UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549

FORM 10-Q

(MARK ONE)


þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2007

~~FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2007~~OR


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

For the transition period from to

Commission file number 001-15149

LENNOX INTERNATIONAL INC.

Incorporated pursuant to the Laws of the State of DELAWARE

Internal Revenue Service Employer Identification No. 42-0991521

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

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yesþ Noo

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

Large Accelerated Filerþ Accelerated Filero Non-Accelerated Filero

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Securities Exchange Act of 1934).
Yeso Noþ

As of ~~April 20,~~July 24, 2007, the number of shares outstanding of the registrant’s common stock, par value $.01 per share, was ~~68,259,377.~~67,677,802.

PART I — FINANCIAL INFORMATION

Item 1. Financial Statements.

LENNOX INTERNATIONAL INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
As of ~~March 31,~~June 30, 2007 and December 31, 2006
(In millions, except share and per share data)


		March 31,			December 31,			June 30,			December 31,
		2007			2006			2007			2006
		(unaudited)						(unaudited)
ASSETS	ASSETS

CURRENT ASSETS:
Cash and cash equivalents		$	93.6		$	144.3		$	120.1		$	144.3
Short-term investments									23.9			—
Accounts and notes receivable, net			502.3			502.6			637.2			502.6
Inventories			398.1			305.5
Inventories, net									377.9			305.5
Deferred income taxes			21.3			22.2			20.2			22.2
Other assets			60.1			43.8			52.4			43.8

Total current assets			1,075.4			1,018.4			1,231.7			1,018.4
PROPERTY, PLANT AND EQUIPMENT, net			288.0			288.2			294.7			288.2
GOODWILL, net			242.2			239.8			252.3			239.8
DEFERRED INCOME TAXES			102.1			104.3			105.8			104.3
OTHER ASSETS			74.0			69.1			76.3			69.1

TOTAL ASSETS		$	1,781.7		$	1,719.8		$	1,960.8		$	1,719.8

LIABILITIES AND STOCKHOLDERS’ EQUITY	LIABILITIES AND STOCKHOLDERS’ EQUITY

CURRENT LIABILITIES:
Short-term debt		$	0.8		$	1.0		$	5.0		$	1.0
Current maturities of long-term debt			11.4			11.4			11.3			11.4
Accounts payable			342.2			278.6			381.0			278.6
Accrued expenses			285.7			326.3			314.5			326.3
Income taxes payable			—			33.8			15.2			33.8

Total current liabilities			640.1			651.1			727.0			651.1
LONG-TERM DEBT			132.3			96.8			161.8			96.8
POSTRETIREMENT BENEFITS, OTHER THAN PENSIONS			12.7			12.9			12.3			12.9
PENSIONS			51.0			49.6			51.3			49.6
OTHER LIABILITIES			113.6			105.0			117.2			105.0

Total liabilities			949.7			915.4			1,069.6			915.4

COMMITMENTS AND CONTINGENCIES STOCKHOLDERS’ EQUITY:
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS’ EQUITY:
Preferred stock, $.01 par value, 25,000,000 shares authorized, no shares issued or outstanding			—			—			—			—
Common stock, $.01 par value, 200,000,000 shares authorized, 78,544,586 shares and 76,974,791 shares issued for 2007 and 2006, respectively			0.8			0.8
Common stock, $.01 par value, 200,000,000 shares authorized, 78,797,443 shares and 76,974,791 shares issued for 2007 and 2006, respectively									0.8			0.8
Additional paid-in capital			736.9			706.6			747.7			706.6
Retained earnings			313.5			312.5			365.0			312.5
Accumulated other comprehensive income (loss)			7.7			(5.1	)		33.7			(5.1	)
Treasury stock, at cost, 10,288,970 shares and 9,818,904 for 2007 and 2006, respectively			(226.9	)		(210.4	)
Treasury stock, at cost, 11,142,647 shares and 9,818,904 for 2007 and 2006, respectively									(256.0	)		(210.4	)

Total stockholders’ equity			832.0			804.4			891.2			804.4

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY		$	1,781.7		$	1,719.8		$	1,960.8		$	1,719.8

LENNOX INTERNATIONAL INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS
For the Three Months and Six Months Ended ~~March 31,~~June 30, 2007 and 2006
(Unaudited, in millions, except per share data)


	For the
	Three Months Ended						For the Three Months Ended						For the Six Months Ended
	March 31,						June 30,						June 30,
	2007			2006			2007			2006			2007			2006
NET SALES	$	791.5		$	808.4		$	1,041.8		$	1,012.9		$	1,833.3		$	1,821.4
COST OF GOODS SOLD		586.9			599.3			752.7			742.6			1,339.6			1,342.0

Gross profit		204.6			209.1			289.1			270.3			493.7			479.4
OPERATING EXPENSES:
Selling, general and administrative expenses		191.1			187.9			197.3			201.2			388.4			389.1
(Gains), losses and other expenses, net		(0.7	)		(17.1	)		(3.3	)		(27.2	)		(4.0	)		(44.3	)
Restructuring charges		2.3			6.3			7.6			2.3			9.9			8.6
Equity in earnings of unconsolidated affiliates		(2.7	)		(2.1	)		(3.5	)		(2.9	)		(6.2	)		(5.0	)

Operational income		14.6			34.1			91.0			96.9			105.6			131.0
INTEREST EXPENSE, net		0.9			0.6			2.0			1.8			2.9			2.4
OTHER EXPENSE (INCOME), NET								0.1			—			0.1			—

Income before income taxes		13.7			33.5			88.9			95.1			102.6			128.6
PROVISION FOR INCOME TAXES		5.1			12.5			28.6			26.8			33.7			39.3

Net income	$	8.6		$	21.0		$	60.3		$	68.3		$	68.9		$	89.3


NET INCOME PER SHARE:
Basic	$	0.13		$	0.29		$	0.89		$	0.96		$	1.02		$	1.25
Diluted	$	0.12		$	0.28		$	0.85		$	0.91		$	0.97		$	1.18

AVERAGE SHARES OUTSTANDING:
Basic		67.5			71.3			68.0			71.5			67.7			71.4
Diluted		70.9			75.4			71.2			75.2			71.1			75.4

CASH DIVIDENDS DECLARED PER SHARE	$	0.13		$	0.11		$	0.13		$	0.11		$	0.26		$	0.22

LENNOX INTERNATIONAL INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
For the ~~Three~~Six Months Ended ~~March 31,~~June 30, 2007 (unaudited) and the Year Ended December 31, 2006
(In millions, except per share data)


	Common Stock				Additional					Accumulated Other			Treasury			Total						Common Stock				Additional						Accumulated Other			Treasury			Total
	Issued				Paid-In		Retained			Comprehensive			Stock			Stockholders’			Comprehensive			Issued				Paid-In			Retained			Comprehensive			Stock			Stockholders’			Comprehensive
	Shares		Amount		Capital		Earnings			Income (Loss)			at Cost			Equity			Income (Loss)			Shares		Amount		Capital			Earnings			Income (Loss)			at Cost			Equity			Income (Loss)
BALANCE AT DECEMBER 31, 2005		74.7	$	0.7	$	649.3	$	191.0		$	0.4		$	(47.0	)	$	794.4						74.7	$	0.7	$	649.3		$	191.0		$	0.4		$	(47.0	)	$	794.4
Impact of adjustments recorded under provisions of SAB No. 108		—		—		—		(12.4	)		—			—			(12.4	)					—		—		—			(12.4	)		—			—			(12.4	)

ADJUSTED BALANCE AT JANUARY 1, 2006		74.7	$	0.7	$	649.3	$	178.6		$	0.4		$	(47.0	)	$	782.0						74.7	$	0.7	$	649.3		$	178.6		$	0.4		$	(47.0	)	$	782.0
Net income		—		—		—		166.0			—			—			166.0		$	166.0			—		—		—			166.0			—			—			166.0		$	166.0
Dividends, $0.46 per share		—		—		—		(32.1	)		—			—			(32.1	)		—			—		—		—			(32.1	)		—			—			(32.1	)		—
Foreign currency translation adjustments, net		—		—		—		—			20.8			—			20.8			20.8			—		—		—			—			20.8			—			20.8			20.8
Minimum pension liability adjustments, net of tax benefit of $2.0 (revised)⁽¹⁾		—		—		—		—			4.0			—			4.0			4.0
Minimum pension liability adjustments, net of tax benefit of $2.0																							—		—		—			—			4.0			—			4.0			4.0
Stock-based compensation expense		—		—		24.4		—			—			—			24.4			—			—		—		24.4			—			—			—			24.4			—
Derivatives, net of tax provision of $1.0		—		—		—		—			(1.9	)		—			(1.9	)		(1.9	)		—		—		—			—			(1.9	)		—			(1.9	)		(1.9	)
Common stock issued		2.3		0.1		19.7		—			—			—			19.8			—			2.3		0.1		19.7			—			—			—			19.8			—
Treasury stock purchases		—		—		—		—			—			(163.4	)		(163.4	)		—			—		—		—			—			—			(163.4	)		(163.4	)		—
Tax benefits of stock compensation		—		—		13.2		—			—			—			13.2			—			—		—		13.2			—			—			—			13.2			—

Comprehensive income (revised)⁽¹⁾		—		—		—		—			—			—			—		$	188.9
Comprehensive income																							—		—		—			—			—			—			—		$	188.9

Adjustments resulting from adoption of SFAS No. 158, net of tax benefit of $15.0 (revised)⁽¹⁾		—		—		—		—			(28.4	)		—			(28.4	)
Adjustments resulting from adoption of SFAS No. 158, net of tax benefit of $15.0																							—		—		—			—			(28.4	)		—			(28.4	)

BALANCE AT DECEMBER 31, 2006		77.0	$	0.8	$	706.6	$	312.5		$	(5.1	)	$	(210.4	)	$	804.4						77.0	$	0.8	$	706.6		$	312.5		$	(5.1	)	$	(210.4	)	$	804.4

Impact of adoption of FIN No. 48		—		—		—		1.2			—			—			1.2						—		—		—			1.2			—			—			1.2

ADJUSTED BALANCE AT JANUARY 1, 2007		77.0	$	0.8	$	706.6	$	313.7		$	(5.1	)	$	(210.4	)	$	805.6						77.0	$	0.8	$	706.6		$	313.7		$	(5.1	)	$	(210.4	)	$	805.6
Net income		—		—		—		8.6			—			—			8.6		$	8.6			—		—		—			68.9			—			—			68.9		$	68.9
Dividends, $0.13 per share		—		—		—		(8.8	)		—			—			(8.8	)		—
Dividends, $0.26 per share																							—		—		—			(17.6	)		—			—			(17.6	)		—
Foreign currency translation adjustments, net		—		—		—		—			7.4			—			7.4			7.4			—		—		—			—			30.8			—			30.8			30.8
Stock-based compensation expense		—		—		6.2		—			—			—			6.2			—			—		—		13.3			—			—			—			13.3			—
Tax benefits of stock compensation		—		—		12.1		—			—			—			12.1			—
Derivatives, net of tax provision of $2.6		—		—		—		—			5.4			—			5.4			5.4
Reversal of additional paid-in capital on previously recorded stock-based compensation expense due to the reorganization of LII’s corporate administrative function																							—		—		(1.4	)		—			—			—			(1.4	)		—
Derivatives, net of tax provision of $4.3																							—		—		—			—			8.0			—			8.0			8.0
Common stock issued		1.5		—		12.0		—			—			—			12.0			—			1.8		—		15.2			—			—			—			15.2			—
Treasury stock purchases		—		—		—		—			—			(16.5	)		(16.5	)		—			—		—		—			—			—			(45.6	)		(45.6	)		—
Tax benefits of stock compensation																							—		—		14.0			—			—			—			14.0			—

Comprehensive income		—		—		—		—			—			—			—		$	21.4			—		—		—			—			—			—			—		$	107.7

BALANCE AT MARCH 31, 2007		78.5	$	0.8	$	736.9	$	313.5		$	7.7		$	(226.9	)	$	832.0
BALANCE AT JUNE 30, 2007																							78.8	$	0.8	$	747.7		$	365.0		$	33.7		$	(256.0	)	$	891.2

LENNOX INTERNATIONAL INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
For the ~~Three~~Six Months Ended ~~March 31,~~June 30, 2007 and 2006
(Unaudited, in millions)


	For the						For the
	Three Months Ended						Six Months Ended
	March 31,						June 30,
	2007			2006			2007			2006
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	8.6		$	21.0		$	68.9		$	89.3
Adjustments to reconcile net income to net cash used in operating activities:
Equity in earnings of unconsolidated affiliates		(2.7	)		(2.1	)		(6.2	)		(5.0	)
Dividends from affiliates								—			1.2
Restructuring expenses, net of cash paid		(1.8	)		6.9			4.9			8.6
Unrealized gain on futures contracts		(0.3	)		(9.1	)		(0.3	)		(13.2	)
Stock-based compensation expense		6.2			7.8			13.3			12.8
Depreciation and amortization		11.8			9.4			23.5			19.4
Capitalized interest		(0.4	)		(0.3	)		(0.8	)		(0.4	)
Deferred income taxes		2.8			5.0			4.1			(12.9	)
Other (gains), losses and expenses, net		3.7			0.4			10.3			3.0
Changes in assets and liabilities, net of effects of acquisitions:
Accounts and notes receivable		2.8			13.2			(129.0	)		(98.0	)
Inventories		(93.2	)		(99.0	)		(72.1	)		(99.9	)
Other current assets		(3.2	)		(5.2	)		(8.0	)		(2.2	)
Accounts payable		59.9			42.2			105.5			59.7
Accrued expenses		(38.4	)		(41.3	)		(20.6	)		(23.1	)
Income taxes payable		(35.3	)		(2.8	)		(9.5	)		22.4
Long-term warranty, deferred income and other liabilities		4.4			3.6			10.7			3.0

Net cash used in operating activities		(75.1	)		(50.3	)		(5.3	)		(35.3	)

CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from the disposal of property, plant and equipment		0.1			0.8			0.3			0.5
Purchases of property, plant and equipment		(9.9	)		(14.9	)		(25.0	)		(31.4	)
Additional investment in affiliates		—			(4.3	)		—			(5.0	)
Purchases of short-term investments								(25.7	)		—
Proceeds from sales and maturities of short-term investments								1.8			—

Net cash used in investing activities		(9.8	)		(18.4	)		(48.6	)		(35.9	)

CASH FLOWS FROM FINANCING ACTIVITIES:
Short-term (payments) borrowings, net		(0.2	)		2.3
Long-term borrowings, net		35.5			—
Short-term borrowings (payments), net								4.0			2.6
Long-term borrowings (payments), net								64.9			12.9
Proceeds from stock option exercises		12.0			6.8			15.2			14.3
Repurchases of common stock		(16.5	)		(12.2	)		(45.6	)		(58.3	)
Excess tax benefits related to share-based payments		11.0			5.6			12.5			8.5
Cash dividends paid		(8.7	)		(7.8	)		(26.4	)		(23.5	)

Net cash provided by (used in) financing activities		33.1			(5.3	)		24.6			(43.5	)

DECREASE IN CASH AND CASH EQUIVALENTS		(51.8	)		(74.0	)		(29.3	)		(114.7	)
EFFECT OF EXCHANGE RATES ON CASH AND CASH EQUIVALENTS		1.1			0.3			5.1			1.3
CASH AND CASH EQUIVALENTS, beginning of period		144.3			213.5			144.3			213.5

CASH AND CASH EQUIVALENTS, end of period	$	93.6		$	139.8		$	120.1		$	100.1


Supplementary disclosures of cash flow information:
Cash paid during the period for:
Interest	$	0.3		$	0.3		$	5.3		$	5.2

Income taxes (net of refunds)	$	28.9		$	5.9		$	30.4		$	22.5

Non-cash items:
Impact of adjustments recorded under provisions of SAB No. 108	$	—		$	(12.4	)	$	—		$	(12.4	)

Impact of adoption of FIN No. 48	$	1.2		$	—		$	1.2		$	—

LENNOX INTERNATIONAL INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

1. General:

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

Basis of Presentation

The accompanying unaudited Consolidated Balance Sheet as of ~~March 31,~~June 30, 2007, the accompanying unaudited Consolidated Statements of Operations for the three months and six months ended ~~March 31,~~June 30, 2007 and 2006, the accompanying unaudited Consolidated Statement of Stockholders’ Equity for the ~~three~~six months ended ~~March 31,~~June 30, 2007 and the accompanying unaudited Consolidated Statements of Cash Flows for the ~~three~~six months ended ~~March 31,~~June 30, 2007 and 2006 should be read in conjunction with LII’s audited consolidated financial statements and footnotes as of December 31, 2006 and 2005 and for each year in the three year period ended December 31, 2006. The accompanying unaudited consolidated financial statements of LII have been prepared in accordance with generally accepted accounting principles for interim financial information and in accordance with the instructions to Form 10-Q and Article 10 of Regulation S-X. In the opinion of management, the accompanying consolidated financial statements contain all material adjustments, consisting principally of normal recurring adjustments, necessary for a fair presentation of the Company’s financial position, results of operations and cash flows. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to applicable rules and regulations, although the Company believes that the disclosures herein are adequate to make the information presented not misleading. The operating results for the interim periods are not necessarily indicative of the results that may be expected for a full year.

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

Use of Estimates

The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Reclassifications

Certain prior-period balances in the accompanying condensed consolidated financial statements have been reclassified to conform to the current period’s presentation of financial information. Shipping and handling costs related to post-production activities are included as a component of Gross Profit in the accompanying Consolidated Statements of Operations. Such costs were previously reported as part of Selling, General and Administrative Expenses.

Recently Adopted Accounting Pronouncements

Effective January 1, 2007, the Company adopted FASB Interpretation No. 48,Accounting for Uncertainty in Income Taxes – an Interpretation of FASB Statement 109(“FIN No. 48”). FIN No. 48 clarifies the accounting for income taxes by prescribing a minimum threshold that a tax position is required to meet before being recognized in the financial statements. FIN No. 48 also provides guidance on derecognition, measurement, classification, interest and penalties, accounting for interim periods, disclosure and transition. For more information see Note 9.10.

2006, respectively, and net of accounts receivable sold under an ongoing asset securitization arrangement, if any. As of ~~March 31,~~June 30, 2007 and December 31, 2006, no accounts receivable were sold under the Company’s ongoing asset securitization arrangement. Additionally, none of the accounts receivable as reported in the accompanying Consolidated Balance Sheet at ~~March 31,~~June 30, 2007 represent retained interests in securitized receivables that have restricted disposition rights per the terms of the asset securitization agreement and would not be available to satisfy obligations to creditors. The Company has no significant concentration of credit risk within its accounts and notes receivable.

3. Inventories:

Components of inventories are as follows (in millions):


	As of			As of			As of			As of
	March 31,			December 31,			June 30,			December 31,
	2007			2006			2007			2006
Finished goods	$	311.9		$	223.2		$	280.8		$	223.2
Repair parts		46.2			43.3			58.5			43.3
Work in process		10.5			8.1			10.8			8.1
Raw materials		102.8			87.8			101.7			87.8

		471.4			362.4			451.8			362.4
Excess of current cost over last-in, first-out cost		(73.3	)		(56.9	)		(73.9	)		(56.9	)

Total inventories	$	398.1		$	305.5
Total inventories, net							$	377.9		$	305.5

As of June 30, 2007 the Company’s captive insurance subsidiary (the “Captive”) held approximately $23.9 million in debt securities, consisting of U.S. Treasury securities, U.S. government agency securities, corporate bonds, commercial paper, and various securitized debt instruments. The Company did not hold these types of investments at December 31, 2006. In accordance with Statement of Financial Accounting Standards No. 115 (as amended),Accounting for Certain Investments in Debt and Equity Securities, the Company classifies these investments as available-for-sale and carries them at amortized cost, which approximates fair value. Any unrealized holding gains and losses are reported in Accumulated Other Comprehensive Income (“AOCI”), net of applicable taxes, until the gain or loss is realized. Unrealized losses included in AOCI in the accompanying Consolidated Balance Sheet as of June 30, 2007 were not material. Realized gains and losses from the sale of securities were also not material for the three months or six months ended June 30, 2007. These instruments are not classified as cash

and cash equivalents as their original maturity dates are greater than three months. The maturities of these securities range from July 2007 to February 2011. However, it is the Captive’s intention that these investments be available to support its current operations as needed. Therefore, due to the liquidity of these investments, they are classified as current assets in the accompanying Consolidated Balance Sheets. The Company places its investments only in high credit quality financial instruments and limits the amount invested in any one institution or in any one instrument.

6. Cash, Lines of Credit and Financing Arrangements:

The following table summarizes our outstanding debt obligations as of June 30, 2007 and the classification in the accompanying Consolidated Balance Sheet (in millions):


	Short-Term		Current		Long-Term
Description of Obligation	Debt		Maturities		Maturities		Total
Domestic promissory notes	$	—	$	11.1	$	96.1	$	107.2
Bank lines of credit		5.0		—		65.0		70.0
Other foreign obligations		—		0.2		0.7		0.9

Total Debt	$	5.0	$	11.3	$	161.8	$	178.1

The Company has bank lines of credit aggregating ~~$434.9~~$431.4 million, of which ~~$36.3~~$70.0 million was borrowed and outstanding and ~~$92.3~~$91.0 million was committed to standby letters of credit, at ~~March 31,~~June 30, 2007. Of the remaining ~~$306.3~~$270.4 million, the entire amount was available for future borrowings after consideration of covenant limitations. Included in the lines of credit are several regional facilities and a multi-currency facility governed by agreements between the Company and a syndicate of banks. The revolving credit facility, which matures in July 2010, has a borrowing capacity of $400 million. As of ~~March 31,~~June 30, 2007 and December 31, 2006, the Company has unamortized debt issuance costs of ~~$1.7~~$1.5 million and $1.9 million, respectively, which are included in Other Assets in the accompanying Consolidated Balance Sheets. The facility contains certain financial covenants and bears interest at a rate equal to, at the Company’s option, either (a) the greater of the bank’s prime rate or the federal funds rate plus 0.5%, or (b) the London Interbank Offered Rate plus a margin equal to 0.475% to 1.20%, depending upon the ratio of total funded debt-to-adjusted earnings before interest, taxes, depreciation and amortization (“Adjusted EBITDA”), as defined in the facility. The Company pays a facility fee, depending upon the ratio of total funded debt to Adjusted EBITDA, equal to 0.15% to 0.30% of the capacity. The facility includes restrictive covenants that limit the Company’s ability to incur additional indebtedness, encumber its assets, sell its assets and make certain payments, including amounts for share repurchases and dividends. The

Company’s facility and promissory notes are guaranteed by the Company’s material subsidiaries. The facility requires that LII annually and quarterly deliver financial statements, as well as compliance certificates, to the banks within specified time periods.

As of ~~March 31,~~June 30, 2007 and December 31, 2006, the Company had outstanding domestic promissory notes totaling approximately $107.2 million. The term loans mature at various dates through 2010 and have interest rates ranging from 6.73% to 8.00%. In addition, LII ~~has various other notes~~had $0.9 million of obligations outstanding through its foreign ~~subsidiaries.~~subsidiaries as of June 30, 2007.

LII’s domestic revolving and term loans contain certain financial covenant restrictions. As of ~~March 31,~~June 30, 2007, LII believes it was in compliance with all covenant requirements. LII periodically reviews its capital structure, including its primary bank facility, to ensure that it has adequate liquidity. LII believes that cash ~~flow~~flows from operations, as well as available borrowings under its revolving credit facility and other sources of funding will be sufficient to fund its operations for the foreseeable future.

Under a revolving period asset securitization arrangement, the Company transfers beneficial interests in a portion of its trade accounts receivable to a third party in exchange for cash. The Company’s continued involvement in the transferred assets is limited to servicing. These transfers are accounted for as sales rather than secured borrowings. The fair values assigned to the retained and transferred interests are based primarily on the receivables’ carrying value given the short term to maturity and low credit risk. As of ~~March 31,~~June 30, 2007 and December 31, 2006, the Company had not sold any beneficial interests in accounts receivable.

The Company has included $19.9 million of restricted cash in cash and cash equivalents in the accompanying unaudited Consolidated Balance Sheet as of ~~March 31, 2007, $16.2 million of~~June 30, 2007. The restricted cash primarily ~~related~~relates to routine lockbox collections and letters of credit issued with respect to the operations of ~~its captive insurance subsidiary,~~the Captive, which expire on December 31, 2007.

Statements of Operations. Cash flows from the tax benefits of tax deductions in excess of the compensation costs recognized for stock-based awards of $12.5 million and $8.5 million were included in cash flows from financing activities for the six months ended June 30, 2007 and 2006, respectively.

~~Incentive Plan~~

~~Under~~The following tables summarize certain information concerning the Company’s Amended and Restated 1998 Incentive Plan (the “1998 Incentive Plan”), the Company is authorized to issue awards for 24,254,706 shares of common stock. As of March 31, 2007, awards for 21,878,359 shares of common stock had been granted and 4,337,907 shares had been cancelled or repurchased under the 1998 Incentive Plan. Consequently, as of March 31, 2007, there were 6,714,254 shares available for future issuance.

~~The 1998 Incentive Plan provides for various long-term incentive and retentive awards, which include~~ stock options, stock appreciation rights, performance shares and restricted stock awards ~~and stock appreciation rights. A description of these long-term incentive and retentive awards and related activity within each is provided below.~~

~~Stock Options~~

Under the 1998 Incentive Plan, the exercise price for stock options equals the stock’s fair value on the date of grant. Options granted prior to 1998 vested on the date of grant. Options granted in 1998 and after vest over three years. Options issued prior to December 2000 expire after ten years and options issued in December 2000 and after expire after seven years.

~~In addition to the options discussed above, there were 60,344 stock options outstanding~~ as of ~~March 31, 2007 that were issued in connection with LII’s acquisition of Service Experts Inc. All such options are fully vested.~~

~~No stock options were granted during the three months ended March 31, 2007 nor during the three months ended March 31, 2006.~~

Upon the adoption of SFAS No. 123R, options granted prior to the date of adoption continue to be amortized to expense using the graded method. For options granted after the date of adoption, the fair value is amortized to expense ratably over the vesting period.

~~A summary of stock option activity for the three months ended March 31, 2007, follows (in millions, except per share data):~~

Weighted-
Average
Exercise
Price per
Shares Share
Outstanding at beginning of period 4.0 $ 14.63
Granted — —
Exercised (1.0 ) $ 11.58
Forfeited (0.1 ) $ 37.38

Outstanding at end of period 2.9 $ 15.29

Exercisable at end of period 2.8 $ 15.15

~~The following table summarizes information about stock options outstanding as of March 31,~~June 30, 2007 (in millions, except per share data, years, and ~~years)~~forfeiture rates):

Options Outstanding Options Exercisable
Weighted-
Average Weighted-
Remaining Weighted- Average Weighted-
Range of Contractual Average Aggregate Remaining Average Aggregate
Exercise Prices Number Term Exercise Price Intrinsic Number Contractual Life Exercise Price Intrinsic
Per Share Outstanding (in years) Per Share Value Exercisable (in years) Per Share Value
$7.875 - $49.63 2.9 2.4 $ 15.29 $ 59.6 2.8 2.3 $ 15.15 $ 57.8

As of March 31, 2007, there was approximately $0.2 million of unrecognized compensation cost related to nonvested options and such cost is expected to be recognized over a weighted-average period of 0.8 years. The Company’s estimated forfeiture rate for stock options was 8% as of March 31, 2007. Total compensation expense for stock options was $0.1 million and $0.6 million for the three months ended March 31, 2007 and 2006, respectively.


				Stock
	Stock			Appreciation
	Options			Rights
Shares outstanding		2.6			1.7
Weighted-average exercise price per share outstanding	$	14.96		$	26.57
Shares exercisable		2.5			0.6
Weighted-average exercise price per exercisable share	$	14.80		$	20.34
Unrecognized expense	$	0.1		$	5.0
Expected weighted-average period to be recognized (in years)		0.5			2.1
Weighted-average estimated forfeiture rate		7	%		14	%

The total intrinsic value of options exercised, the resulting tax deductions to realize tax benefits, and the tax benefits in excess of the hypothetical deferred tax asset were as follows (in millions):


	Performance			Restricted
	Shares			Stock Awards
Nonvested shares		1.2			1.0
Weighted-average grant date fair value per share	$	21.72		$	25.54
Unrecognized expense	$	14.9		$	9.3
Expected weighted-average period to be recognized (in years)		2.1			2.0
Weighted-average estimated forfeiture rate		22	%		11	%

For the
Three Months Ended
March 31,
2007 2006
Intrinsic value of options exercised $ 24.2 $ 7.5
Realized tax benefits from tax deductions 9.0 2.8
Tax benefits in excess of the hypothetical deferred tax asset 1.1 0.7

~~The Company’s practice is to issue new shares of common stock to satisfy stock option exercises.~~

~~Performance Shares~~

Under the 1998 Incentive Plan, performance shares are granted to certain employees at the discretion of the Board of Directors in December of each year for a three-year performance period beginning the following January 1^st~~. Upon vesting, performance shares are converted to an equal number of shares of the Company’s common stock. Awards granted prior to 2003 vest after ten years of employment at the target amount.~~

Upon the adoption of SFAS No. 123R, all of the performance share plans under the 1998 Incentive Plan were classified as equity based plans and the fair value of each award is the market price of the stock on the date of grant and is amortized to expense ratably over the vesting period. The stock-based compensation expense for any additional shares which may be earned is estimated on the grant date based on the market price of the stock at the date of grant. The number of shares expected to be earned will be adjusted, as necessary, to reflect the actual number of shares awarded.

~~No performance shares were granted during the three months ended March 31, 2007 or 2006.~~

A summary of the status of the Company’s nonvested performance share awards as of March 31, 2007 and changes during the three months ended March 31, 2007 is presented below (in millions, except per share data):

Weighted-
Average
Grant Date
Fair Value
Shares per Share
Nonvested performance share awards:
Nonvested at beginning of period 1.6 $ 19.39
Granted — —
Additional shares earned 0.2 $ 16.89
Vested (0.4 ) $ 16.89
Forfeited — $ 14.15

Nonvested at end of period 1.4 $ 19.83

As of March 31, 2007, there was approximately $17.4 million of total unrecognized compensation cost related to nonvested performance share awards and such cost is expected to be recognized over a weighted-average period of 2.1 years. The Company’s estimated forfeiture rate for performance shares was 18% as of March 31, 2007. Total compensation expense for performance share awards was $3.7 million and $5.1 million for the three months ended March 31, 2007 and 2006, respectively. The Company’s practice is to issue new shares of common stock to satisfy performance share award vestings.

The total intrinsic value of performance share awards vested, the resulting tax deductions to realize tax benefits and the tax benefits in excess of the hypothetical deferred tax asset were as follows (in millions):

For the
Three Months Ended
March 31,
2007 2006
Fair value of performance share awards vested $ 13.1 $ 17.5
Realized tax benefits from tax deductions 4.9 6.5
Tax benefits in excess of the hypothetical deferred tax asset — —

~~Restricted Stock Awards~~

Under the 1998 Incentive Plan, restricted stock awards are issued to attract and retain key Company executives. At the end of a three-year retention period, the award will vest and be distributed to the participant provided that the participant has been an employee of the Company continuously throughout the retention period.

Upon the adoption of SFAS No. 123R, all restricted stock plans under the 1998 Incentive Plan were classified as equity based plans and the fair value of each award is the market price of the Company’s common stock on the date of grant, amortized to expense ratably over the vesting period.

The weighted-average fair value of restricted stock awards for 1,000 shares granted during the three months ended March 31, 2007 was $35.81. The weighted-average fair value of restricted stock awards for 2,414 shares granted during the three months ended March 31, 2006 was $31.95.

A summary of the status of the Company’s nonvested restricted stock awards as of March 31, 2007 and changes during the three months ended March 31, 2007 is presented below (in millions, except per share data):

Weighted-
Average
Grant Date
Fair Value
Shares per Share
Nonvested restricted stock awards:
Nonvested at beginning of period 1.0 $ 25.17
Granted — $ 35.81
Vested — —
Forfeited — $ 24.38

Nonvested at end of period 1.0 $ 25.20

As of March 31, 2007, there was approximately $10.6 million of total unrecognized compensation cost related to nonvested restricted stock awards and such cost is expected to be recognized over a weighted-average period of 2.1 years. The Company’s estimated forfeiture rate for restricted stock awards was 13% as of March 31, 2007. Total compensation expense for restricted stock awards was $1.7 million and $1.5 million for the three months ended March 31, 2007 and 2006, respectively. The Company’s practice is to issue new shares of common stock to satisfy restricted stock award vestings.

During the three months ended March 31, 2007 and 2006, no restricted stock awards vested and therefore there were no resulting tax deductions to realize tax benefits and no tax benefits in excess of the hypothetical deferred tax asset.

~~Stock Appreciation Rights~~

In 2003, the Company began awarding stock appreciation rights under the 1998 Incentive Plan. Each recipient is given the “right” to receive a value equal to the future appreciation of the Company’s stock price. The value is paid in Company stock. Stock appreciation rights vest in one-third increments beginning with the first anniversary date after the grant date.

Upon the adoption of SFAS No. 123R, the compensation expense for awards granted prior to the adoption is the fair value on the date of grant, recognized over the vesting period. The fair value for these awards was estimated using the Black-Scholes-Merton valuation model and follows the provisions of SFAS No. 123R and Staff Accounting Bulletin No. 107,~~Share-Based Payment~~. The Company used historical data and other pertinent information to estimate the expected volatility for the term of the award and the outstanding period of the award for separate groups of employees that had similar historical exercise behavior. The risk free interest rate was based on the U.S. Treasury yield curve in effect at the time of grant.

No stock appreciation rights were granted during the three months ended March 31, 2007. The weighted-average fair value of 7,932 stock appreciation rights granted during the three months ended March 31, 2006 was $8.43.

Upon the adoption of SFAS No. 123R, stock appreciation rights granted prior to the date of adoption continue to be amortized to expense using the graded method. For stock appreciation rights granted after the date of adoption, the fair value is amortized to expense ratably over the vesting period.

~~A summary of stock appreciation rights activity for the three months ended March 31, 2007 follows (in millions, except per share data):~~

Weighted-
Average
Exercise Price
Shares per Share
Outstanding at beginning of period 1.9 $ 25.20
Granted — —
Exercised (0.2 ) $ 18.02
Forfeited — $ 30.01

Outstanding at end of period 1.7 $ 26.18

Exercisable at end of period 0.7 $ 20.19

~~The following table summarizes information about stock appreciation rights outstanding as of March 31, 2007 (in millions, except per share data and years):~~

Stock Appreciation Rights Outstanding Stock Appreciation Rights Exercisable
Weighted- Weighted-
Average Average Weighted-
Remaining Weighted- Remaining Average
Range of Contractual Average Aggregate Contractual Exercise Aggregate
Exercise Prices Number Term Exercise Price Intrinsic Number Life Price Per Intrinsic
Per Share Outstanding (in years) Per Share Value Exercisable (in years) Share Value
$16.76 — $31.945 1.7 5.5 $ 26.18 $ 15.8 0.7 4.2 $ 20.19 $ 10.5

As of March 31, 2007, there was approximately $5.3 million of unrecognized compensation cost related to nonvested stock appreciation rights and such cost is expected to be recognized over a weighted-average period of 2.3 years. The Company’s estimated forfeiture rate for stock appreciation rights was 14% as of March 31, 2007. Total compensation expense for stock appreciation rights was $0.7 million and $0.6 million for the three months ended March 31, 2007 and 2006, respectively.

The total intrinsic value of stock appreciation rights exercised, the resulting tax deductions to realize tax benefits and the tax benefits in excess of the hypothetical deferred tax asset were as follows (in millions):

For the
Three Months Ended
March 31,
2007 2006
Intrinsic value of stock appreciation rights exercised $ 4.0 $ 0.6
Realized tax benefits from tax deductions 1.5 0.2
Tax benefits in excess of the hypothetical deferred tax asset — 0.1

~~The Company’s practice is to issue new shares of common stock to satisfy stock appreciation rights exercises.~~

9.10. Income Taxes:

As a result of the adoption of FIN No. 48, the Company recognized a $1.2 million decrease in the liability for unrecognized tax benefits, which was accounted for as an increase to the January 1, 2007 retained earnings balance.

As of January 1, 2007, the Company ~~has~~had approximately $18.9 million in total gross unrecognized tax benefits. Of this amount, $14.4 million (net of federal benefit on state issues) will be recognized through the statement of operations and $3.2 million will be recognized through goodwill. In addition, the Company recognizes interest and penalties accrued related to unrecognized tax benefits in income tax expense in accordance with FIN No. 48. As of January 1, 2007, the Company ~~has~~had recognized $1.2 million (net of federal tax benefits) in interest and penalties.

The Internal Revenue Service (“IRS”) completed its examination of the Company’s consolidated tax returns for the years 1999 – 2003 and issued a Revenue Agent’s Report (“RAR”) on April 6, 2006. The IRS has proposed certain significant adjustments to the Company’s insurance deductions and research tax credits. The Company disagrees with the RAR, which is currently under review by the administrative appeals division of the IRS, and anticipates resolution by the end of 2007. It is possible that a reduction in the unrecognized tax benefits may occur but an estimate of the impact on the statement of operations cannot be made at this time.

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

~~In April~~Since January 1, 2007, Michigan, New York, South Carolina, and West Virginia have enacted legislation effective for tax years beginning on or after January 1, 2007. The ~~significant provisions include the mandatory unitary combined reporting for corporations that are taxable under the general corporation franchise tax, and several tax rate reductions. The~~ Company believes any adjustments will be immaterial.

A pension settlement loss of approximately $0.7 million is included in the Company’s Residential Heating & Cooling segment’s restructuring expense for the ~~three~~six months ended ~~March 31,~~June 30, 2007. The pension settlement loss related to the Company’s full funding of lump sum pension payments to selected participants in March 2007.

During the ~~three~~six months ended ~~March 31,~~June 30, 2007, the Company reversed to income approximately $0.6 million of restructuring reserves that had been established in connection with a prior restructuring initiative in the Company’s Residential Heating & Cooling segment in 2001.

Also included in restructuring expense for the ~~three~~six months ended ~~March 31,~~June 30, 2006 is a gain of $0.8 million related to the sale of a parcel of land. The Company had reduced the carrying value of the land to its then net realizable value in connection with a prior restructuring initiative of its Service Experts operations in 2001.

~~11.~~12. Earnings per Share:

Basic earnings per share are computed by dividing net income by the ~~weighted average~~weighted-average number of common shares outstanding during the period. Diluted earnings per share are computed by dividing net income by the sum of the weighted-average number of shares and the number of equivalent shares assumed outstanding, if dilutive, under the Company’s stock-based compensation plans. As of ~~March 31,~~June 30, 2007, the Company had ~~78,544,586~~78,797,443 shares issued of which ~~10,288,970~~11,142,647 were held as treasury shares. Diluted earnings per share are computed as follows (in millions, except per share data):


	For the				For the				For the
	Three Months Ended				Three Months Ended				Six Months Ended
	March 31,				June 30,				June 30,
	2007		2006		2007		2006		2007		2006
Net income	$	8.6	$	21.0	$	60.3	$	68.3	$	68.9	$	89.3


Weighted-average shares outstanding		67.5		71.3
Weighted-average shares outstanding — basic						68.0		71.5		67.7		71.4
Effect of diluted securities attributable to share-based payments		3.4		4.1		3.2		3.7		3.4		4.0

Weighted-average shares outstanding, as adjusted		70.9		75.4
Weighted-average shares outstanding — diluted						71.2		75.2		71.1		75.4

Diluted earnings per share	$	0.12	$	0.28	$	0.85	$	0.91	$	0.97	$	1.18

compressors; a ~~50%~~ common stock ownership interest in Frigus-Bohn S.A. de C.V., a Mexican joint venture that produces unit coolers and condensing units; and a ~~21.75%~~ common stock ownership interest in Kulthorn Kirby Public Company Limited, a Thailand company engaged in the manufacture of compressors for refrigeration and air conditioning applications.

The Company recorded ~~$2.7~~$3.5 million and ~~$2.1~~$2.9 million for the three months ended June 30, 2007 and 2006, respectively, and $6.2 million and $5.0 million of equity in the earnings of its unconsolidated affiliates for the ~~three~~six months ended ~~March 31,~~June 30, 2007 and 2006, respectively, and has included these amounts in Equity in Earnings of Unconsolidated Affiliates in the accompanying Consolidated Statements of Operations. The carrying amount of investments in unconsolidated affiliates as of ~~March 31,~~June 30, 2007 and December 31, 2006 is ~~$56.3~~$60.3 million and $52.4 million, respectively, and is included in Long-term Other Assets in the accompanying Consolidated Balance Sheets.

~~14.~~15. Derivatives:

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

The Company accounts for instruments that qualify as cash flow hedges utilizing Statement of Financial Accounting Standards No. 133,Accounting for Derivative Instruments and Hedging Activities, as amended (“SFAS No. 133”). Beginning in the fourth quarter of 2006, futures contracts entered into that met established accounting criteria were formally designated as cash flow hedges. For futures contracts that are designated and qualify as cash flow hedges, the Company assesses hedge effectiveness and measures hedge ineffectiveness at least quarterly throughout the designated period. The effective portion of the gain or loss on the futures contracts are recorded, net of applicable taxes, in ~~accumulated other comprehensive income (“AOCI”),~~AOCI, a component of Stockholders’ Equity in the accompanying Consolidated Balance Sheets. When net income is affected by the variability of the underlying cash flow, the applicable offsetting amount of the gain or loss from the futures contracts that is deferred in AOCI is released to net income and is reported as a component of Cost of Goods Sold in the accompanying Consolidated Statements of Operations. During the three months and the six months ended ~~March 31~~June 30, 2007, ~~$1.6~~$3.0 million and $1.4 million in losses, ~~was~~respectively, were reclassified from AOCI to net income. Changes in the fair value of futures contracts that do not effectively offset changes in the fair value of the underlying hedged item throughout the designated hedge period (“ineffectiveness”) are recorded in net income each period and are reported in (Gains), Losses, and Other Expenses, net in the accompanying Consolidated Statements of Operations. ~~For the three months ended March 31, 2007, there was $0.2 million in gains~~Gains recognized in net income representing hedge ~~ineffectiveness.~~ineffectiveness were not material for the three months or the six months ended June 30, 2007.

The Company may enter into instruments that economically hedge certain of its risks, even though hedge accounting does not apply or the Company elects not to apply hedge accounting under SFAS No. 133 to such instruments. In these cases, there exists a natural hedging relationship in which changes in the fair value of the instruments act as an economic offset to changes in the fair value of the underlying item(s). Changes in the fair

value of instruments not designated as cash flow hedges are recorded in net income throughout the term of the derivative instrument and are reported in (Gains), Losses, and Other Expenses, net in the accompanying Consolidated Statements of Operations. For the three months and the six months ended ~~March 31,~~June 30, 2007 and 2006, net gains of ~~$0.8~~$1.0 million and ~~$18.2~~$1.9 million and $27.2 million and $45.2 million, respectively, were recognized in earnings related to instruments not accounted for as cash flow hedges.

~~15.~~16. Commitments and Contingencies:

Guarantees

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

During the term, the Lake Park Lease requires Procurement to pay base rent in quarterly installments, payable in arrears. At the end of the term, if Procurement is not in default, Procurement must elect to do one of the following: (i) purchase the leased property for a net price of approximately $41.2 million (the “Lease Balance”); (ii) make a

final supplemental payment to BTMUCC equal to approximately 82% of the Lease Balance and return the leased property to BTMUCC in good condition; (iii) arrange a sale of the leased property to a third party; or (iv) renew the Lake Park Lease under mutually agreeable terms. If Procurement elects to arrange a sale of the leased property to a third party, then Procurement must pay to BTMUCC the amount (if any) by which the Lease Balance exceeds the net sales proceeds paid by the third party; provided, however, that, absent certain defaults, such amount cannot exceed approximately 82% of the Lease Balance. If the net sales proceeds paid by the third party are greater than the Lease Balance, the excess sales proceeds will be paid to Procurement.

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

The Company is accounting for the Lake Park Lease as an operating lease.

The majority of the Service Experts segment’s motor vehicle fleet is leased through operating leases. The lease terms are generally non-cancelable for the first 12-month term and then are month-to-month, cancelable at the Company’s option. While there are residual value guarantees on these vehicles, the Company has not historically made significant payments to the lessors as the leases are maintained until the fair value of the assets fully mitigates the Company’s obligations under the lease agreements. As of ~~March 31,~~June 30, 2007, the Company estimates that it will incur an additional ~~$7.7~~$7.3 million above the contractual obligations on these leases until the fair value of the leased vehicles fully mitigates the Company’s residual value guarantee obligation under the lease agreements.

Environmental

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

At one site located in Brazil, the Company is currently evaluating the remediation efforts that may be required ~~by the~~under applicable environmental laws related to the release of certain hazardous materials. The Company currently believes that the release of the hazardous materials occurred over an extended period of time, including a time when the Company did not own the site. The Company ~~plans~~continues to ~~complete~~conduct additional assessments of the site ~~by the second quarter of 2007~~ to help determine the possible remediation activities that may be conducted at this site. Once the site assessments are completed and the possible remediation activities have been evaluated, ~~approval of~~ the Company plans to commence remediation ~~plan~~efforts, pending any required approvals by local governmental ~~authorities will be required before such activities can begin.~~authorities. The Company believes that containment is one of several viable options to comply with local regulatory standards. As a result, the Company recorded a charge of approximately $1.7 million in 2006 for estimated

containment costs at the site. During the ~~three~~six months ended ~~March 31,~~June 30, 2007, the Company recorded a charge of ~~$0.2~~$0.4 million related to additional site assessments. As of ~~March 31,~~June 30, 2007 and December 31, 2006, the Company has discounted liabilities recorded of approximately ~~$1.9~~$2.1 million and $1.7 million related to this matter which are included in Other Long Term Liabilities in the accompanying Consolidated Balance Sheets. These liabilities are discounted at approximately 5% as the aggregate amount of the obligation and the amount and timing of cash payments are reliably determinable. If, after the site assessments are completed, it is determined that containment is more costly or the local governmental authorities require more costly remediation activities, the costs to contain or remediate the site could be as high as ~~$5.2~~$5.7 million (undiscounted). The Company is exploring options for ~~insurance recoveries and recoveries from amounts held in escrow.~~recoveries.

~~In connection with its previous investment in Outokumpu Heatcraft, the~~The Company ~~recorded discounted liabilities~~has additional reserves of ~~$2.6 million and $3.3~~approximately $4.0 million related to ~~joint remediation of certain existing~~various other environmental matters recorded as of ~~March 31, 2007~~June 30, 2007. Balances of approximately $2.1 million and ~~December 31, 2006, respectively. The balances, which~~$1.9 million are recorded in Accrued Expenses and Other ~~Long Term~~ Liabilities, respectively, in the Consolidated Balance ~~Sheets, are discounted at approximately 5% as the aggregate amount of the obligation and the amount and timing of cash payments are reliably determinable.~~Sheet.

Estimates of future costs are subject to change due to prorated cleanup periods and changing environmental remediation regulations.

Litigation

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

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

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

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

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

On behalf of approximately 100 plaintiffs, the lawsuits allege personal injury resulting from alleged emissions of trichloroethylene, dichloroethylene, and vinyl chloride and other unspecified emissions from the South Plant in Grenada, Mississippi, previously owned by Heatcraft Inc. Each plaintiff seeks to recover actual and punitive damages. On Heatcraft Inc.’s motion to transfer venue, two of the four lawsuits (Booker andCrowder) were ordered severed and transferred to Grenada County by the Mississippi Supreme Court, requiring plaintiffs’ counsel to maintain a separate lawsuit for each of the individual plaintiffs named in these suits. To the Company’s knowledge, as of ~~April 20,~~July 17, 2007, plaintiffs’ counsel has requested the transfer of files regarding five individual plaintiffs from theBooker case and five individual plaintiffs from theCrowder case. ~~While at this time, only theBooker~~ ~~andCrowder~~ ~~cases have been ordered severed and transferred~~Additionally, LII has joined in motions to dismiss filed by ~~the Mississippi Supreme Court, LII expects theBeck~~ ~~andBrown~~ ~~cases to be transferred, as well,~~co-defendants in the ~~near future.~~four original lawsuits. These motions, which are still pending, seek dismissal (rather than transfer), without prejudice to refiling in Grenada County, of all cases not yet transferred to Grenada County. It is not possible to predict with certainty the outcome of these matters or an estimate of any potential loss. Based on present knowledge, management believes that it is unlikely that any final resolution of these matters will result in a material liability.

~~16.~~17. Reportable Business Segments:

The Company operates in four reportable business segments of the heating, ventilation, air conditioning and refrigeration (“HVACR”) markets. The first reportable segment is Residential Heating & Cooling, in which LII manufactures and markets a full line of heating, air conditioning and hearth products for the residential replacement and new construction markets in the United States and Canada. The second reportable segment is Commercial Heating & Cooling, in which LII manufactures and sells rooftop products and related equipment for light commercial applications in the United States and Canada and primarily rooftop products, chillers and air handlers in Europe. The third reportable segment is Service Experts, which includes sales, installation, maintenance and

repair services for heating, ventilation and air conditioning (“HVAC”) equipment by LII-owned service centers in the United States and Canada. The fourth reportable segment is Refrigeration, which manufactures and sells unit coolers, condensing units and other commercial refrigeration products in the United States and international markets.

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

The Company uses segment profit (loss) as the primary measure of profitability to evaluate operating performance and to allocate capital resources. The Company has changed its definition of segment profit (loss) to include realized gains (losses) on settled futures contracts not designated as cash flow hedges and foreign currency exchange gains (losses). Realized gains (losses) on settled futures contracts not designated as cash flow hedges and foreign currency gains (losses) are a component of (Gains), Losses and Other Expenses, net in the accompanying Consolidated Statements of Operations. As a result of this change, the Company now defines segment profit (loss) as a segment’s income (loss) from continuing operations before income taxes included in the accompanying Consolidated Statements of ~~Operations;~~Operations excluding (gains), losses and other expenses, net; restructuring charges; goodwill impairment; interest expense, net; and other expense (income) ~~expense,~~, net; less (plus) realized gains (losses) on settled futures contracts not designated as cash flow hedges and foreign currency exchange gains (losses).

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

Net sales and segment profit (loss) by business segment, along with a reconciliation of segment profit (loss) to net earnings (loss) for the three months and the six months ended ~~March 31,~~June 30, 2007 and 2006, are shown below (in millions):


	For the						For the						For the
	Three Months Ended						Three Months Ended						Six Months Ended
	March 31,						June 30,						June 30,
	2007			2006			2007			2006			2007			2006
Net Sales
Residential Heating & Cooling	$	361.1		$	419.3		$	497.9		$	542.5		$	859.1		$	961.8
Commercial Heating & Cooling		162.7			138.2			232.8			187.8			395.5			326.1
Service Experts		143.9			141.0			184.2			177.8			328.0			318.8
Refrigeration		141.3			126.5			151.3			130.8			292.5			257.3
Eliminations⁽¹⁾		(17.5	)		(16.6	)		(24.4	)		(26.0	)		(41.8	)		(42.6	)

	$	791.5		$	808.4		$	1,041.8		$	1,012.9		$	1,833.3		$	1,821.4


Segment Profit (Loss)
Residential Heating & Cooling	$	19.9		$	42.2		$	59.6		$	73.0		$	79.5		$	115.2
Commercial Heating & Cooling		8.5			8.1			30.2			19.3			38.8			27.5
Service Experts		(3.8	)		(6.5	)		13.0			9.2			9.2			2.7
Refrigeration		12.5			12.1			16.3			14.3			28.8			26.3
Corporate and other		(20.6	)		(24.6	)		(20.1	)		(20.5	)		(40.7	)		(45.1	)
Eliminations⁽¹⁾		(0.1	)		0.1			—			(0.4	)		(0.2	)		(0.3	)

Subtotal that includes segment profit and eliminations		16.4			31.4			99.0			94.9			115.4			126.3

Reconciliation to income before income taxes:
(Gains), losses and other expenses, net		(0.7	)		(17.1	)		(3.3	)		(27.2	)		(4.0	)		(44.3	)
Restructuring charges		2.3			6.3			7.6			2.3			9.9			8.6
Interest expense, net		0.9			0.6			2.0			1.8			2.9			2.4

Other expense (income), net								0.1			—			0.1			—
Less: Realized gains on settled futures contracts not designated as cash flow hedges⁽²⁾		0.5			9.1			1.2			22.9			1.7			32.0
Plus: Currency exchange loss⁽²⁾		(0.3	)		(1.0	)
Less: Foreign currency exchange gains (losses)⁽²⁾								2.5			—			2.2			(1.0	)

	$	13.7		$	33.5		$	88.9		$	95.1		$	102.6		$	128.6

Thomas W. Booth, Stephen R. Booth and John W. Norris, III, each a member of the Company’s Board of Directors, John W. Norris, Jr., LII’s former Chairman of the Board, other former directors of the Company, and Lynn B. Storey, the mother of Jeffrey D. Storey, M.D., a director of the Company, as well as other stockholders of the Company who may be immediate family members of the foregoing persons, are, individually or through trust arrangements, members of A.O.C. Corporation (“AOC”). As previously announced, on March 16, 2007, LII entered into an agreement with AOC to issue up to 2,239,589 shares of LII common stock in exchange for 2,695,770 shares of LII common stock owned by AOC. As soon as practicable following the issuance and exchange of LII common stock, AOC will distribute the newly acquired shares of LII common stock pro rata to its shareholders. The issuance, exchange and liquidating distribution are referred to herein as the “AOC Restructuring.” The effect of the AOC Restructuring would be to reduce the number of outstanding shares of LII common stock by 456,181 shares at minimal cost to LII.

Thomas W. Booth, Stephen R. Booth and John W. Norris, III, each a member of the Company’s Board of Directors, John W. Norris, Jr., LII’s former Chairman of the Board, other former directors of the Company, and Lynn B. Storey, the mother of Jeffrey D. Storey, M.D., a director of the Company, as well as other stockholders of the Company who may be immediate family members of the foregoing persons, are also, individually or through trust arrangements, members of AOC Land Investment, L.L.C. (“AOC Land”). AOC Land owned 70% of AOC Development II, L.L.C. (“AOC Development”), which owned substantially all of One Lake Park, L.L.C. (“One Lake Park”) prior to the dissolution of AOC Development and One Lake Park in the second half of 2006. Beginning in 1998, the Company leased part of an office building in Richardson, Texas owned by One Lake Park for use as its corporate headquarters. LII terminated these leases in June 2006. Lease payments for the ~~first three~~six months ofended June 30, 2006 totaled approximately ~~$0.6~~$1.4 million. LII believes that the terms of its leases with One Lake Park were, at the time entered into, comparable to terms that could have been obtained from unaffiliated third parties.

19. Subsequent Events:

On July 25, 2007, the Company announced that its Board of Directors approved a new share repurchase plan for $500 million. Based on the closing price of its common stock on July 24, 2007, a $500 million repurchase would represent over 20% of LII’s market capitalization. The Company has an agreement to amend certain financial covenants contained in its domestic revolving and term loans to provide flexibility for the larger share repurchases under the new share repurchase plan. The Company believes that cash flows from operations, as well as available borrowings under its amended revolving credit facility and other existing sources of funding, will be sufficient to fund its operations and the share repurchases during the term of the new share repurchase plan. The new share repurchase plan terminates and replaces the share repurchase plan adopted by the Company’s Board of Directors in September 2005.

On July 20, 2007, the Company announced plans to open a new manufacturing operation in Saltillo, Mexico. The three-year project is expected to break ground in the second half of 2007, with initial production starting in the second quarter of 2008 and ramping up to full production by early 2010. The Saltillo operation is anticipated to be 300,000 square feet and employ over 500 persons at full production. The Company’s projected capital commitment is approximately $45 million over three years.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Forward-Looking Information

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, that are based on information currently available to management as well as management’s assumptions and beliefs. All statements, other than statements of historical fact, included in this Quarterly Report on Form 10-Q constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including but not limited to statements identified by the words “may,” “will,” “should,” “plan,” “predict,” “anticipate,” “believe,” “intend,” “estimate” and “expect” and similar expressions. Such statements reflect our current views with respect to future events, based on what we believe are reasonable assumptions; however, such statements are subject to certain risks and uncertainties. In addition to the specific uncertainties discussed elsewhere in this Quarterly Report on Form 10-Q, the risk factors set forth in Part I, “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2006, and those set forth in Part II, “Item 1A. Risk Factors” of this report, if any, may affect our performance and results of operations. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may differ materially from those in the forward-looking statements. We disclaim any intention or obligation to update or review any forward-looking statements or information, whether as a result of new information, future events or otherwise.

Overview

We ~~participate~~operate in four reportable business segments of the heating, ventilation, air conditioning and refrigeration (“HVACR”) ~~industry.~~markets. The first reportable segment is Residential Heating & Cooling, in which we manufacture and market a full line of heating, air conditioning and hearth products for the residential replacement and new construction markets in the United States and Canada. The second reportable segment is Commercial Heating & Cooling, in which we ~~primarily~~ manufacture and sell rooftop products and related equipment for light commercial applications in the United States and Canada and primarily rooftop products, chillers and air handlers in Europe. The third reportable segment is Service Experts, which includes sales, installation, maintenance and repair services for heating, ventilation and air conditioning (“HVAC”) equipment by Company-owned service centers in the United States and Canada. The fourth reportable segment is Refrigeration, in which we manufacture and sell unit coolers, condensing units and other commercial refrigeration products in the United States and international markets.

Our products and services are sold through a combination of distributors, independent and Company-owned dealer service centers, other installing contractors, wholesalers, manufacturers’ representatives, original equipment manufacturers and to national accounts. The demand for our products and services is seasonal and dependent on the weather. Hotter than normal summers generate strong demand for replacement air conditioning and refrigeration products and services and colder than normal winters have the same effect on heating products and services. Conversely, cooler than normal summers and warmer than normal winters depress HVACR sales and services. In addition to weather, demand for our products and services is influenced by national and regional economic and demographic factors, such as interest rates, the availability of financing, regional population and employment trends, new construction, general economic conditions and consumer confidence.

The principal elements of cost of goods sold in our manufacturing operations are components, raw materials, factory overhead, labor and estimated costs of warranty expense. In our Service Experts segment, the principal components of cost of goods sold are equipment, parts and supplies and labor. The principal raw materials used in our manufacturing processes are steel, copper and aluminum. Higher prices for these commodities and related components continue to present a challenge to us and the HVACR industry in general. We partially mitigate the impact of higher commodity prices through a combination of price increases, commodity contracts, improved production efficiency and cost reduction initiatives.

Our fiscal year ends on December 31 and our interim fiscal quarters are each comprised of 13 weeks. For convenience, throughout this Management’s Discussion and Analysis of Financial Condition and Results of Operations, the 13-week periods comprising each fiscal quarter are denoted by the last day of the calendar quarter.

2120

~~Results of Operations~~

~~Overview of Results~~Company Highlights

	•		~~Consolidated net sales~~On July 25, 2007, we announced that our Board of Directors approved a new share repurchase plan for $500 million, pursuant to which we plan to repurchase shares of our common stock through open market purchases. Based on the closing price of our common stock on July 24, 2007, a $500 million repurchase would represent over 20% of our market capitalization. We currently plan to fully execute the repurchase by the end of the third quarter of 2008. We have an agreement to amend certain financial covenants contained in our domestic revolving and term loans to provide flexibility for the ~~first~~larger share repurchases under the new share repurchase plan. The new share repurchase plan terminates and replaces the share repurchase plan adopted by our Board of Directors in September 2005 (the “2005 Share Repurchase Plan”).

	•		On July 20, 2007, we announced plans to open a new manufacturing operation in Saltillo, Mexico. We plan to shift the manufacturing lines responsible for our Lennox-brand Merit series air conditioners and heat pumps, as well as air handlers, to Saltillo. The Merit series is currently manufactured in Marshalltown, IA, while the air handlers are currently manufactured in Grenada, MS. The three-year project is expected to break ground in the second half of 2007, with initial production starting in the second quarter of ~~2007 decreased 2.1% as compared~~2008 and ramping up to full production by early 2010. The Saltillo operation is anticipated to be 300,000 square feet and employ over 500 persons at full production. Our projected capital commitment is approximately $45 million over three years.

	•		Three of our four business segments exceeded prior year results in the ~~first~~second quarter of ~~2006 primarily attributable to decreased sales of domestic residential heating, air conditioning and hearth products due to the continued downturn in residential new construction.~~2007. The Commercial Heating & Cooling, Service Experts, and Refrigeration ~~all recorded~~segments experienced strong sales ~~increases for~~in the ~~first~~second quarter of 2007 asdue to increased volumes and favorable product mix changes. Our Residential Heating & Cooling segment’s second quarter sales decreased compared to 2006 largely due to continued weakness in the ~~first quarter of 2006.~~residential new construction market and softness in the residential replacement market.

	•		Operational income for the ~~first~~second quarter of 2007 was ~~$14.6~~$91.0 million as compared to ~~$34.1~~$96.9 million for ~~the first quarter of 2006 as our net sales decreased 2.1% and~~2006. Operational income was lower in 2007 primarily because we recorded lower gains on ~~future~~futures contracts. In ~~the first three months of~~ 2007 we designated certain ~~future~~futures contracts as cash flow hedges, thereby reducing the amount of gains recognized ~~during the quarter~~in 2007 as compared to ~~2006.~~the prior year when the futures contracts were not designated as cash flow hedges. Additionally, we recorded higher restructuring charges in the second quarter of 2007 due to the reorganization of our corporate administrative function.

	•		Net income for the ~~first~~second quarter of 2007 decreased to ~~$8.6~~$60.3 million from ~~$21.0~~$68.3 million in ~~2006~~the prior year primarily due to ~~reduced sales and~~ lower ~~operating~~operational income.

	•		On March 19, 2007 we announced that Todd M. Bluedorn was appointed Chief Executive Officer and elected to our Board of Directors, effective April 2, 2007. Mr. Bluedorn succeeded Robert E. Schjerven, who has served as our Chief Executive Officer since 2001 and held multiple leadership positions since 1986. Mr. Schjerven resigned from our Board of Directors effective April 2, 2007 but will continue to serve as our Chief Executive Officer Emeritus through June 30, 2007, at which point he will retire.

Results of Operations

The following table presents certain information concerning our financial results, including information presented as a percentage of net sales, for the ~~three months~~second quarter ended ~~March 31,~~and year-to-date through June 30, 2007 and 2006 (dollars in millions):


	For the Three Months Ended March 31,												Second Quarter												Year-to-Date June 30,
	2007						2006						2007						2006						2007						2006
	Dollars			Percent			Dollars			Percent			Dollars			Percent			Dollars			Percent			Dollars			Percent			Dollars			Percent
Net sales	$	791.5			100.0	%	$	808.4			100.0	%	$	1,041.8			100.0	%	$	1,012.9			100.0	%	$	1,833.3			100.0	%	$	1,821.4			100.0	%
Cost of goods sold		586.9			74.2			599.3			74.1			752.7			72.2			742.6			73.3			1,339.6			73.1			1,342.0			73.7

Gross profit		204.6			25.8			209.1			25.9			289.1			27.8			270.3			26.7			493.7			26.9			479.4			26.3
Selling, general and administrative expenses		191.1			24.1			187.9			23.2			197.3			19.0			201.2			19.9			388.4			21.2			389.1			21.3
(Gains), losses and other expenses, net		(0.7	)		(0.1	)		(17.1	)		(2.1	)		(3.3	)		(0.3	)		(27.2	)		(2.7	)		(4.0	)		(0.2	)		(44.3	)		(2.4	)
Restructuring charges		2.3			0.3			6.3			0.8			7.6			0.7			2.3			0.2			9.9			0.5			8.6			0.5
Equity in earnings of unconsolidated affiliates		(2.7	)		(0.3	)		(2.1	)		(0.2	)		(3.5	)		(0.3	)		(2.9	)		(0.3	)		(6.2	)		(0.3	)		(5.0	)		(0.3	)

Operational income	$	14.6			1.8	%	$	34.1			4.2	%	$	91.0			8.7	%	$	96.9			9.6	%	$	105.6			5.7	%	$	131.0			7.2	%


Net income	$	8.6			1.1	%	$	21.0			2.6	%	$	60.3			5.8	%	$	68.3			6.7	%	$	68.9			3.8	%	$	89.3			4.9	%

Net sales ~~decreased $16.9~~increased $28.9 million, or ~~2.1%~~2.9%, to ~~$791.5~~$1,041.8 million for the ~~three months ended March 31,~~second quarter of 2007 from ~~$808.4~~$1,012.9 million for the ~~three months ended March 31,~~second quarter of 2006. The ~~decrease~~increase in net sales was ~~primarily driven by lower~~due to strong sales resulting from increased volumes and favorable product mix changes in our Commercial Heating & Cooling, Service Experts, and Refrigeration segments. Our Residential Heating & Cooling ~~segment due~~segment’s sales decreased for the second quarter of 2007 compared to the ~~continued downturn in residential new construction. In the first three months of 2006, our Residential Heating & Cooling segment experienced strong sales of HVAC equipment~~prior year quarter largely due to ~~above average demand as our customers purchased remaining 10 to 12 seasonal energy efficiency rating, or “SEER,”~~weak residential ~~central air conditioning products or purchased~~ new construction sales and the soft residential central air conditioning products meeting the minimum 13 SEER standard under the National Appliance Energy Conservation Act of 1987, as amended (“NAECA”), which was effective as of January 23, 2006. The decrease in our Residential Heating & Cooling segment is partially offset by an increase in sales in our other segments.replacement market. The favorable impact of foreign currency translation increased net sales by ~~$8.8~~$14.6 million.

Gross Profit

Gross profit was ~~$204.6~~$289.1 million for the ~~three months ended March 31,~~second quarter of 2007 compared to ~~$209.1~~$270.3 million for the ~~three months ended March 31, 2006, a decrease~~prior year quarter, an increase of ~~$4.5~~$18.8 million. Gross profit margin ~~remained relatively flat at 25.8%~~increased to 27.8% for the ~~three months ended March 31,~~second quarter of 2007 compared to ~~25.9%~~26.7% in 2006 ~~as our price~~due to favorable sales mix changes and volume increases. Price increases ~~were~~partially offset by increases in commodity and component costs.

Selling, General and Administrative Expenses

Selling, general and administrative (“SG&A”) expenses ~~increased $3.2~~decreased $3.9 million, or ~~1.7%~~1.9%, ~~in 2007. Higher SG&A costs are attributable~~for the second quarter of 2007 compared to ~~increased salaries and benefits and an increase in depreciation of IT assets. These increases were partially offset by a decrease in professional fees.~~the prior year quarter. As a percentage of total net sales, SG&A expenses ~~increased~~decreased to ~~24.1%~~19.0% for the ~~three months ended March 31,~~second quarter of 2007 from ~~23.2%~~19.9% for the ~~three months ended March 31,~~second quarter of 2006. The reduction in SG&A expenses was primarily driven by increased focus on cost management.

(Gains), Losses and Other Expenses, Net

(Gains), losses and other expenses, net were ~~$(0.7)~~$(3.3) million for the ~~three months ended March 31,~~second quarter of 2007 ~~and $(17.1)~~compared to $(27.2) million for the ~~three months ended March 31,~~second quarter of 2006 and included the following (in millions):


	For the Three Months Ended						Second Quarter
	March 31,						2007			2006
	2007			2006
Realized (gains) on settled future contracts not designated as cash flow hedges	$	(0.5	)	$	(9.1	)
Unrealized (gains) on unsettled future contracts not designated as cash flow hedges		(0.3	)		(9.1	)
Realized (gains) on settled futures contracts not designated as cash flow hedges							$	(1.2	)	$	(22.9	)
Unrealized (gains) losses on unsettled futures contracts not designated as cash flow hedges								0.2			(4.3	)
Ineffective portion of (gains) on cash flow hedges		(0.2	)		—			—			—
Other items, net		0.3			1.1			(2.3	)		—

(Gains), losses and other expenses, net	$	(0.7	)	$	(17.1	)	$	(3.3	)	$	(27.2	)

Restructuring Charges

~~Restructuring charges decreased by $4.0~~We recognized $7.6 million toand $2.3 million in restructuring charges for the ~~three months ended March 31,~~second quarter of 2007 ~~from $6.3 million for the three months ended March 31, 2006.~~and 2006, respectively. Restructuring charges incurred during the second quarter of 2007 primarily related to the reorganization of our corporate administrative function. Charges recognized in ~~2007 and in~~the second quarter of 2006 primarily ~~relate~~related to the consolidation of our manufacturing, distribution, research and development and administrative operations of our two-step operations into South Carolina and closing of our ~~current~~ operations in Bellevue, ~~Ohio.~~Ohio (the “Allied Air Enterprises Consolidation”). The restructuring of these operations was substantially ~~complete as~~completed during the first quarter of ~~March 31,~~ 2007.

Equity in Earnings of Unconsolidated Affiliates

Investments in affiliates in which ~~the Company does~~we do not exercise control ~~and has a 20% or more voting interest~~but have significant influence are accounted for using the equity method of accounting. Equity in earnings of unconsolidated affiliates increased by $0.6 million to ~~$2.7~~$3.5 million for the ~~three months ended March 31,~~second quarter of 2007 as compared to ~~$2.1~~$2.9 million for the same period in 2006. The increase iswas due to the performance of our unconsolidated affiliates.

Interest Expense, ~~net~~Net

Interest expense, net, increased ~~$0.3~~by $0.2 million to ~~$0.9~~$2.0 million for the ~~three months ended March 31,~~second quarter of 2007 from ~~$0.6~~$1.8 million for the ~~three months ended March 31,~~second quarter of 2006. The higher net interest expense was due primarily to higher interest expense and a decrease in interest income earned during the quarter ended ~~March 31, 2007 as the average amount invested over the three months was less than that in the same period in 2006.~~June 30, 2007.

Provision for Income Taxes

The provision for income taxes was ~~$5.1~~$28.6 million for the ~~three months ended March 31,~~second quarter of 2007 compared to ~~$12.5~~$26.8 million for the ~~three months ended March 31, 2006.~~prior year quarter. The effective tax rate was ~~37.2%~~32.2% and ~~37.3%~~28.2% for the ~~three months ended March 31,~~second quarter of 2007 and ~~March 31,~~ 2006, respectively. Our effective rates differ from the statutory federal rate of 35% for certain items, such as a $3.2 million benefit in 2007 from a change in estimated gain from the prior year, state and local taxes, non-deductible expenses, foreign operating losses for which no tax benefits have been recognized and foreign taxes at rates other than 35%.

~~Three Months Ended March 31,~~Second Quarter 2007 Compared to ~~Three Months Ended March 31,~~Second Quarter 2006 – Results by Segment

The key performance indicators of our segments’ profitability are net sales and operational profit. We define segment profit (loss) as a segment’s income (loss) from continuing operations before income taxes included in the accompanying Consolidated Statements of ~~Operations;~~Operations excluding (gains), losses and other expenses, net; restructuring ~~charge;~~charges; goodwill impairment; interest expense, net; and other expense (income) ~~expense,~~, net; less (plus) realized gains (losses) on settled futures contracts not designated as cash flow hedges and foreign currency exchange gains (losses).

Residential Heating & Cooling

The following table details our Residential Heating & Cooling segment’s net sales and profit for the ~~three months ended March 31,~~second quarter of 2007 and 2006 (dollars in millions):


	Three Months Ended
	March 31,												Second Quarter
	2007			2006			Difference			% Change			2007			2006			Difference			% Change
Net sales	$	361.1		$	419.3		$	(58.2	)		(13.9	)%	$	497.9		$	542.5		$	(44.6	)		(8.2	)%
Profit		19.9			42.2			(22.3	)		(52.8	)		59.6			73.0			(13.4	)		(18.4	)
% of net sales		5.5	%		10.1	%								12.0	%		13.5	%

Net sales in our Residential Heating & Cooling business segment decreased ~~$58.2~~$44.6 million, or ~~13.9%~~8.2%, to ~~$361.1~~$497.9 million for the ~~three months ended March 31,~~second quarter of 2007 from ~~$419.3~~$542.5 million for the ~~three months ended March 31,~~second quarter of 2006. The decrease in net sales ~~is primarily~~was largely due to a decrease in unit ~~volumes. Net sales generally decreased across the residential HVAC industry due to depressed~~volumes in connection with lower residential new construction ~~demand~~sales and ~~unfavorable weather conditions. Additionally, in~~ the ~~first three months of 2006 the~~soft residential HVAC industry experienced strong sales of equipment largely due to above average demand as customers purchased remaining 10 to 12 SEER residential central air conditioning products or purchased new residential central air conditioning products meeting the minimum 13 SEER standard. We do not believe that we experienced as significant of a decrease as compared to the residential HVAC industry.replacement market. The decrease in net sales attributable to lower volumes was partially offset by ~~an increase in sales from price and favorable product mix changes.~~higher prices.

Segment profit in Residential Heating & Cooling decreased ~~52.8%~~18.4% to ~~$19.9~~$59.6 million for the second quarter of 2007 from ~~$42.2~~$73.0 million in 2006. The decrease in segment profit is primarily due to a decrease in volumes partially offset by an increase in sales from price and product mix changes. Additionally, we recorded higher warranty expenses due to the ~~increased component costs for replacement parts.~~prior year. Segment profit margins declined from ~~10.1% in~~13.5% for the second quarter of 2006 to ~~5.5% in~~12.0% for the second quarter of 2007. The decrease in segment profit ~~margins~~ was ~~due to an increase~~primarily driven by a decrease in unit volumes. Price increases implemented as a result of higher commodity and component costs ~~as well as essentially flat operating expenses on lower revenue.~~partially offset the decrease in segment profit margins.

Commercial Heating & Cooling

The following table details our Commercial Heating & Cooling segment’s net sales and profit for the ~~three months ended March 31,~~second quarter of 2007 and 2006 (dollars in millions):


	Three Months Ended
	March 31,											Second Quarter
	2007			2006			Difference		% Change			2007			2006			Difference		% Change
Net sales	$	162.7		$	138.2		$	24.5		17.7	%	$	232.8		$	187.8		$	45.0		24.0	%
Profit		8.5			8.1			0.4		4.9			30.2			19.3			10.9		56.5
% of net sales		5.2	%		5.9	%							13.0	%		10.3	%

Net sales in our Commercial Heating & Cooling segment increased ~~$24.5~~$45.0 million, or ~~17.7%~~24.0%, to ~~$162.7~~$232.8 million for the ~~three months ended March 31,~~second quarter of 2007 from ~~$138.2~~$187.8 million for the ~~three months ended March 31,~~second quarter of 2006. The increase in net sales ~~was due primarily to increased volumes in our European operations combined with pricing increases~~resulted from a favorable product mix shift in our domestic ~~operations. The increase~~operations, increased demand in ~~volumes~~international markets and price increases throughout the segment. Our European operations experienced surges in ~~Europe is due to growth of two-step distribution sales and increased market~~product demand resulting from growth in ~~Central~~both mature and ~~Eastern~~emerging markets associated with favorable economic conditions across Europe. ~~In addition, we~~The favorable impact of foreign currency translation increased ~~our prices to commercial HVAC customers beginning in the second quarter of 2006 to cover rising commodity and component costs.~~net sales by $5.2 million.

Segment profit in Commercial Heating & Cooling increased ~~4.9%~~56.5% to ~~$8.5~~$30.2 million for the ~~three months ended March 31,~~second quarter of 2007 from ~~$8.1~~$19.3 million ~~for~~in the ~~three months ended March 31, 2006.~~prior year. As a percentage of net sales, segment profit ~~decreased~~increased from ~~5.9%~~10.3% in 2006 to ~~5.2%~~13.0% in 2007. The ~~decline~~improvement in ~~margins is primarily due to higher component costs resulting from increased commodity prices and changes~~segment profit was driven by the favorable product mix shift in our ~~production mix.~~domestic operations and increased demand in European markets. Additionally, we realized the benefits of our North American strategic initiative in freight and logistics through the establishment of our Commercial Regional Distribution Network designed to optimize transportation load capacity and reduce transportation costs for our products.

Service Experts

The following table details our Service Experts segment’s net sales and ~~loss~~profit for the ~~three months ended March 31,~~second quarter of 2007 and 2006 (dollars in millions):


	Three Months Ended
	March 31,											Second Quarter
	2007			2006			Difference		% Change			2007			2006			Difference		% Change
Net sales	$	143.9		$	141.0		$	2.9		2.1	%	$	184.2		$	177.8		$	6.4		3.6	%
(Loss)		(3.8	)		(6.5	)		2.7		41.5
Profit													13.0			9.2			3.8		41.3
% of net sales		(2.6	)%		(4.6	)%							7.1	%		5.2	%

incur expenses ~~increased due to costs~~ associated with expanding our international operations, including our strategic growth initiatives in Asia.

Corporate and Other

Corporate and other costs were relatively flat at $20.1 million for the second quarter of 2007 compared to $20.5 million for the second quarter of 2006. Lower incentive plan costs for employees and executives were partially offset by an increase in salary expenses.

Year-to-Date Through June 30, 2007 Compared to Year-to-Date Through June 30, 2006 – Consolidated Results

Net Sales

Year-to-date net sales increased $11.9 million, or 0.7%, to $1,833.3 million in 2007 from $1,821.4 million in 2006. Our Commercial Heating & Cooling, Service Experts, and Refrigeration segments had increases in net sales resulting from increased volumes and favorable product mix changes. Net sales decreased in our Residential Heating & Cooling segment largely due to softness in residential new construction market demands. The favorable impact of foreign currency translation increased net sales by $23.4 million.

Gross Profit

Year-to-date gross profit was $493.7 million in 2007 compared to $479.4 million in 2006, an increase of $14.3 million. Gross profit margin increased to 26.9% for 2007 compared to 26.3% for 2006 due to favorable sales mix changes and volume increases. Price increases partially offset increases in commodity and component costs.

Selling, General and Administrative Expenses

Year-to-date SG&A expenses were relatively flat at $388.4 million in 2007 compared to $389.1 million in 2006. As a percentage of total net sales, SG&A expenses were 21.2% for 2007 and 21.3% for 2006. Higher year over year SG&A expenses incurred during the first quarter of 2007 were offset by lower year over year SG&A expenses in the second quarter of 2007 resulting from an increased focus on cost management.

(Gains), Losses and Other Expenses, Net

Year-to-date (gains), losses and other expenses, net were $(4.0) million in 2007 and $(44.3) million in 2006 and included the following (in millions):


	Year-to-Date June 30,
	2007			2006
Realized (gains) on settled futures contracts not designated as cash flow hedges	$	(1.7	)	$	(32.0	)
Unrealized (gains) on unsettled futures contracts not designated as cash flow hedges		(0.2	)		(13.2	)
Ineffective portion of (gains) on cash flow hedges		(0.2	)		—
Other items, net		(1.9	)		0.9

(Gains), losses and other expenses, net	$	(4.0	)	$	(44.3	)

Realized and unrealized gains on settled futures contracts not designated as cash flow hedges decreased as we had fewer futures contracts not designated as cash flow hedges in the first six months of 2007 compared to the same period in 2006. Beginning in the fourth quarter of 2006, futures contracts entered into that met established accounting criteria were formally designated as cash flow hedges. Additional decreases were due to differences in commodity markets for the first six months of 2007 as compared to the same period in 2006. For more information see Note 15 in the Notes to our Consolidated Financial Statements.

Restructuring Charges

We recognized $9.9 million and $8.6 million in year-to-date restructuring charges in 2007 and 2006, respectively. Restructuring charges incurred in 2007 primarily related to the reorganization of our corporate administrative function and the Allied Air Enterprises Consolidation. Charges recognized in 2006 primarily related to the Allied Air Enterprises Consolidation, which was substantially completed during the first quarter of 2007.

Equity in Earnings of Unconsolidated Affiliates

Investments in affiliates in which we do not exercise control but have significant influence are accounted for using the equity method of accounting. Year-to-date equity in earnings of unconsolidated affiliates increased by $1.2 million to $6.2 million in 2007 as compared to $5.0 million in 2006. The increase was due to the performance of our unconsolidated affiliates.

Interest Expense, Net

Year-to-date interest expense, net, increased by $0.5 million to $2.9 million in 2007 from $2.4 million in 2006. The higher net interest expense was due primarily to a decrease in interest income earned as the average amount invested over the first six months of 2007 was less than the amount invested in the same period in 2006.

Provision for Income Taxes

The year-to-date provision for income taxes was $33.7 million in 2007 compared to $39.3 million in 2006. The year-to-date effective tax rate was 32.8% and 30.6% for 2007 and 2006, respectively. Our effective rates differ from the statutory federal rate of 35% for certain items, such as a $3.2 million benefit in 2007 from a change in estimated gain from the prior year, state and local taxes, non-deductible expenses, foreign operating losses for which no tax benefits have been recognized and foreign taxes at rates other than 35%.

Year-to-Date Through June 30, 2007 Compared to Year-to-Date Through June 30, 2006 – Results by Segment

The key performance indicators of our segments’ profitability are net sales and operational profit. We define segment profit (loss) as a segment’s income (loss) from continuing operations before income taxes included in the accompanying Consolidated Statements of Operations excluding (gains), losses and other expenses, net; restructuring charges; goodwill impairment; interest expense, net; and other expense (income), net; less (plus) realized gains (losses) on settled futures contracts not designated as cash flow hedges and foreign currency exchange gains (losses).

Residential Heating & Cooling

The following table details our Residential Heating & Cooling segment’s year-to-date net sales and profit for 2007 and 2006 (dollars in millions):


	Year-to-Date June 30,
	2007			2006			Difference			% Change
Net sales	$	859.1		$	961.8		$	(102.7	)		(10.7	)%
Profit		79.5			115.2			(35.7	)		(31.0	)
% of net sales		9.3	%		12.0	%

Year-to-date net sales in our Residential Heating & Cooling segment decreased $102.7 million, or 10.7%, to $859.1 million in 2007 from $961.8 million in 2006. The decrease in net sales was primarily due to a decrease in unit volumes. Unit volumes were generally lower across the residential HVAC industry due to softness in the residential new construction market. The decrease in net sales attributable to lower unit volumes was partially offset by an increase in sales prices implemented as a result of higher commodity and component costs and a favorable change in product mix.

Year-to-date segment profit in Residential Heating & Cooling decreased 31.0% to $79.5 million in 2007 from $115.2 million in 2006. Segment profit margins declined from 12.0% for 2006 to 9.3% for 2007. The decrease in segment profit was primarily driven by a decrease in unit volumes, which was partially offset by an increase in sales from price increases and product mix changes. We also recorded higher warranty expenses primarily due to adjustments to failure rates for products we no longer manufacture and cost experience.

Commercial Heating & Cooling

The following table details our Commercial Heating & Cooling segment’s year-to-date net sales and profit for 2007 and 2006 (dollars in millions):


	Year-to-Date June 30,
	2007			2006			Difference		% Change
Net sales	$	395.5		$	326.1		$	69.4		21.3	%
Profit		38.8			27.5			11.3		41.1
% of net sales		9.8	%		8.4	%

Year-to-date net sales in our Commercial Heating & Cooling segment increased $69.4 million, or 21.3%, to $395.5 million in 2007 from $326.1 million in 2006. The increase in net sales was primarily due to increased demand in our European operations combined with a favorable product mix shift in our domestic operations and price increases throughout the segment. Our European operations experienced growth in both direct and two-step distribution channels as well as market growth due to strong European economic conditions. The favorable impact of foreign currency translation increased net sales by $8.8 million.

Year-to-date segment profit in Commercial Heating & Cooling increased 41.1% to $38.8 million in 2007 from $27.5 million in 2006. As a percentage of net sales, segment profit increased from 8.4% for 2006 to 9.8% for 2007. Segment profit has benefited from increased demand in our international markets and a favorable product mix shift in our domestic operations. The successful execution of strategic initiatives to optimize freight and logistics in North America through our Commercial Regional Distribution Network further contributed to the Commercial Heating & Cooling segment’s year over year increase in profits.

Service Experts

The following table details our Service Experts segment’s year-to-date net sales and profit for 2007 and 2006 (dollars in millions):


	Year-to-Date June 30,
	2007			2006			Difference		% Change
Net sales	$	328.0		$	318.8		$	9.2		2.9	%
Profit		9.2			2.7			6.5		240.7
% of net sales		2.8	%		0.8	%

Year-to-date net sales in our Service Experts segment increased $9.2 million, or 2.9%, to $328.0 million in 2007 from $318.8 million in 2006. Net sales increased primarily because of favorable changes in the mix of our sales and services. Residential service and replacement sales increased year over year as a result of our continued focus on higher margin residential service and replacement business, which offset a decrease in sales caused by the decline in residential new construction. Commercial sales decreased slightly and were a smaller percentage of our total net sales.

Year-to-date segment profit in Service Experts increased $6.5 million to $9.2 million in 2007 from $2.7 million in 2006. As a percentage of net sales, segment profit increased from 0.8% for 2006 to 2.8% for 2007. The improvement in our margins was primarily caused by a favorable change in sales and service mix as a larger percentage of our sales came from higher margin service and replacement business in 2007 as compared to 2006. Additionally, an increase in sales volumes helped to increase our segment profit.

Refrigeration

The following table details our Refrigeration segment’s year-to-date net sales and profit for 2007 and 2006 (dollars in millions):


	Year-to-Date June 30,
	2007			2006			Difference		% Change
Net sales	$	292.5		$	257.3		$	35.2		13.7	%
Profit		28.8			26.3			2.5		9.5
% of net sales		9.8	%		10.2	%

Year-to-date net sales in our Refrigeration segment increased $35.2 million, or 13.7%, to $292.5 million in 2007 from $257.3 million in 2006. The Refrigeration segment’s strong sales performance was led by higher sales in Europe, Australia, and Brazil. The increase in net sales was due to increased unit volumes due to strengthening economic conditions in our foreign operations combined with increased exports in South America. We increased prices as the result of an increase in commodity and component costs. The favorable impact of foreign currency translation increased net sales by $13.9 million.

Year-to-date segment profit in our Refrigeration segment increased $2.5 million to $28.8 million in 2007 from $26.3 million in 2006. Segment profit margins decreased to 9.8% for 2007 from 10.2% for 2006. Higher commodity and component costs reduced profit margins. Additionally, a change in our geographic mix generated more sales in foreign markets that have lower margins. We also incurred higher costs associated with expanding our international operations, including our strategic growth initiatives in Asia.

Corporate and Other

Corporate and other’s year-to-date costs decreased from ~~$24.6~~$45.1 million in 2006 to ~~$20.6~~$40.7 million in 2007. The decrease inprimarily resulted from lower incentive plan costs ~~is primarily due to~~for employees and executives and a reduction in professional fees ~~as well as lower long-term incentive plan expenses for our executive management.~~partially offset by an increase in salary expenses.

Liquidity and Capital Resources

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

As of ~~March 31,~~June 30, 2007, our debt-to-total-capital ratio was ~~15%~~16.7%, up from ~~13%~~13.7% as of ~~March 31,~~June 30, 2006, primarily due to an ~~increase~~incremental $41.7 million of ~~$21.6 million~~debt in ~~our outstanding~~2007. Higher debt ~~balances. The higher debt balance is~~was primarily ~~attributable~~due to ~~increased borrowings related to the use of cash from operations and~~ the repurchase of approximately ~~6.1~~5.5 million shares of our common stock for ~~$163.1~~$146.0 million since June 30, 2006 under the ~~stock repurchase program adopted by the Board of Directors in September~~ 2005 ~~(the “2005 Stock~~Share Repurchase ~~Program”) since March 31, 2006.~~Plan.

The following table summarizes our year-to-date cash activity for ~~the three months ended March 31,~~ 2007 and 2006 (in millions):


	Three Months Ended						Year-to-Date
	March 31,						June 30,
	2007			2006			2007			2006
Net cash used in operating activities	$	(75.1	)	$	(50.3	)	$	(5.3	)	$	(35.3	)
Net cash used in investing activities		(9.8	)		(18.4	)		(48.6	)		(35.9	)
Net cash provided by (used in) financing activities		33.1			(5.3	)		24.6			(43.5	)

~~During the first three months of 2007,~~Year-to-date cash used in operating activities in 2007 was ~~$75.1~~$5.3 million compared to ~~$50.3~~$35.3 million in 2006. The primary reasons for the decrease in cash used in operating activities were an increase in accounts payable of $105.5 million in 2007 compared to $59.7 million in 2006 and an increase in inventory of $72.1 million in 2007 compared to an increase of $99.9 million in 2006. Accounts payable were low at the end of 2006 due to reduced production activities in the fourth quarter. Increased production activities in our Commercial Heating & Cooling segment in the second quarter of 2007 contributed to an increase in accounts payable. Inventory increased in the first six months of 2007 due to a normal seasonal increase. However, inventory increased more in the first six months of 2006 primarily due to a planned increase in finished goods to manage through the Allied Air Enterprises Consolidation. The impact of accounts payable and inventory was partially offset by an increase in accounts receivable of $129.0 million in 2007 compared to $98.0 million in 2006. The increase in ~~cash used in operations is primarily due to the timing of payment for income taxes. Our 2005 federal tax liability~~accounts receivable was paid in its entirety during 2005. A portion of our 2006 federal tax liability was deferred and paid in the first three months of 2007. Our cash used in operating activities is also higher due to lower net income for the three months ended March 31, 2007 as compared to the same period in 2006. In addition, the higher use of cash waslargely due to increased ~~cash payments for restructuring activities~~sales in ~~2007. These changes~~the second quarter resulting from the seasonality of our products. Our incremental second quarter sales were ~~partially offset by a~~ larger ~~increase~~ in ~~accounts payable during~~ 2007 as compared to 2006.

~~During the first three months of 2007,~~Year-to-date net cash provided by financing activities was ~~$33.1~~$24.6 million in 2007 compared to ~~$5.3~~$43.5 million used in 2006. We paid a total of ~~$8.7~~$26.4 million in dividends on our common stock in the ~~three~~first six months ~~ended March 31,~~of 2007 as compared to ~~$7.8~~$23.5 million during the same period in 2006. The increase in cash dividends paid was attributable to an increase in the quarterly cash dividend from $0.11 to $0.13 per share of common stock, effective as of the dividend paid on January 12, 2007. ~~Net~~Year-to-date net short-term and revolving long-term borrowings totaled approximately ~~$35.3~~$68.9 million in ~~the first three months of~~ 2007 as compared to ~~$2.3~~$15.5 million ~~for the same period~~ in 2006. ~~The increase in net borrowings is~~During the first six months of 2007, we used approximately $45.6 million to repurchase 1,324,000 shares of our common stock. Such repurchases were made primarily ~~due to the repurchase of shares~~ under the 2005 Stock Repurchase ~~Program, coupled with~~Plan.

As of ~~March 31,~~June 30, 2007, we had outstanding long-term debt obligations totaling ~~$143.7 million.~~$173.1 million, including $11.3 million of current maturities. The amount outstanding consisted primarily of outstanding domestic promissory notes with an aggregate principal outstanding of $107.2 million. The promissory notes mature at various dates through 2010 and have interest rates ranging from 6.73% to 8.00%.

We have bank lines of credit aggregating ~~$434.9~~$431.4 million, of which ~~$36.3~~$70.0 million was borrowed and outstanding and ~~$92.3~~$91.0 million was committed to standby letters of credit as of ~~March 31,~~June 30, 2007. Of the remaining ~~$306.3~~$270.4 million, the entire amount was available for future borrowings after consideration of covenant limitations. Included in the lines of credit are several regional facilities and a multi-currency facility governed by agreements between us and a syndicate of banks. The revolving credit facility, which matures in July 2010, has a borrowing capacity of $400 million. The facility contains certain financial covenants and bears interest at a rate equal to, at our option, either (a) the greater of the bank’s prime rate or the federal funds rate plus 0.5% or (b) the London Interbank Offered Rate plus a margin equal to 0.475% to 1.20% depending upon the ratio of total funded debt-to-adjusted earnings before interest, taxes, depreciation and amortization (“Adjusted EBITDA”), as defined in the facility. We pay a facility fee, depending upon the ratio of total funded debt to Adjusted EBITDA, equal to 0.15% to 0.30% of the capacity. The facility includes restrictive covenants that limit our ability to incur additional indebtedness, encumber our assets, sell our assets and make certain payments, including amounts for share repurchases and dividends. Our facility and promissory notes are guaranteed by our material subsidiaries.

As of ~~March 31,~~June 30, 2007, ~~$16.2~~$19.9 million of cash and cash equivalents ~~were~~was restricted primarily due to routine lockbox collections and letters of credit issued with respect to the operations of our captive insurance subsidiary, which expire on December 31, 2007. These letter of credit restrictions can be transferred to our revolving lines of credit as needed.

Our domestic revolving and term loans contain certain financial covenant restrictions. As of ~~March 31,~~June 30, 2007, we believe we were in compliance with all covenant requirements.

On July 25, 2007, we announced that our Board of Directors approved a new share repurchase plan for $500 million, pursuant to which we plan to repurchase shares of our common stock through open market purchases. Based on the closing price of our common stock on July 24, 2007, a $500 million repurchase would represent over 20% of our market capitalization. We currently intend to fund the stock repurchases through a combination of cash from operations and third party borrowings and to fully execute the repurchase by the end of the third quarter of 2008. We have an agreement to amend certain financial covenants contained in our domestic revolving and term loans to provide flexibility for the larger share repurchases under the new share repurchase plan. We periodically review our capital structure, including our primary bank facility, to ensure that it has adequate liquidity. We believe that cash ~~flow~~flows from operations, as well as available borrowings under our amended revolving credit facility and other existing sources of funding, will be sufficient to fund our operations ~~for~~and the ~~foreseeable future.~~share repurchases during the term of the new share repurchase plan. The new share repurchase plan terminates and replaces the 2005 Share Repurchase Plan.

Off-Balance Sheet Arrangements

In addition to the revolving and term loans described above, we utilize the following financing arrangements in the course of funding our operations:

	•		Trade accounts receivable are sold on a non-recourse basis to third parties. The sales are reported as a reduction of Accounts and Notes Receivable, Net in the Consolidated Balance Sheets. As of ~~March 31,~~June 30, 2007 and December 31, 2006, respectively, we had not sold any of such accounts receivable. If receivables are sold, the related discount from face value is included in Selling, General and Administrative Expense in the Consolidated Statements of Operations.

	•		We also lease real estate and machinery and equipment pursuant to leases that, in accordance with Generally Accepted Accounting Principles, ~~(“GAAP”),~~ are not capitalized on the balance sheet, including high-turnover equipment such as autos and service vehicles and short-lived equipment such as personal computers.

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

Our results of operations can be affected by changes in exchange rates. Net sales and expenses in foreign currencies are translated into United States dollars for financial reporting purposes based on the average exchange rate for the period. Net sales from outside the United States represented ~~25.5%~~24.8% and ~~21.1%~~20.3% and 25.1% and 20.7% of

various dates through ~~June~~September 2008 with a fair value as an asset of ~~$9.3~~$12.5 million. The impact of a 10% change in commodity prices would have a significant impact on our results from operations on an annual basis, absent any other contravening actions.

Our results of operations can be affected by changes in interest rates due to variable rates of interest on our revolving credit facilities. A 10% change in interest rates would not be material to our results of operations.

Item 4. Controls and Procedures.

Disclosure Controls and Procedures

We carried out an evaluation, under the supervision and with the participation of our current management, including our Chief Executive Officer and Chief Financial Officer (our principal executive officer and principal financial officer, respectively) of the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures were effective as of ~~March 31,~~June 30, 2007 in alerting them in a timely manner to material information required to be disclosed by us in the reports we filed or submitted to the Securities and Exchange Commission under the Securities Exchange Act of 1934.

Changes in Internal Control Over Financial Reporting

During the quarter ended ~~March 31,~~June 30, 2007, there were no changes in our internal controls over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.

2831

PART II — OTHER INFORMATION

Item 1. Legal Proceedings

There have been no significant changes concerning our legal proceedings since December 31, ~~2006.~~2006, except as follows:

As previously reported, in January 2003, we, along with one of our subsidiaries, Heatcraft Inc., were named in four lawsuits in connection with our former heat transfer operations (the “Heatcraft Matter”), two of which were ordered severed and transferred to Grenada County by the Mississippi Supreme Court, requiring plaintiffs’ counsel to maintain a separate lawsuit for each of the individual plaintiffs named in these suits. To our knowledge, as of July 17, 2007, plaintiffs’ counsel has requested the transfer of files regarding five individual plaintiffs from theBooker case and five individual plaintiffs from theCrowder case. We have joined in motions to dismiss filed by co-defendants in the four original lawsuits. These motions, which are still pending, seek dismissal (rather than transfer), without prejudice to refiling in Grenada County, of all cases not yet transferred to Grenada County.

See Note 1516 in the Notes to the Consolidated Financial Statements set forth in Part I, Item 1, of this Quarterly Report on Form 10-Q for additional discussion regarding ~~legal proceedings.~~the Heatcraft Matter.

Item 1A. Risk Factors.

In addition to the other information set forth in this Quarterly Report on Form 10-Q, you should carefully consider the risk factors discussed in Part I, “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2006, which could materially affect our business, financial condition or results of operations. There have been no material changes in our risk factors from those disclosed in our 2006 Annual Report on Form 10-K.

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

ISSUER PURCHASES OF EQUITY SECURITIES (1)

Total Number of Maximum Number
Shares Purchased of Shares that may
Total Number Average Price Paid as Part of Publicly yet be Purchased
of Shares per Share Announced Plans Under the Plans or
Period Purchased (2) (including fees) (2) or Programs (1) Programs (1)
January 1 through January 31 495 $ 29.76 — 3,642,959

February 1 through February 28 337,932 $ 35.45 306,000 3,336,959

March 1 through March 31 (3) 131,639 $ 33.96 102,000 3,234,959

Total 470,066 $ 35.02 408,000 3,234,959


					Total Number of		Maximum Number
					Shares Purchased		of Shares that may
	Total Number		Average Price Paid		as Part of Publicly		yet be Purchased
	of Shares		per Share		Announced Plans		Under the Plans or
Period	Purchased (2)		(including fees) (2)		or Programs (1)		Programs (1)
April 1 through April 30		163	$	34.23		—		3,234,959

May 1 through May 31		751,514	$	34.02		748,000		2,486,959

June 1 through June 30 (3)		102,000	$	34.34		102,000		2,384,959


Total		853,677	$	34.06		850,000		2,384,959


(1)		On September 19, 2005, we announced that the Board of Directors authorized a ~~stock~~share repurchase ~~program,~~plan, pursuant to which we may repurchase up to 10,000,000 shares of our common stock, from time to time, through open market-purchases (the “2005 ~~Stock~~Share Repurchase ~~Program”~~Plan”). Prior to ~~January~~April 1, 2007, we had repurchased ~~6,357,041~~6,765,041 shares of common stock under the 2005 ~~Stock~~Share Repurchase ~~Program.~~Plan. On July 25, 2007, we announced that a new share repurchase plan for $500 million terminated and replaced the 2005 Share Repurchase Plan.

(2)		In addition to purchases under the 2005 ~~Stock~~Share Repurchase ~~Program,~~Plan, this column reflects the surrender to us of ~~62,066~~3,677 shares of common stock to satisfy tax withholding obligations in connection with the exercise of stock appreciation ~~rights and the payout of shares of our common stock pursuant to vested performance share awards.~~rights.


(3)		All purchases made by us under the 2005 ~~Stock~~Share Repurchase ~~Program~~Plan during ~~March~~June 2007 were settled in ~~March~~June 2007 but traded in ~~February~~May 2007.

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

Our 2007 Annual Meeting of Stockholders (“Annual Meeting”) was held on May 17, 2007. At the Annual Meeting, our stockholders (i) elected five directors with terms expiring at our 2010 Annual Meeting of Stockholders and (ii) approved our proposal to issue up to 2,239,589 shares of our common stock pursuant to an Agreement and Plan of Reorganization with A.O.C. Corporation in exchange for 2,695,770 shares of our common stock. Stockholders representing 63,522,436 shares of our common stock were present, in person or represented by proxy, at the Annual Meeting.

The voting results at the Annual Meeting for the election of directors were as follows:


Directors	For		Withheld
Todd M. Bluedorn		62,270,068		1,252,368
Janet K. Cooper		62,378,931		1,143,505
C.L. (Jerry) Henry		62,380,743		1,141,702
Terry D. Stinson		58,990,701		4,531,735
Richard L. Thompson		62,920,008		602,428

Following the Annual Meeting, Thomas W. Booth, James J. Byrne, John W. Norris, III, and Paul W. Schmidt, having terms expiring in 2008, and Linda G. Alvarado, Steven R. Booth, John E. Major, and Jeffrey D. Storey, M.D., having terms expiring in 2009, continued in office. As previously disclosed, Robert E. Schjerven retired from his position as Chief Executive Officer and as a member of the Company’s Board of Directors effective April 2, 2007.

The voting results at the Annual Meeting for the proposal to issue up to 2,239,589 shares of our common stock pursuant to an Agreement and Plan of Reorganization with A.O.C. Corporation in exchange for 2,695,770 shares of our common stock were as follows:


	Shares
For:		53,980,659
Against:		56,621
Abstain:		27,123

Item 6. Exhibits


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

3.2	—	Amended and Restated Bylaws of LII (filed as Exhibit ~~3.2~~3.1 to LII’s Current Report on Form 8-K filed on ~~February 28, 2005~~July 25, 2007 and incorporated herein by reference).


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

4.2	—	Rights Agreement, dated as of July 27, 2000, between LII and ChaseMellon Shareholder Services, L.L.C., as Rights Agent, which includes as Exhibit A the form of Certificate of Designations of Series A Junior Participating Preferred Stock setting forth the terms of the Preferred Stock, as Exhibit B the form of Rights Certificate and as Exhibit C the Summary of Rights to Purchase Preferred Stock (filed as Exhibit 4.1 to LII’s Current Report on Form 8-K filed on July 28, 2000 and incorporated herein by reference).

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

~~10.1~~		Agreement and Plan of Reorganization, dated March 16, 2007, between Lennox International Inc. and A.O.C. Corporation (filed as Exhibit 10.1 to LII’s Current Report on Form 8-K filed on March 21, 2007 and incorporated herein by reference).

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

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

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

3033


Total product warranty liability at December 31, 2006	$	104.7		$	104.7
Payments made in 2007		(7.7	)
Payments made in 2007, net of recoveries					(15.6	)
Changes resulting from issuance of new warranties		6.1			14.6
Changes in estimates associated with pre-existing warranties		5.5			9.6

Total product warranty liability at March 31, 2007	$	108.6
Total product warranty liability at June 30, 2007				$	113.3


	As of			As of			As of			As of
	March 31,			December 31,			June 30,			December 31,
	2007			2006			2007			2006
Total Assets
Residential Heating & Cooling	$	654.1		$	587.0		$	706.5		$	587.0
Commercial Heating & Cooling		301.1			285.7			361.4			285.7
Service Experts		186.1			183.4			202.7			183.4
Refrigeration		363.4			344.3			370.9			344.3
Corporate and other		289.0			328.7			334.7			328.7
Eliminations⁽¹⁾		(12.0	)		(9.3	)		(15.4	)		(9.3	)

Segment Assets	$	1,781.7		$	1,719.8
Segment assets							$	1,960.8		$	1,719.8


	Page
Part I. Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets – ~~March 31,~~June 30, 2007 (Unaudited) and December 31, 2006		3
Consolidated Statements of Operations (Unaudited) – Three Months and Six Months Ended ~~March 31,~~June 30, 2007 and 2006		4
Consolidated Statements of Stockholders’ Equity – ~~Three~~Six Months Ended ~~March 31,~~June 30, 2007 (Unaudited) and Year Ended December 31, 2006		5
Consolidated Statements of Cash Flows (Unaudited) – ~~Three~~Six Months Ended ~~March 31,~~June 30, 2007 and 2006		6
Notes to Consolidated Financial Statements (Unaudited)		7
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	21	20
Item 3. Quantitative and Qualitative Disclosures About Market Risk	27	30
Item 4. Controls and Procedures	28	31

Part II. Other Information
Item 1. Legal Proceedings	29	32
Item 1A. Risk Factors	29	32
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	29	32
Item 4. Submission of Matters to a Vote of Security Holders		33
Item 6. Exhibits	29	33
Certification of the Principal Executive ~~Officers~~Officer
Certification of the Principal Financial Officer
~~Certificatio of the Principal Executive Officer and the Principal Financial Officer~~Certification Pursuant to 18 U.S.C. Section 1350


~~(1)~~		The Consolidated Statement of Stockholders’ Equity for the year ended December 31, 2006 in the Company’s 2006 Form 10-K included a charge of $28.4 million for the impact of adoption of Statement of Financial Standards No. 158, ~~Employer’s Accounting for Defined Benefit Pension and Other Postretirement Plans – An Amendment of FASB Statements No. 87, 88, 106, and 132(R)~~ (“SFAS No. 158”) as a component of comprehensive income rather than displaying the adoption impact as a separate component of accumulated other comprehensive income (loss) (“AOCI”). This Consolidated Statement of Stockholders’ Equity for the year ended December 31, 2006 is included to enhance disclosures for the adoption of SFAS No. 158 by presenting the $28.4 million adoption impact as a separate component of AOCI and a corresponding increase to 2006 comprehensive income. The revision did not change net income, total AOCI, or cash flows for the year ended December 31, 2006.


	Balance at				Balance at		Balance at					Balance at
Segment	December 31, 2006		Changes⁽¹⁾		March 31, 2007		December 31, 2006		Changes⁽¹⁾			June 30, 2007
Residential Heating & Cooling	$	33.9	$	—	$	33.9	$	33.9	$	(0.3	)	$	33.6
Commercial Heating & Cooling		30.1		0.3		30.4		30.1		0.8			30.9
Service Experts		97.9		0.8		98.7		97.9		8.0			105.9
Refrigeration		77.9		1.3		79.2		77.9		4.0			81.9

Total	$	239.8	$	2.4	$	242.2	$	239.8	$	12.5		$	252.3


	For the												For the
	Three Months Ended March 31,												Three Months Ended June 30,
	2007			2006			2007			2006			2007			2006			2007			2006
	Pension Benefits						Other Benefits						Pension Benefits						Other Benefits
Service cost	$	1.8		$	1.9		$	0.2		$	0.3		$	1.8		$	1.8		$	0.1		$	0.3
Interest cost		3.7			3.8			0.2			0.4			3.8			3.8			0.2			0.4
Expected return on plan assets		(4.4	)		(4.1	)		—			—			(4.4	)		(4.1	)		—			—
Amortization of prior service cost		0.2			0.3			(0.4	)		(0.1	)		0.2			0.3			(0.4	)		(0.2	)
Amortization of net loss		1.2			1.5			0.2			0.2			1.2			1.6			0.3			0.2
Settlements or curtailments		0.7			1.9			—			—			—			—			—			—

Total net periodic pension cost	$	3.2		$	5.3		$	0.2		$	0.8		$	2.6		$	3.4		$	0.2		$	0.7


	For the
	Six Months Ended June 30,
	2007			2006			2007			2006
	Pension Benefits						Other Benefits
Service cost	$	3.5		$	3.7		$	0.3		$	0.6
Interest cost		7.5			7.6			0.4			0.8
Expected return on plan assets		(8.8	)		(8.2	)		—			—
Amortization of prior service cost		0.5			0.6			(0.8	)		(0.3	)
Amortization of net loss		2.4			3.1			0.5			0.4
Settlements or curtailments		0.7			1.9			—			—

Total net periodic pension cost	$	5.8		$	8.7		$	0.4		$	1.5


				Weighted-
				Average
				Exercise
				Price per
	Shares			Share
Outstanding at beginning of period		4.0		$	14.63
Granted		—			—
Exercised		(1.0	)	$	11.58
Forfeited		(0.1	)	$	37.38

Outstanding at end of period		2.9		$	15.29

Exercisable at end of period		2.8		$	15.15


	For the
	Three Months Ended
	March 31,
	2007		2006
Intrinsic value of options exercised	$	24.2	$	7.5
Realized tax benefits from tax deductions		9.0		2.8
Tax benefits in excess of the hypothetical deferred tax asset		1.1		0.7


				Weighted-
				Average
				Grant Date
				Fair Value
	Shares			per Share
Nonvested performance share awards:
Nonvested at beginning of period		1.6		$	19.39
Granted		—			—
Additional shares earned		0.2		$	16.89
Vested		(0.4	)	$	16.89
Forfeited		—		$	14.15

Nonvested at end of period		1.4		$	19.83


				Weighted-
				Average
				Exercise Price
	Shares			per Share
Outstanding at beginning of period		1.9		$	25.20
Granted		—			—
Exercised		(0.2	)	$	18.02
Forfeited		—		$	30.01

Outstanding at end of period		1.7		$	26.18

Exercisable at end of period		0.7		$	20.19


	For the						For the Three Months				For the Six Months
	Three Months						Ended June 30,				Ended June 30,
	Ended March 31,						2007		2006		2007			2006
	2007			2006
Reorganization of corporate administrative function							$	6.6	$	—	$	6.6		$	—
Facility lease								0.3		—		0.3			—
Allied Air Enterprises consolidation	$	2.2		$	7.1			0.7		2.3		2.9			9.4
Pension Settlement (A)		0.7			—
Pension settlement⁽¹⁾								—		—		0.7			—
Gain on sale of land		—			(0.8	)		—		—		—			(0.8	)
Other		(0.6	)		—			—		—		(0.6	)		—

Total	$	2.3		$	6.3		$	7.6	$	2.3	$	9.9		$	8.6


~~(A)~~(1)		Amount not reflected in restructuring reserves as this item is related to the Company’s pension ~~obligation and is included in pension liabilities as of March 31, 2007.~~obligation.


					Reversal														Reversal of
	Balance at		Charged		of Prior								Balance at		Balance at		Charged		Prior								Balance at
	December 31,		to		Period			Cash			Non-Cash		March 31,		December 31,		to		Period			Cash					June 30,
Description of reserves	2006		Earnings		Charges			Utilization			Utilization		2007
Description of Reserves															2006		Earnings		Charges			Utilization			Other		2007
Severance and related expense	$	1.8	$	0.2	$	—		$	(1.9	)	$	—	$	0.1	$	1.8	$	7.1	$	—		$	(2.2	)	$	1.4	$	8.1
Equipment moves		—		0.9		—			(0.9	)		—		—		—		1.0		—			(1.0	)		—		—
Recruiting and relocation		—		0.3		—			(0.3	)		—		—		—		0.6		—			(0.6	)		—		—
Lease termination		1.5		—		—			(0.2	)		—		1.3		1.5		0.3		—			(0.3	)		—		1.5
Other		0.8		0.8		(0.6	)		(0.8	)		—		0.2		0.8		0.8		(0.6	)		(0.9	)		—		0.1

Total restructuring reserves	$	4.1	$	2.2	$	(0.6	)	$	(4.1	)	$	—	$	1.6	$	4.1	$	9.8	$	(0.6	)	$	(5.0	)	$	1.4	$	9.7


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

(2)		Realized gains (losses) on settled futures contracts not designated as cash flow hedges and foreign currency exchange gains (losses) are a component of (Gains), Losses and Other Expenses, net in the accompanying Consolidated Statements of Operations.


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


	LENNOX INTERNATIONAL INC.
Date: ~~April 27,~~August 1, 2007	/s/ Susan K. Carter
	Susan K. Carter
	Chief Financial Officer (on behalf of registrant and as principal financial officer)