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, 2008, 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") industry. Our reportable segments are Residential Heating & Cooling, Commercial Heating & Cooling, Service Experts and Refrigeration. For more detailed information regarding our reportable segments, see Note 15 in the Notes to our Consolidated Financial Statements. Our products and services are sold through a combination of distributors, independent and company-owned dealer service centers, other installing contractors, wholesalers, manufacturers' representatives, original equipment manufacturers and to national accounts. The demand for our products and services is seasonal and dependent on the weather. Warmer than normal summer temperatures generate strong demand for replacement air conditioning and refrigeration products and services and colder than normal winter temperatures 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. In recent years, a trend toward higher prices for these commodities and related components has challenged 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 also partially mitigate volatility in the prices of these commodities by entering into futures contracts and fixed forward contracts.
A substantial portion of the sales in each of our business segments is attributable to replacement business, with the balance comprised of new construction business. With the current downturn in residential and commercial new construction activity and current overall economic conditions, we are seeing a decline in the demand for the products and services we sell into these markets.
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.

Impact of Current Economic Environment on Our Business The second quarter of each fiscal year is the beginning of the summer and our most profitable season. During the second quarter of 2009, we continued to face challenging market conditions. The global economic downturn has impacted consumer and business confidence and led to lower replacement and new construction business across all our end markets. While we saw a decrease in the year-over-year rate of decline in our Residential and Service Experts businesses in the second quarter from the first quarter, we saw an increase in the rate in our Commercial and Refrigeration businesses. We continued to execute on our strategic priorities to win new business, capture opportunities in the replacement market, and lower our cost structure for the current market conditions.
We are continuing to adjust to lower demand levels in the marketplace by accelerated efforts to increase our operational efficiency and reduce costs while we continue to focus on providing our customers a high level of value and service. During the second quarter of 2009, we recorded restructuring charges of $4.7 million, and during the first half of 2009 we recorded restructuring charges of $15.9 million. In addition to the savings related to restructuring activities, we believe that we will realize additional savings from lower commodity prices on certain metals and from our global sourcing initiatives for the remainder of 2009. We are also executing on additional operating efficiency and cost reduction initiatives that are designed to substantially reduce our selling, general and administrative expenses through salaried headcount reduction and other measures. Our salaried headcount is down over 9% from the beginning of 2009.
We believe that when market conditions recover, we will be well-positioned with significant upside leverage in our business model. Company Highlights
• Net sales for the second quarter of 2009 were $790.5 million, $209.1 million or 20.9% below the second quarter of 2008. Lower volumes of $204.3 million across all business segments negatively impacted revenues on a year-over-year basis.

• Operational income from continuing operations for the second quarter of 2009 was $59.5 million compared to $88.4 million for the second quarter of 2008. The decline in operational income was primarily due to lower sales partially offset by savings from cost reductions and cost control initiatives.

• Net income for the second quarter of 2009 was $31.7 million compared to $51.2 million in the same period in 2008. Diluted earnings per share was $0.56 per share in the second quarter 2009 compared to $0.88 per share in the second quarter of 2008.

• We generated $82.7 million of cash from operating activities for the first half of 2009, compared to $23.6 million during the same period in 2008 as we continued to focus on working capital improvements. Cash from operating activities increased primarily due to favorable working capital changes and with our strong cash generation, we repaid debt of $85.7 million during the second quarter of 2009.

Results of Operations
The following table presents certain information concerning our financial
results, including information presented as a percentage of net sales (dollars
in millions):

                                    Second Quarter                                  Six Months Ended June 30,
                            2009                      2008                       2009                       2008
                    Dollars      Percent      Dollars      Percent       Dollars      Percent       Dollars      Percent
Net sales           $  790.5        100.0 %   $  999.6        100.0 %   $ 1,375.9        100.0 %   $ 1,764.1        100.0 %
Cost of goods
sold                   561.6         71.0        721.5         72.2       1,008.2         73.3       1,292.3         73.3

Gross profit           228.9         29.0        278.1         27.8         367.7         26.7         471.8         26.7
Selling, general
and
administrative
expenses               165.8         21.0        187.2         18.7         322.8         23.5         371.1         21.0
Losses
(gains) and other
expenses, net            0.7          0.1         (4.6 )       (0.5 )        (0.1 )          -          (7.9 )       (0.4 )
Restructuring
charges                  4.7          0.6          7.7          0.9          15.9          1.1          10.5          0.5
Impairment of
equity method
investment                 -            -          2.3          0.2             -            -           2.3          0.1
Income from
equity method
investments             (1.8 )       (0.2 )       (2.9 )       (0.3 )        (3.2 )       (0.2 )        (6.0 )       (0.3 )

Operational
income              $   59.5          7.5 %   $   88.4          8.8 %   $    32.3          2.3 %   $   101.8          5.8 %


Net income          $   31.7          4.0 %   $   51.2          5.1 %   $    13.6          1.0 %   $    57.5          3.3 %

The following table sets forth net sales by geographic market (dollars in millions):

                                        Second Quarter                                  Six Months Ended June 30,
                                2009                      2008                       2009                       2008
                        Dollars      Percent      Dollars      Percent       Dollars      Percent       Dollars      Percent
Geographic Market:
U.S.                    $  591.0         74.8 %   $  711.2         71.1 %   $ 1,015.9         73.8 %   $ 1,242.9         70.5 %
Canada                      82.9         10.5        105.5         10.6         141.3         10.3         187.0         10.6
International              116.6         14.7        182.9         18.3         218.7         15.9         334.2         18.9

Total net sales         $  790.5        100.0 %   $  999.6        100.0 %   $ 1,375.9        100.0 %   $ 1,764.1        100.0 %

Second Quarter of 2009 Compared to Second Quarter of 2008 - Consolidated Results Net Sales
Net sales decreased 20.9% for the second quarter of 2009 as compared to the same period in 2008. The decrease in net sales was due to unfavorable impacts in sales volumes of approximately 21% across all segments and was driven by declines in the overall markets we serve. While the residential market continued to decline from a year ago, we saw the rate of decline slow in the second quarter. In the commercial and refrigeration markets, we saw the rate of decline increase. The declines in unit volumes were partially offset by pricing gains of approximately 2% and positive sales mix of almost 2%. Changes in foreign currency exchange rates adversely impacted revenues by almost 4%. Gross Profit
Gross profit margins improved 120 basis points to 29.0% for the second quarter of 2009 compared to gross margins of 27.8% in the same period of 2008. Pricing gains increased gross profit margins by approximately 130 basis points. Gross profit margins were also positively impacted by nearly 60 basis points for the net incremental effect of warranty adjustments. However, product costs, including under-absorbed manufacturing costs, decreased gross profit margins by approximately 120 basis points. The changes in foreign currency exchange rates also had an approximate 20 basis point positive impact on our gross profit margins.
Selling, General and Administrative Expenses SG&A expenses for the second quarter decreased by approximately $21.4 million in 2009 compared to the same period in 2008. As a percentage of total net sales, SG&A expenses were 21.0% for the second quarter of 2009 and 18.7% for the second quarter of 2008 primarily due to the decline in sales volumes at a greater pace than we were able to realize benefits from our cost reduction efforts. Selling and administrative expenses decreased generally due to cost reductions, including headcount savings, totaling approximately $13 million, and the impact of foreign exchange rates of almost $8 million. Research and development expenses remained constant as we continue to invest in future product offerings. Losses (Gains) and Other Expenses, Net
Losses (gains) and other expenses, net for the second quarters of 2009 and 2008 included the following (in millions):

                                                                  Second Quarter
                                                                2009           2008
Realized losses (gains) on settled futures contracts         $      1.3      $    (0.6 )
Unrealized (gains) losses on unsettled futures contracts
not designated as cash flow hedges                                 (2.5 )          0.4
Foreign currency exchange losses (gains)                            1.5           (4.7 )
Other items, net                                                    0.4            0.3

Losses (Gains) and other expenses, net                       $      0.7      $    (4.6 )

The change in gains and losses on futures contracts was primarily due to decreases in commodity prices relative to the futures contract prices during 2009 as compared to 2008 for the contracts that settled during the quarter. Conversely, the change in unrealized (gains) losses related to unsettled futures contracts not designated as cash flow hedges was primarily due to higher commodity prices relative to the futures contract prices for those contracts. For more information, see Note 5 in the Notes to the Consolidated Financial Statements. The change in foreign currency losses (gains) was primarily due to a favorable catch-up adjustment of $5.0 million related to foreign currency fluctuations on intercompany loans recorded in 2008. Additionally, we incurred foreign exchange transaction losses on intercompany transactions as the dollar weakened against certain foreign currencies. Restructuring Charges
As part of our strategic priorities of manufacturing and sourcing excellence, distribution excellence and expense reduction, we have initiated actions designed to improve the delivery of our products to customers and also to lower our cost structure. We have begun to reorganize our sales support and administrative functions to be more effective and efficient in the markets we serve. We continue to focus on restructuring activities to position our company for profitable growth as the economy improves.
In the second quarters of 2009 and 2008, we incurred restructuring charges consisting of:

                                                                   Second Quarter
                                                                2009            2008
Manufacturing rationalizations                               $      1.3       $     6.8
Reorganization of distribution network                              0.2               -
Reorganizations of corporate and business unit selling
and administrative functions                                        3.2             0.9

Total                                                        $      4.7       $     7.7

For further detail regarding restructuring reserves and individual restructuring actions, see Note 12 in the Notes to our Consolidated Financial Statements. Manufacturing Rationalizations
The restructuring charges incurred in the second quarter of 2009 primarily related to the consolidation of Residential Heating & Cooling manufacturing operations from Blackville, South Carolina into our operations in Orangeburg, South Carolina and Saltillo, Mexico. The consolidation is expected to be completed within two years. These restructuring charges related to manufacturing rationalizations consisted primarily of $1.3 million of asset write-offs and accelerated depreciation.
In the future, we expect to incur additional charges of $7.8 million related to the manufacturing rationalization projects that were in process during the second quarter of 2009. Of the additional charges expected, $3.7 million is accelerated depreciation or asset impairment charges and, therefore, non-cash. We also expect to incur $2.0 million in equipment move costs and $2.1 million of other costs. Included in these other costs are $1.2 million of facility demolition and site clean-up and $0.9 million of manufacturing inefficiencies incurred prior to the plant closure.
Reorganization of North American Distribution Network In the second quarter of 2009, we incurred $0.2 million of equipment move costs related to the transition of activities currently performed at our North American Parts Center in Des Moines, Iowa to other locations, including our North American Distribution Center in Marshalltown, Iowa.
In the future, we expect to incur additional charges of $1.2 million related to this project, consisting of $0.7 million in severance and $0.5 million in other costs, consisting of relocation, pension curtailment and facility clean-up costs. The current restructuring project is expected to be completed within two years. We anticipate that we will initiate additional restructuring activities in this area as we seek to further enhance our North American distribution network.

Reorganizations of Corporate and Business Unit Selling and Administrative Functions
The restructuring charges incurred in second quarter 2009 related primarily to the reorganization of selling and administrative functions in our European operations and included $2.6 million of severance and related charges, $0.4 million of lease termination costs, and $0.2 million of other costs. To date and in total, we have incurred $12.5 million of restructuring charges related to reorganizations of selling and administrative functions for projects that were in process during the second quarter of 2009. Of that amount, $9.6 million was severance costs, $0.9 million was asset write-offs and accelerated depreciation, $1.0 million was lease termination costs, and the remaining $1.0 million was other charges.
In the future, we expect to incur additional charges of $1.3 million related to these projects, of which $0.9 million is expected to be severance. All of these future charges will require the use of cash. Future Charges and Expense Savings
We anticipate incurring approximately $10.3 million of future restructuring charges relating to projects that were in process during the second quarter of 2009. Of that amount, about $3.7 million are anticipated to be non-cash charges for accelerated depreciation and asset impairments. Future cash outlays for restructuring activities that are currently in progress are estimated to be $19.8 million. These restructuring charges and cash outlays are expected to be incurred generally within the next two years.
We expect to realize $15.3 million of incremental expense savings for the remainder of 2009.
Income from Equity Method Investments
Investments over which we do not exercise control but have significant influence are accounted for using the equity method of accounting. Income from equity method investments decreased to $1.8 million in the second quarter of 2009 compared to $2.9 million during the same period in 2008 primarily due to the lowered performance of our U.S. joint venture in compressor manufacturing, which experienced reduced sales as a result of a reduction in our volume of purchases. Interest Expense, net
Interest expense, net, decreased to $1.9 million in the second quarter of 2009 from $3.8 million during the same period in 2008. The decrease in interest expense was primarily attributable to a decrease in the average interest rate paid on variable rate debt and average amounts borrowed in the second quarter of 2009 as compared to the same period in 2008. Income Taxes
The income tax provision was $21.6 million in the second quarter of 2009 compared to $33.1 million during the same period in 2008. The effective tax rate was 37.6% for the second quarter of 2009 as compared to 39.2% for the same period in 2008. 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%.
Discontinued Operations
Near the end of 2008, we announced plans to sell seven unprofitable service centers. We have reclassified losses related to these service centers in the second quarter of 2009 of $0.6 million to discontinued operations. This compares with losses from these discontinued operations incurred in the second quarter of 2008 of $0.3 million. We entered into agreements to sell all of these service centers during the first quarter of 2009. Also included in the loss from discontinued operations is a provision of $6.2 million for an unfavorable judgment in litigation related to the sale of a service center in 2004 that was included in discontinued operations.

Second Quarter 2009 Compared to Second Quarter 2008 - Results by Segment
Residential Heating & Cooling
The following table details our Residential Heating & Cooling segment's net
sales and profit for the second quarters of 2009 and 2008 (dollars in millions):

                               Second Quarter
                              2009        2008        Difference       % Change
            Net sales        $ 379.3     $ 450.7     $      (71.4 )        (15.8 )%
            Profit              39.3        50.0            (10.7 )        (21.4 )
            % of net sales      10.4 %      11.1 %

The decrease in net sales was due to continuing weakness in the U.S. residential new construction market and softer replacement business as consumers remain cautious in the current economic environment. Unit volumes were lower across the industry. While net sales continued to decline from a year ago, the rate of decline decreased compared to the rate in the first quarter of 2009. Product mix continued to shift towards our premium products, driven in part by government incentives to consumers for energy efficient products. Volumes decreased net sales by nearly 18% in 2009 as compared to 2008. The decreases related to net sales was partially offset by pricing gains of approximately 3% related to increases that were enacted in the later quarters of 2008 and positive sales mix of about 1%. The unfavorable impact of changes in foreign currency exchange rates decreased net sales by approximately 2%.
Changes in net sales unfavorably impacted segment profit by $9 million. In addition, product costs of $9 million, including under-absorbed manufacturing costs, also adversely impacted segment profit. Offsetting these unfavorable impacts to segment profit was an incremental favorable adjustment to our warranty liabilities of $4 million and SG&A cost reductions, including headcount savings, of $5 million.
Commercial Heating & Cooling
The following table details our Commercial Heating & Cooling segment's net sales and profit for the second quarters of 2009 and 2008 (dollars in millions):

                               Second Quarter
                              2009        2008        Difference       % Change
            Net sales        $ 162.7     $ 229.5     $      (66.8 )        (29.1 )%
            Profit              19.3        26.7             (7.4 )        (27.7 )
            % of net sales      11.9 %      11.6 %

Our Commercial Heating & Cooling business experienced lower sales volume of 29%, primarily due to weak new construction in North America and overall weakness in European business. The unfavorable impact of changes in foreign currency exchange rates on net sales was approximately 4%. As an offset to these negative impacts to sales, we experienced pricing gains of about 1% from increases that were enacted during the later quarters of 2008 and positive sales mix of 4%. Changes in net sales unfavorably impacted segment profit by $11 million. In addition, product costs of $3 million, including under-absorbed fixed manufacturing costs, also contributed to the decrease in segment profit. Offsetting these unfavorable impacts were SG&A cost reductions, including headcount savings, of $5 million and a favorable warranty adjustment of $2 million.
Service Experts
The following table details our Service Experts segment's net sales and profit for the second quarters of 2009 and 2008 (dollars in millions):

                               Second Quarter
                              2009        2008        Difference       % Change
            Net sales        $ 153.7     $ 179.6     $      (25.9 )        (14.4 )%
            Profit               8.7        14.3             (5.6 )        (39.2 )
            % of net sales       5.7 %       8.0 %

The decrease in net sales was primarily due to the decline in the residential new construction and residential service and replacement markets resulting from the weakness of the U.S. economy. The sales decrease was primarily due to a volume decline of approximately 11% as both price and sales mix were relatively flat. The year-over-year rate of decline for replacements slowed as compared to the first quarter of 2009. The unfavorable impact of changes in foreign currency exchange rates decreased net sales by approximately 3%.
Changes in net sales unfavorably impacted segment profit by approximately $8 million. The lower sales volumes were partially offset by SG&A cost reductions, including headcount savings of about $2 million. Refrigeration
The following table details our Refrigeration segment's net sales and profit for the second quarters of 2009 and 2008 (dollars in millions):

                               Second Quarter
                              2009        2008        Difference       % Change
            Net sales        $ 122.1     $ 169.1     $      (47.0 )        (27.8 )%
            Profit               9.6        17.5             (7.9 )        (45.1 )
            % of net sales       7.9 %      10.3 %

Net sales decreased due to lower sales volumes of 22% and the unfavorable impact of changes in foreign currency exchange rates of almost 9%. Net sales were down significantly in all international markets except China. Pricing gains of approximately 3% partially offset these negative impacts.
Changes in net sales unfavorably impacted segment profit by $9 million. In . . .