We engineer, manufacture and market air-conditioning and heating equipment consisting of standardized and custom rooftop units, chillers, air-handling units, make-up units, heat recovery units, condensing units, coils and boilers. Custom units are marketed and sold to retail, manufacturing, educational, medical and other commercial industries. We market units to all 50 states in the United States and certain provinces in Canada. International sales are less than five percent as the majority of all sales are domestic.

We sell our products to property owners and contractors through a network of manufacturers' representatives and our internal sales force. Demand for our products is influenced by national and regional economic and demographic factors. The commercial and industrial new construction market is subject to cyclical fluctuations in that it is generally tied to housing starts, but has a lag factor of 6-18 months. Housing starts, in turn, are affected by such factors as interest rates, the state of the economy, population growth and the relative age of the population. When new construction is down, we emphasize the replacement market.

The principal components of cost of goods sold are labor, raw materials, component costs, factory overhead, freight out and engineering expense. The principal high volume raw materials used in our manufacturing processes are steel, copper and aluminum, which are obtained from domestic suppliers. The raw materials market was volatile during 2009 and 2008 due to the economic environment. In addition to our derivative instrument, we attempt to limit the impact of price fluctuations on these materials by entering into cancelable and noncancelable fixed price contracts with our major suppliers for periods of 6 - 18 months. We expect to receive delivery of raw materials for use in our manufacturing operations from our fixed price contracts. These contracts are not accounted for as derivative instruments because they meet the normal purchases and sales exemption allowed by GAAP. We have entered into contracts that are both above and below the average index price as of September 30, 2009. Prices decreased by approximately 49% for steel, 56% for aluminum and 27% for copper from September 30, 2008 to September 30, 2009. The lower commodity prices have contributed to our lower cost of goods sold.

Selling, general, and administrative ("SG&A") costs include our internal sales force, warranty costs, profit sharing and administrative expense. Warranty expense is estimated based on historical trends and other factors. Our product warranty is: the earlier of one year from the date of first use or 18 months from date of shipment for parts; an additional four years on compressors; 15 years on gas-fired heat exchangers; and 25 years on stainless steel heat exchangers. Warranty charges on heat exchangers occur infrequently.

Our office facilities consist of a 337,000 square foot building (322,000 sq. ft. of manufacturing/ warehouse space and 15,000 sq. ft. of office space) located at 2425 S. Yukon Avenue, Tulsa, Oklahoma ("the original facility"), and a 563,000 square foot manufacturing/warehouse building and a 22,000 square foot office building ("the expansion facility") located across the street from the original facility at 2440 S. Yukon Avenue. We previously leased 61% of the expansion facility to a third party. Upon expiration of the lease on May 31, 2009, we began renovations on the expansion facility to give us increased manufacturing capacity. Our 2009 capital expenditures budget reflects the projected outlay to remodel the facility.

Other operations are conducted in a plant/office building at 203-207 Gum Springs Road in Longview, Texas, containing 258,000 square feet (251,000 sq. ft. of manufacturing/ warehouse and 7,000 sq. ft. of office space). An additional 15 acres of land was purchased for future expansion in 2004 and 2005 in Longview, Texas.

Our facility in Burlington, Ontario, Canada, is located at 279 Sumach Drive. The facility consists of an 82,000 sq. ft. office/manufacturing facility on a 5.6 acre tract of land. The facility was classified as available for sale upon closure of our manufacturing operations in third quarter 2009 (see Note 15, Assets Held For Sale). We plan to sell the property within one year.

Set forth below is unaudited income statement information for the periods ended September 30, 2009 and 2008:

                                  Three Months Ended                                       Nine Months Ended
                   September 30, 2009           September 30, 2008          September 30, 2009          September 30, 2008
                                                                (In thousands)

Net sales        $    58,492         100 %    $    79,279         100 %   $    191,054        100 %   $    219,516        100 %

Cost of sales         40,764        69.7 %         59,261        74.7 %        138,288       72.4 %        165,856       75.6 %

Gross profit          17,728        30.3 %         20,018        25.3 %         52,766       27.6 %         53,660       24.4 %

Selling,
general and
administrative
expenses               5,313         9.1 %          7,294         9.3 %         18,641        9.7 %         19,325        8.8 %

Income from
operations            12,415        21.2 %         12,724        16.0 %         34,125       17.9 %         34,335       15.6 %

Interest
expense                    -         0.0 %            (39 )       0.0 %             (9 )      0.0 %            (58 )      0.0 %
Interest
income                    64         0.1 %              -         0.0 %             71        0.0 %             27        0.0 %
Other income
(expense), net          (173 )      (0.3 )%           169         0.2 %              1        0.0 %            416        0.2 %

Income before
income taxes          12,306        21.0 %         12,854        16.2 %         34,188       17.9 %         34,720       15.8 %
Income tax
provision              4,565         7.8 %          4,499         5.7 %         12,622        6.6 %         12,171        5.5 %

Net income       $     7,741        13.2 %    $     8,355        10.5 %   $     21,566       11.3 %   $     22,549       10.3 %

Results of Operations
Key events impacting our cash balance, financial condition, and results of operations for the nine months ended September 30, 2009, include the following:
· We remained the leader in the industry for environmentally-friendly, energy efficient and quality innovations, utilizing R410A refrigerant and phasing out pollutant causing R22 refrigerant. The phase out of R22 began in early 2004. We also utilize a high performance composite foam panel to eliminate over half of the heat transfer from typical fiberglass insulated panels. We continue to utilize sloped condenser coils, and access compartments to filters, motor, and fans. All of these innovations increase the demand for our products thus increasing market share.

· In February 2006, the Board of Directors initiated a program of semi-annual cash dividend payments. Cash dividend payments of $5.8 million were made in 2008 and $5.9 million in 2009. Cash dividends of $3.1 million were declared and accrued for in June 2009, and paid in July 2009. In May 2009, the Board of Directors increased the semi-annual cash dividend from $0.16 per share to $0.18 per share.

· Stock repurchases resulted in cash payments of $2.5 million. The cash received in the nine months ended September 30, 2009 from options exercised was $0.9 million.

· Purchases of equipment and expansion of facilities to create efficiencies remained a priority. Our capital expenditures were $8.6 million. Equipment purchases create significant efficiencies, lower production costs and allow continued growth in production. We currently expect to spend approximately $8.0 million to $9.0 million on capital expenditures during 2009 for continued growth. A portion of our budgeted capital expenditures will be spent expanding our manufacturing facilities in Tulsa. Such expansion provides manufacturing capacity to increase production of our products traditionally manufactured in Tulsa. The expansion also provides operational flexibility for us to establish production lines in Tulsa to manufacture custom products which had been manufactured at our Canadian facilities. We closed our manufacturing operations and reclassified our Canadian facility as held for sale in September 2009 (see Note 15 Assets Held For Sale).

Net sales decreased $20.8 million or 26% to $58.5 million from $79.3 million for the three months ended, and decreased $28.4 million or 13% to $191.1 million from $219.5 million for the nine months ended September 30, 2009, compared to the same periods in 2008. The decrease in net sales was a result of the decreased volume related to the current economic environment and lower sales from our Canadian operations. The current economic environment has negatively impacted commercial construction markets with some projects delayed, postponed indefinitely or cancelled. The replacement market has also been affected by customers delaying equipment replacement as a cost saving strategy.

Gross Profit

Gross profit decreased $2.3 million or 12% to $17.7 million from $20.0 million for the three months ended, and decreased $0.9 million or 2% to $52.8 million from $53.7 million for the nine months ended September 30, 2009, compared to the same periods in 2008. As a percentage of sales, gross margins were 30.3% compared to 25.3% for the three months ended, and 27.6% compared to 24.4% for the nine months ended September 30, 2009 and 2008, respectively. The 20% increase in gross margin percentages for the three months and 13% increase for the nine months was primarily a result of lower material costs, improved production and labor efficiencies, a reduction in manufacturing related expenses and a $1.0 million unrealized gain from a derivative asset included in cost of sales (see Note 4 Derivatives) despite lower net sales and expenses associated with the Canadian facility closure. Our gross margins as a percentage of sales excluding the unrealized gain were 28.6% compared to 25.3% for the three months ended, and 27.1% compared to 24.4% for the nine months ended September 30, 2009 and 2008, respectively.

The principal components of cost of goods sold are labor, raw materials, component costs, factory overhead, freight out and engineering expense. The principal high volume raw materials used in our manufacturing processes are steel, copper and aluminum, which are obtained from domestic suppliers. The raw materials market was volatile during 2009 and 2008 due to the economic environment. In addition to our derivative instrument, we attempt to limit the impact of price fluctuations on these materials by entering into cancelable and noncancelable fixed price contracts with our major suppliers for periods of 6 - 18 months. We expect to receive delivery of raw materials for use in our manufacturing operations from our fixed price contracts. These contracts are not accounted for as derivative instruments since they meet the normal purchases and sales exemption allowed by GAAP. We have entered into contracts that are both above and below the average index price as of September 30, 2009. Prices decreased by approximately 49% for steel, 56% for aluminum and 27% for copper from September 30, 2008 to September 30, 2009. The lower commodity prices have contributed to our lower cost of goods sold and higher gross profit margins.

Selling, General and Administrative Expenses

Selling, general and administrative expenses decreased $2.0 million or 27% to $5.3 million from $7.3 million for the three months ended, and decreased $0.7 million or 4% to $18.6 million from $19.3 million for the nine months ended September 30, 2009, compared to the same periods in 2008. The decrease was primarily due to a lower warranty expense related to fewer sales and sales related expenses.

Other Income (Expense)

Other expense increased approximately $342,000 to $173,000 compared to other income of $169,000 for the three months ended September 30, 2009 and 2008, respectively. Other income decreased approximately $415,000 to $1,000 from $416,000 for the nine months ended September 30, 2009, compared to the same periods in 2008. The decrease in other income (expense) was primarily related to the termination of the lease on our expansion facility.

Other income is primarily attributable to rental income from our expansion facility which we received through the lease expiration on May 31, 2009. Upon expiration of the lease, we began renovations on the expansion facility to give us increased manufacturing capacity. Our 2009 capital expenditures budget reflects the projected outlay to remodel the facility.

Our working capital and capital expenditure requirements are generally met through net cash provided by operations and occasionally, based on current liquidity at the time, the revolving bank line of credit.

Our revolving credit facility provides for maximum borrowings of $15.2 million which is provided by the Bank of Oklahoma, National Association. Under the line of credit, there is one standby letter of credit totaling $1.0 million. The letter of credit is a requirement of our workers compensation insurance and will expire December 31, 2009. Interest on borrowings is payable monthly at the rate of 4% or LIBOR plus 2.5%, whichever is higher (4.00% at September 30, 2009). No fees are associated with the unused portion of the committed amount.

At September 30, 2009, we did not have an outstanding balance under the revolving credit facility. At December 31, 2008, we had $2.9 million borrowed under the revolving credit facility. Borrowings available under the revolving credit facility at September 30, 2009 were $14.2 million. At September 30, 2009 and 2008, we were in compliance with our financial ratio covenants. The covenants are related to our tangible net worth, total liabilities to tangible net worth ratio and working capital. At September 30, 2009 our tangible net worth was $114.9 million which meets the requirement of being at or above $75 million. Our total liabilities to tangible net worth ratio was 1 to 3 which meets the requirement of 2 to 1. Our working capital was $57.2 million which meets the requirement of being at or above $30 million. On July 30, 2009, we renewed the line of credit with a maturity date of July 30, 2010, with terms substantially consistent with the previous agreement.

Management believes our projected cash flows from operations and bank revolving credit facility, or comparable financing, will provide the necessary liquidity and capital resources for fiscal year 2009 and the foreseeable future. Our belief that we will have the necessary liquidity and capital resources is based upon our knowledge of the heating, ventilation, and air conditioning ("HVAC") industry and our place in that industry, our ability to limit the growth of our business if necessary, our ability to adjust dividend cash payments, and our relationship with the existing bank lender. For information concerning our revolving credit facility at September 30, 2009 (see Note 7 Revolving Credit Facility).

Cash Flows Provided by Operating Activities. Net cash provided by operating activities increased in the nine months ended September 30, 2009, by $6.2 million from the nine months ended September 30, 2008. The increase was primarily due to changes in accounts receivable and provision for losses on accounts receivable, inventories, accounts payable and accrued liabilities.

Cash Flows Used in Investing Activities. Cash flows used in investing activities were $8.6 million and $5.5 million for the nine months ended September 30, 2009 and 2008, respectively. The increase in cash flows used in investing activities in 2009 was related to higher capital expenditures of $8.6 million for additions to machinery and equipment and manufacturing facilities, compared to $5.5 million for the same period in 2008. Capital expenditures in 2008 related to a building expansion and additions of machinery and equipment to further automate production. Management utilizes cash flows provided from operating activities to fund capital expenditures that are expected to increase growth and create efficiencies. We have budgeted capital expenditures of approximately $8.0 million to $9.0 million in 2009 to complete the building expansion that started in 2008, our building renovation of the previously third party leased production facility, and machinery and equipment purchases. We expect our cash requirements to be provided from cash flows from operations.

Cash Flows Used in Financing Activities. Cash flows used in financing activities were $10.2 million and $25.1 million for the nine months ended September 30, 2009 and 2008, respectively. The decrease of cash used in financing activities is primarily due to a lower volume of stock repurchases during the period.

We repurchased shares of stock from employees' 401(k) savings and investment plan, from directors and officers and the open market for the nine months ended September 30, 2009 in the amount of $2.5 million for 134,777 shares of stock. There were 1,171,272 shares of stock repurchased for a total of $24.1 million for the same period in 2008.

Cash dividends were declared in December 2008 and were paid in January 2009 in the amount of $2.8 million. Cash dividends of $3.1 million were declared on May 19, 2009, and accrued then paid on July 2, 2009, to shareholders of record on June 11, 2009. Cash dividends of $2.8 million were declared on May 20, 2008, and accrued then paid on July 3, 2008 to shareholders of record on June 12, 2008. Board of Director approval is required to determine the date of declaration and amount for each semi-annual payment.

Critical Accounting Policies

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Because these estimates and assumptions require significant judgment, future actual results could differ from those estimates and could have a significant impact on our results of operations, financial position and cash flows. We reevaluate our estimates and assumptions on a monthly basis.

A comprehensive discussion of our critical accounting policies and management estimates is included in Management's Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the year ended December 31, 2008. There have been no significant changes in critical accounting policies or management estimates other than as related to derivatives stated below since the year ended December 31, 2008.

We have added the following accounting policies since December 31, 2008:

Derivatives

We use derivatives to mitigate our exposure to volatility in copper prices. Fluctuations in copper commodity prices impact the value of the derivatives that we hold. We are subject to gains which we record as derivative assets if the forward copper commodity prices increase and losses which we record as derivative liabilities if they decrease. We record the fair value of the derivative position in the Consolidated Balance Sheets. We use COMEX index pricing to support our fair value calculation, which is a Level 2 input per the valuation hierarchy as the pricing is for instruments similar but not identical to the contract we will settle (see Note 16, Fair Value Measurements). We did not designate the derivative as a cash flow hedge. We record changes in the derivative's fair value currently in earnings based on mark-to-market accounting. The change in earnings is recorded to cost of sales in the Consolidated Statements of Income. We do not use derivatives for speculative purposes.

New Accounting Pronouncements

In March 2008, the FASB issued FASC Topic 815, Derivatives and Hedging, formerly SFAS No. 161, ("FASC 815"), which requires enhanced disclosures about (i) how and why an entity uses derivative instruments, (ii) how derivative instruments and related hedged items are accounted for under prior guidance and (iii) how derivative instruments and related hedged items affect an entity's financial position, financial performance and cash flows. FASC 815 is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008. Adoption of FASC 815 did not have a material impact on our Consolidated Financial Statements (see Note 4, Derivatives).

In May 2009, the FASB issued FASC Topic 855, Subsequent Events, formerly SFAS
165 ("FASC 855"), which requires entities to disclose the date through which they have evaluated subsequent events and whether the date corresponds with the release of their financial statements. FASC 855 is effective for interim and annual periods ending after June 15, 2009. We adopted FASC 855 for reporting in second quarter 2009. Adoption of FASC 855 did not have a material impact on our Consolidated Financial Statements.

In August 2009, the FASB issued ASU 2009-05, Fair Value Measurement and Disclosures: Measuring Liabilities at Fair Value ("ASU 2009-05"), which provides clarification on measuring liabilities at fair value when a quoted price in an active market is not available. ASU 2009-05 is effective for the first reporting period beginning after issuance. We do not expect adoption of ASU 2009-05 to have a material impact on our Consolidated Financial Statements.

Forward-Looking Statements

This Quarterly Report on Form 10-Q includes "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Words such as "expects", "anticipates", "intends", "plans", "believes", "seeks", "estimates", "will", and variations of such words and similar expressions are intended to identify such forward-looking statements. These statements are not guarantees of future performance and involve certain risks, uncertainties and assumptions, which are difficult to predict. Therefore, actual outcomes and results may differ materially from what is expressed or forecasted in such forward-looking statements. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date on which they are made. We undertake no obligation to update publicly any forward-looking statements, whether as a result of new information, future events or otherwise. Important factors that could cause results to differ materially from those in the forward-looking statements include (1) the timing and extent of changes in raw material and component prices, (2) the effects of fluctuations in the commercial/industrial new construction market, (3) the timing and extent of changes in interest rates, as well as other competitive factors during the year, and (4) general economic, market or business conditions.