UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
(MARK ONE)
þQUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
þ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY
PERIOD ENDED SEPTEMBER 30, 2007MARCH 31, 2008
OR
oTRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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, a non-accelerated filer or a non-accelerated filer.smaller reporting company. See definitionthe definitions of “large accelerated filer”, “accelerated filer” and “large accelerated filer”“smaller reporting company” in Rule 12b-2 of the Securities Exchange Act of 1934.
Large Accelerated FilerþAccelerated Fileroþ      Accelerated FileroNon-Accelerated FileroSmaller Reporting Companyo
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 October 24, 2007,April 28, 2008, the number of shares outstanding of the registrant’s common stock, par value $.01 per share, was 63,962,882.56,614,285.
 
 

 


 

LENNOX INTERNATIONAL INC.
FORM 10-Q
For the Three and Nine Months Ended September 30, 2007March 31, 2008
INDEX
     
  Page
    
Financial StatementsInformation    
Item 1.Financial Statements
Consolidated Balance Sheets – September 30, 2007— March 31, 2008 (Unaudited) and December 31, 20062007  3 
Consolidated Statements of Operations (Unaudited) Three Months Ended March 31, 2008 and Nine Months Ended September 30, 2007 and 2006  4 
Consolidated Statements of Stockholders’ Equity – Nine— Three Months Ended September 30, 2007March 31, 2008 (Unaudited) and Year Ended December 31, 20062007  5 
Consolidated Statements of Cash Flows (Unaudited) – Nine— Three Months Ended September 30,March 31, 2008 and 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  2021 
Item 3.Quantitative and Qualitative Disclosures About Market Risk30
Item 4.Controls and Procedures30
Part II.Other Information
Item 1.Legal Proceedings  31 
  32 
    
Item 1. Legal Proceedings1A.Risk Factors  3331 
  33 
Item 2.Unregistered Sales of Equity Securities and Use of Proceeds  3331 
  34
  34
Item 6.Exhibits31
 
 Certification of the Principal Executive OfficerExhibit 31.1
 Certification of the Principal Financial OfficerExhibit 31.2
 Certification Pursuant to 18 U.S.C. Section 1350Exhibit 32.1

2


PART I — FINANCIAL INFORMATION
Item 1. Financial Statements.
Item 1.Financial Statements.
LENNOX INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS

As of September 30, 2007March 31, 2008 and December 31, 2006
2007
(In millions, except share and per share data)
        
         March 31, December 31, 
 September 30, December 31,  2008 2007 
 2007 2006  (unaudited)   
 (unaudited)  
ASSETS ASSETS
 
CURRENT ASSETS:  
Cash and cash equivalents $93.5 $144.3  $120.3 $145.5 
Short-term investments 25.1   34.7 27.7 
Accounts and notes receivable, net 630.8 502.6  490.8 492.5 
Inventories, net 358.7 305.5  379.5 325.7 
Deferred income taxes 20.1 22.2  25.1 30.9 
Other assets 51.1 43.8  85.9 48.4 
          
Total current assets 1,179.3 1,018.4  1,136.3 1,070.7 
PROPERTY, PLANT AND EQUIPMENT, net 306.4 288.2  318.8 317.9 
GOODWILL, net 262.4 239.8  264.5 262.8 
DEFERRED INCOME TAXES 108.3 104.3  88.1 94.0 
OTHER ASSETS 78.4 69.1  72.7 69.2 
          
TOTAL ASSETS $1,934.8 $1,719.8  $1,880.4 $1,814.6 
          
  
LIABILITIES AND STOCKHOLDERS’ EQUITY LIABILITIES AND STOCKHOLDERS’ EQUITY
 
CURRENT LIABILITIES:  
Short-term debt $3.8 $1.0  $5.5 $4.8 
Current maturities of long-term debt 61.3 11.4  36.4 36.4 
Accounts payable 349.4 278.6  330.4 289.8 
Accrued expenses 346.4 326.3  319.2 352.1 
Income taxes payable 25.4�� 33.8   1.1 
          
Total current liabilities 786.3 651.1  691.5 684.2 
 
LONG-TERM DEBT 95.4 96.8  359.7 166.7 
POSTRETIREMENT BENEFITS, OTHER THAN PENSIONS 12.1 12.9  16.1 16.2 
PENSIONS 47.0 49.6  34.3 34.8 
OTHER LIABILITIES 124.3 105.0  109.8 104.2 
          
Total liabilities 1,065.1 915.4  1,211.4 1,006.1 
  
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, 81,326,014 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, 83,546,395 shares and 81,897,439 shares issued for 2008 and 2007, respectively 0.8 0.8 
Additional paid-in capital 750.4 706.6  788.4 760.7 
Retained earnings 417.6 312.5  445.4 447.4 
Accumulated other comprehensive income (loss) 61.8  (5.1)
Treasury stock, at cost, 16,883,456 shares and 9,818,904 shares for 2007 and 2006, respectively  (360.9)  (210.4)
Accumulated other comprehensive income 81.5 63.6 
Treasury stock, at cost, 24,866,016 shares and 19,844,677 shares for 2008 and 2007, respectively  (647.1)  (464.0)
          
Total stockholders’ equity 869.7 804.4  669.0 808.5 
          
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY $1,934.8 $1,719.8  $1,880.4 $1,814.6 
          
The accompanying notes are an integral part of these consolidated financial statements.

3


LENNOX INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS

For the Three Months Ended March 31, 2008 and Nine Months Ended September 30, 2007 and 2006

(Unaudited, in millions, except per share data)
                        
 For the For the  For the 
 Three Months Ended Nine Months Ended  Three Months Ended 
 September 30, September 30,  March 31, 
 2007 2006 2007 2006  2008 2007 
NET SALES $1,029.8 $1,020.3 $2,863.1 $2,841.7  $767.1 $791.5 
COST OF GOODS SOLD 736.2 763.5 2,075.8 2,105.5  564.3 586.9 
              
Gross profit 293.6 256.8 787.3 736.2  202.8 204.6 
OPERATING EXPENSES:  
Selling, general and administrative expenses 194.3 200.8 582.7 589.9  193.7 191.1 
(Gains), losses and other expenses, net  (1.2)  (3.0)  (5.2)  (47.3)  (3.3)  (0.7)
Restructuring charges 4.3 4.5 14.2 13.1  2.8 2.3 
Equity in earnings of unconsolidated affiliates  (2.7)  (2.5)  (8.9)  (7.5)  (3.1)  (2.7)
              
Operational income 98.9 57.0 204.5 188.0  12.7 14.6 
INTEREST EXPENSE, net 1.9 1.2 4.8 3.6  2.7 0.9 
OTHER EXPENSE (INCOME), net 0.2 0.1 0.3 0.1 
              
Income before income taxes 96.8 55.7 199.4 184.3  10.0 13.7 
PROVISION FOR INCOME TAXES 35.6 20.1 69.3 59.4  3.7 5.1 
              
Net income $61.2 $35.6 $130.1 $124.9  $6.3 $8.6 
              
  
NET INCOME PER SHARE:  
Basic $0.92 $0.51 $1.93 $1.77  $0.10 $0.13 
Diluted $0.88 $0.49 $1.84 $1.67  $0.10 $0.12 
 
AVERAGE SHARES OUTSTANDING:  
Basic 66.6 69.5 67.4 70.7  60.3 67.5 
Diluted 69.8 72.9 70.7 74.6  62.7 70.9 
 
CASH DIVIDENDS DECLARED PER SHARE $0.13 $0.11 $0.39 $0.33  $0.14 $0.13 
The accompanying notes are an integral part of these consolidated financial statements.

4


LENNOX INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

For the NineThree Months Ended September 30, 2007March 31, 2008 (unaudited) and the Year Ended December 31, 2006
2007
(In millions, except per share data)
                                                                
 Common Stock Additional Accumulated Other Treasury Total    Accumulated       
 Issued Paid-In Retained Comprehensive Stock Stockholders’ Comprehensive  Common Stock Additional Other Treasury Total   
 Shares Amount Capital Earnings Income (Loss) at Cost Equity Income (Loss)  Issued Paid-In Retained Comprehensive Stock Stockholders’ Comprehensive 
BALANCE AT DECEMBER 31, 2005 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) 
                Shares Amount Capital Earnings Income (Loss) at Cost Equity Income (Loss) 
ADJUSTED BALANCE AT JANUARY 1, 2006 74.7 $0.7 $649.3 $178.6 $0.4 $(47.0) $782.0 
BALANCE AS OF DECEMBER 31, 2006 77.0 $0.8 $706.6 $312.5 $(5.1) $(210.4) $804.4 
Impact of adoption of FIN No. 48    0.9   0.9 
               
ADJUSTED BALANCE AS OF JANUARY 1, 2007 77.0 $0.8 $706.6 $313.4 $(5.1) $(210.4) $805.3 
Net income    166.0   166.0 $166.0     169.0   169.0 $169.0 
Dividends, $0.46 per share     (32.1)    (32.1)  
Dividends, $0.53 per share     (35.0)    (35.0)  
Foreign currency translation adjustments, net     20.8  20.8 20.8      62.9  62.9 62.9 
Minimum pension liability adjustments, net of tax benefit of $2.0     4.0  4.0 4.0 
Pension and postretirement liability changes, net of tax benefit of $0.0     3.2  3.2 3.2 
Stock-based compensation expense   24.4    24.4     21.0    21.0  
Derivatives, net of tax provision of $1.0      (1.9)   (1.9)  (1.9)
Reversal of previously recorded stock-based compensation expense related to share-based awards canceled in restructuring    (2.1)     (2.1)  
Derivatives, net of tax provision of $1.3     2.6  2.6 2.6 
Common stock issued 2.3 0.1 19.7    19.8   4.9  21.5    21.5  
Treasury stock purchases       (163.4)  (163.4)         (253.6)  (253.6)  
Tax benefits of stock-based compensation   13.2    13.2     20.1    20.1  
Other tax-related items    (6.4)     (6.4)  
      
Comprehensive income        $188.9         $237.7 
                    
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 
               
Impact of adoption of FIN No. 48    1.2   1.2 
               
ADJUSTED BALANCE AT JANUARY 1, 2007 77.0 $0.8 $706.6 $313.7 $(5.1) $(210.4) $805.6 
BALANCE AS OF DECEMBER 31, 2007 81.9 $0.8 $760.7 $447.4 $63.6 $(464.0) $808.5 
Net income    130.1   130.1 $130.1     6.3   6.3 $6.3 
Dividends, $0.39 per share     (26.2)    (26.2)  
Dividends, $0.14 per share     (8.3)    (8.3)  
Foreign currency translation adjustments, net     57.1  57.1 57.1      9.2  9.2 9.2 
Stock-based compensation expense   16.6    16.6     3.2    3.2  
Reversal of previously recorded stock-based compensation expense related to share-based awards canceled in restructuring    (1.4)     (1.4)  
Derivatives, net of tax provision of $5.2     9.8  9.8 9.8 
Derivatives, net of tax provision of $4.8     8.7  8.7 8.7 
Common stock issued 4.3  18.6    18.6   1.6  12.3    12.3  
Treasury stock purchases       (150.5)  (150.5)         (183.1)  (183.1)  
Tax benefits of stock-based compensation   16.3    16.3     12.2    12.2  
Other tax related items    (6.3)     (6.3)  
       
Comprehensive income        $197.0         $24.2 
                                  
BALANCE AT SEPTEMBER 30, 2007 81.3 $0.8 $750.4 $417.6 $61.8 $(360.9) $869.7 
BALANCE AS OF MARCH 31, 2008 83.5 $0.8 $788.4 $445.4 $81.5 $(647.1) $669.0 
                              
The accompanying notes are an integral part of these consolidated financial statements

5


LENNOX INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Three Months Ended March 31, 2008 and 2007
(Unaudited, in millions)
         
  For the 
  Three Months Ended 
  March 31, 
  2008  2007 
CASH FLOWS FROM OPERATING ACTIVITIES:        
Net income $6.3  $8.6 
Adjustments to reconcile net income to net cash used in operating activities:        
Equity in earnings of unconsolidated affiliates  (3.1)  (2.7)
Restructuring expenses, net of cash paid  (1.1)  (1.8)
Unrealized gain on futures contracts  (2.8)  (0.5)
Stock-based compensation expense  3.2   6.2 
Depreciation and amortization  12.7   11.8 
Capitalized interest  (0.3)  (0.4)
Deferred income taxes  7.2   2.8 
Other items, net  10.8   3.7 
Changes in assets and liabilities, net of effects of acquisitions:        
Accounts and notes receivable  5.5   2.8 
Inventories  (54.7)  (93.2)
Other current assets  (13.6)  (3.2)
Accounts payable  34.4   59.9 
Accrued expenses  (33.7)  (38.4)
Income taxes payable  (15.4)  (35.3)
Long-term warranty, deferred income and other liabilities  11.7   4.6 
       
Net cash used in operating activities  (32.9)  (75.1)
         
CASH FLOWS FROM INVESTING ACTIVITIES:        
Proceeds from the disposal of property, plant and equipment  0.3   0.1 
Purchases of property, plant and equipment  (9.5)  (9.9)
Purchases of short-term investments  (21.7)   
Proceeds from sales and maturities of short-term investments  14.9    
       
Net cash used in investing activities  (16.0)  (9.8)
         
CASH FLOWS FROM FINANCING ACTIVITIES:        
Short-term borrowings (payments), net  0.5   (0.2)
Revolver long-term borrowings  193.0   35.5 
Proceeds from stock option exercises  12.3   12.0 
Repurchases of common stock  (183.1)  (16.5)
Excess tax benefits related to share-based payments  10.8   11.0 
Cash dividends paid  (8.7)  (8.7)
       
Net cash provided by financing activities  24.8   33.1 
         
DECREASE IN CASH AND CASH EQUIVALENTS  (24.1)  (51.8)
EFFECT OF EXCHANGE RATES ON CASH AND CASH EQUIVALENTS  (1.1)  1.1 
CASH AND CASH EQUIVALENTS, beginning of period  145.5   144.3 
       
CASH AND CASH EQUIVALENTS, end of period $120.3  $93.6 
       
         
Supplementary disclosures of cash flow information:        
Cash paid during the period for:        
Interest $2.5  $0.3 
       
Income taxes (net of refunds) $5.9  $28.9 
       
Non-cash items:        
Impact of adoption of FIN No. 48 $  $0.9 
       
The accompanying notes are an integral part of these consolidated financial statements.

5


LENNOX INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Nine Months Ended September 30, 2007 and 2006
(Unaudited, in millions)
         
  For the 
  Nine Months Ended 
  September 30, 
  2007  2006 
CASH FLOWS FROM OPERATING ACTIVITIES:        
Net income $130.1  $124.9 
Adjustments to reconcile net income to net cash provided by operating activities:        
Minority interest  0.3   0.3 
Equity in earnings of unconsolidated affiliates  (8.9)  (7.5)
Dividends from affiliates     1.3 
Restructuring expenses, net of cash paid  8.0   9.8 
Unrealized loss on futures contracts  1.1   5.3 
Stock-based compensation expense  16.6   17.6 
Depreciation and amortization  35.9   32.8 
Capitalized interest  (1.2)  (0.6)
Deferred income taxes  5.1   (21.6)
Other losses, (gains) and expenses, net  10.7   1.2 
Changes in assets and liabilities, net of effects of acquisitions:        
Accounts and notes receivable  (111.3)  (93.3)
Inventories  (45.1)  (96.9)
Other current assets  (6.7)  5.1 
Accounts payable  67.4   69.3 
Accrued expenses  3.7   (2.6)
Income taxes payable  (2.4)  40.7 
Long-term warranty, deferred income and other liabilities  7.2   (1.0)
       
Net cash provided by operating activities  110.5   84.8 
         
CASH FLOWS FROM INVESTING ACTIVITIES:        
Proceeds from the disposal of property, plant and equipment  0.5   0.8 
Purchases of property, plant and equipment  (44.5)  (49.8)
Additional investment in affiliates     (5.4)
Purchases of short-term investments  (32.4)   
Proceeds from sales and maturities of short-term investments  7.4    
       
Net cash used in investing activities  (69.0)  (54.4)
         
CASH FLOWS FROM FINANCING ACTIVITIES:        
Short-term borrowings (payments), net  2.8   (0.6)
Long-term borrowings (payments), net  48.5   (0.1)
Proceeds from stock option exercises  18.6   15.1 
Payments of deferred financing costs  (0.3)  (0.3)
Repurchases of common stock  (150.5)  (128.8)
Excess tax benefits related to share-based payments  14.5   8.8 
Cash dividends paid  (35.0)  (31.2)
       
Net cash (used in) financing activities  (101.4)  (137.1)
         
DECREASE IN CASH AND CASH EQUIVALENTS  (59.9)  (106.7)
EFFECT OF EXCHANGE RATES ON CASH AND CASH EQUIVALENTS  9.1   2.6 
CASH AND CASH EQUIVALENTS, beginning of period  144.3   213.5 
       
CASH AND CASH EQUIVALENTS, end of period $93.5  $109.4 
       
         
Supplementary disclosures of cash flow information:        
Cash paid during the period for:        
Interest $6.5  $5.4 
       
Income taxes (net of refunds) $57.2  $33.0 
       
Non-cash items:        
Impact of adjustments recorded under provisions of SAB No. 108 $  $(12.4)
       
Impact of adoption of FIN No. 48 $1.2  $ 
       
The accompanying notes are an integral part of these consolidated financial statements.

6


LENNOX INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(unaudited)
1.General:
1. General:
References in this Quarterly Report on Form 10-Q to “we,” “our”, “us”,“our,” “us,” “LII” or the “Company” refer to Lennox International Inc. and its subsidiaries, unless the context requires otherwise.
Basis of Presentation
The accompanying unaudited Consolidated Balance Sheet as of September 30, 2007,March 31, 2008, the accompanying unaudited Consolidated Statements of Operations for the three months ended March 31, 2008 and nine months ended September 30, 2007, and 2006, the accompanying unaudited Consolidated Statement of Stockholders’ Equity for the ninethree months ended September 30, 2007March 31, 2008 and the accompanying unaudited Consolidated Statements of Cash Flows for the ninethree months ended September 30,March 31, 2008 and 2007 and 2006 should be read in conjunction with LII’s audited consolidated financial statements and footnotes as of December 31, 20062007 and 20052006 and for each year in the three yearthree-year period ended December 31, 2006.2007. 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, 2007,2008, the Company adopted Statement of Financial Accounting Standards No. 157,Fair Value Measurements(“SFAS No. 157”), which establishes a framework for measuring fair value in generally accepted accounting principles, clarifies the definition of fair value within that framework, and expands disclosures about the use of fair value measurements. SFAS No. 157 is effective for fiscal years beginning after November 15, 2007. However, in February 2008, the Financial Accounting Standards Board (“FASB”) issued FASB InterpretationStaff Position No. 48,FA5 157-2,Accounting for Uncertainty in Income Taxes – an Interpretation Effective Date of FASB Statement 109(“FIN No. 48”). FIN157 (“FSP No. 48 clarifies157-2”), which deferred the accountingeffective date of SFAS No. 157 for income taxes by prescribing a minimum thresholdone year for non-financial assets and liabilities, except for certain items that a tax position is required to meet before beingare recognized or disclosed at fair value in the financial statements. FINstatements on a recurring basis (at least annually). The Company is currently evaluating the impact of SFAS No. 48157 on its Consolidated Financial Statements for items within the scope of FSP No. 157-2, which will become effective on January 1, 2009.
Effective January 1, 2008, the Company also provides guidanceadopted Statement of Financial Accounting Standards No. 159,The Fair Value Option for Financial Assets and Financial Liabilities(“SFAS No. 159”). SFAS No. 159 allows an entity the irrevocable option to elect fair value for the initial and subsequent measurement for certain financial assets and liabilities on derecognition, measurement, classification, interest and penalties, accounting for interim periods, disclosure and transition. For more information see Note 10.a contract-by-contract basis. The adoption of SFAS No. 159 had no impact on the Company’s Consolidated Financial Statements.

7


2. Accounts and Notes Receivable:
2.Accounts and Notes Receivable:
Accounts and Notes Receivable have been reported in the accompanying Consolidated Balance Sheets net of allowance for doubtful accounts of $18.9$19.1 million and $16.7$17.1 million as of September 30, 2007March 31, 2008 and December 31, 2006, respectively.2007, respectively, and net of accounts receivable sold under an ongoing asset securitization arrangement, if any. As of September 30, 2007March 31, 2008 and December 31, 2006,2007, 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 Sheets at September 30, 2007as of March 31, 2008 and December 31, 20062007 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:
3.Inventories:
Components of inventories are as follows (in millions):
                
 As of As of  As of As of 
 September 30, December 31,  March 31, December 31, 
 2007 2006  2008 2007 
Finished goods $265.8 $223.2  $288.8 $247.7 
Work in process 11.3 8.1  13.3 10.5 
Raw materials and repair parts 155.5 131.1  150.4 137.9 
          
 432.6 362.4  452.5 396.1 
Excess of current cost over last-in, first-out cost  (73.9)  (56.9)  (73.0)  (70.4)
          
Total inventories, net $358.7 $305.5 
Total inventories $379.5 $325.7 
          
Repair parts are primarily utilized in our service operations and to fulfill our warranty obligations.
4.Goodwill:
4. Goodwill:
The Company evaluates the impairment of goodwill under the guidance of Statement of Financial Accounting Standards No. 142,Goodwill and Other Intangible Assets,for each of its reporting units. During the first quarter of 20072008 and 2006,2007, the Company performed its annual goodwill impairment test and determined that no impairment charge was required.
The changes in the carrying amount of goodwill for the ninethree months ended September 30, 2007,March 31, 2008, in total and by segment, are as follows (in millions):
             
  Balance at     Balance at 
                  Segment December 31, 2006  Changes(1)  September 30, 2007 
Residential Heating & Cooling $33.9  $  $33.9 
Commercial Heating & Cooling  30.1   1.5   31.6 
Service Experts  97.9   14.5   112.4 
Refrigeration  77.9   6.6   84.5 
          
Total $239.8  $22.6  $262.4 
          
             
  Balance at      Balance at 
Segment December 31, 2007  Changes(1)  March 31, 2008 
Residential Heating & Cooling $33.7  $  $33.7 
Commercial Heating & Cooling  32.1   1.7   33.8 
Service Experts  112.5   (2.7)  109.8 
Refrigeration  84.5   2.7   87.2 
          
Total $262.8  $1.7  $264.5 
          
(1) Relate to changes in foreign currency translation rates.
5. Short-Term Investments:
5.Short-Term Investments:
     As of September 30, 2007 theThe Company’s captive insurance subsidiary (the “Captive”) held approximately $25.1 million inholds debt securities, consisting of U.S. Treasury securities, U.S. government agency securities, corporate bonds, commercial paper,asset-backed securities, collateralized mortgage obligations 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.available-for-sale. Any unrealized holding gains and losses are reported in Accumulated Other Comprehensive Income (Loss) (“AOCI”), net of applicable taxes, until the gain or loss is realized. These instruments are not classified as cash and cash equivalents as their original maturity dates are greater than three months. The Company places its investments in high credit quality financial instruments only and limits the amount invested in any one institution or in any one instrument.

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As of March 31, 2008 and December 31, 2007, the Captive held approximately $34.7 million and $27.7 million, respectively, of short-term investments. Unrealized losses included in AOCI in the accompanying Consolidated Balance SheetSheets as of September 30,March 31, 2008 and December 31, 2007 were not material. Realized gains and losses from the sale of securities were also not material for the three months or nine months ended September 30, 2007. These instruments are not classified as cash and cash equivalents as their original maturity dates are greater than three months.March 31, 2008. The maturities of these securities range from October 2007April 2008 to February 2011. However, itIt is the

8


Captive’s intention that these investments be available to support its current operations as needed. Therefore, dueDue to the liquidity of these investments, they are classified as current assets in the accompanying Consolidated Balance Sheets. The Company places itsFor more information on the valuation of these investments, only in high credit quality financial instruments and limits the amount invested in any one institution or in any one instrument.see Note 16.
6. Cash, Lines of Credit and Financing Arrangements:
6.Cash, Lines of Credit and Financing Arrangements:
The following table summarizestables summarize the Company’s outstanding debt obligations as of September 30, 2007 and the classification in the accompanying Consolidated Balance SheetSheets as of March 31, 2008 and December 31, 2007 (in millions):
                                
 Short- Current Long-Term    Short-Term Current Long-Term   
Description of Obligation Term Debt Maturities Maturities Total 
Description of Obligation as of March 31, 2008 Debt Maturities Maturities Total 
Domestic promissory notes(1) $ $61.1 $46.1 $107.2  $ $36.1 $35.0 $71.1 
Domestic revolving credit facility   48.5 48.5    324.0 324.0 
Other foreign obligations 3.8 0.2 0.8 4.8  5.5 0.3 0.7 6.5 
                  
Total Debt $3.8 $61.3 $95.4 $160.5  $5.5 $36.4 $359.7 $401.6 
                  
     As of September 30,
                 
  Short-Term  Current  Long-Term    
Description of Obligation as of December 31, 2007 Debt  Maturities  Maturities  Total 
Domestic promissory notes (1)
 $  $36.1  $35.0  $71.1 
Domestic revolving credit facility        131.0   131.0 
Other foreign obligations  4.8   0.3   0.7   5.8 
             
Total Debt $4.8  $36.4  $166.7  $207.9 
             
(1)Domestic promissory notes as of March 31, 2008 and December 31, 2007 consisted of the following (in millions):
         
  March 31,  December 31, 
  2008  2007 
6.73% promissory notes, payable $11.1 annually through 2008 $11.1  $11.1 
6.75% promissory notes, payable in 2008  25.0   25.0 
8.00% promissory note, payable in 2010  35.0   35.0 
On October 12, 2007, the Company hadentered into the Third Amended and Restated Revolving Credit Facility Agreement (the “Credit Agreement”), which contains a $650.0 million domestic revolving credit facility. The Credit Agreement replaced the Company’s previous domestic revolving credit facility, withthe Second Amended and Restated Credit Facility Agreement, dated as of July 8, 2005. The Company made a borrowing capacity$25.0 million prepayment on a domestic promissory note to facilitate the amendment of $400.0the Credit Agreement, resulting in a make-whole payment of $0.2 million, which was recognized as interest expense.
As of which $48.5March 31, 2008, the Company had outstanding borrowings of $324.0 million was borrowedunder the $650.0 million domestic revolving credit facility and outstanding and $92.1$111.7 million was committed to standby letters of credit. OfAll of the remaining $259.4$214.3 million the entire amount was available for future borrowings after consideration of covenant limitations. The facility matures in July 2010. AsOctober 2012.
The domestic revolving credit facility includes a subfacility for swingline loans of September 30, 2007 and December 31, 2006, the Company has unamortized debt issuance costs of $1.6up to $50 million and $1.9 million, respectively, which are included in Other Assetsprovides for the issuance of letters of credit for the full amount of the credit facility. The revolving loans bear interest at either (i) the Eurodollar rate plus a margin of between 0.5% and 1% that is based on the Company’s Debt to Adjusted EBITDA Ratio (as defined in the accompanying Consolidated Balance Sheets. The facility bears interest at a rate equal to, atCredit Agreement) or (ii) the Company’s option, eitherhigher of (a) the greater of the bank’s prime rate or the federal funds rateFederal Funds Rate plus 0.5%, or (b) the London Interbank Offered Rate plus a margin equal to 0.475% to 1.20%, depending uponprime rate set by Bank of America, N.A. The Company may prepay the ratio of total funded debt-to-adjusted earnings before interest, taxes, depreciation and amortization (“Adjusted EBITDA”), as definedrevolving loans at any time without premium or penalty, other than customary breakage costs in the facility.case of Eurodollar loans. The Company payswill pay a facility fee depending uponin the ratiorange of total funded debt0.125% to 0.25% based on the Company’s Debt to Adjusted EBITDA equalRatio. The Company will also pay a letter of credit fee in the range of 0.5% to 0.15%1% based on the Company’s Debt to 0.30%Adjusted EBITDA Ratio, as well as an additional issuance fee of 0.125% for letters of credit issued.

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The Credit Agreement contains financial covenants relating to leverage and interest coverage. Other covenants contained in the capacity. The facility includes restrictive covenants that limitCredit Agreement restrict, among other things, mergers, asset dispositions, guarantees, debt, liens, acquisitions, investments, affiliate transactions and the Company’s ability to incur additional indebtedness, encumber its assets, sell its assetsmake restricted payments.
The Credit Agreement contains customary events of default. If any event of default occurs and make certain payments, includingis continuing, lenders with a majority of the aggregate commitments may require the administrative agent to terminate the Company’s right to borrow under the Credit Agreement and accelerate amounts due under the Credit Agreement (except for share repurchasesa bankruptcy event of default, in which case such amounts will automatically become due and dividends. The facility requires that LII annuallypayable and quarterly deliver financial statements, as well as compliance certificates,the lenders’ commitments will automatically terminate).
In addition to the banks within specified time periods.
     As of September 30, 2007 and December 31, 2006,financial covenants contained in the Company had outstanding domestic promissory notes totaling approximately $107.2 million. The promissory notes mature at various dates through 2010 and have interest rates ranging from 6.73% to 8.00%.
Credit Agreement outlined above, LII’s domestic revolving facility and promissory notes contain certain financial covenant restrictions. As of September 30, 2007,March 31, 2008, LII believes it was in compliance with all covenant requirements. The Company’s revolving credit facility and promissory notes are guaranteed by the Company’s material subsidiaries.
The Company has additional borrowing capacity through several foreign facilities governed by agreements between the Company and a syndicate of banks, used primarily to finance seasonal borrowing needs of its foreign subsidiaries. LII had $4.8$6.5 million and $5.8 million of obligations outstanding through its foreign subsidiaries as of September 30, 2007.March 31, 2008 and December 31, 2007, respectively.
Under a revolving period asset securitization arrangement, the Company transfersis eligible to transfer beneficial interests in a portion of its trade accounts receivable to a third partyparties 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 September 30, 2007March 31, 2008 and December 31, 2006,2007, the Company had not sold any beneficial interests in accounts receivable.
     LII periodically reviews its capital structure, including its primary bank facility, to ensure that it has adequate liquidity. LII believes that cash 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.
The Company has included $18.0 millionconsiders all highly liquid temporary investments with original maturity dates of restrictedthree months or less to be cash inequivalents. Cash and Cash Equivalents in the accompanying unaudited Consolidated Balance Sheetcash equivalents of $120.3 million and $145.5 million as of September 30, 2007. TheMarch 31, 2008 and December 31, 2007, respectively, consisted of cash, overnight repurchase agreements and investment-grade securities and are stated at cost, which approximates fair value.
As of March 31, 2008 and December 31, 2007, $16.3 million and $20.2 million, respectively, of cash and cash equivalents were restricted cash primarily

9


relates due to routine lockbox collections and letters of credit issued with respect to the operations of the Captive, which expire on December 31, 2007.
     On October 12, 2007, the Company entered into a $650 million Third Amended and Restated Revolving Credit Facility Agreement which replaces2008. The restrictions related to lockbox collections typically expire within three to five business days after receipt. The letter of credit restrictions can be transferred to the Company’s previous domestic revolving lines of credit facility. For more information see Note 20.as needed.
7. Product Warranties:
7.Product Warranties:
The changes in the carrying amount of the Company’s total product warranty liabilities for the ninethree months ended September 30, 2007 wereMarch 31, 2008 are as follows (in millions):
     
Total product warranty liability at December 31, 2006 $104.7 
Payments made in 2007, net of recoveries  (23.3)
Changes resulting from issuance of new warranties  23.7 
Changes in estimates associated with pre-existing warranties  10.8 
    
Total product warranty liability at September 30, 2007 $115.9 
    
     
Total product warranty liability at December 31, 2007 $98.4 
Payments made in 2008  (5.9)
Changes resulting from issuance of new warranties  6.5 
Changes in estimates associated with pre-existing liabilities  0.3 
Changes in foreign currency translation rates  0.4 
    
Total product warranty liability at March 31, 2008 $99.7 
    
The change in product warranty liability that results from changes in estimates of warranties issued prior to 20072008 was primarily due to revaluing warranty reserves based on higher material input costs, adjustments to failure rates for products the Company no longer manufactures, and changes in foreign currency translation rates. In the third quarter, the Company recorded $1.2 million related to changes in estimates associated with pre-existing warranties which was primarily due to changes in foreign currency translation rates. Productcosts. The current portion of product warranty liabilities of $34.3$31.9 million and $27.2$33.8 million areis included in Accrued Expenses and $81.6the long-term portion of $67.8 million and $77.5$64.6 million areis included in Other Liabilities in the accompanying Consolidated Balance Sheets as of September 30, 2007March 31, 2008 and December 31, 2006,2007, respectively.

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8. Pension and Postretirement Benefit Plans:
8.Pension and Postretirement Benefit Plans:
The components of net periodic benefit cost for the three months and nine months ended September 30, 2007 and 2006 were as follows (in millions):
                                
 For the  For the 
 Three Months Ended September 30,  Three Months Ended March 31, 
 2007 2006 2007 2006  2008 2007 2008 2007 
 Pension Benefits Other Benefits  Pension Benefits Other Benefits 
Service cost $1.7 $1.8 $0.2 $0.4  $1.8 $1.8 $0.2 $0.2 
Interest cost 3.7 3.9 0.2 0.3  4.1 3.7 0.2 0.2 
Expected return on plan assets  (4.2)  (4.2)     (4.5)  (4.4)   
Amortization of prior service cost 0.2 0.2  (0.4)  (0.1) 0.1 0.2  (0.5)  (0.4)
Amortization of net loss 1.1 1.5 0.2 0.2  1.2 1.2 0.3 0.2 
Settlements or curtailments 3.9    
Settlements and curtailments  0.7   
                  
Total net periodic pension cost $6.4 $3.2 $0.2 $0.8 
Total net periodic benefit cost $2.7 $3.2 $0.2 $0.2 
                  
                 
  For the 
  Nine Months Ended September 30, 
  2007  2006  2007  2006 
  Pension Benefits  Other Benefits 
Service cost $5.3  $5.5  $0.5  $1.0 
Interest cost  11.2   11.5   0.6   1.1 
Expected return on plan assets  (13.0)  (12.4)      
Amortization of prior service cost  0.7   0.8   (1.3)  (0.4)
Amortization of net loss  3.5   4.6   0.8   0.6 
Settlements or curtailments  4.6   1.9       
             
Total net periodic pension cost $12.3  $11.9  $0.6  $2.3 
             
9.Stock-Based Compensation:
     The Company recorded a one-time pension settlement change of $3.9 million in the third quarter of 2007 related to the retirement of its former chief executive officer.
9. Stock-Based Compensation:
The Company’s Amended and Restated 1998 Incentive Plan provides for various long-term incentive awards, which include stock options, performance shares,share units, restricted stock awardsunits and stock appreciation rights. A detailed description of thethese awards under these plans is included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2006.2007.

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The Company accounts for stock-based awards under the provisions of Statement of Financial Accounting Standards No. 123R,Share-Based Payment. Compensation expense of $3.3$3.2 million and $4.8 million and $16.6 million and $17.6$6.2 million was recognized for the three months ended March 31, 2008 and the nine months ended September 30, 2007, and 2006, respectively, and is included in Selling, General and Administrative Expenses in the accompanying Consolidated Statements of Operations. The decrease in stock-based compensation expense was primarily due to an increase in forfeiture rates and a decrease in the estimated pay-out percentage on outstanding performance share units in the first quarter of 2008 as compared to the same period in 2007. Cash flows from the tax benefits of tax deductions in excess of the compensation costs recognized for stock-based awards of $14.5$10.8 million and $8.8$11.0 million were included in cash flows from financing activities for the ninethree months ended September 30,March 31, 2008 and 2007, and 2006, respectively.
The following tables summarize certain information concerning the Company’s stock options, stock appreciation rights, performance sharesshare units and restricted stock awardsunits as of September 30, 2007March 31, 2008 (in millions, except per share data, years, and forfeiture rates):
                
 Stock Stock 
 Stock Appreciation Stock Appreciation 
 Options Rights Options Rights 
Shares outstanding 2.4 1.6  1.4 1.9 
Weighted-average exercise price per share outstanding $15.03 $26.66  $15.45 $30.15 
Shares exercisable 2.3 0.6  1.4 0.8 
Weighted-average exercise price per exercisable share $14.86 $20.43  $15.45 $25.82 
Unrecognized expense $0.1 $4.4   $7.4 
Expected weighted-average period to be recognized (in years) 0.3 1.9   2.2 
Weighted-average estimated forfeiture rate  7%  14%   15%
                
 Performance Restricted Performance Restricted 
 Shares Stock Awards Share Units Stock Units 
Nonvested shares 1.1 0.9 
Weighted-average grant date fair value per share $22.32 $26.15 
Nonvested units 0.8 0.7 
Weighted-average grant date fair value per unit $27.16 $31.78 
Unrecognized expense $13.0 $8.1  $13.8 $11.2 
Expected weighted-average period to be recognized (in years) 1.9 1.9  2.1 2.2 
Weighted-average estimated forfeiture rate  20%  12%  29%  16%

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10.Income Taxes:
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,March 31, 2008, the Company had approximately $20.0$23.9 million in total gross unrecognized tax benefits. Of this amount, $14.4$12.8 million (net of federal benefit on state issues) will, if recognized, would be recognizedrecorded through the statement of operations,operations. Also included in the balance of unrecognized tax benefits as of March 31, 2008 are $3.2 million willthat, if recognized, would be recognized throughrecorded as an adjustment to goodwill and $1.0$6.4 million willthat, if recognized, would be recognized throughrecorded as an adjustment to stockholders’ equity. In addition, the Company recognizes interest and penalties accrued related to unrecognized tax benefits in income tax expense in accordance with FASB Interpretation No. 48,Accounting for Uncertainty in Income Taxes — an Interpretation of FASB Statement 109(“FIN No. 48.48”). As of January 1, 2007,March 31, 2008, the Company had recognized $1.2$1.9 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 2007.2008. 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-USnon-U.S. income tax examinations by taxing authorities for years before 1999.
Since January 1, 2007, Michigan, New York, South Carolina, and2008, West Virginia havehas enacted legislation

11


effective for tax years beginning on or after January 1, 2007.2008 to adjust tax rates and require combined reporting in future years. The Company believes any adjustments will be immaterial.
11. Restructuring Charges:
11.Restructuring Charges:
Restructuring charges incurred include the following amounts for the three months ended March 31, 2008 and nine months ended September 30, 2007 and 2006 include the following amounts (in millions):
                 
  For the Three Months  For the Nine Months 
  Ended September 30,  Ended September 30, 
  2007  2006  2007  2006 
Consolidation of Hearth Products operations $2.4  $  $2.4  $ 
Reorganization of corporate administrative function  1.1      7.7    
Facility lease     1.2   0.3   1.2 
Allied Air Enterprises consolidation  0.3   3.3   3.2   12.7 
Pension settlement(1)
        0.7    
Gain on sale of land           (0.8)
Other  0.5      (0.1)   
             
Total $4.3  $4.5  $14.2  $13.1 
             
         
  For the Three Months 
  Ended March 31, 
  2008  2007 
Consolidation of U.S. Refrigeration operations $1.3  $ 
Consolidation of Lennox Hearth Products operations  1.2    
Integration of Australia and New Zealand operations  0.3    
Allied Air Enterprises consolidation     2.2 
Pension settlement(1)
     0.7 
Other     (0.6)
       
Total $2.8  $2.3 
       
(1) Amount not reflected in restructuring reserves as this item is related to the Company’s pension obligation.obligation and is included in pension liabilities as of March 31, 2007.
The table below provides further analysis of the Company’s restructuring reserves for the ninethree months ended September 30, 2007March 31, 2008 (in millions):
                                                    
 Reversal    Balance as Reversal Balance as 
 Balance at Charged of Prior Balance at  of Charged of Prior   of 
Description of December 31, to Period Cash Non-cash September 30, 
Reserves 2006 Earnings Charges Utilization Utilization Other 2007 
 December 31, to Period Cash Non-Cash March 31, 
Description of reserves 2007 Earnings Charges Utilization Utilization 2008 
Severance and related expense $1.8 $10.6 $ $(2.8) $ $1.4 $11.0  $15.2 $0.2 $ $(1.9) $ $13.5 
Equipment moves  1.0   (1.0)      0.8   (0.8)   
Recruiting and relocation  0.7   (0.7)           
Lease termination 1.5 0.3   (0.4)   1.4  1.5    (0.3)  1.2 
Other 0.8 1.5  (0.6)  (1.3)  (0.4)     1.8   (0.9)  (0.9)  
                            
Total restructuring reserves $4.1 $14.1 $(0.6) $(6.2) $(0.4) $1.4 $12.4  $16.7 $2.8 $ $(3.9) $(0.9) $14.7 
                            

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In the fourth quarter of 2007, the Company announced plans to close its refrigeration operations in Danville, Illinois and consolidate its Danville manufacturing, support and warehouse functions in its Tifton, Georgia and Stone Mountain, Georgia operations. The consolidation is a phased process and is expected to be completed in the first quarter of 2009. In connection with this consolidation project, the Company recorded pre-tax restructuring charges of $1.3 million in its Refrigeration segment for the three months ended March 31, 2008. The restructuring charges primarily related to costs to move certain equipment and disposal of certain long-lived assets, including charges of $0.8 million of accelerated depreciation recorded in 2008 related to the reduction in useful lives and disposal of certain long-lived assets. In addition to the amounts accrued as of March 31, 2008, the Company expects to incur pre-tax restructuring charges of approximately $8.1 million over the next 12 months due to this consolidation project.
In the fourth quarter of 2007, the Company’s Australian-based manufacturing facilities in Milperra assumed all heat transfer equipment manufacturing, while the smaller coil production facility in New Zealand was closed. In connection with this integration project, the Company recorded pre-tax restructuring charges of $0.3 million in its Refrigeration segment for the three months ended March 31, 2008. The restructuring charges primarily related to severance costs and disposal of certain long-lived assets. The integration was substantially complete as of March 31, 2008.
In the third quarter of 2007, the Company announced plans to close its hearth productsLennox Hearth Products Inc.’s operations in Lynwood, California and consolidate its U.S. factory-built fireplace manufacturing operations in its facility in Union City, Tennessee. The consolidation will be a phased process and is expected to be completed by the end of the second quarter of 2008. In connection with this consolidation project, the Company recorded pre-tax restructuring charges of $2.4$1.2 million in its Residential Heating & Cooling segment for the three months ended September 30, 2007.March 31, 2008. The restructuring charges primarily related to severance related costs to move equipment and the disposal of certain long-lived assets. LII currently expects to incur pre-tax restructuring charges of approximately $2.7 million over the next six months due to thisThe consolidation project.
     In the second quarter of 2007, the Company reorganized its corporate administrative function and eliminated the position of chief administrative officer. In connection with this action, the Company entered into negotiations with its former chief administrative officer to settle the terms of his employment agreement. As of June 30, 2007, these negotiations continued and the final settlement was unknown. Therefore, the Company recorded a liability of approximately $8.0 millionsubstantially complete as of June 30, 2007, which represented the Company’s estimate of the amounts to be paid to settle the employment agreement. Restructuring expense of $6.6 million was recorded in the second quarter of 2007, which represented the $8.0 million estimate of the amounts to be paid to settle the employment agreement, net of $1.4 million of previously recorded stock-based compensation expense. March 31, 2008.
In September 2007, the Company reached an agreement to settle the terms of the former chief administrative officer’s employment agreement. As a result, the Company recorded an additional $1.1 million of restructuring expense related to this matter in the third quarter of 2007.

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     A division of the Company’s Residential Heating & Cooling segment commenced plans to close its Burlington, Washington facility in 2005. During the three months ended September 30, 2006, the Company recorded a pre-tax restructuring chargecommenced consolidation of approximately $1.2 million related to an operating lease on the idle facility in Burlington. The charge reflected the net present value of the remaining lease payments on the operating lease, net of estimated sublease income on the facility. In the second quarter of 2007, the Company entered into a sub-lease agreement for the idle facility. As a result, the Company recorded a pre-tax restructuring charge of approximately $0.3 million to reflect the net present value of the remaining lease payments on the operating lease, net of sublease income on the facility. The operating lease and sub-lease both expire in June 2011.
     In February 2006, Allied Air Enterprises, a division of the Company’s Residential Heating & Cooling segment, announced that it had commenced plans to consolidate its manufacturing, distribution, research &and development, and administrative operations of Allied Air Enterprises Inc., the Company’s two-step Residential Heating & Cooling operations in South Carolina, and closeclosure of its current operations in Bellevue, Ohio. The consolidation was substantially completed duringcomplete as of March 31, 2007. In connection with this consolidation project, the first quarter of 2007. The amountsCompany recorded related primarily to severance and benefits and other exit costs incurred, includingpre-tax restructuring charges of $1.5$2.2 million and $3.7 million of accelerated depreciation recorded infor the three months and nine months ended September 30, 2006, respectively, related to the reduction in useful lives and disposal of certain long-lived assets.March 31, 2007.
A pension settlement loss of approximately $0.7 million is included in the Company’s Residential Heating & Cooling segment’s restructuring expense for the ninethree months ended September 30, 2007. The pension settlement lossMarch 31, 2007, which related to the Company’s full funding of lump sumlump-sum pension payments to selected participants in March 2007.2007 as part of a prior restructuring initiative in 2001.
     Also included in restructuring expense forDuring the ninethree months ended September 30, 2006 is a gainMarch 31, 2007, the Company reversed to income approximately $0.6 million of $0.8 million related to the sale of a parcel of land. The Companyrestructuring reserves that had reduced the carrying value of the land to its then net realizable valuebeen established in connection with a prior restructuring initiative of its Service Experts operations in 2001.
12. Earnings per Share:
12.Earnings per Share:
Basic earnings per share are computed by dividing net income by the weighted-averageweighted 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 September 30, 2007,March 31, 2008, the Company had 81,326,01483,546,395 shares issued, of which 16,883,45624,866,016 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 Nine Months Ended  Three Months Ended 
 September 30, September 30,  March 31, 
 2007 2006 2007 2006  2008 2007 
Net income $61.2 $35.6 $130.1 $124.9  $6.3 $8.6 
              
  
Weighted-average shares outstanding — basic 66.6 69.5 67.4 70.7  60.3 67.5 
Effect of diluted securities attributable to share-based payments 3.2 3.4 3.3 3.9  2.4 3.4 
              
Weighted-average shares outstanding — diluted 69.8 72.9 70.7 74.6  62.7 70.9 
              
 
Diluted earnings per share $0.88 $0.49 $1.84 $1.67  $0.10 $0.12 
              

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Options to purchase 99,27815,001 shares of common stock at prices ranging from $35.82$40.30 to $49.63 per share and options to purchase 720,59751,588 shares of common stock at prices ranging from $29.34$38.99 to $49.63 per share were outstanding for the ninethree months ended September 30,March 31, 2008 and March 31, 2007, and 2006, respectively, but were not included in the diluted earnings per share calculation because the assumed exercise of such options would have been anti-dilutive.
13. Comprehensive Income:
13.Comprehensive Income:
Comprehensive income for the three months ended March 31, 2008 and nine months ended September 30, 2007 and 2006 was computed as follows (in millions):

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 For the For the  For the 
 Three Months Ended Nine Months Ended  Three Months Ended 
 September 30, September 30,  March 31, 
 2007 2006 2007 2006  2008 2007 
Net income $61.2 $35.6 $130.1 $124.9  $6.3 $8.6 
         
Foreign currency translation adjustments 26.4 0.5 57.1 16.3  9.2 7.4 
Effective portion of gains on futures contracts designated as cash flow hedges 1.7  9.8  
Minimum pension liability     (0.5)
Effective portion of gains on future contracts designated as cash flow hedges 8.7 5.4 
              
Total comprehensive income $89.3 $36.1 $197.0 $140.7  $24.2 $21.4 
              
14. Investments in Affiliates:
14.Investments in Affiliates:
Investments in affiliates in which the Company does not exercise control but has significant influence are accounted for using the equity method of accounting. If the fair value of an investment in an affiliate is below its carrying value and the difference is deemed to be other than temporary, the difference between the fair value and the carrying value is charged to earnings.
Investments in affiliated companies accounted for under the equity method consist of the following: a 24.5% common stock ownership interest in Alliance Compressor LLC, a domestic joint venture engaged in the manufacture and sale of 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 13.05% 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$3.1 million and $2.5$2.7 million of equity in the earnings of its unconsolidated affiliates for the three months ended September 30,March 31, 2008 and 2007, and 2006, respectively, and $8.9 million and $7.5 million of equity in the earnings of its unconsolidated affiliates for the nine months ended September 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 September 30, 2007March 31, 2008 and December 31, 2006 is $62.82007 of $55.3 million and $52.4$52.6 million, respectively, and is included in Long-termLong-Term Other Assets in the accompanying Consolidated Balance Sheets.
15. Derivatives:
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.

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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 areis recorded, net of applicable taxes, in 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 ended March 31, 2008 and the nine months ended September 30, 2007, $3.2($2.1) million and $4.6$1.6 million, respectively, in gains, respectively,(gains), losses 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. LossesFor the three months ended March 31, 2008 and 2007, net gains of $0.1 million and $0.2 million, respectively, were recognized in net income representing hedge ineffectiveness were not material for the three months or the nine months ended September 30, 2007.ineffectiveness.

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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 ended March 31, 2008 and the nine months ended September 30, 2007, and 2006, net gains of $0.4$3.1 million and $2.2 million and $1.6 million and $47.0$0.8 million, respectively, were recognized in earnings related to instruments not accounted for as cash flow hedges. For more information on the valuation of these derivative instruments, see Note 16.
16.Fair Value Measurements:
SFAS No. 157 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. SFAS No. 157 provides a framework for measuring fair value, establishes a three-level hierarchy for fair value measurements based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date and requires consideration of the Company’s creditworthiness when valuing certain liabilities.
16. CommitmentsFair Value Hierarchy
The three-level fair value hierarchy for disclosure of fair value measurements defined by SFAS No. 157 is as follows:
Level 1
Quoted prices foridenticalinstruments in active markets at the measurement date.
Level 2
Quoted prices forsimilarinstruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations in which all significant inputs and significant value drivers are observable in active markets at the measurement date and for the anticipated term of the instrument.
Level 3
Valuations derived from valuation techniques in which one or more significant inputs or significant value drivers areunobservableinputs that reflect the reporting entity’s own assumptions about the assumptions market participants would use in pricing the asset or liability developed based on the best information available in the circumstances.
Fair Value Techniques
The Company’s valuation techniques are applied to all of the assets and Contingencies:liabilities carried at fair value as of January 1, 2008, upon adoption of SFAS No. 157. Where available, the fair values are based upon quoted prices in active markets. However, if quoted prices are not available, then the fair values are based upon quoted prices for similar assets or liabilities or independently sourced market parameters, such as credit default swap spreads, yields curves, reported trades, broker/dealer quotes, interest rates and benchmark securities. For assets and liabilities with a lack of observable market activity, if any, the fair values are based upon discounted cash flow methodologies incorporating assumptions that, in management’s judgment, reflect the assumptions a marketplace participant would use. To ensure that financial assets and liabilities are recorded at fair value, valuation adjustments may be required to reflect the creditworthiness of either party and constraints on liquidity. Where appropriate, these amounts were incorporated into the Company’s valuations as of March 31, 2008, the measurement date.

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Assets and Liabilities Measured at Fair Value on a Recurring Basis
The following table presents the fair value hierarchy for those assets and liabilities measured at fair value on a recurring basis as of March 31, 2008 (in millions):
                 
  Fair Value Measurements on a Recurring Basis as of March 31, 2008 
      Significant       
  Quoted Prices in  Other  Significant    
  Active Markets for  Observable  Unobservable    
  Identical Assets  Inputs  Inputs    
  (Level 1)  (Level 2)  (Level 3)  Total 
Assets:
                
Derivatives, net(1)
 $  $14.3  $  $14.3 
Short-term investments     34.7      34.7 
(1)Derivatives are recorded in Other Current Assets and Other Non-Current Assets in the accompanying Consolidated Balance Sheets.
The Company’s adoption of SFAS No. 157 has resulted in changes to the valuation techniques used by the Company when determining the fair value of its derivative instruments. These derivatives are primarily valued using estimated future cash flows that are based directly on observed prices from exchange-traded derivatives. The Company also takes into account the counterparty’s creditworthiness, or the Company’s own creditworthiness, as appropriate. The calculation of the credit adjustment for derivatives is based upon observable credit default swap spreads and interpolation between these observable spreads for interim periods without observable spreads; however, these inputs are insignificant to the fair value measurement. The effect of adopting these changes to the valuation techniques resulted in a net credit adjustment to the fair value of the Company’s derivative instruments of $0.1 million as of March 31, 2008.
The majority of the Company’s short-term investments are managed by professional investment advisors. The net asset values are furnished in statements received from the investment advisor and reflect valuations based upon the respective pricing policies utilized by the investment advisor. The Company has assessed the classification of the inputs used to value these investments as Level 2 through examination of pricing policies and significant inputs and through discussions with investment managers. The fair values of the Company’s short-term investments are based on several observable inputs including, but not limited to, benchmark yields, reported trades, broker/dealer quotes, issuer spreads and benchmark securities. The adoption of SFAS No. 157 resulted in no net changes to the valuations for these securities.
17.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 September 30, 2007,March 31, 2008, the Company estimates that it will incur an additional $7.9$7.8 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.

16


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 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. TheExtensive investigations have been performed and the Company continues to conduct additional assessments of the site 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, the Company plans to

15


commence remediation efforts, pending any required approvals by local governmental 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 nine months ended September 30, 2007, the Company recorded a charge of $0.4 million primarily related to additional site assessments. As of September 30, 2007March 31, 2008 and December 31, 2006,2007, the Company had discounted liabilities recorded of approximately $2.1 million and $1.7 million related to this matter which are includedof $2.0 million at each balance sheet date. As of March 31, 2008 and December 31, 2007, $0.1 million and $1.9 million were recorded in Accrued Expenses and Other Long TermLong-Term Liabilities, respectively, in the accompanying Consolidated Balance Sheets. These liabilities areThe amount recorded as of March 31, 2008 reflects an undiscounted liability of $2.4 million, which is discounted at approximately 6%8% 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 containmentremediation 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 $5.1$3.1 million (undiscounted). The Company is exploring options for recoveries.
The Company hashad additional reserves of approximately $4.2$3.7 million and $3.9 million related to various other environmental matters recorded as of September 30, 2007.March 31, 2008 and December 31, 2007, respectively. Balances of approximately $1.7$0.7 million and $2.5$2.0 million arewere recorded in Accrued Expenses as of March 31, 2008 and Other Liabilities,December 31, 2007, respectively, in the Consolidated Balance SheetSheets. Balances of approximately $3.0 million and $1.9 million were recorded in Other Liabilities as of September 30, 2007.March 31, 2008 and December 31, 2007, respectively, in the Consolidated Balance Sheets. The amount recorded as of March 31, 2008 reflects undiscounted liabilities of approximately $6.4 million, which are discounted at approximately 7% as the aggregate amount of the obligations and the amount and timing of cash payments are reliably determinable.
Estimates of future costs are subject to change due to prorated cleanup periods and changing environmental remediation regulations.regulations and/or site-specific requirements.
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., 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.

17


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 October 19, 2007,April 15, 2008, plaintiffs’ counsel has requested the transfer of files regarding five individual plaintiffs from theBooker case and five individual plaintiffs from theCrowder case. Additionally,While at this time, only the Booker and Crowder cases have been ordered severed and transferred by the Mississippi Supreme Court, LII has joined in motionsexpects the Beck and Brown cases 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 yetbe transferred to Grenada County.as well. It is not possible to predict with certainty the outcome of these matters or an estimate of any potential loss. Based on current negotiations,present knowledge, management believes that it is unlikely that any final resolution of these matters will haveresult in a material impact on the Company’s financial statements.liability.
17. Share Repurchase Plan:
18.Share Repurchase Plan:
On July 25, 2007, the CompanyLII announced that itsthe Board of Directors approved a new $500 million share repurchase plan, pursuant to which LII plansthe Company is authorized to repurchase up to $500 million of shares of its common stock through open market purchases (the “2007 Share Repurchase Plan”). Based on the closing price of LII’s common stock on July 24, 2007,LII is party to a $500 million repurchase would represent over 20%written trading plan under Rule 10b5-1 of the Company’s market capitalization. TheSecurities Exchange Act of 1934, as amended (the “10b5-1 Plan”), to facilitate share repurchases under the 2007

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Share Repurchase Plan terminates and replaces the 2005 Share Repurchase Plan. The Company currently intendsPrior to fully executeJanuary 1, 2008, LII had repurchased 5,878,987 shares of common stock for approximately $203,347,263 under the repurchase by2007 Share Repurchase Plan. In the end of the thirdfirst quarter of 2008. During the third quarter of 2007, the Company purchased 3,026,1002008, LII repurchased shares of its common stock for $104.2 million, representing approximately 21% of the $500 million repurchase authorization.as follows:
18. Reportable Business Segments:
                 
      Average Price  Total Number of  Approximate Dollar 
      Paid per  Shares Purchased  Value of Shares that 
  Total Number  Share  as Part of Publicly  may yet be Purchased 
  of Shares  (including  Announced Plans  Under the Plans or 
Period Purchased(1)  fees)  or Programs  Programs 
                 
January 1 through January 31  1,951,792  $36.51   1,926,669  $226,412,444 
                 
February 1 through February 29  1,419,035  $37.24   1,409,415  $173,925,208 
                 
March 1 through March 31  1,650,512  $35.75   1,394,678  $123,905,357 
               
                 
Total  5,021,339  $36.47   4,730,762     
               
(1)In addition to purchases under the 2007 Share Repurchase Plan, this column reflects the surrender to LII of 290,577 shares of common stock to satisfy tax-withholding obligations in connection with the exercise of stock appreciation rights and the distribution of shares of the Company’s common stock pursuant to vested performance share units.
19.Reportable Business Segments:
The Company operates in four reportable business segments of the heating, ventilation, air conditioning and refrigeration (“HVACR”) markets.industry. 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.

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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 defines segment profit (loss) as a segment’s income (loss) from continuing operations before income taxes included in the accompanying Consolidated Statements of Operations, excluding unusual and nonrecurring items; (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 the ineffective portion of settled cash flow hedges; and less (plus)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 ended March 31, 2008 and the nine months ended September 30, 2007 and 2006, are shown below (in millions):
                 
  For the  For the 
  Three Months Ended  Nine Months Ended 
  September 30,  September 30, 
  2007  2006  2007  2006 
Net Sales
                
Residential Heating & Cooling $456.5  $502.4  $1,315.5  $1,464.2 
Commercial Heating & Cooling  255.1   228.0   650.6   554.1 
Service Experts  183.9   174.0   512.0   492.8 
Refrigeration  157.5   137.3   450.1   394.6 
Eliminations(1)
  (23.2)  (21.4)  (65.1)  (64.0)
             
  $1,029.8  $1,020.3  $2,863.1  $2,841.7 
             
                 
Segment Profit (Loss)
                
Residential Heating & Cooling $63.7  $53.4  $143.2  $168.7 
Commercial Heating & Cooling  37.8   25.8   76.6   53.2 
Service Experts  9.2   7.4   18.4   10.2 
Refrigeration  17.8   13.8   46.6   40.2 
Corporate and other  (23.4)  (21.2)  (64.2)  (66.5)
Eliminations(1)
     0.5   (0.2)  0.3 
             
Subtotal that includes segment profit and eliminations  105.1   79.7   220.4   206.1 
Reconciliation to income before income taxes:                
(Gains), losses and other expenses, net  (1.2)  (3.0)  (5.2)  (47.3)
Restructuring charges  4.3   4.5   14.2   13.1 
Interest expense, net  1.9   1.2   4.8   3.6 
Other expense (income), net  0.2   0.1   0.3   0.1 
Less: Realized gains on settled futures contracts not designated as cash flow hedges and the ineffective portion of settled cash flow hedges (2)
  1.5   20.2   3.2   52.3 
Less: Foreign currency exchange gains (losses) (2)
  1.6   1.0   3.7    
             
  $96.8  $55.7  $199.4  $184.3 
             
         
  For the 
  Three Months Ended 
  March 31, 
  2008  2007 
Net Sales
        
Residential Heating & Cooling $329.2  $361.1 
Commercial Heating & Cooling  165.2   162.7 
Service Experts  140.1   143.9 
Refrigeration  154.8   141.3 
Eliminations(1)
  (22.2)  (17.5)
       
  $767.1  $791.5 
       
         
Segment Profit (Loss)
        
Residential Heating & Cooling $13.2  $19.9 
Commercial Heating & Cooling  6.2   8.5 
Service Experts  (7.6)  (3.8)
Refrigeration  14.8   12.5 
Corporate and other  (12.2)  (20.6)
Eliminations(1)
  (1.7)  (0.1)
       
Subtotal that includes segment profit and eliminations  12.7   16.4 
Reconciliation to income before income taxes:        
(Gains), losses and other expenses, net  (3.3)  (0.7)
Restructuring charges  2.8   2.3 
Interest expense, net  2.7   0.9 
Less: Realized gains on settled futures contracts not designated as cash flowhedges (2)
  0.4   0.5 
Less: Foreign currency exchange gains (losses) (2)
  0.1   (0.3)
       
  $10.0  $13.7 
       
(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 the ineffective portion of settled cash flow hedges and foreign currency exchange gains (losses) are componentsa component of (Gains), Losses and Other Expenses, net in the accompanying Consolidated Statements of Operations.

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Total assets by business segment as of September 30, 2007March 31, 2008 and December 31, 20062007 are shown below (in millions). The assets in the Corporate segment are primarily comprised of cash, deferred tax assets, and investments in consolidated subsidiaries. Assets recorded in the operating segments represent those assets directly associated with those segments.
         
  As of  As of 
  September 30,  December 31, 
  2007  2006 
Total Assets
        
Residential Heating & Cooling $648.0  $587.0 
Commercial Heating & Cooling  383.8   285.7 
Service Experts  212.6   183.4 
Refrigeration  391.6   344.3 
Corporate and other  311.2   328.7 
Eliminations(1)
  (12.4)  (9.3)
       
Segment assets $1,934.8  $1,719.8 
       
         
  As of  As of 
  March 31,  December 31, 
  2008  2007 
Total Assets
        
Residential Heating & Cooling $579.1  $548.5 
Commercial Heating & Cooling  347.6   336.6 
Service Experts  203.5   200.4 
Refrigeration  409.3   388.1 
Corporate and other  355.5   349.6 
Eliminations(1)
  (14.6)  (8.6)
       
Segment assets $1,880.4  $1,814.6 
       
(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.
19. Related Party Transactions:
20.Related Party Transactions:
Thomas W. Booth, StephenSteven R. Booth and John W. Norris, III, each a member of the Company’s Board of Directors, John W. Norris, Jr., LII’s former Chairmanthe father of the Board, other former directors of the Company,Mr. Norris, III, 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,were, individually or through trust arrangements, membersshareholders 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. ThisUpon completion of the transaction was completed onin September 6, 2007.2007, LII acquired 2,695,770 shares of LII common stock owned by AOC in exchange for 2,239,563 newly issued shares of LII common shares.stock. The transaction reduced the number of outstanding shares of LII common stock by 456,207 shares, at minimal cost to LII. Following the issuance and exchange of LII common stock, AOC distributed 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 Transaction.”
There were no special benefits provided for any of the related persons described above under the AOC Transaction. Each related person’s participation in the AOC Transaction arose out of his or her ownership of common stock of AOC and was on the same basis as all other shareholders of AOC.

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     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 six months ended June 30, 2006 totaled approximately $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.
20. Subsequent Events:
     On October 10, 2007 the Company announced plans to close its refrigeration operations in Danville, Illinois and consolidate its Danville manufacturing, support, and warehouse functions in its Tifton, Georgia and Stone Mountain, Georgia operations. The facility in Danville manufactures evaporators and other heat transfer products for the commercial refrigeration industry. The consolidation will be a phased process and is expected to be completed over the next 18 months with pre-tax restructuring-related charges of approximately $17 million over that time.
     The Company entered into a $650 million Third Amended and Restated Revolving Credit Facility Agreement (the “Credit Agreement”) with Bank of America, N.A., as administrative agent, swingline lender and issuing bank (the “Administrative Agent”), JPMorgan Chase Bank, N.A. and Wachovia Bank, National Association, as co-syndication agents, and the lenders party thereto on October 12, 2007. The Credit Agreement replaces the Company’s previous domestic revolving credit facility, the Second Amended and Restated Credit Facility Agreement, dated as of July 8, 2005, among the Company, Bank of America, N.A., as administrative agent, JPMorgan Chase Bank, N.A., as syndication agent, and the lenders named therein.
     The Credit Agreement provides for an unsecured $650 million revolving credit facility that matures on October 12, 2012. The revolving credit facility includes a subfacility for swingline loans of up to $50 million and provides for the issuance of letters of credit for the full amount of the credit facility. The revolving loans bear interest at either (i) the Eurodollar rate plus a margin of between 0.5% and 1% that is based on the Company’s Debt to Adjusted EBITDA Ratio (as defined in the Credit Agreement) or (ii) the higher of (a) the Federal Funds Rate plus 0.5% and (b) the prime rate set by Bank of America, N.A. The Company may prepay the revolving loans at any time without premium or penalty, other than customary breakage costs in the case of Eurodollar loans.
     The Company will pay a facility fee in the range of 0.125% to 0.25% based on the Company’s Debt to Adjusted EBITDA Ratio. The Company will also pay a letter of credit fee in the range of 0.5% to 1% based on the Company’s Debt to Adjusted EBITDA Ratio, as well as an additional issuance fee of 0.125% for letters of credit issued.
     The Credit Agreement contains financial covenants relating to leverage and interest coverage. Other covenants contained in the Credit Agreement restrict, among other things, mergers, asset dispositions, guarantees, debt, liens, acquisitions, investments, affiliate transactions and the Company’s ability to make restricted payments.
     The Credit Agreement contains customary events of default. If any event of default occurs and is continuing, lenders with a majority of the aggregate commitments may require the Administrative Agent to terminate the Company’s right to borrow under the Credit Agreement and accelerate amounts due under the Credit Agreement (except for a bankruptcy event of default, in which case such amounts will automatically become due and payable and the lenders’ commitments will automatically terminate).
     The Company’s obligations under the Credit Agreement are guaranteed by certain of its material domestic subsidiaries, including Lennox Industries Inc., Allied Air Enterprises Inc., Service Experts Inc. and Lennox Global Ltd.
     The Company made a $25 million prepayment on a domestic promissory note to facilitate the amendment of the Credit Agreement, resulting in a make-whole payment of $0.2 million which will be recognized as interest expense in the fourth quarter of 2007.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
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, 2006,2007, and those set forth in Part II, “Item 1A. Risk Factors” of this report, if any, may affect our performance and results of operations. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may differ materially from those in the forward-looking statements. We disclaim any intention or obligation to update or review any forward-looking statements or information, whether as a result of new information, future events or otherwise.
Overview
We operate in four reportable business segments of the heating, ventilation, air conditioning and refrigeration (“HVACR”) markets.HVACR industry. 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 StatesU.S. and Canada. The second reportable segment is Commercial Heating & Cooling, in which we manufacture and sell rooftop products and related equipment for light commercial applications in the United StatesU.S. 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”)HVAC equipment by Company-ownedcompany-owned service centers in the United StatesU.S. 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 StatesU.S. and international markets.
Our products and services are sold through a combination of distributors, independent and Company-ownedcompany-owned dealer service centers, other installing contractors, wholesalers, manufacturers’ representatives and 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 spending habits and 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.
We estimate approximately 30% of the sales of our Residential Heating & Cooling segment is for new construction, with the balance attributable to repair, retrofit and replacement. With the current downturn in residential new construction activity, we are continuing to see a decline in the demand for the products and services we sell into this market.
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.

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Company Highlights
  Our Commercial Heating & Cooling, Service Experts,Net sales for the three months ended March 31, 2008 were $767.1 million and Refrigeration segments experienced increaseswere negatively impacted on a year-over-year basis due primarily to unfavorable economic conditions in the U.S. and Southern Europe. Foreign currency translation rates had a favorable impact on net sales in the third quarter of 2007 compared to the prior year quarter due to favorable product price and mix changes, increased volumes and the favorable impact of changes in foreign currency exchange rates. Our Residential Heating & Cooling segment’s sales decreased for the third quarter of 2007 compared to the prior year quarter largely due to weak residential new construction sales.2008.
 
  Operational income for the third quarter of 2007 increased $41.9 million, or 73.5%, from the prior year quarter.three months ended March 31, 2008 was $12.7 million. As a percentage of net sales, operational income increaseddecreased from 1.8% in 2007 to 9.6%1.7% in the third quarter of 2007 as compared to 5.6% in the third quarter of 2006. The increase in operational income was due to price increases implemented since the third quarter of 2006 offsetting increases in commodity and other manufacturing costs. Additionally, we reduced selling, general and administrative expenses through cost management and cost reduction initiatives.2008.
 
  Net income for the third quarter of 2007 increased $25.6 million, or 71.9%, as compared to the prior year quarter due to higher gross profit and lower operating expenses.three months ended March 31, 2008 was $6.3 million. Diluted net income per share was $0.10 per share in 2008, down from $0.12 per share in 2007.
 
  On July 25,Cash used in operating activities was $32.9 million for the three months ended March 31, 2008, improved from $75.1 million in 2007, we announced that our Board of Directors approved a new $500 million share repurchase plan, pursuantprimarily due to which we plan to repurchase shares of our common stock through open market purchases (the “2007 Share Repurchase Plan”). 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 fully execute the repurchase by the end of the third quarter of 2008. The 2007 Share Repurchase Plan terminatesfavorable changes in inventory and replaces the 2005 Share Repurchase Plan. During the third quarter, we purchased 3,026,100 shares of our common stock for $104.2 million, representing approximately 21% of the $500 million repurchase authorization.
On October 12, 2007, we entered into a $650 million Third Amended and Restated Revolving Credit Facility Agreement which replaces our previous $400 million domestic revolving credit facility.income taxes payable.
Results of Operations
The following table presents certain information concerning our financial results, including information presented as a percentage of net sales for the third quarterthree months ended March 31, 2008 and year-to-date through September 30, 2007 and 2006 (dollars in millions):
                                                
 Third Quarter Year-to-Date September 30,  For the Three Months Ended March 31, 
 2007 2006 2007 2006  2008 2007 
 Dollars Percent Dollars Percent Dollars Percent Dollars Percent  Dollars Percent Dollars Percent 
Net sales $1,029.8  100.0% $1,020.3  100.0% $2,863.1  100.0% $2,841.7  100.0% $767.1  100.0% $791.5  100.0%
Cost of goods sold 736.2 71.5 763.5 74.8 2,075.8 72.5 2,105.5 74.1  564.3 73.6 586.9 74.2 
                          
Gross profit 293.6 28.5 256.8 25.2 787.3 27.5 736.2 25.9  202.8 26.4 204.6 25.8 
Selling, general and administrative expenses 194.3 18.9 200.8 19.7 582.7 20.4 589.9 20.8  193.7 25.3 191.1 24.1 
(Gains), losses and other expenses, net  (1.2)  (0.1)  (3.0)  (0.3)  (5.2)  (0.2)  (47.3)  (1.7)  (3.3)  (0.4)  (0.7)  (0.1)
Restructuring charges 4.3 0.4 4.5 0.4 14.2 0.5 13.1 0.5  2.8 0.4 2.3 0.3 
Equity in earnings of unconsolidated affiliates  (2.7)  (0.3)  (2.5)  (0.2)  (8.9)  (0.3)  (7.5)  (0.3)  (3.1)  (0.4)  (2.7)  (0.3)
                          
Operational income $98.9  9.6% $57.0  5.6% $204.5  7.1% $188.0  6.6% $12.7  1.7% $14.6  1.8%
                      
  
Net income $61.2  5.9% $35.6  3.5% $130.1  4.5% $124.9  4.4% $6.3  0.8% $8.6  1.1%
                      
The following table sets forth net sales by geographic market for the third quarter ended and year-to-date through September 30, 2007 and 2006 (dollars in millions):

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 Third Quarter Year-to-Date September 30,  For the Three Months Ended March 31, 
 2007 2006 2007 2006  2008 2007 
 Dollars Percent Dollars Percent Dollars Percent Dollars Percent  Dollars Percent Dollars Percent 
Geographic Market:
  
U.S $758.0  73.6% $789.1  77.4% $2,130.8  74.4% $2,234.0  78.6%
U.S. $534.3  69.7% $589.9  74.5%
Canada 108.4 10.5 95.1 9.3 270.7 9.5 237.6 8.4  81.5 10.6 65.1 8.2 
International 163.4 15.9 136.1 13.3 461.6 16.1 370.1 13.0  151.3 19.7 136.5 17.3 
                          
Total net sales $1,029.8  100.0% $1,020.3  100.0% $2863.1  100.0% $2,841.7  100.0% $767.1  100.0% $791.5  100.0%
                          
Third Quarter 2007Three Months Ended March 31, 2008 Compared to Third Quarter 2006 –Three Months Ended March 31, 2007 — Consolidated Results
Net Sales
Net sales increased $9.5decreased $24.4 million, or 0.9%3.1%, to $1,029.8$767.1 million for the third quarter of 2007three months ended March 31, 2008 from $1,020.3$791.5 million for the third quarterthree months ended March 31, 2007. Declines in unit volumes more than offset the $31.4 million of 2006. The favorable impact of changes in foreign currency exchange rates increased netrates. Our Residential Heating & Cooling and Service Experts segments experienced decreases in sales by $21.0 million.due primarily to the weakened residential new construction market in the U.S. Our Commercial Heating & Cooling Service Experts,segment experienced a decrease in unit volumes in our domestic and Refrigeration segments experienced increases in net salesEuropean operations primarily due to favorable product price and mix changes and increased volumes. Our Residential Heating & Cooling segment’s sales decreasedunfavorable economic conditions. Sales for the third quarter of 2007 compared to the prior year quarter largely due to weak residential new construction sales.our Refrigeration segment were relatively flat year-over-year.

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Gross Profit
Gross profit was $293.6$202.8 million for the third quarter of 2007three months ended March 31, 2008 compared to $256.8$204.6 million for the prior year quarter, an increasethree months ended March 31, 2007, a decrease of $36.8$1.8 million. Gross profit margin increased to 28.5%26.4% for the thirdfirst quarter of 20072008 compared to 25.2%25.8% in 20062007 primarily due to favorable product mix and price increases implemented since the thirdfirst quarter of 2006 combined with lower manufacturing costs.2007.
Selling, General and Administrative Expenses
Selling, general and administrative (“SG&A”) expenses decreased $6.5increased $2.6 million, or 3.2%1.4%, for the third quarter of 2007 compared to the prior year quarter. Asin 2008 and as a percentage of total net sales increased to 25.3% for the first quarter of 2008 from 24.1% for the first quarter of 2007. The increase in SG&A expenses decreasedwas primarily due to 18.9% for the third quarter of 2007 from 19.7% for the third quarter of 2006. A decrease in volumea $7.2 million increase related selling expenses had a favorable impact on SG&A expenses. Additionally, cost reduction initiatives resulted in lower SG&A expensesto foreign currency exchange rates and higher bad debt expense as weakness in the third quartereconomy has impacted collection efforts in certain areas of 2007 as compared to the prior year quarter.business. These savingsincreases were partially offset by lower stock-based compensation expenses, a one-time pension settlement charge of $3.9 million related to the retirement of our former chief executive officerreduction in professional fees and changes in foreign currency exchange rates.cost control measures.
(Gains), Losses and Other Expenses, Net
(Gains), losses and other expenses, net were $(1.2)$(3.3) million for the third quarter of 2007 compared to $(3.0)three months ended March 31, 2008 and $(0.7) million for the third quarter of 2006three months ended March 31, 2007 and included the following (in millions):
         
  Third Quarter 
  2007  2006 
Realized gains on settled futures contracts not designated as cash flow hedges $(1.4) $(20.2)
Unrealized losses on unsettled futures contracts not designated as cash flow hedges  1.0   18.6 
Ineffective portion of losses on cash flow hedges  0.3    
Foreign currency exchange gains  (1.6)  (1.0)
Other items, net  0.5   (0.4)
       
(Gains), losses and other expenses, net $(1.2) $(3.0)
       
         
  For the Three Months Ended 
  March 31, 
  2008  2007 
Realized (gains) on settled future contracts not designated as cash flow hedges $(0.4) $(0.5)
Unrealized (gains) on unsettled future contracts not designated as cash flow hedges  (2.7)  (0.3)
Ineffective portion of (gains) on cash flow hedges  (0.1)  (0.2)
Other items, net  (0.1)  0.3 
       
(Gains), losses and other expenses, net $(3.3) $(0.7)
       
     Realized andThe increase in unrealized gains on settled futuresfuture contracts not designated as cash flow hedges decreasedwas primarily due to increases in commodity prices during the three months ended March 31, 2008 as we had fewer futures contracts not designated as cash flow hedges in the third quarter 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.2007. For more information see Note 15 in the Notes to our Consolidated Financial Statements.
Restructuring Charges
We recognized $4.3$2.8 million and $4.5$2.3 million in restructuring charges for the third quarter of 2007 and 2006, respectively. Restructuring charges incurred during the third quarter of 2007 primarily related to the consolidation of our Hearth Products operations and the reorganization of our corporate administrative function. Charges recognized in the third quarter of 2006 primarily related to the consolidation of our manufacturing,

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distribution, research and development and administrative operations of our two-step operations into South Carolina and closing of our operations in Bellevue, Ohio (the “Allied Air Enterprises Consolidation”). The restructuring of these operations was substantially completed during the first quarter of 2007. Charges recorded in the third quarter of 2006 reflected the net present value of remaining lease payments on an operating lease at an idle facility in Burlington, Washington, net of estimated sublease income on the facility.2008 and 2007, respectively, as further discussed below.
     In the third quarter of 2007, we announced plans to close our Hearth Products operations in Lynwood, California and consolidate our U.S. factory-built fireplace manufacturing operations in our facility in Union City, Tennessee. In connection with this consolidation project, we recorded pre-tax restructuring charges of $2.4 million in our Residential Heating & Cooling segment for the three months ended September 30, 2007. The restructuring charges primarily related to severance related costs and the disposal of certain long-lived assets. The consolidation will be a phased process and is expected to be completed by the end of the second quarter of 2008. We currently expect to incur pre-tax restructuring charges of approximately $2.7 million over the next six months due to this consolidation project and anticipate the consolidation leading to annual cost reductions of over $2.0 million beginning in April of 2008.
     In the second quarter of 2007, we reorganized our corporate administrative function and eliminated the position of chief administrative officer. In connection with this action, we entered into negotiations with our former chief administrative officer to settle the terms of his employment agreement. Restructuring expense of $6.6 million was recorded in the second quarter of 2007, which represented the $8.0 million estimate of the amounts to be paid to settle the employment agreement, net of $1.4 million of previously recorded stock-based compensation expense. In September 2007, we reached an agreement to settle the terms of the former chief administrative officer’s employment agreement. As a result, we recorded an additional $1.1 million of restructuring expense related to this matter in the third quarter of 2007. We do not expect to incur any material costs related to this reorganization in the future.
On October 10, 2007, we announced plans to close our refrigeration operations in Danville, Illinois and consolidate our Danville manufacturing, support, and warehouse functions in our Tifton, Georgia and Stone Mountain, Georgia operations. The consolidation will beis a phased process and is expected to be completed overin the first quarter of 2009. In connection with this consolidation project, we recorded pre-tax restructuring charges of $1.3 million for the three months ended March 31, 2008. Over the next 1812 months, withwe expect to incur pre-tax restructuring-related charges of approximately $17$8.1 million over that time.related to this project. We expect the consolidation towill lead to annual pre-tax cost reductions of over $6 million beginning in 2009.
In the third quarter of 2007, we announced plans to close our hearth products operations in Lynwood, California and consolidate our U.S. factory-built fireplace manufacturing operations in our facility in Union City, Tennessee. In connection with this consolidation project, we recorded pre-tax restructuring charges of $1.2 million in our Residential Heating & Cooling segment for the three months ended March 31, 2008. The restructuring charges primarily related to costs to move equipment and the disposal of certain long-lived assets. The consolidation was substantially complete as of March 31, 2008. We currently anticipate the consolidation will lead to annual cost reductions of over $2.0 million beginning in April of 2008.

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In the fourth quarter of 2007, our Australian-based manufacturing facilities in Milperra assumed all heat transfer equipment manufacturing, while the smaller coil production facility in New Zealand was closed. In connection with this integration project, we recorded pre-tax restructuring charges of $0.3 million in our Refrigeration segment for the three months ended March 31, 2008. The restructuring charges primarily related to severance costs and disposal of certain long-lived assets. The integration was substantially complete as of March 31, 2008.
Restructuring charges incurred in 2007 primarily 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. The restructuring of these operations was substantially complete as of March 31, 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. Equity in earnings of unconsolidated affiliates increased by $0.2$0.4 million to $3.1 million for the three months ended March 31, 2008 as compared to $2.7 million for the third quarter of 2007 compared to $2.5 million for the same period in 2006.2007. The increase wasis due to the performance of our unconsolidated affiliates.
Interest Expense, Netnet
Interest expense, net, increased by $0.7$1.8 million to $1.9$2.7 million for the third quarter of 2007three months ended March 31, 2008 from $1.2$0.9 million for the third quarter of 2006.three months ended March 31, 2007. The higher netincrease in interest expense was primarily due to higher interest expense and a decrease in interest income earned during the quarter ended September 30, 2007. Interest expense increased dueattributable to higher debt balances as the result of our share repurchases. InterestAdditionally, interest income decreased during the quarter ended March 31, 2008 as the average amount invested over the three months was less than that in the same period in 2007 and due to lower rates in the thirdfirst quarter of 20072008 as compared to the prior year quarter.
Provision for Income Taxes
The provision for income taxes was $35.6$3.7 million for the third quarter of 2007three months ended March 31, 2008 compared to $20.1$5.1 million for the prior year quarter.three months ended March 31, 2007. The effective tax rate was 36.8%37.0% and 36.1%37.2% for the third quarter ofthree months ended March 31, 2008 and March 31, 2007, and 2006, respectively. Our effective rates differ from the statutory federal rate of 35% for certain items, such as state and local taxes, non-deductible expenses, foreign operating losses for which no tax benefits have been recognized and foreign taxes at rates other than 35%.
Third Quarter 2007Three Months Ended March 31, 2008 Compared to Third Quarter 2006 –Three Months Ended March 31, 2007 — 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 OperationsOperations; excluding (gains), losses and other expenses, net;

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restructuring charges; goodwill impairment; interest expense, net; and other (income) expense, (income), net; less (plus) realized gains (losses) on settled futures contracts not designated as cash flow hedges and the ineffective portion of settled cash flow hedges; and less (plus) foreign currency exchange gains (losses).
Residential Heating & Cooling
The following table details our Residential Heating & Cooling segment’s net sales and profit for the third quarter ofthree months ended March 31, 2008 and 2007 and 2006 (dollars in millions):
                
                 Three Months Ended     
 Third Quarter     March 31,     
 2007 2006 Difference % Change 2008 2007 Difference % Change 
Net sales $456.5 $502.4 $(45.9)  (9.1)% $329.2 $361.1 $(31.9)  (8.8)%
Profit 63.7 53.4 10.3 19.3  13.2 19.9  (6.7)  (33.7)
% of net sales  14.0%  10.6%   4.0%  5.5% 
Net sales in our Residential Heating & Cooling business segment decreased $45.9$31.9 million, or 9.1%8.8%, to $456.5$329.2 million for the third quarter of 2007three months ended March 31, 2008 from $502.4$361.1 million for the third quarter of 2006.three months ended March 31, 2007. Due to continuing weakness in the U.S. residential new construction market, unit volumes were down in the thirdfirst quarter of 20072008 as compared to the thirdfirst quarter of 2006. Price increases implemented2007. Additionally, the slowdown in responsethe U.S. economy led to higher commodity and component costsa slight decline in the replacement market on a year-over-year basis. The decrease related to sales volumes was partially offset the decrease in sales due to reduced unit volumes.by favorable product mix.

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Segment profit in Residential Heating & Cooling increased 19.3%decreased 33.7% to $63.7$13.2 million for the thirdfirst quarter of 20072008 from $53.4$19.9 million in the prior year. Segment profit margins improveddecreased from 10.6%5.5% for the thirdfirst quarter of 20062007 to 14.0%4.0% for the thirdfirst quarter of 2007. The2008. These decreases were primarily due to the unfavorable impact of lower unit volumes, was more thanwhich were partially offset by a reduction in operatingfavorable product mix and administrative expenses. Operating and administrativelower expenses were lower in the third quarter of 2007 compared to the prior year primarily due to cost reduction activities and costs savings relatedefforts. Higher bad debt expenses, due to the consolidation of our Allied Air Enterprises manufacturing operations. Our operating margins were also higherweakness in the third quarter of 2007 as compared to the prior year quarter as price increases were effective in offsetting higher commodity and component costs. In addition, freight and commission costs were lower as a percentage of sales.
     In the third quarter of 2007 we revised our warranty policy for fulfilling the terms of our warranty obligationU.S. economy, also had an unfavorable impact on certain products that we no longer manufacture. We believe that the revised policy may have a favorable and material impact to our financial results in future periods while still meeting the terms of our warranty obligation to our customers.profitability.
Commercial Heating & Cooling
The following table details our Commercial Heating & Cooling segment’s net sales and profit for the third quarter ofthree months ended March 31, 2008 and 2007 and 2006 (dollars in millions):
                
                 Three Months Ended     
 Third Quarter     March 31,     
 2007 2006 Difference % Change 2008 2007 Difference % Change 
Net sales $255.1 $228.0 $27.1  11.9% $165.2 $162.7 $2.5  1.5%
Profit 37.8 25.8 12.0 46.5  6.2 8.5  (2.3)  (27.1)
% of net sales  14.8%  11.3%   3.8%  5.2% 
Net sales in our Commercial Heating & Cooling segment increased $27.1$2.5 million, or 11.9%1.5%, to $255.1$165.2 million for the third quarter of 2007three months ended March 31, 2008 from $228.0$162.7 million for the third quarter of 2006. The increasethree months ended March 31, 2007. Our domestic operations experienced reduced volumes on a year-over-year basis due to the weaknesses in net sales was driventhe U.S. economy. These reduced volumes were almost entirely offset by price increases throughout the segment combined with aand favorable product mix shiftmix. Primarily due to weakness in Southern Europe, unit volumes in our domesticoverseas operations as demand for our high-efficiency units increasedwere down in the thirdfirst quarter of 2007. Unit volumes remained relatively flat across2008 as compared to the segment.first quarter of 2007. The favorable impact of changes in foreign currency exchange rates increased net sales by $6.5$8.7 million.
Segment profit in Commercial Heating & Cooling increased 46.5%decreased 27.1% to $37.8$6.2 million for the third quarter of 2007three months ended March 31, 2008 from $25.8$8.5 million infor the prior year.three months ended March 31, 2007. As a percentage of net sales, segment profit increaseddecreased from 11.3%5.2% in 20062007 to 14.8%3.8% in 2007.2008. The improvement inreduced segment profit was drivendue primarily to operating losses in our European operations due to planned infrastructure investments to support cost reduction efforts. These losses were partially offset by price increases that offset increases in materials and other manufacturing costs. A favorable product mix shift to high-efficiency units in our domestic operations also contributed to the increase in segment profit in the third quarter of 2007 as compared to the prior

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year. We continued to realize the benefits of our Commercial Regional Distribution Network in North America, a strategic initiative in freight and logistics designed to optimize transportation load capacity and reduce transportation costs for our products. Additionally, SG&A expenses decreased due to cost reduction initiatives.operations.
Service Experts
The following table details our Service Experts segment’s net sales and profitloss for the third quarter ofthree months ended March 31, 2008 and 2007 and 2006 (dollars in millions):
                
                 Three Months Ended     
 Third Quarter     March 31,     
 2007 2006 Difference % Change 2008 2007 Difference % Change 
Net sales $183.9 $174.0 $9.9  5.7% $140.1 $143.9 $(3.8)  (2.6)%
Profit 9.2 7.4 1.8 24.3 
(Loss)  (7.6)  (3.8)  (3.8)  (100.0)
% of net sales  5.0%  4.3%   (5.4)%  (2.6)% 
Net sales in our Service Experts segment increased $9.9decreased $3.8 million, or 5.7%2.6%, to $183.9$140.1 million for the third quarter of 2007three months ended March 31, 2008 from $174.0$143.9 million for the third quarter of 2006.three months ended March 31, 2007. The increasedecrease in net sales was primarily due to favorable changesthe decline in the mix of our sales and services in both the U.S. and Canadian markets. Strong residential service and replacement sales offset a sales decline related to the residential new construction market in the U.S. Residentialand lower residential replacement and service sales in the U.S. resulting from weakness in the economy. These decreases were partially offset by strong residential new construction sales in our Canadian operations remained strong due to favorable market conditions. Commercial sales decreased slightly in the third quarter of 2007 as compared to the same period in 2006 due to a decrease in commercial new construction sales.Canada. The favorable impact of changes in foreign currency exchange rates increased net sales by $2.6$4.9 million.
Segment profitloss in Service Experts increased $1.8$3.8 million to $9.2a $7.6 million loss for the third quarter of 20072008 from $7.4a $3.8 million loss in the prior year. As a percentage of net2007. The increase in segment loss was primarily due to lower sales segment profitvolumes, higher operating costs resulting primarily from increased from 4.3% for the third quarter of 2006 to 5.0% for the third quarter of 2007. Our margins primarily improved as we increased the percentage offuel costs and higher margin service and replacement business in 2007 as compared to 2006.administrative costs.

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Refrigeration
The following table details our Refrigeration segment’s net sales and profit for the third quarter ofthree months ended March 31, 2008 and 2007 and 2006 (dollars in millions):
                
                 Three Months Ended     
 Third Quarter     March 31,     
 2007 2006 Difference % Change 2008 2007 Difference % Change 
Net sales $157.5 $137.3 $20.2  14.7% $154.8 $141.3 $13.5  9.6%
Profit 17.8 13.8 4.0 29.0  14.8 12.5 2.3 18.4 
% of net sales  11.3%  10.1%   9.6%  8.8% 
Net sales in our Refrigeration segment increased $20.2$13.5 million, or 14.7%,9.6 %, to $157.5 million for the third quarter of 2007 from $137.3$154.8 million in the prior year. Increases2008 from $141.3 million in 2007. Decreases in unit volumes in our European, Australian and South Americandomestic operations were almost entirely offset a slight decreaseby increases in our domestic unit volumes. Our international operations’ unit volumes increased due to favorable economic conditionsin South America and export growth. Increased prices contributed to the increase in sales, particularlyAsia and price increases in our domestic operations. Price increases were implemented as the result of risinghigher commodity and component costs. The favorable impact of changes in foreign currency exchange rates increased net sales by $9.4$13.6 million.
Segment profit in Refrigeration increased $4.0$2.3 million to $17.8$14.8 million for the third quarter of 2007three months ended March 31, 2008 from $13.8$12.5 million for the prior year quarter.three months ended March 31, 2007. Segment profit margins increased to 11.3%9.6% in 2007 compared to 10.1%2008 from 8.8% in 2006.2007. The increase in segment profit iswas primarily due to cost controls, especially for SG&A expenses, and the increase in unit volumes in international markets and price increases effectively offsetting higher commodity and component costs.favorable impact of foreign currency exchange rates.
Corporate and Other
Corporate and other costs were slightly higher at $23.4 million for the third quarter of 2007 compared to $21.2 million for the third quarter of 2006. 2007 expenses increased primarily due to a one-time executive retirement pension settlement charge that was partially offset by lower professional fees.

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Year-to-Date Through September 30, 2007 Compared to Year-to-Date Through September 30, 2006 – Consolidated Results
Net Sales
  ��  Year-to-date net sales increased $21.4 million, or 0.8%, to $2,863.1decreased from $20.6 million in 2007 from $2,841.7to $12.2 million in 2006. The increase in net sales was due to increased volumes and favorable price and product mix changes in our Commercial Heating & Cooling, Service Experts, and Refrigeration segments, as well as a favorable impact of changes in foreign currency exchange rates of $44.4 million. Net sales decreased in our Residential Heating & Cooling segment largely due to decreased demand in the residential new construction market.
Gross Profit
     Year-to-date gross profit was $787.3 million in 2007 compared to $736.2 million in 2006, an increase of $51.1 million. Gross profit margin increased to 27.5% for 2007 compared to 25.9% 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 decreased to $582.7 million in 2007 compared to $589.9 million in 2006. As a percentage of total net sales, SG&A expenses were 20.4% for 2007 and 20.8% for 2006. Year-over-year reductions in unit volumes decreased volume related selling expenses included in SG&A expenses. Additionally, cost management and cost reduction initiatives had a favorable impact on SG&A expenses in the first nine months of 2007 as compared to the prior year. These savings in SG&A expenses were partially offset by a one-time pension settlement charge of $3.9 million recorded in the third quarter of 2007 related to the retirement of our former chief executive officer.
(Gains), Losses and Other Expenses, Net
     Year-to-date (gains), losses and other expenses, net were $(5.2) million in 2007 and $(47.3) million in 2006 and included the following (in millions):
         
  Year-to-Date September 30, 
  2007  2006 
Realized gains on settled futures contracts not designated as cash flow hedges $(3.1) $(52.3)
Unrealized losses on unsettled futures contracts not designated as cash flow hedges  0.9   5.3 
Ineffective portion of losses on cash flow hedges  0.1    
Foreign currency exchange gains  (3.7)   
Other items, net  0.6   (0.3)
       
(Gains), losses and other expenses, net $(5.2) $(47.3)
       
     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 nine 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. For more information see Note 15 in the Notes to our Consolidated Financial Statements.
Restructuring Charges
     We recognized $14.2 million and $13.1 million in year-to-date restructuring charges in 2007 and 2006, respectively. In 2007 we incurred restructuring charges of $2.4 million related to the consolidation of our Hearth Products operations, $7.7 million related to the reorganization of our corporate administrative function and $3.2 million related to 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

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using the equity method of accounting. Year-to-date equity in earnings of unconsolidated affiliates increased by $1.4 million to $8.9 million in 2007 as compared to $7.5 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 $1.2 million to $4.8 million in 2007 from $3.6 million in 2006. The higher net interest expense was due primarily to an increase in interest expense and a decrease in interest income earned. Interest expense increased due to higher debt balances as the result of our share repurchases. Interest income decreased due to lower average investment balances and lower rates in 2007 as compared to 2006.
Provision for Income Taxes
     The year-to-date provision for income taxes was $69.3 million in 2007 compared to $59.4 million in 2006. The year-to-date effective tax rate was 34.8% and 32.2% 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 September 30, 2007 Compared to Year-to-Date Through September 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 the ineffective portion of settled cash flow hedges; and less (plus) 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    
  September 30,    
  2007 2006 Difference % Change
Net sales $1,315.5  $1,464.2  $(148.7)  (10.2)%
Profit  143.2   168.7   (25.5)  (15.1)
% of net sales  10.9%  11.5%        
     Year-to-date net sales in our Residential Heating & Cooling segment decreased $148.7 million, or 10.2%, to $1,315.5 million in 2007 from $1,464.2 million in 2006. Net sales decreased primarily due to reduced unit volumes attributable to the U.S. residential new construction market. Unit volumes have generally been lower across the residential HVAC industry in 2007 as compared to 2006 due to softness in the U.S. residential new construction market. We believe the decrease in our unit volumes is consistent with industry trends.2008. 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.
     Year-to-date segment profit in Residential Heating & Cooling decreased 15.1% to $143.2 million in 2007 from $168.7 million in 2006. Segment profit margins declined from 11.5% for 2006 to 10.9% for 2007. The decrease in segment profitcosts was primarily driven by a decrease in unit volumes. Adjustments to failure rates for products we no longer manufacture and the higher cost of claims increased our warranty costs. Favorable price changes partially offset the decrease in segment profit. Lower sales volumes resulted in a reduction of our freight and commission expenses. Additionally, our cost saving initiatives helped to reduce SG&A expenses.
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):

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  Year-to-Date    
  September 30,    
  2007 2006 Difference % Change
Net sales $650.6  $554.1  $96.5   17.4%
Profit  76.6   53.2   23.4   44.0 
% of net sales  11.8%  9.6%        
     Year-to-date net sales in our Commercial Heating & Cooling segment increased $96.5 million, or 17.4%, to $650.6 million in 2007 from $554.1 million in 2006. The increase in net sales was primarily due to favorable price and product mix changes in our domestic operations as customer demand increased for our high-efficiency rooftop units. The favorable impact of the change in foreign currency exchange rates increased net sales by $15.3 million.
     Year-to-date segment profit in Commercial Heating & Cooling increased 44.0% to $76.6 million in 2007 from $53.2 million in 2006. As a percentage of net sales, segment profit increased from 9.6% for 2006 to 11.8% for 2007. An increase in demand in our international markets combined with price increases and a favorable product mix shift in our domestic operations has improved segment profit. Additionally, the strategic initiatives related to our Commercial Regional Distribution Network in North America helped to lower freight costs and 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    
  September 30,    
  2007 2006 Difference % Change
Net sales $512.0  $492.8  $19.2   3.9%
Profit  18.4   10.2   8.2   80.4 
% of net sales  3.6%  2.1%        
     Year-to-date net sales in our Service Experts segment increased $19.2 million, or 3.9%, to $512.0 million in 2007 from $492.8 million in 2006. The increase in net sales primarily relates to favorable changes in the mix of our sales and services. Residential sales in our Canadian operations increased in 2007 as compared to 2006 in both residential service and replacement and residential new construction due to favorable market conditions. Additionally, 2007 year-to-date net sales increased in our U.S. operations. As a percentage of total sales, U.S. residential service and replacement sales increased year over year, offsetting a decrease in sales caused by the decline in residential new construction sales.
     Year-to-date segment profit in Service Experts increased $8.2 million to $18.4 million in 2007 from $10.2 million in 2006. As a percentage of net sales, segment profit increased from 2.1% for 2006 to 3.6% 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 coupled with an increase in sales volumes. We incurred higher commissions expense in 2007 related to the increase in residential service and replacement sales.
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    
  September 30,    
  2007 2006 Difference % Change
Net sales $450.1  $394.6  $55.5   14.1%
Profit  46.6   40.2   6.4   15.9 
% of net sales  10.4%  10.2%        

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     Year-to-date net sales in our Refrigeration segment increased $55.5 million, or 14.1%, to $450.1 million in 2007 from $394.6 million in 2006. The Refrigeration segment’s sales increase was primarily due to an increase in volumes in Europe, Australia, and Brazil. Favorable market conditions in Europe and Australia and an increase in exports in South America improved our foreign operations’ unit volumes. Additionally, increased prices resulting from an increase in commodity and component costs contributed to higher sales. The favorable impact of the change in foreign currency exchange rates increased net sales by $23.3 million.
     Year-to-date segment profit in our Refrigeration segment increased $6.4 million to $46.6 million in 2007 from $40.2 million in 2006. Segment profit margins increased to 10.4% for 2007 from 10.2% for 2006. Increases in sales volumes increased segment profit. However, a change in the product mix and geographic mix of our sales generated more sales of products with lower margins during the first half of the year. Additionally, higher commodity and component costs that were not fully offset by price increases lowered profit margins. Lower expenses from cost reduction initiatives were offset by 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 $66.5 million in 2006 to $64.2 million in 2007. The decrease primarily resulted from a reduction in compliance activities, stock-based compensation and professional fees partially offset by a one-time executive retirement pension settlement charge.and overall tight budgetary controls.
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 September 30, 2007,March 31, 2008, our debt-to-total-capital ratio was 15.6%38%, up from 12.7%15% as of September 30, 2006,March 31, 2007, primarily due to an incremental $40.6increase of $257 million ofin our outstanding debt in 2007.balances as well a reduced stockholders’ equity balance due to share repurchases. Higher debt was primarily due to an increase in borrowings to fund the repurchase of approximately 5.411.5 million shares of our common stock for $179.8$405.0 million since September 30, 2006March 31, 2007 under the 2005 Share Repurchase Planour former and the 2007 Share Repurchase Plan.current share repurchase plans.
The following table summarizes our year-to-date cash activity for 2007the three months ended March 31, 2008 and 20062007 (in millions):
         
  Year-to-Date
  September 30,
  2007 2006
Net cash provided by operating activities $110.5  $84.8 
Net cash used in investing activities  (69.0)  (54.4)
Net cash used in financing activities  (101.4)  (137.1)
         
  Three Months Ended 
  March 31, 
  2008  2007 
Net cash used in operating activities $(32.9) $(75.1)
Net cash used in investing activities  (16.0)  (9.8)
Net cash provided by financing activities  24.8   33.1 
Net Cash Provided byUsed in Operating Activities
     Year-to-dateDuring the first three months of 2008, cash provided byused in operating activities in 2007 was $110.5$32.9 million compared to $84.8$75.1 million in 2006. The primary reason for the increase2007. Our cash used in cash provided by operating activities wasis lower primarily due to a changesmaller use of cash from changes in inventory from an increase of $45.1 million in 2007 compared to an increase of $96.9 million in 2006. Inventory increasedand income taxes payable in the first ninequarter of 2008 versus the prior year. Seasonal increases in inventory typically result in a use of cash in the first quarter of the year. However, the seasonal growth in inventory of $54.7 million for the first three months of 2008 was down when compared to the $93.2 million of growth in the same period in 2007 due to our adjustment to the preseason cooling equipment build to reflect the continued declines in the residential markets. Changes in income taxes payable resulted in a smaller use of cash in 2008 as compared to 2007 due to a normal seasonal increase. However, inventory increased morelarger payment of taxes in the first nine monthsquarter of 20062007 versus the first quarter of 2008. These changes were partially offset by a smaller increase in accounts payable of $34.4 million during the first quarter of 2008 as compared to $59.9 million in the same period in 2007, primarily due to (i) a planned increase in finished goods to manage through the Allied Air Enterprises Consolidation, (ii) increased costs of 13 SEER unitslower production during the 2006 transition, and (iii) increasing commodity costs impacting raw materialquarter to better align inventory costs during the first nine months of 2006. The impact of the inventory improvement was partially offset by an increase in accounts receivable of $111.3 million in 2007 compared to $93.3 million in 2006. The increase in accounts receivable was primarily due to increasedgrowth with sales in the third quarter as well as geographic and customer mix. Our third quarter sales were modestly higher in 2007 as compared to 2006.expectations.

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Net Cash Used in Investing Activities
     Year-to-date netNet cash used in investing activities was $69.0$16.0 million for the first three months of 2008 compared to $9.8 million in 20072007. This increase was primarily driven by the net purchase of $6.8 million of short-term investments in the first three months of 2008 compared to $54.4 millionno purchases in

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2006. the same period in 2007. Capital expenditures of $44.5$9.5 million and $49.8$9.9 million in 20072008 and 2006,2007, respectively, were primarily for purchases of production equipment in the manufacturing plants in our Residential Heating & Cooling and Commercial Heating & Cooling segments. We made net short-term investments in debt securities of $25.0 million in 2007.
Net Cash Used inProvided by Financing Activities
     Year-to-dateDuring the first three months of 2008, net cash used inprovided by financing activities was $101.4$24.8 million in 2007 compared to $137.1$33.1 million used in 2006.2007. We paid a total of $35.0$8.7 million in dividends on our common stock in the first ninethree months of 2007 compared to $31.2 million duringended March 31, 2008, which is unchanged from 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. Year-to-date netNet short-term and revolving long-term borrowings totaled approximately $51.3$193.5 million in 2007the first three months of 2008 as compared to $(0.7)$35.3 million for the same period in 2006.2007. During the first ninethree months of 2007,ended March 31, 2008, we used approximately $150.5$183.1 million to repurchase 4,284,1004,730,762 shares of our common stock. Such repurchases were made primarilystock under our share repurchase plan and 290,577 shares of our common stock to satisfy tax withholding obligations in connection with the 2005 Stock Repurchase Planexercise of stock appreciation rights and the 2007 Stock Repurchase Plan.distribution of shares of our common stock pursuant to vested performance share units.
The following table summarizestables summarize our outstanding debt obligations as of September 30, 2007 and the classification in the accompanying Consolidated Balance SheetSheets as of March 31, 2008 and December 31, 2007 (in millions):
                                
 Short- Current Long-Term    Short-Term Current Long-Term   
Description of Obligation Term Debt Maturities Maturities Total 
Description of Obligation as of March 31, 2008 Debt Maturities Maturities Total 
Domestic promissory notes(1) $ $61.1 $46.1 $107.2  $ $36.1 $35.0 $71.1 
Domestic revolving credit facility   48.5 48.5    324.0 324.0 
Other foreign obligations 3.8 0.2 0.8 4.8  5.5 0.3 0.7 6.5 
                  
Total Debt $3.8 $61.3 $95.4 $160.5  $5.5 $36.4 $359.7 $401.6 
                  
     As of September 30, 2007, we had outstanding long-term debt obligations totaling $156.7 million, including $61.3 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%.
                 
  Short-Term  Current  Long-Term    
Description of Obligation as of December 31, 2007 Debt  Maturities  Maturities  Total 
Domestic promissory notes (1)
 $  $36.1  $35.0  $71.1 
Domestic revolving credit facility        131.0   131.0 
Other foreign obligations  4.8   0.3   0.7   5.8 
             
Total Debt $4.8  $36.4  $166.7  $207.9 
             
(1)Domestic promissory notes as of March 31, 2008 and December 31, 2007 consisted of the following (in millions):
         
  March 31,  December 31, 
  2008  2007 
6.73% promissory notes, payable $11.1 annually through 2008 $11.1  $11.1 
6.75% promissory notes, payable in 2008  25.0   25.0 
8.00% promissory note, payable in 2010  35.0   35.0 
     As of September 30, 2007, we had a domestic revolving credit facility with a borrowing capacity of $400.0 million, of which $48.5 million was borrowed and outstanding and $92.1 million was committed to standby letters of credit. Of the remaining $259.4 million, the entire amount was available for future borrowings after consideration of covenant limitations. The facility matures in July 2010. 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 domestic revolving and term loans contain certain financial covenant restrictions. As of September 30, 2007, we believe we were in compliance with all covenant requirements. Our facility and promissory notes are guaranteed by our material subsidiaries.
     We have additional borrowing capacity through several foreign facilities governed by agreements between us and a syndicate of banks, used primarily to finance seasonal borrowing needs of our foreign subsidiaries. We had $4.8 million of obligations outstanding through our foreign subsidiaries as of September 30, 2007.
     As of September 30, 2007, $18.0 million of cash and cash equivalents 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.
On October 12, 2007, we entered into a $650 millionthe Third Amended and Restated Revolving Credit Facility Agreement (the “Credit Agreement”) with Bank of America, N.A., as administrative agent, swingline lender and issuing bank (the “Administrative Agent”), JPMorgan Chase Bank, N.A. and Wachovia Bank, National Association, as co-syndication agents, and the lenders party thereto.which contains a $650.0 million domestic revolving credit facility. The Credit Agreement replacesreplaced our previous domestic revolving credit facility, the Second Amended and Restated Credit Facility Agreement, dated as of July 8, 2005.
As of March 31, 2008, we had outstanding borrowings of $324.0 million under the $650.0 million domestic revolving credit facility and $111.7 million was committed to standby letters of credit. All of the remaining $214.3 million was available for future borrowings after consideration of covenant limitations. The facility matures in October 2012.

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8, 2005, among us, Bank of America, N.A., as administrative agent, JPMorgan Chase Bank, N.A., as syndication agent, and the lenders named therein.
The Credit Agreement provides for an unsecured $650 million revolving credit facility that matures on October 12, 2012. Thedomestic revolving credit facility includes a subfacility for swingline loans of up to $50 million and provides for the issuance of letters of credit for the full amount of the credit facility. The revolving loans bear interest at either (i) the Eurodollar rate plus a margin of between 0.5% and 1% that is based on the Company’sour Debt to Adjusted EBITDA Ratio (as defined in the Credit Agreement) or (ii) the higher of (a) the Federal Funds Rate plus 0.5% andor (b) the prime rate set by Bank of America, N.A. We may prepay the revolving loans at any time without premium or penalty, other than customary breakage costs in the case of Eurodollar loans.
We will pay a facility fee in the range of 0.125% to 0.25% based on our Debt to Adjusted EBITDA Ratio. We will also pay a letter of credit fee in the range of 0.5% to 1% based on our Debt to Adjusted EBITDA Ratio.Ratio, as well as an additional issuance fee of 0.125% for letters of credit issued.
The Credit Agreement contains financial covenants relating to leverage and interest coverage. Other covenants contained in the Credit Agreement restrict, among other things, mergers, asset dispositions, guarantees, debt, liens, acquisitions, investments, affiliate transactions and our ability to make restricted payments.
The Credit Agreement contains customary events of default. If any event of default occurs and is continuing, lenders with a majority of the aggregate commitments may require the Administrative Agentadministrative agent to terminate our right to borrow under the Credit Agreement and accelerate amounts due under the Credit Agreement (except for a bankruptcy event of default, in which case such amounts will automatically become due and payable and the lenders’ commitments will automatically terminate).
     Our obligations underIn addition to the financial covenants contained in the Credit Agreement outlined above, our domestic promissory notes contain certain financial covenant restrictions. As of March 31, 2008, we believe we were in compliance with all covenant requirements. Our revolving credit facility and promissory notes are guaranteed by certainour material subsidiaries.
We have additional borrowing capacity through several foreign facilities governed by agreements between us and a syndicate of banks, used primarily to finance seasonal borrowing needs of our material domesticforeign subsidiaries. We had $6.5 million and $5.8 million of obligations outstanding through our foreign subsidiaries including Lennox Industries Inc., Allied Air Enterprises Inc., Service Experts Inc.as of March 31, 2008 and Lennox Global Ltd.December 31, 2007, respectively.
Under a revolving period asset securitization arrangement, we are eligible to transfer beneficial interests in a portion of our trade accounts receivable to third parties in exchange for cash. Our continued involvement in the transferred assets 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, 2008 and December 31, 2007, we had not sold any beneficial interests in accounts receivable.
We consider all highly liquid temporary investments with original maturity dates of three months or less to be cash equivalents. Cash and cash equivalents of $120.3 million and $145.5 million as of March 31, 2008 and December 31, 2007, respectively, consisted of cash, overnight repurchase agreements and investment grade securities and are stated at cost, which approximates fair value.
As of March 31, 2008 and December 31, 2007, $16.3 million and $20.2 million, respectively, of cash and cash equivalents were 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, 2008. The restrictions related to lockbox collections typically expire within three to five business days after receipt. The letter of credit restrictions can be transferred to our revolving lines of credit as needed.
On July 25, 2007, we announced that our Board of Directors approved a new share repurchase plan, for $500 million, pursuant to which we planare authorized to repurchase up to $500 million of shares of our common stock through open market purchases.purchases (the “2007 Share Repurchase Plan”). Based on the closing price of our common stock on July 24, 2007, a $500 million repurchase would representrepresented over 20% of our market capitalization. We are currently intend to fundfunding the stock repurchases through a combination of cash from operations and third party borrowings andborrowings. We plan to fully execute repurchases under the repurchase2007 Share Repurchase Plan by the end of the thirdsecond quarter of 2008. The 2007 Share Repurchase Plan terminates and replaces the 2005 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 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 the foreseeable future and the share repurchases during the term of the new share repurchase plan. 2007 Share Repurchase Plan.

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Fair Value Measurements

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

Fair Value Hierarchy

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

Level 1 -
Quoted prices foridenticalinstruments in active markets at the measurement date.
Level 2 -
Quoted prices forsimilarinstruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations in which all significant inputs and significant value drivers are observable in active markets at the measurement date and for the anticipated term of the instrument.

Level 3 -
Valuations derived from valuation techniques in which one or more significant inputs or significant value drivers areunobservableinputs that reflect the reporting entity’s own assumptions about the assumptions market participants would use in pricing the asset or liability developed based on the best information available in the circumstances.

Fair Value Techniques

Our valuation techniques are applied to all of the assets and liabilities carried at fair value as of January 1, 2008, upon adoption of SFAS No. 157. Where available, the fair values are based upon quoted prices in active markets. However, if quoted prices are not available, then the fair values are based upon quoted prices for similar assets or liabilities or independently sourced market parameters, such as credit default swap spreads, yields curves, reported trades, broker/dealer quotes, interest rates and benchmark securities. For assets and liabilities with a lack of observable market activity, if any, the fair values are based upon discounted cash flow methodologies incorporating assumptions that, in our judgment, reflect the assumptions a marketplace participant would use. To ensure that financial assets and liabilities are recorded at fair value, valuation adjustments may be required to reflect the creditworthiness of either party and constraints on liquidity. Where appropriate, these amounts were incorporated into our valuations as of March 31, 2008, the measurement date.

Our adoption of SFAS No. 157 has resulted in changes to the valuation techniques used when determining the fair value of our derivative instruments. These derivatives are primarily valued using estimated future cash flows that are based directly on observed prices from exchange-traded derivatives. We also take into account the counterparty’s creditworthiness, or our own creditworthiness, as appropriate. The calculation of the credit adjustment for derivatives is based upon observable credit default swap spreads and interpolation between these observable spreads for interim periods without observable spreads; however, these inputs are insignificant to the fair value measurement. The effect of adopting these changes to the valuation techniques resulted in a net credit adjustment to the fair value of our derivative instruments of $0.1 million as of March 31, 2008, the measurement date.

The majority of our short-term investments are managed by professional investment advisors. The net asset values are furnished in statements received from the investment advisor and reflect valuations based upon the respective pricing policies utilized by the investment advisor. We have assessed the classification of the inputs used to value these investments as Level 2 through examination of pricing policies and significant inputs and through discussions with investment managers. The fair values of our short-term investments are based on several observable inputs including, but not limited to, benchmark yields, reported trades, broker/dealer quotes, issuer spreads and benchmark securities. The adoption of SFAS No. 157 resulted in no net changes to the valuations for these securities.

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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:
  TradeWe are eligible to transfer beneficial interests in a portion of our trade accounts receivable are sold on a non-recourse basis to third parties. Theparties in exchange for cash through the use of a revolving period asset securitization arrangement. Our continued involvement in the transferred assets is limited to servicing. These transfers are accounted for as sales rather than secured borrowings and are reported as a reduction of Accounts and Notes Receivable, Net in the Consolidated Balance Sheets. As of September 30, 2007March 31, 2008 and December 31, 2006,2007, 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,generally accepted accounting principles, are not capitalized on the balance sheet, including high-turnover equipment such as automobilesautos and service vehicles and short-lived equipment such as personal computers.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
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 StatesU.S. dollars for financial reporting purposes based on the average

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exchange rate for the period. Net sales from outside the United States represented 26.4%30.3% and 22.6% and 25.6% and 21.4%25.5% of total net sales for the third quarterthree months ended March 31, 2008 and year-to-date through September 30, 2007, and 2006, respectively. Historically, foreign currency transactiontranslation gains (losses) have not had a material effect on our overall operations. TheAs of March 31, 2008, the impact to net income of a 10% change in exchange rates on income from operations is estimated to be approximately $6.4$7.6 million on an annual basis.
We enter into commodity futures contracts to stabilize prices expected to be paid for raw materials and parts containing high copper and aluminum content. These contracts are for quantities equal to or less than quantities expected to be consumed in future production. As of September 30, 2007,March 31, 2008, we had metal futures contracts maturing at various dates through FebruaryJune 2009 with a fair value as an asset of $11.3$14.3 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.
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 September 30, 2007March 31, 2008 in alerting them in a timely manner to material information required to be disclosed by us in the reports we filedfile or submittedsubmit to the Securities and Exchange Commission under the Securities Exchange Act of 1934.
Changes in Internal Control Over Financial Reporting
During the quarter ended September 30, 2007,March 31, 2008, there were no changes in our internal controlscontrol over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal controlscontrol over financial reporting.

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PART II — OTHER INFORMATION
Item 1. Legal Proceedings
Item 1.Legal Proceedings.
There have been no significant changes concerning our legal proceedings since June 30,December 31, 2007.
See Note 1617 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 our legal proceedings.
Item 1A. Risk Factors.
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, 2006,2007, 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 20062007 Annual Report on Form 10-K.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
ISSUER PURCHASES OF EQUITY SECURITIES (1)
                 
              Approximate 
          Total Number of  Dollar Value of 
          Shares Purchased  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) 
July 1 through July 31  12,385  $34.49     $500,000,000 
 
August 1 through August 31  2,254,753  $34.46   2,252,400  $422,396,682 
 
September 1 through September 30  777,901  $34.41   773,700  $395,780,523 
               
 
   3,045,039  $34.44   3,026,100     
   ��            
 
AOC Restructuring (3)  2,695,770             
                
 
Total  5,740,809             
                
(1)Item 2. On July 25, 2007, we announced that our BoardUnregistered Sales of Directors approved a new share repurchase plan for $500 million, pursuant to which we plan to repurchase sharesEquity Securities and Use of our common stock, par value $.01 per share, through open market-purchases (the “2007 Share Repurchase Plan”). The 2007 Share Repurchase Plan terminates and replaces the share repurchase plan approved by our Board of Directors in September 2005 (the “2005 Share Repurchase Plan”). In addition, on August 3, 2007, we entered into a written trading plan under Rule 10b5-1 of the Securities Exchange Act of 1934, as amended (the “10b5-1 Plan”), to facilitate share repurchases under the 2007 Share Repurchase Plan. The 10b5-1 Plan became effective on September 4, 2007 and will terminate on February 8, 2008. Prior to July 25, 2007, we had repurchased 7,615,041 shares of common stock under the 2005 Share Repurchase Plan.
(2)In addition to purchases under the 2005 Share Repurchase Plan and 2007 Share Repurchase Plan, this column reflects the surrender to us of 18,939 shares of common stock to satisfy tax withholding obligations in connection with the exercise of stock appreciation rights.
(3)We acquired 2,695,770 shares of our common stock owned by members of A.O.C. Corporation in exchange for 2,239,563 newly issued common shares. The transaction reduced the number of outstanding shares ofProceeds.

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The information set forth in Note 18 in the Notes to the Consolidated Financial Statements set forth in Part I, Item 1, of this Quarterly Report on Form 10-Q regarding our repurchases of equity securities during the first quarter of 2008 is incorporated in this Item 2 by reference.
Item 6. our common stock by 456,207 shares at minimal cost to us. For more information see Note 19 in the Notes to our Consolidated Financial Statements.Exhibits.
Item 5. Other Information.
     To streamline our management structure, we have made the decision to eliminate the position of Executive Vice President, IT and Business Development, currently held by Linda A. Goodspeed. Accordingly, on October 26, 2007, we informed Ms. Goodspeed that we will not renew her existing employment agreement which presently expires on December 31, 2007. We do not expect any charges related to her existing employment agreement to be material to our financial statements.
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 3.1 to LII’s Current Report on Form 8-K filed on July 25,26, 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.
     
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).

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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
     
 LENNOX INTERNATIONAL INC.
 
 
Date: October 31, 2007May 1, 2008 /s/ Susan K. Carter   
 Susan K. Carter  
 Chief Financial Officer
(on behalf of registrant and as principal financial officer) 
 
 

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EXHIBIT INDEX
Exhibit No.Description
3.1Restated Certificate of Incorporation of Lennox International Inc. (“LII”) (filed as Exhibit 3.1 to LII’s Registration Statement on Form S-1 (Registration Statement No. 333-75725) filed on April 6, 1999 and incorporated herein by reference).
3.2Amended and Restated Bylaws of LII (filed as Exhibit 3.1 to LII’s Current Report on Form 8-K filed on July 26, 2007 and incorporated herein by reference).
4.1Specimen 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).
4.2Rights 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.
31.1Certification of the principal executive officer (filed herewith).
31.2Certification of the principal financial officer (filed herewith).
32.1Certification of the principal executive officer and the principal financial officer pursuant to 18 U.S.C. Section 1350 (filed herewith).

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