Professional Group. From December 1996 to December 2000, he served as the Chairman and President of Kodak’s Greater Asian Region based in Shanghai, China.

Mr. Lawrence M. Blackburn joined us in September 2001 after having served as Vice President and Chief Financial Officer of Amana Appliances from February 2000 to July 2001. Mr. Blackburn became a Director on April 21, 2008. From April 1983 to August 1999, Mr. Blackburn was with Newell Rubbermaid, Inc. and previously Rubbermaid, Inc., where he had most recently been President and General Manager of its wholly owned subsidiary, Little Tikes Commercial Play Systems, Inc.

Index to Financial Statements

Mr. Ben D. Campbell joined us in November 2000 as Executive Vice President, Secretary and General Counsel. Mr. Campbell served as Assistant General Counsel of Centex Corporation from 1998 to 2000 and Senior Group Counsel for J.C. Penney Company, Inc. from 1988 to 1998. Prior to that time, he was a partner in the law firm of Baker, Mills & Glast P.C. in Dallas, Texas.

Mr. Donald R. King joined us in November 2000 as Executive Vice President, Human Resources. Prior to joining Goodman, Mr. King led the human resources function for the Americas Region of Halliburton Company. Mr. King has over 25 years of human resources experience that spans a variety of industries and Fortune 100 companies, including Ryder Systems, Inc., Aetna Insurance Company, The Prudential Insurance Company of America and Phillips Petroleum Company.

Index to Financial Statements

Mr. Peter H. Alexander has been with the Goodman family of companies for over 25 years in numerous executive level positions with us and Amana. All Amana and Goodman sales personnel responsible for independent distribution, national accounts and residential new construction report to Mr. Alexander.

Mr. Samuel G. Bikman joined us in January 2002 from Compaq, where he was responsible for Worldwide Logistics. The Customer Service, Production Scheduling, Logistics, PTAC Sales and International Sales teams all report to Mr. Bikman.

Mr. Gary L. Clark joined us in April 2002 after four years at Rheem and 14 years at Carrier, where he led their Residential Product marketing efforts. Prior to that time, Mr. Clark worked in the contracting business.

Mr. James L. Mishler joined us in September 2003. Mr. Mishler has over 25 years of marketing, sales, service, distribution, operations and general management experience in the highly competitive major appliance and HVAC industries. Some of hisHis previous affiliations haveemployment has been with Whirlpool, Frigidaire and Lennox.

Mr. Terrance M. Smith joined us in March 2003. Mr. Smith has over 35 years of business and information technology experience. In his last position, Mr. Smith was the Vice President of Information Systems for Cooper Industries, Ltd.

Mr. William L. Topper joined us in April 2002 after 28 years with Electrolux (Frigidaire), where he had responsibility for all Domestic Refrigeration Production.domestic refrigeration production.

Mr. Mark Dolan joined us in April 2005 after 12 years with Lennox, where he held several senior financial and operations positions. Mr. Dolan was previously with PricewaterhouseCoopers.

Mr. Ardee Toppe was appointed President and General Manager of Quietflex in January of 2005. Mr. Toppe joined us in April 2003 as Vice President, Corporate Controller and Treasurer. Prior to joining Goodman, Mr. Toppe spent approximately three years with Dayton Superior, a construction supply company, most recently as the Vice President and General Manager of the Dur-O-Wal division. Previously he held various financial roles with Clopay, Allied Signal, and Eveready Battery Company (Energizer).

Mr. Erik Ragatz became one of our directors on February 13, 2008. Mr. Ragatz is a Managing Director at Hellman & Friedman LLC. Prior to joining Hellman & Friedman in 2001, Mr. Ragatz was a vice-president with Pacific Equity Partners in Sydney, Australia and an associate with Bain Capital in Boston, Massachusetts. Mr. Ragatz also worked as a management consultant for Bain & Company in San Francisco, California. Mr. Ragatz also currently serves as a director of Sheridan Holdings, Inc., LP Financial and San Francisco Education Fund.

Mr. Charles A. Carroll joined us in September 2001 and was our President and Chief Executive Officer until his retirement on April 21, 2008. Mr. Carroll remained a director and Chairman of our and our Parent’s Board of Directors. Before joining us, Mr. Carroll served as President and Chief Executive Officer of Amana Appliances from January 2000 to July 2001, when substantially all of the assets of Amana Appliances were acquired by Maytag Corporation. From 1971 to March 1999, Mr. Carroll was employed by Rubbermaid, Inc. where, from 1993, he held the position of President and Chief Operating Officer. Effective immediately after the filing with the Securities and Exchange Commission (the SEC) of this annual report on Form 10-K, Mr. Carroll will resign as Chairman of our and Parent’s Boards and remain as a director of our and Parent’s Boards.

Mr. Philip U. Hammarskjold became one of our directors on February 13, 2008, as well as of Parent. Mr. Hammarskjold joined Hellman & Friedman LLC in 1992, became a partner in January 1996, and has served as a Managing Director of Hellman & Friedman LLC since January 1998. Mr. Hammarskjold also serves as a director of Emdeon Business Services, AlixPartners LLP and Catalina Marketing Corporation. Effective immediately after the filing with the SEC of this annual report on Form 10-K, Mr. Hammarskjold will resign as director of our and Parent’s Boards.

Mr. Robert B. Henske became one of our directors on February 13, 2008, as well as of Parent, and is a member of its Audit Committee and Compensation Committee.2008. Mr. Henske has served as a Managing Director of Hellman & Friedman LLC since July 2007. From May 2005 until July 2007, he served as Senior Vice President and General Manager of the Consumer Tax Group of Intuit Inc. He was Intuit’s Chief Financial Officer from January 2003 to September 2005. Prior to joining Intuit, he served as Senior Vice President and Chief Financial Officer of Synopsys, Inc., a supplier of electronic design automation software, from May 2000 until January 2003. From January 1997 to May 2000, Mr. Henske was at Oak Hill Capital Management, a Robert M. Bass Group private equity investment firm, where he was a partner. Mr. Henske also serves on the board of directors of VeriFone, Inc. and Activant Solutions, Inc. Mr. Henske also serves as Chairman of the Board of Activant Solutions, Inc. and is or has been a member of the Board of Directors of VeriFone Holdings, Inc., Williams Scotsman, Grove Worldwide, Reliant Building Products and American Savings Bank.

Index to Financial Statements

Mr. Erik RagatzMs. Saloni Saraiya Multani became one of our directors on February 13, 2008, as well as of Parent, Chill Holdings, Inc., and is a member of its Audit Committee and Compensation Committee. Mr. Ragatz is a Managing Director at Hellman & Friedman LLC. Prior to joining Hellman & Friedman in 2001, Mr. Ragatz was a vice-president with Pacific Equity Partners in Sydney, Australia and an associate with Bain Capital in Boston, Massachusetts. Mr. Ragatz also worked as a management consultant for Bain & Company in San Francisco, California. Mr. Ragatz is also currently serving as a director of Sheridan Holdings, Inc. Effective immediately after the filing with the SEC of this annual report on Form 10-K, Mr. Ragatz will serve as Chairman of our and Parent’s Boards.

2008. Ms. Saloni K. Saraiya became one of our directors on February 13, 2008, as well as of Parent, and is a member of Parent’s Audit Committee. Ms. SaraiyaMultani is a Principal at Hellman & Friedman LLC. Prior to joining Hellman & Friedman in 2006, Ms. SaraiyaMultani worked in the Private Equity Group at The Blackstone Group and at Columbia House Company, both in New York. Ms. Saraiya isMultani also currently servingserves as a director of Vertafore, Inc.

Code of Ethicsethics

We have adopted a Code of Business Conduct and Ethics applicable to all employees, executive officers and directors of Goodman and each of its subsidiaries, including Goodman’s principal executive officer, principal financial officer, principal accounting officer and controller, and persons performing similar functions.

The purpose of the Code of Ethics is: (1) to deter wrongdoing; (2) to promote honest and ethical conduct, including the ethical handling of actual or apparent conflicts of interest between personal and professional relationships; (3) to promote full, fair, accurate, timely, and understandable disclosure in reports and documents that we file with the SEC or otherwise communicate to the public; (4) to promote compliance with applicable governmental laws, rules and regulations; (5) to promote prompt internal reporting of violations of the code to an appropriate person; and (6) to promote accountability for adherence to the Code.

We will provide a copy of the Code of Business Conduct and Ethics without charge to any person upon request by contacting Goodman’s Corporate Secretary at our executive office. The Code of Business Conduct and Ethics is available on Goodman’s website at www.goodmanglobal.com.

Board Compositioncomposition and Governancegovernance

The compositionOur Board of Directors consists of 6 directors. Our by-laws provide that our Board of Directors is establishedconsist of no less than 2 nor more than 10 persons. The exact number of members on our Board of Directors will be determined from time to time by resolution of a majority of our full Board of Directors.

Each of our directors serves for a term of one year. Directors hold office until the termsannual meeting of stockholders and until their successors have been duly elected and qualified.

In connection with the 2008 Acquisition, we entered into a stockholders agreement entered into by us,with Parent, funds affiliated with each of Hellman & Friedman LLC, which we refer to as the Hellman & Friedman Investors, GSO Capital Partners, Farallon Partners and AlpInvest Partners, certain other investors that the funds affiliated with GSO Capital Partners syndicated their investments to and certain members of our management. Among other things, thisUnder the stockholders agreement, provides that, prior to an initial public offering of the shares of Parent’s common stock, the parties that beneficially own sharesBoard of Parent’s common stockDirectors of Parent will vote those shares to elect a boardconsist of directors comprised of the following persons:

the chief executive officer of Parent;Parent and

the remaining board members additional directors designated by the funds affiliated with Hellman & Friedman with at least one ofInvestors and their affiliates. Following such designees being designated byan initial public offering, the stockholders agreement provides that the Hellman & Friedman Capital Executives VI, L.P. for so long as it owns any share equivalents.Investors will generally be entitled to nominate a number of directors (rounded up to the nearest whole number) corresponding to their proportionate equity interest in Parent.

For a discussion regarding the stockholders agreement, please refer to “Certain Relationships and Related Transactions, and Director Independence—Agreements Relatedrelated to the 2008 Acquisition – Acquisition—Stockholders Agreement.agreement.

The members of our Board of Directors have been determined by action of Parent, our sole stockholder. Parent has designated the members of its Board of Directors to also be the members of our Board of Directors. Because we have a single stockholder, we do not have a standing nominating committee of our Board of Directors and do not recommend directors for approval by Parent.

We believe that Parent seeks to ensure that our Board of Directors is composed of members whose particular experience, qualifications, attributes and skills, when taken together, will allow our Board of Directors to satisfy its oversight responsibilities effectively in light of our business and structure. In that regard, we believe that Parent considers all factors it deems appropriate, including the information discussed in each of the board members’ biographical information set forth above and, in particular, with regards to Messrs. Ragatz, Henske and Saraiya, their significant experience, expertise and background with regard to financial matters.

Our Board of Directors currently has one standing committee, the Audit Committee.

Index to Financial Statements

Audit Committee

The Audit Committee currently consists of three directors, Messrs. Erik D. Ragatz (Chairman) and Robert B. Henske and Ms. Saloni K. Saraiya.Saraiya Multani. All were appointed to the Audit Committee in 2008. Our Board of Directors has determined that Robert B. Henske has accounting or related financial management expertise and qualifies as an audit committee financial expert as defined under the SEC’s rules and regulations.

Compensation committee interlocks and insider participation

Compensation decisions are made by the Board of Directors and Compensation Committee of Parent. Parent’s board has appointed Messrs. Henske and Ragatz, who are also members of our Board of Directors, to serve on Parent’s compensation committee. None of our executive officers has served as a member of the compensation committee (or other committee serving an equivalent function) of any other entity, whose executive officers served as a director of our company or members of Parent’s compensation committee.

Messrs. Henske and Ragatz are managing directors of Hellman & Friedman LLC. As of December 31, 2009, affiliates of Hellman & Friedman LLC control approximately 87% of the outstanding common stock of Parent. See “Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters” and “Certain Relationships and Related Transactions, and Director Independence.”

Director compensation

During fiscal year 2009, none of our executive officer directors received additional compensation for serving on our Board of Directors, except for reimbursement of out of pocket expenses associated with attendance at Board meetings. Likewise, during fiscal year 2009, none of our non-employee directors received compensation from us for serving on our Board of Directors, as they were compensated for their services by H&F. Mr. Carroll served as a non-executive employee during 2009, for which he received compensation of $150,000, pursuant to his employment agreement.

The following table sets forth the aggregate compensation during 2009 awarded to, earned by, or paid to non-executive officer directors.

Name

  Fees earned
or paid in
cash
  Total

Charles A. Carroll

  $150,000  $150,000

Messrs. Ragatz and Henske and Ms. Multani

   —     —  

Index to Financial Statements
ITEM 11.Executive Compensation

EXECUTIVE COMPENSATION

Compensation Discussiondiscussion and Analysisanalysis

Our executive compensation program, including with respect to our named executive officers, (“NEOs”)or “NEOs”, is overseen and administered by the Compensation Committee of our Parent’s Board of Directors (the “Board”).Directors. Our NEOs for 2008 are2009 were (1) David L. Swift, our current chief executive officer, who commenced employment with us on April 21, 2008, (2) Charles A. Carroll, our former chief executive officer who retired as president and chief executive officer effective April 21, 2008, and who will resign his position as Chairman of our Board of Directors and our Parent’s Board effective immediately after the filing of this annual report on
Form 10-K, (3) Lawrence M. Blackburn, our current chief financial officer and (4)(3) Ben D. Campbell, Donald R. King and William L. Topper, who were our three other most highly compensated executive officers who were serving as executive officers at the endas of December 31, 2008.2009.

Following the consummation of the Merger,2008 Acquisition, a new Compensation Committee of Chill Holdings, Inc., our Parent (the “Compensation Committee”), was established, consisting of Erik D. Ragatz and Robert B. Henske. None of our executive officers has served as a member of our Compensation Committee (or other committee serving an equivalent function) of any other entity whose executive officers served as a director of our company or member of our Compensation Committee.

For 2009, our Board of Directors, or the 2008 fiscal year, the Board,“Board,” together with the Compensation Committee, administered the Chill Holdings, Inc.Parent’s 2008 Stock Incentive Plan, (theor the “2008 Stock Incentive Plan”), and theour 2008 Annual Incentive Compensation Plan, (the “2008or the “Bonus Program.” Under the Bonus Program”).Program, the Board and the Compensation Committee adopt annual performance goals and bonus levels. The Board, together with the Compensation Committee, reviewed the performance of our executive officers and key employees and determined the compensation of our executive officers and other compensation arrangements. The Executive Vice President of Human Resources supported the Compensation Committee in its duties and, along with the president and chief executive officer, was delegated authority to fulfill certain administrative duties regarding the compensation programs. Our former chief executive officer provided recommendations to our Board and Compensation Committee and participated in discussions and evaluations regarding the compensation of the other NEOs.

Objectives of Compensation Programscompensation programs

In 2008,2009, we compensated our senior executives, including the NEOs, at levels we believed to be competitive within the HVAC industry and with similar durable goods manufacturing businesses of comparable revenue ranges. Our primary objective for executive compensation in 20082009 was to ensure our ability to continue to retain our senior level executives, as well as to attract, retain and motivate the management team required to lead the Companyus in achieving itsour vision and mission while supporting our core values in a highly competitive marketplace. Our business strategy depends to a significant degree upon our executive officers and key employees and their relationships with distributors. Therefore, we seek to retain our senior executives over the long-term and believe that continuity of management is in the best interests of our shareholders.stockholders.

We designedhave structured our executive compensation programs to provide a competitive base salary for our NEOs as well as to award performance-based cash incentives and long-term equity incentives. Our executive compensation for 20082009 was determined in conjunction with the Merger and with a view to each NEO’s past compensation levels as well as our future business strategy. The total compensation and benefits package provided to each of our NEOs in 20082009 was designed to be competitive and to exceed median market compensation for talented and experienced senior executives.

Compensation paid to Mr. Carroll,Swift, our former president and chief executive officer, was materially greater than the compensation paid to our other non-CEO NEOs to reflect the primary differences in the scope of job responsibilities and to include his role as Chairman of the Board. Compensation payable to Mr. Swift, our current president and chief executive officer, continues to be materially different from the compensation paid to our other non-CEO NEOs to reflect those same differences in the scope of job responsibilities, although Mr. Swift does not also serve in the capacity of Chairman.responsibilities. Our pay practices are reflective of competitive market data, which reflect

Index to Financial Statements

competitive pay practices found among companies in our specific industry as well as general industry (see “Competitive Analysis,” below). We did not engage an outside consultant in 20082009 to review our executive compensation program.

Compensation Philosophyphilosophy

Our overall compensation philosophy is to use straightforward compensation programs that offer appropriate incentives to our executives, while providing transparency to our shareholders.stockholders. In implementing this philosophy, we generally do not provide perquisites, personal benefits, defined benefit plans or supplemental plans for executives. For 2008,2009, our executive compensation emphasized cash and equity compensation, and consisted primarily of the following:

 

base salary to provide stable income to our NEOs during the fiscal year,

 

annual performance-based cash incentives under our Bonus Program that are tied to our profitability which bonus awards were granted under our 2008 Bonus Program, and

Index to Financial Statements

equity awards in the form of stock options which were granted in February 2008 (and for David Swift, our current chief executive officer, in April 2008) under the 2008 Stock Incentive Plan to provide retention benefits and long-term incentives to continue to build share price and shareholderstockholder value.

For 2008,2009, as for prior years, our Board and Compensation Committee emphasized a mix of base salary and cash incentives. Approximately forty49% of Mr. Swift’s target cash compensation and approximately 43% percent of eachother NEO’s target cash compensation for 20082009 was “at risk” incentive compensation that depended upon our profitability for the year. In addition, as noted above, option grants were made in February 2008 in connectionWe have structured our executive compensation programs with the closing of the Merger in orderperformance metrics designed to encourage the achievement of long-term business objectives that enhance shareholder value on a continuing basis.balanced and sustained corporate growth.

Competitive Analysisanalysis

For 2008,2009, Donald King, the Executive Vice-President of Human Resources, (“EVPor “EVP HR”), compiled executive compensation data from the Hewitt Associates Total Compensation Measurement Survey, (theor the “Survey”), to assist with the assessment of our compensation programs. This survey included data from approximately 400500 manufacturing service and financial services organizations. The Board and Compensation Committee reviewed the data compiled by the EVP HR from the Survey regarding executive compensation paid by companies against which we believe we compete for executive talent.

The compensation of each of the NEOs was compared againstto competitive market ranges derived from the compensation programs of companies participating in the Survey for executives with comparable positions and job responsibilities. The compensation components reviewed for each position were base salary, annual cash bonus and long-term incentives, both individually and in the aggregate. Although the Survey data was used as an important measure for determiningassessing competitive levels of compensation for our NEOs, we did not benchmark the compensation of our NEOs against the companies participating in the Survey. Rather, the Survey data was used as a guide, such that the Board and Compensation Committee exercised their discretion in setting both the individual compensation components and the total pay of each of our NEOs at levels that were commensurate with their specific positionpositions and job responsibilities, taking into account the need to retain and motivate our NEOs to achieve superior levels of performance. The compensation of our NEOs was set at levels that were above the 50th percentile (and in some cases above the 75th percentile) as compared to the companies participating in the Survey. These levels of compensation are, in our opinion, necessary to retain and incentivize our NEOs to continue to provide outstanding performance.

Compensation Programsprograms

Design of Compensation Programs.. Our compensation programs in 20082009 were designed to effectively retain our NEOs and continue to build the Companycompany in a stable management environment as well as to attract, retain and motivate highly talented individuals to lead the Companyus in achieving itsour vision and mission in a very competitive marketplace. Specifically,

Index to Financial Statements

base salary was designed at levels were set to attract, retain and motivate employees capable of managing our operations, following the Merger,

 

annual cash incentives based on pre-determined performance targets were designed to reward execution of our strategy and achievement of profitability objectives, and

 

equity awards in the form of stock options (which were granted in connection with the Merger under our new 2008 Plan)2008) were designedgranted to provide additional retention benefits and long-term incentives to build shareholderstockholder value.

Impact of Performance on CompensationCompensation.. Approximately 40%49% of eachMr. Swift’s target cash compensation and approximately 43% percent of other NEO’s target cash compensation in 20082009 was “at risk” and depended on our performance. On March 12, 2008,13, 2009, the Board adopted performance goals and bonus levels for 2009 under our 2008 Bonus Program. Under the 2008 Bonus Program, each NEO’s annual cash incentives were tied to pre-established EBITDA targets which were designed to emphasize profitability. The EBITDA targets provided incentives to increase revenues and also to control costs, to the degree that costs were within the control of the executive officers. As discussed in greater detail below under the heading “Annual Cash Incentive and Description of Performance Metrics,” cash incentive compensation earned by the NEOs in 20082009 was at the target“excellence” level established under the 2008 Bonus Program, based on the level of our consolidated EBITDA for the year.

With respect to equity-based incentive awards, any increase in our value as a result of the efforts of the NEOs to improve our performance also increased the value of the NEOs’ stock options, and therefore rewarded the NEOs for contributing to shareholderstockholder value. Additionally, 40% of the stock options granted to our NEOs (except Mr. Carroll)NEO’s in 2008 were subject to performance-based vesting criteria. No stock options were granted to our NEO’s in 2009.

Index to Financial Statements

Elements of Compensationcompensation

As discussed above, compensation paid or awarded to our NEOs during 20082009 included base salary and an annual cash incentive award, and stock options, each as further described below.

Base salary of the NEOs

The base salary component of our compensation was designed to provide the executives with a stable income and to attract and retain talented and experienced executives capable of managing our operations and strategic growth.

In connection with the Merger,2008 Acquisition, all of our NEOs (except Mr. Swift), as well as other of our executive officers, negotiated new employment arrangements with our controlling stockholders, which became effective on February 13, 2008, upon the closing of the Merger.2008 Acquisition. Pursuant to those arrangements, the salariessalary and the executive positionsposition of each of our NEOs remained unchanged at that time, as they were viewed to be at competitive levels. The base salary for Mr. Swift was negotiated in connection with his employment agreement entered into effective as of April 21, 2008. Mr. Swift’s base salary was set at a level determined to be competitive for his position and level of responsibility and necessary to induce him to serve as our president and chief executive officer.

Following the review by the Board and the Compensation Committee of the recommendations of our EVP HR, in March 2008, the Board approved an annual increase in base salary of approximately 3.9% for each of Messrs. Blackburn, Campbell, King and Topper, effective as of April 1, 2008. The increase was implemented in order to maintain the base salaries of our NEOs within the 50th50th to 75th75th percentile of comparable compensation offered by the surveyed companies in the Hewitt Associates Total Compensation Management Survey. However, no increaseIn light of the uncertain and challenging macroeconomic environment in early 2009, the Board decided not to approve merit increases to the base salaries of our NEOs and other salaried employees until economic conditions clarified. In light of Company performance and improvements in economic conditions during the course of 2009, in October 2009 the Board approved a one-time lump-sum performance and merit-based payment to the executive officers and certain other exempt and non-exempt employees who had not theretofore received 2009 merit increases. The payment was approvedequal to approximately 2.5% of salary for Mr. Carroll because of his more limited role with us on a going forward basis.the months April through December.

Annual Cash Incentivecash incentive and Descriptiondescription of Performance Metricsperformance metrics

Cash Incentive Awards. Approximately forty percent75% of each NEO’s cash compensation for 2009 was paid as a cash incentive award under the 2008 Bonus Program and depended upon our profitability, as measured by consolidated EBITDA for the 20082009 fiscal year (see “Performance Metrics,”Metrics” below). The bonus payment was “at risk” and was designed to reward the executives for reaching pre-established levels of profitability. Awards were structured to be paid based on the company achieving threshold, target, target plus, superior, excellence or excellence plus levels for consolidated EBITDA, which comprised 93.1%91.4%, 100%100.0%, 106.9%, 110.3%, 113.8% and 117.2% of the target,

Index to Financial Statements

respectively, as set forth in the table below. We set the consolidated EBITDA goals at levels that reflected our internal business plan at the time the awards were established. The consolidated EBITDA target level for our cash incentive awards was set at $290 million for 20082009 and required a challenging but achievable level of financial performance. The highest specified level, excellence plus (at consolidated EBITDA of $340 million for 2008)2009), represented truly exceptional performance beyond reasonably likely levels of achievement, and we have never achieved this level of performance. Historically, we have generally achieved performance between the target and target plus levels.

Pursuant

Index to their bonus award agreements, each of our NEOs agreed that the maximum payout available for the 2008 year would not exceed the payout available at the superior level of performance under the 2008 Bonus Program in return for the Board lowering the initially projected consolidated EBITDA target reflected in their employment and severance agreements, as applicable, from $300 million to $290 million. The revised target reflected a recognition of the continuing weakness in the overall macro-economic environment, including a slower rate of growth in new housing starts than previously anticipated at the time their agreements were negotiated.

Financial Statements

In setting the range of bonus awards to our NEOs, we considered the potential bonuses available for comparable positions based on the subset of the Survey data discussed above (see “Competitive Analysis”) and the total compensation payable for such comparable positions, including other elements of compensation and perquisites provided for such comparable positions, using the 75th75th percentile as a guideline, as well as internal equity differentiation based on the scope and complexity of each position. The range of payouts was based on a multiple of each NEO’s base salary for the 20082009 fiscal year. The range of payouts in dollars, assuming consolidated EBITDA goals were met at threshold, target and superiorexcellence levels for 2008,2009, is indicated in the Grants of Plan-Based Awards Table, reflecting that for 2008, all ofin 2009 Table. NEO bonuses with respect to 2009 under the NEOs agreed thatBonus Program were capped at the payout for the 2008 fiscal year would not exceed the amount payable for achieving the superior level of performance of consolidated EBITDA of $320 million, even if actual financial performance were to have exceeded $320 million.excellence level. The table below summarizes the range of bonus opportunities for 20082009 for our NEOs as a percentage of base salary, based on the level of achievement of the consolidated EBITDA target of $290 million:

 

   Threshold
Level
  Target
Level
  Target
Plus Level
  Superior
Level
  Excellence
Level
  Excellence
Plus Level
 
         As a percentage of consolidated EBITDA target  (in millions) 
   93.1%  100.0%  106.9%  110.3%  113.8%  117.2%
  $270  $290  $310  $320  $330  $340 
   Bonus opportunity as a percentage of base salary 

NEO

       

David L. Swift (1)

   35.6%  95.0%  154.4%  255.4%  255.4%  255.4%

Lawrence M. Blackburn

   25.0   75.0   125.0   212.5   212.5   212.5 

Ben D. Campbell

   25.0   75.0   125.0   212.5   212.5   212.5 

Donald R. King

   25.0   75.0   125.0   212.5   212.5   212.5 

William L. Topper

   25.0   75.0   125.0   212.5   212.5   212.5 

Charles A. Carroll (2)

   37.5   100.0   162.5   268.8   268.8   268.8 

(1)The amount of the bonus payable was pro-rated from April 21, 2008, the effective date of Mr. Swift’s employment with us, through December 31, 2008, on the basis of the amount of base salary actually earned during the 2008 fiscal year.

(2)The amount of the bonus payable was pro-rated through April 21, 2008, the effective date of Mr. Carroll’s retirement as our and our Parent’s president and chief executive officer, on the basis of the amount of base salary actually earned during the 2008 fiscal year.
   Threshold
level
  Target
level
  Target
plus level
  Superior
level
  Excellence
level
  Excellence
plus level
 
   As a percentage of consolidated EBITDA target 
   91.4  100.0  106.9  110.3  113.8  117.2

(Dollars in millions)

  $265   $290   $310   $320   $330   $340  
   Bonus opportunity as a percentage of base salary 

NEO

       

David L. Swift

   35.6  95.0  154.4  255.4  356.3  356.3

Lawrence M. Blackburn

   25.0    75.0    125.0    212.5    300.0    300.0  

Ben D. Campbell

   25.0    75.0    125.0    212.5    300.0    300.0  

Donald R. King

   25.0    75.0    125.0    212.5    300.0    300.0  

William L. Topper

   25.0    75.0    125.0    212.5    300.0    300.0  

Bonus opportunities for our president and chief executive officer were materially different from the opportunities for our other NEOs to reflect the primary differences in the scope of job responsibilities, overall ability to achieve our business objectives, strategic impact of the position and expected future contributions. In addition, the bonus opportunities of Mr. Carroll, our former president and chief executive officer, were intended to reflect his additional role as Chairman of the Board. As noted above, these pay practices are reflective of competitive market data, which reflects competitive pay practices found among companies in our specific industry as well as general industry.

In 2008,2009, we achieved consolidated EBITDA of $290$330.1 million, which was targetthe excellence level of consolidated EBITDA for the 20082009 fiscal year. As a result, Mr. Swift was awarded a bonus of 95%equal to 356.3% of his base salary earned in 2008,2009, or $626,736, Mr. Carroll was awarded a bonus of 100% of his base salary earned in 2008 as our president and

Index to Financial Statements

chief executive officer, or $328,136,$3,285,277, Mr. Blackburn was awarded a bonus of 75%equal to 300.0% of his base salary, or $344,888,$1,392,600, and our other NEOs were likewise awarded a bonus equal to 75%300.0% of their base salaries, or $286,535, $278,945$1,157,013, $1,126,353 and $252,019,$1,017,600, respectively, for each of Messrs. Topper, Campbell and King.

Performance MetricsMetrics.. The primary financial metric used under our performance-based annual and long-term incentive programs is consolidated EBITDA. Consolidated EBITDA as used in our executive compensation programs in 20082009 was equal to consolidated net income before interest, taxes, depreciation and amortization as reflected in our audited consolidated financial statements for such period, consistent with the definition of consolidated EBITDA in our credit arrangements, subject to certain adjustments, including adjustments for projected cost savings and stock-based compensation expense and certain other pro-formapro forma adjustments. Consolidated EBITDA as defined for this purpose is different from the definitions of consolidated EBITDA used in the indentures governing our senior subordinated notes or Parent’s 11.5% senior discount notes due 2014.

The performance metrics established by our Board and Compensation Committee are based upon assumptions about the future business of our company as of the date the goal is established. The annual cash incentive plan provides that, in the event that after the date the performance metrics are fixed, the Compensation Committee determines, after consultation with our president and chief executive officer, that any acquisition or disposition or any unusual event, unusual or nonrecurring transaction or certain other extraordinary events affecting our company occur, such that an adjustment is determined by the Compensation Committee to be appropriate in order to prevent diminution or enlargement of benefits, then the Compensation Committee may adjust the performance metrics to reflect the projected effect of such transactions or events. Except as required by applicable law, there is no policy that would allow us or our Parent to recover awards or payments paid if the company performance metrics upon which they are based are restated or otherwise adjusted in a manner that would reduce the size of an award or payment.

Index to Financial Statements

Discretionary BonusesBonuses.. In addition, our Parent’s chief executive officer has the discretion to pay to some or all of the participants in the cash bonus plan (other than himself), for a calendar year, incentive compensation in an aggregate amount not to exceed $750,000, without regard to consolidated EBITDA for such year and to allocate the amount of such incentive compensation among the participants and employees who do not formally participate in the cash bonus plan, as the chief executive officer determines in his discretion. In 2008,2009, none of our NEOs received any portion of the discretionary $750,000 bonus pool.

Long-Term Incentives—Long-term incentives—Stock Optionsoptions

Option Acceleration in Connection with the Merger. All of the outstanding time-vesting options granted prior to the Merger automatically accelerated in full upon the closing of the Merger; additionally, our Board exercised its discretion to accelerate the remaining unvested performance-vesting options. Other than options that were subject to option rollover agreements (see “Equity Contribution Agreements,” below), all of the options outstanding at the time of the Merger were canceled and converted into the right to receive an amount in cash, less applicable tax withholding and without interest, equal to the product of (x) the number of shares of our common stock subject to each option as of the effective time of the Merger multiplied by (y) the excess of the Merger consideration over the exercise price per share of common stock under such option.

New Option Grants Made in Connection with the Merger. On February 13, 2008, Parent’sthe Board of Parent adopted a new equity incentive plan to replace our two pre-existing equity incentive plans, as described in greater detail below under “New Equitythe 2008 Stock Incentive Plan. At that time, weParent granted new time-vesting and performance-vesting options to alleach of our then current NEOs, except for Mr. Carroll who received time-vesting options only in light of the nature of his ongoing relationship with us, since he was expected to serve as our presidentMessrs. Blackburn, Campbell, King and chief executive officer only until a replacement was found. Additionally,Topper. On April 21, 2008, Mr. Swift was granted time-vesting and performance-vesting options on April 21, 2008of Parent in connection with the commencement of his employment with us (see “New Equity Incentive Plan,” below) at a level that reflected the scope and nature of his responsibilities as our president and chief executive officer. All of such options granted to our NEOs in 2008 under the new equity incentive plan had an exercise price of $10.00 per share, which was equal to the price at which our currentParent’s stockholders subscribed for common stock of Parent at closing.the closing of the 2008 Acquisition.

Index to Financial Statements

Severance and Changechange in Control Benefitscontrol benefits

We have entered into executive arrangements, pursuant to employment and severance agreements, with certain key executives, including the NEOs, providing for severance benefits, as described in further detail below. The severance and change in control benefits are designed to provide economic protection to our key executives so that they can remain focused on our business without undue personal concern in the event that an executive’s position is eliminated or significantly altered by the company, including in connection with a change in control of our company. We recognize that circumstances may arise in which we may consider eliminating certain key positions that are no longer necessary or a change in control transaction may occur. These benefits are intended to provide the security needed for the executives to remain focused and reduce the distraction regarding personal concerns during a transition. The level of severance benefits for our president and chief executive officer and our chief financial officer is generally twice that payable to our other current NEOs to reflect the level of seniority, responsibility and strategic impact of those positions, as well as the greater potential impact for us in losing the services of our top two executive officers.

In the event of a change in control transaction, all outstanding unvested options held by our NEOs will automatically accelerate and become exercisable. This provision preserves our NEO’sthe equity stake of each of our NEOs in the event of a change in control and assists in aligning their interests with those of our majority shareholder.stockholder. In addition, in the event that any payment or benefit to be received in connection with a change in control transaction under the employment or severance agreements entered into with our NEOs will trigger the imposition of excise tax under Section 4999 of the Internal Revenue Code of 1986, as amended, (the “Code”)or the “Internal Revenue Code”, then all payments will be reduced to the extent necessary so that the excise tax will not be imposed unless the amount of such reduction would equal or exceed 110% of the excise tax that would be imposed on such amounts. This provision imposes a potential cut-back on change in control payments to be received by our NEOs where the benefit of avoiding the excise tax and associated costs to us overrides the benefit of paying our NEOs the full amount of the benefits they would otherwise be entitled to receive in connection with a change in control transaction.

Personal Benefitsbenefits and Perquisitesperquisites

None of our NEOs with the exception of Mr. Swift, received any perquisites or personal benefits in 20082009 other than those broadly available to all employees. As a general matter, we emphasize cash compensation and equity compensation, and therefore perquisites and personal benefits constituted an immaterial portion of each NEO’s total compensation, except for Mr. Swift who received an aggregate of $1,064,083 in 2008 for various expenses incurred in connection with the commencement of his employment with us and his relocation to Houston, Texas, which perquisites were negotiated as part of his new employment arrangement with us (see “Executive Compensation—New Employment Agreement”).

Historical Employment Agreementscompensation.

Employment Agreements. Through the closing of the Merger, we had employment agreements in place with Messrs. Carroll and Blackburn. The employment agreements each had an initial term of three years, with automatic extensions of one year each unless notice was given by either party at least 180 days prior to expiration.

The employment agreements provided for the payment of an annual base salary for Mr. Carroll and Mr. Blackburn, and for annual target bonuses that were payable in the event that certain financial and other performance targets were met.

Under the agreements, the executives were each granted a non-qualified stock option under the 2004 Stock Option Plan to purchase shares of our common stock.

As amended in 2006, each of the employment agreements provided that the executive would receive an amount equal to two times base salary and annual target bonus following the executive’s termination of employment under certain circumstances, as well as a pro-rated annual bonus for the year of termination.

Index to Financial Statements

Each of the employment agreements also contained restrictive covenants providing that the executive would be subject to certain non-competition and non-solicitation restrictions for two years following the executive’s termination of employment.

Additionally, Mr. Carroll’s employment agreement, as amended, provided that, following Mr. Carroll’s termination of employment under certain circumstances, Mr. Carroll and his eligible dependents would receive continued group health benefits until Mr. Carroll reached age 65, or the qualifying age under Medicare, if later.

Severance Agreements. Through the closing of the Merger, we had severance agreements with several of our executive officers, including Ben D. Campbell, Donald R. King and William L. Topper.

The severance agreements generally had an initial term of two years with automatic extensions of one year each unless notice was given by either party at least 90 days prior to expiration of the term.

As amended in 2006, each severance agreement provided for the payment of one times base salary plus an annual target bonus following the executive’s termination of employment under certain circumstances.

Non-Competition Agreements. Through the closing of the Merger, we had non-competition agreements with a number of our executive officers, including Ben D. Campbell, Donald R. King and William L. Topper. These non-competition agreements provided that each executive would be subject to certain non-solicitation and non-competition restrictions for a period of two years following the executive’s termination of employment.

Transaction Bonus and Equity Rollover Incentivearrangements

Upon the consummation of the Merger, certain members of senior management received transaction bonuses equal to 75% of their current base salary, totaling more than $3,202,110 in the aggregate. The transaction bonuses paid to our named executive officers are set forth in the table below. In addition, certain members of senior management were given a “rollover” incentive bonus payment equal to 100% of their then current base salary, totaling not more than $4,269,480 in the aggregate. The rollover incentive bonuses paid to our NEOs in connection with the consummation of the Merger are set forth in the table below.

   Transaction Bonus Paid
Upon Consummation of
the Merger
  Equity Rollover Incentive
Paid Upon Consummation
of the Merger

Executive Officers:

    

Charles A. Carroll

  $805,425  $1,073,900

Lawrence M. Blackburn

   335,100   446,800

Ben D. Campbell

   271,013   361,350

Donald R. King

   244,875   326,500

William L. Topper

   278,378   371,170

New Employment and Severance Arrangements

Upon the consummation of the Merger,2008 Acquisition, we entered into newan employment agreementsagreement with Messrs. Carroll andMr. Blackburn and new severance agreements with all our executive officers, including Ben D.Messrs. Campbell, Donald R. King and William L. Topper. In general, the agreements provided for substantially similar levels of base salary and bonus opportunities, and similar severance provisions as compared with the employment and severance agreements in effect prior to the closing of the Merger.

We also entered into a newan employment agreement with David L.Mr. Swift, effective as of April 21, 2008, to serve as our Presidentpresident and Chief Executive Officer.chief executive officer. The specific terms of the new agreements are set forth below under “Executive Compensation—New Employment Agreements”“Narrative to the Summary Compensation Table and “Executive Compensation—New Severance Agreements,Grants of Plan-Based Awards in 2009 Table. respectively.

Index to Financial Statements

Equity Contributioncontribution and Share Subscription Agreementsshare subscription agreements

Prior to the closing of the Merger, Parent2008 Acquisition, we entered into equity contribution agreements with each of our named executive officers.officers, other than Mr. Swift. Pursuant to the terms of these agreements, each executive committed to acquire shares of common stock of our ParentGoodman Global Group, Inc. at closing, by either transferring the number of shares of Goodman Global, Inc. common stock having a value equal to an agreed upon amount ($10,000,000 in the case of Mr. Carroll, $8,771,0008,771,000 in the case of Mr. Blackburn, $3,736,000 in the case of Mr. Campbell, $3,687,000 in the case of Mr. King and $2,405,000 in the case of Mr. Topper, and $3,687,000 in the case of Mr. King)Topper) or using cash proceeds from the transaction equal to 90% of such agreed upon amount. At closing, each of the executives purchased that number of shares of ParentGoodman Global Group, Inc. stock with the values indicated below by contributing an equivalent value in shares of Goodman Global, Inc. stock at $25.60 per share, which was the price other stockholders were paid per share of Goodman Global, Inc. common stock in the Merger.2008 Acquisition.

 

  Value of shares rolled

Executive

  Value of Shares Rolled  

Charles A. Carroll

  $10,000,000

Lawrence M. Blackburn

   8,718,208  $8,718,208

Ben D. Campbell

   3,736,000   3,736,000

Donald R. King

   3,687,000   3,687,000

William L. Topper

   2,405,000   2,405,000

The shares so acquired by each of our NEOsexecutives are subject to the terms and conditions of the Management Stockholders Agreement, described under the section entitled “Certain Relationships and Related Party Transactions—Transactions, and Director Independence—Agreements related to the 2008 Acquisition—Management Stockholders Agreement.stockholders agreement.” To the extent that an executive did not own a sufficient number of shares to cover his committed amount, each of the equity contribution agreements also provided that the executive would be able to satisfy such shortfall by rolling over options to acquire shares of our common stock into options to acquire shares of common stock of Parent.Goodman Global Group, Inc. As Mr. Blackburn did not have a sufficient number of shares to cover his committed amount, he entered into an option rollover agreement with ParentGoodman Global Group, Inc. at closing, pursuant to which he rolled over an option to acquire shares of our common stock having an intrinsic value of approximately $53,000 (i.e., the excess of the value of the shares subject to the option over the aggregate exercise price for such shares), into an option to acquire shares of ParentGoodman Global Group, Inc. common stock having substantially the same intrinsic value. The exercise price for each rollover option was set at $2.07 per share, such that Mr. Blackburn received an option over 6,659 shares of ParentGoodman Global Group, Inc. common stock. TheThese rollover options, which became vested in full at closing, are generally subject to the same terms and conditions under which they were originally granted; however, any shares acquired pursuant to the exercise of such options will be subject to the terms of the Management Stockholders Agreement.

In connection with the execution of his employment agreement, Mr. Swift agreed to subscribe for shares of Parent’sGoodman Global Group, Inc.’s common stock having an aggregate value equal to $1,000,000. Effective as of December 22, 2008, Mr. Swift entered into a share subscription agreement with ParentGoodman Global Group, Inc. to purchase 99,900.10 shares of Parent’sGoodman Global Group, Inc.’s common stock for an aggregate purchase price of $1,000,000, or $10.01 per share. The shares so purchased are subject to the terms and conditions of the Management Stockholders Agreement.

New Equity2008 Stock Incentive Plan

The following is a summary of the material terms and conditions of the 2008 Stock Incentive Plan. This summary is qualified in its entirety by reference to the terms of the 2008 Plan.Stock Incentive Plan, filed as exhibit 10.10 to Goodman Global, Inc.’s Amendment No. 1 to the Registration Statement on Form S-4, filed with the SEC on May 30, 2008. Awards under the 2008 Stock Incentive Plan may be in the form of stock options (either incentive stock options or non-qualified stock options) or other stock-based awards, including restricted stock purchase awards, restricted stock units and stock appreciation rights. The 2008 Stock Incentive Plan, unless sooner terminated by Parent’sthe Board, will remain in effect through the tenth anniversary of its adoption.

TheAs of the date of this Report on Form 10-K, the maximum number of shares of Goodman Global Group, Inc. reserved for the grant or settlement of awards under the 2008 Stock Incentive Plan is 6,734,9236,834,923 shares, of Parent, subject to adjustment in the event of an extraordinary dividend or other distribution, recapitalization, stock split, reorganization, merger, consolidation, spin-off, combination, repurchase or share exchange or other similar

Index to Financial Statements

corporate transaction. In the event of a change in control, the Compensation Committee

Index to Financial Statements

will have the discretion to accelerate all outstanding awards, cancel awards for fair value, provide for the issuance of substitute awards and/or provide award holders an opportunity to exercise their awards prior to the occurrence of the change in control transaction. Subject to certain conditions, all options granted in 2008 under the 2008 Stock Incentive Plan will become fully vested and exercisable in the event of a “change in control” of Parent.

In connection with the consummation of the Merger, we granted options under the 2008 Plan to our then current NEOs at a strike price equal to $10 per share, which was the subscription price for each share of Parent common stock paid by our current controlling stockholders at closing. Options granted under the 2008 Plan to our NEOs have generally consisted of both time-vesting and performance-vesting options, except that only time-vesting options were granted to Mr. Carroll, as described above (see “Long-Term Incentives—Stock Options”). We also granted time-vesting and performance-vesting options with a strike price of $10 per share to David Swift, our current president and chief executive officer, at the time he commenced employment with us.Goodman Global Group, Inc.

To the extent vested, options are generally exercisable for a period of 90 days following termination of employment, except in the case of death or disability where the period of exercisability is extended to 12 months after either such termination. Under the terms of the option grant agreements, both time-vesting and performance-vesting options will accelerate in full upon the occurrence of a change in control transaction. All of the options have a 10-year term and may be exercised by way of a “cashless exercise” unless such exercise would result in adverse accounting treatment or would be prohibited by the terms of applicable financing arrangements.

The following non-qualified (i.e., non-statutory) option grants were made to our NEOs on February 13, 2008, with the exception of Mr. Swift whose option grant was made on April 21, 2008, in connection with the commencement of his employment with us:

 

  Time-vesting
options
  Performance-vesting
options

Named Executive Officer

  Time-vesting Options  Performance-vesting Options    

David L. Swift

  1,010,239  673,492  1,010,239  673,492

Charles A. Carroll

  431,035  —  

Lawrence M. Blackburn

  581,897  387,932  581,897  387,932

Ben D. Campbell

  202,048  134,698  202,048  134,698

Donald R. King

  202,048  134,698  202,048  134,698

William L. Topper

  202,048  134,698  202,048  134,698

The consolidated EBITDA targets for the performance-vesting options were established in a similar manner as described above under the heading “Annual Cash Incentive and Description of Performance Metrics—Performance Metrics,” and are based on “Consolidated EBITDA” as such term is defined under our credit agreements, subject to certain adjustments for projected cost savings and stock-based compensation expenses and certain other pro-forma adjustments. Consolidated EBITDA as defined for this purpose is different from the definitions of consolidated EBITDA used in the indentures governing our senior subordinated notes or Parent’s 11.500% senior discount notes due 2014. The consolidated EBITDA targets were established based on our operating business plan over a period of five years and were designed to represent a challenging but achievable level of performance. In the event that a performance target is missed in a given fiscal year, but the performance target for the following fiscal year is achieved, the tranche of performance-vesting options that did not vest during the preceding fiscal year will also become vested. The performance targets are subject to adjustment under certain circumstances such as corporate acquisitions and divestitures. In 2008,2009, we achieved consolidated EBITDA of $290$330.1 million, which was belowexceeded the threshold of $300$290 million necessary to vest the firstsecond 20% tranche of the performance-vesting options granted to our NEOs. Induring 2008. This threshold was amended by the Board and the Compensation Committee in March 2009 from approximately $346 million in light of the difficult business climate duringdeterioration in the 2008 fiscal year, including the deteriorating economic condition of the housing marketmacroeconomic environment and overall global recession our financial performanceafter February 2008, when the original threshold was not as robust asset.

The first 20% tranche of such performance-vesting options had been originally projected atpreviously vested, by joint action of the beginning of 2008. As part of its review of executive performance for 2008,Board and the Compensation Committee, determinedfollowing determination by the Compensation Committee that, even though 2008 financial performance had not met the performance-vesting threshold for the first tranche, our NEOs’ contribution to our profitability in 2008 was exceptional, notwithstanding the very challenging economic climate, and for this reason decided to vest the first tranche of the performance-vesting options which is equal to 20% of the performance-vesting options granted to our NEOs in 2008.climate. All other employees who were granted performance-vesting options were also vested in the first tranche of their options in the same manner as our NEOs.

In 2009, our Parent paid a cash dividend to its stockholders, including the NEOs, of approximately $3.15 per outstanding share. Because Parent’s Board of Directors determined that the dividend was an extraordinary dividend, the board was required to make an equitable adjustment to outstanding options under the terms of the 2008 Stock Incentive Plan. Accordingly, Parent paid a distribution to its optionholders, including the NEOs, of approximately $3.15 per outstanding option, and did not make any other adjustments to the terms of outstanding options. The distribution to optionholders was paid contemporaneously in the case of vested options; the distribution on unvested options will be paid as the options vest.

Index to Financial Statements

ImpactDeductibility of Tax and Accounting Rulesexecutive compensation/Internal Revenue Code Section 162(m)

Section 162(m).Internal Revenue Code Section 162(m) (as interpreted by IRS Notice 2007-49) denies a federal income tax deduction for certain compensation in excess of $1 million per year paid to the Code placeschief executive officer and the three other most highly-paid executive officers (other than the company’s chief executive officer and chief financial officer) of a limit of $1,000,000 on the amountpublicly-traded corporation. Certain types of compensation, including compensation based on performance criteria that may be deductedare approved in advance by us in any year with respect tostockholders, are excluded from the NEOs unless the compensation is performance-based compensation as described in Section 162(m) and the related regulations, as well as pursuant to a plan approved by our stockholders. Cash incentives paid with respect to 2008 were fully deductible for purposes of 162(m). In addition, followingdeduction limit. Following the consummation of the Merger,2008 Acquisition, we ceased to be subject to Section 162(m) because we no longer have any class of equity securities that is required to be registered under Section 12 of the Securities Exchange Act of 1934.

FAS 123(R). Options granted in 2008 resulted in compensation expense to us under FAS 123(R).

COMPENSATION COMMITTEE REPORT

The Compensation Committee of Parent’s Board of Directors has reviewed and discussed the Compensation Discussion and Analysis with management. Based upon such review, the related discussions and such other matters deemed relevant and appropriate by the Compensation Committee, the Compensation Committee has recommended to the Board of Directors that the Compensation Discussion and Analysis be included in this annual report.

 

Members of the Compensation Committee of Parent’s Board of Directors:
Robert B. Henske (Chairman)
Erik Ragatz

March 12, 200911, 2010

Index to Financial Statements

Summary Compensation TableSummary compensation table

The following tables set forth the aggregate compensation during 20082009 awarded to, earned by, or paid to both our current and former president and chief executive officer, theour chief financial officer and our three other most highly compensated executive officers other than the chief executive officers and the chief financial officer who were serving as executive officers at the end of the last completed fiscal year.

 

Name and Principal Position

  Year  Salary ($)  Bonus  Option
Awards ($) (3)
  Non-Equity
Incentive Plan
Compensation
($) (4)
  All Other
Compensation
  Total ($)

David L. Swift
President and Chief Executive Officer

  2008  $659,722(1) $1,490,000(2) $1,104,846  $626,736  $1,064,083(11) $4,945,387

Charles A. Carroll
Former President and
Chief Executive Officer (5)

  2008
2007
2006
   

 
 

451,717

1,064,084
1,004,166

(6)

 
 

  

 

 

—  

—  

—  

 

 

 

  
 
 
599,182
963,419
799,319
   
 
 
328,136
2,306,008
1,347,591
   

 

 

—  

—  

—  

 

 

 

  
 
 
1,379,035
4,333,511
3,151,076

Lawrence M. Blackburn
Executive Vice President
and Chief Financial Officer

  2008
2007
2006
   

 
 

459,850

443,106
426,900

(7)

 
 

  

 

 

—  

—  

—  

 

 

 

  
 
 
704,332
523,514
477,707
   
 
 
344,888
751,608
436,955
   

 

 

—  

—  

—  

 

 

 

  
 
 
1,509,070
1,718,228
1,341,562

Ben D. Campbell
Executive Vice President,
Secretary and General Counsel

  2008
2007
2006
   

 
 

371,926

358,399
346,152

(8)

 
 

  

 

 

—  

—  

—  

 

 

 

  
 
 
244,559
204,898
185,252
   
 
 
278,945
607,873
354,358
   

 

 

—  

—  

—  

 

 

 

  
 
 
895,430
1,171,170
885,762

Donald R. King
Executive Vice President, Human Resources

  2008
2007
2006
   

 
 

336,025

323,800
311,927

(9)

 
 

  

 

 

—  

—  

—  

 

 

 

  
 
 
244,559
204,898
185,252
   
 
 
252,019
549,246
319,287
   

 

 

—  

—  

—  

 

 

 

  
 
 
832,603
1,077,944
816,466

William L. Topper
Senior Vice President,
Operations

  2008
2007
2006
   

 
 

382,046

368,102
355,650

(10)

 
 

  

 

 

—  

—  

—  

 

 

 

  
 
 
244,559
133,196
110,209
   
 
 
286,535
624,395
364,044
   

 

 

—  

—  

—  

 

 

 

  
 
 
913,140
1,125,693
829,903

Name and principal position

  Year  Salary  Bonus
(1)
  Option
awards

(2)
  Non-equity
incentive plan
compensation
(3)
  All other
compensation
  Total

David L. Swift

  2009  $950,000  $17,813  $—    $3,385,277  $—    $4,353,090

President and Chief Executive Officer

  2008   659,722   1,490,000   5,744,604   626,736   1,064,083   9,585,145

Lawrence M. Blackburn

  2009   464,200   8,704   —     1,392,600   —     1,865,504

Executive Vice President and Chief Financial Officer

  2008   459,850   —     3,329,445   344,888   —     4,134,183
  2007   443,106   —     711,000   751,608   —     1,905,714

Ben D. Campbell

  2009   375,450   7,040   —     1,126,353   —     1,508,843

Executive Vice President, Secretary and General Counsel

  2008   371,926   —     1,156,057   278,945   —     1,806,928
  2007   358,399   —     276,500   607,873   —     1,242,772

Donald R. King

  2009   339,200   6,360   —     1,017,600   —     1,363,160

Executive Vice President, Human Resources

  2008   336,025   —     1,156,057   252,019   —     1,744,101
  2007   323,800   —     276,500   549,246   —     1,149,546

William L. Topper

  2009   385,670   7,231   —     1,157,013   —     1,549,914

Senior Vice President, Operations

  2008   382,046   —     1,156,057   286,535   —     1,824,638
  2007   368,102   —     197,500   624,395   —     1,189,997

 

(1)PursuantBonuses granted in 2009 reflect a one-time lump-sum payment paid to all executive employees and all non-executive employees who would otherwise have received a raise in April 2009 equal to approximately 2.5% of salary for the terms of his employment agreement, Mr. Swift is entitled to an annualized base salary of $950,000. The amount indicated above reflects his pro-rated base salary frommonths April 21, 2008 through December 31, 2008.December. These payments were approved and paid in October 2009.

(2)Represents the sum of signing bonus and “stage 2 bonus” payments made to Mr. Swift pursuant to the terms of his employment agreement with us dated as of April 21, 2008.

(3)The amounts in this column reflect the expense recognized for financial statement reporting purposes foraggregate grant date fair value of option awards granted during the specified fiscal year ended December 31, 2008, in accordance with FAS 123(R), of outstanding stock options granted in 2008.as calculated pursuant to Financial Accounting Standards Board Accounting Standards Codification Topic 718,Compensation - Stock Compensation (ASC Topic 718). The assumptions used in calculating these amounts under FAS 123(R)ASC Topic 718 are set forth in Note 45 to our audited financial statements included in this
annual report on Form 10-K.

(4)(3)Amounts listed under the column “Non-Equity Incentive Plan Compensation” constitute annual incentive payments earned in 2008for 2009 and paid in November 2008October 2009 and March 2009.2010.

Grants of plan-based awards in 2009

(5)Charles Carroll retired as our president and chief executive officer effective April 21, 2008, the date on which our new president and chief executive officer, David L. Swift, commenced employment. Mr. Carroll remains as Chairman of our and our Parent’s Board of Directors.

 

(6)The executive’s annualized base salary was $1,073,900 until his retirement as our president and chief executive officer; thereafter, his base salary was reduced to $150,000 per year.

(7)The executive’s annualized base salary was $446,800 until April 1, 2008, when the base salary was increased to $464,200 per year.

(8)The executive’s annualized base salary was $361,350 until April 1, 2008 when the base salary was increased to $375,450 per year.

(9)The executive’s annualized base salary was $326,500 until April 1, 2008, when the base salary was increased to $339,200 per year.

(10)The executive’s annualized base salary was $371,171 until April 1, 2008, when the base salary was increased to $385,670 per year.

(11)For Mr. Swift, amount consists of $85,315 of relocation expenses for temporary housing and transportation of household goods, $15,194 reimbursement for legal fees and an aggregate of $963,574 of tax gross-up payments on account of the signing bonus and “stage 2 bonus” received by Mr. Swift.
   Estimated future payouts under non-equity
incentive plan awards

Name

  Threshold  Target  Maximum

David L.Swift

  $338,438  $902,500  $3,385,277

Lawrence M. Blackburn

   116,050   348,150   1,392,600

Ben D. Campbell

   93,863   281,588   1,126,353

Donald R. King

   84,800   254,400   1,017,600

William L. Topper

   96,418   289,253   1,157,013

Index to Financial Statements

GrantsAmounts earned for 2009 were at the excellence level of Plan-Based Awards for Fiscal Year 2008

   Estimated Possible Payouts Under
Non-Equity Incentive Plan Awards(1)
  Estimated
Future
Payouts
Under Equity
Incentive
Plan Awards
  All other
Option
Awards:
Number of
Securities
Underlying
Options
  Exercise
Price of
Options
Awards
  Grant Date
Fair Value
of Option
Awards
($)(4)

Name

  Option Grant
Date
  Threshold
($)
  Target
($)
  Maximum
($)
        

David L. Swift (2)

  April 21, 2008  $234,861  $626,736  $1,684,930  673,492  1,010,239  $10.00  $5,744,604

Charles A. Carroll (3)

  Feb. 13, 2008  $123,051  $328,136  $882,030  —    431,035  $10.00   1,518,719

Lawrence M. Blackburn

  Feb. 13, 2008  $114,963  $344,888  $977,181  387,932  581,897  $10.00   3,329,445

Ben D. Campbell

  Feb. 13, 2008  $92,982  $278,945  $790,343  134,698  202,048  $10.00   1,156,057

Donald R. King

  Feb. 13, 2008  $84,006  $252,019  $714,053  134,698  202,048  $10.00   1,156,057

William L. Topper

  Feb. 13, 2008  $95,512  $286,535  $811,848  134,698  202,048  $10.00   1,156,057

(1)Amounts earned for 2008 were at the target level of performance of $290performance of $330.1 million of consolidated EBITDA, as specified under the 2008 Bonus Program. Amounts shown in the table as Maximum payout reflect the superior level specified under the 2008 Bonus Program.

(2)Mr. Swift’s annual incentive award for 2008 was pro-rated based on the period from April 21, 2008 (the date he commenced employment with us) through December 31, 2008 on the basis of the amount of base salary earned during the 2008 fiscal year.

(3)Mr. Carroll’s annual incentive award for 2008 was pro-rated based on the period from January 1, 2008 through April 21, 2008, the date on which he retired as our president and chief executive officer, on the basis of the amount of base salary earned during the 2008 fiscal year in that capacity.

(4)In accordance with FAS 123(R), the amounts in this column reflect the aggregate grant date fair value of option awards granted in 2008, based on the assumptions set forth for financial statement reporting purposes for the year ended December 31, 2008, in Note 4 to our audited financial statements included in this Form 10-K.

As shown in the Summary Compensation Table, above,table as maximum payout reflect the primary elements of compensation ofexcellence level specified under the NEOs are cash in the form of base salary and incentive bonus. For 2008, amounts paid as performance-based cash compensation were less than base salary for all of our NEOs except Mr. Carroll whose bonus was equal to his base salary for the 2008 fiscal year in his capacity as our president and chief executive officer. The lower levels of cash bonuses earned by our NEOs in 2008, as compared with prior years, are generally reflective of the more difficult economic climate in which we have been operating.Bonus Program.

The amounts shown in the Grants of Plan-Based Awards Table in 2009 Table represent payouts at the threshold, target and the superiorexcellence levels for the annual cash incentives earned by the NEOs in 2008.2009. The potential payouts were performance-driven, based on achievement of pre-established consolidated EBITDA targets, and therefore completely at risk. If threshold levels of performance were not met, then the payout could have been zero. If our EBITDA performance exceeded the level corresponding to the highest specified payout (the superior level), it was also agreed that the Board would not award an amount greater than the highest specified payout. A portion of the annual incentive compensation for 20082009 was paid in November 20082009 and the remainder in March 2009,2010, and reflected the targetexcellence level of performance, or consolidated EBITDA of $290$330.1 million.

Outstanding EquityNarrative to the Summary Compensation Table and Grants of Plan-Based Awards at Fiscal Year-End 2008

   Option Awards

Name

  Number of Securities
Underlying
Unexercised Options
(#) Exercisable
  Number of Securities
Underlying
Unexercised Options
(#) Unexercisable(1)
  Equity Incentive Plan
Awards: Number of
Securities Underlying
Unexercised Unearned
Options (#)
  Option
Exercise
Price ($)
  Option
Expiration
Date

David L. Swift

  134,698  1,010,239(2) 538,794(1)(3) $10.00  4/21/18

Charles A. Carroll

  89,799  341,236(4) —    $10.00  2/13/18

Lawrence M. Blackburn

  6,659  —    —    $2.07  12/23/14
  77,586  581,897(5) 310,346(3) $10.00  2/13/18

Ben D. Campbell

  26,940  202,048(5) 107,758(3) $10.00  2/13/18

Donald R. King

  26,940  202,048(5) 107,758(3) $10.00  2/13/18

William L. Topper

  26,940  202,048(5) 107,758(3) $10.00  2/13/18

(1)In the event of a change in control, both the time-vesting options and the performance-vesting options shall, subject to certain conditions, accelerate and immediately become fully vested and exercisable immediately prior to the effective date of the change in control.

Index to Financial Statements
(2)The time-vesting option vests in four equal installments (of 25%) each) on April 21 of each calendar year 2009 through 2012, subject to Mr. Swift’s continuous service with us.

(3)The performance-vesting options will vest in five equal installments (of 20% each) of the shares covered by the option on December 31 of each calendar year 2008 through 2012, subject to the satisfaction of certain performance targets for each such year, and further subject to “catch-up” vesting in the event an EBITDA target is satisfied in the year following the year in which an EBITDA target is missed. In light of the current economic conditions and their impact on our financial performance, the Compensation Committee determined to vest 20% of the performance vesting options effective as of December 31, 2008, notwithstanding that the consolidated EBITDA performance target of $300 million was not satisfied.

(4)The first grant of 269,397 options vests in equal installments of 33-1/3% on June 30 of each of 2008, 2009 and 2010, provided that Mr. Carroll continues to provide services to us. The second time-vesting option grant of 161,638 will vest as to 25% of each of the first four anniversaries of February 13, 2008, so long as Mr. Carroll continues to serve as Chairman of our Board. The terms of this option were amended by letter agreement dated March 13, 2009, whereby the options will continue to vest following Mr. Carroll’s resignation from his position as Chairman of our and our Parent’s Boards so long as he continues to serve as a director of our Parent’s Board. See “Executive Compensation—New Employment Agreement—Charles Carroll,” below.

(5)The time-vesting options will vest as to 25% of the award on the first anniversary of the grant date of February 13, 2008, and on each of the following three anniversaries thereafter, subject to the optionholder’s provision of continued services.

Option Exercises

None of our NEOs exercised options in 2008.

New Employment Agreements2009 Table

Executive employment agreements

David L. Swift

Mr. Swift entered into an employment agreement with us, effective as of April 21, 2008, pursuant to which he commenced serving as our and our Parent’s president and chief executive officer, and as a member of our and our Parent’s Board of Directors. Mr. Swift’s employment agreement has an initial term of five years, which will renew for additional one-year periods unless either party provides notice of non-renewal at least 180 days prior to the end of the then-current term.

Salary and Bonus. The employment agreement provides that while employed as our president and chief executive officer, Mr. Swift will receive a base salary at the annual rate of $950,000, subject to annual review and adjustment, and will be eligible to earn an annual bonus in a target amount equal to 95% of his base salary, with a maximum bonus opportunity equal to 457.33% of his base salary. The employment agreement also required us to pay Mr. Swift an initial cash signing bonus of $850,000; we also paid Mr. Swift a tax gross-up payment equal to the federal income, state income and employment taxes imposed on the initial signing bonus, in the amount of $596,493. As Mr. Swift remained employed with us through the Stage 2 Date (as defined below), on November 6, 2008, we paid an additional cash bonus, of $640,000, plus a tax gross-up payment on such additional cash bonus in the amount of $367,081. Mr. Swift is also entitled to participate in our employee benefit plans on the same basis as those plans are generally made available to other similarly situated executives.

In the event that any payment or benefit to be received under the employment agreement will trigger the imposition of excise tax under Section 4999 of the Internal Revenue Code, then all payments will be reduced to the extent necessary so that the excise tax will not be imposed unless the amount of such reduction would equal or exceed 110% of the excise tax that would be imposed on such amounts.

Equity Participation. Mr. Swift’s equity participation in us, our Parent and any of their subsidiaries will beis pursuant to the 2008 Plan, described in the section entitled “Executive Compensation—New EquityStock Incentive Plan, option award agreements issued under the 2008 Stock Incentive Plan, the Management Stockholders Agreement described in the section above entitled “Management Stockholders Agreement,” and any contribution or subscription agreements relating to our or our Parent’s equity. On April 21, 2008, Mr. Swift and Parent entered into both a time-vesting stock option agreement and a performance-vesting stock option agreement.agreement with us. In addition, it was agreed that on the Stage 2 Date, Parent and Mr. Swift and Parent would enter into a share subscription agreement, providing that Mr. Swift shall purchase

Index to Financial Statements

that number of shares of our Parent’s common stock, par value $0.01 per share, having an aggregate value equal to $1,000,000, on the terms described in the share subscription agreement. Pursuant to a share subscription agreement dated as of December 22, 2008, Mr. Swift purchased 99,900.10 shares of Parent’s common stock at a purchase price of $10.01 per share.

The options granted to Mr. Swift are described under the heading “New Equity Incentive Plan,” above and are subject to the provisions of the 2008 Stock Incentive Plan, as well as the terms of the applicable award agreements. Pursuant to a performance-vesting stock option agreement, Mr. Swift was granted an option to purchase 673,492 shares at an exercise price of $10 per share, vesting in five equal installments (of 20% each) of the shares covered by the option on December 31 of each calendar year 2008 through 2012, subject to the satisfaction of certain performance targets for each such year. Pursuant to a time-vesting stock option agreement, Mr. Swift was granted an option to purchase 1,010,239 shares at an exercise price of $10 per share. The time-vesting option vests in four equal installments (of 25% each) on April 21 of each calendar year 2009 through 2012, subject to Mr. Swift’s continuous service with us. In the event of a change in control, both the time-vesting options and the performance-vesting options then outstanding shall accelerate and immediately become fully vested and exercisable immediately prior to the effective date of the change in control.

Index to Financial Statements

Relocation ArrangementsArrangements.. We agreed with Mr. Swift that an agent acting as a representative for us would purchase Mr. Swift’s residential property in St. Joseph, Michigan (the Property) for a purchase price of $1,150,000 and simultaneous with such purchase, the agent would enter into a lease agreement to lease the Property to Mr. Swift and his spouse. The Property was listed by the agent for sale. Our prior consent was required to accept any purchase offer, and Mr. Swift’s and our prior consent was required to accept any purchase offer for the Property received prior to July 31, 2008 for a price less than $1,700,000. The date of closing of the sale of the Property by the agent to an unaffiliated third party was the Stage 2 Date and the purchase price was the Stage 2 Price.

We also agreed with Mr. Swift that the purchase price paid for the Property would be calculated as the average of two third-party appraisals, and such amount represented the good faith belief of both Mr. Swift and us as to the fair market value of the Property. It was also agreed that to the extent that the Stage 2 Price was less than $1,000,000, Mr. Swift would indemnify us for the amount of such loss.

Pursuant to the employment agreement, we were required to pay or reimburse Mr. Swift for relocation costs incurred in connection with his permanent move to Houston, Texas, and for reasonable legal fees incurred in connection with the negotiation of the employment agreement. We reimbursed Mr. Swift for such expenses in an aggregate amount of $100,509.

Termination ArrangementsArrangements.. In the event that Mr. Swift is terminated by us without “cause,” or resigns for “good reason,” we will provide him with payments totaling two times his base salary, plus two times his target bonus, over the two-year period following such termination, as well as a pro-rated annual bonus for the year of termination, payable at the time such payment would have otherwise been paid under the bonus program. In the event that prior to April 21, 2009, Mr. Swift is terminated by us with “cause” or he resigns without “good reason,” Mr. Swift must repay both the initial cash signing bonus and additional cash bonus, as well as any tax gross-ups paid pursuant thereto.

Pursuant to the employment agreement, Mr. Swift has agreed not to disclose our confidential information at any time, and, for the period during which he provides services to us and for the two-year period thereafter, he has also agreed not to compete with us, interfere with our business, or solicit or hire our employees or customers.

Charles Carroll

In connection with the closing of the Merger on February 13, 2008, we entered into a new employment agreement with Charles Carroll under which Mr. Carroll continued to serve as our president and chief executive officer until April 21, 2008. Charles Carroll retired as our president and chief executive officer effective April 21, 2008, the date on which our new president and chief executive officer, David L. Swift, commenced employment. Mr. Carroll’s employment agreement provides that he will remain as the Chairman of our Board after his service as our chief executive officer ends, unless otherwise agreed. In the event Mr. Carroll is no longer serving as the Chairman of the Board, the agreement also provides that Mr. Carroll will be given the opportunity to serve as a
non-executive employee for the period ending no earlier than June 30, 2010.

Index to Financial Statements

While employed as our chief executive officer, Mr. Carroll received a base salary at the annual rate of $1,073,900 and became eligible to earn a pro-rata annual bonus (based on the number of days Mr. Carroll served as our Chief Executive Officer) in a target amount equal to 100% of his base salary as chief executive officer, with a maximum bonus opportunity equal to 481.4% of his base salary. For the period effective from April 21, 2008, his base salary was paid at the annual rate of $150,000 and he was no longer entitled to participate in our annual bonus program. During his service with us in any capacity, Mr. Carroll will be entitled to participate in our employee benefit plans on the same basis as those plans are generally made available to other similarly situated executives. Mr. Carroll’s employment agreement was amended effective May 29, 2008 to provide that he will be entitled to continued participation in our group health plans until he reaches the age of 65, or if later, the qualifying age under Medicare, irrespective of his continued employment, provided he pays the premium up to the amount that would have been payable if such coverage were provided under COBRA.

In the event Mr. Carroll is terminated by us without “cause,” or resigns for “good reason,” we will provide him with payments totaling two times his base salary, plus two times his target bonus, over the two-year period following such termination, as well as a pro-rated annual bonus for the year of termination (if such termination had occurred during his service as our president and chief executive officer), payable at the time such payment would have otherwise been paid under the bonus program, and post-termination health insurance coverage.

Pursuant to the employment agreement, Mr. Carroll has agreed not to disclose our confidential information at any time, and, for the period during which he provides services to us and for the two-year period thereafter, he has also agreed not to compete with us, interfere with our business, or solicit or hire our employees or customers.

In the event that any payment or benefit to be received under the employment agreement will trigger the imposition of an excise tax under Section 4999 of the Code, then all payments will be reduced to the extent necessary so that the excise tax will not be imposed unless the amount of such reduction would equal or exceed 110% of the excise tax that would be imposed on such amounts.

Mr. Carroll has informed our and Parent’s Boards of his intention to resign as Chairman of our and Parent’s Boards and to continue to serve as a director on both Boards. Our and Parent’s Boards approved Mr. Carroll’s resignation as Chairman, to be effective immediately after the filing with the Securities and Exchange Commission (the SEC) of this Annual Report on Form 10-K. The Board also approved a letter agreement, dated March 13, 2009, between Mr. Carroll, Parent and us, to be effective immediately after the filing with the SEC of this annual report on Form 10-K, which is filed as an exhibit hereto. Pursuant to this letter agreement, Mr. Carroll’s resignation as Chairman will not constitute termination of Mr. Carroll’s employment or result in the termination of Mr. Carroll’s option agreement with us, as he will continue to offer valuable service to us and our Parent as one of our and Parent’s directors and service as a non-executive employee. Mr. Carroll and we agreed to amend the terms of vesting of one of the options granted to him on February 13, 2008. Subject to Mr. Carroll’s continuous service on Parent’s Board, this option will continue to vest according to the terms of the grant. All other terms of Mr. Carroll’s employment and option agreements remain unchanged.

Lawrence Blackburn

On February 13, 2008, we also entered into a new employment agreement with Lawrence Blackburn, pursuant to which Mr. Blackburn will continue to serveserves as our and our Parent’s chief financial officer and as our and our Parent’s executive
vice-president. Mr. Blackburn became a director of us and our Parent on April 21, 2008. Mr. Blackburn’s employment agreement has an initial term of four years, which will renew for additional one-year periods until either party provides notice of non-renewal at least 180 days prior to the end of the then-current term. The agreement provides that while employed as our and our Parent’s chief financial officer, Mr. Blackburn will receive a base salary at the annual rate of $446,800 (currently $464,200), subject to annual review and adjustment, and will be eligible to earn an annual bonus in a target amount equal to 75% of his base salary, with a maximum bonus opportunity equal to 387.5% of his base salary. The agreement further provides that during his employment with us, Mr. Blackburn will be entitled to participate in our employee benefit plans on the same basis as those plans are generally made to other similarly situated executives.

Index to Financial Statements

In the event Mr. Blackburn is terminated by us without “cause,” or resigns for “good reason,” we will provide him with payments totaling two times his then-applicable base salary, plus two times his target bonus, payable over the two-year period following such termination, as well as a pro-rated annual bonus for the year of termination, payable at the time such payment would have otherwise been paid had Mr. Blackburn’s employment not terminated.

In the event that any payment or benefit to be received under the employment agreement will trigger the imposition of an excise tax under Section 4999 of the Internal Revenue Code, then all payments will be reduced to the extent necessary so that the excise tax will not be imposed unless the amount of such reduction would equal or exceed 110% of the excise tax that would be imposed on such amounts.

Pursuant to his employment agreement, Mr. Blackburn has agreed not to disclose our confidential information at any time and, for the period during which he is employed by us and for a two-year period following termination of his employment, he has also agreed not to compete with us, interfere with our business, or solicit or hire our employees or customers.

New Severance Agreementsagreements

In connection with the closing of the Merger2008 Acquisition on February 13, 2008, we also entered into individual severance agreements with our other named executive officers, Messrs. Topper, Campbell and King. Each severance agreement has an initial term of four years and renews automatically for additional one-year periods unless either party provides notice of non-renewal at least 90 days prior to the end of the then-current term. Each agreement provides for the payment of an

Index to Financial Statements

annual base salary (currently $385,670 for Mr. Topper, $375,450 for Mr. Campbell, and $339,200 for Mr. King), subject to annual review and adjustment, and each agreement also provides that the executive will be eligible to earn an annual bonus in a target amount equal to 75% of the executive’s base salary, with a maximum bonus opportunity in an amount equal to 387.5% of the executive’s base salary.

The severance agreements also provide that if the executive is terminated by us without “cause” or resigns for “good reason,” we will provide the executive with payments totaling one times the executive’s then-applicable base salary, plus one times his bonus, payable over the two-year period following such termination, as well as a pro-rated annual bonus for the year of termination, payable at the time such payment would have otherwise been paid had the executive’s employment not terminated. Each severance agreement further provides that the executive will not disclose our confidential information at any time and, for the period during which the executive is employed by us and for a period following termination of employment, the executive will not compete with us, interfere with our business, or solicit or hire our employees or customers.

In the event that any payment or benefit to be received under the severance agreement will trigger the imposition of an excise tax under Section 4999 of the Internal Revenue Code, then all payments will be reduced to the extent necessary so that the excise tax will not be imposed unless the amount of such reduction would equal or exceed 110% of the excise tax that would be imposed on such amounts.

Outstanding equity awards at 2009 fiscal year-end

   Option awards

Name

  Number of
securities
underlying
unexercised
options
exercisable
  Number of
securities
underlying
unexercised
options

unexercisable
(1)
  Equity incentive
plan awards:
number of
securities
underlying
unexercised

unearned options
  Option
exercise
price
  Option
expiration
date

David L. Swift

  521,956  757,680(2)  404,095(1)(3)  $10.00  4/21/18

Lawrence M. Blackburn

  6,659  —     —      2.07  12/23/14
  300,647  436,423(4)  232,759(3)   10.00  2/13/18

Ben D. Campbell

  104,391  151,536(4)  80,819(3)   10.00  2/13/18

Donald R. King

  104,391  151,536(4)  80,819(3)   10.00  2/13/18

William L. Topper

  104,391  151,536(4)  80,819(3)   10.00  2/13/18

(1)In the event of a change in control, both the time-vesting options and the performance-vesting options shall, subject to certain conditions, accelerate and immediately become fully vested and exercisable immediately prior to the effective date of the change in control.
(2)The time-vesting option vests in four equal installments (of 25% each) on April 21 of each year 2009 through 2012, subject to Mr. Swift’s continuous service with us.
(3)The performance-vesting options will vest in five equal installments (of 20% each) of the shares covered by the option on December 31 of each calendar year 2008 through 2012, subject to the satisfaction of certain performance targets for each such year, and further subject to “catch-up” vesting in the event an EBITDA target is satisfied in the year following the year in which an EBITDA target is missed. In light of then existing economic conditions and their impact on our financial performance, the Compensation Committee determined to vest 20% of the performance vesting options effective as of December 31, 2008, notwithstanding that the consolidated EBITDA performance target of $300 million was not satisfied.
(4)The time-vesting options will vest as to 25% of the award on the first anniversary of the grant date of February 13, 2008, and on each of the following three anniversaries thereafter, subject to the optionholder’s provision of continued services.

Option exercises

None of our NEOs exercised options in 2009.

Index to Financial Statements

Potential Payments Upon Terminationpayments upon termination or Changechange in Control under Employment and Severance Agreementscontrol

As summarized above, following the closing of the Merger,2008 Acquisition, each of our named executive officers (except Mr. Swift who entered into an employment agreement effective as of April 21, 2008) entered into new employment or new severance agreements, as applicable, and agreed to terminate the employment and severance agreements that were in place prior to the closing.

The amounts payable to the NEOs upon termination of employment (including termination following a change ofin control) are summarized in the table below, calculated on the basis of the agreements and arrangements in effect as of December 31, 2008.

Index to Financial Statements

Potential Payments on Change in Control or Severance2009.

 

  Severance upon Qualifying Termination and Change in Control Vesting  Severance upon qualifying termination and change in control vesting

Name

  Trigger (1)  Salary $  Bonus $  Pro-rated
Annual
Bonus
  Medical
Benefits (2)
  Change of
Control
Vesting (3)
  Total  Trigger
(1)
  Salary  Bonus  Pro-rated
annual
bonus
  Medical
benefits
  Change in
control
vesting

(2)
  Total

David L. Swift

  Termination  $1,900,000  $1,805,000  $626,736  $—    $15,490  $4,347,226  Termination  $1,900,000  $1,805,000  $2,651,995  $—    $464,710  $6,821,705

Charles A. Carroll

  Termination   300,000   656,272   —     —     3,412   959,684

Lawrence M. Blackburn

  Termination   928,400   696,300   344,888   —     8,922   1,978,510  Termination   928,400   696,300   1,102,474   —     267,673   2,994,847

Ben D. Campbell

  Termination   375,450   281,588   278,945   —     3,098   939,081  Termination   375,450   281,588   891,696   —     92,943   1,641,677

Donald R. King

  Termination   339,200   254,400   252,019   —     3,098   848,717  Termination   339,200   254,400   805,600   —     92,943   1,492,143

William L. Topper

  Termination   385,670   289,253   286,535   —     3,098   964,556  Termination   385,670   289,253   915,968   —     92,943   1,683,834

 

(1)A “qualifying termination” of employment is a termination by us without “cause” (other than due to disability) or resignation by the executive for “good reason.” In the event that any payment or benefit to be received by the executive would trigger the imposition of an excise tax under Section 4999 of the Internal Revenue Code, then all payments would be reduced to the extent necessary so that such excise tax will not be imposed unless the amount of such reduction would equal or exceed 110% of the excise tax that would be imposed on such amounts.

(2)Pursuant to Mr. Carroll’s employment agreement, he is entitled to continue participating in our group health plans until he reaches age 65 or, if later, his qualifying age under Medicare, provided that he pays 100% of the cost of premiums that would have been payable under COBRA, less a 2% administrative surcharge.

(3)The amounts in this column reflect the accelerated vesting of all unvested time-vested options and performance-vested options held by Messrs. Swift, Carroll, Blackburn, Campbell, King and Topper upon a change ofin control, as if a change in control had occurred and the options had vested as of December 31, 2008,2009, calculated based upon the positive difference between Parent’sour stock price at year-end (which we currently believe is $10.01believed was $10.40 per share)share at such time) and the exercise price of the options. These benefits would not be payable in the event of a “qualifying termination” of employment absent a change in control.

We have used substantially similar definitions for the terms “cause”, “good reason” and “change in control” in all of the employment and severance agreements with our NEOs, as follows:

 

“Cause” has generally been defined to mean an executive’s willful failure to perform his duties, his commission of a felony or other crime involving moral turpitude, unlawful drug use, or fraud, embezzlement, breach of fiduciary duty or similar misconduct.

 

“Good Reason” has generally been defined to mean our failure to continue the executive’s position, duties or authority, our material breach of our agreement with the executive, including our failure to pay or provide benefits under the agreement, or relocation of the executive outside of a 75-mile radius of his current place of employment.

 

“Change in Control” has generally been defined as:

 

 (i)(1)a sale or disposition of all or substantially all of our assets;

 

 (ii)(2)a transaction or series of transactions where a person or related group acquires more than 50% of the voting power of Parent’s stock,Goodman Global Group, Inc., or more stock than is owned by our initial investors; or

 

 (iii)(3)approval of our complete liquidation or dissolution.

Compensation Committee Interlocks and Insider Participation

Compensation decisions are made by the board of directors and Compensation Committee of Chill Holdings, Inc., our parent. Parent’s board has appointed Messrs. Henske and Ragatz, who are also members of our Board of Directors, to serve on Parent’s compensation committee. None of our executive officers has served as a member of the compensation committee (or other committee serving an equivalent function) of any other entity, whose executive officers served as a director of our company or members of our compensation committee.

Index to Financial Statements

Messrs. Henske and Ragatz are managing directors of Hellman & Friedman LLC. As of December 31, 2008, affiliates of Hellman & Friedman LLC control approximately 87% of the outstanding common stock of Chill Holdings, Inc. See “Certain Relationships and Related Party Transactions.”

ITEM 12.Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

We are a wholly owned subsidiary of Chill Holdings,Goodman Global Group, Inc., which we refer to as Parent, which indirectly owns all of our issued and outstanding capital stock through its direct ownership of all of the issued and outstanding capital stock of Chill Intermediate Holdings, Inc. All of Parent’s issued and outstanding capital stock is owned by funds affiliated with Hellman & Friedman LLC, investment funds affiliated with GSO (the GSO Equity Entities),Capital Partners, investment funds affiliated with Farallon Capital Partners, L.P. (the Farallon Equity Entities) and investment funds affiliated with AlpInvest Partners, (AlpInvest), along with certain other investors thatto whom the GSO Equity EntitiesCapital Partners funds syndicated their investments, to, whichwhom we collectively refer to as the Investors, and certain members of our management, whom we refer to as the Management Participants. See Item 13, “Certain Relationships and Related Transactions, and Director Independence.”

The Investors are able to control all actions by the boardBoard of directorsDirectors of Parent by virtue of their being able to appoint a majority of the directors and their rights under the stockholders agreement to which they and Parent are parties. In addition, as a result of the voting and transfer provisions of the stockholders agreement, the Investors may be deemed to constitute a group within the meaning of Section 13(d)(3) of the Securities Exchange Act of 1934. Accordingly, each of the members of this group may be deemed to beneficially own all of the shares of Parent common stock held by the Investors and the Management Participants. Each of the Investors disclaims any beneficial ownership of shares of Parent common stock held by the other Investors and the Management participants. See “Certain Relationships and Related Party Transactions.”Participants.

All of our issued and outstanding shares of capital stock have been pledged as collateral to the lenders under our senior secured term credit facilities. If we were to default on our senior secured credit facilities, the lenders could foreclose on these shares of our common stock, which would result in a change of control.

Index to Financial Statements

The following table sets forth as of December 31, 20082009 certain information regarding the beneficial ownership of the voting securities of Parent by each person who beneficially owns more than five percent of Parent common stock, and by the directors of us and Parent and the executive officers named in the “Summary Compensation Table”compensation table” on page 51, individually, and by the directors and executive officers of us and Parent as a group.

 

Name of Beneficial Owner

  Number of
Shares
  Percentage

5% Stockholders:

    

Funds affiliated with Hellman & Friedman LLC(1)

  111,465,213  86.9

Farallon Equity Entities (2)

  10,000,000  7.8

Directors and Executive Officers:

    

David L. Swift(3)(4)

  234,599  *

Lawrence M. Blackburn(3)(5)

  1,101,540  *

Ben D. Campbell(3)(6)

  451,053  *

Donald R. King(3)(7)

  446,153  *

William L. Topper(3)(8)

  317,953  *

Charles A. Carroll(3)(9)

  1,130,209  *

Philip U. Hammarskjold(1)(11)

  111,465,213  86.9

Robert B. Henske(1)

  111,465,213  86.9

Erik Ragatz(1)

  111,465,213  86.9

Saloni K. Saraiya(1)

  111,465,213  86.9

All directors and officers as a group(17 individuals)(10)

  116,472,634  89.9
   Shares of common
stock beneficially

owned
 

Name and address of owner

  Number  Percent 

5% Stockholders:

    

Hellman & Friedman LLC(1)

  111,465,213  86.9

Farallon Equity Entities(2)

  10,000,000  7.8

Directors and Executive Officers:

    

David L. Swift(3)

  621,847  *  

Lawrence M. Blackburn(4)

  1,324,600  1.0

Ben D. Campbell(5)

  528,504  *  

Donald R. King(6)

  523,604  *  

William L. Topper(7)

  395,404  *  

Charles A. Carroll(8)

  1,260,417  *  

Robert B. Henske(1)

  —    *  

Erik Ragatz(1)

  —    *  

Saloni Saraiya Multani(1)

  —    *  

All directors and officers as a group(16 individuals)(9)

  6,400,267  4.9

 

*Indicates ownership of less than 1%.

Index to Financial Statements
(1)ConsistsCommon stock consists of 62,365,698 shares held by Hellman & Friedman Capital Partners VI, L.P. (“HFCP VI”), 32,555,251 shares held by H&F Chill Partners, L.P. (“H&F Chill”), 16,287,805 shares held by Hellman & Friedman Capital Partners VI (Parallel), L.P. (“HFCP VI (Parallel)”), 230,418 shares held by Hellman & Friedman Capital Executives VI, LP (“HFCE VI”), and 26,041 shares held by Hellman & Friedman Capital Associates VI, LP (“HFCA VI,” and together with HFCP VI, H&F Chill, HFCP VI (Parallel) HFCE VI and HFCA VI, the “H&F Entities”). Hellman & Friedman Investors VI, L.P. (“H&F VI”) is the general partner of HFCP VI, HFCP VI (Parallel), HFCE VI and HFCA VI, and the managing member of H&F Chill GP LLC, which is the general partner of H&F Chill. Hellman & Friedman LLC is the general partner of H&F VI. The investment decisions of each of the H&F Entities are made by theAn investment committee of Hellman & Friedman LLC, which exercisesacting by majority vote, has sole voting and dispositive powercontrol over these shares.the shares of Goodman Global Group, Inc. held by the H&F Entities. The investment committee is comprised of F. Warren Hellman, Brian M. Powers, Philip U. Hammarskjold, Patrick J. Healy and Thomas F. Steyer; provided, however, that Mr. Steyer has no authority or voting rights with respect to investment committee decisions relating to Goodman Global Group, Inc. Messrs. Hammarskjold, Henske and Ragatz are managing directors andManaging Directors of Hellman & Friedman LLC but neither of them serve on the investment committee. Ms. SaraiyaMultani is a principal of H&F VI.Hellman & Friedman LLC. Each of the members of the investment committee, as well as Messrs. Hammarskjold, Henske and Ragatz and Ms. SaraiyaMultani, disclaim beneficial ownership of thesethe shares in Goodman Global Group, Inc, or Goodman Global, Inc. except to the extent of their individualrespective pecuniary interest in these entities.therein. The address for the H&F Entities, Messrs. Hammarskjold, Henske and Ragatz and Ms. SaraiyaMultani is c/o Hellman and Friedman LLC, One Maritime Plaza, 12th Floor, San Francisco, California 94111.

(2)Consists of 3,975,000 shares held by Farallon Capital Partners, L.P., 4,950,000 held by Farallon Capital Institutional Partners, L.P., 550,000 shares held by Farallon Capital Institutional Partners II, L.P., 350,000 shares held by Farallon Capital Institutional Partners III, L.P. and 175,000 shares held by Tinicum Partners, L.P. The address for the Farallon Equity Entities is One Maritime Plaza, Suite 2100, San Francisco, California 94111.

(3)The address of this individual is c/o Goodman Global, Inc., 5151 San Felipe, Houston, Texas, 77056.

(4)Includes 134,698521,957 shares subject to options that are exercisable within 60 days of December 31, 2008.2009.

(5)(4)Includes 229,720452,780 shares subject to options that are exercisable within 60 days of December 31, 2008.2009.

(6)(5)Includes 77,452154,903 shares subject to options that are exercisable within 60 days of December 31, 2008.2009.

(7)(6)Includes 77,452154,903 shares subject to options that are exercisable within 60 days of December 31, 2008.2009.

(8)(7)Includes 77,452154,903 shares subject to options that are exercisable within 60 days of December 31, 2008.2009.

(9)(8)Includes 130,209260,417 shares subject to options that are exercisable within 60 days of December 31, 2008.2009.

(10)(9)Includes 1,278,0102,670,856 shares subject to options that are exercisable within 60 days of December 31, 2008.2009.

(11)Mr. Hammarskjold will resign from our and Parent’s Boards effective immediately after the filing with the Securities and Exchange Commission of this Annual Report on Form 10-K.

Index to Financial Statements
ITEM 13.Certain Relationships and Related Transactions, and Director Independence

Agreements Relatedrelated to the 2008 Acquisition

Goodman Global, Inc. and Chill Acquisition, Inc., or Merger Sub, entered into several related party agreements in contemplation of the 2008 Acquisition, to which we succeeded by operation of law as a result of the 2008 Acquisition. As a part of the 2008 Acquisition, the Company paid $8.1 million to Hellman & Freidman LLC in reimbursement for third party transaction related expenses.

Merger Agreement

As a result of the merger, certain members of senior management received transaction bonuses equal to 75% of their current base salary, totaling not more than $3,202,110 in the aggregate. The transaction bonuses paid to our named executive officers are set forth in the table below. In addition, certain members of senior management were given a “rollover” incentive bonus payment equal to 100% of their current base salary, totaling not more than $4,269,480 in the aggregate. The rollover incentive bonuses paid to our named executive officers are also set forth in the table below.

    Transaction Bonus Paid Upon
Consummation of the Merger
  Equity Rollover Incentive Paid
Upon Consummation of the
Merger

Executive Officers:

    

Charles A. Carroll

  $805,425  $1,073,900

Lawrence M. Blackburn

   335,100   446,800

Ben D. Campbell

   271,013   361,350

Donald R. King

   244,875   326,500

William L. Topper

   278,378   371,170

Index to Financial Statements

Stockholders Agreementagreement

In connection with the closing of the 2008 Acquisition, Chill Holdings, Inc. (our Parent),Parent, Merger Sub, and each of the following: funds affiliated with Hellman & Friedman LLC, which we refer to as the Hellman & Friedman Investors, funds affiliated with GSO Capital Partners, which we refer to as the GSO Equity Entities, funds affiliated with Farallon Partners, which we refer to as the Farallon Equity Entities, funds affiliated with AlpInvest Partners, which we refer to as AlpInvest along with certain other investors thatto whom the GSO Equity EntitiesCapital Partner funds syndicated their investments to (collectively, the Fund Co-Investors) (collectively, the Investors) and certain members of our management, whom we refer to as the Management Participants, entered into a stockholders agreement that generally contains the following provisions:

Board of Directors. The stockholders agreement requires that, until an initial public offering of shares of Parent’s common stock, the parties that beneficially own shares of Parent’s common stock will vote those sharesprovides board nomination rights to elect a board of directors of Parent comprised of the following persons:

the chief executive officer of Parent and

the remaining board members designated by the Hellman & Friedman Investors, with at least one of such designees being designated by Hellman & Friedman Capital Executives VI, L.P. for so long as it owns any share equivalents.

After an initial public offering of Parent’s common stock, the Hellman & Friedman Investors and their affiliates will have the right to nominate the number of individuals for election to the board of directors that is equal to the product of the percentage of Parent’s share equivalents held by the Hellman & Friedman Investorsaffiliates. See “Item 10, “Directors, Executive Officers and their affiliates, multiplied by the number of directors then on the board, rounded up to the nearest whole number.

For as long as the Hellman & Friedman Investors are entitled to nominate an individual for election to the board of directors, Parent is required to nominate such individual for election as a director as part of the slate that is included in the proxy statement or consent solicitation relating to such electionCorporate Governance – Management-Board Composition and provide the highest level of support for the election of such individual as it provides to any other individual standing for election as part of Parent’s slate.Governance.”

Indemnification. We generally are required to indemnify and hold harmless each of the stockholders that is party to the stockholders agreement, together with its partners, stockholders, members, affiliates, directors, officers, fiduciaries, controlling persons, employees and agents from any losses arising out of either of the following, subject to limited exceptions:

 

the stockholder’s or its affiliate’s ownership of share equivalents or other equity securities of ParentGoodman Global Group, Inc. or its ability to control or influence Parent,Goodman Global Group, Inc., or

 

the business, operations, properties, assets or other rights or liabilities of ParentGoodman Global Group, Inc. or any of its subsidiaries.

Transfer restrictions. Under the stockholders agreement, the consent of the Hellman & Friedman Investors is required for all transfers of share equivalents by the Co-Investors other than specified exceptions including, but not limited to, transfers to permitted transferees (i.e., certain affiliates), or in connection with a tag-along or drag-along sale (see below). This transfer restriction continues until the twelve month anniversary of an initial public offering or, if earlier, until the equity ownership of the Hellman & Friedman Investors or the Co-Investors falls below specified levels.

Tag-along rights. Under the stockholders agreement, in connection with any sale of share equivalents by a Hellman & Friedman Investor, subject to exceptions, the Co-Investors, including the Hellman & Friedman Investors, will have “tag-along” rights that allow them to sell a proportionate amount of their share equivalents in such sale. These tag-along rights expire when the transfer restrictions on the Co-Investors expire.

Drag-along rights. Under the stockholders agreement, subject to certain exceptions, the Hellman & Friedman Investors have “drag-along” rights that allow them to cause the Co-Investors to participate in a transaction or transactions involving the transfer of not less than 50% of the outstanding share equivalents of Parent. The drag-along right may only be exercised prior to the twelve month anniversary of an initial public offering, and to exercise the drag-along, either (x) the Hellman & Friedman Investors must own at least 25% of the outstanding shares, or (y) holders of at least 50% of the outstanding shares must have approved the drag-along transaction. This drag-along right expires one year after the completion of an initial public offering.

Registration rights. The stockholders agreement grants the Hellman & Friedman Investors and Co-Investors rights with respect to the registration of shares under the Securities Act. These rights include demand registration rights, shelf registration rights and piggyback registration rights, as well as customary indemnification. All fees, costs and expenses related to registrations will be borne by us; provided, however, that we are not required to pay stock transfer taxes or underwriters’ discounts or selling commissions.

Demand registration rights. The stockholders agreement grants the Hellman & Friedman Investors demand registration rights. Under the terms of the stockholders agreement, subject to certain exceptions, we will be required, upon the written request of the holders of 25% or more of the shares held by the Hellman & Friedman Investors, to use our reasonable best efforts to effect registration of shares requested to be registered by the Hellman & Friedman Investors and the Co-Investors as soon as practicable. We are not required to effect more than four such demand registrations, which include marketed shelf registrations, in any twelve month period. We are not required to effect

Index to Financial Statements

a demand registration on Form S-1 after we have effected three such demand registrations. We are not required to comply with any registration demand with a reasonably anticipated net aggregate offering price (after deduction of underwriter commissions and offering expenses) of less than $10 million.

Shelf registration rights. The stockholders agreement grants the Hellman & Friedman Investors and the Co-Investors shelf registration rights. Under the terms of the stockholders agreement, holders of 25% or more of shares held by the Hellman & Friedman Investors may demand that the Company file a shelf registration statement with respect to those shares. Upon such demand, we are required to use our reasonable best efforts to effect such registration. Notice of the shelf registration will be provided to the Co-Investors and any other parties with piggyback rights, and they will have the right to include their registrable securities in the registration statement and participate in any offering thereunder, subject to various exceptions, including for non-marketed shelf offerings by the Hellman & Friedman Investors. We are not required to effect more than four demand registrations, which include marketed shelf registrations, in any twelve month period.

Piggyback registration rights. The stockholders agreement grants the Hellman & Friedman Investors and the Co-Investors piggyback registration rights. If we register any of Parent’s securities either for our own account or for the account of other security holders, the holders of these shares are entitled to include their shares in the registration. Subject to certain exceptions, we may limit the number of shares included in the underwritten offering if the underwriters believe that marketing factors, including an adverse effect on the per share offering price, require a limit on the number of shares to be underwritten. Unless otherwise agreed by the Hellman & Friedman Investors, these piggyback rights do not apply until one year after an initial public offering, except with respect to registrations in which the Hellman & Friedman Investors participate.

Participation Rightsrights. Subject to specified exceptions, until an initial public offering, ParentGoodman Global Group, Inc. may not issue equity securities, orand Goodman Global Group, Inc. and its subsidiaries may not issue debt securities a post closing issuance,to the Hellman & Friedman Investors or their affiliates, without permitting each Co-Investor and each Hellman & Friedman Investor the opportunity to purchase a pro rata share of the securities being issued, based on the Investor’sits respective ownership of share equivalents in Goodman Global Group, Inc. at that time.

Transfer Provisions and Registration Rights. TheManagement stockholders agreement also contains (1) transfer restrictions applicable to the share equivalents held by Parent, the Investors and the Management Participants, (2) tag-along rights in favor of the Hellman & Friedman Investors and each eligible tag-along Investor, (3) drag-along rights in favor of the Hellman & Friedman Investors, and (4) certain registration rights (including customary indemnification) and Rule 144 sale provisions applicable to the Investors and their affiliates and the Management Participants.

Index to Financial Statements

Management Stockholders Agreement

The Goodman Global Group, Inc. common stock and options in Parent issued to the initial Management Participants, each of whom entered into an equity contribution agreement, are subject to a management stockholders agreement, which generally contains the following provisions:

 

transfer restrictions, including rights of first refusal in favor of ParentGoodman Global Group, Inc. and the Hellman & Friedman Investors or its designee,their designees, subject to certain exceptions, including transfers to family members and affiliates or in connection with a tag-along or drag-along sale; these transfer restrictions expire on the six month anniversary of an initial public offering or, if later, the expiration of the lock-up agreements between the Hellman & Friedman Investors and the underwriters,

 

repurchase rights in favor of ParentGoodman Global Group, Inc. or its designee,

 

put rights in favor of the Management Participants,

 

piggyback registration rights in favor of the Management Participants, and

 

tag-along rights in favor of the Management Participants with respect to certain non-public sales by the Hellman & Friedman Investors and

drag-along rights in favorthat exceed 10% of the Hellman & Friedman Investors.our outstanding shares (excluding restricted shares and assuming exercise and conversion of certain stock options and convertible securities, if any).

Subscription AgreementExchange and registration rights agreement related to senior subordinated notes

In connection with the 2008 Acquisition, Parent entered into a subscription agreement with each of the following: funds affiliated with the Hellman & Friedman Investors, GSO Equity Entities, Farallon Equity Entities, AlpInvest, and the Fund Co-Investors, each a “Subscriber,” which set forth the terms of the sale and purchase of the subscription securities. Under the subscription agreement, the Subscribers were also required to enter into the stockholders agreement, described above.

Exchange and Registration Rights Agreement

Merger Sub, prior to the 2008 Acquisition,Goodman Global, Inc. entered into a registration rights agreement with the funds affiliated with GSO Capital Partners, funds affiliated with Farallon Partners, funds affiliated with AlpInvest Partners and funds affiliated with the Fund Co-Investors that purchased the senior subordinated notes (the Purchasers), pursuant to which the we were required to fileGoodman Global, Inc. filed a registration statement and deliverdelivered to the Purchasers the exchangeregistered notes registered hereunder, in exchange for the initial notes tendered by the Purchasers. Under the agreement, Goodman Global, Inc. and each guarantor, jointly and severally, agreed to indemnify and hold harmless each holder and controlling person against any losses, claims, damages, liabilities, costs and reasonable expenses (Losses), if any Losses are based upon any untrue statement of material fact in any registration statement, prospectus or in any amendment or supplement thereto, in any preliminary prospectus or any free-writing prospectus or “issuer

Index to Financial Statements

information” filed or required to be filed pursuant to Rule 433(d) under the Securities Act, or any omission or alleged omission to state therein a material fact required to be stated or necessary to make the statements therein not misleading.

Indemnification of Directorsdirectors and Officersofficers

Pursuant to the closing of the 2008 Acquisition, ParentGoodman Global, Inc. entered into indemnification agreements with our officers, Messrs. Alexander, Bikman, Blackburn, Campbell, Carroll, Clark, King, Mishler, Smith, Toppe and Topper. ParentWe agreed that itwe will indemnify each of the directors and officers of our predecessorPredecessor to the fullest extent permitted by Delaware law against claims arising out of or pertaining to the fact that the person was an officer or director of our predecessorPredecessor or any of our subsidiaries prior to the 2008 Acquisition or is an officer or director of us or any of our subsidiaries. TheOur certificate of incorporation of the surviving corporation provides that we will indemnify each of our directors and officers to the fullest extent permitted by law for claims arising by reason of the fact that he or she is a director, officer or employee of us, or of any of our subsidiaries. On March 6, 2008, we entered into indemnification agreements with our directors, Messrs. Hammarskjold, Henske and Ragatz and Ms. Saraiya,Multani, with similar terms as described above.

Index to Financial Statements

Employment and Severance Agreementsseverance agreements

In connection with the closing of the 2008 Acquisition, Merger SubGoodman Global, Inc. entered into a new employment agreement with Charles Carroll on February 13, 2008, under which Mr. Carroll would continue as the Chief Executive Officer of Goodman Global, Inc. until June 30, 2008 or, if earlier, the date on which his replacement commenced employment. Mr. Carroll retired as our President and Chief Executive Officer and our new President and Chief Executive Officer, David Swift, joined us on April 21, 2008. On February 13, 2008, Merger SubGoodman Global, Inc. also entered into a new employment agreement with Lawrence Blackburn pursuant to which Mr. Blackburn continues to serve as our Chief Financial Officer. In connection with the closing, Merger SubGoodman Global, Inc. also entered into individual severance agreements with our other executive officers. See “ExecutiveItem 11, Executive Compensation—New Employment Agreements”agreements and “ExecutiveExecutive Compensation—New Severance Agreements.”agreements.

Equity Contribution Agreements

Certain members of senior management, including our named executive officers, have entered into equity contribution agreements with Parent. Pursuant to the equity contribution agreements, at the effective time of the 2008 Acquisition, each executive contributed to Parent a portion of the shares of Goodman Global, Inc. common stock he then held in exchange for shares of Parent common stock having an equivalent value based on the price per share our current controlling shareholders paid for their shares of Parent common stock. To the extent that an executive did not hold a sufficient number of shares of Goodman Global, Inc. common stock at the effective time of the 2008 Acquisition to contribute the specific value described in his equity contribution agreement, he contributed a sufficient number of vested options to purchase shares of Goodman Global, Inc. common stock in exchange for vested options for Parent stock so that the total value of the shares of Goodman Global, Inc. common stock and vested options to purchase shares of Goodman Global, Inc. common stock contributed to Parent was equal to the value the executive agreed to contribute in his equity contribution agreement. These options were contributed pursuant to the terms of option rollover agreements dated as of February 13, 2008. The aggregate value of Goodman (predecessor) stock contributed for common stock of Chill Holdings, Inc. by all members of senior management, including our named executive officers pursuant to the equity contribution agreements, was $36.1 million. See “Executive Compensation—Compensation Discussion and Analysis—Equity Contribution and Share Subscription Agreements.”

In addition, Messrs. Blackburn, Clark, Mishler, Smith and Toppe entered into option rollover agreements to “roll” options over Goodman Global, Inc. common stock in exchange for new Parent options to purchase shares of Parent equity, at an exercise price per share calculated on the basis of a ratio of the price paid for each share of Goodman Global, Inc. common stock in the 2008 Acquisition over the price per share of Parent common stock paid by our current controlling stockholders. Although the intrinsic value of the shares rolled varied for each executive, the terms of these option rollover agreements are identical to the terms summarized at “Executive Compensation—Compensation Discussion and Analysis—Equity Contribution and Share Subscription Agreements.” Each member of senior management who contributed his existing equity for new equity in Parent or invested in additional equity in Parent was required to become a party to a management stockholders’ agreement, the terms of which are summarized above under “Management Stockholders Agreement.”

Agreements with our New Presidentpresident and Chief Executive Officerchief executive officer

Employment Agreementagreement

Mr. Swift entered into an employment agreement with us, (the Employment Agreement), effective as of April 21, 2008, pursuant to which Mr. Swifthe commenced serving as our and our Parent’s President and Chief Executive Officer and as a member of our and our Parent’sthe Board of Directors.Directors of Goodman Global Group, Inc. and Goodman Global, Inc. See “Executive Compensation—New Item 11, Executive compensation—Employment Agreements.”

agreements.

Index to Financial Statements

Indemnification Agreementagreement

Mr. Swift also entered into an Indemnification Agreement with us on substantially the same terms as those of the Indemnification Agreements between our ParentGoodman Global, Inc. and the directors and officers described above. The Indemnification Agreement by and between Goodman Global, Inc. and Mr. Swift does not supersede, limit or alter any of the rights and obligations of either party as set forth in the Employment AgreementMr. Swift’s employment agreement and any equity agreements between our ParentGoodman Global, Inc. and Mr. Swift.

Joinder to the Management Stockholders Agreementmanagement stockholders agreement

Mr. Swift and Goodman Global Group, Inc. each executed a joinder (the Joinder), to the Management Stockholders Agreement, described above under the heading “Management Stockholders Agreement.stockholders agreement.” Pursuant to the Joinder, Mr. Swift will share the same rights and obligations as the Initial Management Investors, as defined in the Management Stockholders Agreement.

Changes to our and Parent’s BoardsResignation of Directors

Mr. Carroll informed our and Parent’s Boards of his intention to resign as Chairman of our and Parent’s Boards and to remain as a director on both Boards. Both Boards accepted his resignation as Chairman effective immediately after the filingBoard of this annual report on Form 10-K with the SEC. Directors

In connection with this change, we, ParentMr. Carroll’s resignation from his position as Chairman of our Board of Directors in March 2009, Goodman Global Group, Inc., Goodman Global, Inc. and Mr. Carroll entered into a letter agreement dated March 13, 2009, which will be effective immediately after filing of this annual report on Form 10-K with the SEC, confirming that this change willdid not constitute termination of Mr. Carroll’s employment or result in the termination of Mr. Carroll’s option agreement with us, as he will continue to offer valuable serviceservices to us and our Parent as one of our and Parent’s directors and as a non-executive employee.

On March 13,Other relationships

Kronos Inc. (Kronos), a portfolio company of H&F and its affiliates, provides certain software and related services for our time and attendance reporting. In 2009, Mr. Hammarskjold submittedwe paid Kronos $0.1 million.

Index to our and Parent’s Boards a letter of resignation from our and Parent’s Boards, which will be effective immediately after filing of this 10-K with the SEC. In connection with these changes, our and Parent’s Boards appointed Mr. Ragatz as Chairman of our and Parent’s Board, which will be effective immediately after filing of this annual report on Form 10-K with the SEC.

Financial Statements

Policies and Proceduresprocedures for Reviewreview and Approvalapproval of Related Party Transactionsrelated party transactions

We currently have certain policies and procedures to address transactions with related persons, including any executive officer, director, nominee for election as a director, greater than 5% holder of our common stock, or immediate family member of any of the foregoing. Our Board of Directors has adopted a written policy that all transactions with related persons are subject to approval or ratification by the Audit Committee (other than certain transactions exempted under our certification of incorporation).

In determining whether to approve or ratify an interested transaction, the Audit Committee may take into account, among other factors that it deems appropriate, whether the interested transaction is on terms no less favorable to us than could be obtained from an unaffiliated third party under the same or similar circumstances, as well as the extent of the related person’s interest in the transaction. If an interested transaction is ongoing, the Audit Committee may establish guidelines for our management to monitor the Company’s ongoing dealings with the related person. Thereafter, the Audit Committee will assess such ongoing relationships on an annual basis.

The Board of Directors has delegated to the Chairman of the Audit Committee the authority to pre-approve or ratify (as applicable) any interested transaction in which the amount involved is expected to be less than $250,000. In addition, the following transactions are deemed to be pre-approved by the Audit Committee for purposes of our related-person policies and procedures, even if the amount involved exceeds $100,000: (1) employment of executive officers and related compensation, (2) director compensation, (3) transactions with another company if the related person is an employee (other than an executive officer) of that company and the aggregate amount involved does not exceed $1 million or 2 percent of that company’s revenues, and (4) transactions in which the related person’s interest arises solely from ownership of our common stock and all holders of our common stock receive the same benefit on a pro rata basis.

Index to Financial Statements

Director Independenceindependence

None of the members of our board of directors, audit committee or compensation committee is “independent.” Our board of directors is not comprised of a majority of independent directors, and its committees are not comprised solely of independent directors, becauseBecause we are a privately-held company and not subject to applicable listing standards, we have not determined whether members of our Board of Directors or Audit Committee are “independent” under any such standards. The terms of the stockholders agreement described above require that certain members of our boardBoard of directorsDirectors be comprised of persons affiliated with our company.

 

ITEM 14.Principal AccountantAccounting Fees and Services

The following summarized the fees billed to us and our subsidiaries by Ernst & Young LLP for professional services rendered in 20082009 and 2007.2008.

 

  Year ended December 31,   Year ended December 31, 
  2008 2007   2009 2008 

Fee Category

  Amount  Percent Amount  Percent   Amount  Percent Amount  Percent 

Audit Fees

  $880,250  92.0% $1,573,500  95.4%  $1,370,900  83.8 $880,250  92.0

Audit-Related Fees

   64,000  6.7   63,500  3.9    249,100  15.2    64,000  6.7  

Tax Fees

   12,000  1.3   12,000  0.7    16,300  1.0    12,000  1.3  

All Other Fees

   —    —     —    —      —    —      —    —    
                          

Total Fees

  $956,250  100% $1,649,000  100%  $1,636,300  100.0 $956,250  100.0
                          

Fees for audit services include fees associated with the annual audit, our annual report on Form 10-K and the reviews of our quarterly reports on Form 10-Q, services that are normally provided by the independent auditor in connection with statutory and regulatory filings or engagements and services that generally only the independent auditors can provide. Audit-related fees include reviews of SEC comment letters and debt offerings. All other fees include due diligence in connection with acquisitions and accounting consultations. Tax fees include tax compliance and limited consulting services.

Policy on Pre-Approvalpre-approval of Auditaudit and Permissible Non-Audit Servicespermissible non-audit services of Independent Auditorsindependent auditors

All audit and permissible non-audit services provided by the independent auditors are pre-approved by the Audit Committee. These services may include audit services, audit-related services, tax services and other services. Pre-approval is generally provided for up to one year and any pre-approval is detailed as to the particular service or category of services and is generally subject to a specific budget. The independent auditors and management are required to periodically report to the Audit Committee regarding the extent of services provided by the independent auditors in accordance with this pre-approval, and the fees for the services performed to date. The Audit Committee may also pre-approve particular services on a case-by-case basis.

Index to Financial Statements

PART IV

 

ITEM 15.Exhibits and Financial Statement Schedules

 

(a)1. Financial Statements and reports on internal control over financial reporting:

(a)  1.Page

Management’s report on internal control over financial reporting

  Financial Statements:69

Reports of Independent Registered Public Accounting Firm

  Report of independent registered public accounting firm7170

Consolidated balance sheets at December 31, 2008 and 2007

  72
For the period February 14 to December 31, 2008, the period January 1 to February 13, 2008 and for each of the years ended December 31, 2007 and 2006:

Consolidated statements of income statements

  73

Consolidated statements of stockholders’shareholders’ equity and comprehensive income

  74

Consolidated statements of cash flows

  75

Notes to consolidated financial statements

  76
  2.Page

2.Financial statement schedules

Valuation and Qualifying Accounts disclosures have been incorporated in the notes to consolidated financial statements.

Index to Financial Statements
Valuation and Qualifying Accounts disclosures have been incorporated in the Notes to consolidated financial statements.
 3.Exhibits

 

Exhibit

No.

  

Description

  2.1  Asset Purchase Agreement, dated November 18, 2004, by and among Goodman Global Holdings, Inc., Frio Holdings, Inc. and Frio, Inc. (incorporated by reference to Exhibit 2.1 on Goodman Global Holdings, Inc.’s Form S-4, filed with the SEC on September 21, 2005, File No. 333-128462).
  2.2  Agreement and Plan of Merger, dated as of October 21, 2007, by and among Chill Holdings, Inc., Chill Acquisition, Inc. and Goodman Global, Inc. (incorporated by reference to Exhibit 2.1 on Goodman Global, Inc.’s Form 8-K, filed with the SEC on October 25, 2007).
  2.3  Amendment No. 1 to Agreement and Plan of Merger, dated as of January 3, 2008, by and among Chill Holdings, Inc., Chill Acquisition, Inc. and Goodman Global, Inc. (incorporated by reference to Exhibit 2.1 on Goodman Global, Inc.’s
Form 8-K, filed with the SEC on January 4, 2008).
  3.1†3.1  Amended and Restated Certificate of Incorporation of Goodman Global, Inc..Inc. (incorporated by reference to Exhibit 3.1 on Goodman Global, Inc.’s Annual Report on Form 10-K, filed with the SEC on March 13, 2009).
  3.2  Amended and Restated Bylaws of Goodman Global, Inc. (incorporated by reference to Exhibit 3.7 on Goodman Global, Inc.’s Amendment No. 1 to the Registration Statement on Form S-4, filed with the SEC on May 30, 2008).
  4.1  Indenture, dated as of February 13, 2008, by and between Chill Acquisition, Inc., to be merged with and into Goodman Global, Inc., and Wells Fargo Bank, National Association, as Trustee (incorporated by reference to Exhibit 4.1 on Goodman Global, Inc.’s Registration Statement on Form S-4, filed with the SEC on April 15, 2008).
  4.2  Guarantor Supplemental Indenture, dated as of February 13, 2008, among the Guaranteeing Subsidiaries of Goodman Global, Inc., as identified therein, and Wells Fargo Bank, National Association, as Trustee (incorporated by reference to Exhibit 4.2 on Goodman Global, Inc.’s Registration Statement on Form S-4, filed with the SEC on April 15, 2008).

Index to Financial Statements
  4.3  Form of Exchange Note (incorporated by reference to Exhibit 4.3 on Goodman Global, Inc.’s Registration Statement on Form S-4, filed with the SEC on April 15, 2008).
  4.4  Form of 13.50%/14.00% Note (incorporated by reference to Exhibit 4.4 on Goodman Global, Inc.’s Registration Statement on Form S-4, filed with the SEC on April 15, 2008).
  4.5  Exchange and Registration Rights Agreement, dated February 13, 2008, by and among Chill Acquisition, Inc., GSO Domestic Capital Funding LLC, GSO COF Facility LLC, GSO Origination Funding Partners LP, Farallon Funding, L.L.C., AlpInvest Partners Mezzanine 2007 C.V., KKR Financial Holdings III, LLC and CMP II Initial Holdings, L.L.C. (incorporated by reference to Exhibit 4.5 on Goodman Global, Inc.’s Registration Statement on Form S-4, filed with the SEC on April 15, 2008).
  4.6  Joinder and Assumption Agreement, dated February 13, 2008, among Goodman Global, Inc., the Initial Guarantors listed therein, GSO Domestic Capital Funding LLC, GSO COF Facility LLC, GSO Origination Funding Partners LP, Farallon Funding, L.L.C., AlpInvest Partners Mezzanine 2007 C.V., KKR Financial Holdings III, LLC and CMP II Initial Holdings, L.L.C. (incorporated by reference to Exhibit 4.6 on Goodman Global, Inc.’s Registration Statement on Form S-4, filed with the SEC on April 15, 2008).
10.1  $800,000,000 Credit Agreement, dated as of February 13, 2008, among Chill Intermediate Holdings, Inc., Chill Acquisition Inc., which merged with and into Goodman Global, Inc., and Barclays Capital, the investment banking division of Barclays Bank Plc and Calyon New York Branch, as Joint Lead Arrangers, and Barclays Capital, the investment banking division of Barclays Bank Plc, Calyon New York Branch and General Electric Capital Corporation, as joint bookrunners, and General Electric Capital Corporation, as the Administrative and Collateral Agent (incorporated by reference to Exhibit 10.1 on Goodman Global, Inc.’s Registration Statement on Form S-4, filed with the SEC on April 15, 2008).

Index to Financial Statements
10.2†First Amendment to Term Loan Credit Agreement, dated as of December 7, 2009, among Goodman Global, Inc., Chill Intermediate Holdings, Inc., each other Guarantor, each Lender party thereto and General Electric Capital Corporation, as administrative agent.
    10.210.3  Revolving Credit Agreement, dated as of February 13, 2008, among Chill Intermediate Holdings, Inc., Chill Acquisition Inc., which merged with and into Goodman Global, Inc., and Barclays Capital, the investment banking division of Barclays Bank Plc and General Electric Capital Corporation, as Joint Lead Arrangers, Barclays Capital, the investment banking division of Barclays Bank Plc, Calyon New York Branch and General Electric Capital Corporation, as joint bookrunners, General Electric Capital Corporation, as the Administrative, Collateral Agent, Swingline Lender and Letter of Credit Issuer (incorporated by reference to Exhibit 10.2 on Goodman Global, Inc.’s Registration Statement on Form S-4, filed with the SEC on April 15, 2008).
    10.310.4†First Amendment to Revolving Credit Agreement, dated as of December 7, 2009, among Goodman Global, Inc., Chill Intermediate Holdings, Inc., each other Guarantor, each Lender party thereto and General Electric Capital Corporation, as administrative agent.
10.5  Intercreditor Agreement, dated February 13, 2008, between General Electric Capital Corporation, as collateral agent for the Term Loan Secured Parties and the Revolving Secured Parties referred to therein and acknowledged by Chill Holdings, Inc., Chill Acquisition, Inc., which merged with and into Goodman Global, Inc. and certain subsidiaries of Goodman Global, Inc. (incorporated by reference to Exhibit 10.3 on Goodman Global, Inc.’s Registration Statement on Form S-4, filed with the SEC on April 15, 2008).
    10.410.6  Term Loan Security Agreement, dated as of February 13, 2008, among Chill Intermediate Holdings, Inc., each of the Subsidiary Guarantors listed therein of Chill Acquisition, Inc., which merged with and into Goodman Global, Inc. and General Electric Capital Corporation, as collateral agent for the Secured Parties as defined therein (incorporated by reference to Exhibit 10.4 on Goodman Global, Inc.’s Registration Statement on Form S-4, filed with the SEC on April 15, 2008).
    10.510.7  Revolving Security Agreement, dated as of February 13, 2008, among Chill Intermediate Holdings, Inc., each of the Subsidiary Guarantors listed therein of Chill Acquisition, Inc., which merged with and into Goodman Global, Inc. and General Electric Capital Corporation, as collateral agent for the Secured Parties as defined therein (incorporated by reference to Exhibit 10.5 on Goodman Global, Inc.’s Registration Statement on Form S-4, filed with the SEC on April 15, 2008).
    10.610.8  Term Loan Guarantee, dated as of February 13, 2008, among Chill Intermediate Holdings, Inc., each of the Subsidiary Guarantors listed therein of Chill Acquisition, Inc., which merged with and into Goodman Global, Inc. and General Electric Capital Corporation, as collateral agent for the Secured Parties as defined therein (incorporated by reference to Exhibit 10.6 on Goodman Global, Inc.’s Registration Statement on Form S-4, filed with the SEC on April 15, 2008).

Index to Financial Statements
    10.710.9  Revolving Guarantee, dated as of February 13, 2008, among Chill Intermediate Holdings, Inc., each of the Subsidiary Guarantors listed therein of Chill Acquisition, Inc., which merged with and into Goodman Global, Inc. and General Electric Capital Corporation, as collateral agent for the Secured Parties as defined therein (incorporated by reference to Exhibit 10.7 on Goodman Global, Inc.’s Registration Statement on Form S-4, filed with the SEC on April 15, 2008).
    10.810.10  Term Loan Pledge Agreement, dated as of February 13, 2008, among Chill Intermediate Holdings, Inc., each of the Subsidiary Guarantors listed therein of Chill Acquisition, Inc., which merged with and into Goodman Global, Inc. and General Electric Capital Corporation, as collateral agent for the Secured Parties as defined therein (incorporated by reference to Exhibit 10.8 on Goodman Global, Inc.’s Registration Statement on Form S-4, filed with the SEC on April 15, 2008).
    10.910.11  Revolving Pledge Agreement, dated as of February 13, 2008, among Chill Intermediate Holdings, Inc., each of the Subsidiary Guarantors listed therein of Chill Acquisition, Inc., which merged with and into Goodman Global, Inc. and General Electric Capital Corporation, as collateral agent for the Secured Parties as defined therein (incorporated by reference to Exhibit 10.9 on Goodman Global, Inc.’s Registration Statement on Form S-4, filed with the SEC on April 15, 2008).
    10.10*10.12*  Chill Holdings, Inc. 2008 Stock Incentive Plan (incorporated by reference to Exhibit 10.10 on Goodman Global, Inc.’s Amendment No. 1 to the Registration Statement on Form S-4, filed with the SEC on May 30, 2008).

Index to Financial Statements
    10.11*†10.13*  Amended and Restated Chill Holdings, Inc. 2008 Annual Incentive Compensation Plan and form of award agreement thereunder.thereunder (incorporated by reference to Exhibit 10.11 on Goodman Global, Inc.’s Annual Report on Form 10-K, filed with the SEC on March 13, 2009).
    10.12*10.14*  Employment Agreement, dated February 13, 2008, between Chill Acquisition, Inc. and Charles A. Carroll (incorporated by reference to Exhibit 10.12 on Goodman Global, Inc.’s Registration Statement on Form S-4, filed with the SEC on April 15, 2008).
    10.13*10.15*  Employment Agreement, dated February 13, 2008, between Chill Acquisition, Inc. and Lawrence M. Blackburn (incorporated by reference to Exhibit 10.13 on Goodman Global, Inc.’s Registration Statement on Form S-4, filed with the SEC on April 15, 2008).
    10.1410.16  Stockholders Agreement, dated February 13, 2008 by and among Chill Holdings, Inc., Chill Acquisition, Inc., Hellman & Friedman Capital Partners VI, L.P., Hellman & Friedman Capital Partners VI (Parallel), L.P., Hellman & Friedman Capital Associates VI, L.P., Hellman & Friedman Capital Executive VI, L.P., H&F Chill Partners, L.P., GSO Special Situations Fund LP, GSO Origination Funding Partners LP, GSO COF Facility LLC, Farallon Capital Institutional Partners, L.P., Farallon Capital Institutional Partners II, L.P., Farallon Capital Institutional Partners III, L.P., Tinicum Partners, L.P., AlpInvest Partners Mezzanine 2007 C.V. and CMP II Initial Holdings, L.L.C. (incorporated by reference to Exhibit 10.14 on Goodman Global, Inc.’s Registration Statement on Form S-4, filed with the SEC on April 15, 2008).
    10.15*10.17*  Management Stockholders Agreement, dated February 13, 2008 by and among Chill Holdings, Inc., Chill Acquisition, Inc., Hellman & Friedman Capital Partners VI, L.P., Hellman & Friedman Capital Partners VI (Parallel), L.P., Hellman & Friedman Capital Associates VI, L.P., Hellman & Friedman Capital Executives VI, L.P., and H&F Chill Partners, L.P. and each of the Management Stockholder identified therein (incorporated by reference to Exhibit 10.15 on Goodman Global, Inc.’s Registration Statement on Form S-4, filed with the SEC on April 15, 2008).

Index to Financial Statements
    10.1610.18  Lease Agreement, dated December 1, 1994, between the Daniel Childrens 1991 Trust, the Lucy Hughes Abell 1991 Trust, the Sam Houston Abell 1991 Trust, the JBG Childrens 1991 Trust, the Hutton Gregory Goodman 1990 Trust, the Hannah Jane Goodman 1990 Trust, the Mary Jane Goodman 1990 Trust and the Harold Viterbo Goodman, II 1990 Trust and Goodman Manufacturing Company, L.P. (incorporated by reference to Exhibit 10.35 on Goodman Global, Inc.’s Amendment No. 1 to Form S-1, filed with the SEC on March 13, 2006, File No. 333-131597).
    10.17*10.19*  Charles A. Carroll Form of Option Agreement (incorporated by reference to Exhibit 10.17 on Goodman Global, Inc.’s Registration Statement on Form S-4, filed with the SEC on April 15, 2008).
    10.18*10.20*  Form of Equity Contribution Agreement (incorporated by reference to Exhibit 10.18 on Goodman Global, Inc.’s Registration Statement on Form S-4, filed with the SEC on April 15, 2008).
    10.19*10.21*  Form of Option Roll Over Agreement (incorporated by reference to Exhibit 10.19 on Goodman Global, Inc.’s Registration Statement on Form S-4, filed with the SEC on April 15, 2008).
    10.20*10.22*  Form of Severance Agreement (incorporated by reference to Exhibit 10.20 on Goodman Global, Inc.’s Registration Statement on Form S-4, filed with the SEC on April 15, 2008).
    10.21*10.23*  Form of Indemnification Agreement (incorporated by reference to Exhibit 10.21 on Goodman Global, Inc.’s Registration Statement on Form S-4, filed with the SEC on April 15, 2008).
    10.22*10.24*  Form of Time-Vested Option Agreement (incorporated by reference to Exhibit 10.22 on Goodman Global, Inc.’s Registration Statement on Form S-4, filed with the SEC on April 15, 2008).
    10.23*†10.25*  Form of Performance-Vested Option Agreement, as amended.amended (incorporated by reference to Exhibit 10.23 on Goodman Global, Inc.’s Annual Report on Form 10-K, filed with the SEC on March 13, 2009).
    10.24*10.26*  Employment Agreement, dated April 17, 2008 between Goodman Global, Inc. and David L. Swift (incorporated by reference to Exhibit 10.24 on Goodman Global, Inc.’s Amendment No. 1 to the Registration Statement on Form S-4, filed with the SEC on May 30, 2008).

Index to Financial Statements
    10.25*10.27*  Amendment Number One to Employment Agreement dated February 13, 2008 between Chill Acquisition, Inc. and Charles A. Carroll (incorporated by reference to Exhibit 10.25 on Goodman Global, Inc.’s Amendment No. 1 to the Registration Statement on Form S-4, filed with the SEC on May 30, 2008).
    10.26†*10.28*  Letter Agreement betweenamong Goodman Global, Inc., Chill Holdings, Inc. and Charles A. Carroll dated March 13, 2009 (incorporated by reference to Exhibit 10.26 on Goodman Global, Inc.’s Annual Report on Form 10-K, filed with the SEC on March 13, 2009)
12.1†  Statement of Computation of Ratio of Earnings to Fixed Charges
    21.121.1†  Subsidiaries of the Registrant (incorporated by reference to Exhibit 21.1 on Goodman Global, Inc.’s Registration Statement on Form S-4, filed with the SEC on April 15, 2008).
31.1†  Rule 13a-14(a)/15d-14(a) Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

Index to Financial Statements
31.2†  Rule 13a-14(a)/15d-14(a) Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1†  Section 1350 Certification of Annual Report by the Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

Filed herewith.

*Management contract or compensatory plan or arrangement

Index to Financial Statements

SIGNATURES

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

 

 GOODMAN GLOBAL, INC.
Date: March 13, 200912, 2010 By: 

/s/ LawrenceS/    LAWRENCE M. Blackburn    BLACKBURN        

  

Lawrence M. Blackburn

Executive Vice President and

Chief Financial Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated:

 

Signature

  

Title

  

Date

/s/ DavidS/    DAVID L. Swift    SWIFT        

David L. Swift

  

President, Chief Executive Officer and Director

  March 13, 200912, 2010

/s/ LawrenceS/    LAWRENCE M. Blackburn    BLACKBURN        

Lawrence M. Blackburn

  

Executive Vice President, Chief Financial Officer and Director

  March 13, 200912, 2010

/s/ MarkS/    MARK M. Dolan    DOLAN        

Mark M. Dolan

  

Vice President, Corporate Controller and Treasurer

  March 13, 200912, 2010

/s/ CharlesS/    ERIK RAGATZ        

Erik Ragatz

Chairman of the Board of Directors

March 12, 2010

/S/    CHARLES A. Carroll    CARROLL        

Charles A. Carroll

  Chairman of the Board of Directors

Director

  March 13, 200912, 2010

/s/ Philip U. Hammarskjold    

Philip U. Hammarskjold

DirectorMarch 13, 2009

S/s/ Robert    ROBERT B. Henske    HENSKE        

Robert B. Henske

  

Director

  March 13, 200912, 2010

/s/ Erik Ragatz    S/    SALONI SARAIYA MULTANI        

Erik RagatzSaloni Saraiya Multani

  

Director

  March 13, 2009

/s/ Saloni K. Saraiya    

Saloni K. Saraiya

DirectorMarch 13, 200912, 2010

Index to Financial Statements

Index to reports on internal control over financial reporting and consolidated financial statements

 

   Page

Audited consolidatedManagement’s report on internal control over financial statements Years ended December 31, 2008, 2007 and 2006reporting

  69

ReportReports of Independent Registered Public Accounting Firm

  7170

Consolidated balance sheets at December 31, 2008 and 2007

  72

For the period February 14 to December 31, 2008, the period January 1 to February 13, 2008 and for each of the years ended December 31, 2007 and 2006:

Consolidated statements of income

  73

Consolidated statements of shareholders’ equity

  74

Consolidated statements of cash flows

  75

Notes to consolidated financial statements

  76

Index to Financial Statements

MANAGEMENT’S REPORT ON INTERNAL CONTROL

OVER FINANCIAL REPORTING

Management of the Company, including the Chief Executive Officer and the Chief Financial Officer, is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Rules 13a-15(f) and 15d-15(f) of the Securities Exchange Act of 1934, as amended. Our internal controls were designed to provide reasonable assurance as to (i) the reliability of our financial reporting; (ii) the reliability of the preparation and presentation of the consolidated financial statements for external purposes in accordance with accounting principles generally accepted in the United States; and (iii) the safeguarding of assets from unauthorized use or disposition.

We conducted an evaluation of the effectiveness of our internal control over financial reporting as of December 31, 2009 based on the framework in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Through this evaluation, we did not identify any material weaknesses in our internal controls. There are inherent limitations in the effectiveness of any system of internal control over financial reporting; however, based on our evaluation, we have concluded that our internal control over financial reporting was effective as of December 31, 2009.

The effectiveness of our internal control over financial reporting has been audited by Ernst & Young LLP, an independent registered public accounting firm, as stated in their report which is included herein.

Index to Financial Statements

Report of Independent Registered Public Accounting Firm

The Board of Directors and Shareholders of

Goodman Global, Inc.

We have audited the accompanying consolidated balance sheets of Goodman Global, Inc. as of December 31, 20082009 and 2007 (Predecessor),2008 and the related consolidated statements of income, shareholders’ equity, and cash flows for the year ended December 31, 2009, the period February 14, 2008 to December 31, 2008, the period January 1, 2008 to February 13, 2008 (Predecessor) and the two yearsyear ended December 31, 2007 (Predecessor). These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the Standardsstandards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. We were not engaged to perform an audit of the Company’s internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements,statements. An audit also includes assessing the accounting principles used and significant estimates made by management, andas well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Goodman Global, Inc. at December 31, 20082009 and 2007 (Predecessor),2008, and the consolidated results of its operations and its cash flows for the period January 1, 2008 to February 13, 2008,year ended December 31, 2009 and the period February 14, 2008 to December 31, 2008 , the period January 1, 2008 to February 13, 2008 (Predecessor) and the two yearsyear ended December 31, 2007 (Predecessor) in conformity with accounting principles generally accepted in the United States.

As discussed in Notes 2 and 7 to the consolidated financial statements, effective January 1, 2007, the Company adoptedchanged its method of accounting for income tax contingencies with the adoption of the guidance originally issued in Financial Accounting Standards Board Interpretation No. 48 “Accounting for Uncertainty(codified in FASB ASC Topic 740,Income Taxes).

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Goodman Global, Inc.’s internal control over financial reporting as of December 31, 2009, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 12, 2010 expressed an interpretation of FASB Statement No. 109.”unqualified opinion thereon.

/s/    Ernst & Young LLP

/S/    ERNST & YOUNG LLP        

Houston, Texas

March 12, 2010

Index to Financial Statements

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Shareholders of

Goodman Global, Inc.

We have audited Goodman Global, Inc.’s internal control over financial reporting as of December 31, 2009, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). Goodman Global, Inc.’s management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the company’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, Goodman Global, Inc. maintained, in all material respects, effective internal control over financial reporting as of December 31, 2009, based on the COSO criteria.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial position of Goodman Global, Inc. at December 31, 2009 and 2008 , and the consolidated results of its operations and its cash flows for the year ended December 31, 2009, the period February 14, 2008 to December 31, 2008, the period January 1, 2008 to February 13, 2008 (Predecessor), and the year ended December 31, 2007 (Predecessor), and our report dated March 12, 2010 expressed an unqualified opinion thereon.

/S/    ERNST & YOUNG LLP        

Houston, Texas

March 12, 2010

Index to Financial Statements

Goodman Global, Inc.

Consolidated balance sheets

 

  Successor Predecessor
  December 31,  December 31, 
  2008 2007  2009  2008 
  (In thousands, except share data)  (In thousands) 

Assets

       

Current assets:

       

Cash and cash equivalents

  $144,118  $18,955  $39,679  $144,118  

Restricted cash

   2,700   2,600   2,700   2,700  

Accounts receivable, net of allowance for doubtful accounts ($3.9 million at December 31, 2008; $7.0 million at December 31, 2007)

   206,821   217,035

Accounts receivable, net of allowance for doubtful accounts ($4.4 million at December 31, 2009; $3.9 million at December 31, 2008)

   207,870   206,821  

Inventories

   223,330   277,723   294,651   223,330  

Deferred tax assets

   63,714   41,062   13,326   63,714  

Other current assets

   19,300   18,246   33,956   19,300  
             

Total current assets

   659,983   575,621   592,182   659,983  

Property, plant, and equipment, net

   177,693   159,395   169,906   177,693  

Goodwill

   1,399,536   391,287   1,399,536   1,399,536  

Identifiable intangibles

   802,265   398,707   782,223   802,265  

Deferred tax assets

   —     28,059

Deferred financing costs

   36,268   14,548   27,968   36,268  

Other non current assets

   7,708   —    
       
      

Total assets

  $3,075,745  $1,567,617  $2,979,523  $3,075,745  
             

Liabilities and shareholders’ equity

       

Current liabilities:

       

Trade accounts payable

  $59,664  $104,438  $95,038  $59,664  

Accrued warranty

   37,683   39,669   37,233   37,683  

Other accrued expenses

   126,393   92,040   124,283   126,393  

Current portion of long-term debt

   —     3,500   —     —    
             

Total current liabilities

   223,740   239,647   256,554   223,740  

Long-term debt, less current portion

   1,347,526   651,925   1,160,790   1,347,526  

Deferred tax liabilities

   165,349   —     155,216   165,349  

Other long-term liabilities

   76,833   53,939   91,445   76,833  

Common stock, par value $.01, 1,000 shares authorized, 10 shares issued and outstanding as of December 31, 2008

   —     —  

Common stock, par value $.01, 275,000,000 shares authorized, 68,938,590 issued and outstanding as of December 31, 2007

   —     689

Common stock, par value $.01, 1,000 shares authorized, 10 shares issued and outstanding as of December 31, 2009 and as of December 31, 2008

   —     —    

Accumulated other comprehensive income (loss)

   (52,069)  337   8,230   (52,069

Additional paid-in capital

   1,288,070   466,056   1,294,214   1,288,070  

Retained earnings

   26,296   155,024   13,074   26,296  
             

Total shareholders’ equity

   1,262,297   622,106   1,315,518   1,262,297  
             

Total liabilities and shareholders’ equity

  $3,075,745  $1,567,617  $2,979,523  $3,075,745  
             

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

Index to Financial Statements

Goodman Global, Inc.

Consolidated statements of income

 

  Successor Predecessor
  February 14 to
December 31,

2008
  January 1 to
February 13,

2008
  For the years ended December 31,  Successor  Predecessor 
   2007 2006  For the year
ended

December 31,
2009
 February 14 to
December 31,
2008
  January 1 to
February 13,
2008
 For the year
ended

December 31,
2007
 
    (in thousands)    (In thousands) 

Sales, net

  $1,730,229   $147,137  $1,935,690  $1,794,753  $1,851,186   $1,730,229  $147,137   $1,935,690  

Costs and expenses:

           

Cost of goods sold

   1,319,113   115,714   1,462,776   1,374,774   1,290,747    1,319,113   115,714    1,462,776  

Selling, general, and administrative expenses

   187,144   22,677   210,613   205,894   236,231    187,144   22,677    210,613  

Acquisition-related expenses

   —     42,939   —     —     —      —     42,939    —    

Depreciation expense

   27,178   2,791   26,254   23,776   28,393    27,178   2,791    26,254  

Amortization expense

   17,735   1,044   8,865   8,865   20,042    17,735   1,044    8,865  
                         

Operating profit (loss)

   179,059   (38,028)  227,182   181,444   275,773    179,059   (38,028  227,182  

Interest expense

   135,616   56,176   68,378   77,825

Interest expense, net

   134,767    135,616   56,176    68,378  

Other (income) expense, net

   1,554   (347)  (2,752)  5,264   (19,642  1,554   (347  (2,752
                         

Earnings (losses) before taxes

   41,889   (93,857)  161,556   98,355   160,648    41,889   (93,857  161,556  

Provision for (benefit from) income taxes

   15,593   (27,815)  60,177   34,188   58,870    15,593   (27,815  60,177  
                         

Net income (loss) before preferred stock dividends

   26,296   (66,042)  101,379   64,167

Less: Preferred stock dividends

   —     —     —     6,622
            

Net income (loss)

  $26,296  $(66,042) $101,379  $57,545  $101,778   $26,296  $(66,042 $101,379  
                         

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

Index to Financial Statements

Goodman Global, Inc.

Consolidated statements of shareholders’ equity

 

  Common Stock  Additional
Paid-In
  Retained
Earnings
 Accumulated
Other
Comprehensive

Income (Loss)
  Total   Common stock  Additional
paid in
capital
  Retained
earnings
(deficit)
  Accumulated
other
comprehensive
income (loss)
  Total 
  Shares  Amount  Capital  (Deficit)   Shares  Amount   
  (in thousands)   (In thousands) 

Predecessor

                    

Balance at December 31, 2005

  47,972  $480  $108,073  $(2,826) $2,088  $107,815 

Net income

  —     —     —     64,167   —     64,167 

Change in fair value of derivatives, net of tax

  —     —     —     —     661   661 

Foreign currency translation

  —     —     —     —     797   797 

Defined benefit plans:

          

Prior service costs, net of tax

  —     —     —     —     (549)  (549)

Net loss arising during the period, net of tax

  —     —     —     —     90   90 
            

Comprehensive income

  —     —     —     —     —     65,166 

Preferred stock dividend

  —     —     —     (6,622)  —     (6,622)

Common stock issued

  20,931   209   351,961   —     —     352,170 

Stock-based compensation expense

  —     —     2,556   —     —     2,556 
                   

Balance at December 31, 2006

  68,903   689   462,590   54,719   3,087   521,085   68,903  $689  $462,590  $54,719   $3,087   $521,085  

Net income

  —     —     —     101,379   —     101,379   —     —     —     101,379    —      101,379  

Change in fair value of derivatives, net of tax

  —     —     —     —     (5,339)  (5,339)  —     —     —     —      (5,339  (5,339

Foreign currency translation

  —     —     —     —     2,228   2,228   —     —     —     —      2,228    2,228  

Defined benefit plans:

                    

Prior service costs, net of tax

  —     —     —     —     314   314   —     —     —     —      314    314  

Net loss arising during the period, net of tax

  —     —     —     —     47   47   —     —     —     —      47    47  
                        

Comprehensive income

  —     —     —     —     —     98,629   —     —     —     —      —      98,629  

Common stock issued

  36   —     307   —     —     307   36   —     307   —      —      307  

Stock-based compensation expense

  —     —     3,159   —     —     3,159   —     —     3,159   —      —      3,159  

Cumulative effect of FIN 48 adoption

  —     —     —     (1,074)  —     (1,074)

Cumulative effect of change in accounting principle

  —     —     —     (1,074  —      (1,074
                                      

Balance at December 31, 2007

  68,939   689   466,056   155,024   337   622,106   68,939   689   466,056   155,024    337    622,106  

Net loss

  —     —     —     (66,042)  —     (66,042)  —     —     —     (66,042  —      (66,042

Change in fair value of derivatives, net of tax

  —     —     —     —     9,099   9,099   —     —     —     —      9,099    9,099  

Foreign currency translation

  —     —     —     —     (41)  (41)  —     —     —     —      (41  (41
                        

Comprehensive loss

  —     —     —     —     —     (56,984)  —     —     —     —      —      (56,984

Accrued stock options

  —     —     31,510   —     —     31,510   —     —     31,510   —      —      31,510  
                                      

Balance at February 13, 2008

  68,939  $689  $497,566  $88,982  $9,395  $596,632   68,939  $689  $497,566  $88,982   $9,395   $596,632  
                   
                   

Successor

                    

Balance at February 14, 2008

  —    $—    $—    $—    $   $—     —    $—    $—    $—     $—     $—    

Net income

  —     —     —     26,296   —     26,296   —     —     —     26,296    —      26,296  

Change in fair value of derivatives, net of tax

  —     —     —     —     (41,736)  (41,736)  —     —     —     —      (41,736  (41,736

Foreign currency translation

  —     —     —     —     (5,482)  (5,482)  —     —     —     —      (5,482  (5,482

Defined benefit plans:

                    

Prior service costs, net of tax

  —     —     —     —     (4,851)  (4,851)  —     —     —     —      (4,851  (4,851
                        

Comprehensive loss

  —     —     —     —     —     (25,773)  —     —     —     —      —      (25,773

Equity contribution

  —     —     1,278,247   —     —     1,278,247   —     —     1,278,247   —      —      1,278,247  

Accrued stock options

  —     —     5,810   —     —     5,810   —     —     5,810   —      —      5,810  

Issuance of stock

  —     —     4,013   —     —     4,013   —     —     4,013   —      —      4,013  
                                      

Balance at December 31, 2008

  —    $—    $1,288,070  $26,296  $(52,069) $1,262,297   —     —     1,288,070   26,296    (52,069  1,262,297  

Net income

  —     —     —     101,778    —      101,778  

Change in fair value of derivatives, net of tax

  —     —     —     —      55,839    55,839  

Foreign currency translation

  —     —     —     —      3,483    3,483  

Defined benefit plans:

          

Prior service costs, net of tax

  —     —     —     —      977    977  
                               

Comprehensive income

  —     —     —     —      —      162,077  

Dividend distribution

  —     —     —     (115,000  —      (115,000

Accrued stock options

  —     —     6,144   —      —      6,144  
                   

Balance at December 31, 2009

  —    $—    $1,294,214  $13,074   $8,230   $1,315,518  
                   

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

Index to Financial Statements

Goodman Global, Inc.

Consolidated statements of cash flows

 

  Successor Predecessor   Successor Predecessor 
  February 14 to
December 31,
2008
 January 1 to
February 13,
2008
 December 31,
2007
 December 31,
2006
   December 31,
2009
 February 14 to
December 31,
2008
 January 1 to
February 13,
2008
 December 31,
2007
 
    (In thousands)     (In thousands) 

Operating activities

          

Net income (loss)

  $26,296  $(66,042) $101,379  $64,167   $101,778   $26,296   $(66,042 $101,379  

Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:

          

Depreciation

   27,178   2,791   26,254   23,776    28,393    27,178    2,791    26,254  

Amortization

   17,735   1,044   8,865   8,865    20,042    17,735    1,044    8,865  

Allowance for bad debt

   6,279   507   5,699   4,322    10,410    6,279    507    5,699  

Deferred tax provision

   (8,502)  9,212   6,150   15,992    15,770    (8,502  9,212    6,150  

Gain on disposal of assets

   (448)  (42)  (1,999)  (15)   (437  (448  (42  (1,999

Gain on repurchase of long-term debt

   (16,636  —      —      —    

Amortization of inventory step-up in basis

   47,991   —     —     —      —      47,991    —      —    

Compensation expense related to stock options

   4,574   6,240   3,363   2,696    5,083    4,574    6,240    3,363  

Amortization of deferred financing costs

   9,470   14,548   7,757   8,113    8,903    9,470    14,548    7,757  

Amortization of original issue discount

   7,526   —     —     —      7,303    7,526    —      —    

Changes in operating assets and liabilities, net of effects of acquisition:

          

Accounts receivable

   (9,551)  12,579   (22,648)  15,715    (11,459  (9,551  12,579    (22,648

Inventories

   77,502   (36,053)  68,336   (42,764)   (71,321  77,502    (36,053  68,336  

Other assets

   29,768   (67,820)  3,803   (13,125)   12,588    29,768    (67,820  3,803  

Accounts payable and accrued expenses

   (51,758)    80,347   (2,742)  (34,018)   97,288    (51,758  80,347    (2,742
                          

Net cash provided by (used in) operating activities

   184,059   (42,689)  204,217   53,724    207,705    184,059    (42,689  204,217  

Investing activities

          

Purchases of property, plant, and equipment

   (18,203)  (3,409)  (26,416)  (39,383)   (20,209  (18,203  (3,409  (26,416

Proceeds from the sale of property, plant, and equipment

   1,264   1   12,235   40    9    1,264    1    12,235  

Changes in restricted cash

   —     (100)  —     —      —      —      (100  —    

Acquisition, net of assumed debt

   (1,946,622)  —     —     —      —      (1,946,622  —      —    
                          

Net cash used in investing activities

   (1,963,561)  (3,508)  (14,181)  (39,343)   (20,200  (1,963,561  (3,508  (14,181

Financing activities

          

Proceeds from long-term debt, net of original issue discount

   1,373,000   —     —     —      —      1,373,000    —      —    

Repayments of successor long-term debt

   (28,000)   

Repayments of predecessor long-term debt

   (655,425)  —     (182,625)  (123,325)

Borrowings under revolving credit agreement during the year

   100,000   11,500   —     —   

Payments under revolving credit agreement during the year

   (105,000)   

Repayments of Successor long-term debt

   (75,029  (28,000  —      —    

Repayments of Predecessor long-term debt

   —      (655,425  —      (182,625

Borrowings under revolving credit agreement

   —      100,000    11,500    —    

Payments under revolving credit agreement

   (100,000  (105,000  —      —    

Equity contribution

   1,278,247   —     —     —      —      1,278,247    —      —    

Dividend distribution

   (115,000  —      —      —    

Equity issuance costs

   (8,142)  (99)  —     —      —      (8,142  (99  —    

Issuance of stock

   4,013   —     —     —      —      4,013    —      —    

Deferred finance costs

   (45,738)  —     —     —      (2,976  (45,738  —      —    

Exercise of options

   —     —     204   14    —      —      —      204  

Excess tax benefit from exercise of options

   1,236   25,270   —     —      1,061    1,236    25,270    —    

Other transaction costs

   —     —     (229)  —       —      —      (229

Proceeds from initial public offering

   —     —     —     354,491 

Redemption of preferred stock and accrued dividends

   —     —     —     (255,234)

Initial public offering transaction costs

   —     —     —     (2,537)
                          

Net cash provided by (used in) financing activities

   1,914,191   36,671   (182,650)  (26,591)

Net cash (used in) provided by financing activities

   (291,944  1,914,191    36,671    (182,650
             

Net increase (decrease) in cash

   134,689   (9,526)  7,386   (12,210)

Net (decrease) increase in cash

   (104,439  134,689    (9,526  7,386  

Cash at beginning of period

   9,429   18,955   11,569   23,779    144,118    9,429    18,955    11,569  
                          

Cash at end of period

  $144,118  $9,429  $18,955  $11,569   $39,679   $144,118   $9,429    18,955  
             
             

Supplementary disclosures of cash flow information:

          

Cash paid for interest

  $118,681  $43,547  $64,337  $70,407   $96,960   $118,681   $43,547   $64,337  
                          

Cash paid for income taxes, net of refunds received

  $32,255  $402  $48,950  $40,439   $33,364   $(35,113 $402   $48,950  
                          

Non-cash item: Accrual for purchases of property, plant and equipment

  $354  $425  $1,600  $6,546 
             

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

Index to Financial Statements

GOODMAN GLOBAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. Nature of operations

1.Nature of operations

Goodman Global, Inc. (Company), through its subsidiaries, is the second-largest U.S.a leading domestic manufacturer of heating, ventilation and air-conditioning (HVAC)air conditioning, or HVAC, products for residential and light commercial usesuse. Since the Company began to manufacture HVAC equipment in 1982, management believes that it has grown its share of the residential HVAC market to now become one of the country’s largest residential HVAC manufacturers based on unit sales. The Company’s activities include engineering, manufacturing, distributing, and marketing of an extensive line of heating, air-conditioningHVAC equipment and related products. The Company’s products inare predominantly marketed under the United States and in certain international markets. Branded products manufactured and marketed by the Company include primarily Goodman®, Amana®, and Quietflex®. The Company sells its products brand names. Management believes the Goodman® brand is the single largest domestic residential HVAC brand, based on unit sales, and caters to various types of customers, including distributors, installing dealers, national accounts and original equipment manufacturers with no single customer accounting for more than 10% of consolidated 2008 net revenues. Approximately 5%the large segment of the 2008 consolidated revenues weremarket that is price sensitive and desires reliable and low-cost climate comfort, while its premium Amana® brand includes advanced features, quieter operation and enhanced warranties. The Quietflex® brand is a recognized brand of flexible duct. Founded in 1975 as a manufacturer of flexible duct, the Company expanded into the broader HVAC manufacturing market in 1982. Since then, it has expanded its product offerings and maintained its core competency of manufacturing high-quality products at low costs. Management attributes its growth and success to a strategy of providing a quality, competitively priced product that it believes is designed to be reliable and easy-to-install. Revenues derived from external customers outside the United States. Although there is demand for the Company’s products throughout the year,States have not exceeded 5% of consolidated revenues in eachany of the past three years approximately 57% to 60% of total sales occurred in the second and third quarters of the fiscal year.

The Company follows Statement of Financial Accounting Standards (SFAS),Disclosures about Segments of an Enterprise and Related Information (SFAS 131). As the Company’s consolidated financial information is reviewed by the chief decision makers, and the business is managed under one operating and marketing strategy, the Company operates under one reportable segment.ended December 31, 2009, 2008 or 2007. Approximately 1% of the Company’s total assets are located outside the United States.

BasisGoodman Global, Inc. was incorporated under the laws of presentationDelaware in 2004. On December 23, 2004, Apollo Management, L.P., or Apollo, through its affiliate, Frio Holdings LLC, acquired the business from Goodman Global Holdings, Inc., a Texas corporation (the 2004 Acquisition) and following reorganization, operated as Goodman Global, Inc.

On April 11, 2006, the CompanyGoodman Global, Inc. completed an initial public offering of the Company’sits common stock. The Company offered 20.9 million shares and selling shareholders sold an additional 6.1 million shares, which included 3.5 million shares sold by selling shareholders pursuant to the exercise of the underwriters’ over-allotment option. Before expenses, the Company received proceeds of approximately $354.5 million. These proceeds were used to redeem all of the Company’s outstanding Series A Preferred Stock including associated accrued dividends, to satisfy a $16.0 million fee resulting from the termination of the Company’s management agreement with Apollo Management, L.P., or “Apollo”, and to redeem $70.7 million of the Company’s subsidiary’s floating rate notes.

In order to capitalize on the long-term growth prospects of the business, on October 21, 2007, Chill Holdings, Inc. (Parent),On February 13, 2008, Chill Acquisition, Inc., a subsidiary of Parent (Merger Sub), and the Company entered into an agreement and plan of merger (Merger Agreement) pursuant to which Merger SubDelaware corporation formed in October 2007, merged with and into Goodman Global, Inc., with Goodman Global, Inc. as the surviving corporation, now an indirect subsidiary of Goodman Global Group, Inc. (formerly Chill Holdings, Inc.), or Parent, a Delaware corporation formed October 2007 by affiliates of Hellman & Friedman LLC. This is referred to as the 2008 Acquisition.

Effective December 7, 2009, the Company amended its Term Loan Credit Agreement and Revolving Credit Agreement to permit a one-time dividend payable to its stockholder in an aggregate amount of $115.0 million. The Company incurred a fee of $3.0 million to its lenders in satisfaction of a condition to effectiveness of the amendments. The dividend was paid on February 13, 2008 (2008 Acquisition). Merger Sub was incorporated on October 15, 2007 forDecember 16, 2009.

On December 11, 2009, Parent completed a private placement of $586.0 million in aggregate principal amount at maturity of its 11.5% Senior Discount Notes due 2014 with gross proceeds of approximately $320 million. The senior discount notes are obligations of the purposeParent. The senior discount notes are not guaranteed by Goodman Global, Inc. and its subsidiaries and are effectively subordinated in right of acquiringpayment to all existing and future indebtedness and other liabilities of the Company and did not have any operations prior to February 13, 2008 other than in connection withits subsidiaries, including the 2008 Acquisition. Parent is controlled by investment funds affiliated with Hellman & Friedman LLC,indebtedness and other stockholders include investment funds affiliated with GSO Capital Partners L.P., Farallon Capital Partners L.P.obligations under its credit facilities and AlpInvest Partners N.V., along with certain other investors that GSO syndicated their investments to, as well as certain members of the Company’s management.outstanding senior subordinated notes. The 2008 Acquisition was financed through these entities contributing a total of $1,278.2 million to Parent in connection with the 2008 Acquisition along withused the net proceeds of the senior discount notes along with the dividend that it received from the Company to pay a private placement of $500.0 million aggregate principal amount of 13.50%/14.00% senior subordinated notes due 2016 (whollydividend to its shareholders and unconditionally guaranteed by each subsidiary guarantor), $800.0 million borrowed under the term loan credit agreement, and $105.0 million borrowed under the revolving credit agreement, totaling $1,373.0 million.

On February 13, 2008, each share of the Company’s common stock issued and outstanding immediately prioran equitable distribution to the effective time of the 2008 Acquisition was converted into the right to receive $25.60 in cash. In addition, all outstanding options to acquire the Company’s common stock issuedits option holders pursuant to the Company’s equity plans, whether or not vested, became fully vested asrequirements of the time immediately prior to the 2008 Acquisition and were cancelled and converted into cash payments (other than in the case of certain options held by members of the Company’s senior management who exchanged a portion of their vested options for new vested options in Parent).its stock incentive plan.

The financial statements for the year ended December 31, 2009 and for the period February 14 to December 31, 2008 have been presented to reflect the Company subsequent to the 2008 Acquisition (Successor). The financial statements for the period January 1 to February 13, 2008, and the years ended December 31, 2007 and 2006 have been presented to reflect the Company prior to the 2008 Acquisition (Predecessor).

Index to Financial Statements
2.Significant accounting policies

GOODMAN GLOBAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

2. Significant accounting policies

Principles of consolidation

The accompanying consolidated financial statements include the accounts of the Company and its subsidiaries. All material intercompany balances and transactions have been eliminated.

Estimates and assumptions

The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. The Company must make these estimates and assumptions because certain information that it uses is dependent on future events, cannot be calculated with a high degree of precision from data available or simply cannot be readily calculated based on generally accepted methodologies. In some cases, these estimates are particularly difficult to determine and significant judgment must be exercised. In preparing the financial statements, the most difficult, subjective and complex estimates and the assumptions that deal with the greatest amount of uncertainty relate to goodwill, intangible and long-lived assets and reserves for self-insurance, warranty and income tax liabilities. Actual results could differ materially from the estimates and assumptions used in the preparation of our financial statements.

Restricted cash and cash equivalents

Cash equivalents represent short-term investments, primarily money market funds and treasury bills, with an original maturity of three months or less. At December 31, 20082009 and 2007,2008, the restricted cash pertains to the Company’s extended warranty program and is invested in United States treasury notes and bills.

Inventories

Inventory costs include material, labor, depreciation, logistics, and plant overhead. The Company’s inventory is stated at the lower of cost or market using the first-in, first-out (FIFO) method.

As of the 2008 Acquisition, the Company’s inventory was increased by $48.0 million to reflect fair market value. As of December 31, 2008, this fair market value adjustment has been effectively reversed as the related inventory was sold and replaced by manufactured inventory valued at cost. The impact to the Company’s statement of income was an increase to its cost of goods sold of $48.0 million during the period February 14 to December 31, 2008.

A rollforwardroll forward of inventory reserves consists of the following (in thousands):

 

  Successor Predecessor   Successor Predecessor 
  February 14 to
December 31,
2008
 January 1
to February 13,
2008
 Twelve Months
Ended
December 31,
2007
 Twelve Months
Ended
December 31,
2006
   Year ended
December 31, 2009
 February 14 to
December 31,
2008
 January 1 to
February 13,
2008
 Year ended
December 31, 2007
 

At the beginning of the period

  $4,802  $4,735  $4,568  $1,785   $4,319   $4,802   $4,735   $4,568  

Current-period accruals

   1,208   164   3,261   7,680 

Current-period uses

   (1,691)    (97)  (3,094)  (4,897)

Current period accruals

   2,552    1,208    164    3,261  

Current period uses

   (1,457  (1,691  (97  (3,094
                          

At the end of the period

  $4,319  $4,802  $4,735  $4,568   $5,414   $4,319   $4,802   $4,735  
                          

Property, plant, and equipment

Property, plant and equipment are recorded at cost less accumulated depreciation. Expenditures for renewals and betterments are capitalized and expenditures for repairs and maintenance are charged to expense as incurred. Buildings and building improvements are depreciated using the straight-line method over the assets’estimated remaining useful lives of the assets, which is 10 to 39 years. Equipment is depreciated on a straight-line basis over the assets’ remaining useful lives, which is 3 to 10 years.

Interest attributable to construction in progress assets is capitalized. For the twelve months ended December 31, 2009, 2008 2007 and 2006,2007, the Company capitalized $0.8 million, $0.2 million $0.4 million and $1.3$0.4 million in interest, respectively.

Impairment of long-lived assets

The Company follows the provisions of SFAS No. 144,Accounting for the Impairment of Long-Lived Assets (SFAS 144). The statement sets forth the accounting for impairment of long-lived assets other than goodwill and indefinite-lived intangibles. The Company periodically evaluates whether current facts or circumstances indicate that the carrying value of its depreciable assets to be held and used may not be recoverable. If such circumstances are determined to exist, an estimate of undiscounted future cash flows produced by the long-lived asset is compared to the carrying value to determine whether impairment exists. If an asset is determined to be impaired, the loss is measured based on a quoted market price or the fair value based on various valuation techniques. There have been no impairments recorded in the three years ended December 31, 2008.2009.

Index to Financial Statements

GOODMAN GLOBAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Deferred financing costs

Debt issuance costs are capitalized and amortized to interest expense using the effective interest method over the period the related debt is anticipated to be outstanding. AsThe Company recorded $45.7 million in deferred financing fees in connection with long-term debt issued as a result of the 2008 Acquisition and the related extinguishment of Predecessor’s outstanding debt, Predecessor recognized an additional charge of $14.2$3.0 million in the period ended February 13, 2008December 2009 related to the write offan amendment to its credit agreement, of the remaining deferred financing costs. In connection with the 2008 Acquisition and new debt structure, the Company incurred deferred financing costswhich $28.0 was outstanding as of $45.7 million in the period February 14 to December 31, 2008, of which $36.3 million was unamortized at December 31, 2008.2009.

Identifiable intangible assets

The values assigned to amortizable intangible assets are amortized to expense over their estimated useful lives and are reviewed for potential impairment. The estimated useful lives are based on an evaluation of the circumstances surrounding each asset, including an evaluation of events that may have occurred that would cause the useful life to be decreased. In the event the useful life would be considered to be shortened, or if the asset’s future value were deemed to be impaired, an appropriate amount would be charged to amortization expense. Future operating results and residual values could therefore reasonably differ from the Company’s current estimates and could require a provision for impairment in a future period. Indefinite lived intangible assets are reviewed in accordance with SFAS No. 142,Goodwill and Other Intangibles (SFAS 142)Financial Accounting Standards Board (FASB) accounting standards by comparison of the fair market value with its carrying amount. The Company performed its annual test as of October 1, 20082009 and determined that no impairment exists. As of December 31, 2008,2009, there were no indicators noted that would require the Company to re-evaluate its annual impairment test.

The values assigned to the Company’s identifiable intangible assets were determined using the income approach, whereby the fair value of an asset is based on the present value of its estimated future economic benefits. This approach was considered appropriate, as the inherent value of these intangible assets is their ability to generate current and future cash flows. The key assumption in using this approach is the identification of the revenue streams attributable to these assets based on budgetedprojected future revenues. Amounts allocated to the identifiable intangibles are amortized on a straight-line basis over their estimated useful lives, with no residual value, as follows:

 

Useful lives
in years

Customer Relationshipsrelationships

  40 years

Trade Names—names – Amana

  15 years

Trade Names—Othernames – other

  Indefinite

Technology

  10 years

Identifiable intangible assets as of December 31, 2008 consist of the following (in thousands):

 

   Gross  Accumulated
Amortization
  Net

Intangible assets subject to amortization:

     

Customer relationships

  $535,000  $(11,836) $523,164

Trade names—Amana

   40,000   (2,360)  37,640

Technology

   40,000   (3,539)  36,461
            

Total intangible assets subject to amortization

   615,000   (17,735)  597,265

Total indefinite-lived trade names

   205,000   —     205,000
            

Total identifiable intangible assets

  $820,000  $(17,735) $802,265
            
   Intangible assets subject to amortization       
   Customer
relationships
  Trade
names -
Amana
  Technology  Sub-total  Indefinite-
lived trade
names
  Total 

Balance at February 14, 2008

  $535,000   $40,000   $40,000   $615,000   $205,000  $820,000  

2008 amortization

   (11,836  (2,360  (3,539  (17,735  —     (17,735
                         

Balance at December 31, 2008

   523,164    37,640    36,461    597,265    205,000   802,265  

2009 amortization

   (13,375  (2,666  (4,001  (20,042  —     (20,042
                         

Balance at December 31, 2009

  $509,789   $34,974   $32,460   $577,223   $205,000  $782,223  
                         

The amortization related to the amortizable intangibles assets for Successor in the aggregate will be approximately $20.0 million per year over the next five years.

Index to Financial Statements

Predecessor identifiable intangible assets as of December 31, 2007 consist of the following (in thousands):GOODMAN GLOBAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

   Gross  Accumulated
amortization &
impairment
  2007
net

Intangible assets subject to amortization:

      

Customer relationships

  $291,560  $22,046  $269,514

Technology

   15,760   4,767   10,993

Contracts

   11,033   11,033   —  
            

Total intangible assets subject to amortization

   318,353   37,846   280,507

Total indefinite-lived trade names

   118,200   —     118,200
            

Total identifiable intangible assets

  $436,553  $37,846  $398,707
            

Goodwill

Goodwill is the excess of the cost of an acquired company over the amounts assigned to assets acquired and liabilities assumed. Under SFAS No. 142,Goodwill and Other Intangible Assets(SFAS 142), goodwill and other indefinite-lived intangibles are not amortized, but are tested for impairment annually or more frequently if an event occurs or circumstances change that would indicate the carrying amount could be impaired. Impairment testing for goodwill is done at the reporting unit level, which the Company has concluded is on a consolidated basis as the Company has only one operating segment.reporting unit. An impairment charge generally would be recognized when the carrying amount of the reporting unit exceeds the estimated fair market value of the reporting unit. The Company estimates fair value using standard business valuation techniques such as discounted cash flows, industry participant information and reference to comparable business transactions. The discounted cash flow fair value estimates are based on the Company’s projected future cash flows and the estimated weighted-average cost of capital of market participants. Management assumptions about expected future cash flows can be affected by changes in industry or market conditions or the rate and extent to which anticipated synergies or cost savings are realized. The estimated weighted-average cost of capital is based on the risk-free interest rate and other factors such as equity risk premiums and the ratio of total debt and equity capital. The Company performed its annual test as of October 1, 20082009 and determined that no impairment exists. As of December 31, 2008,2009, there were no indicators noted that would require the Company to re-evaluate its annual impairment test. However, if these estimates or the related assumptions change, the Company may be required to record impairment charges for these assets in the future.

Fair value of financial instruments

Financial instruments include cash equivalents, accounts receivable, accounts payable, revolving loans payable, assets held in the defined pension plan, long-term debt and commodity swap agreements. Management believes the fair value of cash equivalents, accounts receivable and accounts payable approximates their carrying value due to their short-term nature. The fair value of revolving loans payable and long-term debt is estimated based on anticipated interest rates that management believes would currently be available todetermined using the Company for similar issues of debt, taking into accountincome approach. The Company’s assets held in the current credit risk of the Companydefined pension plan and other market factors and arms length trades for debt securities, which are traded. The fair value of long-term debt is estimated to approximate the carrying amount at December 31, 2008. Commodityit commodity swaps are recorded at fair value.

Revenue recognition

Revenue from the sale of products is recognized when persuasive evidence of an arrangement exists, delivery has occurred, sale price is fixed and determinable and collectability is reasonably assured. Revenues are recorded net of rebates to certain distributors, dealers and builders. These rebates relate to several programs and are designed to stimulate sales of the Company’s products. Provisions are made for warranties at the time revenues are recognized. Costs associated with shipping and handling of the Company’s products isare included in costs of goods sold.

The Company consigns certain products to manysome of its independent distributors. Product inventories shipped on consignment terms are maintained under a consignment arrangement on the premises of independent distributors.

Index to Financial Statements

Revenues and cost of sales are recognized at the time consigned inventory is sold by the independent distributor to a third party.

Trade and other receivables

The Company’s receivables are recorded when billed and represent claims against third parties that will be settled in cash. The customer’s financial position is periodically reviewed and no collateral is required. The carrying value of the Company’s receivables, net of the allowance for doubtful accounts, represents their estimated net realizable value. The Company estimates its allowance for doubtful accounts based on historical collection trends, type of customer, the age of outstanding receivables and existing economic conditions. If events or changes in circumstances indicate that specific receivable balances may be impaired, further consideration is given to the collectability of those balances and the allowance is adjusted accordingly. The Company does not have significant credit risk concentrations and historically has not experienced significant losses related to its receivables.

Index to Financial Statements

GOODMAN GLOBAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

A rollforwardroll forward of receivable reserves consists of the following (in thousands):

 

  Successor Predecessor   Successor   Predecessor 
  February 14 to
December 31,
2008
 January 1 to
February 13,
2008
 Year ended
December 31,
2007
 Year ended
December 31,
2006
   Year ended
December 31, 2009
 February 14 to
December 31,
2008
   January 1 to
February 13,
2008
 Year ended
December 31, 2007
 

At the beginning of the period

  $6,014  $7,032  $7,258  $7,795   $3,900   $6,014     $7,032   $7,258  

Current-period accruals

   6,279   507   5,699   4,322 

Current-period uses

   (8,393)    (1,525)  (5,925)  (4,859)

Current period accruals

   7,534    6,279      507    5,699  

Current period uses

   (7,048  (8,393    (1,525  (5,925
                            

At the end of the period

  $3,900  $6,014  $7,032  $7,258   $4,386   $3,900     $6,014   $7,032  
                            

Warranty costs

Warranty costs are accrued at the time of sale based on estimated future warranty claims. The Company’s estimated future warranty claims are determined based on historical failure rates and other factors. The Company also sells extended warrantyservice contracts for certain of its products with terms of up to ten years. Revenues from extended warrantyservice contracts are deferred and amortized on a straight-line basis over the term of the contracts. Expenses related to obtaining and servicing these contracts are expensed as incurred. A rollforwardroll forward of the liabilities for warranties consists of the following (in thousands):

 

   Successor  Predecessor 
   February 14 to
December 31,
2008
  January 1 to
February 13,
2008
  Year ended
December 31,
2007
  Year ended
December 31,
2006
 

At the beginning of the period

  $38,567  $39,669  $41,773  $37,685 

Current-period accruals

   42,059   3,542   40,801   35,192 

Current-period uses

   (42,943)    (4,644)  (42,905)  (31,104)
                 

At the end of the period

  $37,683  $38,567  $39,669  $41,773 
                 

Index to Financial Statements
   Successor     Predecessor 
   Year ended
December 31, 2009
  February 14 to
December 31,
2008
     January 1 to
February 13,
2008
  Year ended
December 31, 2007
 

At the beginning of the period

  $37,683   $38,567     $39,669   $41,773  

Current period accruals

   58,584    42,059      3,542    40,801  

Current period uses

   (59,034  (42,943    (4,644  (42,905
                   

At the end of the period

  $37,233   $37,683     $38,567   $39,669  
                   

Accrued selfSelf insurance reserves

The Company is self-insured up to certain stop-loss amounts for workers’ compensation, product liability, general liability, auto liability, group health and physical damage. The expense and liabilities are determined based on historical company claims information, as well as industry factors and trends in the level of such claims and payments. The Company’s self-insurance reserves, calculated on an undiscounted basis, as of December 31, 20082009 and 2007,2008, represent the best estimate of the future payments to be made on incurred claims reported and unreported. Based on historical payment patterns, the Company expects payments of undiscounted ultimate losses related to workers’ compensation as of December 31, 20082009 to be made as follows (in thousands):

2009

  $3,993

2010

   1,165

2011

   484

2012

   224

2013

   169

Thereafter

   291
    

Total

  $6,326
    

$7.0 million. As of December 31, 2008,2009, the Company had a balance of $4.8$3.8 million of self-insurance reserves related to medical claims that are short term in nature.

Stock compensation plans

Effective January 1, 2006, Predecessor adopted FASB SFAS No. 123 (revised),Share-Based Payment (SFAS 123(R)) utilizing the modified prospective approach. Prior to the adoption of SFAS 123(R), Predecessor accounted for stock option grants in accordance with Accounting Principles Board Opinion No. 25Accounting for Stock Issued to Employees (the intrinsic value method)(APB 25), and accordingly, recognized no compensation expense for stock option grants when the exercise price equaled the market value of common stock on the date of grant.

Under the modified prospective approach, SFAS 123(R) applies to new awards issued on or after January 1, 2006, as well as awards that were outstanding and unvested as of December 31, 2005, including those that are subsequently modified, repurchased or cancelled. Under the modified prospective approach, compensation cost for periods subsequent December 31, 2005 includes compensation cost for all share-based payments granted prior to, but not yet vested as of December 31, 2005, in accordance with the original provisions of SFAS 123. Prior periods were not restated to reflect the impact of adopting the new standard, and compensation was recognized over the vesting period of the award.

The Company accounts for its stock options under theat fair value recognition provisions of SFAS 123(R).value. The SuccessorCompany recognized compensation expense of $5.1 million ($3.1 million, net of tax) and $4.6 million ($2.8 million, net of tax) during the year ended December 31, 2009 and the period February 14 to December 31, 2008, and the Predecessorrespectively. The Company recognized compensation expense of $6.2 million ($4.0 million, net of tax) during the period January 1 to February 13, 2008 primarily as a result of the 2008 Acquisition, when 1.7 million shares vested. The Predecessor recognized $3.2vested and $3.4 million ($2.0 million, net of tax) and $2.6 million ($1.72.1 million, net of tax) during the yearsyear ended December 31, 2007 and 2006, respectively.2007. The Company’s compensation expense is included in selling, general and administrative expense in the accompanying consolidated statements of income.

The Company receives a tax deduction for certain stock option exercises during the period in which the options are exercised, generally for the excess of the price at which the stock is sold over the exercise price of the options. In addition, the Company receives an additional tax deduction when non-vested stock vests at a higher

Index to Financial Statements

GOODMAN GLOBAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

value than the value used to recognize compensation expense at the date of grant. In accordance with SFAS 123(R), theThe Company is required to reportreports excess tax benefits from the award of equity instruments as financing cash flows. Excess tax benefits will beare recorded when a deduction reported for tax return purposes for an award of equity instruments exceeds the cumulative compensation cost for the instruments recognized for financial reporting purposes. For the year ended December 31, 2009 and the period February 14 to December 31, 2008, the Company recognized an excess tax benefit from the exercise of stock options of $1.1 million and $1.2 million, respectively, in its financing cash flows. For the period of January 1 to February 13, 2008, Predecessor recordedrecognized in its financing cash flows a tax benefit of $25.3 million related to the exercise of options as a result of the Transactions. During the Successor period February 14 to December 31, 2008 and the Predecessor years ended December 31, 2007 and 2006, net cash proceedsAcquisition. There was no excess tax benefit from the exercise of stock options andin the net tax benefit from the proceeds of stock options were not material.Predecessor year ended December 31, 2007.

Pensions and other postretirement benefits

The Company accounts for its defined benefit pension plan and its defined benefit postretirement medical plan in accordance with SFAS No. 158,Employers’ Accounting for Defined Benefit Pension and other Postretirement Plans(SFAS 158), SFAS No. 87,Employers’ Accounting for Pensions (SFAS 87) and SFAS No. 106,Employers’ Accounting for Postretirement Benefits Other Than Pensions(SFAS 106).FASB accounting standards. These standards require that amounts recognized in the financial statements be determined on an actuarial basis. Significant assumptions involved in

Index to Financial Statements

determining the Company’s pension and other postretirement benefit expense include the expected return on plan assets, expected healthcare cost and the discount rate for calculating future liability. The assumed long-term rate of return on assets is applied to a calculated value of plan assets which results in an estimated return on plan assets that is included in current year pension income or expense.

Research and development

Research and development costs are charged to selling, general and administrative expense as incurred. Research and development expense was $11.2 million for the year ended December 31, 2009 and $9.3 million for the Successor period February 14 to December 31, 2008 and $1.2 million $9.1 million and $8.8$9.1 million for the Predecessor periods of January 1 to February 13, 2008 and the yearsyear ended December 31, 2007, and 2006, respectively.

Income taxes

The Company uses the liability method of accounting for taxes. Under this method, deferred tax assets and liabilities are determined based on differences between financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when such differences reverse.

The Company regularly evaluates valuation allowances established for deferred tax assets for which future realization is uncertain. The Company performs this evaluation at least quarterly and at the end of each fiscal year. The estimation of required valuation allowances includes estimates of future taxable income. In assessing the realizability of deferred tax assets at December 31, 20082009 the Company considered whether it was more likely than not that some portion or all of the deferred tax assets would not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. The Company considers taxable income in carry back years, the reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. If actual future taxable income is different from the estimates, the Company’s results could be affected.

Effective January 1, 2007, the Company adopted the provisions of FASB Interpretation Number (FIN) No. 48,Accounting for Uncertainty in Income Taxes(FIN 48). FIN 48 clarifies SFAS No. 109,Accounting for Income Taxes(SFAS 109), and requiresaccounting standards that require the Company to evaluate its tax positions for all jurisdictions and for all years where the statute of limitations has not expired. FIN 48 requiresUnder the provisions, companies are required to meet a “more-likely-than-not” threshold (i.e. greater than a 50 percent likelihood of a tax position being sustained under examination) prior to recording a benefit for their tax positions. Additionally, for tax positions meeting this “more-likely-than-not” threshold, the amount of benefit is limited to the largest benefit that has a greater than 50 percent probability of being realized upon effective settlement. The Company recognizes interest and penalties related to unrecognized tax benefits in income tax expense on its income statement. For a further discussion of the impact of the adoption of FIN 48, see Note 7.

Derivatives and hedging activities

The Company uses financial instruments to manage market risk from changes in commodity prices and selectively hedges anticipated transactions that are subject to commodity price exposure, primarily using commodity contracts relating to raw materials used in its production process. The instruments are designated as cash flow hedges in accordance with SFAS 133, Accounting for Derivative Instruments and Hedging Activities(SFAS 133), as amended and are recorded in the consolidated statement of financial position at fair value. The effective portion of the contracts’ gains or losses due to changes in fair value are initially recorded as a component of accumulated Otherother comprehensive income (OCI) and are subsequently reclassified into cost of sales in the period in which the end products are sold to the Company’s customers.

Index to Financial Statements

GOODMAN GLOBAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Advertising

Advertising costs are expensed as incurred. Advertising expense was $1.9 million for the year ended December 31, 2009 and $1.1 million for the Successor period February 14 to December 31, 2008 and $0.6 million, $2.4 million and $2.7 million for2008. During the Predecessor period of January 1 to February 13, 2008 and the yearsyear ended December 31, 2007, advertising expense was $0.6 million and 2006,$2.4 million, respectively.

New accounting pronouncements

In June 2009, the FASB issued revisions to ASC Topic 860 and will require more information about transfers of financial assets, including securitization transactions, and where entities have continuing exposure to the risks related to transferred financial assets. It eliminates the concept of a “qualifying special-purpose entity,” provides for more restrictive requirements for derecognizing financial assets, and requires additional disclosures. The changes will be effective January 1, 2010. Early application is not permitted. The Company does not anticipate that adoption of this standard will have a material effect on its consolidated financial statements.

3. Long-term debt

Long-term debt consists of the following (in thousands):

   December 31, 2009  December 31, 2008 

Senior subordinated notes

  $423,962   $500,000  

Term loan credit agreement

   754,000    772,000  

Revolving credit agreement

   —      100,000  

Original issue discount

   (17,172  (24,474
         

Total long-term debt, net of original issue discount

   1,160,790    1,347,526  

Current portion of long-term debt

   —      —    
         

Long-term debt

  $1,160,790   $1,347,526  
         

Senior subordinated notes

In February 2008, the Company issued and sold $500.0 million of 13.50%/14.00% senior subordinated notes due 2016. The senior subordinated notes bear interest at a rate of 13.50% per annum, provided that the Company may, at its option, elect to pay interest in any interest period at a rate of 14.00%, per annum, in which case up to 3.0% per annum may be paid by issuing additional notes. The notes are wholly and unconditionally guaranteed by each subsidiary guarantor.

In April 2009, the Company formed Goodman Global Finance (Delaware) LLC (GGF), a Delaware limited liability company and, as of that date, an unrestricted subsidiary of the Company, that entered into two separate transactions to purchase for $58.9 million (inclusive of $1.9 million in accrued interest) approximately $76.0 million aggregate face value of the Company’s 13.5%/14% senior subordinated notes. The Company recognized a gain of $16.6 million in the second quarter of 2009 as a result of this early extinguishment of long-term debt, after taking into consideration the recognition of $2.4 million of previously unamortized deferred financing costs associated with the $76.0 million of senior subordinated notes. In December 2009, the Company designated GGF a restricted subsidiary and retired the $76.0 million aggregate face value 13.5%/14% senior subordinated notes that were held by GGF.

Term loan credit agreement/revolving credit agreement

In February 2008, the Company entered into an $800.0 million term loan credit agreement due 2014 and a $300.0 million revolving credit agreement due 2013. The term loan credit agreement has an interest rate of Prime or

Index to Financial Statements

UseGOODMAN GLOBAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

London Interbank Offered Rate (LIBOR), with a minimum of estimates3.25% plus applicable margin, based on certain leverage ratios, which was 3.0% and totaled 6.25% as of December 31, 2009. The revolving credit agreement has an interest rate of Prime or LIBOR, plus applicable margin, which was 1.0% and totaled 4.25% as of December 31, 2009.

As of December 31, 2009, the Company owed $754.0 million on its term loan credit agreement and had no outstanding obligation on its revolving credit agreement.

In December 2009, the Company made an $18.0 million payment on its term loan credit agreement to satisfy its obligation of $2.0 million per quarter for the period beginning October 1, 2011 and ending December 31, 2013. As a result, the Company recognized an expense of $0.3 million of previously unamortized deferred financing fees and $0.4 million of previously unamortized original issue discount that related directly to the amount of the early extinguishment of debt. The outstanding balance at December 31, 2009 of $754.0 million is due at maturity in February 2014.

The Company had availability under the revolving credit agreement of $198.0 million at December 31, 2009 after taking into consideration outstanding commercial and standby letters of credit issued under the credit facility, which totaled $33.5 million as of December 31, 2009.

Original issue discount

The preparationterm loan credit agreement included an original issue discount of consolidated$32.0 million. It is being amortized to interest expense using the effective interest method over the period the debt is anticipated to be outstanding through maturity. As of December 31, 2009, the unamortized balance of the original issue discount was $17.2 million.

Deferred financing fees

The Company incurred $45.7 million in loan origination fees and direct loan origination costs related to issuance of the senior subordinated notes and the term loan and revolving credit agreement. In December 2009, the Company paid a fee of $3.0 million to the holders of the term loan and revolving credit agreement to obtain amendments to permit a one-time dividend payable to its stockholder. As of December 31, 2009, the Company had $28.0 million in unamortized deferred financing fees which is being amortized to interest expense using the effective interest method over the period that the debt is anticipated to be outstanding.

Other

Future maturities of long-term debt by year at December 31, 2009 are as follows (in thousands):

2010

  $—  

2011

   —  

2012

   —  

2013

   —  

2014

   754,000

Thereafter

   423,962

Under the term loan credit agreement, the Company is required to satisfy and maintain specified financial statementsratios and other financial condition tests, including a minimum interest coverage ratio and a maximum total leverage ratio. In addition, under its revolving credit agreement, the Company is required to satisfy and maintain, in conformitycertain circumstances, a minimum fixed charge coverage ratio. As of December 31, 2009, the Company was in compliance with accounting principles generally accepted inall of the United States requires managementcovenants under its senior term loan credit agreement and revolving credit agreement.

All of the existing U.S. subsidiaries of the Company (other than AsureCare Corp., a Florida corporation and Goodman Global Finance (Delaware) LLC, a Delaware limited liability company) and all future restricted U.S. subsidiaries of the Company guarantee its debt obligations. In addition, Chill Intermediate Holdings, Inc. guarantees

Index to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates.

Financial Statements

New accounting pronouncementsGOODMAN GLOBAL, INC.

Effective January 1, 2008, NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

the Company adopted Statement of Financial Accounting Standards No. 157,Fair Value Measurements(SFAS 157), which establishes a framework for measuring fair value in generally accepted accounting principles, clarifiesCompany’s debt obligations under the definition of fair value within that framework,term loan and expands disclosures about the use of fair value measurements. SFAS 157 is effective for fiscal years beginning after November 15, 2007. However, in February 2008, the FASB issued FASB Staff Position No. FA5 157-2, Effective Date of FASB Statement No. 157 (FSP 157-2), which deferred the effective date of SFAS 157 for one year for non-financial assets and liabilities, except for certain items that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually).revolving credit agreements. The Company is structured as a holding company and substantially all of its assets and operations are held by its subsidiaries. There are currently evaluatingno significant restrictions on the impactability of SFAS 157 onthe Company to obtain funds from its subsidiaries by dividend or loan. The Company’s and the non-guarantor subsidiaries’ independent assets, revenues, income before taxes, and operating cash flows in total are more than 3% of the consolidated total. As such, separate financial statements for items withinof the scope of FSP 157-2, which became effective on January 1, 2009.guarantors are included herein in Note 14 condensed consolidating financial information.

4. Fair value measurements

Beginning January 1, 2009, the Company will adopt the provisions for nonfinancial assets and nonfinancial liabilities that are not required or permitted to be measured at fairFair value on a recurring basis, which include those measured at fair value in goodwill impairment testing, indefinite-lived tangible assets measured at fair value for impairment assessments, nonfinancial long-lived assets measured at fair value for impairment assessments and those initially measured at fair value in a business combination. We do not expect the provisions of FSP 157-2 related to these items to have a material impact on our consolidated financial statements.

SFAS 157 defines fair valueis defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. SFAS 157 providesFASB accounting standards also provide a framework for measuring fair value, establishes a three-level hierarchy for fair value measurements based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date and requires consideration of the Company’s creditworthiness when valuing certain liabilities.

The three-levelhierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets and liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). The three levels of the fair value hierarchy for disclosure of fair value measurements defined by SFAS 157 is as follows:are described below:

 

Level 1 -  QuotedUnadjusted quoted prices for identical instruments in active markets that are accessible to the reporting entity at the measurement date.date for identical assets and liabilities.
Level 2 -  QuotedInputs other than quoted prices forsimilarinstruments in active markets;markets for identical assets and liabilities which are observable either directly or indirectly for substantially the full term of the asset or liability. Level 2 inputs include the following:

-   quoted prices for similar assets and liabilities in active markets

-   quoted prices for identical or similar instrumentsassets or liabilities 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

-   observable inputs other than quoted prices that are used in the valuation techniques in which oneof the assets or more significant inputs or significant value drivers areunobservableliabilities (e.g., interest rate and yield curve quotes at commonly quoted intervals)

-   inputs that reflectare derived principally from or corroborated by observable market data by correlation or other means

Level 3-Unobservable inputs for the reporting entity’sasset or liability that is supported by little or no market activity. Level 3 inputs include management’s own assumptionsassumption about the assumptions that market participants would use in pricing the asset or liability developed based on the best information available in the circumstances.(including assumptions of risk)

The Company’s valuation techniques are applied to all oflevel in the assets and liabilities carried at fair value as of January 1, 2008, upon adoption of SFAS 157. Currently,hierarchy within which the Company’s commodity derivative instruments are carried at fair value under SFAS 157. The fair values aremeasurement is classified is determined based upon independently sourced market parameters. To ensureon the lowest level input that these derivative instruments are recorded atis significant to the fair value valuation adjustments may be required to reflect the creditworthiness of either party and constraints on liquidity. Any such adjustment is not material as of December 31, 2008.measure in its entirety.

   Fair value measurements on a recurring basis
   (In thousands)
   Quoted prices in
active markets
for identical
assets (Level 1)
  Significant other
observable inputs
(Level 2)
  Significant
unobservable inputs
(Level 3)
  Total

Restricted cash

  $2,700  $—    $—    $2,700

Derivatives, net

   —     23,378   —     23,378

Index to Financial Statements

GOODMAN GLOBAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Other fair value measurements

Long-term debt

In order to determine the fair value of its debt instruments at December 31, 2009, the Company considered valuation techniques that included the market, income and liquidation approaches in the analysis of its interest bearing debt. The following table presentsCompany elected to determine the fair value of each tranche of interest bearing debt using the income approach. The fair values presented are estimates and are not necessarily indicative of amounts for which the Company could settle such instruments currently or indicative of its intent or ability to dispose of or liquidate them. The Company estimates the fair value of its interest bearing debt as follows (in thousands):

Interest bearing security

  Par value
at December 31, 2009
  Range of fair value at December 31, 2009
    Low  High

Senior subordinated notes

  $423,962  $455,635  $473,375

Term loan

   754,000   749,623   762,311

Defined pension plan

The investments held by the Company’s defined benefit plan (the plan) are stated at fair value. Purchases and sales of securities are recorded on a trade-date basis. Interest income is recorded as earned. Dividends are recorded on the ex-dividend date. Net appreciation (depreciation) includes the defined benefit plan’s gains and losses on investments bought and sold as well as held during the year. The level in the fair value hierarchy within which the fair value measurement is classified is determined based on the lowest level input that is significant to the fair value measure in its entirety.

This is a description of the valuation methodologies used for those assets and liabilities measured at fair value on a recurring basisin the plan:

Money market funds-Valued at the net asset value of shares held by the plan at the financial statement date.
Mutual funds-Valued at the net asset value of shares held by the plan at the financial statement date.

Common/collective

trust fund

-Valued at the net asset value as reported by the issuer of the fund.

The following table sets forth by level, within the fair value hierarchy, the plan’s assets carried at fair value as of December 31, 20082009 (in millions)thousands):

 

   Fair Value Measurements on a Recurring Basis as of
December 31, 2008
 
   Quoted Prices in
Active Markets
for Identical
Assets (Level 1)
  Significant
Other
Observable
Inputs
(Level 2)
  Significant
Unobservable
Inputs
(Level 3)
  Total 

Liabilities:

       

Derivatives, net

  $—    $(52.8) $—    $(52.8)
                 

Effective January 1, 2008, the Company also adopted Statement of Financial Accounting Standards No. 159,The Fair Value Option for Financial Assets and Financial Liabilities(SFAS 159). SFAS 159 allows an entity the irrevocable option to elect fair value for the initial and subsequent measurement for certain financial assets and liabilities on a contract-by-contract basis. As the Company has not elected the fair value option for any of its assets or liabilities, the adoption of SFAS 159 had no impact on the Company’s consolidated financial statements.

3.Business combinations

The 2008 Acquisition is being accounted for under the purchase method of accounting, under the provisions of SFAS No. 141,Business Combinations (SFAS 141). The aggregate purchase price has been allocated to the assets acquired and liabilities assumed based upon their fair values.

The Company estimated the fair value of the acquired assets and liabilities using several generally accepted valuation techniques. Trade names, customer relationships, and technology were valued using the income approach, whereby the fair value of an asset is based on the present value of its estimated future economic benefit. Tangible assets were valued using the cost approach, or if a ready market for similar assets could be identified and relied upon, the market approach. The cost approach measures fair market value as the cost to construct or replace the asset with another asset of like utility. The market approach established fair market based on recent sales of comparable property. The trade names consist primarily of the “Goodman®”, “Amana®” and “Quietflex®” trademarks.

The excess of the cost of the 2008 Acquisition over the fair value of the net assets acquired is recorded as goodwill. The goodwill recorded is the result of the ability to earn a higher rate of return from the acquired business than would be expected if the assets had to be acquired or developed separately. The increase in basis of the assets will result in non-cash charges in future periods, principally related to the step-up in the value of inventory, property, plant and equipment and intangible assets. The acquirer incurred costs of $8.1 million which are included in goodwill related to the 2008 Acquisition. The incremental goodwill as a result of the 2008 Acquisition will not be deductible for federal income tax purposes.

   Quoted prices in
active markets for
identical assets
(Level 1)
  Significant other
observable
inputs

(Level 2)
  Significant
unobservable
inputs

(Level 3)
  Total

Money market fund

  $1,253  $—    $—    $1,253

Common/collective trust fund

   —     3,323   —     3,323

Mutual funds

   23,041   —     —     23,041
                

Total assets fair value

  $24,294  $3,323  $—    $27,617
                

Index to Financial Statements

The Company finalized its purchase price accounting during the fourth quarter of 2008. During the one-year purchase price allocation period, the Company made adjustments to the purchase price allocation estimated at February 13, 2008. These adjustments primarily related to the finalization of the fair market values of the intangibles assets, inventory and fixed assets, liabilities of the Predecessor and adjustments to deferred tax liabilities. The following table summarizes the fair values of the assets and liabilities assumed on February 13, 2008:GOODMAN GLOBAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

   Preliminary
Valuation as of
February 13, 2008
  Adjustments  Final
Valuation as of
December 31, 2008

Current assets

  $657,133  $(1,419) $655,714

Property, plant & equipment

   192,722   (2,852)  189,870

Deferred financing costs

   44,522   —     44,522

Deferred taxes

   22,091   —     22,091

Intangible assets

   785,000   35,000   820,000

Goodwill

   1,399,204   332   1,399,536
            

Total Assets Acquired

   3,100,672   31,061   3,131,733

Current liabilities

   226,630   9,793   236,423

Other liabilities

   55,307   7,241   62,548

Deferred taxes

   167,488   14,027   181,515

Debt

   1,373,000   —     1,373,000
            

Total Liabilities Assumed

   1,822,425   31,061   1,853,486
            

Net Assets Acquired

  $1,278,247  $—    $1,278,247
            

Unaudited proforma operating results of the Company giving to effect to the 5. Stock compensation plans

2008 Acquisition on January 1, 2008 and January 1, 2007 respectively, is summarized as follows (in thousands):

   Successor  Predecessor
   Year Ended December 31,
   2008  2007

Sales, net

  $1,877,366  $1,935,690

Net income (loss)

  $25,000(1) $5,346

(1)Stock Incentive Plan

Does not include non-recurring expenses of $55.1 million directly related to the Acquisition that were incurred in the Predecessor period January 1, 2008 to February 13, 2008.

4.Stock Compensation Plans

All outstanding options to acquire the Company’s common stock issued pursuant to Predecessor’s equity plans, whether or not vested, became fully vested immediately prior to the 2008 Acquisition and were cancelled and converted into cash payments, without interest, equal to the product of (1) the number of shares of the Company’s common stock subject to each option as of the effective time of the 2008 Acquisition multiplied by (2) the excess, if any, of $25.60 over the exercise price per share of common stock subject to such option (other than in the case of certain options held by members of Predecessor’s senior management who exchanged a portion of their vested options for new vested options in Parent).

On February 13, 2008, the Board of Directors of the Parent adopted the 2008 Chill Holdings, Inc. 2008 Stock Incentive Plan (2008 Plan). The 2008 Plan is a comprehensive incentive compensation plan that permits grants of equity-based compensation awards to employees and consultants of the Parent and its subsidiaries. Awards under the 2008 Plan may be in the form of stock options (either incentive stock options or non-qualified stock options) or other stock-based awards, including restricted stock purchase awards, restricted stock units and stock appreciation rights. TheAs of December 31, 2009, the maximum number of shares reserved for the grant or settlement of awards under the 2008 Plan is 6,734,923 shares of Parent, subject to adjustment in the event of an extraordinary dividend or other distribution, recapitalization, stock split, reorganization, merger, consolidation, spin-off, combination, repurchase or share exchange or other similar corporate transaction. Any shares subject to awards which are cancelled, forfeited, reacquired or repurchased before vesting under the 2008 Plan will again be available for grants under the 2008 Plan. In the event of a change in control, Parent’s Compensation Committee will have the discretion to accelerate all

Index to Financial Statements

outstanding awards, cancel awards for fair value, provide for the issuance of substitute awards and/or provide award holders an opportunity to exercise their awards prior to the occurrence of the change in control transaction.

In December 2009, the Parent’s Board of Directors deemed it advisable and in the best interest of the Parent’s stockholders to declare and pay an extraordinary dividend of approximately $3.15 per share for all issued and outstanding shares of Parent’s common stock. Pursuant to the terms and conditions of the 2008 Plan, the Parent’s Board of Directors approved and paid an equitable adjustment of approximately $3.15 to all outstanding stock option holders with a vesting date on or before December 31, 2009 and Parent established a reserve of $15.1 million for all non-vested issued and outstanding options as of December 31, 2009 that will be paid to the stock option holders at a future date when vesting occurs.

Through December 31, 2008,2009, the Company has issued 6.1 million stock optionsand outstanding under the 2008 Plan (1) 6,290,262 stock options with an exercise price of $10.00 per share, with a contractual life of 10 years and a weighted average fair market value at the date of grant of $3.43$3.44 per share. Relatedshare and (2) 301,250 shares of Goodman Global, Inc. common stock that were sold to employees of the 2008 Plan, 0.1 million shares vested inCompany at $10.00 per share, which was the period February 14, 2008 through December 31, 2008.estimated fair value of the stock as of the date of the sale. A portion of the options issued under the 2008 Plan vest based on a time period of up to four years and a portion vest based on achievement of pre-established performance targets in installments through 2012. It is the Company’s belief that the performance shares will vest over the installment period. Approximately 1.4 million stock options issued under the 2008 Plan vested in the year ended December 31, 2009.

A summary of stock option activity of the 2008 Plan follows (shares in thousands):

 

  Shares Weighted Average
Exercise Price per
Share
  Shares Weighted average
exercise price
per share

Predecessor

   

Outstanding at December 31, 2007

  5,207  $8.25

Outstanding at February 14, 2008

  —     

Issued

  6,083   $10.00

Forfeited

  —      —  
     

Outstanding at December 31, 2008

  6,083    10.00

Granted

  —     —    212    10.01

Exercised

  (5,207) $8.25  —      —  

Forfeited

  —     —    (5  10.00
           

Outstanding at February 13, 2008

  0  $0

Outstanding at December 31, 2009

  6,290    10.00
           

Successor

   

Outstanding at February 14, 2008

  —    $—  

Granted

  6,083  $10.00

Exercised

  —     —  

Forfeited

  —     —  
      

Outstanding at December 31, 2008

  6,083  $10.00
      

Shares available for future stock option awards to employees under the 2008 Plan were 350,411143,411 at December 31, 2008,2009, after taking into consideration that 301,250 shares were sold in 2008 to Company employees at $10.00 per share.

The fair value of each option award is estimated on the date of grant using the Black-Scholes-Merton model using assumptions discussed below. The expected volatility at the grant date was based mainly on the volatility of the Company’s competitors. The expected term of the options granted is based on the time period the options are expected to be outstanding. The risk-free interest rate is based on the U.S. Treasury rate of a note with the expected maturity of the expected term of the options. The Company has not considered a dividend payment in its calculation and believes that forfeitures will not be significant.

Index to Financial Statements

GOODMAN GLOBAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

Risk-free interest rates

  2.1%2.12% - 3.9%

Expected life of options (in years)

  7

Expected volatility

  30% - 32%

Dividend yield

  

Predecessor plan

The Company also had 54,188 outstanding stock options under a Predecessor plan. Under the terms of the February 13, 2008 merger agreement, these options became fully vested and Parent converted these options to 138,849 fully vested stock options of Goodman Global, Inc.

Other

The following table summarizes information about stock options outstanding as of December 31, 2008:2009 under the 2008 and Predecessor Plans:

 

      Options Outstanding  Options Exercisable
Exercise
Price Per

Share
  Number of
shares
Outstanding
(in thousands)
  Weighted
Average
Remaining
Contractual
Term
(in years)
  Weighted
Average
Exercise
Price Per
Share
  Aggregate
Intrinsic
Value
  Number of
shares
Exercisable
(in thousands)
  Weighted
Average
Remaining
Contractual
Term
(in years)
  Weighted
Average
Exercise
Price Per
Share
  Aggregate
Intrinsic
Value
$10.00  6,222  9.2  $9.82  $—    681  9.1  $8.38  $

Index to Financial Statements
   Options outstanding  Options exercisable

Exercise price per share

  Number of
options
outstanding
(in thousands)
  Weighted
average
remaining
contractual
life
  Weighted
average
exercise
price per
share
  Aggregate
intrinsic value

(in thousands)
  Number of
options
exercisable
  Weighted
average
remaining
contractual
life
  Weighted
average
exercise
price per
share
  Aggregate
intrinsic value

(in thousands)

$2.07 to $10.01

  6,429  8.2  $9.83  $3,667  1,659  8.2  $9.34  $1,759
                            

The following table summarizes the Company’s non-vested stock option award activity forsince the inception of the 2008 and 2007:Plan on the date of the 2008 Acquisition:

 

  Shares Weighted Average
Grant Date Fair
Value Per Share
  Shares
(in thousands)
 Weighted average
grant date fair
value per share

Predecessor

   

Nonvested at January 1, 2007

  2,235  $1.97

Non-vested at February 14, 2008

  —     $—  

Granted

  6,083    3.43

Vested

  (90  3.52

Forfeited

  —      —  

Non-vested at December 31, 2008

  5,993    3.43

Granted

  653   7.75  212    3.49

Vested

  (1,183)  1.93  (1,430  3.44

Forfeited

  (19)  3.73  (5  3.52
          

Nonvested at December 31, 2007

  1,686   3.68

Granted

  —    

Vested

  (1,686)  3.68

Forfeited

  —     —  

Non-vested at December 31, 2009

  4,770    3.43
          

Nonvested at February 13, 2008

  —    $—  
     

Successor

   

Granted

  6,083  $10.00

Vested

  (542)  10.00

Forfeited

  —     —  
     

Nonvested at December 31, 2008

  5,541  $10.00
     

At December 31, 2008,2009, there was $16.3$12.0 million of unrecognized compensation cost related to the Company’s stock options that are expected to be recognized over a weighted-average period of 3.42.5 years.

Index to Financial Statements

GOODMAN GLOBAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

5.Comprehensive Income (loss)

6. Comprehensive income (loss)

Accumulated other comprehensive income (loss) consists of the following (in thousands):

 

  Defined benefit
plans
 Change in fair
value of
derivatives
 Foreign currency
translation
 Total   Defined
benefit
plans
 Changes in fair
value of
derivatives
 Foreign
currency
translation
 Total 

Predecessor

          

December 31, 2005

  $(673) $2,436  $325  $2,088 

Net Change through December 31, 2006

   (459)  661   797   999 
             

December 31, 2006

   (1,132)  3,097   1,122   3,087   $(1,132 $3,097   $1,122   $3,087  
             

Net Change through December 31, 2007

   361   (5,339)  2,228   (2,750)

Net change through December 31, 2007

   361    (5,339  2,228    (2,750
                          

December 31, 2007

   (771)  (2,242)  3,350   337    (771  (2,242  3,350    337  
             

Net change through February 13, 2008

   —     9,099   (41)  9,058    —      9,099    (41  9,058  
                          

February 13, 2008

  $(771) $6,857  $3,309  $9,395   $(771 $6,857   $3,309   $9,395  
                          

Successor

          

February 14, 2008

  $—    $—    $—    $—     $—     $—     $—     $—    

Net change through December 31, 2008

   (4,851)  (41,736)  (5,482)  (52,069)   (4,851  (41,736  (5,482  (52,069
                          

December 31, 2008

  $(4,851) $(41,736) $(5,482) $(52,069)   (4,851  (41,736  (5,482  (52,069

Net change through December 31, 2009

   977    55,839    3,483    60,299  
                          

December 31, 2009

  $(3,874 $14,103   $(1,999 $8,230  
             

7. Significant balance sheet accounts

Index to Financial Statements
6.Significant balance sheet accounts

Inventories consist of the following (in thousands):

 

  Successor Predecessor  Year ended December 31,
  December 31,
2008
 December 31,
2007
  2009  2008

Raw materials and parts

  $24,538  $29,958  $22,005  $24,538

Finished goods

   198,792   247,765   272,646   198,792
            

Total inventories

  $223,330   $277,723  $294,651  $223,330
            

Property, plant, and equipment consist of the following (in thousands):

 

   Useful Lives
in Years
  Successor  Predecessor 
     December 31,
2008
  December 31,
2007
 

Land

  —    $14,417  $9,291 

Buildings and improvements

  10–39   48,863   50,827 

Equipment

  3–10   128,087   156,861 

Construction-in-progress

  —     11,575   6,904 
           
     202,942   223,883 

Less: Accumulated depreciation

     (25,249)    (64,488)
           
    $177,693  $159,395 
           

As a result of the 2008 Acquisition, the Company’s property, plant, and equipment has been increased by $28.7 million to reflect fair market value.

   Useful lives
in years
  Year ended December 31, 
     2009  2008 

Land

  —    $14,417   $14,417  

Buildings and improvements

  10-39   49,588    48,863  

Equipment

  3-10   148,037    128,087  

Construction-in-progress

  —     11,467    11,575  
           

Sub-total

     223,509    202,942  

Less: accumulated depreciation

     (53,603  (25,249
           

Property, plant and equipment, net

    $169,906   $177,693  
           

Other accrued expenses consist of the following significant items (in thousands):

 

   Successor  Predecessor
   December 31,
2008
  December 31,
2007

Accrued rebates

  $22,390  $33,710

Accrued self insurance reserves

   11,170   13,636

Derivatives

   52,836    2,769

Other

   39,997   41,925
        
  $126,393  $92,040
        
Other long term liabilities consist of the following significant items (in thousands):   
   Successor  Predecessor
   December 31,
2008
  December 31,
2007

Extended warranty

  $21,652  $19,228

FIN 48

   43,155   30,113

Pension liability

   9,278   2,711

Other

   2,748   1,887
        
  $76,833   $53,939
        
   Year ended December 31,
   2009  2008

Accrued rebates

  $33,423  $22,390

Accrued payroll

   27,595   11,689

Accrued self insurance reserves

   12,558   11,170

Accrued interest

   21,597   181

Derivative liability

   1,138   52,836

Other

   27,972   28,127
        

Total accrued expenses

  $124,283  $126,393
        

Index to Financial Statements
7.Income taxes

GOODMAN GLOBAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Other long term liabilities consist of the following significant items (in thousands):

   Year ended December 31,
   2009  2008

Extended service contracts

  $27,326  $21,652

Unrecognized tax benefits

   53,624   43,155

Pension liability

   8,185   9,278

Other

   2,310   2,748
        

Total other long term liabilities

  $91,445  $76,833
        

8. Income taxes

The provision (benefit) for income taxes consisted of the following (in thousands):

 

  Successor Predecessor        Predecessor
  February 14 to
December 31,
2008
 January 1
to February 13,
2008
 Year Ended
December 31,
2007
 Year Ended
December 31,
2006
   December 31,
2009
  February 14 to
December 31,
2008
 January 1 to
February 13,
2008
 December 31,
2007

Current expense (benefit):

           

U.S.

           

Federal

  $21,064  $(37,333) $44,905  $14,267   $39,592  $21,064   $(37,333 $44,905

State

   894   259   7,199   2,350    1,240   894    259    7,199
                         

Total U.S.

   21,958   (37,127)  52,104   16,617    40,832   21,958    (37,074  52,104

Foreign

   2,137   47   1,923   1,703    2,268   2,137    47    1,923
                         

Total current

   24,095   (37,027)  54,027   18,320    43,100   24,095    (37,027  54,027

Deferred expense (benefit):

           

U.S.

           

Federal

   (9,841)  11,082   5,591   14,426    10,426   (9,841  11,082    5,591

State

   1,339   (1,870)  559   1,442    5,344   1,339    (1,870  559
                         

Total U.S.

   (8,502)  9,212   6,150   15,865    15,770   (8,502  9,212    6,150

Foreign

   —     —     —     —      —     —      —      —  
                         

Total deferred

   (8,502)    9,212   6,150   15,858    15,770   (8,502  9,212    6,150
                         

Total provision for income taxes

  $15,593  $(27,815) $60,177  $34,188 
             

A reconciliation between the provision for income taxes and income taxes computed by applying the U.S. statutory rate is as follows (in thousands):

  

  Successor Predecessor 
  February 14 to
December 31,
2008
 January 1
to February 13,
2008
 Year ended
December 31,
2007
 Year ended
December 31,
2006
 

Tax provision at statutory rate at 35%

  $14,660  $(32,850) $56,545  $34,424 

Add (deduct):

     

State income taxes, net of federal taxes

   1,920   (1,704)  5,238   2,970 

Domestic production activities deduction

   (1,270)    1,812   (2,546)  (567)

Interest related to uncertain tax positions

   230   52   1,258   —   

Tax credits

   (250)  —     —     —   

Other permanent differences

   303   5,045   (488)  (2,639)

Changes in valuation allowance

   —     (170)  170   —   
             

Total provision for income taxes

  $15,593  $(27,815) $60,177  $34,188   $58,870  $15,593   $(27,815 $60,177
                         

A reconciliation between the provision for income taxes and income taxes computed by applying the U.S. statutory rate is as follows (in thousands):

         Predecessor 
   December 31,
2009
  February 14 to
December 31,
2008
  January 1 to
February 13,
2008
  December 31,
2007
 

Tax provision at statutory rate at 35%

  $55,503   $14,660   $(32,850 $56,545  

Add (deduct):

     

State income taxes, net of federal taxes

   6,150    1,920    (1,704  5,238  

Domestic production activities deduction

   (2,572  (1,270  1,812    (2,546

Uncertain tax positions

   (51  230    52    1,258  

Tax credits

   (220  (250  —      —    

Other permanent differences

   60    303    5,045    (488

Changes in valuation allowance

   —      —      (170  170  
                 

Total provision for income taxes

  $58,870   $15,593   $(27,815 $60,177  
                 

Index to Financial Statements

GOODMAN GLOBAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

The tax effects of temporary differences that give rise to the deferred tax assets and liabilities were as follows (in thousands):

 

  Successor Predecessor   Year ended December 31, 
  Year ended
December 31,
2008
 Year ended
December 31,
2007
   2009 2008 

Deferred tax assets:

      

Accrued liabilities

  $44,403  $46,905   $46,978   $44,403  

Identifiable intangible assets

   —     15,943 

Goodwill

   —     25,620 

Stock options

   1,761   2,279    3,718    1,761  

Derivative instruments

   26,181   1,448    —      26,181  

Federal tax credits

   2,484   —      4,501    2,484  

Net operating loss carryforward

   6,291   3,769 

Net operating loss carry forward

   3,358    6,291  

Other

   4,377   —      5,136    4,337  
       

Less: Valuation allowance

   (3,358)  (3,528)   (3,358  (3,358
              

Total deferred tax asset

   82,099   92,436    60,333    82,099  

Deferred tax liabilities:

      

Accrued liabilities

   —     (7,699)

Identified intangible assets

   (153,624)  —      (160,127  (153,624

Goodwill

   (2,789)    —      (5,949  (2,789

Property, plant, and equipment

   (27,321)  (15,616)   (27,376  (27,321

Derivative instruments

   —     —      (8,771  —    
              

Total deferred tax liability

   (183,734)  (23,315)   (202,223  (183,734
              

Net deferred tax asset/(liability)

  $(101,635) $69,121 
       

Net deferred tax liability

  $(141,890 $(101,635
       

The Company adopted the provisions of FIN 48, an interpretation of SFAS 109 were adoptedFASB accounting standards on January 1, 2007.

2007 that, among other things, require companies to recognize the tax benefits of uncertain positions only when the position is “more likely than not” to be sustained assuming examination by tax authorities. A reconciliation of the beginning and ending amount of unrecognized tax benefits, including accrued interest, is as follows (in thousands):

 

Balance at January 1, 2007

  $19,271

Additions based on tax positions related to the current year

   9,584

Additions related to tax positions of prior years

   —  

Accrued interest

   1,258

Reductions for tax positions of prior years

   —  

Settlements

   —  

Lapse of statute of limitations

   —  
   

Balance at January 1, 2008

  $30,113  $30,113  

Additions based on tax positions related to the current year

   1,300   1,300  

Additions related to tax positions of prior years

   —     —    

Accrued interest

   53   53  

Reductions for tax positions of prior years

   —  
    

Balance at February 13, 2008

   31,466  

Additions based on tax positions related to the current year:

   9,584  

Additions related to tax positions of prior years

   1,253  

Accrued interest

   852  
    

Balance at December 31, 2008

   43,155  

Additions based on tax positions related to the current year:

   9,601  

Additions related to tax positions of prior years

   882  

Accrued interest

   1,764  

Settlements

   —     (1

Lapse of statute of limitations

   —     (1,777
       

Balance at February 13, 2008

   31,466

Additions based on tax positions related to the current year

   9,584

Additions related to tax positions of prior years

   1,253

Accrued interest

   852

Reductions for tax positions of prior years

   —  

Settlements

   —  

Lapse of statute of limitations

   —  

Balance at December 31, 2009

  $53,624  
       

Balance at December 31, 2008

  $43,155
   

The Company recognizes interest and penalties related to uncertain tax positions in income tax expense. There is no material impact on the Company’s tax expense for the period. As of December 31, 2008,2009, the Company has approximately $4.2$5.1 million of accrued interest related to uncertain tax positions.

Index to Financial Statements

As of December 31, 2008,2009, approximately $3.4$4.4 million of unrecognized tax benefits (including interest) would affect the Company’s income tax expense and its effective income tax rate if recognized in future periods. While the amount of unrecognized tax benefits could change in the next twelve months, the Company does not expect this change to have a significant impact on its results of operations or financial position.

The tax years 2005, 2006, 2007 and 20072008 remain open to examination by the major taxing jurisdictions to which the Company is subject. The companyCompany is currently being audited by the Internal Revenue Service for the years ended December 31, 2006 and 2007 and the period January 1 to February 13, 2008.

Index to Financial Statements

GOODMAN GLOBAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

As of December 31, 2008,2009, the Company hashad a gross federal net operating loss carryforwardcarry forward of $8.7 million which expires beginning in 2014 through 2019. As of December 31, 2008,2009, the Company has a valuation allowance of $3.3 million for the portion of theentire net operating loss carryforwardcarry forward deferred tax asset that is subject to the Separate Return Limitation Year provision as a result of the 2004 Acquisition.an earlier acquisition.

Based upon the reversal of deferred tax liabilities and projected future taxable income, the Company does not believe that a valuation allowance is warranted on the remaining deferred tax assets, as it is more likely than not that these deferred tax assets will be realized.

For the period February 14 toyear ended December 31, 2008,2009, for the Predecessor period January 1 to February 13, 2008 and for the yearsPredecessor year ended December 31, 2007, and 2006, the Company paid taxes of $32.3$33.4 million, $0.4 million and $49.0 million, and $40.4 million, respectively. For the period February 14 to December 31, 2008, the Company received a refund, net of taxes paid, of $35.1 million.

Deferred income taxes have not been provided for on unremitted foreign earnings reinvested abroad. Currently, the Company does not expect these unremitted earnings to reverse and become taxable in the future. Due to the timing and circumstances of repatriation of such earnings, if any, it is not practicable to determine the unrecognized deferred tax liability relating to such amounts. The Company’s foreign subsidiary has cumulative earnings of approximately $17.8$24.3 million for which no U.S. income taxes or foreign withholding taxes that may be applicable upon actual or deemed repatriation have been accrued based on the expectation that those funds are permanently reinvested in the Company’s operations in that country.

9. Related-party transactions

8.Long-term debt

Long-term debt consistsKronos Inc. (Kronos), a portfolio company of the followingH&F and its affiliates, provides certain software and related services for the years ended December 31 (in thousands):

   Successor
2008
  Predecessor
2007
 

Senior subordinated notes

  $500,000  $—   

Term loan credit agreement

   772,000   —   

Revolving credit agreement

   100,000   —   

Original issue discount

   (24,474)    —   

Senior floating rate notes

   —     179,300 

Senior subordinated notes

   —     400,000 

Term credit facility

   —     76,125 

Current maturities

   —     (3,500)
         

Total long-term debt, net of original issue discount, less current maturities

  $1,347,526  $651,925 
         

Index to Financial Statements

On January 10, 2008, Successor commenced cash tender offers to purchase outstanding notes of Predecessor’s subsidiary, Goodman Global Holdings, Inc., consisting of outstanding 7-7/8% Senior Subordinated Notes due 2010 ($400 million aggregate principal amount outstanding)Company’s time and Floating Rate Notes due 2010 ($179.3 million aggregate principal amount outstanding) (together, the Existing Notes). On January 25, 2008, Predecessor executed the proposed amendments to the indentures for the Existing Notes, which amendments became operative immediately prior to the 2008 Acquisition. On February 13, 2008, Predecessor accepted the tendersattendance reporting. In 2009 and Successor made payment to holders of the Existing Notes of the tender offer consideration and consent payments, called for redemption, deposited the redemption payment with the trustee in respect of untendered Existing Notes. In addition, on February 13, 2008, the Successor repaid the $76.1 million outstanding under Predecessor’s then-existing term credit facility and $11.5 million outstanding under Predecessor’s then-existing revolving credit facility. As a result of the extinguishment of the Predecessor company debt, Predecessor incurred prepayment penalties of $35.6 million which are included in interest expense in the period ended February 13, 2008.

On February 13, 2008, Merger Sub issued and sold $500.0 million of 13.50%/14.00% senior subordinated notes due 2016. The senior subordinated notes bear interest at a rate of 13.50% per annum, provided that the Company may, at its option, elect to pay interest in any interest period at a rate of 14.00%, per annum, in which case up to 3.0% per annum may be paid by issuing additional notes. The notes are wholly and unconditionally guaranteed by each subsidiary guarantor, and borrowed (1) $800.0 million under a new term loan credit agreement due 2013 with Barclays Capital and Calyon New York Branch, as joint lead arrangers, Barclays Capital, Calyon New York Branch and General Electric Capital Corporation, as joint bookrunners, General Electric Capital Corporation, as administrative agent and collateral agent, and the lenders from time to time party thereto, and (2) $105.0 million under a new $300.0 million revolving credit agreement due 2013 with Barclays Capital and General Electric Capital Corporation, as joint lead arrangers, Barclays Capital, Calyon New York Branch and General Electric Capital Corporation, as joint bookrunners, General Electric Capital Corporation, as administrative agent and collateral agent, General Electric Capital Corporation, as letter of credit issuer, and the lenders from time to time party thereto. The term loan credit agreement has an interest rate of LIBOR (with a minimum of 3.25%) or Prime, plus applicable margin, based on certain leverage ratios, which was 4.25% and totaled 7.71% as of December 31, 2008. The revolving credit agreement has an interest rate of LIBOR or Prime, plus applicable margin, which totaled 4.25% as of December 31, 2008. The original issue discount is being amortized to interest expense using the effective interest method over the period the debt is anticipated to be outstanding through maturity. The Company incurred $45.7 million in loan origination fees and direct loan origination costs which is also being amortized to interest expense using the effective interest method over the period that the debt is anticipated to be outstanding.

The Company had availability under the revolving credit agreement of $69.1 million at December 31, 2008. Outstanding commercial and standby letters of credit issued under the credit facility totaled $33.5 million as of December 31, 2008.

In July 2008, the Company made a $26.0 million payment on its term loan credit agreement to satisfy its obligation of $2.0 million per quarter for the period beginning July 1, 2008 and ending September 30, 2011. In conjunction, the Company recognized an expense of $0.8 million of previously unamortized deferred financing fees and $0.9 million of previously unamortized original issue discount that related directly to the amount of the early extinguishment of debt. The next quarterly payment that is due under the terms of the term loan credit agreement is on December 31, 2011.

Under the term loan credit agreement, the Company is required to satisfy and maintain specified financial ratios and other financial condition tests, including a minimum interest coverage ratio and a maximum total leverage ratio. In addition, under its revolving credit agreement, the Company is required to satisfy and maintain, in certain circumstances, a minimum fixed charge coverage ratio. At December 31, 2008, the Company was in compliance with all of the covenants under its senior term loan credit agreement and it revolving credit agreement.

All of the existing and future restricted U.S. subsidiaries of the Company (other than AsureCare Corp., a Florida corporation) guarantee its debt obligations. The Company is structured as a holding company and substantially all of its assets and operations are held by its subsidiaries. There are currently no significant restrictions on the ability of the Company to obtain funds from its subsidiaries by dividend or loan. The Company’s and the non-guarantor subsidiaries’ independent assets, revenues, income before taxes, and operating cash flows in total are more than 3% of the consolidated total. As such, separate financial statements of the guarantors are included herein in Note 14 Condensed consolidating financial information.

Index to Financial Statements

Future scheduled maturities of the long-term debt at December 31, 2008, are as follows (in thousands):

2009

  $—  

2010

   —  

2011

   2,000

2012

   8,000

2013

   108,000

Thereafter

   1,254,000
    

Total

  $1,372,000
    

Interest paid by Successor was $118.7 million for the period February 14 to December 31, 2008. Interest paid by Predecessor was $43.5 million for the period January 1 to February 13, 2008, and $64.3Kronos $0.1 million and $70.4$0.1 million, for the year ended December 31, 2007 and 2006, respectively.

9.Related-party transactions

As a part of the 2008 Acquisition, the Company paid $8.1 million to Hellman & Freidman LLC in reimbursement for third party transaction related expenses.

expenses in 2008. Predecessor recorded certain related party transactions in 2007 and 2006 that were associated with the Predecessor’s founder and former director, Mr. Harold Goodman and certain of his family members including the payment of $0.2 million for an operating lease during each of 2007 and 2006.lease. In the ordinary course of its business, Predecessor purchased grilles and other materials from AirGuide Corp. (AirGuide) of approximately $1.3 million during each of 2007 and 2006, respectively.2007. Mr. Goodman and his immediate family were beneficiaries of trusts that owned a combined interest of 18.75% in AirGuide. Mr. Goodman is no longer a director of the Company, and Mr. Goodman and the Goodman family, either directly or through family trusts, owns no longer own any beneficial interest in Successor.

In connection with the initial public offering in April 2006, Predecessor redeemed all of its outstanding Series A Preferred Stock with an aggregate liquidation preference and accrued and unpaid dividends of approximately $255.2 million, of which members of Predecessor’s management received approximately $10.3 million, affiliates of Apollo received approximately $173.7 million and the Goodman family trusts and other equity syndicate investors received approximately $71.2 million. As of December 31, 2007 and 2006, Apollo owned approximately 41% of Predecessor’s common stock outstanding which deregistered in conjunction with the 2008 Acquisition. Neither Apollo nor the Goodman family owns any beneficial interest in Successor.10. Employee benefit plans

10.Employee benefit plans

401(k) plans

The Company sponsors two 401(k) savings plans for employees who have completed a requisite term of service, with one covering all nonunion employees of the Company and one covering union employees of the Company. Nonunion employees of the Company may defer up to 17% of their salaries and wages with the Company, at its discretion, matching 100% of amounts deferred, up to a maximum matching contribution of the lesser of 6% of the employee’s salary or $3,000. Union employees may defer up to 17% of their salaries and wages with the Company matching 50% of amounts deferred, up to a maximum matching contribution of 3% of the employee’s salary (up to a maximum matching contribution of 6% of the employee’s salary for employees hired on or after December 15, 2002). Employer-matching contributions for all plans were approximately $3.1 million, $3.9 million $3.6 million and $3.5$3.6 million, for the years ended December 31, 2009, 2008 2007 and 2006,2007, respectively.

Pension and other employee benefit plans

The Company sponsors a defined benefit plan (the plan), which covers certain union employees who have both attained age 21 and completed one year of service. The Company has 1,063 employees who are members of the collective bargaining unit, representing approximately 24% of the Company’s employees. Effective December 14, 2002, the defined benefit plan was amended to freeze participation for all employees except those hired on or before December 14, 2002. As of December 31, 2009, the Company had 1,120 participants in the plan. Benefits are provided at stated amounts based on years of service, as defined by the plan.

Index to Financial Statements

Benefits vest after completion of five years of service. The Company’s funding policy is to make contributions in amounts actuarially determined by an independent consulting actuary to fund the benefits to be provided. Plan assets consist of primarily equity and fixed-income securities.

A significant assumption we utilize is the discount rate used in calculating our benefit obligations. For 2008 we used the equivalent single discount rate based on discounting expected retirement plan benefit cash flows using the Citigroup Pension Discount Curve.

On February 12, 2008, Goodman was purchased by Hellman & Friedman LLC. As a result, the plan was adjusted to recognize all unrecognized amounts.

On December 31, 2006, the Company adopted the recognition and disclosure provisions of SFAS 158. SFAS 158 required the Company

Index to recognize the funded status (i.e., the difference between the fair value of plan assets and the projected benefit obligations) of its pension plan in the December 31, 2006 statement of financial position, with a corresponding adjustment to accumulated other comprehensive income, net of tax. The adjustment to accumulated other comprehensive income at adoption represents the net unrecognized actuarial losses, unrecognized prior service costs and unrecognized transition obligation remaining from the initial adoption of SFAS 87, all of which were previously netted against the plan’s funded status in the Company’s statement of financial position pursuant to the provisions of SFAS 87. These amounts will be subsequently recognized in net periodic pension cost pursuant to the Company’s historical accounting policy for amortizing such amounts. Further, actuarial gains and losses that arise in subsequent periods and are not recognized as net periodic pension cost in the same periods will be recognized as a component of other comprehensive income. Those amounts will be subsequently recognized as a component of net periodic pension cost on the same basis as the amounts recognized in accumulated other comprehensive income at adoption of SFAS 158.Financial Statements

GOODMAN GLOBAL, INC.

Included in accumulated other comprehensive income at December 31, 2008 is additional unrecognized actuarial losses of $7.9 million ($4.9 million net of tax) that was related primarily to decreases in the value of equity investments in the Plan.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

The funded status of the plan is as follows for the fiscal years ended December 31 (in thousands):

 

  Pension Benefits   Pension benefits 
  2008 2007 2006   2009 2008 2007 

Benefit payments

    

Benefit payments:

    

Benefit obligation at beginning of year

  $30,690  $30,281  $28,050   $31,613   $30,690   $30,281  

Service cost

   651   712   788    649    651    712  

Interest cost

   1,834   1,730   1,641    1,966    1,834    1,730  

Actuarial losses (gains)

   (300)  (795)  (84)   3,007    (300  (795

Amendments

   —     —     967    —      —      —    

Benefit payments

   (1,262)  (1,238)  (1,081)   (1,433  (1,262  (1,238
                    

Benefit obligation at end of year

  $31,613  $30,690  $30,281   $35,802   $31,613   $30,690  
                    

Change in plan assets:

    

Fair value of plan assets at beginning of year

  $27,979  $25,388  $21,552   $22,335   $27,979   $25,388  

Actual return on plan assets

   (6,293)  1,512   2,245    5,855    (6,293  1,512  

Employer contributions

   1,912   2,317   2,672    860    1,912    2,317  

Benefit payments

   (1,263)  (1,238)  (1,081)   (1,433  (1,263  (1,238
                    

Fair value of plan assets at end of year

  $22,335  $27,979  $25,388   $27,617   $22,335   $27,979  
                    

Funded status of the plan

  $(9,278) $(2,711) $(4,893)  $(8,185 $(9,278 $(2,711

Unrecognized amounts:

        

Net losses

   —     —     —      6,299    7,888    440  

Adjustment required to recognize minimum liability

   —     —     —   

Prior service costs

   —      —      816  
                    

Total

   —     —     —   

Net accrued benefit cost

  $(1,886 $(1,390 $(1,455
                    

Net prepaid (accrued) benefit cost

  $(9,278) $(2,711) $(4,893)
          

Components of net periodic benefit expense:

    

Service cost

  $649   $651   $712  

Interest cost

   1,966    1,834    1,730  

Expected return on plan assets

   (1,764  (2,288  (2,142

Amortization of net loss

   505    —      —    

Net amortization of prior service cost

   —      9    76  
          

Net periodic benefit expense

   1,356    206    376  

Purchase accounting charge

   —      1,641    —    
          

Total net periodic benefit expense

  $1,356   $1,847   $376  
          

Weighted-average assumptions as of December 31:

    

Discount rate (1)

   5.88  6.14  6.00
          

Expected long-term rate of return on plan assets (2)

   8.00  8.00  8.25
          

(1)For the years ended December 31, 2009 and 2008, the Company used the equivalent single discount rate based on discounting expected retirement plan benefit cash flows using the Citigroup Pension Discount Curve. For the year ended December 31, 2007, the Company based the discount rate on comparing corporate bond rates at that time.
(2)To develop the expected long-term rate of return on assets assumption, the Company considers the historical returns and the future expectations for returns for each asset category, as well as the target asset allocation of the pension portfolio and the effect of periodic rebalancing.

Index to Financial Statements

Components of net periodic benefit expense:

    

Service cost

  $651  $712  $788 

Interest cost

   1,834   1,730   1,641 

Expected return on plan assets

   (2,288)  (2,142)  (1,839)

Net amortization of prior service cost

   9   76   76 
             

Net periodic benefit expense

  $206  $376  $666 
             

Weighted-average assumptions as of December 31:

    

Discount rate

   6.14%  6.00%  5.75%

Expected long-term rate of return on plan assets

   8.00%  8.25%  8.25%

GOODMAN GLOBAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

The Company’s investment strategy for pension plan assets is to utilize a diversified blend of equity and fixed income portfolios to earn a long-term investment return that meets or exceeds the long-term actuarial expected rate of return on plan assets of 8%. Active investment management strategies are used to measure each investment portfolio’s returns and risk levels against applicable market indices. The weighted-average asset allocation for the Company’s pension plan assets are as follows:

   Actual allocation
as of December 31,
  Target
allocation
 
   2008  2009  2010 

Equities

  44 66 65

Fixed income

  0   30   30  

Cash equivalents

  56   4   5  
          

Total

  100 100 100
          

The Company anticipates making contributions to the plan during 20092010 of $0.9 million. The Company expects its pension plan to pay benefits over the next five years and in the aggregate for the five years thereafter as follows (in thousands):

 

2009

  $1,324

2010

   1,377  $1,422

2011

   1,439   1,491

2012

   1,535   1,596

2013

   1,647   1,715

2014-2018

   9,961

2014

   1,827

2015-2019

   11,048

The weighted-average asset allocation for the Company’sActuarial gains and losses that are not recognized as net periodic pension plan assets as of December 31, 2007 and 2008, as well as the target allocation for the year ended December 31, 2009, follow:

   Actual allocation as of
December 31:
  Target
2009
Allocation
 
   2007  2008  

Equities

  0% 44% 65%

Fixed income

  0  0  30 

Cash equivalents

  100  56  5 
          

Total

  100% 100% 100%
          

As of December 31, 2007, the Company wascost in the processsame periods are recognized as a component of changing trusteesother comprehensive income. Those amounts will be subsequently recognized as a component of its pension plan; therefore, all assets were shown as cash equivalents due to the transfer of those assets. The investment strategy for pension plan assets is to utilize a diversified blend of equity and fixed income portfolios to earn a long-term investment return that meets or exceeds the long-term expected rate of return for actuarial purposes of 8.0%. Active investment management strategies are used to measure each investment portfolio’s returns and risk levels against applicable market indices.

To develop the expected long-term rate of return on assets assumption, the Company considers the historical returns and the future expectations for returns for each asset category, as well as the target asset allocation of the pension portfolio and the effect ofnet periodic rebalancing.

The Company also provided unfunded postretirement benefits for union employees, covering medical benefits. The collective bargaining agreement was renegotiated in December of 2004 and these postretirement medical benefits were terminated in the new collective bargaining agreement that will expire in December 2009. Employees were eligible for these benefits when they reached age 55 and had completed five years of service with the Company. As of the date of termination, the plan had one participant who was grandfathered into the plan therefore any disclosures and liability are not material.

Index to Financial Statements
11.Accounting for derivative instruments

During the first quarter of 2005, the Company entered into interest rate swaps with notional amounts of $250.0 million, which matured in 2007 and 2008, to manage variable rate exposure on the floating rate debt. During the first quarter of 2007, the interest rate swap with a notional amount of $150.0 million matured based on its terms. During the first quarter of 2008, the interest rate swap with a notional amount of $100.0 million matured based on its terms. These interest rate derivative instruments were designated as cash flow hedges. For qualifying hedges, SFAS 133 allows changes in the fair market value of these hedged instruments to be reportedbenefit cost. Included in accumulated other comprehensive income. income at December 31, 2009 is additional unrecognized actuarial losses of $6.3 million ($3.9 million net of tax).

Risks and uncertainties

The Plan provides investments in various securities which, in general, are exposed to various risks, such as market volatility, interest rate and credit risks. Due to the level of risk associated with certain investment securities, it is reasonably possible that changes in the values of investment securities will occur in the near term and that such changes could materially affect the amounts reported in the statements of net assets available for benefits. Plan contributions are made and the actuarial present value of accumulated plan benefits are reported based on certain assumptions pertaining to interest rates, inflation rates and employee demographics, all of which are subject to change. Due to uncertainties inherent in these estimates and assumptions there could be material differences to the financial statements in the near future.

11. Accounting for derivative instruments

The Company assesseduses derivative instruments to manage risks related to interest rates and the effectivenesspurchases of the transactions that receivedcommodities. The Company evaluates each derivative instrument to determine whether it qualifies for hedge accounting treatment. Any ineffectiveness, which generally arises from minor differences between the terms

Interest Rate Risks

Certain of the swap and terms of the underlying hedged debt, was recorded in other income, net in the statement of income. Any such differences for the period February 14 to December 31, 2008 were immaterial.

The Company isCompany’s long-term obligations are subject to interest rate and related cash flow risk in connection with borrowings under its term loan credit agreement and its revolving credit agreement which totaled $772.0 million and $100.0 million, respectively as of December 31, 2008.risks. To reduce the risk associated with fluctuations in the interest rate of its floating rate debt, in May 2008 the Company entered into a two-year interestfixed rate capcontracts in March 2009 with a notional amount of $150.0 million.$500.0 million for up to 24 months. The London Interbank Offered Rate (LIBOR) cap (CAP) is 7%. Company elected not to designate the interest rate derivatives as cash flow hedges. Therefore, gains and losses from changes in the fair values of derivatives that are not designated as hedges are recognized in interest (income) expense.

Index to Financial Statements

GOODMAN GLOBAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Commodity Derivatives

The fair valueCompany uses financial instruments to manage market risk from changes in commodity prices and selectively hedges anticipated transactions that are subject to commodity price exposure, primarily using commodity contracts relating to raw materials used in its production process. The Company has open positions for copper and aluminum in notional amounts of the CAP is immaterial.

During the third5.4 million pounds and fourth quarters of 2006 and throughout 2008, the Company entered into swaps for a portion of its 2007 and 2008 aluminum and copper supply67.3 million pounds, respectively, to fix the purchase price, and thereby substantially reduce the variability of its purchase price for these commodities. TheseThe swaps, which expire by December 31, 2009, have been designated as cash flow hedges.

During the fourth quarter of 2008, the Company terminated a portion of its existing copper swaps that had a fair market value of $10.2 million ($6.3 million net of tax) on the date of termination. The Company determined that the settled derivatives remained effective and that the derivative loss related to the settled positions would remain in other comprehensive income and subsequently reclassified into cost of sales in February 2009 to April 2009 when the end products are sold to the Company’s customers.

In December 2008, the Company entered into new swaps in the same quantities and for the same periods as the terminated copper swaps with the intent of fixing the purchase price, and thereby substantially reducing the variability of its purchase price for this commodity. The new swaps have a notional amount of $8.0 million and a fair market value as a liability of $0.2 million as of December 31, 2008. These swaps expire by April 30, 2009 andat various dates through 2011, have been designated as cash flow hedges.

For these qualifying commoditycash flow hedges, SFAS 133 allows changes in the fair market value of these hedge instruments to beare reported in accumulated other comprehensive income. In connection withincome and reclassified into earnings in the 2008 Acquisition, Predecessor’s other comprehensive income was eliminated in accordance with purchase accounting.same period during which the hedged transaction affects earnings. Assuming commodity prices remain constant, $14.0 million ($8.6 million, net of tax) of derivative earnings are expected to be reclassified into earnings within the next twelve months. The Company has assessed the effectiveness of the transactions that receive hedge accounting treatment and any ineffectiveness would be recorded in other (income) expense, netexpense.

FASB accounting standards establish, among other things, the disclosure requirements for derivative instruments and for hedging activities. Certain qualitative disclosures are required about objectives and strategies for using derivatives, quantitative disclosures about fair value amounts of gains and losses on derivative instruments and disclosures about credit risk related contingent features in the statement of income. derivative agreements.

The ineffectiveness for the period January 1 to February 13, 2008 and the period February 14 to December 31, 2008 were a gain of $0.3 million, and a loss of $0.4 million, respectively.

At December 31, 2008,following table discloses the fair market value of the derivative instruments in the Company’s derivatives was a liability of $52.8 million, which is included in other accrued expenses. Included in stockholders’ equity is a loss of $59.7 million, ($36.7 million, net of tax) is expected to be reclassified into earnings within the next twelve months in cost of sales as the underlying hedged inventory is sold.condensed consolidated balance sheets (in thousands):

 

12.Contingent liabilities
   

Asset derivatives

     

Liability derivatives

   

Fair value as of December 31, 2009

     

Fair value as of December 31, 2009

   

Balance sheet location

  Fair value     

Balance sheet location

  Fair value
      Interest rate swaps  Other accrued expenses  $1,138

Commodity contracts

  Other current assets  $15,777      

Commodity contracts

  Other long term assets   7,601      
              
    $23,378      $1,138
              

On October 26, 2007, a putative class action was filed

Derivatives in cash flow hedging relationships

  Amount of (gain) loss
recognized in OCI on
derivative

(effective portion) as
of December 31, 2009
 

Commodity contracts

  $(14,103
     

Location of (gain) loss

reclassified from

Accumulated OCI into

income (effective portion)

  Amount of (gain) loss reclassified
from accumulated OCI into income
(effective portion) for the year
ended December 31, 2009
  

Location of loss recognized in

income on derivative

(ineffective portion and

amount excluded from

effectiveness testing)

  Amount of (gain) loss recognized in
income on derivative (ineffective
portion and amount excluded from
ineffectiveness testing) for the year
ended December 31, 2009

Cost of goods sold

  $46,228  Other (income) expense  $525
          

The following table discloses the effect of derivative instruments on behalfthe statements of all similarly situated stockholders of the Company in the Harris County District Court, Houston, Texas, styled Call4U, Ltd. v. Carroll, Case Number 2007-66888. A similar case, styled Pipefitters Local No. 636 Defined Benefit Plan vs. Goodman, was later filed and then consolidated with the Call 4U, Ltd. case. The lawsuits namedincome that are not designated as defendants the Company, all of its directors andhedging instruments (in thousands):

Derivatives not designated as hedging instruments

  

Location of loss
recognized in income
on derivative

  Amount of (income) loss
recognized in income on
derivative for year ended

December 31, 2009

Interest rate swaps

  Interest expense  $3,170
      

Index to Financial Statements

Hellman & Friedman, and asserted claims for breach of fiduciary duty againstGOODMAN GLOBAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Contingent Features

The Company’s derivative instruments contain provisions that require the directors and aiding and abetting such breaches against Hellman & Friedman. The plaintiffs soughtcounterparties’ debt to maintain an injunction restraininginvestment grade rating. If the closingrating of the merger, reimbursementdebt were to fall below investment grade, it would be in violation of associated attorneys’ and experts’ fees and other reliefthese provisions which would render the hedging relationship ineffective. The aggregate fair value of all derivative instruments with credit-risk related contingent features that the court deems proper. On January 4, 2008 Goodman entered into a memorandum of understanding setting outare in an agreement in principal to settle all claims in the litigation, which settlement is subject to certain conditions precedent, including court approval.asset position on December 31, 2009 was $23.4 million. As of December 31, 2008,2009, the matter is still pending.counterparties were at or above an acceptable investment grade rating.

12. Contingent liabilities

As part of the equity contribution associated with the sale of the Amana Appliance business in July 2001, the Company agreed to indemnify Maytag for certain potential product liability and environmental claims. In light of these potential liabilities, the Company has purchased insurance that the Company expects will shield it from incurring material costs toassociated with such potential claims.

Pursuant to a March 15, 2001 Consent Order with the Florida Department of Environmental Protection (FDEP), the Company’s subsidiary, Goodman Distribution Southeast, Inc. (GDI Southeast) (formerly Pioneer Metals Inc.) is continuing to investigate and pursue, under FDEP oversight, the delineation of groundwater contamination at and around the GDI Southeast facility in Fort Pierce, Florida. Remediation has not begun. The contamination was discovered through environmental assessments conducted in connection with a Company subsidiary’s acquisition of the Fort Pierce facility in 2000 and was reported to FDEP, giving rise to the Consent Order.

The ultimate cost for the investigation, remediation and monitoring of the site cannot be predicted with certainty due to the variables relating to the contamination and the appropriate remediation methodology, the evolving nature of remediation technologies and governmental regulations and the inability to determine the extent to which contribution will be available from other parties. All of these factors are taken into account to the extent possible in estimating potential liability. A reserve appropriate for the probable remediation costs, which are reasonably susceptible to estimation, has been established.

Based on analyses of currently available information, it is probable that the proposed infrastructure and setup costs associated with the site will be approximately $0.5 million. The Company reserved approximately $0.5 million as of December 31, 2008 in accordance with SFAS 5,Accounting for Contingencies and Statement of Position 90-6,2009, although it is possible that costs could exceed this amount by up to approximately $3.0$3.3 million. Costs of future expenditures are not discounted to their present value. Management believes any liability arising from potential environmental obligations is not likely to have a material adverse effect on itsthe Company’s liquidity or financial position as such obligations could be satisfied over a period of years. Nevertheless, future developments could require material changes in the recorded reserve amount.

The Company believes this contamination predated GDI Southeast’s involvement with the Fort Pierce facility and GDI Southeast’s operation at this location has not caused or contributed to the contamination. Accordingly, the Company is pursuing litigation against a former ownersowner and a former lessee of the Fort Pierce facility in an attempt to recover its costs. At this time, the Company cannot estimate probable recoveries from this litigation.

The Company is party to a number of other pending legal and administrative proceedings and is subject to various regulatory and compliance obligations. The Company believes that these proceedings and obligations will not have a materially adverse effect on its consolidated financial condition, cash flows or results of operations. To the extent required, the Company has established reserves that it believes to be adequate based on current evaluations and its experience in these types of matters. Nevertheless, an unexpected outcome in any such proceeding could have a material adverse impact on the Company’s consolidated results of operations in the period in which it occurs. Moreover, future adverse developments could require material changes in the recorded reserve amounts.

Index to Financial Statements

GOODMAN GLOBAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Operating Leasesleases

The Company leases vehicles, computer and office equipment, and office and warehouse facilities from various third parties that are accounted for as operating leases and have expiration dates through 2016.

Index to Financial Statements

Future minimum lease payments under operating leases as of December 31, 2008,2009, are as follows (in thousands):

 

  Third
party

2009

  $26,157

2010

   21,674  $26,307

2011

   16,906   20,349

2012

   13,128   16,583

2013

   9,437   12,836

2014

   8,676

Thereafter

   11,031   4,125
      

Total

  $98,333  $88,876
      

Rent expense on the operating leases was $30.6 million for the year ended December 31, 2009, $24.8 million for the Successor period February 14 to December 31, 2008, and $6.0 million, $28.7 million and $23.7 million for the Predecessor periods ofperiod January 1 to February 13, 2008 (Predecessor) and $28.7 for the yearsyear ended December 31, 2007 and 2006, respectively.(Predecessor).

13. Quarterly financial information (unaudited)

13.Quarterly financial information (unaudited)

Unaudited quarterly information for Successor periodthe year ended December 31, 2009 and the periods January 1 to February 13, 2008 (Predecessor) and February 14, 2008 to December 31, 2008 and the Predecessor period January 1, 2008 to February 13, 2008 and for the Predecessor year ended December 31, 2007 is stated below (in thousands):

2008

   2009
   First
Quarter
  Second
Quarter
  Third
Quarter
  Fourth
Quarter

Sales, net

  $318,235   $583,763  $530,642  $418,546

Operating profit

   10,113    114,750   99,435   51,475

Net income

   (17,361  61,125   43,026   14,988

 

   Predecessor  Successor 
   January 1 to
February 13,
2008
  February 14 to
March 31,
2008
  Second
Quarter
  Third
Quarter
  Fourth
Quarter
 

Sales, net

  $147,137  $217,730  $588,355  $533,718  $390,426 

Operating profit (loss) (1)

   (38,028)  (6,154)  64,439   88,204   32,570 

Net income (loss) (2)

   (66,042)    (17,190)  17,279   30,290   (4,083)
2007 
      Predecessor 
      First Quarter  Second
Quarter
  Third
Quarter
  Fourth
Quarter
 

Sales, net

   $380,274  $563,722  $565,515  $426,179 

Operating profit

    22,775   78,580   83,993   41,834 

Net income

    4,631   38,971   43,107   14,670 
   2008 
   Predecessor  Successor 
   January 1 to
February 13,
2008
  February 14
to
March 31,
2008
  Second
Quarter
  Third
Quarter
  Fourth
Quarter
 

Sales, net

  $147,137   $217,730   $588,355  $533,718  $390,426  

Operating profit (1)

   (38,028  (6,154  64,439   88,204   32,570  

Net income (2)

   (66,042  (17,190  17,279   30,290   (4,083

 

(1)The Company’s operating profit was negatively impacted by $24.0 million equally for the period February 14 to March 31, 2008 and the three month period ended June 30, 2008 due to the purchase accounting treatment of the step up in basis in inventory as a result of the Transactions.2008 Acquisition. The Company’s operating profit was also negatively impacted by $42.9 million in transaction related expenses for the period January 1 to February 13, 2008.2008 as a result of the 2008 Acquisition.

(2)The Company’s net income was negatively impacted by $57.1 million for the period January 1 to February 13, 2008, relating to the Transactions2008 Acquisition and the write off of deferred financing costs and the prepayment penalty associated with the extinguishment of the Predecessor’s outstanding debt and negatively impacted by $14.8 million equally for the period February 14 to March 31, 2008 and the three month period ended June 30, 2008 due to the purchase accounting treatment of the step up in basis in inventory as a result of the Transactions.2008 Acquisition. The Company’s net income was positively impacted during the three month period ended June 30, 2009 by a $16.6 million gain related to the related to the repurchase of $76.0 million aggregate face value senior subordinated notes.

Index to Financial Statements
14.Condensed consolidating financial information

GOODMAN GLOBAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

14. Condensed consolidating financial information

As discussed in Note 8,3, all of the existing and future restricted U.S. subsidiaries of the Company (other than AsureCare Corp., a Florida corporation) and Goodman Global Finance (Delaware) LLC) and all future restricted U.S. subsidiaries of the Company guarantee the Company’s debt obligations. The Company is structured as a holding company and substantially all of its assets and operations are held by its subsidiaries. The following information presents the condensed consolidating balance sheets as of December 31, 20082009 and 2007 and2008, the condensed consolidating statements of operations for the three years ended December 31, 2009 and the condensed consolidating cash flows for the three years ended December 31, 2008, 2007 and 20062009 of (a) the “Guarantors”, Goodman Global, Inc., and all of the existing U.S. subsidiaries of the Company (other than AsureCare Corp.) and Goodman Global Finance (Delaware) LLC), (b) the “Non-Guarantors”, Asure CareAsureCare Corp., Goodman Global Finance (Delaware) LLC and Goodman Canada, L.L.C., and includes eliminating entries and the Company on a consolidated basis. Intercompany transactions between Goodman Global, Inc. and Goodman Canada L.L.C. are recorded asreflected in financing activities in the Condensed consolidated statementcondensed consolidating statements of cash flows. For comparability purposes, the Predecessor period of January 1 to February 13, 2008 and the Successor period from February 14 to December 31, 2008 were combined for this presentation. (All amounts are in thousands).

Condensed Consolidating Balance Sheetconsolidating balance sheet

 

  December 31, 2008  December 31, 2009
  Guarantors Non-guarantors Consolidating
Entries
 Consolidated  Guarantors  Non-guarantors Consolidating
entries
 Consolidated

Current assets

  $625,610  $34,373  $   $659,983  $559,989  $32,193   $—     $592,182

Property, plant and equipment

   177,527   166    177,693   169,776   130    —      169,906

Goodwill

   1,399,536   —      1,399,536   1,399,536   —      —      1,399,536

Identifiable intangibles

   802,265   —      802,265   782,223   —      —      782,223

Other assets

   36,710   —     (442)  36,268   36,118   —      (442  35,676

Investment in affiliates

   26,767   —      (26,767  —  
                        

Total assets

  $3,041,648  $34,539  $(442) $3,075,745  $2,974,409  $32,323   $(27,209 $2,979,523
            
            

Current liabilities

  $221,496  $2,244  $   $223,740  $251,287  $5,267   $—     $256,554

Intercompany payable (receivable)

   (11,941)  11,941    —     887   (887  —      —  

Long-term debt, less current portion

   1,347,526   —      1,347,526   1,160,790   —      —      1,160,790

Long-term liabilities

   240,617   1,564    242,182   245,485   1,176    —      246,661

Shareholders’ equity

   1,243,950   18,789   (442)  1,262,297   1,315,960   26,767    (27,209  1,315,518
                        

Total liabilities and shareholders’ equity

  $3,041,648  $34,538  $(442) $3,075,745  $2,974,409  $32,323   $(27,209 $2,979,523
                        
  December 31, 2007
  Guarantors Non-guarantors Consolidating
Entries
 Consolidated

Current assets

  $558,656  $16,965  $   $575,621

Property, plant and equipment

   159,110   285    159,395

Goodwill

   391,287   —      391,287

Identifiable intangibles

   398,707   —      398,707

Other assets

   43,049   —     (442)  42,607
            

Total assets

  $1,550,809  $17,250  $(442) $1,567,617
            

Current liabilities

  $236,959  $2,688  $   $239,647

Intercompany payable (receivable)

   7,395   (7,395)   —  

Long-term debt, less current portion

   651,925     651,925

Long-term liabilities

   51,914   2,025    53,939

Shareholders’ equity

   602,616   19,932   (442)  622,106
            

Total liabilities and shareholders’ equity

  $1,550,809  $17,250  $(442) $1,567,617
            

   December 31, 2008
   Guarantors  Non-guarantors  Consolidating
entries
  Consolidated

Current assets

  $625,610   $34,373  $—     $659,983

Property, plant and equipment

   177,527    166   —      177,693

Goodwill

   1,399,536    —     —      1,399,536

Identifiable intangibles

   802,265    —     —      802,265

Other assets

   36,710    —     (442  36,268

Investment in affiliates

   17,283    —     (17,283  —  
                

Total assets

  $3,058,931   $34,539  $(17,725 $3,075,745
                

Current liabilities

  $219,990   $3,750  $—     $223,740

Intercompany payable (receivable)

   (11,941  11,941   —      —  

Long-term debt, less current portion

   1,347,526    —     —      1,347,526

Long-term liabilities

   240,617    1,565   —      242,182

Shareholders’ equity

   1,262,739    17,283   (17,725  1,262,297
                

Total liabilities and shareholders’ equity

  $3,058,931   $34,539  $(17,725 $3,075,745
                

Index to Financial Statements
Condensed Consolidating Statement of Operations     
   Successor
For Year Ended December 31, 2008 (1)
 
   Guarantors  Non-guarantors  Eliminations  Consolidated 

Sales, net

  $1,810,101  $68,739  $(1,474) $1,877,366 

Cost of goods sold

   1,379,908   56,393   (1,474)  1,434,827 
                 

Gross profit

   430,193   12,346   —     442,539 

Selling, general and administrative expenses

   203,822   5,999    209,821 

Acquisition-related expenses

   42,939   —      42,939 

Depreciation and amortization

   48,666   82    48,748 
                 

Operating profit

   134,766   6,265   —     141,031 

Interest expense, net

   191,537   (55)   191,482 

Other (income) expense, net

   (425)  1,942    1,517 
                 

Earnings before income taxes

   (56,346)  4,378   —     (51,968)

Income tax provision

   (12,222)    (12,222)
                 

Net income (loss)

  $(44,124) $4,378  $—    $(39,746)
                 
   Predecessor
For Year Ended December 31, 2007
 
   Guarantors  Non-guarantors  Eliminations  Consolidated 

Sales, net

  $1,873,342  $63,549  $(1,201) $1,935,690 

Cost of goods sold

   1,412,154   51,823   (1,201)  1,462,776 
                 

Gross profit

   461,188   11,726   —     472,914 

Selling, general and administrative expenses

   204,159   6,454    210,613 

Depreciation and amortization

   35,074   45    35,119 
                 

Operating profit

   221,955   5,227   —     227,182 

Interest expense, net

   68,511   (133)   68,378 

Other (income) expense, net

   (2,752)  —      (2,752)
                 

Earnings before income taxes

   156,196   5,360   —     161,556 

Income tax provision

   60,177   —      60,177 
                 

Net income (loss)

  $96,019  $5,360  $—    $101,379 
                 

GOODMAN GLOBAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Condensed consolidating statement of operations

   Successor
For Year Ended December 31, 2009
 
   Guarantors  Non-guarantors  Eliminations  Consolidated 

Sales, net

  $1,773,140   $80,041   $(1,995 $1,851,186  

Cost of goods sold

   1,223,964    68,778    (1,995  1,290,747  
                 

Gross profit

   549,176    11,263    —      560,439  

Selling, general and administrative expenses

   229,228    7,003    —      236,231  

Acquisition-related expenses

   —      —      —      —    

Depreciation and amortization

   48,352    83    —      48,435  
                 

Operating profit

   271,596    4,177    —      275,773  

Interest expense, net

   134,841    (74  —      134,767  

Other (income) expense, net

   (17,934  (1,708  —      (19,642

Equity in earnings of affiliates

   (3,960   3,960    —    
                 

Earnings before income taxes

   158,649    5,959    (3,960  160,648  

Income tax provision

   56,871    1,999    —      58,870  
                 

Net income (loss)

  $101,778   $3,960   $(3,960 $101,778  
                 

   Successor
For year ended December 31, 2008
 
   Guarantors  Non-guarantors  Eliminations  Consolidated 

Sales, net

  $1,810,101   $68,739  $(1,474 $1,877,366  

Cost of goods sold

   1,379,908    56,393   (1,474  1,434,827  
                 

Gross profit

   430,193    12,346   —      442,539  

Selling, general and administrative expenses

   203,822    5,999   —      209,821  

Acquisition-related expenses

   42,939    —     —      42,939  
                 

Depreciation and amortization

   48,666    82   —      48,748  

Operating profit

   134,766    6,265   —      141,031  

Interest expense, net

   191,537    255   —      191,792  

Other (income) expense, net

   (425  1,632   —      1,207  

Equity in earnings of affiliates

   (2,872    2,872    —    
                 

Earnings before income taxes

   (53,474  4,378   (2,872  (51,968

Income tax provision

   (13,728  1,506   —      (12,222
                 

Net income (loss)

  $(39,746 $2,872  $(2,872 $(39,746
                 

Index to Financial Statements
   Predecessor
For Year Ended December 31, 2006
   Guarantors  Non-guarantors  Eliminations  Consolidated

Sales, net

  $1,744,492  $51,418  $(1,157) $1,794,753

Cost of goods sold

   1,334,452   41,479   (1,157)  1,374,774
                

Gross profit

   410,040   9,939   —     419,979

Selling, general and administrative expenses

   200,783   5,111    205,894

Depreciation and amortization

   32,588   53    32,641
                

Operating profit

   176,669   4,775   —     181,444

Interest expense, net

   77,951   (126)   77,825

Other (income) expense, net

   5,264   —      5,264
                

Earnings before income taxes

   93,454   4,901   —     98,355

Income tax provision

   34,188   —      34,188
                

Net income (loss)

  $59,266  $4,901  $—    $64,167
                

Condensed Consolidating Statement of Cash FlowsGOODMAN GLOBAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

   Successor
For Year Ended December 31, 2008 (1)
 
   Guarantors  Non-guarantors  Consolidated 

Net cash provided by (used for):

    

Operating Activities

  $147,601  $(6,231) $141,370 

Investing Activities

   (1,967,060)  (9)  (1,967,069)

Financing Activities

   1,931,526   19,336   1,950,862 
             

Net increase (decrease) in cash

   112,067   13,096   125,163 

Cash at beginning of period

   17,103   1,852   18,955 
             

Cash at end of period

  $129,170  $14,948  $144,118 
             

Condensed consolidating statement of operations (continued)

   Predecessor
For Year Ended December 31, 2007
 
   Guarantors  Non-guarantors  Eliminations  Consolidated 

Sales, net

  $1,873,342   $63,549   $(1,201 $1,935,690  

Cost of goods sold

   1,412,154    51,823    (1,201  1,462,776  
                 

Gross profit

   461,188    11,726    —      472,914  

Selling, general and administrative expenses

   204,159    6,454    —      210,613  

Depreciation and amortization

   35,074    45    —      35,119  
                 

Operating profit

   221,955    5,227    —      227,182  

Interest expense, net

   68,511    (133  —      68,378  

Other (income) expense, net

   (2,752  —      —      (2,752

Equity in earnings of affiliates

   (3,464  —      3,464    —    
                 

Earnings before income taxes

   159,660    5,360    (3,464  161,556  

Income tax provision

   58,281    1,896    —      60,177  
                 

Net income (loss)

  $101,379   $3,464   $(3,464 $101,379  
                 

Condensed consolidating statement of cash flows

   Successor
For year ended December 31, 2009
 
   Guarantors  Non-guarantors  Consolidated 

Net cash provided by (used for):

    

Operating Activities

  $207,690   $15   $207,705  

Investing Activities

   (20,173  (27  (20,200

Financing Activities

   (279,116  (12,828  (291,944
             

Net increase (decrease) in cash

   (91,599  (12,840  (104,439

Cash at beginning of period

   129,170    14,948    144,118  
             

Cash at end of period

  $37,571   $2,108   $39,679  
             

   Successor
For year ended December 31, 2008
 
   Guarantors  Non-guarantors  Consolidated 

Net cash provided by (used for):

    

Operating Activities

  $147,601   $(6,231 $141,370  

Investing Activities

   (1,967,060  (9  (1,967,069

Financing Activities

   1,931,526    19,336    1,950,862  
             

Net increase (decrease) in cash

   112,067    13,096    125,163  

Cash at beginning of period

   17,103    1,852    18,955  
             

Cash at end of period

  $129,170   $14,948   $144,118  
             

Index to Financial Statements
   Predecessor
For Year Ended December 31, 2007
 
   Guarantors  Non-guarantors  Consolidated 

Net cash provided by (used for):

    

Operating Activities

  $197,795  $6,422  $204,217 

Investing Activities

   (14,059)  (122)  (14,181)

Financing Activities

   (178,058)  (4,592)  (182,650)
             

Net increase (decrease) in cash

   5,678   1,708   7,386 

Cash at beginning of period

   11,425   144   11,569 
             

Cash at end of period

  $17,103  $1,852  $18,955 
             
   Predecessor
For Year Ended December 31, 2006
 
   Guarantors  Non-guarantors  Consolidated 

Net cash provided by (used for):

    

Operating Activities

  $51,232  $2,492  $53,724 

Investing Activities

   (39,293)  (50)  (39,343)

Financing Activities

   (23,354)  (3,237)  (26,591)
             

Net increase (decrease) in cash

   (11,415)  (795)  (12,210)

Cash at beginning of period

   22,840   939   23,779 
             

Cash at end of period

  $11,425  $144  $11,569 
             

GOODMAN GLOBAL, INC.

(1)For comparability purposes, the Predecessor period January 1 to February 13, 2008 and the Successor period February 14 to December 31, 2008 were combined for this presentation.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

102Condensed consolidating statement of cash flows (continued)

   Predecessor
For year ended December 31, 2007
 
   Guarantors  Non-guarantors  Consolidated 

Net cash provided by (used for):

    

Operating Activities

  $197,795   $6,422   $204,217  

Investing Activities

   (14,059  (122  (14,181

Financing Activities

   (178,058  (4,592  (182,650
             

Net increase (decrease) in cash

   5,678    1,708    7,386  

Cash at beginning of period

   11,425    144    11,569  
             

Cash at end of period

  $17,103   $1,852   $18,955  
             

For comparability purposes, the Predecessor period January 1 to February 13, 2008 and the Successor period February 14 to December 31, 2008 were combined for this presentation.

15.Subsequent Events

The Company has evaluated subsequent events through the time of this filing which represents the date the financial statements are issued.

100